========================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31,1997
or
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to __________
Commission file number 0-22686
-------
PALATIN TECHNOLOGIES, INC.
(Exact name of small business issuer as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
95-4078884
(I.R.S. Employer Identification No.)
214 Carnegie Center - Suite 100
Princeton, New Jersey 08540
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (609) 520-1911
Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for
such shorter period that the Issuer was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.
[X] Yes [ ] No
As of May 14, 1997, 11,825,855 shares of the Issuer's common stock, par
value $.01 per share, were outstanding.
Transitional Small Business Disclosure Format: [X] Yes [ ] No
========================================================================
<PAGE>
PALATIN TECHNOLOGIES, INC.
Table of Contents
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS -- As of March 31, 1997
(unaudited) and June 30,1996 (audited) Page 3
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) --
For the Three and Nine Months Ended March 31, 1996 and
March 31, 1997 and the Period from January 28, 1986
(Commencement of Operations) through March 31, 1997 Page 4
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) --
For the Nine Months Ended March 31, 1996 and March 31,
1997 and the Period From January 28, 1986 (Commencement
of Operations) through March 31, 1997 Page 5
Notes to Consolidated Financial Statements Page 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations Page 10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings Page 14
Item 2. Change in Securities Page 14
Item 3. Defaults Upon Senior Securities Page 16
Item 4. Submission of Matters to a Vote of
Security Holders Page 16
Item 5. Other Information Page 16
Item 6. Exhibits and Reports on Form 8-K Page 16
Signatures Page 17
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
PALATIN TECHNOLOGIES, INC.
(A Development Stage Enterprise)
CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
March 31, 1997 June 30, 1996
-------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,863,237 $ 6,791,300
Accounts receivable 267,870 4,574
Prepaid expenses and other 59,137 66,430
------------ ------------
Total current assets 5,190,244 6,862,304
Equipment, net of accumulated depreciation of
$222,174 and $183,535 as of March 31, 1997 and
June 30, 1996, respectively 186,008 96,354
Intangibles, net of accumulated amortization of
$98,782 and $91,336 as of March 31, 1997 and
June 30, 1996, respectively 75,940 82,547
------------ ------------
$ 5,452,192 $ 7,041,205
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 216,572 $ 214,424
Accrued compensation owed to employees - 78,084
Accrued expenses 311,048 655,197
Current portion of long-term financing, including
accrued interest of $352,829 and $38,912 as of
March 31, 1997 and June 30, 1996, respectively 936,950 311,695
Senior bridge notes, including related party
transaction of $110,000 as of June 30, 1996 - 1,100,000
------------ ------------
Total current liabilities 1,464,570 2,359,400
Long-term financing, including accrued interest
of $0 and $273,339 as of March 31, 1997 and
June 30, 1996, respectively 968,527 1,727,619
Deferred license revenue 550,000 -
Notes payable to stockholders, including accrued
interest of $41,979 and $35,979 as of
March 31, 1997 and June 30, 1996, respectively 121,979 115,979
------------ ------------
Total liabilities 3,105,076 4,202,998
------------ ------------
Stockholders' equity:
Preferred stock, $.01, and 2,000,000 shares
authorized, as of March 31,1997 and June 30, 1996;
and 30,630 and no shares issued as of March 31, 1997
and June 30, 1996, respectively 2,680,591 -
Common stock, $.01, and 25,000,000 shares authorized,
as of March 31, 1997 and June 30, 1996; and
11,753,978 and 11,538,777 issued as of March 31, 1997
and June 30, 1996, respectively 117,540 115,388
Treasury stock, 1,229 shares of Common Stock (1,667) (1,667)
Additional paid-in capital 11,018,039 10,804,394
Common stock earned but not issued 279,278 53,030
Unamortized deferred compensation (88,221) -
Deficit accumulated during the development stage (11,658,444) (8,132,938)
------------ ------------
Total stockholders' equity 2,347,116 2,838,207
------------ ------------
$ 5,452,192 $ 7,041,205
============ ===========
The accompanying notes to consolidated financial statements are an integral part of these balance sheets.
</TABLE>
3
<PAGE>
PALATIN TECHNOLOGIES, INC.
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Inception
(January 28, 1986)
Three Months Ended March 31, Nine Months Ended March 31, through
1997 1996 1997 1996 March 31, 1997
<S> <C> <C> <C> <C> <C>
REVENUES:
Grants and contracts $ 267,862 - $ 267,862 - $ 3,128,374
License fees and royalties 350,000 - 350,000 - 684,296
Sales - $ 12,240 22,184 $ 20,971 318,917
------------ ----------- ---------- ----------- ------------
Total revenues 617,862 12,240 40,046 20,971 4,131,587
------------ ----------- ---------- ----------- ------------
EXPENSES:
Research and development 1,050,400 242,212 2,300,669 557,955 6,697,077
General and administrative 793,370 405,111 1,740,125 1,017,061 6,643,086
------------ ----------- ---------- ----------- ------------
Total expenses 1,843,770 647,323 4,040,794 1,575,016 13,340,163
------------ ----------- ---------- ----------- ------------
OTHER INCOME (EXPENSES):
Other income 36,330 - 159,023 - 230,403
Interest expense (84,927) (143,465) (301,200) (348,121) (1,344,386)
Placement agent commissions
and fees on debt offering - (101,541) - (135,341) (168,970)
Merger costs 17,419 (9,611) 17,419 (9,611) (457,581)
Restructuring charge - (24,309) - (114,309) (450,000)
Net intangibles write down - - - - (259,334)
------------ ----------- ---------- ----------- ------------
Total other income (expenses) (31,178) (278,926) (124,758) (607,382) (2,449,868)
------------ ----------- ---------- ----------- ------------
NET LOSS $ (1,257,086) $ (914,009) $(3,525,506) $(2,161,427) $ 11,658,444)
============ ============ =========== =========== ============
Weighted average number of common
shares outstanding 11,745,837 1,294,792 11,618,271 1,290,451 1,948,514
Net loss per common share $ (0.11) $ (0.71) $ (0.30) $ (1.67) $ (5.98)
============ ============ =========== =========== ============
The accompanying notes to consolidated financial statements are an integral part of these statements.
</TABLE>
4
<PAGE>
PALATIN TECHNOLOGIES, INC
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Inception
Nine Months Ended (January 28, 1986)
March 31, through
1997 1996 March 31, 1997
-------------- -------------- --------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,525,506) $ (2,161,428) $ (11,658,444)
Adjustments to reconcile net loss to net
cash used for operating activities:
Depreciation and amortization 46,085 58,788 354,659
Interest expense on related-party debt 6,000 6,000 59,387
Accrued interest on long-term financing 226,248 247,407 1,022,286
Accrued interest on short-term financing (100,000) 93,510 7,936
Intangibles and equipment write down - - 278,318
Deferred license revenue 550,000 - 550,000
Accretion of compensatory options and warrants 116,078 - 116,078
Equity and notes payable issued for expenses - - 296,047
Settlement with consultant - - (28,731)
Changes in certain operating assets and liabilities:
Accounts receivable (263,295) (2,999) (267,869)
Prepaid expenses and other 7,293 (12,761) (59,137)
Intangibles (839) (15,833) (428,177)
Accounts payable 2,148 (82,329) 215,672
Accrued compensation owed to employees (78,084) 27,126 16,548
Accrued expenses (344,149) 27,097 339,779
-------------- -------------- ---------------
Net cash used for operating activities 3,358,021) (1,815,422) (9,185,648)
-------------- -------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (128,293) (9,513) (463,522)
-------------- -------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable, related party - - 302,000
Payments on notes payable, related party - (302,000) (309,936)
Proceeds from senior bridge notes payable - 1,850,000 1,850,000
Payments on senior bridge notes (1,000,000) - (1,850,000)
Proceeds from notes payable and long-term financing - - 1,951,327
Payments on notes payable and long-term financing (133,837) (45,000) (323,898)
Proceeds from paid-in capital from common
stock warrants 9,999 - 109,999
Proceeds from common stock, stock option
issuances and preferred stock, net 2,682,089 305,617 12,784,581
Purchase of treasury stock and fractional shares - - (1,667)
-------------- -------------- ---------------
Net cash provided by financing activities 1,558,251 1,808,617 14,512,407
-------------- -------------- ---------------
NET INCREASE (DECREASE) IN CASH (1,928,063) (16,318) 4,863,237
CASH and cash equivalents, beginning of period 6,791,300 46,768 -
-------------- -------------- ---------------
CASH and cash equivalents, end of period $ 4,863,237 $ 30,450 $ 4,863,237
============== ============== ===============
The accompanying notes to consolidated financial statements are an integral part of these statements.
</TABLE>
5
<PAGE>
PALATIN TECHNOLOGIES, INC.
(A Development Stage Enterprise)
Notes to Consolidated Financial Statements (Unaudited)
For the Nine Months Ended March 31, 1997 and 1996
(1) Nature of Business
Through its wholly-owned subsidiary RhoMed Incorporated
("RhoMed"), Palatin Technologies, Inc. (the "Company") is a
development-stage biopharmaceutical company dedicated to developing
and commercializing products and technologies for diagnostic imaging,
cancer therapy and ethical drug development utilizing peptide,
monoclonal antibody and radiopharmaceutical technologies. The
Company was incorporated under the laws of the State of Delaware on
November 21, 1986. Since June 25, 1996, the effective date of the
merger (the "Merger") of a wholly-owned subsidiary of the Company
with and into RhoMed, all outstanding shares of RhoMed equity
securities were exchanged for the Company's common stock, $.01 par
value per share (the "Common Stock"). The business of RhoMed
represents the on-going business of the Company.
