SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (NO FEE REQUIRED)
Commission file number 1-12584
SHEFFIELD PHARMACEUTICALS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3808303
(STATE OF INCORPORATION) (IRS EMPLOYEE IDENTIFICATION NUMBER)
425 SOUTH WOODSMILL ROAD 63017 (314) 579-9899
ST. LOUIS, MISSOURI (ZIP CODE) (REGISTRANT'S TELEPHONE,
(ADDRESS OF PRINCIPAL INCLUDING AREA CODE)
EXECUTIVE OFFICES)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock. $.01 par value American Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [ X ]Yes [ ] No
Indicate by check mark if disclosure of delinquent filers to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
The aggregate market value at March 19, 1999 of the voting stock of the
registrant held by non-affiliates (based upon the closing price of $2.25 per
share of such stock on the American Stock Exchange on such date) was
approximately $49,178,000. Solely for the purposes of this calculation, shares
held by directors and officers and beneficial owners of 10% or more of the
Company's Common Stock of the registrant have been excluded. Such exclusion
should not be deemed a determination or an admission by the registrant that such
individuals are, in fact, affiliates of the registrant.
Indicate the number of shares outstanding of each of the registrant's
classes of common equity, as of the latest practicable date: At March 19, 1999,
there were outstanding 27,083,419 shares of the registrant's Common Stock, $.01
par value.
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PART I
ITEM 1. BUSINESS
GENERAL
Sheffield Pharmaceuticals, Inc. (the "Company") is a specialty
pharmaceutical company focused on development and commercialization of later
stage, lower risk pharmaceutical products that utilize the Company's unique
proprietary pulmonary delivery technologies. The Company is in the development
stage and as such has been principally engaged in the development of its
pulmonary delivery systems.
The Company has strategic alliances for pulmonary delivery
development with Elan Corporation, plc ("Elan"), Siemens AG ("Siemens") and
Zambon Group SpA ("Zambon"). The Company believes that a less costly, more
predictable path to commercial development of therapeutics can be achieved
through the creative use of collaborations and alliances, combined with
state-of-the-art technology with experienced management. The Company is applying
this strategy to the development of both respiratory and systemic pharmaceutical
products to be delivered through the Company's proprietary pulmonary delivery
systems.
In 1997, the Company acquired the Metered Solution Inhaler
("MSI") pulmonary delivery system through a worldwide exclusive license and
supply arrangement with Siemens. During the second half of 1998, the Company
acquired the rights to an additional pulmonary delivery technology, the Aerosol
Drug Delivery System ("ADDS") from a subsidiary of Aeroquip-Vickers, Inc.
("Aeroquip-Vickers"). The ADDS technology is a new generation propellant-based
pulmonary delivery system.
Using these pulmonary delivery systems as platforms, the
Company has established strategic alliances for developing the initial products.
In a collaboration with Zambon, the Company is developing a range of
pharmaceutical products delivered by the MSI to treat respiratory diseases. As
part of the strategic alliance with Elan, a world leader in pharmaceutical
delivery technology, the Company is developing therapies for systemic diseases
to be delivered to the lungs. The initial systemic programs are for therapies in
the breakthrough pain and migraine headache markets. Elan licensed two of its
own delivery technologies to the Company that complement the MSI and ADDS
technologies. Outside of its alliances, the Company owns the worldwide rights to
respiratory disease applications of all of its technologies, subject only to the
MSI respiratory rights licensed to Zambon.
The Company's approach to its business is to maximize the
application of Company resources toward product development and to minimize
infrastructure and related overhead costs. The Company does not currently have
sales or marketing capabilities.
Sheffield Medical Technologies Inc. ("Sheffield") was incorporated
under Canadian law in October 1986. In May 1992, the Company became domesticated
as a Wyoming corporation pursuant to a "continuance" procedure under Wyoming
law. In January 1995, the Company's shareholders approved the proposal to
reincorporate Sheffield in Delaware, which was effected on June 13, 1995. On
January 10, 1996, Ion Pharmaceuticals, Inc. ("Ion"), was formed as a wholly
owned subsidiary of the Company. At that time, Ion acquired the Company's rights
to certain early stage biomedical technologies. On April 17, 1997, CP
Pharmaceuticals, Inc. ("CP") was formed for the purpose of acquiring Camelot
Pharmacal, L.L.C., a privately held pharmaceutical development company, which
acquisition was consummated on April 25, 1997. In June 1997, the Company's
shareholders approved the proposal to change Sheffield's name from Sheffield
Medical Technologies Inc. to Sheffield Pharmaceuticals, Inc. As part of an
agreement with Elan, on June 30, 1998, Systemic Pulmonary Delivery, Ltd. ("SPD")
was formed as a wholly owned subsidiary of the Company. At that time, SPD
acquired the Company's rights to the systemic applications of the MSI and
acquired Elan's rights to certain pulmonary delivery technologies. Unless the
context requires otherwise, Sheffield, Ion, CP and SPD are referred herein to as
"the Company".
The Company's headquarters are located at 425 South Woodsmill
Road, Suite 270, St. Louis, Missouri 63017-3441 and its telephone number is
(314) 579-9899.
BUSINESS STRATEGY
The Company's business strategy is to seek out opportunities
to acquire and develop commercially attractive pharmaceutical products,
primarily in the area of pulmonary drug delivery. Where possible, the Company
intends to enter into joint ventures or other forms of strategic alliances to
defray or reduce significant development and manufacturing costs associated with
these opportunities that otherwise might be borne by the Company while retaining
certain commercial rights. As commercialization nears, the Company intends to
add or obtain access to a specialty pharmaceutical sales force in the United
States, as well as the attendant marketing infrastructure.
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The Company will to continue to be opportunistic in the
acquisition and/or in-licensing of technologies or products that meet the
Company's strategic objectives. Such opportunities include: (1) technologies or
products that meet the needs of healthcare communities that are not currently
served, (2) technologies or products that can cost effectively be developed when
viewed in light of the commercial opportunity and competitive environment within
the U.S. market, (3) technologies or products that will be of substantive
interest to other companies with regard to co-development and co-promotion with
limited incremental investment by the Company, and (4) products and technologies
with the potential for marketing to a specialty group or limited physician
audience. The Company plans to pay special attention to platform technologies
that can be developed into multiple applications in varying therapeutic
categories.
PULMONARY DELIVERY MARKET ENVIRONMENT
The Company competes in the pulmonary delivery market. The
principal use of pulmonary delivery has been in the treatment of respiratory
diseases such as asthma, chronic obstructive pulmonary disease ("COPD") and
cystic fibrosis. In 1998, industry sources estimate there were approximately
35.5 million asthma patients and 49.5 million COPD patients in the world. These
sources indicate that the number of newly diagnosed patients is growing at a
rate in excess of 10% annually due to an increase in worldwide air pollution
levels and the overall aging of the population. By the year 2005, the Company
expects that there will be more than 19 million asthma patients in the United
States alone.
In addition, the competitive marketplace has been significantly
affected by the worldwide phase out of Chlorofluorocarbons (CFCs) pursuant to
the Montreal Protocol. CFCs are the propellants used for MDIs, which are the
most common form of pulmonary delivery. Companies in the respiratory market have
initiated significant programs to redevelop existing products using alternative
propellants, dry powders or nebulizers.
There is considerable interest in applying pulmonary delivery
technology to systemic therapies that would benefit from the relatively easy
access to the circulatory system through the lungs. Work on pulmonary delivery
of insulin by other pulmonary delivery companies has received significant public
notice. There is a range of therapies that could provide a significant market
opportunity if available in a pulmonary delivered form. There is also
significant advantage in aerosol therapy for respiratory disease. It delivers
the medication directly onto the lung epithelial surfaces. In many cases, this
means that drugs can be effective in very low doses -- eliminating the side
effects usually associated with systemic administration.
Today, three types of devices are widely used in metered dose
administration: metered dose inhalers, dry powder inhalers, and nebulizers.
METERED DOSE INHALERS. Currently, metered dose inhalers
("MDIs") are the most commonly used pulmonary delivery
systems. It is estimated that in the United States, 80% of
pulmonary drug delivery is via MDI, with the majority of this
use coming from adults with asthma and COPD.
The main components of an MDI include a canister containing
the drug mixed with propellant and surfactant, a mouthpiece
that acts as the delivery conduit and the actuator seat for
the release of the drug. The initial velocity of particles as
they leave an inhaler is very high -- approximately 60 mph --
resulting in wasted drug if the patient is not able to
coordinate his/her breath with the delivery of aerosol into
the mouth. A number of studies have demonstrated that as many
as 60% of patients cannot accurately time their inspiration
with the actuation of their inhaler which results in under
medication and lack of compliance. Typically, only 20% of
delivered drug actually reaches the lungs.
The primary advantages of an MDI include its small size,
portability, quick usage time, and its availability for use
with most respiratory drugs. Disadvantages of an MDI include
patient coordination issues and efficient dose delivery.
Additionally, because the use of chlorofluorocarbon ("CFC")
propellants traditionally used in MDIs is being phased out by
international agreement (Montreal Protocol), alternative
propellants and formulations are being developed. Over time,
all current MDI users will be required to move to a non-CFC
MDI or other alternative delivery systems. The majority of
U.S. patients favor aerosol MDIs although a sizable percentage
may not coordinate them properly.
DRY POWDER INHALERS. Dry powder inhalers ("DPIs") were
introduced in the 1960s as single-dose inhalers. In these
devices, the drug is loaded as a unit dose that is
mechanically released as a powder for inhalation prior to each
use. To date, these relatively cumbersome systems have been
the primary form of DPI available in the United States, and
account for approximately 1% of the total aerosol delivery
market.
The inconvenience of the single dose DPI has been overcome
outside of the U.S. with the development and introduction of
multi-dose DPIs that can deliver up to 200 doses of
medication. However, like the single dose systems, they are
inspiratory flow rate dependent, that is, the amount of drug
delivered to the lung depends on the patient's ability to
inhale.
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Two of the most significant advantages of DPIs include (1) no
hand-breath coordination is required as with MDIs; and (2)
they contain no CFCs. However, most require a high inspiratory
flow rate, which can be problematic in younger patients or
patients with compromised lung function. In addition, they
often present difficulties for those with manual disabilities
(e.g., arthritis) or limited vision and, depending upon the
powder load delivered, they may induce acute bronchospasm in
sensitive individuals. Additionally, multi-dose powder
inhalers are subject to moisture sensitivity either from the
environment or patient breath and have had difficulty meeting
U.S. regulatory standards for dose-to-dose variation.
NEBULIZERS. The third widely used aerosol delivery system is
the nebulizer. Jet nebulizers, which are the most commonly
used nebulizer, work on a stream of compressed air or oxygen
that is forced through a narrow tube lying just above the
surface of the liquid to be nebulized. It takes approximately
10 to 15 minutes to nebulize this amount of liquid. Studies
suggest keeping the duration of nebulization below 10 minutes,
as longer durations are associated with poor compliance.
During nebulization only about 10% of the drug is delivered to
the lungs; about 80% gets trapped in the reservoir, tubing and
mask; the rest is exhaled.
Nebulizers can be used for a wide range of patients, but are
especially useful for those old and young patients who cannot
manage other inhaler devices. Nebulizers also play a key role
in emergency room and intensive care treatment for patients
with acute bronchospasm. Another feature exclusive to
nebulizers is that a mixture of drugs can be administered in
one sitting. However, currently approved nebulizers are bulky
table-top units that are time consuming, have a high initial
cost (often in excess of the amount reimbursable by managed
care) and can be noisy during operation.
SHEFFIELD'S PULMONARY DELIVERY PLATFORMS
The Company recognizes that no single technology in the area
of pulmonary drug delivery will meet the needs of patients and providers of the
wide variety of compounds (both for respiratory disease and systemic disease
therapy) that may benefit therapeutically and commercially from pulmonary
delivery. As a result, it remains the Company's goal to acquire or in-license a
portfolio of pulmonary delivery technologies to meet the broadest based market
opportunity.
For this reason, the Company acquired worldwide, exclusive
rights to the Siemens-developed Metered Solution Inhaler ("MSI"), a portable
nebulizer-based pulmonary delivery system. This was also the rationale for the
acquisition in mid 1998 from Aeroquip-Vickers of the Aerosol Drug Delivery
System ("ADDS") technology, an improved version of the MDI. In addition, as part
of its alliance with Elan, the Company acquired the rights to two Elan-developed
technologies, the Ultrasonic Pulmonary Drug Absorption System ("UPDAS") and a
therapeutic agent to enhance absorption of drugs in the deep lungs ("Enhancing
Technology").
In keeping with the Company's strategy of minimizing
infrastructure and capital required to bring products to market, the Company
partnered the development of respiratory products in the MSI with Zambon. Under
its agreement with Zambon, MSI commercial rights for respiratory products have
been sublicensed to Zambon, with the Company maintaining co-promotion rights for
the U.S. market. The Company's ability to co-promote MSI respiratory products in
the U.S. requires no additional payment by the Company. Zambon has committed to
fund the development costs for respiratory compounds delivered by the MSI as
well as making certain milestone payments and royalties on net sales resulting
from these MSI products to the Company.
The ADDS technology, acquired by the Company in mid-1998,
along with certain applications of the MSI, have become the focus of a strategic
alliance with Elan for development for pulmonary delivery of drugs for treatment
of systemic (non-respiratory) diseases. Two Elan technologies have also been
licensed to the venture. The Company has retained exclusive rights outside of
the strategic alliance to respiratory disease applications utilizing the ADDS
technology and the two Elan technologies. Two systemic compounds for pulmonary
delivery are currently under development, one in the MSI for breakthrough pain
and one for migraine in the ADDS.
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The Company is in discussions with an aerosol manufacturer
with regard to the manufacture of both systemic and respiratory drugs in the
ADDS. The Company is also in discussions with a range of pharmaceutical and
biotechnology companies about potential collaborations for developing specific
compounds (both respiratory and systemic) in ADDS. Unlike the MSI, ADDS is a
technology that lends itself to individual product applications in the
respiratory market. While the ADDS technology may be applicable to a wide range
of respiratory products, the Company believes that a full line of products
delivered by ADDS is not necessary for commercial success. The reverse is true
with the MSI, since one of the MSI's primary competitive advantages is the
delivery of a range of drugs in interchangeable cartridges used with the parent
nebulizer device.
METERED SOLUTION INHALER
The Company owns the worldwide rights to the Metered Solution
Inhaler, a patented state-of-the-art, multi-dose nebulizer delivery system from
Siemens AG, the multi-national engineering and electronics conglomerate.
Worldwide development responsibility and commercial rights for respiratory
products in the MSI have been licensed to Zambon Group SpA in return for an
equity investment in the Company (approximately 10%), milestone payments and
royalties on net sales. The Company retains U.S. co-promotion rights.
The MSI pulmonary drug delivery system has been developed to
provide the therapeutic benefit of nebulization with the convenience of
pressurized metered dose inhalers (MDIs) in one system. The MSI was developed to
meet specific needs within the respiratory market, particularly for pediatric
and geriatric patients suffering from asthma and COPD.
Albuterol in the MSI is currently the subject of an
Investigational New Drug Application ("IND") with the Food and Drug
Administration ("FDA"). A Phase I/II study being conducted by Zambon at the
University of Maryland under this IND. The Company expects this study will be
completed late in the first quarter of 1999.
DESCRIPTION OF THE MSI
The MSI is comprised of two main components: a reusable,
pocket-size inhaler unit developed and manufactured for the Company by Siemens
AG, a global leader in electronics and technology and interchangeable drug
cartridges containing multiple doses of drug in solution. Arrangements have been
made for the drug- containing cartridges to be filled and assembled at
Chesapeake Biological Laboratories of Baltimore, Maryland. The cartridges are an
integral part of the total system and the cartridge plus each drug formulation
will be the subject of a separate drug device combination New Drug Application
("NDA").
The basic technology of the system involves the rapid
nebulization of therapeutic agents using ultrasonic waves. This produces a
concentrated cloud of medication delivered through the mouthpiece over a two to
three second period for inhalation. The key components of the technology are
housed in the inhaler unit. They are the rechargeable battery-operated motor,
ultrasonic horn and drug cartridge. The pocketsize MSI allows for administration
of a range of drugs in a single, simple-to-use, environmentally friendly
delivery system. Each cartridge contains, depending on formulation,
approximately a one to two month supply of drug.
To use the MSI system, a patient simply selects the
appropriate color-coded drug cartridge and places it into the chamber of the
inhaler unit. Pressing the "on" button activates a small electrical motor that
transports a precise dose of drug from the cartridge chamber to the ultrasonic
horn -- transforming the solution into an aerosolized cloud. The patient's
inspiratory breath carries this cloud of medication directly to the lungs where
it is needed. The dose delivered by the MSI is very accurate and consistent
because: (1) the MSI is designed to be inspiratory flow rate independent; that
is, delivery of the drug does not depend upon the patient's ability to inhale
forcefully, and (2) the MSI does not require a high level of coordination
between inspiration and actuation of the device. The patient's natural breath
carries the medication directly to the lungs, minimizing the amount of drug
deposited in the mouth and throat.
MSI ADVANTAGES
The Company believes that the MSI provides significant
advantages over other drug delivery systems. It is particularly suited for
younger and older asthma patients, as well as for older COPD patients who have
difficulty using MDIs and currently have to depend on larger, more
time-consuming tabletop nebulizers for delivery of their medications. These
potential advantages include:
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ACCURACY. The superior engineering and patient-friendly design
of the MSI is intended to provide minimal dose to dose
variability. Patients can therefore expect to receive the
right therapeutic dose consistently. Recent testing with the
MSI system found dose-to-dose variability significantly better
than the current FDA requirement.
ENHANCED PATIENT COMPLIANCE. The pocketsize, portable MSI unit
is designed to combine the therapeutic benefits of
nebulization with the convenience of pressurized metered dose
inhalers. The drug dose is precisely measured and delivered in
seconds, as compared to 10 to 15 minutes or more for the
typical nebulizer. The device is easy to operate, requiring
minimal coordination between actuation and inhalation for
proper drug delivery. These benefits are expected to improve
patient compliance with the proper administration of their
respiratory medication. Another expected factor in enhanced
patient compliance is the broad range of drugs that can be
accommodated by the MSI, allowing patients on multiple
medications to rely on one simple delivery system.
INSPIRATORY FLOW RATE INDEPENDENCE. Unlike most of the DPIs
currently available (or in development), the MSI is designed
to achieve a consistent and significant level of drug
deposition over a broad range of inspiratory flow rates. This
is especially important in younger patients or patients with
compromised lung function (e.g., during an asthma attack) who
have a difficult time breathing normally.
VERSATILITY. Many asthma and COPD patients are taking multiple
inhalation medications. The MSI accommodates interchangeable
drug cartridges to allow for the administration of a broad
range of frequently used respiratory drugs in a single,
simple-to-use delivery system. The system includes an early
warning mechanism that signals when the batteries need
recharging or when the dosator is not functioning properly and
a dose counter indicating when a new inhaler unit is required.
These user-friendly features result in a simplified dosing
procedure for both patients and their caregivers.
PULMONARY TARGETING. The particle size of the inhaled
medication affects the effectiveness of drug delivery to the
lung. Generally, a drug is "respirable" if the particle size
is between two and five microns. Larger particles tend to
deposit in the inhaler or in the patient's mouth and throat.
Smaller particles tend to be exhaled. Within the respirable
range, the MSI is designed to deliver particles specifically
targeted for certain portions of the lungs, the central lung
for local treatment or the deep lung for enhanced absorption
into the blood stream for systemic therapies.
ENVIRONMENTALLY FRIENDLY. CFCs, the most commonly used
propellant for MDI aerosols, are believed to adversely affect
the Earth's ozone layer. They are subject to worldwide
regulations aimed at eliminating their production and use
within the decade under the Montreal Protocol. The MSI does
not use CFCs or any other type of ozone depleting propellant.
ECONOMICAL. The Company believes that the MSI offers
significant value to the patient because it is designed to
allow a single device to be used with a complete family of
respiratory medications available in cost-effective
interchangeable cartridges. The inhaler unit itself is
expected to have a life of two to three years. The initial
cost of the inhaler unit is expected to be within the cost
range that managed care providers will reimburse patients. The
Company anticipates the combined cost to the patient of the
device plus the drug filled cartridges will be comparable to
the average cost per dose of the standard metered dose
inhaler.
MSI PRODUCT PIPELINE IN DEVELOPMENT
Through development alliances with strategic partners, Zambon
and Elan, the Company is implementing a broad development strategy for the MSI.
The Company and Zambon are developing a range of widely used respiratory drugs
for delivery in the MSI. Potential candidates for respiratory disease therapy
include albuterol, ipratropium, cromolyn, inhaled bronchial steroids and
combination products, which are described below. Most patients who experience
respiratory disease commonly use multiple medications to treat their conditions.
The initial Phase I/II clinical trial on albuterol in the MSI is expected to be
completed in the first quarter of 1999. The Company anticipates completion of
the albuterol development program and submission of the drug device combination
NDA in the second half of 2000. The Company and Zambon intend to initiate
additional clinical trials for other respiratory therapies in the MSI during
1999.
Among the drugs planned for development for the MSI system are:
ALBUTEROL. Albuterol is a beta agonist used as rescue therapy
for patients with asthma and chronic obstructive pulmonary
disease. It is the largest selling respiratory compound with
U.S. sales of over $500 million in all dosage forms. It is
available in a metered dose inhaler and nebulizer solution as
well as solid and liquid dosage forms.
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IPRATROPIUM. Ipratropium is a bronchodilator used primarily to
treat COPD patients. It is useful because of its
anticholinergic properties, which reduce pulmonary congestion.
It is available in a metered dose inhaler, nebulizer solution
and a combination product with albuterol.
CROMOLYN. Cromolyn is a non-steroidal, anti-inflammatory drug
used to reduce the underlying bronchial inflammation
associated with asthma. It is extremely safe and it is most
commonly used to treat pediatric patients. It is available in
a metered dose inhaler and nebulizer solution.
INHALED BRONCHIAL STEROIDS. Inhaled bronchial steroids are
anti-inflammatory agents. They address the underlying
inflammation in the lungs of asthma and COPD patients. They
are available in a metered dose inhaler. Steroids are the
fastest growing category in the respiratory market, growing at
25% per year.
OTHER RESPIRATORY THERAPIES. In addition to the drugs listed
above, the Company and Zambon are assessing the market
potential for a range of additional respiratory therapies.
These therapies are expected to include a combination of an
anti-inflammatory and beta agonist, and an anticholinergic and
beta agonist, as well as antibiotics, cystic fibrosis
treatments and a range of early stage biotech compounds that
target respiratory disease.
MSI SYSTEMIC MEDICATIONS - PAIN MANAGEMENT. Through its
development alliance with Elan, the Company will develop
certain drugs for systemic treatment by pulmonary delivery
through the MSI. The first of these drugs will be a compound
for the treatment of severe pain. The pain management market
includes patients with cancer, post-operative, migraine
headache and chronic persistent pain. Narcotic analgesics for
treatment of these severe forms of pain are estimated to
exceed $5.5 billion in worldwide sales in the year 2000. The
Company has identified a market opportunity for a
rapid-acting, non-invasive treatment for breakthrough pain and
is undertaking pre-clinical formulation and system feasibility
development on an analgesic compound for pulmonary delivery in
the MSI.
AEROSOL DRUG DELIVERY SYSTEM
The Company's Aerosol Drug Delivery System is a novel,
proprietary inhaled-drug delivery system that is currently undergoing
preclinical feasibility trials for delivery of both respiratory (local) and
systemic drugs. The ADDS technology represents a new generation MDI.
The ADDS technology was developed to correct major
deficiencies associated with existing MDI technology. MDIs have provided
convenient, safe, self-administered treatment for over 30 years and decrease the
cost of therapy because they can be used by the patient at home with minimal
medical supervision. However, proper use of current MDIs requires training and
precise execution of the delivery technique. For these reasons, many patients do
not use their MDIs in the prescribed manner to coordinate actuation and
inhalation. Incorrect technique has been shown to result in little or no
benefits from MDI use in half of all adult patients and in a greater proportion
of children. Moreover, because of these coordination issues, most children under
age five cannot use a standard MDI.
Even with correct technique, current MDIs deliver less than
20% of the drug to the lungs of the patient. The remaining 80% of the drug is
wasted upon deposition on the back of the mouth, or by completely missing the
airway. This results from: (1) the high linear velocity (two to seven
meters/second) of the aerosol jet as it discharges; (2) incomplete evaporation
of the propellant leading to large size droplets that deposit in the mouth and
larynx rather than reaching the lung; and (3) inadequate mixing resulting in a
non-uniform distribution of drug particles in the inspiratory flow stream. Drug
deposited in the mouth and throat can be swallowed and absorbed systemically or,
in the case of inhaled steroids, may create a local concentration of the drug
that causes immunosuppression response and the development of fungal infections.
In addition, swallowing beta agonist bronchodilators causes relaxation of the
smooth muscles of the gastrointestinal tract that decreases activity of the
stomach.
From a therapeutic view, the most serious problem with MDIs is
inconsistency of delivery. With existing MDIs the actual dose can vary from 0%
to 300% of the intended dose. Patients may not receive sufficient drug to
achieve a therapeutic effect, or they may overdose with undesirable side
effects. These conditions can lead to the need for emergency treatment.
A major advantage for the ADDS technology is that it uses the
same aerosol canisters and valves as are currently used in existing MDIs. As a
result, existing aerosol facilities will be able to produce canisters with
formulations optimized for use in ADDS. The only additional step required is to
place the aerosol canister in the "device" prior to final packaging. This
results in a cost effective product and provides numerous benefits to patients.
The device, like the canister, is disposable when the canister is empty.