As a result of the Merger, RhoMed became a wholly-owned
subsidiary of the Company, with the holders of RhoMed preferred stock
and RhoMed common stock (including the holders of "RhoMed Derivative
Securities" as hereafter defined) receiving an aggregate of
approximately 96% interest in the equity securities of the Company on
a fully-diluted basis. Additionally, all warrants and options to
purchase common stock of RhoMed outstanding immediately prior to the
Merger (the "RhoMed Derivative Securities"), including without
limitation, any rights underlying RhoMed's qualified or nonqualified
stock option plans, were automatically converted into rights upon
exercise to receive the Company's Common Stock in the same manner in
which the shares of RhoMed common stock were converted. Since the
former stockholders of RhoMed retained more than a 50% controlling
interest in the surviving company (Palatin Technologies, Inc.), the
Merger was accounted for as a reverse merger. The historical
financial statements prior to June 25, 1996, are those of RhoMed,
except that the net loss per common share has been stated on an as if
converted basis.
Since its inception, RhoMed has devoted substantially all of its
efforts and resources to the research and development of its
technology. RhoMed has experienced operating losses in each year
since its inception and, as of March 31, 1997, the Company, including
its wholly-owned subsidiary RhoMed, had a deficit accumulated during
the development stage of $11,658,444. The Company expects to incur
additional operating losses over the next several years and expects
cumulative losses to increase as the Company's research and
development and clinical testing efforts continue and expand. The
ultimate completion of the Company's development projects is
contingent upon a number of factors, including the successful
completion of technology and product development, obtaining required
regulatory approvals and additional financing and, ultimately,
successfully commercializing its products and achieving profitable
operations.
6
<PAGE>
(2) Basis of Presentation
The accompanying financial statements have been prepared by the
Company without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission (the "Commission"). Certain
information and footnote disclosure normally included in the
Company's audited annual financial statements has been condensed or
omitted in the Company's interim financial statements. In the
opinion of the Company, these financial statements contain all
adjustments (consisting of only normal recurring adjustments)
necessary to present fairly the financial position of the Company as
of March 31, 1997 and June 30, 1996, and the results of operations
for the three and nine month periods ended March 31, 1997 and 1996
and cash flows for the nine months ended March 31, 1997 and 1996, and
for the period from inception (January 28, 1986) to March 31, 1997.
The results of operations for the interim period may not necessarily
be indicative of the results of operations expected for the full
year, except that the Company expects to incur a significant loss for
the fiscal year ended June 30, 1997.
The accompanying financial statements and the related notes
should be read in conjunction with the Company's audited financial
statements for the ten months ended June 30, 1996 and the fiscal
years ended August 31, 1995 and 1994 filed with the Company's Form
10-KSB for the transition period from September 1, 1995 to June 30,
1996.
(3) Summary of Significant Accounting Policies:
Research and Development Costs -- The costs of research and
development activities are expensed as incurred.
Net Loss per Common Share -- Net loss per common share is
calculated based upon the weighted average number of shares of Common
Stock, on an as if converted basis, outstanding during each period.
All options and warrants were excluded in the calculation of weighted
average shares outstanding since their inclusion would have had, in
the aggregate, an anti-dilutive effect.
In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standard No. 128 (SFAS 128),
"Earnings per Share." The statement is effective for financial
statements for periods ending after December 15, 1997, and changes
the method in which earnings per share will be determined. Adoption
of this statement by the Company will not have a material impact on
earnings per share.
Use of Estimates -- The preparation of consolidated financial
statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from those estimates.
7
<PAGE>
(4) Senior Bridge Notes:
On July 28, 1995, the Board of Directors of RhoMed authorized an
offering of up to 40 units at $25,000 per unit, with each unit
consisting of a $25,000 face amount Senior Bridge Note and a Class A
Warrant to purchase 75,000 shares of RhoMed common stock (equivalent to
13,285 shares of Common Stock) at an exercise price of $.01 per share
(the "Class A Note and Warrant Offering"). The Senior Bridge Notes
sold in the Class A Note and Warrant Offering (the "Senior Bridge
Notes") bore interest at 1% per month, and were payable, with accrued
interest, one year from the date of issuance. All of the 40 Class A
Note and Warrant Offering units were purchased with proceeds prior to
commissions and expenses of $1,000,000. In August and September of
1996, the Senior Bridge Notes sold in the Class A Note and Warrant
Offering were repaid in full, totaling $1,000,000 of principal and
$120,000 of accrued interest.
(5) Series A Preferred Stock:
On December 2, 1996, the Company commenced an offering of units
of Series A Preferred Stock (the "Series A Offering"), pursuant to
which up to a maximum of 240 units is being offered at a price of
$100,000 per unit, with each unit consisting of 1,000 shares of
Series A Preferred Stock. As of March 31, 1997, the Company had
sold 30.63 units, representing 30,630 shares of Series A Preferred
Stock, for net proceeds to the Company of $2,680,591, after deducting
commission and other expenses of the Series A Preferred Stock
offering. As of May 14, 1997, the Company had sold an aggregate
total of 137.78 units, representing 137,780 shares of Series A
Preferred Stock, for net proceeds to the Company of approximately
$11,800,000, after deducting commission and other expenses of the
Series A Offering.
Each share of Series A Preferred Stock is convertible, at the
option of the holder thereof, into shares of Common Stock, initially
at a conversion price of (i) $1.35 or (ii) 85% of the average closing
bid price of the Common Stock on the OTC Bulletin Board for twenty
(20) consecutive trading days immediately preceding any interim
closing date or the final closing of the Series A Offering, which
ever is lower. The conversion price is currently $1.24. The Series
A Preferred Stock also contains a reset mechanism (see Part II, Item
2, "Change in Securities"). The Series A Preferred Stock may be
mandatorily converted by the Company, if, commencing twelve (12)
months after the final closing date, the closing bid price of the
Common Stock has exceeded 200% of the then applicable conversion
price for at least twenty (20) trading days in any thirty (30)
consecutive trading day period ending three (3) days prior to the
date of conversion.
In the event that the Company does not, within 270 days
following the final closing date, increase its authorized capital to
at least that number of shares of Common Stock necessary for issuance
upon exercise of all Series A Preferred Stock sold in the offering,
the Company has agreed that the holders of Series A Preferred Stock
shall be entitled, at the option of each holder to either: (i)
require the Company to repurchase all shares of Series A Preferred
Stock then held by such holder at $100.00 per share of Series A
Preferred Stock, or (ii) require the Company to purchase at fair
market value that portion of the shares which would have been
issuable to the holder upon conversion but which the Company was
unable to issue due to the lack of authorized and reserved shares of
Common Stock. The fair market value per share of Common Stock shall
8
<PAGE>
be paid in cash, or, if the Company does not have sufficient cash,
then with secured demand notes, the fair market value shall mean the
closing bid price per share of the Common Stock as quoted on the OTC
Bulletin Board for the trading day immediately preceding the
conversion.
The securities offered in the Series A Offering have not been
registered under the Securities Act of 1933, as amended, and may not
be offered or sold in the United States absent registration or an
applicable exemption from registration requirements. The Company has
agreed to undertake, no later than sixty (60) days following the
final closing date of the Series A Offering, to file a registration
statement under the Securities Act to permit resales of the Common
Stock issuable upon conversion of the Series A Preferred Stock.
(6) Equipment:
Equipment consists of the following at March 31, 1997 and June
30, 1996:
March 31, June 30,
1997 1996
---------- --------
Office equipment $ 257,470 $ 202,960
Laboratory equipment 83,285 76,929
Leasehold improvements (not placed
in service) 67,427 --
---------- ---------
Equipment at cost 408,182 279,889
Less: Accumulated depreciation 222,174 183,535
---------- ---------
$ 186,008 $ 96,354
========== ==========
(7) Commitments and Contingencies:
Leases -- The Company leases certain of its facilities and
equipment under noncancellable operating leases. In October 1996,
the lease on the facility in Albuquerque, New Mexico was extended
from March 31, 1997 until August 31, 1997, and in March 1997, the
lease was amended to provide for optional extensions through December
31, 1997. In March 1997, the Company entered into a ten-year lease
on research and development facilities in Edison, New Jersey, with
the lease term expected to commence in July 1997. Minimum future
lease payments escalate from approximately $116,000 per year to
$200,000 per year after the fifth year of the lease term. The lease
will expire in fiscal year 2007.
Merger Costs -- In conjunction with the Merger which occurred on
June 25, 1996, costs of $475,000 were charged to operations for the
ten months ended June 30, 1996. With no additional Merger costs
anticipated, the remaining accrual of $17,419 was written off as of
March 31, 1997.