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The ADDS technology features two improvements over existing
MDIs and dry powder inhalers. Fluid dynamics modeling and IN-VITRO trials
indicate that up to 50% of drug emitted by the ADDS reaches the lungs with oral
deposition reduced to less than 10%. Because of this increase in efficiency,
ADDS should require less drug per actuation than existing devices to achieve a
therapeutic effect. This will result in more unit doses per drug canister than a
conventional MDI, with less potential for adverse reactions.
ADDS also features a unique proprietary triggering mechanism
that actuates at the correct time during inhalation. It is designed to
automatically adjust to the patient's breathing pattern to accommodate
differences in age and disease state. This synchronous trigger is designed to
reduce patient coordination problems and enhances patient compliance.
DESCRIPTION OF ADDS
The ADDS technology utilizes a standard aerosol MDI canister,
encased in a compact device that provides an aerosol flow-control chamber and a
synchronized triggering mechanism. Manipulation of the discharged drug-
containing aerosol cloud is key to optimization of the efficiency and
consistency for MDIs. The unique features of ADDS are:
AEROSOL FLOW-CONTROL CHAMBER. The ADDS design uses fluid
dynamics to: (1) reduce the velocity of the drug relative to
the inspiratory breath velocity (less than one meter/second);
(2) increase residence time of the aerosol droplets before
exiting the device to allow near complete evaporation of
propellant; (3) increase droplet dispersion and mixing, thus
increasing evaporation and improving vapor fraction at every
point along the flow path; (4) reduce the diameter of the drug
particles at the exit plane of the device; (5) decrease
inertia of droplets to reduce impaction; and (6) optimize
timing of dose discharge with inspiratory breath for maximum
drug deposition in lungs.
SYNCHRONIZING TRIGGER MECHANISM. The aerosol flow-control
chamber allows the patient to inhale through the device at a
normal breathing rate, instead of a forced breath. The
inspiratory breath establishes flow fields within the device
that mix and uniformly disperse the drug in the breath. At the
mouthpiece, nearly all the propellant is evaporated leaving
only drug particles to be inspired, allowing a dramatic
increase in the amount of drug delivered to the lungs. Only
small amounts of drug deposit in the mouth and throat. A
triggering and timing mechanism that is synchronized with the
patient's inspiratory breath control the discharge of the
metering valve. ADDS can accommodate different flowrates, so
any patient can activate the triggering device. Similarly, the
timing mechanism will automatically adjust to the flow
generated by the patient, delaying or hastening discharge in
proportion to the total volume passing through the flow
control chamber. This feature accommodates differences in
inspiratory flow characteristic of pulmonary disease states in
children, adults and the infirm.
ADDS ADVANTAGES
The performance characteristics of the ADDS are expected to
translate into multiple benefits, including:
IMPROVED DRUG DELIVERY EFFICIENCY. The majority of the drug
emitted by the ADDS is delivered to the lungs while less than
10% is lost through deposition in the mouth and throat. The
improved delivery efficiency enhances efficacy, reduces side
effects and provides greater consistency of dose
administration.
GREATER PATIENT COMPLIANCE. The ADDS eliminates technique
dependence for simple, consistent dose-to-dose delivery,
resulting in improved compliance with prescribed therapy.
BROADER PATIENT BASE. The ADDS can be prescribed for a broader
patient base since it is designed to be self-administered by
children and the elderly as well as adult patients.
PHARMACOECONOMIC BENEFIT. The ADDS has increased delivery
efficiency with less waste, so patients can receive more unit
doses per standard canister. This allows for a lower drug cost
per day in addition to reducing prescription and payor costs
because fewer pharmacy visits are required.
ADDS PRODUCT PIPELINE IN DEVELOPMENT
The Company believes that the ADDS technology possesses many
potential competitive advantage over other inhalation systems in both local
respiratory and systemic applications. It is applicable to all age categories,
eliminating the most troublesome problems of aerosol metered dose delivery.
Increased efficiency allows for potential application to proteins and peptides
formerly discarded as candidates for aerosol delivery.
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The development of systemic drugs using ADDS is being
conducted as part of the Company's alliance with Elan. A range of suitable
compounds has been identified and the first product has begun the development
process. Therapeutic areas of interest to the Company include:
ADDS MIGRAINE THERAPY. Migraine headaches affect 16-18 million
Americans. Annual sales for the migraine therapy market are in
excess of $1.3 billion with many patients unable to get
satisfactory relief from currently available therapies. In
fact, it is estimated that absenteeism and medical expenses
resulting from migraine total $50 billion annually. Current
oral drug therapies for the treatment of migraine headaches
have slow onset of action, resulting in a medical need that
may be better satisfied through pulmonary delivery.
ADDS RESPIRATORY THERAPIES. The ADDS has broad applications
across respiratory disease therapies since it utilizes basic
MDI delivery methods that are the most popular forms of
respiratory delivery. The ADDS technology's ability to vastly
minimize oral deposition makes it especially applicable to
steroids and steroid combinations with which fungal overgrowth
side effects are common. In addition, U.S. patients and
physicians have indicated that they prefer metered dose
aerosol delivery. The ADDS technology is positioned to take
advantage of this built-in market preference for MDIs with its
potential for superior performance, reduced adverse reactions
and cost-effectiveness. Inhaled steroids are the fastest
growing segment of the respiratory market and the largest in
Europe. The features of the ADDS directly minimize the aspects
of inhaled steroids that remain a concern to patients and
physicians. The market for inhaled steroids on a worldwide
basis is approximately $1.5 billion.
As with MSI, there remains opportunities for developing ADDS
for a range of therapies either directly by the Company or in collaboration with
strategic partners. Unlike the MSI, it is potentially advantageous for the
Company to partner on a product-by-product basis, concentrating on prime
partners to launch the system commercially and to aid in subsequent development
with products developed specifically for exclusive commercialization by the
Company.
ULTRASONIC PULMONARY DRUG ABSORPTION SYSTEM
The Ultrasonic Pulmonary Drug Absorption System ("UPDAS(TM)")
is a novel ultrasonic pulmonary delivery system designed by Elan as a disposable
unit dose nebulizer system. UPDAS was designed primarily for the delivery of
proteins, peptides and other large molecules to the lungs for absorption into
the bloodstream. Elan's preliminary research with UPDAS demonstrated unique
atomization that may prevent denaturing of bioactive molecules and particle size
distribution that meets the targets for local and systemic delivery. The Company
intends to initiate in-vitro validation testing of UPDAS to confirm Elan's
preliminary results and to develop data to support patent filings. A plan for
additional development of UPDAS will be prepared based upon the results of this
confirmational testing.
ENHANCING TECHNOLOGY
As part of the same transaction in which the Company acquired
UPDAS, the Company also acquired a worldwide exclusive license to Elan's
Enhancing Technology. While not a delivery system itself, the Enhancing
Technology is a therapeutic agent identified by Elan to increase the systemic
absorption of drugs delivered to the lungs. The Enhancing Technology will be
utilized in conjunction with the Company's other pulmonary delivery systems. The
Company intends to complete the in-vitro testing necessary to substantiate the
unique absorption properties of the Enhancing Technology that have been
identified by Elan. After this work is completed and analyzed, the Company plans
to determine the appropriate patent strategy to take and to begin development of
the Enhancing Technology for use in the Company's delivery systems.
EARLY STAGE RESEARCH PROJECTS
As part of the Company's focus on later stage opportunities,
the Company is seeking to out-license its portfolio of early stage medical
research projects to companies that are committed to early stage biotechnology
opportunities. The Company has determined that its early stage technologies do
not fit the Company's pulmonary drug delivery strategy. Consequently, the
Company plans to out-license these technologies while maintaining an interest in
the technologies' promise without incurring the development costs associated
with early stage research and development.
Because the Company is no longer funding these projects, it
may be at risk of losing its rights to certain of these technologies. There can
be no assurance that the Company will be able to sell or license its rights to
any of its remaining early stage research projects or realize any milestone
payments or other revenue from those early stage research projects that have
been previously divested.
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ANTI-PROLIFERATIVE TECHNOLOGIES
The Company holds rights to certain compounds and their uses
for the treatment of conditions characterized by unregulated cell proliferation
or cell growth and sickle cell anemia. The Company's intellectual property
portfolio consists of clotrimazole ("CLT"), its metabolites and a number of
proprietary new chemical entities co-owned by the Company termed the
Trifens(TM). Such compounds have demonstrated promise in therapeutic
applications for treating a number of conditions characterized by unregulated
cell proliferation, such as cancer (including multiple drug resistance cases)
and certain proliferative dermatological conditions, as well as sickle cell
anemia and secretory diarrhea.
The Company entered into a license arrangement with Lorus
Therapeutics, Inc. (formerly Imutec Pharma Inc.) in November 1997. The
arrangement licenses rights to a series of compounds for the treatment of
cancer, Kaposi's sarcoma and actinic keratosis to a newly formed company, NuChem
Pharmaceuticals, Inc. ("NuChem") for which Lorus Therapeutics will provide
funding and management of the development program. The Company holds a 20%
equity interest in NuChem.
Work on the lead compounds by NuChem has progressed in the
pre-clinical phase. NuChem recently announced that the U.S. National Cancer
Institute has agreed to undertake additional in vitro screening after initial
evaluation of the compounds. The initial IND for the lead compounds is planned
to be filed in early 2000.
The Company is actively seeking to partner or license the use
of clotrimazole and the Trifens in the fields of sickle cell anemia and
gastrointestinal disorders.
RBC-CD4 ELECTROINSERTION TECHNOLOGY
The Company is the worldwide licensee of certain technology
(the "RBC-CD4 Electroinsertion Technology") relating to the electroinsertion of
full-length CD4 protein into red blood cells for use as a potential therapeutic
in the treatment of HIV that leads to AIDS. The Company has signed an option
agreement with a private investment group that had a prior interest in the
RBC-CD4 Electroinsertion Technology to sell the Company's rights to this
HIV/AIDS technology. As consideration for the option, the third party will fund
an additional study related to the RBC-CD4 Electroinsertion Technology. If this
option is exercised, the Company will retain a one-third interest in all future
commercial and sublicensing results.
LIPOSOME-CD4 TECHNOLOGY
The Company is the worldwide licensee of certain technology
(the "Liposome-CD4 Technology") relating to the incorporation of CD4 antigens
into liposome bilayers and their use as a potential therapeutic agent in the
treatment of HIV/AIDS. The Company entered into a sublicense agreement in July
1996 with SEQUUS Pharmaceuticals, Inc. for the continued development and
commercialization of the Liposome-CD4 Technology.
HIV/AIDS VACCINE
The Company holds an exclusive worldwide license to a
potential HIV/AIDS vaccine and diagnostic test under development at the French
Institute of Health and Medical Research. The Company is seeking a partner for
this technology.
UGIF TECHNOLOGY - PROSTATE CANCER
The Company holds an exclusive worldwide license to a growth
regulatory factor, termed Urogenital Sinus Derived Growth Inhibitory Factor
("UGIF"), which could serve as a potential prostate cancer therapy.
Identification of UGIF as a growth inhibitory factor for certain prostate cells
was based upon laboratory studies conducted at Baylor Medical College. The
Company is seeking a partner for this technology.
GOVERNMENT REGULATION
The Company's research and development activities and,
ultimately, the production and marketing of its licensed products, are subject
to comprehensive regulation by numerous governmental authorities in the United
States and other countries. Among the applicable regulations in the United
States, pharmaceutical products are subject to the Federal Food, Drug & Cosmetic
Act, the Public Health Services Act, other federal statutes and regulations, and
certain state and local regulations. These regulations and statutes govern the
development, testing, formulation, manufacture, labeling, storage, record
keeping, quality control, advertising, promotion, sale, distribution and
approval of such pharmaceutical products. Failure to comply with applicable
requirements can result in fines, recall or seizure of products, total or
partial suspension of production, refusal by the government to approve marketing
of the product and criminal prosecution.
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A new drug may not be legally marketed for commercial use in
the United States without FDA approval. In addition, upon approval, a drug may
only be marketed for the indications, in the formulations and at the dosage
levels approved by the FDA. The FDA also has the authority to withdraw approval
of drugs in accordance with applicable laws and regulations. Analogous foreign
regulators impose similar approval requirements relating to commercial marketing
of a drug in their respective countries and may impose similar restrictions and
limitations after approval.
In order to obtain FDA approval of a new product, the Company
and its strategic partners must submit proof of safety, efficacy, purity and
stability, and the Company must demonstrate validation of its manufacturing
process. The testing and application process is expensive and time consuming,
often taking several years to complete. There is no assurance that the FDA will
act favorably or quickly in reviewing such applications. With respect to
patented products, processes or technologies, delays imposed or caused by the
governmental approval process may materially reduce the period during which the
Company will have the exclusive right to exploit them. Such delays could also
affect the commercial advantages derived from proprietary processes.
As part of the approval process, the FDA reviews the Drug
Master File (the "DMF") for a description of product chemistry and
characteristics, detailed operational procedures for product production, quality
control, process and methods validation, and quality assurance. As process
development continues to mature, updates and modifications of the DMF are
submitted.
The FDA approval process for a pharmaceutical product includes
review of (i) chemistry and formulations, (ii) preclinical laboratory and animal
studies, (iii) initial IND clinical studies to define safety and dose
parameters, (iv) well-controlled IND clinical trials to demonstrate product
efficacy and safety, followed by submission and FDA approval of a New Drug
Application (the "NDA"). Preclinical studies involve laboratory evaluation of
the product and animal studies to assess activity and safety of the product.
Products must be formulated in accordance with United States Good Manufacturing
Procedures ("GMP") requirements and preclinical tests must be conducted by
laboratories that comply with FDA regulations governing the testing of drugs in
animals. The results of the preclinical tests are submitted to the FDA as part
of the IND application and are reviewed by the FDA prior to granting the sponsor
permission to conduct clinical studies in human subjects. Unless the FDA objects
to an IND application, the application will become effective 30 days following
its receipt by the FDA. There can be no certainty that submission of an IND will
result in FDA authorization to commence clinical studies.
Human clinical trials are typically conducted in three
sequential phases with some amount of overlap allowed. Phase I trials normally
consist of testing the product in a small number of normal volunteers for
establishing safety and pharmacokinetics using single and multiple dosing
regiments. In Phase II, the continued safety and initial efficacy of the product
are evaluated in a limited patient population, and appropriate dosage amounts
and treatment intervals are determined. Phase III trials typically involve more
definitive testing of the appropriate dose for safety and clinical efficacy in
an expanded patient population at multiple clinical testing centers. A clinical
plan, or "protocol," accompanied by the approval of the institution
participating in the trials, must be submitted to the FDA prior to commencement
of each clinical trial phase. Each clinical study must be conducted under the
auspices of an Institutional Review Board (the "IRB") at the institution
performing the clinical study. The IRB is charged with protecting the safety of
patients in trials and may require changes in a protocol, and there can be no
assurance that an IRB will permit any given study to be initiated or completed.
In addition, the FDA may order the temporary or permanent discontinuation of
clinical trials at any time. The Company must rely on independent investigators
and institutions to conduct these clinical studies.
All the results of the preclinical and clinical studies on a
pharmaceutical product are submitted to the FDA in the form of an NDA for
approval to commence commercial distribution. The information contained in the
DMF is also incorporated into the NDA. Submission of an NDA does not assure FDA
approval for marketing. The application review process often requires 12 months
to complete. However, the process may take substantially longer if the FDA has
questions or concerns about a product or studies regarding the product. In
general, the FDA requires two adequate and controlled clinical studies
demonstrating efficacy with sufficient levels of statistical assurance. However,
additional support may be required. The FDA also may request additional
information relating to safety or efficacy, such as long-term toxicity studies.
In responding to an NDA, the FDA may grant marketing approval, require
additional testing and/or information, or deny the application. Accordingly,
there can be no assurance about any specific time frame for approval, if any, of
products by the FDA or foreign regulatory agencies. Continued compliance with
all FDA requirements and conditions relative to an approved application,
including product specifications, manufacturing process, labeling and
promotional material, and record keeping and reporting requirements, is
necessary throughout the life of the product. In addition, failure to comply
with FDA requirements, the occurrence of unanticipated adverse effects during
commercial marketing or the result of future studies, could lead to the need for
product recall or other FDA-initiated actions that could delay further marketing
until the products or processes are brought into compliance.
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The facilities of each pharmaceutical manufacturer must be
registered with and approved by the FDA as compliant with GMP. Continued
registration requires compliance with standards for GMP. In complying with GMP,
manufacturers must continue to expend time, money and effort in production,
record keeping and quality control to ensure technical compliance. In addition,
manufacturers must comply with the United States Department of Health and Human
Services and similar state and local regulatory authorities if they handle
controlled substances, and they must be registered with the United States
Environmental Protection Agency and similar state and local regulatory
authorities if they generate toxic or dangerous waste streams. Other regulatory
agencies such as the Occupational Safety and Health Administration also monitor
a manufacturing facility for compliance. Each of these organizations conducts
periodic establishment inspections to confirm continued compliance with its
regulations. Failure to comply with any of these regulations could mean fines,
interruption of production and even criminal prosecution.
For foreign markets, a pharmaceutical company is subject to
regulatory requirements, review procedures and product approvals which,
generally, may be as extensive, if not more extensive, as those in the United
States. Although the technical descriptions of the clinical trials are
different, the trials themselves are often substantially the same as those in
the United States. Approval of a product by regulatory authorities of foreign
countries must be obtained prior to commencing commercial product marketing in
those countries, regardless of whether FDA approval has been obtained. The time
and cost required to obtain market approvals in foreign countries may be longer
or shorter than required for FDA approval and may be subject to delay. There can
be no assurance that regulatory authorities of foreign countries will grant
approval. The Company has no experience in manufacturing or marketing in foreign
countries nor in matters such as currency regulations, import-export controls or
other trade laws.
PATENTS AND TRADEMARKS
MSI SYSTEM PATENTS AND TRADEMARK
Under its agreement with Siemens AG for the technology
underlying the MSI system, the Company is responsible for jointly financing and
prosecuting the U.S. patent applications for the benefit of the owners and
licensors of this technology. To date, one U.S. patent has issued, two U.S.
patent applications are pending, and three foreign patent applications are
pending. In addition, the Company holds a trademark on "Premaire(TM)" as a brand
name for the MSI system.
AEROSOL DRUG DELIVERY SYSTEM PATENTS
As a result of its acquisition of ADDS, the Company was
assigned the rights to one U.S. patent application and three foreign patent
applications that are pending on ADDS.
EARLY STAGE RESEARCH TECHNOLOGY PATENTS
Under its license agreements for its early stage research
projects, the Company is responsible for financing and prosecuting patent
applications for the benefit of the owners and licensors of these technologies.
While the Company holds several U.S. and foreign patents and patent applications
for these early stage technologies, the Company expects to assign these patents
and applications to future acquirors, if any, of these technologies. Because the
Company does not intend to continue to pay for future patent fees on these early
stage technologies, in the event that no acquirors are found for these
technologies, the Company expects that it will allow some or all of these
patents and patent applications to lapse or the rights may be returned to the
licensors.
COMPETITION
The Company competes with approximately 25 other companies
involved in developing and selling respiratory products for the U.S. market.
Most of these companies possess financial and marketing resources and
developmental capabilities substantially greater than the Company. Some of the
products in development by other companies may be demonstrated to be superior to
the Company's current or future products. Furthermore, the pharmaceutical
industry is characterized by rapid technological change and competitors may
complete development and reach the market place prior to the Company. The
Company believes that competition in the respiratory category will be based upon
several factors, including product efficacy, safety, reliability, availability,
and price, among others.
EMPLOYEES
As of March 19, 1999, the Company employed 12 persons, five of
whom are executive officers.
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CERTAIN RISK FACTORS THAT MAY AFFECT FUTURE RESULTS, FINANCIAL CONDITION AND
MARKET PRICE OF SECURITIES
DEVELOPMENT STAGE COMPANY; HISTORY OF OPERATING LOSSES AND
ACCUMULATED DEFICIT; GOING CONCERN OPINION
The Company is in the development stage. The Company has been
principally engaged to date in research, development and licensing efforts, and
has experienced significant operating losses. The Company experienced operating
losses of $18,560,461 and $9,489,138 for the fiscal years ended December 31,
1998 and 1997 and, as of December 31, 1998, the Company had an accumulated
deficit of $55,156,763. The independent auditors' report dated March 11, 1999,
on the Company's consolidated financial statements stated that the Company has
generated only minimal operating revenue, has incurred recurring operating
losses and will require additional capital and that these conditions raise
substantial doubt about its ability to continue as a going concern. The Company
expects that it will continue to have a high level of operating expenses and
will be required to make significant up-front expenditures in connection with
its product development activities. As a result, the Company anticipates
additional operating losses for 1999 and that such losses will continue
thereafter until such time, if ever, as the Company is able to generate
sufficient revenues to sustain its operations.
The Company's ability to achieve profitable operations is
dependent in large part on regulatory approvals of its products. There can be no
assurance that the Company will ever achieve such approvals or profitable
operations.
SIGNIFICANT LIQUIDITY RESTRAINTS
The Company's cash available for funding its operations as of
December 31, 1998 was $2,456,290. As of such date, the Company had trade
payables of $615,138 and current research obligations of $449,805. In addition,
committed and/or anticipated funding of research and development after December
31, 1998 is estimated at approximately $2,076,000. The Company will be required
to obtain additional funds for its business through operations or equity or debt
financings, collaborative arrangements with corporate partners or from other
resources. No assurance can be given that these funds will be available for the
Company to finance its development on acceptable terms, if at all. If adequate
funds are not available from operations or additional sources of funding, the
Company's business will suffer a material adverse effect.
NEED FOR ADDITIONAL FINANCING; UNCERTAINTY OF OBTAINING
ADDITIONAL FUNDING
The Company's operations to date have consumed substantial and
increasing amounts of cash. The negative cash flow from operations is expected
to continue in the foreseeable future. The development of the Company's
technologies and proposed products will require a commitment of substantial
funds to conduct costly and time-consuming research, preclinical and clinical
testing, and to bring any such products to market. The Company's future capital
requirements will depend on many factors, including continued progress in
out-licensing the early stage technology and developing the Company's pulmonary
delivery technologies, the ability of the Company to establish and maintain
collaborative arrangements with others and to comply with the terms thereof,
receipt of payments due from partners under research and development agreements,
progress with preclinical and clinical trials, the time and costs involved in
obtaining regulatory approvals, the cost involved in preparing, filing,
prosecuting, maintaining and enforcing patent claims, the need to acquire
licenses to new technology and the status of competitive products.
The Company needs to raise substantial additional capital to
fund its operations. The Company intends to seek such additional funding through
collaborative or partnering arrangements, the extension of existing
arrangements, or through public or private equity or debt financings. There can
be no assurance that additional financing will be available on acceptable terms
or at all. If additional funds are raised by issuing equity securities, further
dilution to shareholders may result. If adequate funds are not available, the
Company may be required to delay, reduce the scope of, or eliminate one or more
of its research or development programs or obtain funds through arrangements
with collaborative partners or others that may require the Company to relinquish
rights to certain of its technologies, product candidates or products that the
Company would otherwise seek to develop or commercialize. If adequate funds are
not available from operations or additional sources of funding, the Company's
business will suffer a material adverse effect.
NO COMMERCIALIZATION OF PRODUCTS TO DATE
The Company has not yet begun to generate revenues from the
sale of products. The Company's products will require significant additional
development, clinical testing and investment prior to commercialization. The
Company does not expect regulatory approval for commercial sales of any of its
products in the immediate future. There can be no assurance that such products
will be successfully developed, proven to be safe and efficacious in clinical
trials, able to meet applicable regulatory standards, able to obtain required
regulatory approvals, or produced in commercial quantities at reasonable costs
or be successfully commercialized and marketed.
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ROYALTY PAYMENT OBLIGATIONS
The owners and licensors of the technology rights acquired by
the Company are entitled to receive a certain percentage of all royalties and
payments in lieu of royalties received by the Company from commercialization, if
any, of products in respect of which the Company holds licenses. Accordingly, in
addition to its substantial investment in product development, the Company will
be required to make substantial payments to others in connection with revenues
derived from commercialization of products, if any, developed under licenses the
Company holds. Consequently, the Company will not receive the full amount of any
revenues that may be derived from commercialization of products to fund ongoing
operations.
POTENTIAL LOSS OF RIGHTS UPON DEFAULT
Under the terms of existing agreements, the Company is
obligated to make certain payments to its licensors. In the event that the
Company defaults on the payment of an installment under the terms of an existing
licensing agreement, its rights thereunder could be forfeited. As a consequence,
the Company could lose all rights under a license agreement to the related
licensed technology, notwithstanding the total investment made through the date
of the default. There can be no assurance that unforeseen obligations or
contingencies will not deplete the Company's financial resources and,
accordingly, sufficient resources may not be available to fulfill the Company's
commitments.
RAPID TECHNOLOGICAL CHANGE; COMPETITION
The medical field is subject to rapid technological change and
innovation. Pharmaceutical and biomedical research and product development are
rapidly evolving fields in which developments are expected to continue at a
rapid pace. Reports of progress and potential breakthroughs are occurring with
increasing frequency. There can be no assurance that the Company will have a
competitive advantage in its fields of technology or in any of the other fields
in which the Company may concentrate its efforts.
The Company's success will depend upon its ability to develop
and maintain a competitive position in the research, development and
commercialization of products and technologies in its areas of focus.
Competition from pharmaceutical, chemical, biomedical and medical companies,
universities, research and other institutions is intense and is expected to
increase. All, or substantially all, of these competitors have substantially
greater research and development capabilities, experience, and manufacturing,
marketing, financial and managerial resources. Further, acquisitions of
competing companies by large pharmaceutical or other companies could enhance
such competitors' financial, marketing and other capabilities. There can be no
assurance that developments by others will not render the Company's products or
technologies obsolete or not commercially viable or that the Company will be
able to keep pace with technological developments.