Restructuring Charge -- In conjunction with the Company's
decision to consolidate and relocate its research and development
9
<PAGE>
facilities and executive offices in the New Jersey area, the Company
established a restructuring charge of $450,000. The restructuring
charge to date represents mainly severance costs, facility closing
expenses and recruiting fees. Included in accrued expenses at March
31, 1997, is $60,057 of this restructuring charge.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
General
The following discussion and analysis should be read in
conjunction with the consolidated financial statements and notes
thereto filed as part of this Form 10-QSB. Unless otherwise indicated
herein, all references to the Company include Palatin Technologies,
Inc. and its wholly owned subsidiary, RhoMed.
Certain statements in the Company's Form 10-QSB contain
"forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks, uncertainties and other
factors which may cause the actual results, performance or
achievements of the Company, or industry results, to be materially
different from any future results, performance, or achievements
express or implied by such forward looking statement.
The Company's business is subject to significant risks,
including the uncertainties associated with product development of
pharmaceutical products, problems or delays with clinical trials,
failure to receive or delays in receiving regulatory approval, lack
of enforceability of patents and proprietary rights, industry
capacity, industry trends, competition, material costs and
availability, changes in business strategy or development plans,
quality of management, availability of capital, availability of
qualified personnel, the effect of government regulation and other
risks detailed in the Company's Commission filings, including the
Company's Form 10-KSB for the transition period from September 1,
1995 to June 30, 1996. The Company expects to incur substantial
operating losses over the next several years due to continuing
expenses associated with its research and development programs,
including pre-clinical testing, clinical trials and manufacturing.
Operating losses may also fluctuate from quarter to quarter as a
result of differences in the timing of expenses incurred.
Results of Operations
Three and Nine Month Periods Ended March 31, 1997 Compared to
Three and Nine Month Periods Ended March 31, 1996. During the three
month period ended March 31, 1997, the Company discontinued the
manufacture and sale of RhoChek, the sole product sold by the
Company, due to insufficient sales. There were no revenues from the
sale of products in the three month period ended March 31, 1997,
compared to $12,240 in the three month period ended March 31, 1996.
Revenues in the nine month period ended March 31, 1997 were $22,184
compared to $20,971 in the nine month period ended March 31, 1996.
The Company anticipates no additional revenues from the sale of
products in the current fiscal year.
10
<PAGE>
In December 1996, the Company entered into a License Option
Agreement ("Option Agreement") with Nihon Medi-Physics Ltd.
("Nihon"), pursuant to which the Company received, in January 1997,
an initial payment of $900,000 net of Japanese withholding taxes of
$100,000 (the "Initial Payment"). The Company has accounted for the
Initial Payment in the period ended March 31, 1997 by recognizing
license fee revenue of $350,000 and deferred license fee revenue of
$550,000. The deferred license fee revenue will be recognized if a
license agreement is consummated with Nihon or eliminated if the
Company is required to repay certain monies to Nihon under the Option
Agreement. There were no revenues from license fees in the three
month period ended March 31, 1996.
During the three month period ended March 31, 1997, the Company
had four Phase I grants under the Small Business Innovative Research
program active with the National Institutes of Health of the
Department of Health and Human Services. Grant revenue from these
grants was $267,862 in the three month period ended March 31, 1997,
compared to no revenues in the three month period ended March 31,
1996. Grant revenue in the nine month period ended March 31, 1997
was $267,862, compared to no revenues in the nine month period ended
March 31, 1996. The Company has approximately $100,000 in additional
grant revenue which can be drawn under the four Phase I grants. The
Company recognizes the grant revenue at the time submissions are made
to the respective government agencies for payment.
Research and development expenses increased to $1,050,400 for
the three month period ended March 31, 1997 from $242,212 for the
three month period ended March 31, 1996, with expenses of $2,300,669
for the nine month period ended March 31, 1997 compared to $557,955
for the nine month period ended March 31, 1996. The increase in
expenses for both the current three and nine month periods is
attributable to expansion in the scale of the Company's research and
development operations, which expanded following completion of a
Common Stock offering in June 1996. The Company substantially
increased research and development spending, primarily relating to
development of the LeuTech product for diagnostic imaging of
infections, including increased expenses for manufacturing scale-up,
consulting and clinical trials, and also relating to research
expenses on the Company's MIDAS metallopeptide technology. The
Company expects research and development expenses to continue to
increase in future quarters as the Company expands manufacturing
efforts and initiates clinical trials on the LeuTech product and
significantly expands its efforts to develop the MIDAS metallopeptide
technology including the hiring of scientists and the acquisition of
equipment and supplies in conjunction with completion of the new
research and development facility in Edison, New Jersey.
General and administrative expenses increased to $793,370 for
the three month period ended March 31, 1997 from $405,111 for the
three month period ended March 31, 1996, and increased to $1,740,125
for the nine month period ended March 31, 1997 from $1,017,061 for
the nine month period ended March 31, 1996. The increase is
attributable primarily to the hiring of certain key executives, the
leasing of executive offices in New Jersey, and increased travel and
consulting expenses. General and administrative expenses were also
affected by the amortization of the value of options and warrants
issued to consultants. General and administrative expenses are
expected to remain approximately at current levels through the
remainder of fiscal year 1997.
11
<PAGE>
Interest income was $36,330 and $159,023 for the three and nine
month periods ended March 31, 1997, compared with no interest income
for the three and nine month periods ended March 31, 1996. The
interest income is primarily the result of interest on net proceeds
from a Common Stock offering of approximately $8,400,000 completed in
June 1996. Interest income is expected to increase in coming
quarters as a result increased cash balances from the proceeds of the
Series A Offering.
Interest expenses decreased to $84,927 for the three month
period ended March 31, 1997 compared with $143,465 for the three
month period ended March 31, 1996, and decreased to $301,200 from
$348,121 for the nine month periods ended March 31, 1997 and 1996
respectively. Interest expense for the nine months ending March 31,
1997, is comprised of (i) interest on long-term financing provided by
Aberlyn Holding Company, the principal and accrued interest of which
totaled $1,905,477, (ii) interest on notes payable to stockholders,
the principal amount of which is $80,000, and (iii) interest on
Senior Bridge Notes which were repaid in full in the quarter ended
September 30, 1996. Under an agreement with Aberlyn Holding Company,
the accrued interest as of April 30, 1997, totaling $303,171, will be
converted to Common Stock at a discounted rate, with the Company
obligated to issue 255,641 shares of Common Stock in payment of
accrued interest. As a result of repayment by the Company of the
Senior Bridge Notes, the principal amount of which was $1,000,000,
interest expense is expected to remain at current levels for the
balance of the current fiscal year, and substantially below the
levels for the prior fiscal year.
Net loss increased to $1,257,086 for the three month period
ended March 31, 1997 compared with $914,009 for the three month
period ended March 31, 1996, and increased to $3,525,506 for the nine
month period ended March 31, 1997 compared to $2,161,427 for the nine
month period ended March 31, 1996. The net loss per share decreased
in both the three and nine month period ended March 31, 1997 compared
to the prior year, a result related to the substantial increase in
the weighted average shares outstanding. There were 11,745,837
shares of Common Stock outstanding in the three month period ended
March 31, 1997 compared to 1,294,792 shares outstanding in the three
month period ended March 31, 1996, and 11,618,271 shares outstanding
in the nine month period ended March 31, 1997 compared to 1,290,451
shares outstanding in the nine month period ended March 31, 1996.
The increase in the shares outstanding is primarily the result of
issuance of 7,664,844 shares of Common Stock in connection with the
sale of Common Stock completed in June 1996.
Liquidity and Capital Resources
Since its inception, the Company has incurred net operating
losses and, as of March 31, 1997, had an accumulated deficit of
$11,658,444. The Company has financed its net operating losses
through March 31, 1997 by a series of debt and equity financings.
At March 31, 1997, the Company had cash and cash equivalents of
$4,863,237. The cash is cash equivalents which are composed of: (i)
the remaining net proceeds from the Company's offering of Common
Stock in June 1996 which totaled approximately $8,400,000, (ii) the
receipt from Nihon of $900,000 pursuant to the Agreement, and (iii)
the net proceeds from the Company's Series A Offering of $2,680,591
as of March 31, 1997.
12
<PAGE>
For the nine months ended March 31, 1997, the net decrease in
cash amounted to $1,928,063. Cash used for operating activities was
$3,358,021, net cash used for investing activities was $128,293, and
cash provided by financing activities was $1,558,251, primarily from
the proceeds from Series A Offering less repayment of the Senior
Bridge Notes.
On December 2, 1996, the Company commenced the Series A Offering
pursuant to which up to a maximum of 240 units is being offered at a
price of $100,000 per unit, with each unit consisting of 1,000 shares
of Series A Preferred Stock. As of March 31, 1997, the Company had
sold 30.63 units, representing 30,630 shares of Series A Preferred
Stock, for net proceeds to the Company of $2,680,591, after deducting
commission and other expenses of the Series A Offering. As of May
14, 1997, the Company had sold an aggregate total of 137.78 units,
representing 137,780 shares of Series A Preferred Stock, for net
proceeds to the Company of approximately $11,800,000, after deducting
commission and other expenses of the Series A Offering. The Company
does not anticipate selling the maximum number of units.