GOVERNMENT REGULATION
The Company's ongoing research and development projects are
subject to rigorous FDA approval procedures. The preclinical and clinical
testing requirements to demonstrate safety and efficacy in each clinical
indication (the specific condition intended to be treated) and regulatory
approval processes of the FDA can take a number of years and will require the
expenditure of substantial resources by the Company. Delays in obtaining FDA
approval would adversely affect the marketing of products to which the Company
has rights and the Company's ability to receive product revenues or royalties.
Moreover, even if FDA approval is obtained, a marketed product, its manufacturer
and its manufacturing facilities are subject to continual review and periodic
inspections by the FDA, and a later discovery of previously unknown problems
with a product, manufacturer or facility may result in restrictions on such
product or manufacturer. Failure to comply with the applicable regulatory
requirements can, among other things, result in fines, suspensions of regulatory
approvals, product recalls, operating restrictions and criminal prosecution.
Additional government regulation may be established which could prevent or delay
regulatory approval of the Company's products. Sales of pharmaceutical products
outside the United States are subject to foreign regulatory requirements that
vary widely from country to country. Even if FDA approval has been obtained,
approval of a product by comparable regulatory authorities of foreign countries
must be obtained prior to the commencement of marketing the product in those
countries. The time required to obtain such approval may be longer or shorter
than that required for FDA approval. The Company has no experience in
manufacturing or marketing in foreign countries nor in matters such as currency
regulations, import-export controls or other trade laws. To date, the Company
has not received final regulatory approval from the FDA or any other comparable
foreign regulatory authority in respect of any product or technology.
RISKS INCIDENT TO PATENT APPLICATIONS AND RIGHTS
The Company's success will depend in part on its ability to
obtain patent protection for products and processes and to maintain trade secret
protection and operate without infringing the proprietary rights of others. The
degree of patent protection to be afforded to pharmaceutical, biomedical or
medical inventions is an uncertain area of the law. There can be no assurance
that the Company will develop or receive sublicenses or other rights related to
proprietary technology which are patentable, that any patents pending will
issue, or that any issued patents will provide the Company with any competitive
advantages or will not be challenged by third parties. Furthermore, there can be
no
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assurance that others will not independently duplicate or develop similar
products or technologies to those developed by or licensed to the Company. If
the Company is required to defend against charges of patent infringement or to
protect its own proprietary rights against third parties, substantial costs will
be incurred and the Company could lose rights to certain products and
technologies.
RELIANCE ON THIRD PARTIES; NO MARKETING OR MANUFACTURING
CAPABILITIES
The Company does not currently have its own sales force or an
agreement with another pharmaceutical company to market the Company's products
that are in development. When appropriate, the Company will attempt to build or
otherwise acquire the necessary marketing capabilities to promote its products.
There can be no assurance that the Company will have the resources available to
build or otherwise acquire its own marketing capabilities, or that agreements
with other pharmaceutical companies can be reached to market the Company's
products on terms acceptable to the Company.
In addition, the Company does not intend to manufacture its
own products. While the Company has already entered into two manufacturing and
supply agreements related to the MSI system, there can be no assurance that
these manufacturing and supply agreements will be adequate or that the Company
will be able to enter into future manufacturing and supply agreements on terms
acceptable to the Company.
DEPENDENCE UPON OBTAINING HEALTHCARE REIMBURSEMENT
The Company's ability to commercialize human therapeutic and
diagnostic products may indirectly depend in part on the extent to which costs
for such products and technologies are reimbursed by private health insurance or
government health programs. The uncertainty regarding reimbursement may be
especially significant in the case of newly approved products. There can be no
assurance that reimbursement price levels will be sufficient to provide a return
to the Company on its investment in new products and technologies.
ADEQUACY OF PRODUCT LIABILITY INSURANCE
The use of the Company's proposed products and processes
during testing, and after approval, may entail inherent risks of adverse effects
which could expose the Company to product liability claims and associated
adverse publicity. Although the Company currently maintains general liability
insurance, there can be no assurance that the coverage limits of the Company's
insurance policies will be adequate. The Company currently maintains clinical
trial product liability insurance of $2.0 million per event for certain clinical
trials and intends to obtain insurance for future clinical trials of products
under development. There can be no assurance, however, that the Company will be
able to obtain or maintain insurance for any future clinical trials. Such
insurance is expensive, difficult to obtain and may not be available in the
future on acceptable terms, or at all. A successful claim brought against the
Company in excess of the Company's insurance coverage would have a material
adverse effect upon the Company and its financial condition. The Company intends
to require its licensees to obtain adequate product liability insurance.
However, there can be no assurance that licensees will be able to maintain or
obtain adequate product liability insurance on acceptable terms or that such
insurance will provide adequate coverage against all potential claims.
POTENTIALLY LIMITED TRADING MARKET; POSSIBLE VOLATILITY OF
STOCK PRICE.
The Common Stock is listed for trading on American Stock
Exchange (the "AMEX") under the symbol "SHM". The Company does not presently
satisfy the listing guidelines of the AMEX, including the AMEX guideline that a
listed company that has sustained losses from operations and/or net losses in
three of its four most recent fiscal years have stockholders' equity of at least
$4,000,000. The Company has sustained net losses for its four most recent fiscal
years and, at December 31, 1998, had stockholders' equity of $655,205. The
failure to meet the AMEX listing guidelines may result in the Common Stock no
longer being eligible for listing on the AMEX and trading, if any, of the Common
Stock would thereafter be conducted in the over-the-counter market. If the
Company's Common Stock were to be delisted from the AMEX, it may be more
difficult for investors to dispose of, or to obtain accurate quotations as to
the market value of, the Common Stock.
In the event of the delisting of the Company's Common Stock
from the AMEX, the regulations of the Securities and Exchange Commission
("Commission") promulgated under the Securities Exchange Act of 1934, as amended
("Exchange Act"), require additional disclosure relating to the market for penny
stocks. Commission regulations generally define a penny stock to be an equity
security that has a market price of less than $5.00 per share, subject to
certain exceptions. A disclosure schedule explaining the penny stock market and
the risks associated therewith is required to be delivered to a purchaser and
various sales practice requirements are imposed on broker-dealers who sell penny
stocks to persons other than established customers and accredited investors
(generally institutions). In addition, the broker-dealer must provide the
customer with current bid and offer quotations for the penny stock, the
compensation of the broker-dealer and its salesperson in the transaction and
monthly account statements showing the market value of each penny stock held in
the customer's account. If the Company's securities become subject to the
regulations applicable to penny stocks (i.e., by AMEX delisting), the market
liquidity for the Company's securities could be severely affected. In such an
event, the regulations on penny stocks could limit the ability of broker-dealers
to sell the Company's
15
<PAGE>
securities and thus the ability of purchasers of the Company's securities to
sell their securities in the secondary market. In the absence of an active
trading market, holders of the Common Stock may experience substantial
difficulty in selling their securities.
VOLATILITY OF MARKET PRICE OF SECURITIES
The market price of securities of firms in the
biotechnology/pharmaceutical industries have tended to be volatile.
Announcements of technological innovations by the Company or its competitors,
developments concerning proprietary rights and concerns about safety and other
factors may have a material effect on the Company's business or financial
condition. The market price of the Common Stock may be significantly affected by
announcements of developments in the medical field generally or the Company's
research areas specifically. The stock market has experienced volatility in
market prices of companies similar to the Company that has often been unrelated
to the operating results of such companies. This volatility may have a material
adverse effect on the market price of the Common Stock.
OUTSTANDING OPTIONS, WARRANTS AND CONVERTIBLE SECURITIES;
DILUTION
As of December 31, 1998, the Company had reserved
approximately 7,910,836 shares of its Common Stock for issuance upon exercise of
outstanding options and warrants convertible into shares of its Common Stock,
including shares of Common Stock issuable upon the exercise of options and
warrants held by officers and directors of the Company. In addition, as of
December 31, 1998, the Company had $1,000,000 principal amount of a Convertible
Promissory Note and 11,914 shares of its Series C Cumulative Convertible
Preferred Stock outstanding. Each of the convertible securities provide for
conversion into shares of Common Stock of the Company at a discount to the
market. The Series C Preferred Stock are convertible into 8,449,647 shares of
Common Stock and the Convertible Promissory Note is convertible into 571,428
shares of Common Stock. The exercise of options and outstanding warrants, the
conversion of such other securities and sales of Common Stock issuable
thereunder could have a significant dilutive effect on the market price of
shares of the Company's Common Stock and could materially impair the Company's
ability to raise capital through the future sale of its equity securities.
AUTHORIZATION OF PREFERRED STOCK
The Company's Certificate of Incorporation authorizes the
issuance of "blank check" preferred stock with such designations, rights and
preferences as may be determined from time to time by the Board of Directors,
without shareholder approval. In the event of issuance, such preferred stock
could be utilized, under certain circumstances, as a method of discouraging,
delaying or preventing a change in control of the Company and preventing
shareholders from receiving a premium for their shares in connection with a
change of control. The Company issued Series A and Series B Cumulative
Convertible Redeemable Preferred Stock in connection with private placements in
February 1997 and April 1998, respectively. All of the Series A Preferred Stock
was converted into common stock during 1998. On July 31, 1998, all of the Series
B Preferred Stock was redeemed for cash. The Company also issued shares of its
Series C Cumulative Convertible Preferred Stock in connection with the
consummation of an agreement with Elan in June 1998. The Company has no present
intention to issue any additional shares of its preferred stock (except for
additional shares of its Series C Preferred Stock that are payable as dividends
to Elan, as holder of the outstanding Series C Preferred Stock); however, there
can be no assurance that the Company will not issue additional shares of its
preferred stock in the future.
ITEM 2. PROPERTIES
The Company's principal executive offices are located at 425 South
Woodsmill Road, St. Louis, Missouri 63017. These premises consist of
approximately 4,521 square feet subject to a lease that expires September 14,
2002. The monthly rent for these premises is $9,042. The Company also maintains
a research facility in Ann Arbor, Michigan, and leases a small office in
Pittsford, New York. The Company maintains no other laboratory, research or
other facilities, but primarily conducts research and development in outside
laboratories under contracts with universities or research facilities. The
Company believes that its existing office arrangements will be adequate to meet
its reasonably foreseeable needs.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings against the Company or
any of its subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
16
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The following table sets forth the high and low sale prices of
the Company's Common Stock on the American Stock Exchange (the "AMEX") for the
periods indicated.
1998: HIGH LOW
---- ---
Fourth Quarter..... $ 2.500 .938
Third Quarter...... 2.500 1.063
Second Quarter..... 2.313 .625
First Quarter...... 1.438 .625
1997:
Fourth Quarter..... $ 2.500 1.125
Third Quarter...... 3.000 2.000
Second Quarter..... 3.375 2.250
First Quarter...... 3.750 2.625
The closing sale price for the Company's Common Stock on the
AMEX on March 19, 1999 was $2.25 per share. At March 19, 1999, there were
approximately 427 holders of record of the Company's Common Stock.
The Company has never paid dividends on its Common Stock and
does not intend to pay cash dividends on its Common Stock in the foreseeable
future. The terms of the Company's Series C Cumulative Convertible Preferred
Stock generally prohibit the payment of cash dividends and other distributions
on the Company's Common Stock unless full cumulative stock dividends on shares
of such Series C Preferred Stock have been paid or declared in full.
During 1998, the Company issued stock dividends totaling 414 shares of Series C
Preferred Stock and cash dividends for fractional shares of $1,112.
The following unregistered securities were issued by the
Company during the quarter ended December 31, 1998:
<TABLE>
<CAPTION>
Number Of Shares
Sold/issued/ Offering/
Description Of Subject To Options Exercise Price
Date Of Sale/Issuance Securities Issued Or Warrants Per Share ($) Purchaser Or Class
- --------------------- ----------------- ------------------- -------------- ------------------
<S> <C> <C> <C> <C>
November 1998 Common Stock Options 120,000 $1.688 - $3.688 Employee
</TABLE>
The issuance of these securities are claimed to be exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933, as amended, as
transactions by an issuer not involving a public offering. There were no
underwriting discounts or commissions paid in connection with the issuance of
any of these securities.
17
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL INFORMATION
(In dollars, except per share information)
The information in the following table should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" under Item 7 and the Company's Consolidated Financial Statements and
related Notes under Item 8.
<TABLE>
<CAPTION>
Year-Ended December 31
-------------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Sublicense and interest income .................... $ 410,273 $ 556,914 $ 673,664 $ 80,610 $ 63,290
Operating costs and expenses:
Research and development ..................... 15,676,301(a) 5,379,193(a) 3,841,818 4,424,154 3,989,838
General and administrative ................... 3,294,433 4,666,859 3,840,735 3,044,173 2,393,082
------------ ------------ ------------ ------------ ------------
Total operating costs and expenses ........... 18,970,734 10,046,052 7,682,553 7,468,327 6,382,920
Loss from operations .............................. $(18,560,461) $ (9,489,138) $ (7,008,889) $ (7,387,717) $ (6,319,630)
Loss per share of common stock - basic ............ $ (0.85) $ (0.80) $ (0.65) $ (0.90) $ (0.96)
Weighted average common shares outstanding ........ 21,931,040 11,976,090 10,806,799 8,185,457 6,596,227
BALANCE SHEET DATA:
Working capital (net deficiency) .................. 1,456,833 $ (837,564) $ 1,433,773 $ 1,585,675 $ (799,629)
Total assets ...................................... 2,862,521 689,937 2,773,884 2,221,050 371,073
Long-term obligations & redeemable preferred stock 1,000,000 4,019,263 27,206 -- --
Accumulated deficit ............................... (55,156,763) (36,157,290) (26,588,652) (19,579,763) (12,192,046)
Stockholders' equity (net capital deficiency) ..... 655,205 (4,716,751) 1,695,837 1,792,363 (573,853)
</TABLE>
- -------------------------------------
No cash dividends have been paid on common stock for any of the periods
presented.
Loss per share is based upon the weighted average number of common and certain
common equivalent shares outstanding.
See consolidated financial statements and accompanying footnotes.
(a) Includes $13,325,000 and $1,650,000 of acquired research and development
in-process technology in 1998 and 1997, respectively.
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
THIS REPORT CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN
THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND
SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, WHICH ARE
INTENDED TO BE COVERED BY THE SAFE HARBORS CREATED HEREBY. ALL FORWARD-LOOKING
STATEMENTS INVOLVE RISKS AND UNCERTAINTY, INCLUDING WITHOUT LIMITATION, RISKS
SET FORTH ABOVE UNDER "BUSINESS - CERTAIN RISK FACTORS THAT MAY AFFECT FUTURE
RESULTS, FINANCIAL CONDITION AND MARKET PRICE OF SECURITIES."
THE DISCUSSION AND ANALYSIS BELOW SHOULD BE READ IN
CONJUNCTION WITH THE FINANCIAL STATEMENTS OF THE COMPANY AND THE RELATED NOTES
TO FINANCIAL STATEMENTS INCLUDED ELSEWHERE HEREIN.
OVERVIEW
Sheffield Medical Technologies Inc. ("Sheffield") was
incorporated under Canadian law in October 1986. In May 1992, the Company became
domesticated as a Wyoming corporation pursuant to a "continuance" procedure
under Wyoming law. In January 1995, the Company's shareholders approved the
proposal to reincorporate Sheffield in Delaware, which was effected on June 13,
1995. On January 10, 1996, Ion Pharmaceuticals, Inc. ("Ion"), was formed as a
wholly owned subsidiary of the Company. At that time, Ion acquired the Company's
rights to certain early stage biomedical technologies. On April 17, 1997, CP
Pharmaceuticals, Inc. ("CP") was formed for the purpose of acquiring Camelot
Pharmacal, L.L.C., a privately held pharmaceutical development company, which
acquisition was consummated on April 25, 1997. In June 1997, the Company's
shareholders approved the proposal to change Sheffield's name from Sheffield
Medical Technologies Inc. to Sheffield Pharmaceuticals, Inc. As part of an
agreement with Elan Corporation plc ("Elan"), on June 30, 1998, Systemic
Pulmonary Delivery, Ltd. ("SPD") was formed as a wholly owned subsidiary of the
Company. At that time, SPD acquired the Company's rights to the systemic
applications of the MSI and acquired Elan's rights to certain pulmonary delivery
technologies. Unless the context requires otherwise, Sheffield, Ion, CP and SPD
are referred herein to as "the Company".
The Company is in the development stage and to date has been
principally engaged in research, development and licensing efforts. The Company
has generated minimal operating revenue and will require additional capital
which the Company intends to obtain through out-licensing as well as through
equity and debt offerings to continue to operate its business. The Company's
ability to meet its obligations as they become due and to continue as a going
concern must be considered in light of the expenses, difficulties and delays
frequently encountered in developing a new business, particularly since the
Company will focus on research, development and unproven technology that may
require a lengthy period of time and substantial expenditures to complete. Even
if the Company is able to successfully develop new products, there can be no
assurance that the Company will generate sufficient revenues from the sale or
licensing of such products to be profitable. Management believes that the
Company's ability to meet its obligations as they become due and to continue as
a going concern through December 1999 is dependent upon obtaining additional
funding.
The accompanying consolidated financial statements have been
prepared on a going concern basis which contemplates the realization of assets
and satisfaction of liabilities and commitments in the normal course of
business.
RESULTS OF OPERATIONS
REVENUE
Sublicense revenue of $350,000 and $500,000 for the years
ended December 31, 1998 and 1997, respectively, relate to a sublicense agreement
entered into during 1997 with Lorus Therapeutics, Inc. (formerly Imutec Pharma
Inc.). The agreement licensed rights to a series of compounds for the treatment
of cancer, Kaposi's sarcoma and actinic kerotosis to a newly formed company,
NuChem Pharmaceuticals, Inc. ("NuChem") for which Lorus Therapeutics, Inc. will
provide funding and management of the development program. The Company received
$500,000 in cash upon signing the agreement in 1997 and received 583,188 shares
of Lorus Therapeutics, Inc. stock with a value of $350,000 in 1998. The
sublicense revenue of $510,000 in 1996 related to a sublicense agreement for the
Company's Liposome - CD4 technology. Interest income was $60,273 for the year
ended December 31, 1998 compared to $56,914 and $163,664 for the years ended
December 31, 1997 and 1996, respectively. The decrease in 1997 interest income
of $106,750 compared to 1996, was due primarily to the use of funds available
for investment as a result of the acquisition of the MSI system from Siemens AG.
19
<PAGE>
ACQUISITION OF RESEARCH & DEVELOPMENT IN-PROCESS TECHNOLOGY
Acquisition of research and development in-process technology
for the years ended December 31, 1998, 1997 and 1996 was $13,325,000, $1,650,000
and $0, respectively. The decrease from 1997 to 1998 is attributable to the
acquisition of the Aerosol Drug Delivery System ("ADDS") from Aeroquip-Vickers
for $825,000 and the acquisition of certain pulmonary delivery technologies from
Elan for $12,500,000. The 1997 amounts are attributable to the acquisition of
Camelot Pharmacal, LLC. The acquisitions noted above were expensed in the year
acquired since the technologies had not demonstrated technological feasibility
and had no alternative future uses.
RESEARCH AND DEVELOPMENT
Research and development expenses were $2,351,301 for the year
ended December 31, 1998 compared to $3,729,193 and $3,841,818 for the years
ended December 31, 1997 and 1996, respectively. The decrease of $1,377,892 from
1997 to 1998 reflects both the Company's continued winding down of its early
stage research projects and the shifting of responsibility for development
expenses of the respiratory applications of the MSI to the Company's partner,
Zambon Group SpA ("Zambon"). This decrease was partially offset by development
costs associated with the ADDS technology acquired in July 1998. The 1997
decrease of $112,625 was attributable to the commencement of winding down of the
Company's early stage technologies.
The Company entered into three R&D transactions in 1998. In
June, the Company entered into an agreement with Zambon, whereby Zambon would
receive an exclusive worldwide marketing and development sublicense for
respiratory products to be delivered by the MSI system. Under this agreement,
Zambon is responsible for the research and development costs associated with the
respiratory applications of the MSI. In addition, SPD also acquired certain
pulmonary delivery technologies from Elan. The Company is responsible for the
development of these technologies. In addition, SPD acquired the ADDS technology
from Aeroquip-Vickers. SPD holds the rights to all systemic applications of the
ADDS technology, while Sheffield retains the rights to develop the respiratory
disease applications. The Company is responsible for the research and
development costs of these systemic applications. Subject to certain conditions
and the making of certain payments to the Company, Elan has the option to
acquire all or a portion of the outstanding stock of SPD.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were $3,043,070 for the
year ending December 31, 1998 compared to $4,627,567 and $3,831,204 for the
years ending December 31, 1997 and 1996, respectively. The decrease from 1997 to
1998 of $1,584,497 was due to lower compensation expense reflecting fewer
employees during 1998 and the extension of certain option and warrant agreements
in 1997. The 1998 decrease also reflects lower consulting costs resulting from
expenses associated with two financings completed in 1997, and a loss realized
on the sale of securities during 1997. The increase from 1996 to 1997 was due to
an increased number of management salaries resulting from the Camelot
acquisition, compensation expense associated with the extension of certain
option and warrant agreements, and expenses related to the two financings
completed during 1997.
INTEREST EXPENSE
Interest expense was $251,363 for the year ending December 31,
1998 compared with $39,292 and $9,531 for the years ending December 31, 1997 and
1996, respectively. The increase of $212,071 in 1998 as compared to 1997 was
primarily due to interest paid on the Company's Series B Cumulative Convertible
Preferred Stock and the Convertible Promissory Note issued to Elan. The increase
from 1996 to 1997 of $29,761 was attributable to the Company's 6% Convertible
Subordinated Debenture issued during 1997.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations
primarily through the sale of securities and convertible debentures, from which
it has raised an aggregate of approximately $49 million through December 31,
1998.
20
<PAGE>
On April 15, 1998, the Company issued 1,250 shares of its
Series B Cumulative Convertible Redeemable Preferred Stock in a private
placement for an aggregate purchase price of $1,250,000. The proceeds were used
to make payment to Siemens A.G. pursuant to the MSI license agreement. During
1998, the Company entered into a sublicense agreement with Zambon that provided
the Company $2,150,000 in gross proceeds from the sale of 2,646,153 shares of
Common Stock. The Company also entered into an agreement with Elan that provided
the Company approximately $17,500,000 of gross proceeds from the sale of
4,571,428 shares of Common Stock and 11,500 shares of the Company's Series C
Cumulative Convertible Preferred Stock. The proceeds from the Elan transaction
were used to purchase certain pulmonary device delivery technologies from Elan
for $12,500,000, the ADDS for $825,000 from Aeroquip-Vickers, and to redeem
$1,250,000 principal amount of Series B Preferred Stock. The remaining proceeds
from the Elan transaction were used for research and development, working
capital and general corporate purposes.
From inception through December 31, 1998, the Company earned
$514,100 in interest on cash, cash equivalents and short-term investments. The
Company invests excess cash in cash equivalents and short-term investments in a
cash management account that invests in U.S. government securities and high
grade corporate investments.
Net cash used in development stage activities was $18,685,726
for the year ended December 31, 1998 compared with $6,677,405, $6,043,876, and
$48,882,176 for the years ended December 31, 1997 and 1996, and from inception
in 1986 through 1998, respectively. Cash of $20,900,000, $3,284,812, $6,420,834,
and $48,855,005 was provided by the issuance of equity securities in 1998, 1997,
1996, and from inception in 1986 through 1998, respectively.
The Company's total assets were $2,862,521 at December 31,
1998 compared with $689,937 at December 31, 1997. The 1998 increase of
$2,172,584 was primarily attributable to proceeds received from the agreement
entered into with Elan. The Company's liabilities at December 31, 1998,
consisting of accounts payable, sponsored research, capital lease obligations, a
note payable and a convertible promissory note, were $2,207,316 compared with
$2,938,425 at December 31, 1997.
The Company spent approximately $21,600,000 from inception
through December 31, 1998 to fund certain ongoing technology research projects
and expects to incur additional costs in the future, including costs relating to
its ongoing research and development activities, and preclinical and clinical
testing of its product candidates. The Company may also bear considerable costs
in connection with filing, prosecuting, defending and/or enforcing its patent
and other intellectual property claims. Therefore, the Company will need
substantial additional capital before it will recognize significant cash flow
from operations, which is contingent on the successful commercialization of the
Company's technologies. There can be no assurance that any of the technologies
to which the Company currently has or may acquire rights to can or will be
commercialized or that any revenues generated from such commercialization will
be sufficient to fund existing and future research and development activities.
The Company's direct research and development (R&D) expenses
for its pulmonary delivery systems were $1,847,652 for the year ended December
31, 1998 and $3,792,500 from inception through December 31, 1998. The Company
has committed to fund an additional $2,076,000 for these pulmonary delivery
systems after December 31, 1998. The Company incurred $21,693 of R&D costs in
1998 associated with its early stage technologies, which includes RBC-CD4
Electroinsertion technology, Liposome-CD4 technology, HIV/AIDS vaccine, UGIF
technology-prostate cancer, and anti-proliferative technologies. From inception
to December 31, 1998, the Company incurred R&D expenses of $15,221,468 on these
technologies. Since the Company is focused on development of its pulmonary
delivery systems, it does not anticipate incurring additional research or
development costs for these early stage projects.
Because the Company does not expect to generate significant
cash flows from operations for at least the next few years, the Company believes
it will require additional funds to meet future costs. The Company will attempt
to meet its capital requirements with existing cash balances and through
additional public or private offerings of its securities, debt financing, and
collaboration and licensing arrangements with other companies. There can be no
assurance that the Company will be able to obtain such additional funds or enter
into such collaborative and licensing arrangements on terms favorable to the
Company, if at all. The Company's development programs may be curtailed if
future financings are not completed.
21
<PAGE>
While the Company does not believe that inflation has had a
material impact on its results of operations, there can be no assurance that
inflation in the future will not impact financial markets which, in turn, may
adversely affect the Company's valuation of its securities and, consequently,
its ability to raise additional capital, either through equity or debt
instruments, or any off-balance sheet refinancing arrangements, such as
collaboration and licensing agreements with other companies.
YEAR 2000 COMPLIANCE
The inability of computers, software and other equipment
utilizing microprocessors to recognize and properly process data fields
containing a two digit year is commonly referred to as the Year 2000 compliance
issue. Such systems that are not Year 2000 compliant may not be able to properly
interpret dates beyond the Year 1999, which could lead to business disruptions
in the U.S. and internationally. The potential costs and uncertainties
associated with the Year 2000 issue will depend on a number of factors,
including software, hardware and the nature of the industry in which a company
operates. Additionally, companies must coordinate with other entities with which
they electronically interact, such as customers, creditors and borrowers.
During 1998, the Company conducted an assessment of its
computer systems to identify systems that could be affected by the Year 2000
issue. Substantially all software programs used by the Company have been
determined to be Year 2000 compliant. In addition, the Company believes that
with readily available upgrades to existing hardware, the Year 2000 issue will
not pose significant operational problems for its computer system. The
completion of hardware modifications to assure Year 2000 compliance is expected
by the end of the second quarter of 1999.
The Company relies on various universities and laboratories
for conducting a significant portion of the research and development of its
products. The Company is currently in the process of communicating with the
parties with which it does significant business to determine their Year 2000
compliance readiness and the extent to which the Company is vulnerable to any
third party Year 2000 issues. The Company expects to complete its assessment of
Year 2000 compliance of these third parties by July 1999. However, there can be
no guarantee that the systems of other companies on which the Company relies
will be timely converted or that a failure to convert by another company, or a
conversion that is incompatible with the Company's systems, would not have
material adverse effect on the Company.
The total cost to the Company of these Year 2000 compliance
activities is estimated to be less than $25,000, and is not anticipated to be
material to its financial position or results of operations. These costs and the
date on which the Company plans to complete the Year 2000 modification and
testing processes are based on management's best estimates, which were derived
utilizing numerous assumptions of future events including the continued
availability of certain resources, third party modification plans and other
factors. However, there can be no assurance that these estimates will be
achieved and actual results could differ from those plans.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company has no material market risk exposure.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
22
<PAGE>
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company and their
positions with the Company are set forth below.
NAME AGE POSITION
Thomas M. Fitzgerald 48 Chairman and Director
Loren G. Peterson 42 President, Chief Executive Officer, and
Director
John M. Bailey 51 Director
Digby W. Barrios 61 Director
Todd C. Davis 37 Director
George R. Griffiths 51 Director
David A. Byron 50 Executive Vice President - Scientific
Affairs
Carl. F. Siekmann 55 Executive Vice President - Corporate
Development
Scott A. Hoffmann 34 Vice President - Finance and
Administration, Treasurer and
Secretary, Chief Financial Officer
THOMAS M. FITZGERALD. Mr. Fitzgerald has been a Director of
the Company since September 1996 and has served as Chairman of the Company since
December 1997. From June 1996 to December 1997, Mr. Fitzgerald served as Chief
Operating Officer of the Company and, from February 1997 to December 1997, he
served as President of the Company. From 1989 to 1996 Mr. Fitzgerald was the
Vice President and General Counsel of Fisons Corporation, an operating unit of
Fisons Group plc, a U.K.-based ethical pharmaceutical company ("Fisons"). Mr.
Fitzgerald was Assistant General Counsel of SmithKline Beecham prior to joining
Fisons.
LOREN G. PETERSON. Mr. Peterson has been the Chief Executive
Officer and a Director of the Company since April 1997. Mr. Peterson has served
as President of the Company since December 1997. From January 1997 to April
1997, Mr. Peterson was a principal of Camelot Pharmacal, L.L.C., a privately
held pharmaceutical development company he co-founded. From 1993 to 1996, Mr.
Peterson served as Vice President - Finance and Chief Financial Officer of Bock
Pharmacal Company, a privately held pharmaceutical company. From 1989 to 1993,
Mr. Peterson was a partner of the accounting firm of Coopers & Lybrand LLP.
JOHN M. BAILEY. Mr. Bailey has been a Director of the Company
since April 1997. Mr. Bailey is the founder and majority shareholder of Bailey
Associates, a consultancy specializing in providing companies with strategic
advice and support through mergers, collaborations and divestments. From 1978 to
1996, Mr. Bailey was employed by Fisons, where he held a number of senior
positions. In 1993, Mr. Bailey was appointed to the main board of Fisons and, in
1995, he was appointed Corporate Development Director of Fisons. In that role he
was directly responsible for worldwide strategic and corporate development and
for all merger, divestment, acquisition and business development activities of
Fisons Group worldwide.
23
<PAGE>
DIGBY W. BARRIOS. Mr. Barrios has been a Director of the
Company since April 1997. Since 1992, Mr. Barrios has been a private consultant
to the pharmaceutical industry. Mr. Barrios served from 1985 to 1987 as
Executive Vice President, and from 1988 to 1992 as President and Chief Executive
Officer, of Boehringer Ingelheim Corporation. Mr. Barrios is a member of the
Board of Directors of Sepracor Inc., Roberts Pharmaceutical Corporation and
Cypros Pharmaceutical Corporation.
TODD C. DAVIS. Mr. Davis has been a Director of the Company
since September 1998. Since May 1997, Mr. Davis has served as Director of
Investments and Corporate Development of Elan Pharmaceutical Research
Corporation, an affiliate of Elan Corporation plc, an Irish pharmaceutical
company. From September 1995 to May 1997, Mr. Davis was on educational leave
from Abbott Laboratories, a pharmaceutical company, while receiving a Masters in
Business Administration from Harvard University. From October 1993 to September
1995, Mr. Davis served as diagnostic systems product manager, and from October
1992 to September 1993 as product specialist of laboratory information systems
of Abbott Laboratories.
GEORGE R. GRIFFITHS. Mr. Griffiths has been a Director of the
Company since July 1998. Since June 1996, Mr. Griffiths has served as General
Manager of Zambon Corporation, USA, the North American subsidiary of Zambon
Group, SpA, a private Italian pharmaceutical company. From December 1995 to June
1996, Mr. Griffiths served as Senior Vice President for Pharmaceuticals of
Zambon Corporation, USA and also from January 1996 to June 1996 he held the
position of Vice President of Business Development. From July 1992 to January
1996, Mr. Griffiths served as Director of New Products/Specialty Products for
Johnson & Johnson's Company's Janssen Pharmaceutica Division.
DAVID A. BYRON. Mr. Byron has been Executive Vice President -
Scientific Affairs of the Company since April 1997. From January 1997 to April
1997, Mr. Byron was a principal of Camelot Pharmacal, L.L.C., a privately held
pharmaceutical development company he co-founded. From 1994 to December 1996,
Mr. Byron served as Vice President of Scientific Affairs of Bock Pharmacal
Company, a privately held pharmaceutical company. From 1990 to 1994, Byron
served as Senior Director - New Product Development of Sanofi-Winthrop
Pharmaceutical Corporation.
CARL F. SIEKMANN. Mr. Siekmann has been Executive Vice
President - Corporate Development of the Company since April 1997. From January
1997 to April 1997, Mr. Siekmann was a principal of Camelot Pharmacal, L.L.C., a
privately held pharmaceutical development company he co-founded. From 1992 to
1996, Mr. Siekmann served as Vice President of Business Development of Bock
Pharmacal Company, a privately held pharmaceutical company.
SCOTT A. HOFFMANN. Mr. Hoffmann has been Chief Financial
Officer and Vice President - Finance and Administration, Treasurer and Secretary
of the Company since November 1998. From March 1995 to November 1998, Mr.
Hoffmann was Assistant Controller of Zeigler Coal Holding Company, a coal mining
company. From 1992 to 1995, Mr. Hoffmann was Vice President - Finance and
Secretary of Zam's, Inc., a publicly-traded retailer.
MEETINGS AND COMMITTEES
The Board of Directors of the Company held five meetings
during the fiscal year ended December 31, 1998. From time to time during such
fiscal year, the members of the Board acted by unanimous written consent. The
Company has standing Stock Option, Compensation, and Audit Committees. The Stock
Option Committee reviews, analyzes and approves grants of stock options and
stock to eligible persons under the Company's 1993 Stock Option Plan and the
Company's 1993 Restricted Stock Plan. The current members of the Stock Option
Committee (appointed in June 1997) are Digby W. Barrios and John M. Bailey. The
Stock Option Committee held one meeting in 1998, and approved certain actions by
written consent. The Compensation Committee reviews, analyses and makes
recommendations to the Board of Directors regarding compensation of Company
directors, employees, consultants and others, including grants of stock options
(other than stock option grants under the Company's 1993 Stock Option Plan and
the Company's Directors Plan). The current members of the Compensation Committee
(appointed in June 1997) are Digby W. Barrios and John M. Bailey. The
Compensation Committee held four meetings in 1998, and approved certain actions
by written consent. The Audit Committee reviews, analyzes and makes
recommendations to the Board of Directors with respect to the Company's
compensation and accounting policies, controls and statements, and coordinates
with the Company's independent public accountants. The current members of the
Audit Committee (appointed in June 1997) are Loren G. Peterson, Digby W. Barrios
and John M. Bailey. The Audit Committee held one formal meeting in 1998. The
Company does not have a standing nominating committee or a committee which
serves nominating functions.
24
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth, for the fiscal years
indicated, all compensation awarded to, earned by or paid to the chief executive
officer of the Company ("CEO") and the executive officers of the Company (other
than the CEO) who were executive officers of the Company during the fiscal year
ended December 31, 1998 and whose salary and bonus exceeded $100,000 with
respect to the fiscal year ended December 31, 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
------------------- -------------
Other Annual Securities
Name and Compensation Underlying
Principal Position Year Salary($) Bonus($) ($)(1) Options(#)
- ------------------ ---- --------- -------- ------ ----------
<S> <C> <C> <C> <C> <C>
1998 $175,000 $40,000 -- 255,000
Thomas M. Fitzgerald, 1997 175,000 -- -- 300,000
Chairman...........................1996 94,792 -- --
Loren G. Peterson, President, 1998 $175,000 -- -- 155,000
Chief Executive Officer............1997 118,655 -- -- 400,000
David A. Byron, Executive Vice 1998 $160,000 -- -- 105,000
President, Scientific Affairs......1997 108,485 -- -- 400,000
Carl F. Siekmann, Executive Vice 1998 $160,000 -- -- 105,000
President, Corporate Development...1997 108,485 -- -- 400,000
Judy Roeske - Bullock, former
Vice President, Finance
& Administration, 1998 $149,808 -- --
Chief Financial Officer(2).........1997 18,750 -- -- 130,000
</TABLE>
- ---------------------
(1) Perquisites and other personal benefits, securities or property
delivered to each executive officer did not exceed the lesser of
$50,000 or 10% of such executive's salary and bonus.
(2) Ms. Roeske-Bullock resigned from the Company effective November 15,
1998.
25
<PAGE>
The following table sets forth certain information regarding
stock option grants made to Messrs. Fitzgerald, Peterson, Byron, and Siekmann
during the fiscal year ended December 31, 1998.
OPTION GRANTS IN LAST FISCAL YEAR
Individual Grants
<TABLE>
<CAPTION>
% Of Total
Options
Granted To Grant Date
Options Employees In Exercise Or Base Present Value
Name Granted (#) Fiscal Year Price ($/Sh) Expiration Date $ (1)
- -------------------------------------------- ----------- ------------- ----------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Thomas M. Fitzgerald,
Chairman ................................... 255,000(2) 23.9% $1.2375 - 3.125 August 28, 2008 $235,600
Loren G. Peterson, President,
Chief Executive Officer .................... 155,000(2) 14.6% $1.2375 - 3.125 August 28, 2008 139,400
David A. Byron,
Executive Vice President,
Vice President, Scientific
Affairs .................................... 105,000(2) 9.9% $1.2375 - 3.125 August 28, 2008 94,150
Carl F. Siekmann,
Executive Vice President,
Corporate Development ...................... 105,000(2) 9.9% $1.2375 - 3.125 August 28, 2008 94,150
</TABLE>
(1) The present value of options at date of grant was estimated using the
Black-Scholes model with the following assumptions: 1) expected life of
10 years; 2) risk-free interest rate of 4.9%; 3) volatility of 69.4%;
and 4) dividend yield of 0%.
(2) These options were granted under a single option grant with exercise
prices ranging from $1.2375 to $3.125.
26
<PAGE>
The following table sets forth certain information regarding
stock options held by Messrs. Fitzgerald, Peterson, Byron, and Siekmann, and Ms.
Bullock as of December 31, 1998.
AGGREGATED OPTION EXERCISES
DURING THE MOST RECENTLY COMPLETED
FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
No. of Securities
Shares Value (1) of
Underlying Unexercised in-
Unexercised the-Money
Options at FY- Options at FY-
Shares End (#) End($)
Acquired on Value Exercisable/ Exercisable/
Name Exercise(#) Realized Unexercisable Unexercisable
---- ----------- -------- ------------- -------------
<S> <C> <C> <C> <C>
Thomas M. Fitzgerald,
Chairman............................. -- -- 150,000/405,000 --/$171,063
Loren G. Peterson,
President and Chief Executive
Officer.............................. -- -- 40,000/515,000 --/$75,063
David A. Byron,
Executive Vice President,
Scientific Affairs................... -- -- 40,000/465,000 --/$48,563
Carl F. Siekmann,
Executive Vice President,
Corporate Development................ -- -- 40,000/465,000 --/$48,563
Judy Roeske - Bullock,
former Vice President, Finance &
Administration,
Chief Financial Officer.............. -- -- 25,000/-- $9,375/--
</TABLE>
- -------------------
(1) Represents the total gain that would be realized if all in-the-money
options held at December 31, 1998 were exercised, determined by
multiplying the number of shares underlying the options by the
difference between the per share option exercise price and the closing
sale price of Common Stock of $2.375 per share reported on the American
Stock Exchange for December 31, 1998. An option is in-the-money if the
fair market value of the underlying shares exceeds the exercise price
of the option.
BOARD OF DIRECTORS COMPENSATION
The Company does not currently compensate directors who are
also executive officers of the Company or directors who are employees of the
Company's alliance partners for their service on the Board of Directors. Under
current Company policy, each non-employee Director of the Company receives a fee
of $750 for each Board meeting attended and $400 for each Board committee
meeting attended. Directors are reimbursed for their expenses incurred in
attending meetings of the Board of Directors.
LONG-TERM INCENTIVE AND PENSION PLANS
During the year ended December 31, 1996, the Company adopted a
defined contribution 401(k) plan in accordance with the Internal Revenue Code.
Employees are eligible to participate in the 401(k) plan upon completion of
three months of service provided they are over 21 years of age. Participants may
defer up to 15% of eligible compensation. Currently, the Company does not
provide matching contributions under the 401(k) Plan.
27
<PAGE>
OTHER
No director or executive officer is involved in any material
legal proceeding in which he is a party adverse to the Company or has a material
interest adverse to the Company.
EMPLOYMENT AGREEMENTS
In June 1996, the Company entered into a three-year employment
agreement with Thomas M. Fitzgerald pursuant to which Mr. Fitzgerald agreed to
serve as Chief Operating Officer of the Company. The employment agreement
requires Mr. Fitzgerald to devote his full business and professional time in
furtherance of the business of the Company. Such agreement automatically renews
for successive one-year terms unless one party provides written notice to the
other of his or its intent to terminate at least six months prior to the end of
the then current term. If Mr. Fitzgerald's employment is terminated other than
for cause, he is entitled to receive a severance payment of $87,500, payable in
six equal monthly installments. The agreement contains non-compete and
confidentiality provisions. Mr. Fitzgerald's annual base salary under the
agreement is currently $175,000.
In April 1997, the Company entered into a five-year employment
agreement with Loren G. Peterson pursuant to which Mr. Peterson agreed to serve
as Chief Executive Officer of the Company. The term of the agreement is
automatically extended for an additional one year term from year to year unless
one party notifies the other of its intention to terminate at least six months
prior to the end of the then current term. The employment agreement requires Mr.
Peterson to devote his full business and professional time in furtherance of the
business of the Company. If Mr. Peterson's employment is terminated other than
for cause, he is entitled to receive a severance payment of $131,250, payable in
nine equal monthly installments. The employment agreement includes
confidentiality and non-compete provisions. Mr. Peterson's annual base salary
under the employment agreement is currently $175,000.
In April 1997, the Company entered into a five-year employment
agreement with David A. Byron pursuant to which Mr. Byron agreed to serve as
Executive Vice President - Scientific Affairs of the Company. The term of the
agreement is automatically extended for an additional one year term from year to
year unless one party notifies the other of its intention to terminate at least
six months prior to the end of the then current term. The employment agreement
requires Mr. Byron to devote his full business and professional time in
furtherance of the business of the Company. If Mr. Byron's employment is
terminated other than for cause, he is entitled to receive a severance payment
of $120,000, payable in nine equal monthly installments. The employment
agreement includes confidentiality and non-compete provisions. The employment
agreement includes confidentiality and non-compete provisions. Mr. Byron's
annual base salary under the employment agreement is currently $160,000.
In April 1997, the Company entered into a five-year employment
agreement with Carl F. Siekmann pursuant to which Mr. Siekmann agreed to serve
as Executive Vice President - Corporate Development of the Company. The term of
the agreement is automatically extended for an additional one year term from
year to year unless one party notifies the other of its intention to terminate
at least six months prior to the end of the then current term. The employment
agreement requires Mr. Siekmann to devote his full business and professional
time in furtherance of the business of the Company. If Mr. Siekmann's employment
is terminated other than for cause, he is entitled to receive a severance
payment of $120,000, payable in nine equal monthly installments. The employment
agreement includes confidentiality and non-compete provisions. Mr. Siekmann's
annual base salary under the employment agreement is currently $160,000.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as
amended, requires the Company's officers and directors, and persons who own more
than ten percent of a registered class of the Company's equity securities, to
file reports of ownership and changes in ownership with the Securities and
Exchange Commission (the "Commission"). Officers, directors and greater than ten
percent shareholders are required by the Commission's regulations to furnish the
Company with copies of all Section 16(a) forms they file. To the Company's
knowledge, all Section 16(a) forms that were required to be filed during the
fiscal year ended December 31, 1998 were filed in compliance with the applicable
requirements of Section 16(a) except as follows: Form 3's were filed late for
each of Todd C. Davis and George R. Griffiths.
28
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The compensation of the Company's senior management is
determined by a Compensation Committee, presently consisting of, Digby W.
Barrios and John M. Bailey. None of the members of the Compensation Committee is
an executive officer of the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The voting securities of the Company outstanding on March 19,
1999 consisted of 27,083,419 shares of Common Stock. The following table sets
forth information concerning ownership of the Company's Common Stock, as at
March 19, 1999, by (i) each director, (ii) each executive officer, (iii) all
directors and executive officers as a group, and (iv) each person who, to the
knowledge of management, owned beneficially more than 5% of the Common Stock.
Beneficial Owner(1) Shares Percent Of
------------------- Beneficially Outstanding
Owned(2) Common Stock(2)
-------- ---------------
Elan International Services, Ltd...... 14,868,216(3) 39.8%
Inpharzam International S.A........... 2,646,153(4) 9.8%
Thomas M. Fitzgerald.................. 166,597(5) *
Loren G. Peterson..................... 301,000(6) 1.1%
David A. Byron........................ 285,500(7) 1.1%
Carl F. Siekmann...................... 287,000(8) 1.1%
John M. Bailey........................ 100,000(9) *
Digby W. Barrios...................... 45,000(10) *
George R. Griffiths................... 2,646,153(11) 9.8%
Todd C. Davis......................... 14,893,216(12) 39.9%
All Directors and Executive
Officers as a Group................. 18,724,466 49.4%
- --------------------
* Less than 1%.
(1) The persons named in the table, to the Company's knowledge, have sole
voting and investment power with respect to all shares shown as
beneficially owned by them, subject to community property laws where
applicable and the information contained in the footnotes hereunder.
(2) Calculations assume that all options and warrants held by each
director, director nominee and executive officer and exercisable within
60 days after March 19, 1999 have been exercised.
(3) Based solely upon the Company's internal records of issuances of Common
Stock and convertible securities to Elan International Services, Ltd.
Includes 10,296,788 shares of Common Stock issuable upon exercise of
warrants and conversion of Series C Cumulative Convertible Preferred
Stock and Convertible Promissory Note. The address of Elan
International Services, Ltd. is 102 St. James Court, Flatts, Smiths
Parish FLO4, Bermuda
(4) Based solely upon information in the Schedule 13D of Inpharzam
International S.A. dated June 15, 1998 filed with the Securities and
Exchange Commission. The address of Inpharzam International S.A. set
forth in such Schedule 13D is Via Industria 1, 6814 Cadempino,
Switzerland.
(5) Includes 150,000 shares of common stock issuable upon exercise of
options exercisable within 60 days after March 19, 1999. Mr.
Fitzgerald's address is c/o Sheffield Pharmaceuticals, Inc., 425 South
Woodsmill Road, St. Louis, Missouri 63017.
29
<PAGE>
(6) Includes 80,000 shares of Common Stock issuable upon exercise of
options exercisable within 60 days after March 19, 1999. 4000 of these
shares are held by Mr. Peterson as custodian for the benefit of his
children. Mr. Peterson disclaims beneficial ownership of such shares.
Mr. Peterson's address is c/o Sheffield Pharmaceuticals, Inc., 425
South Woodsmill Road, Suite 270, St. Louis, Missouri 63017.
(7) Includes 80,000 shares of Common Stock issuable upon exercise of
options exercisable within 60 days after March 19, 1999. Mr. Byron's
address is c/o Sheffield Pharmaceuticals, Inc., 425 South Woodsmill
Road, Suite 270, St. Louis, Missouri 63017.
(8) Includes 80,000 shares of Common Stock issuable upon exercise of
options exercisable within 60 days after March 19, 1999. Mr. Siekmann's
address is c/o Sheffield Pharmaceuticals, Inc., 425 South Woodsmill
Road, Suite 270, St. Louis, Missouri 63017.
(9) Includes 100,000 shares of Common Stock issuable upon exercise of
options exercisable within 60 days after March 19, 1999. Mr. Bailey's
address is c/o Sheffield Pharmaceuticals, Inc., 425 South Woodsmill
Road, St. Louis, Missouri 63017.
(10) Includes 40,000 shares of Common Stock issuable upon exercise of
options exercisable within 60 days after March 19, 1999. Mr. Barrios'
address is c/o Sheffield Pharmaceuticals, Inc., 425 South Woodsmill
Road, St. Louis, Missouri 63017.
(11) Includes 2,646,153 shares held by Inpharzam International S.A. Mr.
Griffiths, an officer of Zambon Corporation, an affiliate of Inpharzam
International S.A., disclaims any beneficial ownership interest in such
shares. Mr. Griffths address is c/o Zambon Corporation, One Meadowland
Plaza, East Rutherford, New Jersey 07073.
(12) Includes 25,000 of Common Stock issuable upon exercise of options
exercisable within 60 days after March 19, 1999. Also includes
4,571,428 shares held by Elan International Services, Ltd. and
10,011,075 shares of Common Stock issuable upon exercise of warrants
and conversion of Series C Cumulative Convertible Preferred Stock and
Convertible Promissory Note. Mr. Davis, an employee of Elan
Pharmaceutical Research Corporation, an affiliate of Elan International
Services Ltd., a Bermuda corporation, disclaims any beneficial
ownership interest in such shares. Mr. Davis' address is c/o Elan
Pharmaceuticals Research Corp., 1300 Gould Drive, Gainesville, GA
30504.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In April 1997, the Company entered into a consulting agreement
with John M. Bailey, a director of the Company, pursuant to which Mr. Bailey
agreed to provide certain business and financial consulting advise to the
Company. Mr. Bailey is paid a monthly retainer of 2,000 British Pounds Sterling
under such agreement, which monthly retainer is reduced to 1,500 British Pounds
Sterling for any month during which a Board of Directors meeting is held.
In December 1997, the Company entered into a severance
agreement with Douglas R. Eger, a former Director and executive officer of the
Company, pursuant to which Mr. Eger resigned as an employee of the Company. The
severance agreement provided, among other things, for the principal amount of an
$80,000 loan by the Company to Mr. Eger (the "Eger Loan") to be paid in six
equal quarterly installments commencing on September 30, 1998, with all
remaining principal and interest being paid in full on December 31, 1999, a
severance payment of $135,000 payable in six equal installments of $22,500 each,
with $2,500 of each such installment being applied to repay Mr. Eger's
obligations under the Eger Loan, and the grant by Mr. Eger of a security
interest in 30,000 shares of the Company's common stock to secure his
obligations under the Eger Loan. During 1998, $15,000 of principal payments were
applied to the Eger Loan. Pursuant to the Eger severence agreement, the Company
was required to forgive the unpaid balance of $65,000 during 1998 when the
Company was unable to make timely severance payments to Mr. Eger.
In February 1998, the Company entered into an agreement (the
"Engagement Agreement") with an unaffiliated individual pursuant to which such
individual was retained by the Company to facilitate an alliance with Zambon.
Pursuant to the Engagement Agreement, the Company agreed to pay such individual
a fee of between 2.5% and 4.0% of any equity investment or other financing
received from Zambon. The Company also agreed to issue such individual warrants
to purchase 150,000 shares of the Company's common stock at 125% of market price
for a financing of $7.5 million or greater, with such warrants to be prorated
proportionally on financing of a lesser amount. The Engagement Agreement also
required the Company pay such individual a fee of 5.0% of amounts actually
received by the Company from Zambon attributable to marketing or other rights to
the Company's MSI system (net of any third party royalty obligations). Douglas
R. Eger, a former officer and director of the Company, advised the Company that
he was entitled to receive a portion of the fees payable by the Company to the
individual who is the Company's counterparty to the Engagement Agreement. In
June 1998, the Company formed a strategic alliance with Zambon for the worldwide
development and commercialization of drugs to treat respiratory disease in the
Company's MSI system. In connection with the Zambon transaction and pursuant to
the Engagement Agreement, the Company paid its counterparty to the Engagement
Agreement $86,000.