Pursuant to the Option Agreement, Nihon can maintain its option
to license certain products based on the Company's MIDAS
metallopeptide technology provided Nihon makes certain milestone
payments based on progress in product development. Nihon may
exercise its right to negotiate a license at any time upon notice and
payment of additional monies to the Company. In the event that the
parties cannot agree on terms of a license agreement, then the
Company will be required to repay certain monies to Nihon. There can
be no assurance that the Company and Nihon will ever enter into a
definitive license agreement, that additional payments provided for
in the Option Agreement will be made, or that the strategic alliance
between the Company and Nihon will result in the development or
commercialization of any product.
Pursuant to the terms of the notes payable to stockholders
("Notes"), repayment of principal and interest is required 30 days
after the completion of a fiscal year when the Company has net assets
of at least $5,000,000.
In March 1997, the Company entered into a ten-year lease on
research and development facilities in Edison, New Jersey, with the
lease term expected to commence in July 1997. Minimum future lease
payments escalate from approximately $116,000 per year to $200,000
per year after the fifth year of the lease term. The lease will
expire in fiscal year 2007. The Company anticipates that the cost of
tenant improvements, net of the landlord's contribution, and
acquisition of laboratory equipment may exceed $1,500,000.
Commencing May 1997, the Company's monthly payments on long-term
financing provided by Aberlyn Holding Company will increase to
$91,695, representing payment of current interest and principal. The
final monthly payment is scheduled to be made in April 1999.
13
<PAGE>
The Company's future capital requirements depend on numerous
factors which cannot be quantified, including continued progress in
its research and development activities, progress with pre-clinical
studies and clinical trials, prosecuting and enforcing patent claims,
technological and market developments, the ability of the Company to
establish product development arrangements, the cost of manufacturing
scale-up, effective marketing activities and arrangements, and
licensing or acquisition activity.
The Company has been seeking and expects to continue to seek to
license or acquire certain products and technologies. If the Company
is successful in acquiring a product or technology, substantial funds
may be required for such acquisition and subsequent development or
commercialization. To date, the Company has not completed an
acquisition and there can be no assurance that any acquisition will
be consummated in the future.
The Company believes that the net proceeds from the Series A
Offering of $11,800,000 as of May 14, 1997 and the Initial Payment
received under the Option Agreement, together with its other cash, is
sufficient to fund the Company's projected debt obligations and fund
projected operations through fiscal year 1998.
The Company anticipates incurring additional losses over at
least the next several years, and such losses are expected to
increase as the Company expands its research and development
activities relating to its MIDAS metallopeptide technology and its
radiolabeling technology. To achieve profitability, the Company,
alone or with others, must successfully develop and commercialize its
technologies and products, conduct pre-clinical studies and clinical
trials, obtain required regulatory approvals and successfully
manufacture, introduce and market such technologies and products.
The time required to reach profitability is highly uncertain, and
there can be no assurance that the Company will be able to achieve
profitability on a sustained basis, if at all.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Change in Securities.
Common Stock. During the three months ended March 31, 1997 the
Company sold the following shares of Common Stock which were not
registered under the Securities Act:
Date Number of Shares Sold To Total
Offering Price
January 10, 1997 13,824 Warrant Holder $750
February 14, 1997 13,824 Warrant Holder $750
None of the shares of Common Stock were publicly offered or sold
through underwriters, and no underwriting discounts or commissions
14
<PAGE>
were paid. The Company claimed exemption from registration pursuant
to Section 4(2) of the Securities Act because each transaction was
the sale of restricted stock to the exercising holder of a restricted
warrant, not involving any public offering.
Series A Preferred Stock. On February 21, 1997 the Company sold
units representing 30,630 shares of Series A Preferred Stock in its
Series A Offering which were not registered under the Securities Act,
pursuant to a private placement limited to accredited investors. The
total offering price for the units was $3,063,000, with the placement
agent receiving a nine percent (9%) commission, amounting to
$275,670, a four percent (4%) non-accountable expense allowance,
amounting to $122,520, and warrants issuable to the placement agent
and its designees to purchase 3,063 shares of Series A Preferred
Stock at an exercise price of $110 per share. The warrants are
exercisable for five (5) years commencing six (6) months following
the final closing of the Series A Offering. The Company claimed
exemption from registration pursuant to Regulation D under the
Securities Act because the Series A Offering was the sale of
restricted securities to accredited investors, as defined in Rule 501
of Regulation D, and not involving any public offering.
Each share of Series A Preferred Stock is convertible, at the
option of the holder thereof, into shares of Common Stock, initially
at a conversion price of (i) $1.35 or (ii) 85% of the average closing
bid price of the Common Stock on the OTC Bulletin Board for twenty
(20) consecutive trading days immediately preceding any interim
closing date or the final closing of the Series A Offering, whichever
is lower. The conversion price is currently $1.24. A reset
mechanism provides that the conversion price is subject to adjustment
on the date which is twelve (12) months after the final closing on
the Series A Offering (the "Reset Date"), if the average closing bid
price of the Common Stock for the thirty (30) consecutive trading
days immediately preceding the Reset Date (the "Reset Trading Price")
is less than 130% of the then applicable conversion price (a "Reset
Event"). Upon the occurrence of a Reset Event, the then applicable
conversion price will be reduced to the greater of (i) the Reset
Trading Price divided by 1.3 and (ii) 50% of the then applicable
conversion price. The conversion price is also subject to
adjustment, under certain circumstances, upon the sale or issuance of
Common Stock for consideration per share less than either (i) the
conversion price in effect on the date of sale or issuance, or (ii)
the market price of the Common Stock as of the date of the sale or
issuance. Upon the occurrence of a merger, reorganization,
consolidation, reclassification, stock dividend or stock split which
will result in an increase or decrease in the number of shares of
Common Stock outstanding the conversion price is subject to
adjustment.
Series A Preferred Stock has a preference over Common Stock as
to dividends and distributions. In addition, holders of Series A
Preferred Stock vote on an "as if converted" basis with Common Stock
as a single class (unless separate class voting is required by law),
except that approval of holders of two-thirds of the Series A
Preferred Stock then outstanding is required to approve (i) any
alteration in the Company's charter documents or by-laws that would
adversely affect the relative rights, preferences, qualifications,
limitations or restrictions of the Series A Preferred Stock, (ii) the
declaration or payment of any dividend on any other securities or the
repurchase of any securities of the Company other than the Series A
Preferred Stock, and (iii) the authorization or issuance, or increase
of the authorized amount of, any security ranking prior to the Series
A Preferred Stock as to liquidation, payment of dividends or
distributions or voting rights.
15
<PAGE>
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
As of May 14, 1996, the Company had closed in the aggregate on
137.78 units, representing 137,780 shares of Series A Preferred
Stock, in its private placement of Series A Preferred Stock, for
gross proceeds of $13,778,000 and net proceeds to the Company of
approximately $11,800,000, after deducting commission and other
expenses of the Series A Offering. The issued Series A Preferred
Stock is convertible to approximately 11,110,000 shares of Common
Stock at the conversion price, $1.24, now in effect.
Placed with accredited investors, the securities have not been
registered under the Securities Act, and may not be offered or sold
in the United States absent registration or an applicable exemption
from registration requirements. The Company has agreed to undertake,
no later than sixty (60) days following the final closing date of the
Series A Offering, to file a registration statement under the
Securities Act to permit resales of the Common Stock issuable upon
conversion of the Series A Preferred Stock.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
3.2 Bylaws of the Company
10.26 1996 Stock Option Plan as Amended
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter for which
this report is filed.
16
<PAGE>
Signatures
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Palatin Technologies, Inc.
(Registrant)
Date: May 15, 1997 /s/ Edward J. Quilty
------------------------
Edward J. Quilty
Chairman of the Board, President
and Chief Executive Officer
Date: May 15, 1997 /s/ John J. McDonough
-------------------------
John J. McDonough
Vice President and Chief Financial
Officer (Principal Financial and
Accounting Officer)
17
BY-LAWS
OF
PALATIN TECHNOLOGIES, INC.
ARTICLE I
OFFICES
SECTION 1.01. Registered Office. The registered office of PALATIN
TECHNOLOGIES, INC. (the "Corporation") in the State of Delaware shall be at
the principal office of The Corporation Trust Company in the City of
Wilmington, County of New Castle, and the registered agent in charge thereof
shall be The Corporation Trust Company.
SECTION 1.02. Other Offices. The Corporation may also have an
office or offices at any other place or places within or without the State of
Delaware as the Board of Directors of the Corporation (the "Board" may from
time to time determine or the business of the Corporation may from time to
time require
ARTICLE II
MEETINGS OF STOCKHOLDERS
SECTION 2.01. Annual Meetings. The annual meeting of stockholders
of the Corporation for the election of directors of the Corporation
("Directors), and for the transaction of such other business as may properly
come before such meeting, shall be held at such place, date and time as shall
be fixed by the Board and designated in the notice or waiver of notice of such
annual meeting; provided, however, that no annual meeting of stockholders need
be held if all actions, including the election of Directors, required by the
General Corporation Law of the State of Delaware (the "General Corporation
Law") to be taken at such annual meeting are taken by written consent in lieu
of meeting pursuant to Section 2.09 hereof.
SECTION 2.02. Special Meetings. Special meetings of stockholders
for any purpose or purposes may be called by the Board or the Chairman of the
Board, the President or the Secretary of the Corporation or by the
recordholders of at least ten percent of the shares of common stock of the
Corporation issued and outstanding ("Shares") and entitled to vote thereat, to
be held at such place, date and time as shall be designated in the notice or
waiver of notice thereof.