30
<PAGE>
During the period January 1, 1998 through April 30, 1998
certain executive officers provided funds for use by the Company in excess of
$60,000 in the aggregate. These funds were comprised of short-term notes having
a 7% annual interest rate, unpaid salaries and unreimbursed expenses. The
largest aggregate amounts due to certain executives during this period are as
follows: Loren G. Peterson, $85,923; David A. Byron, $80,343; and Carl F.
Siekmann, $75,474. As of December 31, 1998 all outstanding balances of these
short-term notes and the unreimbursed expenses had been paid in full.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
The following Financial Statements are included:
Report of Independent Auditors
Consolidated Balance Sheets as of
December 31, 1998 and 1997
Consolidated Statements of Operations for
the years ended December 31, 1998, 1997 and
1996 and for the period October 17, 1986
(inception) to
December, 31 1998
Consolidated Statements of Stockholders'
Equity (net capital deficiency) for the
period from October 17, 1986 (inception)
to December 31, 1998
Consolidated Statements of Cash Flows for
the years ended December 31, 1998, 1997
and 1996 and for the period from October
17, 1986 (inception) to December 31,
1998
Notes to Financial Statements
(a)(2) Financial Statement Schedules
All financial statement schedules are omitted because
they are not applicable, or not required, or because the required information is
included in the financial statements or notes thereto.
(a)(3) Exhibits:
NO. REFERENCE
3.1 Certificate of Incorporation of the Company, as
amended (10)
3.2 By-Laws of the Company (4)
4.1 Form of Common Stock Certificate (2)
4.2 Certificate of Designation defining the powers,
designations, rights, preferences, limitations and
restrictions applicable to the Company's Series A
Cumulative Convertible Redeemable Preferred Stock (7)
4.3 Certificate of Designations defining the powers,
designations, rights, preferences, limitations and
restrictions applicable to the Company's Series B
Cumulative Convertible Redeemable Preferred Stock (11)
4.4 Certificate of Designations defining the powers,
designations, rights, preferences, limitations and
restrictions applicable to the Company's Series C
Cumulative Convertible Redeemable Preferred Stock
(10)
31
<PAGE>
10.6 Employment Agreement dated as of June 6, 1996
between the Company and Thomas M. Fitzgerald (3)
10.6.5 Employment Agreement dated as of November 16, 1998
between the Company and Scott Hoffmann (1)
10.6.6 Employment Agreement dated as of November 17, 1997
between the Company and Judy Roeske-Bullock (14)
10.7 Agreement of Sublease dated as of November 17, 1995
between the Company and Brumbaugh Graves Donohue &
Raymond relating to 30 Rockefeller Plaza, Suite
4515, New York, New York (2)
10.8 1993 Stock Option Plan, as amended (1)
10.9 1993 Restricted Stock Plan, as amended (2)
10.10 1996 Directors Stock Option Plan (7)
10.11 Agreement and Plan of Merger among the Company,
Camelot Pharmacal, L.L.C., David A. Byron, Loren G.
Peterson and Carl Siekmann dated April 25, 1997 (6)
10.12 Employment Agreement dated as of April 25, 1997
between the Company and David A. Byron (6)
10.13 Employment Agreement dated as of April 25, 1997
between the Company and Loren G. Peterson (6)
10.14 Employment Agreement dated as of April 25, 1997
between the Company and Carl Siekmann (6)
10.15 Form of the Company's 6% Convertible Subordinated
Debentures due September 22, 2000. (8)
10.16 Lease dated August 18, 1997 between Corporate
Center, L.L.C. and the Company relating to the
lease of office space in St. Louis, Missouri. (5)
10.17 Assignment and License Agreement dated as of
December 3, 1997 between 1266417 Ontario Limited
and Ion Pharmaceuticals, Inc. (portions of this
exhibit were omitted and were filed separately with
the Securities Exchange Commission pursuant to the
Company's application requesting confidential
treatment in accordance with Rule 24b-2 as
promulgated under the Securities Exchange Act of
1934, as amended). (9)
10.18 Sub-License Agreement dated as of December 3, 1997
between 1266417 Ontario Limited and Ion
Pharmaceuticals, Inc. (portions of this exhibit
were omitted and were filed separately with the
Securities Exchange Commission pursuant to the
Company's application requesting confidential
treatment in accordance with Rule 24b-2 as
promulgated under the Securities Exchange Act of
1934, as amended). (9)
10.19 Form of Sublicense and Development Agreement
between Sheffield Pharmaceuticals, Inc. and
Inpharzam International, S.A. (portions of this
exhibit were omitted and were filed separately with
the Securities and Exchange Commission pursuant to
the Company's application requesting confidential
treatment in accordance with Rule 24b-2 as
promulgated under the Securities Exchange Act of
1934, as amended). (12)
32
<PAGE>
10.20 Securities Purchase Agreement, dated as of June 30,
1998, by and between Sheffield pharmaceuticals,
Inc. and Elan International Services, Ltd., which
includes the Certificate of Designations of Series
C Convertible Preferred Stock as Exhibit B. The
Company agreed to furnish the disclosure schedules
as well as Exhibits A and C, which were omitted
from this filing, to the Commission upon request
(portions of this exhibit were omitted and were
filed separately with the Securities and Exchange
Commission pursuant to the Company's application
requesting confidential treatment in accordance
with Rule 24b-2 as promulgated under the Securities
Exchange Act of 1934, as amended). (13)
10.21 Systemic Pulmonary Delivery, Ltd. Joint Development
and Operating Agreement dated as of June 30, 1998
among Systemic Pulmonary Delivery, Ltd., Sheffield
Pharmaceuticals, Inc. and Elan International
Services, Ltd. (portions of this exhibit were
omitted and were filed separately with the
Securities and Exchange Commission pursuant to the
Company's application requesting confidential
treatment in accordance with Rule 24b-2 as
promulgated under the Securities Exchange Act of
1934, as amended). (13)
10.22 License and Development Agreement dated June 30,
1998 between Sheffield Pharmaceuticals, Inc. and
Systemic Pulmonary Delivery, Ltd. and Elan
Corporation plc. (portions of this exhibit were
omitted and were filed separately with the
Securities and Exchange Commission pursuant to the
Company's application requesting confidential
treatment in accordance with Rule 24b-2 as
promulgated under the Securities Exchange Act of
1934, as amended). (13)
10.23 License and Development Agreement dated June 30,
1998 between Systemic Pulmonary Delivery, Ltd. and
Sheffield Pharmaceuticals, Inc. and Elan
Corporation, plc. (portions of this exhibit were
omitted and were filed separately with the
Securities and Exchange Commission pursuant to the
Company's application requesting Rule 24b-2 as
promulgated under the Securities Exchange Act of
1934, as amended). (13)
10.24 License and Development Agreement dated June 30,
1998 between Elan Corporation, plc and Systemic
Pulmonary Delivery, Ltd. and Sheffield
Pharmaceuticals, Inc. (portions of this exhibit
were omitted and were filed separately with the
Securities and Exchange Commission pursuant to the
Company's application requesting confidential
treatment in accordance with Rule 24b-2 as
promulgated under the Securities Exchange Act of
1934, as amended). (13)
21 Subsidiaries of Registrant (1)
23.1 Consent of Ernst & Young LLP (1)
27 Financial Data Schedule (1)
- -----------------------
(1) Filed herewith.
33
<PAGE>
(2) Incorporated by reference to the Company's Annual Report on Form 10-KSB
for its fiscal year ended December 31, 1995 filed with the Securities
and Exchange Commission.
(3) Incorporated by reference to the Company's Quarterly Report on Form
10-QSB for the quarter ended June 30, 1996 filed with the Securities
and Exchange Commission.
(4) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1997 filed with the Securities and
Exchange Commission.
(5) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1997 filed with the Securities
and Exchange Commission.
(6) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1997 filed with the Securities and
Exchange Commission.
(7) Incorporated by reference to the Company's Annual Report on Form 10-KSB
for the year ended December 31, 1996 filed with the Securities and
Exchange Commission.
(8) Incorporated by reference to the Company's Registration Statement on
Form S-3 (File No. 333-38327) filed with the Securities and Exchange
Commission on October 21, 1997.
(9) Incorporated by reference to the Company's Current Report on Form 8-K
filed with the Securities and Exchange Commission on December 17, 1997.
(10) Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1998 filed with the Securities and
Exchange Commission.
(11) Incorporated by reference to Exhibit 3 of the Company's Current Report
on Form 8-K, dated April 17, 1998, filed with the Securities and
Exchange Commission.
(12) Incorporated by reference to Exhibit 2 of the Company's Current Report
on Form 8-K, dated June 22, 1998, filed with the Securities and
Exchange Commission.
(13) Incorporated by reference to exhibits to the Company's Current Report
on Form 8-K, dated July 16, 1998, filed with the Securities and
Exchange Commission.
(14) Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997 filed with the Securities and
Exchange Commission.
(b) Reports on Form 8-K
None
34
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
SHEFFIELD PHARMACEUTICALS, INC.
Dated: March 23, 1999 /S/ Loren G. Peterson
---------------------------------------
Loren G. Peterson
President and Chief Executive Officer
POWER OF ATTORNEY
Sheffield Pharmaceuticals, Inc. and each of the undersigned do
hereby appoint Loren G. Peterson and Thomas Fitzgerald and each of them
severally, its or his or her true and lawful attorney to execute on behalf of
Sheffield Pharmaceuticals, Inc. and the undersigned any and all amendments to
this Annual Report and to file the same with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission;
each of such attorneys shall have the power to act hereunder with or without the
other.
In accordance with the Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant in the
capacities and on the dates indicated.
Signature Title Date
/S/ Thomas M. Fitzgerald Chairman and Director March 23, 1999
- ---------------------------
Thomas M. Fitzgerald
/S/ Loren G. Peterson Director, President and Chief March 23, 1999
- ------------------------ Executive Officer
Loren G. Peterson
/S/ John M. Bailey Director March 23, 1999
- ---------------------
John M. Bailey
/S/ Digby W. Barrios Director March 23, 1999
- -----------------------
Digby W. Barrios
/S/ Todd C. Davis Director March 23, 1999
- --------------------
Todd C. Davis
/S/ George R. Griffiths Director March 23, 1999
- --------------------------
George R. Griffiths
/S/ Scott A. Hoffmann Vice President, Chief March 23, 1999
- ------------------------ Financial Officer,
Scott A. Hoffmann Treasurer and Secretary
(Chief Financial and
Chief Accounting Officer)
35
<PAGE>
SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
(a development stage enterprise)
CONSOLIDATED FINANCIAL STATEMENTS
Table of Contents
PAGE
Reports of Independent Auditors .............................................F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997.................F-3
Consolidated Statements of Operations for the
three years in the period ended December 31, 1998
and for the period from October 17, 1986
(inception) to December 31, 1998 ............................................F-4
Consolidated Statements of Stockholders' Equity
(Net Capital Deficiency) for the period from October 17, 1986
(inception) to December 31, 1998 ............................................F-5
Consolidated Statements of Cash Flows for
the three years in the period ended December 31, 1998
and for the period from October 17, 1986 (inception)
to December 31, 1998.........................................................F-6
Notes to Consolidated Financial Statements ..................................F-7
F-1
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholders
Sheffield Pharmaceuticals, Inc.
We have audited the accompanying consolidated balance sheets of Sheffield
Pharmaceuticals, Inc. and subsidiaries (a development stage enterprise) as of
December 31, 1998 and 1997, and the related consolidated statements of
operations, stockholders' equity (net capital deficiency), and cash flows for
each of the three years in the period ended December 31, 1998 and for the period
October 17, 1986 (inception) through December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Sheffield
Pharmaceuticals, Inc. and subsidiaries at December 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998 and the period from October
17, 1986 (inception) through December 31, 1998, in conformity with generally
accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that Sheffield Pharmaceuticals, Inc. and subsidiaries will continue as a going
concern. As more fully described in Note 1, the Company has generated only
minimal operating revenue, has incurred recurring operating losses and will
require additional capital. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ Ernst & Young LLP
St. Louis, Missouri
March 11, 1999
F-2
<PAGE>
SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
(a development stage enterprise)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Assets December 31,
1998 1997
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents .................................................... $ 2,456,290 $ 393,608
Marketable equity security ................................................... 127,774 --
Loan receivable - former officer ............................................. -- 80,000
Prepaid expenses and other current assets .................................... 39,035 47,378
------------ ------------
Total current assets ....................................... 2,623,099 520,986
------------ ------------
Property and equipment:
Laboratory equipment ......................................................... 317,032 185,852
Office equipment ............................................................. 175,062 142,562
Leasehold improvements ....................................................... 1,323 --
------------ ------------
Total at cost .................................................. 493,417 328,414
Less accumulated depreciation and amortization ............................... (253,995) (185,201)
------------ ------------
Property and equipment, net ................................ 239,422 143,213
------------ ------------
Other assets ................................................................................... -- 25,738
------------ ------------
Total assets ................................................................. $ 2,862,521 $ 689,937
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
Current liabilities:
Accounts payable and accrued liabilities ..................................... $ 615,138 $ 887,782
Sponsored research payable ................................................... 449,805 470,768
Note payable - related party ................................................. 101,323 --
------------ ------------
Total current liabilities .................................. 1,166,266 1,358,550
Convertible promissory note .................................................................... 1,000,000 --
6% convertible subordinated debenture .......................................................... -- 1,551,000
Other long-term liabilities .................................................................... 41,050 28,875
Series A cumulative convertible redeemable preferred stock, $.01 par value,
authorized 40,000 shares; 0 and 25,000 shares issued and outstanding
December 31, 1998 and 1997, respectively ................................................ -- 2,468,263
Commitments and contingencies .................................................................. -- --
------------ ------------
Total liabilities .............................................................. 2,207,316 5,406,688
Stockholders' equity (net capital deficiency):
Preferred stock, $.01 par value, authorized 3,000,0000 shares:
Series C cumulative convertible preferred stock, authorized 23,000
shares; 11,914 and 0 shares issued and outstanding at
December 31, 1998 and 1997, respectively ....................... 119 --
Common stock, $.01 par value, authorized 50,000,000 shares;
issued and outstanding, 27,058,419 and 12,649,539 shares at
December 31, 1998 and 1997, respectively ............................... 270,584 126,495
Notes receivable in connection with sale of stock ............................ (10,000) (72,600)
Additional paid-in capital ................................................... 55,773,491 31,386,644
Other comprehensive income (loss) ............................................ (222,226) --
Deficit accumulated during development stage ................................. (55,156,763) (36,157,290)
------------ ------------
Total stockholders' equity (net capital deficiency) ................ 655,205 (4,716,751)
------------ ------------
Total liabilities and stockholders' equity (net capital deficiency) ............................ $ 2,862,521 $ 689,937
============ ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
(a development stage enterprise)
Consolidated Statements of Operations
For the Years Ended December 31, 1998, 1997 and 1996 and for the Period
from October 17, 1986 (inception) to December 31, 1998
<TABLE>
<CAPTION>
October 17,
1986
(inception)
Years Ended December 31, to
------------------------ December 31,
1998 1997 1996 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Sublicense revenue .......................................... $ 350,000 $ 500,000 $ 510,000 $ 1,360,000
Interest income ............................................. 60,273 56,914 163,664 514,100
------------ ------------ ------------ ------------
Total revenues ......................................... 410,273 556,914 673,664 1,874,100
Expenses:
Acquisition of research and development in-process
technology
13,325,000 1,650,000 -- 14,975,000
Research and development .................................... 2,351,301 3,729,193 3,841,818 21,603,690
General and administrative .................................. 3,043,070 4,627,567 3,831,204 19,565,329
Interest .................................................... 251,363 39,292 9,531 411,118
------------ ------------ ------------ ------------
Total expenses ......................................... 18,970,734 10,046,052 7,682,553 56,555,137
------------ ------------ ------------ ------------
Loss before extraordinary item ................................. (18,560,461) (9,489,138) (7,008,889) (54,681,037)
Extraordinary item ............................................. -- -- -- 42,787
------------ ------------ ------------ ------------
Net loss ....................................................... $(18,560,461) $ (9,489,138) $ (7,008,889) $(54,638,250)
============ ============ ============ ============
Accretion of mandatorily redeemable preferred stock ............ (23,900) (79,500) -- (103,400)
------------ ------------ ------------ ------------
Net loss - attributable to common shares ....................... $(18,584,361) $ (9,568,638) $ (7,008,889) $(54,741,650)
============ ============ ============ ============
Weighted average common shares outstanding-basic ............... 21,931,040 11,976,090 10,806,799 6,336,589
Net loss per share of common stock - basic:
Loss before extraordinary item ............................. $ (0.85) $ (0.80) $ (0.65) $ (8.63)
Extraordinary item ......................................... -- -- -- .01
------------ ------------ ------------ ------------
Net loss per share ......................................... $ (0.85) $ (0.80) $ (0.65) $ (8.62)
============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
(a development stage enterprise)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
For the Period from October 17, 1986 (Inception) to December 31, 1998
<TABLE>
<CAPTION>
Notes
receivable Deficit Total
in Other accumulated stockholders'
connection Additional comprehensive during equity (net
Preferred Common with sale paid-in income development capital
Stock Stock of Stock Capital (loss) Stage Deficiency)
----- ----- -------- ------- ------ ----- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at October 17, 1986 ................ $-- $ -- $ -- $ -- $ -- $ -- $ --
Common stock issued ........................ -- 11,315,985 -- 9,981,141 -- -- 21,297,126
Reincorporation in Delaware at
$.01 par value ........................ -- (11,220,369) -- 11,220,369 -- -- --
Common stock options issued ................ -- -- -- 75,000 -- -- 75,000
Net loss ................................... -- -- -- -- -- (19,579,763) (19,579,763)
---- ------------ --------- ----------- --------- ------------ ------------
Balance at December 31, 1995 ............... -- 95,616 -- 21,276,510 -- (19,579,763) 1,792,363
Common stock issued ........................ -- 18,267 -- 7,043,328 -- -- 7,061,595
Common stock subscribed .................... -- -- (110,000) -- -- -- (110,000)
Comprehensive income (loss):
Unrealized loss on
marketable securities ............. -- -- -- -- (39,232) -- (39,232)
Net loss ............................ -- -- -- -- -- (7,008,889) (7,008,889)
------------
Comprehensive income (loss) ................ -- -- -- -- -- -- (7,048,121)
---- ------------ --------- ----------- --------- ------------ ------------
Balance at December 31, 1996 ............... -- 113,883 (110,000) 28,319,838 (39,232) (26,588,652) 1,695,837
Issuance of common stock in
connection with acquisition
of Camelot Pharmacal, L.L.C ........... -- 6,000 -- 1,644,000 -- -- 1,650,000
Common stock issued ........................ -- 6,612 37,400 1,041,750 -- -- 1,085,762
Common stock options and
warrants issued ....................... -- -- -- 165,868 -- -- 165,868
Common stock options extended .............. -- -- -- 215,188 -- -- 215,188
Accretion of issuance costs for
Series A preferred stock .............. -- -- -- -- -- (79,500) (79,500)
Comprehensive income (loss):
Unrealized gain on
marketable securities ............... -- -- -- -- 39,232 -- 39,232
Net loss .............................. -- -- -- -- -- (9,489,138) (9,489,138)
------------
Comprehensive income (loss) ................ -- -- -- -- -- -- (9,449,906)
---- ------------ --------- ----------- --------- ------------ ------------
Balance at December 31, 1997 ............... -- 126,495 (72,600) 31,386,644 -- (36,157,290) (4,716,751)
Common stock issued ........................ -- 144,089 62,600 12,472,966 -- -- 12,679,655
Series C preferred stock issued ............ 115 -- -- 11,499,885 -- -- 11,500,000
Series C preferred stock dividends ......... 4 -- -- 413,996 -- (415,112) (1,112)
Accretion of issuance costs for
Series A preferred stock ............. -- -- -- -- -- (23,900) (23,900)
Comprehensive income (loss):
Unrealized loss on
marketable securities ............... -- -- -- -- (222,226) -- (222,226)
Net loss .............................. -- -- -- -- -- (18,560,461) (18,560,461)
------------
Comprehensive income (loss) ................ -- -- -- -- -- -- (18,786,687)
---- ------------ --------- ----------- --------- ------------ ------------
Balance at December 31, 1998 ............... $119 $ 270,584 $ (10,000) $55,773,491 $(222,226) $(55,156,763) $ 655,205
==== ============ ========= =========== ========= ============ ============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
(a development stage enterprise)
Consolidated Statements Of Cash Flows
For the Years Ended December 31, 1998, 1997 and 1996 and for the Period from
October 17, 1986 (Inception) to December 31, 1998
<TABLE>
<CAPTION>
October 17, 1986
(inception) to
Years Ended December 31, December 31,
1998 1997 1996 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash outflows from development stage activities and
extraordinary gain: Loss before extraordinary item ................ $(18,560,461) $(9,489,138) $(7,008,889) $(54,681,037)
Extraordinary gain on extinguishment of debt ................. -- -- -- 42,787
------------ ----------- ----------- ------------
Net loss ..................................................... (18,560,461) (9,489,138) (7,008,889) (54,638,250)
------------ ----------- ----------- ------------
Adjustments to reconcile net loss to net cash used by development stage
activities:
Issuance of common stock, stock options/warrants for services .... 359,913 381,056 640,762 2,281,973
Non-cash interest income ......................................... (670) -- -- (670)
Non-cash interest expense ........................................ 64,844 28,875 -- 143,717
Non-cash acquisition of research and development in process
technology
-- 1,650,000 -- 1,650,000
Issuance of common stock for license ............................. -- -- -- 5,216
Securities acquired under sublicense agreement ................... (350,000) -- (500,000) (850,000)
Issuance of common stock for intellectual property rights ........ -- -- -- 866,250
Depreciation and amortization .................................... 68,794 84,584 71,652 393,219
Increase in debt issuance and organizational costs ............... -- -- -- (77,834)
Loss realized on sale of marketable securities ................... -- 324,915 -- 324,915
Decrease (increase) in prepaid expenses & other current assets ... 8,343 (3,403) 109,810 (98,076)
Decrease in other assets ......................................... 25,738 14,278 44,354 59,041
Increase (decrease) in accounts payable, accrued liabilities ..... (279,264) 440,817 245,680 31,448
Increase (decrease) in sponsored research payable ................ (20,963) (109,389) 352,755 1,026,875
------------ ----------- ----------- ------------
Net cash used by development stage activities ......................... (18,683,726) (6,677,405) (6,043,876) (48,882,176)
------------ ----------- ----------- ------------
Cash flows from investing activities:
Proceeds on sale of marketable securities ........................ -- 175,085 -- 175,085
Acquisition of laboratory and office equipment, and leasehold
improvements ................................................. (131,772) (53,543) (51,136) (449,124)
Decrease (increase) in segregated cash ........................... -- 75,000 (75,000) --
Increase in notes receivable in connection with sale of stock .... -- -- (240,000) (240,000)
Decrease (increase) in loan receivable - former officer .......... 80,000 (80,000) -- --
Payments of notes receivable ..................................... 52,200 37,400 130,000 219,600
Purchase of Camelot Pharmacal, L.L.C., net cash acquired ......... -- (46,687) -- (46,687)
------------ ----------- ----------- ------------
Net cash provided (used) by investing activities ...................... 428 107,255 (236,136) (341,126)
------------ ----------- ----------- ------------
Cash flows from financing activities:
Principal payments under capital lease ........................... (4,020) (50,925) (21,528) (76,473)
Proceeds from notes payable - related party ...................... 150,000 -- -- 150,000
Repayments of notes payable - related party ...................... (50,000) -- -- (50,000)
Proceeds from issuance of convertible notes ...................... 1,000,000 -- -- 1,000,000
Conversion of convertible, subordinated notes .................... -- -- -- 749,976
Proceeds from issuance of convertible debenture .................. -- 1,750,000 -- 2,300,000
Proceeds from issuance of common stock ........................... 8,150,000 -- -- 21,418,035
Proceeds from issuance of preferred stock ........................ 12,750,000 3,284,812 -- 16,034,812
Redemption of preferred stock .................................... (1,250,000) -- -- (1,250,000)
Proceeds from exercise of warrants/stock options ................. -- -- 6,420,834 11,402,158
------------ ----------- ----------- ------------
Net cash provided by financing activities ............................. 20,745,980 4,983,887 6,399,306 51,678,508
------------ ----------- ----------- ------------
Net increase (decrease) in cash and cash equivalents .................. 2,062,682 (1,586,263) 119,294 2,455,206
Cash and cash equivalents at beginning of period ...................... 393,608 1,979,871 1,860,577 1,084
------------ ----------- ----------- ------------
Cash and cash equivalents at end of period ............................ $ 2,456,290 $ 393,608 $ 1,979,871 $ 2,456,290
============ =========== =========== ============
Noncash investing and financing activities:
Common stock, stock options and warrants issued for services ..... $ 359,913 $ 381,056 $ 640,762 $ 2,281,973
Common stock redeemed in payment of notes receivable ............. 10,400 -- -- 10,400
Acquisition of research and development in-process
technology
-- 1,650,000 -- 1,655,216
Common stock issued for intellectual property rights ............. -- -- -- 866,250
Common stock issued to retire debt ............................... -- -- -- 600,000
Common stock issued to redeem convertible securities ............. 4,019,263 1,334,105 -- 5,353,368
Securities acquired under sublicense agreement ................... 350,000 -- 500,000 850,000
Equipment acquired under capital lease ........................... 49,231 -- 72,453 121,684
Notes payable converted to common stock .......................... -- -- -- 749,976
Stock dividends .................................................. 596,195 182,352 -- 778,547
Supplemental disclosure of cash flow information: Interest paid ...... $ 186,519 $ 10,417 $ 9,531 $ 267,401
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
(a development stage enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1998, 1997 and 1996
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Sheffield Medical Technologies Inc. ("Sheffield") was
incorporated under Canadian law in October 1986. In May 1992, the Company became
domesticated as a Wyoming Corporation pursuant to a "continuance" procedure
under Wyoming law. In January 1995, the Company's shareholders approved the
proposal to reincorporate Sheffield in Delaware, which was effected on June 13,
1995. On January 10, 1996, Ion Pharmaceuticals, Inc. ("Ion"), was formed as a
wholly owned subsidiary of the Company. At that time, Ion acquired the Company's
rights to certain early-stage biomedical technologies. On April 17, 1997, CP
Pharmaceuticals, Inc. ("CP") was formed for the purpose of acquiring Camelot
Pharmacal, L.L.C., a privately held pharmaceutical development company, which
acquisition was consummated on April 25, 1997. In June 1997, the Company's
shareholders approved the proposal to change Sheffield's name from Sheffield
Medical Technologies Inc. to Sheffield Pharmaceuticals, Inc. As part of an
agreement with Elan Corporation, plc, ("Elan") on June 30, 1998, Systemic
Pulmonary Delivery, Ltd. ("SPD") was formed as a wholly owned subsidiary of the
Company. At that time, SPD acquired the Company's rights to the systemic
applications of the Metered Solution Inhaler ("MSI") and acquired Elan's rights
to certain pulmonary delivery technologies. Unless the context requires
otherwise, Sheffield, Ion, CP and SPD are referred herein to as "the Company."
All significant intercompany transactions are eliminated in consolidation.
The accompanying consolidated financial statements have
been prepared on a going concern basis which contemplates the realization of
assets and satisfaction of liabilities and commitments in the normal course of
business. The Company is in the development stage and to date has been
principally engaged in research, development and licensing efforts. The Company
has generated minimal operating revenue, sustained significant net operating
losses, and requires additional capital that the Company intends to obtain
through out-licensing as well as through equity and debt offerings to continue
to operate its business. The Company's ability to meet its obligations as they
become due and to continue as a going concern must be considered in light of the
expenses, difficulties and delays frequently encountered in developing a new
business, particularly since the Company will focus on product development that
may require a lengthy period of time and substantial expenditures to complete.
Even if the Company is able to successfully develop new products, there can be
no assurance that the Company will generate sufficient revenues from the sale or
licensing of such products to be profitable. Management believes that the
Company's ability to meet its obligations as they become due and to continue as
a going concern through December 1999 is dependent upon obtaining additional
funding. However, the accompanying financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
2. SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS - The Company considers all highly
liquid instruments with original maturities of three months or less to be cash
equivalents.
MARKETABLE SECURITIES - Marketable securities generally
consist of investments that can be readily purchased or sold using established
markets. The Company's securities, which are classified as available-for-sale,
are carried at market with unrealized gains and losses reported as a separate
component of other comprehensive income within stockholders' equity.
PROPERTY AND EQUIPMENT - Property and equipment are
stated at cost. Depreciation is computed using the straight-line method over
three or five year periods for leasehold improvements and office equipment, and
five years for laboratory equipment. Assets under capital leases, consisting of
office equipment, are amortized over the lesser of the useful life or the
applicable lease terms.
RESEARCH AND DEVELOPMENT COSTS - Research and
development costs ("R & D costs") are expensed as incurred, except for fixed
assets to which the Company has title, which are capitalized and depreciated
over their estimated useful lives.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying
amounts of cash and cash equivalents, accounts payable, sponsored research
payable and notes payable approximates fair value.
BASIC NET LOSS PER SHARE OF COMMON STOCK - Basic net
loss per share is calculated in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 128, EARNINGS PER SHARE. Basic net loss per
share is based upon the weighted average common stock outstanding during each
year. Potentially dilutive securities such as stock options, warrants,
convertible debt and preferred stock, have not been included in any years
presented as their effect is antidilutive. The effect of adoption of SFAS No.
128 had no financial impact, and accordingly, no restatement of loss per share
for prior years was necessary.
USE OF ESTIMATES - The preparation of the financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
F-7
<PAGE>
SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
(a development stage enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STOCK-BASED COMPENSATION - SFAS No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, defines a fair value method of accounting for stock
options and similar equity instruments. As permitted by SFAS 123, the Company
continues to account for such transactions under Accounting Principal Board
Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB 25"), and has
disclosed in a note to the financial statements pro forma net loss and earnings
per share as if the Company had applied the fair value method of accounting for
its stock-based awards. Under APB 25, no expense is generally recognized at the
time of option grant because the exercise price of the Company's employee stock
option equals or exceeds the fair market value of the underlying common stock on
the date of grant.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS - In
1998, the Company adopted SFAS No. 130, REPORTING COMPREHENSIVE INCOME, which
establishes standards for the reporting and display of comprehensive income and
its components in a full set of general purpose financial statements and applies
to all enterprises. In accordance with SFAS No. 130, the Company has changed the
format of its consolidated statements of stockholders' equity to present
comprehensive income. Other comprehensive income or loss shown in the
consolidated statements of stockholders' equity at December 31, 1998, 1997 and
1996 is solely comprised of unrealized gains or losses on marketable securities.
The unrealized gain on marketable securities during 1997 includes
reclassification adjustments for $324,915 of losses realized in income from the
sale of the securities.
In 1998, the Company also adopted SFAS No. 131,
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, which
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. The Company
has no reportable segments as defined by SFAS No. 131.
3. ACQUISITION
On April 25, 1997, the Company completed its acquisition
of Camelot Pharmacal, L.L.C., ("Camelot") a newly formed, privately held
Missouri limited liability company focusing on the development of specialty
pharmaceuticals. The purchase price consisted of 600,000 shares of the Company's
Common Stock (valued at $2.75 per share) and the assumption of certain
liabilities in excess of tangible assets acquired of $8,262 (see Note 5). The
transaction was treated as a purchase for accounting purposes, and accordingly,
the assets and liabilities assumed have been recorded at their estimated fair
market values at the date of acquisition. Since technological feasibility of the
in-process research and development costs have not yet been established and the
technology had no alternative future use at the acquisition date, the in-process
research and development costs of $1,650,000 were immediately written-off and
included in the results of operations as a non-recurring charge for the year
ended December 31, 1997. Camelot had no revenue and minimal operating losses for
the period ended April 24, 1997 and therefore proforma disclosure has not been
included.
4. LEASES
The Company leases its office space and certain
equipment under noncancelable operating and capital leases that expire at
various dates through 2003. During 1998, the Company entered into an equipment
lease that qualifies as a capital lease. At December 31, 1998, assets held under
capital leases consisting of office equipment were $41,026, net of accumulated
amortization of $8,205. Future minimum lease payments under capital and
operating leases at December 31, 1998 are as follows:
Capital Operating
Leases Leases
------ ------
1999....................................... $9,375 $129,452
2000....................................... 9,375 121,351
2001....................................... 9,375 115,997
2002....................................... 9,375 78,364
2003....................................... 1,563 --
------ -------
Total minimum lease payments............... 39,063 $445,164
========
Less amount representing interest.......... (9,854)
-------
Present value of net
minimum lease payments................... 29,209
Less current maturities of capital
lease obligations...................... (5,507)
=======
Capital lease obligations............... $23,702
=======
F-8
<PAGE>
SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
(a development stage enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Rent expense relating to operating leases for the years
ended December 31, 1998, 1997, 1996 and the period from October 17, 1986
(inception) to December 31, 1998 was $143,126, $190,584, and $147,104, and
$666,235, respectively.
5. STOCKHOLDERS' EQUITY
The following table represents the issuance of Common
Stock since the Company's incorporation:
Number of common
Shares Issued
-------------
Date of incorporation 900,000
Issued during year ended December 31, 1986 990,000
Issued during year ended December 31, 1991 412,500
Issued during year ended December 31, 1992 850,000
Issued during year ended December 31, 1993 2,509,171
Issued during year ended December 31, 1994 1,134,324
Issued during year ended December 31, 1995 2,765,651
Issued during year ended December 31, 1996 1,826,628
Issued during year ended December 31, 1997 1,261,265
Issued during year ended December 31, 1998 14,408,880
----------
Balance outstanding at December 31, 1998 27,058,419
==========
The shares issued during 1993 included (i) 1,666,668
shares related to the initial public offering; (ii) 272,500 shares related to
the exercise of warrants at a price of Can. $3.50 per share; (iii) 31,250 shares
as consideration for fiscal agency fees; (iv) 10,000 shares related to the
exercise of warrants at a price of Can. $1.00 per share; (v) 524,753 shares
related to the conversion of 10% Convertible Notes at an average price of Can.
$1.82 per share; (vi) 4,000 shares to members of the Scientific Advisory Board,
in consideration of their services, at $1.78 per share.
Under the UGIF Technology Option Agreement (the "Option
Agreement") dated November 11, 1992, and approved by the shareholders of the
Company on December 2, 1993, the Company obtained an option from E/J Development
Corporation d/b/a TechSource Development Corporation ("TechSource") to acquire
an exclusive sublicense to the UGIF Technology in exchange for 300,000 shares of
Common Stock of the Company (after taking into account a one-for-two reverse
stock split effective on February 11, 1993). Mr. Douglas R. Eger, who was
formerly Chairman of the Company, is a former 50% shareholder of TechSource. On
January 10, 1994, TechSource assigned its right to receive 215,000 shares of
Common Stock pursuant to the Option Agreement to Mr. Eger and assigned its right
to receive 85,000 shares of Common Stock pursuant to the Option Agreement to Mr.
A.M. Jenke, a former director and officer of the Company. Effective January 10,
1994, the Company issued such shares to Messrs. Eger and Jenke at approximately
$0.02 per share (market value of $4.8125 per share) on January 10, 1994, at
which time the Company recorded the estimated fair market value of $866,250 as
an expense. Mr. Eger sold his interest in TechSource to Mr. Jenke in September
1994.
In March 1994, a total of $3,121,164 was received from
the exercise of 832,324 of the Company's Redeemable Stock Purchase Warrants
issued in connection with the Company's February 1993 initial United States
public offering of 833,334 units, each such unit consisting of two shares of
Common Stock and one Redeemable Common Stock Purchase Warrant exercisable for
one share of Common Stock at a price of $3.75, net of the buyback of 1,010
warrants at $0.05 per warrant.
In April 1995, gross proceeds of $3,280,600 were
received through the issuance of 410,075 units by private placement at a price
of $8.00 per unit. Each such unit consisted of two shares of the Company's
Common Stock and a warrant to purchase one share of Common Stock at a price of
$5.00 at any time up until and including February 10, 2000. The warrants are
redeemable by the Company under certain circumstances and contain antidilutive
provisions whereby the Common Stock to be purchased under the warrants and the
related exercise price are adjusted to reflect the completion of certain stock
transactions (see Note 6).
F-9
<PAGE>
SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
(a development stage enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On January 23, 1995, SMT Investment Partnership ("SMT")
made a 10% loan (the "SMT Loan") to the Company in the principal amount of
$550,000 pursuant to a demand loan agreement (the "SMT Loan Agreement"). Under
the terms of the SMT Loan Agreement, SMT could demand the payment in full of the
SMT Loan at any time or December 31, 1996 whichever came first. To secure the
Company's obligations under the SMT Loan Agreement, the Company granted SMT a
security interest in substantially all of the Company's assets, which security
interest has since been released. The note evidencing the SMT Loan (the
"Original SMT Note") was exchanged pursuant to the terms of the SMT Loan
Agreement for a new note (the "SMT Convertible Note") that permitted the holder
to exchange the SMT Convertible Note (in whole or in part) into 200,000 shares
of Common Stock. In addition, the SMT Loan Agreement required the Company upon
issuance of the SMT Convertible Note to issue to SMT warrants (the "SMT
Warrants") to acquire 200,000 shares of Common Stock at any time within five
years after the date of issue for a price of $4.00 per share. The SMT Warrants
are redeemable by the Company for $4.00 per share at any time after the price of
the Common Stock exceeds an average of $6.00 per share for 20 business days. In
addition, the SMT Warrants contain certain antidilutive provisions whereby the
Common Stock to be purchased under the warrants and the related exercise price
are adjusted to reflect the completion of certain transactions (see Note 6). SMT
was granted certain registration rights with respect to the Common Stock
issuable to SMT upon conversion of the SMT convertible Note and SMT Warrants. By
letter dated June 1, 1995, SMT exercised its right to convert the SMT
Convertible Note into 200,000 shares of Common Stock and subsequently assigned
the right to such shares to an unaffiliated third party.
In July 1995, the Company completed a private placement
of 1,375,000 units to accredited investors at a price of $4.00 per unit for
gross proceeds of $5,500,000. Each such unit consists of one share of the
Company's Common Stock and a warrant to purchase one share of Common Stock at a
price of $4.50 at any time up until and including February 10, 2000. The
warrants are redeemable by the Company under certain circumstances and contain
certain antidilutive provisions whereby the Common Stock to be purchased under
the warrants and the related exercise price are adjusted to reflect the
completion of certain stock transactions (see Note 6).
On April 30, 1996, the Company completed its warrant
discount program through which the Company offered holders of warrants issued in
private placements completed in 1995 the opportunity to exercise such warrants
at up to a 121/2 % discount from the actual exercise prices of such warrants. A
total of $5.6 million was received from the exercise of such warrants with the
related issuance of 1,373,250 shares of Common Stock.
On February 26, 1997, 35,700 shares of Series A
Preferred Stock were issued pursuant to a private placement. Holders of Series A
Preferred Stock have the right, exercisable commencing May 29, 1997 and ending
February 28, 1999, to convert shares of Series A Preferred Stock into shares of
Common Stock. The number of shares of Common Stock issuable upon conversion of
Series A Preferred Stock is determined by reference to the lesser of (i)
$3.31875 and (ii) 85% of the "current market price" per share of Common Stock,
where "current market price" means, with certain exceptions, the average of the
closing bid prices of Common Stock for the 10 consecutive trading days ending
the last trading day before the applicable conversion date. Each share of Series
A Preferred Stock earns a cumulative dividend payable in shares of Common Stock
at a rate per share equal to 7.0% of the original $100 purchase price per share
of the Series A Preferred Stock payable at the time of conversion. As of
December 31, 1997, 25,000 shares of Series A Preferred Stock were outstanding.
Between August 26, 1997 and December 31, 1997, 10,700 shares of Series A
Preferred stock, plus related accrued dividends, were converted into 44,769
shares of Common Stock. In 1998, the remaining balance of the Company's
outstanding Series A Preferred Stock, plus related dividends payable, were
converted to Common Stock, resulting in the issuance of 4,075,797 shares of
Common Stock.
On April 25, 1997, Camelot, merged with and into CP
Pharmaceuticals, Inc., a newly formed, wholly owned subsidiary of the Company.
The principals of Camelot at the time of the merger were Loren G. Peterson, Carl
F. Siekmann and David A. Byron. Pursuant to the related agreement and plan of
merger, Messrs. Peterson, Siekmann and Byron each received 200,000 shares of
Common Stock. Following the consummation of the merger, each of Messrs.
Peterson, Siekmann and Byron entered into employment agreements with Sheffield
and received stock options providing each individual the right to purchase up to
400,000 shares of Common Stock (see Note 3).
On September 22, 1997, the Company consummated a private
placement of $1,750,000 principal amount of its 6% Convertible Subordinated
Debentures ("Debentures") due September 22, 2000. In addition, the Company
granted the holder of the Debenture warrants to purchase 140,000 shares of the
Company's Common Stock at $2.80 per share. A value of $115,500 was assigned to
these warrants. The Debentures are convertible at the option of holders from
December 22, 1997 until maturity, subject to certain limitations, into a number
of shares of Common Stock equal to (i) the principal amount of the Debenture
being so converted divided by (ii) 75% of the market price of the Common Stock
as of the date of conversion. For purposes of any conversion of Debentures,
"market price" generally means the average of the closing prices of the Common
Stock for the five trading day period preceding the applicable conversion date.
The Debentures also earn interest at a rate of 6.0% per annum that is payable by
the Company, at the option of the holders and subject to certain conditions, in
shares of its Common Stock at a conversion rate generally equal to the average
of the closing prices of the Common Stock for the ten trading days preceding the
applicable interest payment date. During 1998, the Debentures were converted to
Common Stock resulting in the issuance of 2,925,941 shares of common stock.
On April 15, 1998, the Company issued 1,250 shares of
its Series B Cumulative Convertible Redeemable Preferred Stock in a private
placement for an aggregate purchase price of $1,250,000. In addition, the Holder
of Series B Preferred Stock was issued warrants to acquire 300,000 shares of
Common Stock at any time up until and including April 15, 2001 for a price of
$1.00 per share. Each share of Series B Preferred Stock earns a cumulative
dividend payable at a rate per share equal to 6% per annum. On July 31, 1998,
the Company redeemed all of the Series B Preferred Stock and accrued dividends
for cash.
F-10
<PAGE>
SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
(a development stage enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 1998, the Company entered into an agreement with
Zambon Group, SpA ("Zambon") of Milan, Italy, for a sublicense to the Company's
proprietary MSI drug delivery system (see Note 8). Pursuant to an option
agreement dated April 15, 1998, the Company issued 800,000 shares of Common
Stock for $650,000 in cash. On June 15, 1998, the Company entered into the
definitive agreement, resulting in the issuance of an additional 1,846,153
shares of Common Stock for $1,500,000.
On June 30, 1998, the Company issued 4,571,428 shares of
Common Stock and 11,500 shares of Series C Cumulative Convertible Preferred
Stock, convertible into shares of Common Stock of the Company or of its
wholly-owned subsidiary, SPD, for $17.5 million pursuant to a definitive
agreement with Elan. The Series C Preferred Stock earns cumulative dividend
payable in shares of Series C Preferred Stock at a rate of 7.0% on the stated
value of each outstanding share of Series C Preferred Stock on the dividend
date. Elan also received a warrant to purchase 990,000 shares of Common Stock of
the Company exercisable from December 31, 1998 through January 30, 2005 at an
exercise price of $2.00 per share. Under the terms of the agreement, the
Company, through SPD, acquired certain pulmonary delivery technologies for the
sum of $12.5 million in cash (see Note 8). All of the outstanding common stock
of SPD is pledged to Elan during the term of the agreement. The net book value
of SPD is $1.6 million as of December 31, 1998. During 1998, the Company issued
stock dividends totaling 414 shares of Series C Preferred Stock and cash
dividends for fractional shares of $1,112.
6. STOCK OPTIONS AND WARRANTS
The 1993 Stock Option Plan (the "Option Plan") was
adopted by the Board of Directors in August 1992 and approved by the
shareholders at the annual meeting in December 1993. An amendment to the Option
Plan increasing the number of shares of Common Stock available for issuance
thereunder from 3,000,000 shares to 4,000,000 shares received shareholder
approval on July 15, 1998. The Option Plan permits the grant to employees and
officers of the Company of both incentive stock options and non-statutory stock
options. The Option Plan is administered by the Board of Directors or a
committee of the Board, which determines the persons to whom options will be
granted and the terms thereof, including the exercise price, the number of
shares subject to each option, and the exercisability of each option. The
exercise price of all options for Common Stock granted under the Option Plan
must be at least equal to the fair market value on the date of grant in the case
of incentive stock options and 85% of the fair market value on the date of grant
in the case of non-statutory stock options. Options generally expire five to ten
years from the date of grant and vest either over time or upon the Company's
Common Stock attaining a set market price for a certain number of trading days.
As of December 31, 1998, options available for grant under the Option Plan are
1,559,000.
The 1993 Restricted Stock Plan (the "Restricted Plan")
was adopted by the Board of Directors in August 1992 and approved by the
shareholders at the annual shareholders meeting in December 1993. The Restricted
Plan authorized the grant of a maximum of 150,000 shares of Common Stock to key
employees, consultants, researchers and members of the Company's Scientific
Advisory Board. The Restricted Plan is administered by the Board of Directors or
a committee of the Board, which determines the person to whom shares will be
granted and the terms of such share grants. As of December 31, 1998, no shares
have been granted under the Restricted Plan.
The 1996 Directors Stock Option Plan (the "Directors
Plan") was adopted by the Board of Directors and approved by the shareholders on
June 20, 1996. Under the Directors Plan, the maximum aggregate number of shares
which may be optioned and sold is 500,000 shares of Common Stock. The Directors
Plan initially granted each eligible director 15,000 stock options. To the
extent that shares remain available, any new directors shall receive the grant
of an option to purchase 25,000 shares. To the extent that shares remain
available under the Directors Plan, on January 1 of each year commencing January
1, 1997, each eligible director shall be granted an option to purchase 15,000
shares. The exercise price of all options granted under the Directors Plan shall
be the fair market value at the date of the grant. Options generally expire five
years from the date of grant. As of the December 31, 1998, there are 305,000
options available for grant under the Directors Plan.
F-11
<PAGE>
SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
(a development stage enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Transactions involving stock options and warrants are
summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------- ------------------------ ----------------------------
Weighted Weighted Weighted
Average Average Average
Common Stock Exercise Common Stock Exercise Common Stock Exercise
Options Price Options Price Options Price
------------ ------- ------------ -------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, January 1, ............. 4,781,290 3.65 3,033,755 4.49 4,164,834 4.02
Granted ......................... 3,162,910 1.81 3,683,039 3.92 1,014,922 5.52
Expired ......................... 283,504 4.48 327,500 3.18 70,000 3.77
Exercised ....................... -- -- -- -- 1,942,501 3.76
Canceled ........................ 180,500 5.64 1,608,004 4.11 133,500 4.53
Revalued(1) ..................... 430,640 -- -- -- -- --
--------- ---- --------- ---- --------- ----
Outstanding December 31, ............ 7,910,836 2.55 4,781,290 3.65 3,033,755 4.49
========= ==== ========= ==== ========= ====
Exercisable at end of year .......... 5,028,336 2.71 2,900,290 3.88 2,094,833 4.75
========= ==== ========= ==== ========= ====
</TABLE>
(1) Certain warrants issued by the Company during 1995
contain antidilutive provisions. These warrants total 615,325, and have exercise
prices ranging from $4.00 to $5.00 per share. Pursuant to the antidilutive
provisions of the warrants, the common shares to be purchased under the warrants
were increased to 1,045,965 and the related exercise prices were adjusted to a
range of $2.44 to $2.81 per share.
During the period January 1, 1996 through December 31, 1998, the exercise prices
and weighted average fair value of options and warrants granted by the Company
were as follows:
Weighted Average
Year Number Of Options/warrants Exercise Price Fair Value
---- -------------------------- -------------- ----------------
1996 1,014,922 $3.38 - 8.25 $2.30
1997 3,683,039 $1.50 - 6.00 $4.05
1998 3,162,910 $1.00 - 3.69 $0.99
At December 31, 1998, outstanding warrants to purchase
the Company's Common Stock are summarized as follows:
Weighted
Weighted Average Average
Range of Outstanding Warrants Remaining Contractual Exercise
Exercise Prices At December 31, 1998 Life (Years) Price
--------------- -------------------- --------------------- ------------
$0.73 - $2.00 1,929,910 4.62 $1.63
$2.25 - $3.00 1,340,965 1.37 $2.61
$3.25 - $6.50 511,539 2.91 $3.73
--------
3,782,414 3.24 $2.26
=========
At December 31, 1998, outstanding options to purchase
the Company's Common Stock are summarized as follows:
Weighted
Weighted Average Average
Range of Outstanding Options Remaining Contractual Exercise
Exercise Prices At December 31, 1998 Life (Years) Price
--------------- -------------------- --------------------- ------------
$1.24 - $2.75 2,881,000 6.56 $2.35
$3.00 - $4.00 879,922 3.85 $3.62
$4.06 - $6.25 367,500 2.80 $4.57
---------
4,128,422 5.65 $2.82
=========
F-12
<PAGE>
SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
(a development stage enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SFAS No. 123 requires pro forma information regarding
net income and earnings per share as if the Company has accounted for its stock
options granted subsequent to December 31, 1994, under the fair value method of
SFAS No. 123. The fair value of these stock options is estimated at the date of
grant using a Black-Scholes option pricing model with the following weighted
average assumptions for 1998, 1997, and 1996: risk-free interest rate ranging
from 4.39% to 6.23%; expected volatility ranging from 0.526 and 0.694; expected
option life of one to ten years from vesting and an expected dividend yield of
0.0%.
For purposes of pro forma disclosures, the estimated
fair value of the stock options and warrants is amortized to expense over the
options' vesting period. The Company's pro forma information is as follows:
1998 1997 1996
---- ---- ----
Pro forma net loss ............... $ 18,983,921 $ 9,500,810 $8,500,149
Pro forma basic net loss
per share of common stock...... $ 0.87 $ 0.79 $ 0.79
7. CONVERTIBLE PROMISSORY NOTE
As part of an agreement with Elan, Elan agreed to make
available to the Company a Convertible Promissory Note ("Note") that provides
the Company the right to borrow up to $2,000,000, subject to satisfying certain
conditions. No more than $500,000 may be drawn under the Note in any calendar
quarter and at least one-half of the proceeds must be used to fund SPD's
development activities. The principal outstanding under the Note draws interest
at the prime rate plus 1% and, if not previously converted, matures on June 30,
2005. Prior to repayment, Elan has the right to convert all principal and
accrued interest into shares of the Company's Common Stock at a conversion price
of $1.75 per share. As of December 31, 1998, the outstanding principal balance
of the note was $1,000,000. On February 22, 1999, the Company borrowed an
additional $500,000 under the Note.
8. RESEARCH AND DEVELOPMENT AGREEMENTS
In March 1997, the Company entered into exclusive supply
and license agreements for the world-wide rights to the MSI system of Siemens
A.G. The agreements call for Siemens to be the exclusive supplier of the MSI
system. The Company paid licensing fees of $1.1 million in both April 1997 and
1998, to Siemens pursuant to these agreements. In addition, under certain
circumstances, the Company will be required to make another DM 2.0 million
payment to Siemens during 1999.