SECTION 2.03. Notice of Meetings. (a) Except as otherwise provided
by law, written notice of each annual or special meeting of stockholders
stating the place, date and time of such meeting and, in <PAGE>
<PAGE>
the case of a special meeting, the purpose or purposes for which such meeting
is to be held, shall be given personally or by first-class mail (airmail in
the case of international communications) to each recordholder of Shares (a
"Stockholder") entitled to vote thereat, not less than 10 nor more than 60
days before the date of such meeting. If mailed, such notice shall be deemed
to be given when deposited in the United States mail, postage prepaid,
directed to the Stockholder at such Stockholder's address as it appears on the
records of the Corporation. If, prior to the time of mailing, the Secretary
of the Corporation (the "Secretary") shall have received from any Stockholder
a written request that notices intended for such Stockholder are to be mailed
to some address other than the address that appears on the records of the
Corporation, notices intended for such Stockholder shall be mailed to the
address designated in such request.
(b) Notice of a special meeting of Stockholders may be given by the
person or persons calling the meeting, or, upon the written request of such
person or persons, such notice shall be given by the Secretary on behalf of
such person or persons. If the person or persons calling a special meeting of
Stockholders give notice thereof, such person or persons shall deliver a copy
of such notice to the Secretary. Each request to the Secretary for the giving
of notice of a special meeting of Stockholders shall state the purpose or
purposes of such meeting.
SECTION 2.04. Waiver of Notice. Notice of any annual or special
meeting of Stockholders need not be given to any Stockholder who files a
written waiver of notice with the Secretary, signed by the person entitled to
notice, whether before or after such meeting. Neither the business to be
transacted at, nor the purpose of, any meeting of Stockholders need be
specified in any written waiver of notice thereof. Attendance of a
Stockholder at a meeting, in person or by proxy, shall constitute a waiver of
notice of such meeting, except when such Stockholder attends a meeting for the
express purpose of objecting, at the beginning of the meeting, to the
transaction of any business on the grounds that the notice of such meeting was
inadequate or improperly given.
SECTION 2.05. Adjournments. Whenever a meeting of Stockholders,
annual or special, is adjourned to another date, time or place, notice need
not be given of the adjourned meeting if the date, time and place thereof are
announced at the meeting at which the adjournment is taken. If the
adjournment is for more than 30 days, or if after the adjournment a new record
date is fixed for the adjourned meeting, a notice of the adjourned meeting
shall be given to each Stockholder entitled to vote thereat. At the adjourned
meeting, any business may be transacted which might have been transacted at
the original meeting.
SECTION 2.06. Quorum. Except as otherwise provided by law or the
Amended and Restated Certificate of Incorporation of the Corporation (the
"Certificate of Incorporation"), the recordholders of a majority of the Shares
entitled to vote thereat, present in person or by proxy, shall constitute a
quorum for the transaction of business at all meetings of Stockholders,
whether annual or special. If, however, such quorum shall not be present in
person or by proxy at any meeting of Stockholders, the Stockholders entitled
to vote thereat may adjourn the meeting from time to time in accordance with
Section 2.05 hereof until a quorum shall be present in person or by proxy.
2
<PAGE>
SECTION 2.07. Voting. Each Stockholder shall be entitled to one
vote for each Share held of record by such Stockholder. Except as otherwise
provided by law or the Certificate of Incorporation, when a quorum is present
at any meeting of Stockholders, the vote of the recordholders of a majority of
the Shares constituting such quorum shall decide any question brought before
such meeting.
SECTION 2.08. Proxies. Each Stockholder entitled to vote at a
meeting of Stockholders or to express, in writing, consent to or dissent from
any action of Stockholders without a meeting may authorize another person or
persons to act for such Stockholder by proxy. Such proxy shall be filed with
the Secretary before such meeting of Stockholders or such action of
Stockholders without a meeting, at such time as the Board may require. No
proxy shall be voted or acted upon more than three years from its date, unless
the proxy provides for a longer period.
SECTION 2.09. Stockholders' Consent in Lieu of Meeting. Any action
required by the General Corporation Law to be taken at any annual or special
meeting of Stockholders, and any action which may be taken at any annual or
special meeting of Stockholders, may be taken without a meeting, without prior
notice and without a vote, if a consent in writing, setting forth the action
so taken, shall be signed by the recordholders of Shares having not less than
the minimum number of votes necessary to authorize or take such action at a
meeting at which the recordholders of all Shares entitled to vote thereon were
present and voted.
ARTICLE III
BOARD OF DIRECTORS
SECTION 3.01. General Powers. The business and affairs of the
Corporation shall be managed by the Board, which may exercise all such powers
of the Corporation and do all such lawful acts and things as are not by law,
the Certificate of Incorporation or these By-laws directed or required to be
exercised or done by Stockholders.
SECTION 3.02. Number and Term of Office. The number of Directors
shall be five or such other number as shall be fixed from time to time by the
Board. Directors need not be Stockholders. Directors shall be elected at the
annual meeting of Stockholders or, if, in accordance with Section 2.01 hereof,
no such annual meeting is held, by written consent in lieu of meeting pursuant
to Section 2.09 hereof, and each Director shall hold office until his
successor is elected and qualified, or until his earlier death or resignation
or removal in the manner hereinafter provided.
3
<PAGE>
SECTION 3.03. Resignation. Any Director may resign at any time by
giving written notice to the Board, the Chairman of the Board of the
Corporation (the "Chairman") or the Secretary. Such resignation shall take
effect at the time specified in such notice or, if the time be not specified,
upon receipt thereof by the Board, the Chairman or the Secretary, as the case
may be. Unless otherwise specified therein, acceptance of such resignation
shall not be necessary to make it effective.
SECTION 3.04. Removal. Any or all of the Directors may be removed,
with or without cause, at any time by vote of the recordholders of a majority
of the Shares then entitled to vote at an election of Directors, or by written
consent of the recordholders of Shares pursuant to Section 2.09 hereof.
SECTION 3.05. Vacancies. Vacancies occurring on the Board as a
result of the removal of Directors without cause may be filled only by vote of
the recordholders of a majority of the Shares then entitled to vote at an
election of Directors, or by written consent of such recordholders pursuant to
Section 2.09 hereof. Vacancies occurring on the Board for any other reason,
including, without limitation, vacancies occurring as a result of the creation
of new directorships that increase the number of Directors, may be filled by
such vote or written consent or by vote of the Board or by written consent of
the Directors pursuant to Section 3.08 hereof. If the number of Directors
then in office is less than a quorum, such other vacancies may be filled by
vote of a majority of the Directors then in office or by written consent of
all such Directors pursuant to Section 3.08 hereof. Unless earlier removed
pursuant to Section 3.04 hereof, each Director chosen in accordance with this
Section 3.05 shall hold office until the next annual election of Directors by
the Stockholders and until his successor shall be elected and qualified.
SECTION 3.06. Meetings. (a) Annual Meetings. As soon as
practicable after each annual election of Directors by the Stockholders, the
Board shall meet for the purpose of organization and the transaction of other
business, unless it I shall have transacted all such business by written
consent pursuant to Section 3.08 hereof.
(b) Other Meetings. Other meetings of the Board shall be held at
such times as the Chairman, the President of the Corporation (the
"President"), the Secretary or a majority of the Board shall from time to time
determine.
(c) Notice of Meetings. The Secretary shall give written notice to
each Director of each meeting of the Board, which notice shall state the
place, date, time and purpose of such meeting. Notice of each such meeting
shall be given to each Director, if by mail, addressed to him at his residence
or usual place of business, at least two days before the day on which such
meeting is to be held, or shall be sent to him at such place by telecopy,
telegraph, cable, or other form of recorded communication, or be delivered
personally or by telephone not later than the day before the day on which such
meeting is to be held. A written waiver of notice, signed by the Director
entitled to notice, whether before or after the time of the meeting referred
to in such waiver, shall be deemed equivalent to notice. Neither the business
to
4
<PAGE>
be transacted at, nor the purpose any meeting of the Board need be specified
in any written waiver of notice thereof. Attendance of a Director at a meeting
of the Board shall constitute a waiver of notice of such meeting, except as
provided by law.
(d) Place of Meetings. The Board may hold its meetings at such
place or places within or without the State of Delaware as the Board or the
Chairman may from time to time determine, or as shall be designated in the
respective notices or waivers of notice of such meetings.
(e) Quorum and Manner of Acting. One-third of the total number of
Directors then in office (but in no event less than two if the total number of
directorships, including vacancies, is greater than one and in no event a
number less than one-third of the total number of directorships, including
vacancies) shall be present in person at any meeting of the Board in order to
constitute a quorum for the transaction of business at such meeting, and the
vote of a majority of those Directors present at any such meeting at which a
quorum is present shall be necessary for the passage of any resolution or act
of the Board, except as otherwise expressly required by law, the Certificate
of Incorporation or these By-laws. In the absence of a quorum for any such
meeting, a majority of the Directors present thereat may adjourn such meeting
from time to time until a quorum shall be present.