On June 15, 1998, the Company entered into an agreement
with Zambon for a sublicense to the Company's proprietary MSI drug delivery
system. Under this transaction, Zambon received an exclusive worldwide marketing
and development sublicense for respiratory products to be delivered by the MSI
system including four drugs currently under development by the Company. The
Company maintained certain co-promotion rights in the U.S. for respiratory drugs
as well as the world-wide marketing and development rights for all applications
of the MSI delivery system outside the respiratory products. The Company was
paid an up-front fee in the form of an equity investment and will receive
milestone payments upon marketing approval for each of the four products and
royalties upon commercialization. In addition, Zambon will provide the Company
with an interest-free line of credit totaling $2,000,000 upon the achievement of
certain early milestones.
On June 30, 1998, the Company issued certain equity
securities pursuant to an agreement with Elan (see Note 5). Under the terms of
the agreement, the Company, through its wholly owned subsidiary, SPD, acquired
certain pulmonary delivery technologies for $12.5 million in cash. This payment
was expensed during 1998 as acquired R&D in-process technology since the
technologies acquired have not demonstrated technological feasibility and have
no alternative future uses. The Company is responsible for the development of
the systemic applications of these technologies (including the Aerosol Drug
Delivery System ("ADDS") described below). Pursuant to its agreement with Elan,
at December 31, 1998, the Company was committed to fund $2,076,000 of additional
costs related to SPD's systemic development program.
On July 15, 1998, SPD acquired from Aeroquip-Vickers,
Inc. a new generation metered dose inhaler system called the ADDS for $825,000.
The purchase price has been expensed as acquired R&D in-process technology
because the assets acquired, which consist solely of intellectual property
related to ADDS, have not demonstrated technological feasibility and have no
alternative future uses. SPD holds the rights to all systemic disease
applications of the ADDS technology while Sheffield retains the rights to
develop the respiratory disease applications of ADDS.
F-13
<PAGE>
SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
(a development stage enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company also is party to a number of license and
research agreements, primarily with universities, hospitals, and research
facilities, relating to early stage medical research projects that focus on the
development of new compounds for the treatment of cancer, acquired immune
deficiency syndrome and other diseases. As part of the Company's focus on later
stage opportunities, the Company is seeking to out-license these projects. There
can be no assurance that the Company will receive license fees or other payments
related to these technologies. The Company believes these early stage license
and research agreements will have no material impact on the financial position
of the Company. For the year ended December 31, 1998, the Company funded
approximately $22,000 related to these projects.
On November 20, 1997, the Company entered into a
sublicense agreement with Lorus Therapeutics, Inc. (formerly Imutec Pharma
Inc.). The agreement licenses rights to a series of clotrimazole-related
compounds for the treatment of cancer, Kaposi's sarcoma and actinic keratosis to
a newly formed company, NuChem Pharmaceuticals, Inc. ("NuChem"). In exchange,
Lorus Therapeutics, Inc. ("Lorus") agreed to manage and fund the remaining
development program. The Company received $500,000 in cash upon signing the
agreement, which was recognized as revenue during the year ended December 31,
1997, and received 583,188 shares of Lorus stock valued at $350,000 which was
recognized as revenue during the year end December 31, 1998. In addition, the
Company is entitled to receive additional payments upon the completion of
certain milestones in the development of these compounds and retains a 20
percent ownership interest in NuChem.
9. RELATED PARTY TRANSACTIONS
During 1998, three executive officers provided funds for
use by the Company comprised of short-term notes having a 7% annual interest
rate, unpaid salaries and unreimbursed expenses. The largest amount outstanding
to the executive officers during 1998 was $241,740. As of December 31, 1998, all
amounts under the short-term notes have been repaid.
During 1998, certain shareholders provided funds for use
by the Company comprised of short-term notes totaling $150,000. These notes bore
interest at the rate of 7% per annum and matured on September 8, 1998. On
maturity, the Company repaid principal of $50,000 plus accrued interest, and
extended the terms of the remaining principal balance to January 8, 1999.
Subsequent to December 31, 1998, the Company amended the note extending its
maturity to April 8, 1999.
10. INCOME TAXES
The Company utilizes the liability method to account for
income taxes. Under this method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases of
assets and liabilities and are measured using enacted tax rates and laws that
will be in effect when the differences are expected to reverse.
Deferred income taxes reflect the net effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's net deferred tax asset at December 31,
1998 and 1997 which are considered noncurrent, are as follows:
Deferred Tax Assets 1998 1997
------------------- ---- ----
Net operating loss carryforwards ......... $ 12,600,000 $ 12,400,000
Costs capitalized for tax purposes ....... 14,391,000 578,000
Deferred tax asset valuation allowance ... (26,991,000) (12,978,000)
------------ ------------
Net deferred tax asset ................ $ -- $ --
============ ============
The Company has recorded a valuation allowance for the
entire deferred tax asset due to the uncertainty of its realization. The net
change in the total valuation allowance for the year ended December 31, 1998 was
an increase of $14,013,000. As a result of changes in ownership, and pursuant to
Internal Revenue Code Section 382, the net operating loss carryforwards are
limited in offsetting future taxable income. Future changes in ownership may
limit net operating loss carryforwards generated in the year of change. As a
result of differences between book and tax requirements for writing off
intangible assets acquired, such as in-process R&D, the Company has capitalized
the in-process R&D for tax purposes. The deferred tax asset will be amortized
into taxable income over a useful life of 15 years.
F-14
`
EMPLOYMENT AGREEMENT
AGREEMENT made as of the 16th day of November, 1998, by and
between Sheffield Pharmaceuticals, Inc., a Delaware corporation with its
principal offices at 425 South Woodsmill Road, Suite 270, St. Louis, Missouri
63017-3441 (the "Corporation"), and Scott A. Hoffmann, who currently resides at
17664 Wildridge Drive, Chesterfield, Missouri 63005 ("Executive").
W I T N E S S E T H :
WHEREAS, the Corporation desires to employ and retain
Executive as its Vice President - Finance and Administration and Chief Financial
Officer, upon the terms and subject to the conditions of this Agreement; and
NOW, THEREFORE, in consideration of the premises and the
mutual covenants hereinafter set forth, the parties hereto agree as follows:
1. EMPLOYMENT OF EXECUTIVE. The Corporation hereby employs
Executive as its Vice President - Finance and Administration and Chief Financial
Officer, to perform the duties and responsibilities traditionally incident to
such office, subject at all times to the control and direction of the Board of
Directors of the Corporation.
2. ACCEPTANCE OF EMPLOYMENT; OFFICES; TIME AND ATTENTION, ETC.
(a) Executive hereby accepts such employment and agrees that throughout the
period of his employment hereunder, except as hereinafter provided, he will
devote his full business and professional time in utilizing his business and
professional expertise, with proper attention, knowledge and skills faithfully,
diligently and to the best of his ability in furtherance of the business of the
Corporation and its subsidiaries and will perform the duties assigned to him
pursuant to Paragraph 1 hereof. As Vice President - Finance and Administration
and Chief Financial Officer, Executive shall also perform such specific duties
and shall exercise such specific authority related to the management of the
day-to-day operations of the Corporation and its subsidiaries as may be
reasonably assigned to Executive from time to time by the Board of Directors of
the Corporation that are consistent with Executive's financial and
administrative training and experience.
(b) Executive shall at all times be subject to, observe and
carry out such rules, regulations, policies, directions and restrictions as the
Board of Directors of the Corporation shall from time to time reasonably
establish. During the period of his employment hereunder, Executive shall not,
directly or indirectly, accept employment or compensation from, or perform
services of any nature for, any business enterprise other than the Corporation
and its subsidiaries. Notwithstanding the foregoing in this Paragraph 2,
Executive shall not be precluded from engaging in (i) recreational,
eleemosynary, educational and other activities, which activities do not
materially interfere with his duties hereunder and shall occur during vacations,
holidays and other periods
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outside of business hours and (ii) any other educational activities that have
been approved in advance by the Company's Chief Executive Officer.
3. TERM. Except as otherwise provided herein, the term of
Executive's employment hereunder shall commence on the date hereof and shall
continue to and including November 16, 2001. Unless terminated earlier in
accordance with the terms hereof, this Agreement shall automatically be extended
for one or more additional consecutive one year terms unless either party
notifies the other party in writing at least 90 days before the end of the then
current term (including the initial term) of its or his desire to terminate or
renegotiate the terms of this Agreement. The last day of the term of this
Agreement pursuant to this Paragraph 3 (including any early termination pursuant
to the terms hereof) is referred to herein as the "Termination Date."
4. COMPENSATION. (a) As compensation for his services
hereunder, the Corporation shall pay to Executive (i) a base annual salary at
the rate of $120,000, payable in equal installments in accordance with the
normal payroll practices of the Corporation and (ii) such incentive compensation
and bonuses, if any, as the Board of Directors of the Corporation in its
absolute discretion may determine to award Executive (it being understood that
this Agreement shall in no event be construed to require the payment to
Executive of any incentive compensation or bonuses). All compensation paid to
Executive shall be subject to withholding and other employment taxes imposed by
applicable law.
(b) During the period of Executive's employment hereunder,
Executive shall not be entitled to any additional compensation for rendering
employment services to subsidiaries of the Corporation or for serving in any
office of the Corporation or any of its subsidiaries to which he is elected or
appointed.
5. STOCK OPTIONS. As additional compensation for his services
hereunder, the Corporation shall grant to Executive an option under the
Corporation's 1993 Stock Option Plan (the "Plan") to acquire a total of 120,000
shares of the Corporation's common stock at an exercise price per share no less
than the closing sale price of the Corporation's common stock as reported by the
American Stock Exchange on the date hereof, with the terms of such option to be
evidenced by an option letter agreement in the form annexed as Exhibit "A"
hereto.
6. ADDITIONAL BENEFITS; VACATION. (a) In addition to such base
salary, Executive shall receive and be entitled to participate, to the extent he
is eligible under the terms and conditions thereof, in any profit sharing,
pension, retirement, hospitalization, disability, medical service, insurance or
other employee benefit plan generally available to the executive officers of the
Corporation that may be in effect from time to time during the period of
Executive's employment hereunder. The Corporation agrees to cover Executive
under any directors' and officers' liability policy maintained by the
Corporation.
(b) Executive shall be entitled to three (3) weeks' paid
vacation in respect of each 12-month period during the term of his employment
hereunder, such vacation to be taken at times mutually agreeable to Executive
and the Board of Directors of the Corporation.
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(c) Executive shall be entitled to recognize as holidays all
days recognized as such by the Corporation.
7. REIMBURSEMENT OF EXPENSES. The Corporation shall reimburse
Executive in accordance with applicable policies of the Corporation for all
expenses reasonably incurred by him in connection with the performance of his
duties hereunder and the business of the Corporation, upon the submission to the
Corporation of appropriate receipts or vouchers.
8. RESTRICTIVE COVENANT. (a) In consideration of the
Corporation's entering into this Agreement, Executive agrees that during the
period of his employment hereunder and, in the event of termination of this
Agreement (i) by the Corporation upon Executive becoming Disabled (as that term
is defined in Paragraph 13 hereof), (ii) by the Corporation for Cause (as that
term is defined in Paragraph 14 hereof) or (iii) by Executive otherwise than for
Employer Breach (as that term is defined in Paragraph 15 hereof), for a further
period of six months thereafter, he will not (x) directly or indirectly own,
manage, operate, join, control, participate in, invest in, whether as an
officer, director, employee, partner, investor or otherwise, any business entity
that is engaged in a directly competitive business (as hereinafter defined) to
that of the Corporation or any of its subsidiaries within the United States of
America, (y) for himself or on behalf of any other person, partnership,
corporation or entity, call on any customer of the Corporation or any of its
subsidiaries for the purpose of soliciting away, diverting or taking away any
customer from the Corporation or its subsidiaries, or (z) solicit any person
then engaged as an employee, representative, agent, independent contractor or
otherwise by the Corporation or any of its subsidiaries, to terminate him or his
relationship with the Corporation or any of its subsidiaries. For purposes of
this Agreement, the term "directly competitive business" shall mean any business
that is then involved in the research, development, manufacturing or
commercialization in any way of any product, compound, device or method that is
or becomes a part of the Corporation's business or the business of any of its
subsidiaries during Executive's employment by the Corporation or any of its
subsidiaries. Nothing contained in this Agreement shall be deemed to prohibit
Executive from investing his funds in securities of an issuer if the securities
of such issuer are listed for trading on a national securities exchange or are
traded in the over-the-counter market and Executive's holdings therein represent
less than 10% of the total number of shares or principal amount of the
securities of such issuer outstanding.
(b) Executive acknowledges that the provisions of this
Paragraph 8 are reasonable and necessary for the protection of the Corporation,
and that each provision, and the period or periods of time, geographic areas and
types and scope of restrictions on the activities specified herein are, and are
intended to be, divisible. In the event that any provision of this Paragraph 8,
including any sentence, clause or part hereof, shall be deemed contrary to law
or invalid or unenforceable in any respect by a court of competent jurisdiction,
the remaining provisions shall not be affected, but shall, subject to the
discretion of such court, remain in full force and effect.
9. CONFIDENTIAL INFORMATION.
(a) Executive shall hold in a fiduciary capacity for
the benefit of the Corporation and its subsidiaries all confidential
information, knowledge and data relating to or
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concerned with its operations, sales, business and affairs, and he shall not, at
any time during his employment hereunder and for two years thereafter, use,
disclose or divulge any such information, knowledge or data to any person, firm
or corporation other than to the Corporation and its subsidiaries or their
respective designees or except as may otherwise be reasonably required or
desirable in connection with the business and affairs of the Corporation and its
subsidiaries.
(b) Notwithstanding anything to the contrary
contained herein, Executive's obligations under Paragraph 9(a) hereof shall not
apply to any information which:
(i) becomes rightfully known to Executive subsequent or prior
to his employment by the Corporation;
(ii) is or becomes available to the public other than as a
result of wrongful disclosure by Executive;
(iii) becomes available to Executive subsequent to his
employment by the Corporation on a nonconfidential basis from a source
other than the Corporation or its agents which source has a right to
disclose such information; or
(iv) results from research and development and/or commercial
operations at any time by or on behalf of any person, company or other
entity with which or with whom Executive shall become associated (in a
manner consistent with the terms of this Agreement) subsequent to his
employment by the Corporation or its agents totally independent from
any disclosure from the Corporation or its agents.
(c) Notwithstanding anything to the contrary
contained herein, in the event that Executive becomes legally compelled to
disclose any confidential information, Executive will provide the Corporation
with prompt notice so that the Corporation may seek a protective order or other
appropriate remedy. In the event that such protective order or other remedy is
not obtained, Executive shall furnish only such confidential information which
is legally required to be disclosed.
10. INTELLECTUAL PROPERTY. Any idea, invention, design,
written material, manual, system, procedure, improvement, development or
discovery conceived, developed, created or made by Executive alone or with
others, during the period of his employment hereunder and applicable to the
business of the Corporation or any of its subsidiaries, whether or not
patentable or registrable, shall become the sole and exclusive property of the
Corporation or such subsidiary. Executive shall disclose the same promptly and
completely to the Corporation and shall, during the period of his employment
hereunder and at any time and from time to time hereafter at no cost to
Executive (i) execute all documents reasonably requested by the Corporation for
vesting in the Corporation or any of its subsidiaries the entire right, title
and interest in and to the same, (ii) execute all documents reasonably requested
by the Corporation for filing and prosecuting such applications for patents,
trademarks, service marks and/or copyrights as the Corporation, in its sole
discretion, may desire to prosecute, and (iii) give the Corporation all
assistance it reasonably requires, including the giving of testimony in any
suit, action or proceeding, in order to obtain, maintain and protect the
Corporation's right therein and thereto.
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11. EQUITABLE RELIEF. The parties hereto acknowledge that
Executive's services are unique and that, in the event of a breach or a
threatened breach by Executive of any of his obligations under Paragraphs 8, 9
or 10 this Agreement, the Corporation shall not have an adequate remedy at law.
Accordingly, in the event of any such breach or threatened breach by Executive,
the Corporation shall be entitled to such equitable and injunctive relief as may
be available to restrain Executive and any business, firm, partnership,
individual, corporation or entity participating in such breach or threatened
breach from the violation of the provisions of Paragraph 8, 9 or 10 hereof.
Nothing herein shall be construed as prohibiting the Corporation from pursuing
any other remedies available at law or in equity for such breach or threatened
breach, including the recovery of damages and the immediate termination of the
employment of Executive hereunder, if and to the extent permitted hereunder.
12. TERMINATION OF AGREEMENT; TERMINATION OF EMPLOYMENT;
SEVERANCE; SURVIVAL. (a) This Agreement and Executive's employment hereunder
shall terminate upon the first to occur of the following: (i) Executive becoming
Disabled (as that term is defined in Paragraph 13 hereof); (ii) Executive's
death; (iii) termination of Executive's employment by the Corporation for Cause
or pursuant to subparagraph (b) of this Paragraph 12; (iv) termination of
Executive's employment for Employer Breach and (v) the termination of this
Agreement at the end of the term of this Agreement on the Termination Date
pursuant to Paragraph 3.
(b) Notwithstanding anything to the contrary
contained in this Agreement, in the event of the termination of the Employee's
employment by the Corporation for any reason (other than for Cause or by reason
of Employee becoming Disabled), Employee shall be paid a severance payment in an
amount equal to $5,000 multiplied by the number of full months that Employee has
been employed by the Corporation prior to such termination, with such amount not
to exceed $60,000, payable in six equal monthly installments, with the first
installment being payable on the date falling two weeks after the date of such
termination and each additional installment being paid every month after such
date until such severance is paid in full.
(c) Paragraphs 7, 8, 9, 10, 11, 12 and 26 of this
Agreement shall survive the termination of Executive's employment hereunder,
except in the case of termination pursuant to Paragraph 15.
13. DISABILITY. In the event that during the term of his
employment by the Corporation Executive shall become Disabled (as that term is
hereinafter defined) he shall continue to receive the full amount of the base
salary to which he was theretofore entitled for a period of six months after he
shall be deemed to have become Disabled (the "First Disability Payment Period").
If the First Disability Payment Period shall end prior to the Termination Date,
Executive thereafter shall be entitled to receive salary at an annual rate equal
to 80% of his then current base salary for a further period ending on the
earlier of (i) six months thereafter or (ii) the Termination Date (the "Second
Disability Payment Period"). Upon the expiration of the Second Disability
Payment Period, Executive shall not be entitled to receive any further payments
on account of his base salary until he shall cease to be Disabled and shall have
resumed his duties hereunder and provided that the Corporation shall not have
theretofore terminated this Agreement as hereinafter provided. The Corporation
may terminate Executive's employment hereunder at any time after Executive is
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Disabled, upon at least 10 days' prior written notice; PROVIDED, HOWEVER, that
such termination shall not relieve the Corporation from its obligation to make
the payments to Executive described above in this Paragraph 13. For the purposes
of this Agreement, Executive shall be deemed to have become Disabled when (x) by
reason of physical or mental incapacity, Executive is not able to perform his
duties hereunder for a period of 90 consecutive days or for 120 days in any
consecutive 180-day period and (y) Executive's physician or a physician
designated by the Corporation shall have determined that it is unlikely that
Executive will be able, by reason of physical or mental incapacity, to perform a
substantial portion of his duties hereunder for the following 120 days. In the
event that Executive shall dispute any determination of his disability pursuant
to clauses (x) or (y) above, the matter shall be resolved by the determination
of three physicians qualified to practice medicine in the United States of
America, one to be selected by each of the Corporation and Executive and the
third to be selected by the designated physicians. If Executive shall receive
benefits under any disability policy maintained by the Corporation, the
Corporation shall be entitled to deduct the amount equal to the benefits so
received from base salary that it otherwise would have been required to pay to
Executive as provided above.
14. TERMINATION FOR CAUSE. The Corporation may at any time
upon written notice to Executive terminate Executive's employment for Cause. For
purposes of this Agreement, the following shall constitute Cause: (i) the
willful and repeated failure of Executive to perform any material duties
hereunder or gross negligence of Executive in the performance of such duties,
and if such failure or gross negligence is susceptible to cure by Executive, the
failure to effect such cure within twenty (20) days after written notice of such
failure or gross negligence is given to Executive; (ii) except as permitted
hereunder, unexplained, willful and regular absences of Executive from the
Corporation; (iii) excessive use of alcohol or illegal drugs, interfering with
the performance of Executives duties hereunder; (iv) indictment for a crime of
theft, embezzlement, fraud, misappropriation of funds, other acts of dishonesty
or the violation of any law or ethical rule relating to Executive's employment;
(v) indicted for any other felony or other crime involving moral turpitude by
Executive; or (vi) the breach by Executive of any of the provisions of
paragraphs 8, 9 or 10 and if such breach is susceptible of cure by Executive,
the failure to effect such cure within twenty (20) days after written notice of
such breach is given to Executive. For purposes of this Agreement, an action
shall be considered "willful" if it is done intentionally, purposely or
knowingly, distinguished from an act done carelessly, thoughtlessly or
inadvertently. In any such event, Executive shall be entitled to receive his
base salary to and including the date of termination.
15. TERMINATION BY EMPLOYEE. Executive may upon written notice
to the Corporation terminate this Agreement (including paragraphs 8, 9, 10 and
11) in the event of the breach by the Corporation of any material provision of
this Agreement, and if such breach is susceptible of cure, the failure to effect
such cure within 20 days after written notice of such breach is given to the
Corporation (an "Employer Breach"). Executive's right to terminate this
Agreement under this Paragraph 15 shall be in addition to any other remedies
Executive may have under law or equity. Paragraphs 7 and 12(b) of this Agreement
shall survive the termination of this Agreement by Executive pursuant to this
Paragraph 15.
16. INSURANCE POLICIES. The Corporation shall have the right
from time to time to purchase, increase, modify or terminate insurance policies
on the life of Executive for the benefit
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of the Corporation, in such amounts as the Corporation shall determine in its
sole discretion. In connection therewith, Executive shall, at such time or times
and at such place or places as the Corporation may reasonably direct, submit
himself to such physical examinations and execute and deliver such documents as
the Corporation may reasonably deem necessary or desirable; PROVIDED that such
examinations shall be performed by, and that such documents shall be delivered
only to, qualified physicians and/or medical representatives of licensed
insurance companies. At Executive's written request upon the termination of
Executive's employment under this Agreement (other than for Cause or as result
of Executive's death), the Corporation shall assign to Executive the
Corporation's interest in such life insurance policies (to the extent such
policies are so assignable by their terms), whereupon Executive shall assume all
obligations of the Corporation in respect thereof. Notwithstanding anything to
the contrary contained herein, the Company shall have no right to terminate this
Agreement solely by reason of the Company's inability to obtain insurance
policies on the life of Executive under this paragraph.
17. ENTIRE AGREEMENT; AMENDMENT. This Agreement constitutes
the entire agreement of the parties hereto, and any prior agreement between the
Corporation and Executive is hereby superseded and terminated effective
immediately and shall be without further force or effect. No amendment or
modification herself shall be valid or binding unless made in writing and signed
by the party against whom enforcement thereof is sought.
18. NOTICES. Any notice required, permitted or desired to be
given pursuant to any of the provisions of this Agreement shall be delivered in
person or sent by responsible overnight delivery service or sent by certified
mail, return receipt requested, postage and fees prepaid, if to the Corporation,
at its address set forth above to the attention of the Corporation's Chief
Executive Officer and, if to Executive, at his address set forth above. Either
of the parties hereto may at any time and from time to time change the address
to which notice shall be sent hereunder by notice to the other party given under
this Paragraph 18. Notices shall be deemed effective upon receipt.
19. NO ASSIGNMENT; BINDING EFFECT. Neither this Agreement, nor
the right to receive any payments hereunder, may be assigned by either party
without the other party's prior written consent. This Agreement shall be binding
upon Executive, his heirs, executors and administrators and upon the
Corporation, its successors and assigns.
20. WAIVERS. No course of dealing nor any delay on the part of
either party in exercising any rights hereunder shall operate as a waiver of any
such rights. No waiver of any default or breach of this Agreement shall be
deemed a continuing waiver or a waiver of any other breach or default.
21. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware, except that body
of law relating to choice of laws.
22. INVALIDITY. If any clause, paragraph, section or part of
this Agreement shall be held or declared to be void, invalid or illegal, for any
reason, by any court of competent jurisdiction, such provision shall be
ineffective but shall not in any way invalidate or affect any other clause,
paragraph, section or part of this Agreement.
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23. FURTHER ASSURANCES. Each of the parties shall execute such
documents and take such other actions as may be reasonably requested by the
other party to carry out the provisions and purposes of this Agreement in
accordance with its terms.
24. HEADINGS. The headings contained in this Agreement have
been inserted for convenience only and shall not affect in any way the meaning
or interpretation of this Agreement.
25. PUBLICITY. The Corporation and Executive agree that they
will not make any press releases or other announcements prior to or at the time
of execution of this Agreement with respect to the terms contemplated hereby,
except as required by applicable law, without the prior approval of the other
party, which approval will not be unreasonably withheld.
26. ARBITRATION. Any disputes arising under this Agreement
shall be submitted to and determined by arbitration in St. Louis, Missouri. Such
arbitration shall be conducted in accordance with the rules of the American
Arbitration Association. Any award or decision of the arbitration shall be
conclusive in the absence of fraud and judgment thereon may be entered in any
court having jurisdiction thereof. The costs of such arbitration shall be paid
by the non-prevailing party to the extent directed by the arbitrator(s).
THIS AGREEMENT CONTAINS BINDING ARBITRATION PROVISIONS WHICH MAY
BE ENFORCED BY THE PARTIES.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed as of the day and year first above written.
SHEFFIELD PHARMACEUTICALS, INC.