(f) Organization. At each meeting of the Board, one of the
following shall act as chairman of the meeting and preside, in the following
order of precedence:
(i) the Chairman;
(ii) the President;
(iii) any Director chosen by a majority of the
Directors present.
The Secretary or, in the case of his absence, any person (who shall be an
Assistant Secretary, if an Assistant Secretary is present) whom the chairman
of the meeting shall appoint shall act as secretary of such meeting and keep
the minutes thereof.
SECTION 3.07. Committees of the Board. The Board may, by
resolution passed by a majority of the whole Board, designate one or more
committees, each committee to consist of one or more Directors. The Board may
designate one or more Directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of such committee.
In the absence or disqualification of a member of a committee, the member or
members thereof present at any meeting and not disqualified from voting,
whether or not he or they constitute a quorum, may unanimously appoint another
Director to act at the meeting in the place of any such absent or disqualified
member. Any committee of the Board, to the extent provided in the resolution
of the Board designating such committee, shall have and may exercise all the
5
<PAGE>
powers and authority of the Board in the management of the business and
affairs of the Corporation, and may authorize the seal of the Corporation to
be affixed to all papers which may require it; provided, however, that no such
committee shall have such power or authority in reference to amending the
Certificate of Incorporation (except that such a committee may, to the extent
authorized in the resolution or resolutions providing for the issuance of
shares of stock adopted by the Board as provided in Section 151(a) of the
General Corporation Law, fix the designations and any of the preferences or
rights of such shares relating to dividends, redemption, dissolution, any
distribution of assets of the Corporation or the conversion into, or the
exchange of such shares for, shares of any other class or classes of stock, of
the Corporation or fix the number of shares of any series of stock or
authorize the increase or decrease of the shares of any series), adopting an
agreement of merger or consolidation under Section 251 or 252 of the General
Corporation Law, recommending to the Stockholders the sale, lease or exchange
of all or substantially all the Corporation's property and assets,
recommending to the Stockholders a dissolution of the Corporation or the
revocation of a dissolution, or amending these By-laws; provided further,
however, that, unless expressly so provided in the resolution of the Board
designating such committee, no such committee shall have the power or
authority to declare a dividend, to authorize the issuance of stock, or to
adopt a certificate of ownership and merger pursuant to Section 253 of the
General Corporation Law. Each committee of the Board shall keep regular
minutes of its proceedings and report the same to the Board when so requested
by the Board.
SECTION 3.08. Directors' Consent in Lieu of Meeting. Any action
required or permitted to be taken at any meeting of the Board or of any
committee thereof may be taken without a meeting, without prior notice and
without a vote, if a consent in writing setting forth the action so taken,
shall be signed by all the members of the Board or such committee and such
consent is filed with the minutes of the proceedings of the Board or such
committee.
SECTION 3.09. Action by Means of Telephone or Similar
Communications Equipment. Any one or more members of the Board, or of any
committee thereof, may participate in a meeting of the Board or such committee
by means of conference telephone or similar communications equipment by means
of which all persons participating in the meeting can hear each other, and
participation in a meeting by such means shall constitute presence in person
at such meeting.
SECTION 3.10. Compensation. Unless otherwise restricted by the
Certificate of Incorporation, the Board may determine the compensation of
Directors. In addition, as determined by the Board, Directors may be reimbursed
by the Corporation for their expenses, if any, in the performance of their
duties as Directors. No such compensation or reimbursement shall preclude any
Director from serving the Corporation in any other capacity and receiving
compensation therefor.
6
<PAGE>
ARTICLE IV
OFFICERS
SECTION 4.01. Officers. The officers of the Corporation shall be
the Chairman, the President, the Secretary and a Treasurer and may include one
or more Vice Presidents and one or more Assistant Secretaries and an Assistant
Treasurer. Any two or more offices may be held by the same person.
SECTION 4.02. Authority and Duties. All officers shall have such
authority and perform such duties in the management of the Corporation as may
be provided in these By-laws or, to the extent not so provided, by resolution
of the Board.
SECTION 4.03. Term of Office. Resignation and Removal. (a) Each
officer shall be appointed by the Board and shall hold office for such term as
may be determined by the Board. Each officer shall hold office until his
successor has been appointed and qualified or his earlier death or resignation
or removal in the manner hereinafter provided. The Board may require any
officer to give security for the faithful performance of his duties.
(b) Any officer may resign at any time by giving written notice to
the Board, the Chairman, the President or the Secretary. Such resignation
shall take effect at the time specified in such notice or, if the time be not
specified, upon receipt thereof by the Board, the Chairman, the President or
the Secretary, as the case may be. Unless, otherwise specified therein,
acceptance of such resignation shall not be necessary to make it effective.
(c) All officers and agents appointed by the Board shall be subject
to removal, with or without cause, at any time by the Board or by the action
of the recordholders of a majority of the Shares entitled to vote thereon.
SECTION 4.04. Vacancies. Any vacancy occurring in any office of
the Corporation, for any reason, shall be filled by action of the Board.
Unless earlier removed pursuant to Section 4.03 hereof, any officer appointed
by the Board to fill any such vacancy shall serve only until such time as the
unexpired term of his predecessor expires unless reappointed by the Board.
SECTION 4.05. The Chairman. The Chairman shall have the power to
call special meetings of Stockholders, to call special meetings of the Board
and, if present, to preside at all meetings of Stockholders and all meetings
of the Board. The Chairman shall perform all duties incident to the office of
Chairman of the Board and all such other duties as may from time to time be
assigned to him by the Board or these By-laws. The office of Chairman of the
Board may be filled by two individuals serving simultaneously and who shall be
referred to collectively as Co-Chairmen and who shall each individually be
referred to as a Co-Chairman.
7
<PAGE>
SECTION 4.06. The President. The President shall be the chief
executive officer of the Corporation and shall have general and active
management and control of the business and affairs of the Corporation, subject
to the control of the Board, and shall see that all orders and resolutions of
the Board are carried into effect. The President shall perform all duties
incident to the office of President and all such other duties as may from time
to time be assigned to him by the Board or these By-laws.
SECTION 4.07. Vice Presidents. Vice Presidents, if any, in order
of their seniority or in any other order determined by the Board, shall
generally assist the President and perform such other duties as the Board or
the President shall prescribe, and in the absence or disability of the
President, shall perform the duties and exercise the powers of the President.
SECTION 4.08. The Secretary. The Secretary shall, to the extent
practicable, attend all meetings of the Board and all meetings of Stockholders
and shall record all votes and the minutes of all proceedings in a book to be
kept for that purpose, and shall perform the same duties for any committee of
the Board when so requested by such committee. He shall give or cause to be
given notice of all meetings of Stockholders and of the Board, shall perform
such other duties as may be prescribed by the Board, the Chairman or the
President and shall act under the supervision of the Chairman. He shall keep
in safe custody the seal of the Corporation and affix the same to any
instrument that requires that the seal be affixed to it and which shall have
been duly authorized for signature in the name of the Corporation and, when so
affixed, the seal shall be attested by his signature or by the signature of
the Treasurer of the Corporation (the "Treasurer") or an Assistant Secretary
or the Assistant Treasurer of the Corporation (the Assistant Treasurer") of
the Corporation. He shall keep in safe custody the certificate books and
stockholder records and such other books and records of the Corporation as the
Board, the Chairman or the President may direct and shall perform all other
duties incident to the office of Secretary and such other duties as from time
to time may be assigned to him by the Board, the Chairman or the President.
SECTION 4.09. Assistant Secretaries. Assistant Secretaries of the
Corporation ("Assistant Secretaries"), if any, in order of their seniority or
in any other order determined by the Board, shall generally assist the
Secretary and perform such other duties as the Board or the Secretary shall
prescribe, and, in the absence or disability of the Secretary, shall perform
the duties and exercise the powers of the Secretary.
SECTION 4.10. Treasurer. The Treasurer shall have the care and
custody of a the funds of the Corporation and shall deposit such funds in such
banks or other depositories as the Board, or any officer or officers, or any
officer and agent jointly, duly authorized by the Board, shall, from time to
time, direct or approve. He shall disburse the funds of the Corporation under
the direction of the Board and the President. He shall keep a full and
accurate account of all moneys received and paid on account of the Corporation
and shall render a statement of his accounts whenever the Board, the Chairman
or the
8
<PAGE>
President shall so request. He shall perform all other necessary actions and
duties in connection with the administration of the financial affairs of the
Corporation and shall generally perform all the duties usually appertaining to
the office of treasurer of a corporation. When required by the Board, he
shall give bonds for the faithful discharge of his duties in such sums and
with such sureties as the Board shall approve.
SECTION 4.11. Assistant Treasurer. The Assistant Treasurer of the
Corporation shall generally assist the Treasurer and perform such other duties
as the Board or the Treasurer shall prescribe, and, in the absence or
disability of the Treasurer, shall perform the duties and exercise the powers
of the Treasurer.
ARTICLE V
CHECKS, DRAFTS, NOTES, AND PROXIES
SECTION 5.01. Checks, Drafts and Notes. All checks, drafts and
other orders for the payment of money, notes and other evidences of
indebtedness issued in the name of the Corporation shall be signed by such
officer or officers, agent or agents of the Corporation and in such manner as
shall be determined, from time to time, by resolution of the Board.
SECTION 5.02. Execution of Proxies. The Chairman or the President,
or, in the absence or disability of both of them, any Vice President, may
authorize, from time to time, the execution and issuance of proxies to vote
shares of stock or other securities of other corporations held of record by
the Corporation and the execution of consents to action taken or to be taken
by any such corporation. All such proxies and consents, unless otherwise
authorized by the Board, shall be signed in the name of the Corporation by the
Chairman, the President or any Vice President.
ARTICLE V
SHARES AND TRANSFERS OF SHARES
SECTION 6.01. Certificates Evidencing Shares. Shares shall be
evidenced by certificates in such form or forms as shall be approved by the
Board. Certificates shall be issued in consecutive order and shall be
numbered in the order of their issue, and shall be signed by the Chairman, the
President or any Vice President and by the Secretary, any Assistant Secretary,
the Treasurer or the Assistant Treasurer. If such a certificate is manually
signed by one such officer, any other signature on the certificate may be a
facsimile. In the event any such officer who has signed or whose facsimile
signature has been placed upon a certificate shall have ceased to hold such
office or to be employed by the Corporation before such certificate is issued,
such certificate may be issued by the Corporation with the same effect as if
such officer had held such office on the date of issue.
9
<PAGE>
SECTION 6.02. Stock Ledger. A stock ledger in one or more
counterparts shall be kept by the Secretary, in which shall be recorded the
name and address of each person, firm or corporation owning the Shares
evidenced by each certificate evidencing Shares issued by the Corporation, the
number of Shares evidenced by each such certificate, the date of issuance
thereof and, in the case of cancellation, the date of cancellation. Except as
otherwise expressly required by law, the person in whose name Shares stand on
the stock ledger of the Corporation shall be deemed the owner and recordholder
thereof for all purposes.
SECTION 6.03. Transfers of Shares. Registration of transfers of
Shares shall be made only in the stock ledger of the Corporation upon request
of the registered holder of such shares, or of his attorney thereunto
authorized by power of attorney duly executed and filed with the Secretary,
and upon the surrender of the certificate or certificates evidencing such
Shares properly endorsed or accompanied by a stock power duly executed,
together with such proof of the authenticity of signatures as the Corporation
may reasonably require.
SECTION 6.04. Addresses of Stockholders. Each Stockholder shall
designate to the Secretary an address at which notices of meetings and all
other corporate notices may be served or mailed to such Stockholder, and, if
any Stockholder shall fail to so designate such an address, corporate notices
may be served upon such Stockholder by mail directed to the mailing address,
if any, as the same appears in the stock ledger of the Corporation or at the
last known mailing address of such Stockholder.
SECTION 6.05. Lost, Destroyed and Mutilated Certificates. Each
recordholder of Shares shall promptly notify the Corporation of any loss,
destruction or mutilation of any certificate or certificates evidencing any
Share or Shares of which he is the recordholder. The Board may, in its
discretion, cause the Corporation to issue a new certificate in place of any
certificate theretofore issued by it and alleged to have been mutilated, lost,
stolen or destroyed, upon the surrender of the mutilated certificate or, in
the case of loss, theft or destruction of the certificate, upon satisfactory
proof of such loss, theft or destruction, and the Board may, in its
discretion, require the recordholder of the Shares evidenced by the lost,
stolen or destroyed certificate or his legal representative to give the
Corporation a bond sufficient to indemnify the Corporation against any claim
made against it on account of the alleged loss, theft or destruction of any
such certificate or the issuance of such new certificate.
SECTION 6.06. Regulations. The Board may make such other rules and
regulations as it may deem expedient, not inconsistent with these By-laws,
concerning the issue, transfer and registration of certificates evidencing
Shares.
SECTION 6.07. Fixing Date for Determination of Stockholders of
Record. In order that the Corporation may determine the Stockholders entitled
to notice of or to vote at any meeting of Stockholders or any adjournment
thereof, or to express consent to, or to dissent from, corporate action in
writing without a meeting, or entitled to receive payment of any dividend or
other distribution or allotment of any
<PAGE>
rights, or entitled to exercise any rights in respect of any change,
conversion or exchange of stock, or for the purpose of any other lawful
action, the Board may fix, in advance, a record date, which shall not be more
than 60 nor less than 10 days before the date of such meeting, nor more than
60 days prior to any other such action. A determination of the Stockholders
entitled to notice of or to vote at a meeting of Stockholders shall apply to
any adjournment of such meeting; provided, however, that the Board may fix a
new record date for the adjourned meeting.
ARTICLE VII
SEAL I
SECTION 7.01. Seal. The Board may approve and adopt a corporate
seal, which shall be in the form of a circle and shall bear the full name of
the Corporation, the year of its incorporation and the words "Corporate Seal
Delaware".
ARTICLE VIII
FISCAL YEAR
SECTION 8.01. Fiscal Year. The fiscal year of the Corporation
shall end on the thirty-first day of December of each year unless changed by
resolution of the Board.
ARTICLE IX
INDEMNIFICATION AND INSURANCE
SECTION 9.01. Indemnification. (a) The Corporation shall indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the Corporation) by reason of the fact that he is or was a director,
officer, employee or agent of the Corporation, or is or was serving at the
request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts
paid in settlement actually and reasonably incurred by him in connection with
such action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction, or upon
a plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.
<PAGE>
(b) The Corporation shall indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the Corporation to procure a judgment in
its favor by reason of the fact that he is or was a director, officer,
employee or agent of the Corporation, or is or was serving at the request of
the Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
expenses (including attorneys' fees) actually and reasonably incurred by him
in connection with the defense or settlement of such action or suit if he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the Corporation
unless and only to the extent that the Court of Chancery of the State of
Delaware or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of
all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of Chancery or such
other court shall deem proper.
(c) To the extent that a director, officer, employee or agent of the
Corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in Section 9.01(a) and (b) of these
By-laws, or in defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection therewith.
(d) Any indemnification under Section 9.01(a) and (b) of these
By-laws (unless ordered by a court) shall be made by the Corporation only as
authorized in the specific case upon a determination that indemnification of
the director, officer, employee or agent is proper in the circumstances
because he has met the applicable standard of conduct set forth in Section
9.01(a) and (b) of these By-laws. Such determination shall be made (i) by a
majority vote of the directors who are not parties to such action, suit or
proceeding, even though less than a quorum, or (ii) if there are no such
directors, or if such directors so direct, by independent legal counsel in a
written opinion, or (iii) by the stockholders of the Corporation.
(e) Expenses (including attorneys' fees) incurred by an officer
or director in defending any civil, criminal, administrative or investigative
action, suit or proceeding may be paid by the Corporation in advance of the
final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount
if it shall ultimately be determined that he is not entitled to be indemnified
by the Corporation pursuant to this Article IX. Such expenses (including
attorneys' fees) incurred by other employees and agents may be so paid upon
such terms and conditions, if any, as the Board deems appropriate.
<PAGE>
(f) The indemnification and advancement of expenses provided by, or
granted pursuant to, other Sections of this Article IX shall not be deemed
exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any law, by-law, agreement, vote
of stockholders or disinterested directors or otherwise, both as to action in
an official capacity and as to action in another capacity while holding such
office.
(g) For purposes of this Article IX, references to "the Corporation"
shall include, in addition to the resulting corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors, officers, employees
or agents so that any person who is or was a director, officer, employee or
agent of such constituent corporation, or is or was serving at the request of
such constituent corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
shall stand in the same position under the provisions of this Article IX with
respect to the resulting or surviving corporation as he would have with
respect to such constituent corporation if its separate existence had
continued.
(h) For purposes of this Article IX, references to "other
enterprises" shall include employee benefit plans; references to "fines" shall
include any excise taxes assessed on a person with respect to an employee
benefit plan; and references to "serving at the request of the Corporation"
shall include any service as a director, officer, employee or agent of the
Corporation which imposes duties on, or involves service by, such director,
officer, employee or agent with respect to any employee benefit plan, its
participants, or beneficiaries; and a person who acted in good faith and in a
manner he reasonably believed to be in the interest of the participants and
beneficiaries of an employee benefit plan shall be deemed to have acted in a
manner "not opposed to the best interests of the Corporation" as referred to
in this Article IX.
(i) The indemnification and advancement of expenses provided by, or
granted pursuant to, this Article IX shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person.
SECTION 9.02. Insurance for Indemnification. The Corporation may
purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the Corporation, or is or was serving
at the request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against any liability asserted against him and incurred by him in any such
capacity, or arising out of his status as such, whether or not the Corporation
would have the power to indemnify him against such liability under the
provisions of Section 145 of the General Corporation Law.
<PAGE>
ARTICLE X
AMENDMENTS
SECTION 10.01. Amendments. Any By-law(including these By-laws) may
be adopted, amended or repealed by the vote of the recordholders of a majority
of the Shares then entitled to vote at an election of Directors or by written
consent of Stockholders pursuant to Section 2.09 hereof, or by vote of the
Board or by a written consent of Directors pursuant to Section 3.08 hereof.
1996 STOCK OPTION PLAN
1. Purpose.
The purposes of the 1996 Stock Option Plan (the "Plan") are to induce
certain employees, consultants and directors to remain in the employ or
service, or to continue to serve as directors, of Palatin Technologies, Inc.