By: /s/ Loren G. Peterson
----------------------------
Loren G. Peterson
President & Chief Executive Officer
/s/ Scott A. Hoffmann
---------------------
Scott A. Hoffmann
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Exhibit 10.8
SHEFFIELD MEDICAL TECHNOLOGIES INC.
1993 STOCK OPTION PLAN
(as amended through July 15, 1998)
1. PURPOSES OF THE PLAN. The purposes of this 1993 Stock Option Plan
are to attract and retain the best available personnel for positions of
responsibility within the Company, to provide additional incentive to Employees
of the Company, and to promote the success of the Company's business through the
grant of options to purchase shares of the Company's Common Stock. Options
granted hereunder may be either Incentive Stock or Non-Statutory Stock Options,
at the discretion of the Board. The type of options granted shall be reflected
in the terms of written Stock Option agreements. The Company intends that the
Plan meet the requirements of Rule 16b-3 and that transactions of the type
specified in subparagraphs (c) to (f) inclusive of Rule 16b-3 by officers and
directors of the Company pursuant to the Plan will be exempt from the operation
of Section 16(b) of the Exchange Act. Further, the Plan is intended to satisfy
the performance-based compensation exception to the limitation on the Company's
tax deductions imposed by Section 162(m) of the Code. In all cases, the terms,
provisions, conditions and limitations of the Plan shall be construed and
interpreted consistent with the Company's intent as stated in this Section 1.
2. DEFINITIONS. As used herein, the following definitions shall apply:
(a) "BOARD" shall mean the Board of Directors of the Company
or, when appropriate, the Committee administering the Plan, if one has
been appointed.
(b) "CODE" shall mean the Internal Revenue Code of 1986, as
amended, and the rules and regulations promulgated thereunder.
(c) "COMMON STOCK" shall mean the common stock of the Company
described in the Company's Certificate of Incorporation, as amended.
(d) "COMPANY" shall mean SHEFFIELD MEDICAL TECHNOLOGIES INC.,
a Delaware corporation, and shall include any parent or subsidiary
corporation of the Company as defined in Sections 425(e) and (f),
respectively, of the Code.
(e) "COMMITTEE" shall mean the Stock Option Committee composed
of two or more directors who are Non-Employee Directors and Outside
Directors and who shall be elected by and shall serve at the pleasure
of the Board and shall be responsible for administering the Plan in
accordance with paragraph (a) of Section 4 of the Plan.
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(f) "EMPLOYEE" shall mean key employees, including salaried
officers and directors and other key individuals employed by the
Company. The payment of a director's fee by the Company shall not be
sufficient to constitute "employment" by the Company.
(g) "EXCHANGE ACT" shall mean the Securities and Exchange Act
of 1934, as amended.
(h) "FAIR MARKET VALUE" shall mean, with respect to the date a
given Option is granted or exercised, the value of the Common Stock
determined by the Board in such manner as it may deem equitable for
Plan purposes but, in the case of an Incentive Stock Option, no less
than is required by applicable laws or regulations; provided, however,
that where there is a public market for the Common Stock, the Fair
Market Value per Share shall be the mean of the bid and asked prices of
the Common Stock on the date of grant, as reported in the WALL STREET
JOURNAL (or, if not so reported, as otherwise reported in the National
Association of Securities Dealers Automated Quotation System) or, in
the event the Common Stock is listed on the New York Stock Exchange or
the NASDAQ Stock Market, the American Stock Exchange, the
NASDAQ/National Market System, the Fair Market Value per Share shall be
the closing price on such exchange on the date of grant of the Option,
as reported in the WALL STREET JOURNAL.
(i) "INCENTIVE STOCK OPTION" shall mean an Option which is
intended to qualify as an incentive stock option within the meaning of
Section 422 of the Code.
(j) "NON-EMPLOYEE DIRECTOR" shall mean a non-employee director
as defined in Rule 16b-3.
(k) "NON-STATUTORY STOCK OPTION" shall mean an Option which is
not an Incentive Stock Option.
(l) "OPTION" shall mean a stock option granted under the Plan.
(m) "OPTIONED STOCK" shall mean the Common Stock subject to an
Option.
(n) "OPTIONEE" shall mean an Employee of the Company who has
been granted one or more Options.
(o) "OUTSIDE DIRECTOR" shall mean an outside director as
defined in Section 162(m) of the Code or the rules and regulations
promulgated thereunder.
(p) "PARENT" shall mean a "parent corporation," whether now or
hereafter existing, as defined in Section 425(e) of the Code.
(q) "PLAN" shall mean this 1993 Stock Option Plan.
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(r) "SHARE" shall mean a share of the Common Stock, as
adjusted in accordance with Section 11 of the Plan.
(s) "STOCK OPTION AGREEMENT" shall mean the written agreement
between the Company and the Optionee relating to the grant of an
Option.
(t) "SUBSIDIARY" shall mean a "subsidiary corporation,"
whether now or hereafter existing, as defined in Section 425(f) of the
Code.
(u) "TAX DATE" shall mean the date an Optionee is required to
pay the Company an amount with respect to tax withholding obligations
in connection with the exercise of an option.
3. COMMON STOCK SUBJECT TO THE PLAN. Subject to the provisions of
Section 11 of the Plan, the maximum aggregate number of shares which may be
optioned and sold under the Plan is Four Million (4,000,000) Shares of Common
Stock. The Shares may be authorized, but unissued, or previously issued Shares
acquired by the Company and held in treasury.
If an Option should expire or become unexercisable for any
reason without having been exercised in full, the unpurchased Shares covered by
such Option shall, unless the Plan shall have been terminated, be available for
future grants of Options. The maximum number of Shares that may be subject to
options granted under the Plan to any individual in any calendar year shall not
exceed 500,000 Shares and the method of counting such Shares shall conform to
any requirements applicable to performance-based compensation under Section
162(m) of the Code or the rules and regulations promulgated thereunder.
4. ADMINISTRATION OF THE PLAN.
(a) PROCEDURE.
(i) The Plan shall be administered by the Board in
accordance with Rule 16b-3 under the Exchange Act ("Rule
16b-3"); provided, however, that the Board may appoint a
Committee to administer the Plan at any time or from time to
time, and, provided further, that if the Board is not
"disinterested" within the meaning of Rule 16b-3, the Plan
shall be administered by a Committee in accordance with Rule
16b-3.
(ii) Once appointed, the Committee shall continue to
serve until otherwise directed by the Board. From time to time
the Board may increase the size of the Committee and appoint
additional members thereof, remove members (with or without
cause), appoint new members in substitution therefor, and fill
vacancies however caused: provided, however, that at no time
may any person
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serve on the Committee if that person's membership would cause
the Committee not to satisfy the "disinterested
administration" requirements of Rule 16b-3.
(b) POWERS OF THE BOARD. Subject to the provisions of the
Plan, the Board shall have the authority, in its discretion:
(i) to grant Incentive Stock Options and Nonstatutory Stock
Options; (ii) to determine, upon review of relevant
information and in accordance with Section 2 of the Plan, the
Fair Market Value of the Common Stock; (iii) to determine the
exercise price per Share of Options to be granted, which
exercise price shall be determined in accordance with Section
8(a) of the Plan; (iv) to determine the Employees to whom, and
the time or times at which, Options shall be granted and the
number of Shares to be represented by each Option; (v) to
interpret the Plan; (vi) to prescribe, amend and rescind rules
and regulations relating to the Plan; (vii) to determine the
terms and provisions of each Option granted including, without
limitation, the terms of exercise (including the period of
exercisability) or forfeiture of Options granted hereunder
upon termination of the employment of an Employee; (viii) to
accelerate or defer (with the consent of the Optionee) the
exercise date of any Option; (ix) to authorize any person to
execute on behalf of the Company any instrument required to
effectuate the grant of an Option previously granted by the
Board; (x) to accept or reject the election made by an
Optionee pursuant to Section 17 of the Plan; and (xi) to make
all other determinations deemed necessary or advisable for the
administration of the Plan.
(c) EFFECT OF BOARD'S DECISION. All decisions, determinations
and interpretations of the Board shall be final and binding on
all Optionees and any other holders of any Options granted
under the Plan.
(d) INABILITY OF COMMITTEE TO ACT. In the event that for any
reason the Committee is unable to act or if the Committee at
the time of any grant, award or other acquisition under the
Plan of options or Shares does not consist of two or more
Non-Employee Directors, then any such grant, award or other
acquisition may be approved or ratified in any other manner
contemplated by subparagraph (d) of Rule 16b-3.
5. ELIGIBILITY.
(a) Consistent with the Plan's purposes, Options may be
granted only to Employees of the Company as determined by the Board. An Employee
who has been granted an Option may, if he is otherwise eligible, be granted an
additional Option or Options. Incentive Stock Options may be granted only to
those Employees who meet the requirements applicable under Section 422 of the
Code.
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(b) Unless otherwise provided in the applicable Stock Option
Agreement, all Options granted to Employees of the Company under the Plan will
be subject to forfeiture until such time as the Optionee has been continuously
employed by the Company for one year after the date of the grant of the Options,
and may not be exercised prior to such time. At such time as the Optionee has
been continuously employed by the Company for one year, the foregoing
restriction shall lapse and the Optionee may exercise the Options at any time
otherwise consistent with the Plan.
(c) With respect to Incentive Stock Options, the aggregate
Fair Market Value (determined at the time the Incentive Stock Option is granted)
of the Common Stock with respect to which Incentive Stock Options are
exercisable for the first time by the employee during any calendar year (under
all employee benefit plans of the Company) shall not exceed One Hundred Thousand
Dollars ($100,000).
6. STOCKHOLDER APPROVAL AND EFFECTIVE DATES. The Plan became effective
upon approval by the Board. No Option may be granted under the Plan after August
30, 2003 (ten years from the effective date of the Plan); provided, however that
the Plan and all outstanding Options shall remain in effect until such Options
have expired or until such Options are canceled.
7. TERM OF OPTION. Unless otherwise provided in the Stock Option
Agreement, the term of each Option shall be five (5) years from the date of
grant thereof. In no case shall the term of any Option exceed ten (10) years
from the date of grant thereof. Notwithstanding the above, in the case of an
Incentive Stock Option granted to an Employee who, at the time the Incentive
Stock Option is granted, owns ten percent (10%) or more of the Common Stock as
such amount is calculated under Section 422(b)(6) of the Code ("Ten Percent
Stockholder"), the term of the Incentive Stock Option shall be five (5) years
from the date of grant thereof or such shorter time as may be provided in the
Stock Option Agreement. If an option granted to the Company's chief executive
officer or to any of the Company's other four most highly compensated officers
is intended to qualify as "performance-based" compensation under Section 162(m)
of the Code, the exercise price of such option shall not be less than 100% of
the Fair Market Value of a Share on the date such option is granted.
8. EXERCISE PRICE AND PAYMENT.
(a) EXERCISE PRICE. The per Share exercise price for the
Shares to be issued pursuant to exercise of an Option shall be
determined by the Board, but in the case of an Incentive Stock Option
shall be no less than one hundred percent (100%) of the Fair Market
Value per share on the date of grant, and in the case of a Nonstatutory
Stock Option shall be no less than eighty-five percent (85%) of the
Fair Market Value per share on the date of grant. Notwithstanding the
foregoing, in the case of an Incentive Stock Option granted to an
Employee who, at the time of the grant of such Incentive Stock Option,
is a Ten Percent Stockholder, the per Share exercise price shall be no
less than one hundred ten percent (110%) of the Fair Market Value per
Share on the date of grant.
-5-
<PAGE>
(b) PAYMENT. The price of an exercised Option and the
Employee's portion of any taxes attributable to the delivery of Common
Stock under the Plan, or portion thereof, shall be paid:
(i) In United States dollars in cash or by check,
bank draft or money order payable to the order of the Company;
or
(ii) At the discretion of the Board, through the
delivery of shares of Common Stock with an aggregate Fair
Market Value equal to the option price and withholding taxes,
if any; or
(iii) At the election of the Optionee pursuant to
Section 17 and with the consent of the Board pursuant to
Section 4(b)(x), by the Company's retention of such number of
shares of Common Stock subject to the exercised Option which
have an aggregate Fair Market Value on the exercise date equal
to the Employee's portion of the Company's aggregate federal,
state, local and foreign tax withholding and FICA and FUTA
obligations with respect to income generated by the exercise
of the Option by Optionee;
(iv) By a combination of (i), (ii) and (iii) above;
or
(v) In the manner provided in subsection (c) below.
The Board shall determine acceptable methods for tendering
Common Stock as payment upon exercise of an Option and may impose such
limitations and prohibitions on the use of Common Stock to exercise an Option as
it deems appropriate.
(c) FINANCIAL ASSISTANCE TO OPTIONEES. The Board may assist
Optionees in paying the exercise price of Options granted under this
Plan in the following manner:
(i) The extension of a loan to the Optionee by the
Company; or
(ii) Payment by the Optionee of the exercise price in
installments; or
(iii) A guaranty by the Company of a loan obtained by
the Optionee from a third party.
The terms of any loans, installment payments or guarantees,
including the interest rate and terms of repayment, and collateral requirements,
if any, shall be determined by the Board, in its sole discretion. Subject to
applicable margin requirements, any loans, installment payments or guarantees
authorized by the Board pursuant to the Plan may be granted without security,
but the maximum credit available shall not exceed the exercise price for the
Shares for
-6-
<PAGE>
which the Option is to be exercised, plus any federal and state income tax
liability incurred in connection with the exercise of the Option.
9. EXERCISE OF OPTION.
(a) PROCEDURE FOR EXERCISE; RIGHTS AS A STOCKHOLDER. Any
Option granted hereunder shall be exercisable at such times and under such
conditions as determined by the Board, including performance criteria with
respect to the Company and/or the Optionee, and as shall be permissible under
the terms of the Plan. Unless otherwise determined by the Board at the time of
grant, an Option may be exercised in whole or in part. An Option may not be
exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice
of such exercise has been given to the Company in accordance with the terms of
the Option by the person entitled to exercise the Option and full payment for
the Shares with respect to which the Option is exercised has been received by
the company. Full payment may, as authorized by the Board, consist of any
consideration and method of payment allowable under Section 8(b) of the Plan.
Until the issuance (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company) of the stock
certificate evidencing such Shares, no right to vote or receive dividends or any
other rights as a stockholder shall exist with respect to the Optioned Stock,
notwithstanding the exercise of the Option. No adjustment will be made for a
dividend or other right for which the record date is prior to the date the stock
certificate is issued, except as provided in Section 11 of the Plan.
Exercise of an Option in any manner shall result in a decrease
in the number of Shares which thereafter may be available, both for purposes of
the Plan and for sale under the Option, by the number of Shares to which the
Option is exercised.
(b) TERMINATION OF STATUS AS AN EMPLOYEE. Unless otherwise
provided in the applicable Stock Option Agreement, if an Employee's employment
by the Company is terminated for cause, then any Option held by the Employee
shall be immediately canceled upon termination of employment and the Employee
shall have no further rights with respect to such Option. Unless otherwise
provided in the Stock Option Agreement, if an Employee's employment by the
Company is terminated for reasons other than cause, and does not occur due to
death or disability, then the Employee may, with the consent of the Board, for
ninety (90) days after the date he ceases to be an Employee of the Company,
exercise his Option to the extent that he was entitled to exercise it at the
date of such termination. To the extent that he was not entitled to exercise the
Option at the date of such termination, or if he does not exercise such Option
(which he was entitled to exercise) within the time specified herein or in the
applicable Stock Option Agreement, the Option shall terminate.
(c) DISABILITY. Unless otherwise provided in the applicable
Stock Option Agreement, notwithstanding the provisions of Section 9(b) above, in
the event an Employee is
-7-
<PAGE>
unable to continue his employment with the Company as a result of his permanent
and total disability (as defined in Section 22(e)(3) of the Code), he may, but
only within twelve (12) months from the date of termination, exercise his Option
to the extent he was entitled to exercise it at the date of such termination. To
the extent that he was not entitled to exercise the Option at the date of
termination, or if he does not exercise such Option (which he was entitled to
exercise) within the time specified herein or in the applicable Stock Option
Agreement, the Option shall terminate.
(d) DEATH. Unless otherwise provided in the Stock Option
Agreement, if an Employee dies during the term of the Option and is at the time
of his death an Employee of the Company who shall have been in continuous status
as an Employee since the date of grant of the Option, the Option may be
exercised at any time within twelve (12) months following the date of death (or
such other period of time as is determined by the Board) by the Employee's
estate or by a person who acquired the right to exercise the Option by bequest
or inheritance, but only to the extent that an Employee was entitled to exercise
the Option on the date of death. To the extent the Employee was not entitled to
exercise the Option on the date of death, or if the Employee's estate, or person
who acquired the right to exercise the Option by bequest or inheritance, does
not exercise such Option (which he was entitled to exercise) within the time
specified herein or in the applicable Stock Option Agreement, the Option shall
terminate.
10. NON-TRANSFERABILITY OF OPTIONS. An Option may not be sold, pledged,
assigned, hypothecated, transferred or disposed of in any manner other than by
will or by the laws of descent or distribution, or pursuant to a "qualified
domestic relations order" under the Code and ERISA, and may be exercised, during
the lifetime of the Optionee, only by the Optionee.
11. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION OR MERGER. Subject to
any required action by the stockholders of the Company, the number of shares of
Common Stock covered by each outstanding Option, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options have yet been granted or which have been returned to the Plan
upon cancellation or expiration of an Option, as well as the price per share of
Common Stock covered by each such outstanding Option, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect and no adjustment by reason thereof, shall be made with respect to
the number or price of shares of Common Stock subject to an Option.
-8-
<PAGE>
In the event of the proposed dissolution or liquidation of the
Company, the Option will terminate immediately prior to the consummation of such
proposed action, unless otherwise provided by the Board. The Board may, in the
exercise of its sole discretion in such instances, declare that any Option shall
terminate as of a date fixed by the Board and give each Optionee the right to
exercise his Option as to all or any part of the Optioned Stock, including
Shares as to which the Option would not otherwise be exercisable. In the event
of a proposed sale of all or substantially all of the assets of the Company, or
the merger of the Company with or into another corporation, the Option shall be
assumed or an equivalent option shall be substituted by such successor
corporation or a parent or subsidiary of such successor corporation, unless the
Board determines, in the exercise of its sole discretion and in lieu of such
assumption or substitution, that the Optionee shall have the right to exercise
the option as to all of the Optioned Stock, including Shares as to which the
Option would not otherwise be exercisable. If the Board makes an Option fully
exercisable in lieu of assumption or substitution in the event of a merger
of`sale of assets, the Board shall notify the Optionee that the Option shall be
fully exercisable for a period of sixty (60) days from the date of such notice
(but not later than the expiration of the term of the Option under the Option
Agreement), and the Option will terminate upon the expiration of such period.
12. TIME OF GRANTING OPTIONS. The date of grant of an Option shall, for
all purposes, be the date on which the Board makes the determination granting
such Option. Notice of the determination shall be given to each Employee to whom
an Option is so granted within a reasonable time after the date of such grant.
13. AMENDMENT AND TERMINATION OF THE PLAN.
(a) AMENDMENT AND TERMINATION. The Board may amend or
terminate the Plan from time to time in such respects as the Board may
deem advisable; provided, however, that the following revisions or
amendments shall require approval of the Stockholders of the Company,
to the extent required by law, rule or regulation:
(i) Any material increase in the number of Shares
subject to the Plan, other than in connection with an
adjustment under Section 11 of the Plan;
(ii) Any material change in the designation of the
Employees eligible to be granted Options; or
(iii) Any material increase in the benefits accruing
to participants under the Plan.
(b) EFFECT OF AMENDMENT OR TERMINATION. Any such amendment or
termination of the Plan shall not affect Options already granted and
such Options shall remain in full force and effect as if this Plan had
not been amended or terminated, unless
-9-
<PAGE>
mutually agreed otherwise between the Optionee and the Board, which
agreement must be in writing and signed by the Optionee and the
Company.
14. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued
pursuant to the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act of
1933, as amended, the Exchange Act, the rules and regulations promulgated
thereunder, and the requirements of any stock exchange upon which the Shares may
then be listed, and shall be further subject to the approval of counsel for the
Company with respect to such compliance.
As a condition to the exercise of an Option, the Company may
require the person exercising such Option to represent and warrant at the time
of any such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares if, in the
opinion of counsel for the company, such a representation is required by any of
the aforementioned relevant provisions of law.
Inability of the Company to obtain authority from any
regulatory body having jurisdiction, which authority is deemed by the Company's
counsel to be necessary to the lawful issuance and sale of any Shares hereunder,
shall relieve the Company of any liability in respect of the failure to issue or
sell such Shares as to which such requisite authority shall not have been
obtained.
In the case of an Incentive Stock Option, any Optionee who
disposes of Shares of Common Stock acquired upon the exercise of an Option by
sale or exchange (a) either within two (2) years after the date of the grant of
the Option under which the Common Stock was acquired or (b) within one (1) year
after the acquisition of such Shares of Common Stock shall notify the Company of
such disposition and of the amount realized upon such disposition.
15. RESERVATION OF SHARES. The Company will at all times reserve and
keep available such number of Shares as shall be sufficient to satisfy the
requirements of the Plan.
16. OPTION AGREEMENT. Options shall be evidenced by Stock Option
Agreements in such form as the Board shall approve.
17. WITHHOLDING TAXES. Subject to Section 4(b)(x) of the Plan and prior
to the Tax Date, the Optionee may make an irrevocable election to have the
Company withhold from those Shares that would otherwise be received upon the
exercise of any Option, a number of Shares having a Fair Market Value equal to
the minimum amount necessary to satisfy the Company's federal, state, local and
foreign tax withholding obligations and FICA and FUTA obligations with respect
to the exercise of such Option by the Optionee.
-10-
<PAGE>
An Optionee who is also an officer of the Company must make
the above described election:
(a) at least six months after the date of grant of the Option
(except in the event of death or disability); and
(b) either:
(i) six months prior to the Tax Date, or
(ii) prior to the Tax Date and during the period
beginning on the third business day following the date the
Company releases its quarterly or annual statement of sales
and earnings and ending on the twelfth business day following
such date.
18. MISCELLANEOUS PROVISIONS.
(a) PLAN EXPENSE. Any expense of administering this Plan shall
be borne by the Company.
(b) USE OF EXERCISE PROCEEDS. The payment received from
Optionees from the exercise of Options shall be used for the general
corporate purposes of the Company.
(c) CONSTRUCTION OF PLAN. The place of administration of the
Plan shall be in the State of Wyoming, and the validity, construction,
interpretation, administration and effect of the Plan and of its rules
and regulations, and rights relating to the Plan, shall be determined
in accordance with the laws of the State of Wyoming without regard to
conflict of law principles and, where applicable, in accordance with
the Code.
(d) TAXES. The Company shall be entitled if necessary or
desirable to pay or withhold the amount of any tax attributable to the
delivery of Common Stock under the Plan from other amounts payable to
the Employee after giving the person entitled to receive such Common
Stock notice as far in advance as practical, and the Company may defer
making delivery of such Common Stock if any such tax may be pending
unless and until indemnified to its satisfaction.
(e) INDEMNIFICATION. In addition to such other rights of
indemnification as they may have as members of the Board, the members
of the Board shall be indemnified by the Company against all costs and
expenses reasonably incurred by them in connection with any action,
suit or proceeding to which they or any of them may be party by reason
of any action taken or failure to act under or in connection with the
Plan or any Option, and against all amounts paid by them in settlement
thereof (provided such settlement is approved by independent legal
counsel selected by the Company) or paid by
-11-
<PAGE>
them in satisfaction of a judgment in any such action, suite or
proceeding, except a judgment based upon a finding of bad faith;
provided that upon the institution of any such action, suit or
proceeding a Board member shall, in writing, give the Company notice
thereof and an opportunity, at its own expense, to handle and defend
the same before such Board member undertakes to handle and defend it on
her or his own behalf.
(f) GENDER. For purposes of this Plan, words used in the
masculine gender shall include the feminine and neuter, and the
singular shall include the plural and vice versa, as appropriate.
(g) NO EMPLOYMENT AGREEMENT. The Plan shall not confer upon
any Optionee any right with respect to continuation of employment with
the Company, nor shall it interfere in any way with his right or the
Company's right to terminate his employment at any time.
-12-
EXHIBIT 21
SUBSIDIARIES OF SHEFFIELD PHARMACEUTICALS, INC.
1. Ion Pharmaceuticals, Inc., a Delaware corporation.
2. CP Pharmaceuticals, Inc., a Delaware corporation.
3. Systemic Pulmonary Delivery, Ltd., a Bermuda corporation.
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-3 No. 33-95732, Form S-3 No. 333-27753 and Form S-3 No. 333-38327) of
Sheffield Pharmaceuticals, Inc. and in the related Prospectuses, in the
Registration Statement (Form S-8 No. 33-95262) pertaining to the 1993 Stock
Option Plan of Sheffield Pharmaceuticals, Inc., the 1993 Restricted Stock Plan
of Sheffield Pharmaceuticals, Inc. and options granted to directors, officers,
employees, consultants and advisors of the Company pursuant to other employee
benefit plans of Sheffield Pharmaceuticals, Inc. and in the Registration
Statement (Form S-8 No. 333-14867) pertaining to the 1993 Stock Option Plan of
Sheffield Pharmaceuticals, Inc., the 1996 Directors Stock Option Plan of
Sheffield Pharmaceuticals, Inc. and Options granted to directors, officers,
employees, consultants and advisors of the Company pursuant to other employee
benefit plans of Sheffield Pharmaceuticals, Inc. of our report dated March 11,
1999, with respect to the consolidated financial statements of Sheffield
Pharmaceuticals, Inc. and subsidiaries included in this Annual Report (Form
10-K) for the year ended December 31, 1998.
/s/ Ernst & Young LLP
St. Louis, Missouri
March 23, 1999
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED FINANCIAL STATEMENTS FOR THE QUARTER ENDED DECEMBER 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS.
</LEGEND>
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