(the "Company") and its present and future subsidiary corporations (each a
"Subsidiary"), as defined in Section 424(f) of the Internal Revenue Code of
1986, as amended (the "Code"), to attract new individuals to enter into such
employment or service and to encourage such individuals to secure or increase
on reasonable terms their stock ownership in the Company. The Board of
Directors of the Company (the "Board") believes that the granting of stock
options (the "Options") under the Plan will promote continuity of management
and increased incentive and personal interest in the welfare of the Company by
those who are or may become primarily responsible for shaping and carrying out
the long range plans of the Company and securing its continued growth and
financial success. Options granted hereunder are intended to be either (a)
"incentive stock options" (which term, when used herein, shall have the
meaning ascribed thereto by the provisions of Section 422(b) of the Code) or
(b) options which are not incentive stock options ("non-incentive stock
options") or (c) a combination thereof, as determined by the Committee (the
"Committee") referred to in Section 4 hereof at the time of the grant thereof.
2. Effective Date of the Plan.
The Plan became effective on August 28, 1996, by action of the Board,
subject to ratification by stockholders of the Company.
3. Stock Subject to Plan.
2,000,000 of the authorized but unissued shares of the Common Stock,
$0.01 par value, of the Company (the "Common Stock") are hereby reserved for
issue upon the exercise of Options granted under the Plan; provided, however,
that the number of shares so reserved may from time to time be reduced to the
extent that a corresponding number of issued and outstanding shares of the
Common Stock are purchased by the Company and set aside for issue upon the
exercise of Options. If any Options expire or terminate for any reason with-
out having been exercised in full, the unpurchased shares subject thereto
shall again be available for the purposes of the Plan.
4. Committee.
The Committee shall consist of two or more members of the Board both or
all of whom shall be "non-employee directors" within the meaning of Rule 16b-
3(b)(3)(i) promulgated under the Securities Exchange Act of 1934, as amended
<PAGE>
(the "Exchange Act") and "outside directors" within the contemplation of
Section 162(m)(4)(C)(i) of the Code. The President of the Company shall also
be a member of the Committee, ex-officio, whether or not he or she is
otherwise eligible to be a member of the Committee. The Committee shall be
appointed annually by the Board, which may at any time and from time to time
remove any members of the Committee, with or without cause, appoint additional
members to the Committee and fill vacancies, however caused, in the Committee.
In the event that no Committee shall have been appointed, the Board shall
serve as the Committee. A majority of the members of the Committee shall con-
stitute a quorum. All determinations of the Committee shall be made by a
majority of its members present at a meeting duly called and held. Any
decision or determination of the Committee reduced to writing and signed by
all of the members of the Committee shall be fully as effective as if it had
been made at a meeting duly called and held.
5. Administration.
Subject to the express provisions of the Plan, the Committee shall have
complete authority, in its discretion, to interpret the Plan, to prescribe,
amend and rescind rules and regulations relating to it, to determine the terms
and provisions of the respective option agreements or certificates (which need
not be identical), to determine the individuals (each a "Participant") to whom
and the times and the prices at which Options shall be granted, the periods
during which each Option shall be exercisable, the number of shares of the
Common Stock to be subject to each Option and whether such Option shall be an
incentive stock option or a non-incentive stock option and to make all other
determinations necessary or advisable for the administration of the Plan. In
making such determinations, the Committee may take into account the nature of
the services rendered by the respective employees and consultants, their
present and potential contributions to the success of the Company and the
Subsidiaries and such other factors as the Committee in its discretion shall
deem relevant. The Committee's determination on the matters referred to in
this Section 5 shall be conclusive. Any dispute or disagreement which may
arise under or as a result of or with respect to any Option shall be
determined by the Committee, in its sole discretion, and any interpretations
by the Committee of the terms of any Option shall be final, binding and
conclusive.
6. Eligibility.
A. An Option may be granted only to (i) an employee or consultant of the
Company or a Subsidiary, (ii) a director of the Company who is not employed by
the Company or any of the Subsidiaries (a "Non-Employee Director") and (iii)
employees of a corporation or other business enterprise which has been
acquired by the Company or a Subsidiary, whether by exchange or purchase of
stock, purchase of assets, merger or reverse merger or otherwise, who hold
options with respect to the stock of such corporation which the Company has
agreed to assume or for which the Company has agreed to provide substitute
options.
2
<PAGE>
B. (i) On August 28, 1996, each Non-Employee Director shall be granted
an Option (a "Non-Employee Director's Formula Option") to purchase 20,000
shares of the Common Stock at the initial per share option price equal to the
fair market value of a share of the Common Stock on the date of grant.
(ii) At the first meeting of the Board immediately following the
annual meeting of the Stockholders of the Company held in 1997, and at the
first meeting of the Board immediately following each subsequent annual
meeting of the Stockholders of the Company, each Non-Employee Director shall
be granted an Option (a "Non-Employee Director's Formula Option") to purchase
10,000 shares of the Common Stock at the initial per share option price equal
to the fair market value of a share of the Common Stock on the date of grant.
(iii) Each Non-Employee Director who becomes a director subsequent
to the adoption date of the Plan, and prior to the date of any annual meeting
of the Shareholders of the Company, shall be granted, on the date he or she
becomes a director, an Option (a "Non-Employee Director's Formula Option") to
purchase the number of shares of the Common Stock equal to the product of (i)
10,000 and (ii) a fraction, the numerator of which is the number of full
calendar months prior to the next scheduled annual meeting of Shareholders and
the denominator of which is 12, at the initial per share option price equal to
the fair market value of a share of the Common Stock on the date of grant.
(iv) A Non-Employee Director may not exercise a Non-Employee
Director's Formula Option during the period commencing on the date of the
granting of such Option to him or her and ending on the day next preceding the
first anniversary of such date. A Non-Employee Director may (i) during the
period commencing on the first anniversary of the date of the granting of a
Non-Employee Director's Formula Option to him or her and ending on the day
next preceding the second anniversary of such date, exercise such Option with
respect to one-fourth of the shares granted thereby, (ii) during the period
commencing on such second anniversary and ending on the day next preceding the
third anniversary of the date of the granting of such Option, exercise such
Option with respect to one-half of the shares granted thereby, (iii) during
the period commencing on such third anniversary and ending on the date next
preceding the fourth anniversary of the date of the granting of such Option,
exercise such Option with respect to three-fourths of the shares granted
thereby and (iv) during the period commencing on such fourth anniversary and
ending on the date of the expiration of such Option, exercise such Option with
respect to all of the shares granted thereby.
7. Option Prices.
A. Except as otherwise provided in Section 17, the initial per share
option price of any Option shall be the price determined by the Committee, but
not less than the fair market value of a share of the Common Stock on the date
of grant; provided, however, that, in the case of a Participant who owns
(within the meaning of Section 424(d) of the Code) more than 10% of the total
3
<PAGE>
combined voting power of the Common Stock at the time an Option which is an
incentive stock option is granted to him or her, the initial per share option
price shall not be less than 110% of the fair market value of a share of the
Common Stock on the date of grant.
B. For all purposes of the Plan, the fair market value of a share of the
Common Stock on any date shall be determined by the Committee as follows:
(i)If the Common Stock is listed on the OTC Electronic Bulletin
Board, its fair market value shall be the closing selling price on such date
for the Common Stock as reported on the OTC Electronic Bulletin Board. If
there are no sales of the Common Stock on that date, then the reported closing
selling price for the Common Stock on the next preceding date for which such
closing selling price is quoted shall be determinative of fair market value;
or,
(ii) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation, the Nasdaq
National Market System or the Nasdaq SmallCap Market System, its fair market
value shall be the reported closing selling price for the Common Stock on the
principal securities exchange or national market system on which the Common
Stock is at such date listed for trading. If there are no sales of Common
Stock on that date, then the reported closing selling price for the Common
Stock on the next preceding day for which such closing selling price is quoted
shall be determinative of fair market value; or,
(iii) If the Common Stock is not traded on the OTC Electronic
Bulletin Board, an exchange, or a national market system, its fair market
value shall be determined in good faith by the Committee, and such
determination shall be conclusive and binding on all persons.
8. Option Term.
Participants shall be granted Options for such term as the Committee
shall determine, not in excess of ten years from the date of the granting
thereof; provided, however, that, except as otherwise provided in Section 17,
in the case of a Participant who owns (within the meaning of Section 424(d) of
the Code) more than 10% of the total combined voting power of the Common Stock
of the Company at the time an Option which is an incentive stock option is
granted to him or her, the term with respect to such Option shall not be in
excess of five years from the date of the granting thereof; provided, further,
however, that the term of each Non-Employee Director's Formula Option shall be
ten years from the date of the granting thereof.
9. Limitations on Amount of Options Granted.
A. Except as otherwise provided in Section 17, the aggregate fair market
value of the shares of the Common Stock for which any Participant may be
4
<PAGE>
granted incentive stock options which are exercisable for the first time in
any calendar year (whether under the terms of the Plan or any other stock
option plan of the Company) shall not exceed $100,000.
B. Except as otherwise provided in Section 17, no Participant shall,
during any fiscal year of the Company, be granted Options to purchase more
than 500,000 shares of the Common Stock.
10. Exercise of Options.
A. Except as otherwise provided in Section 17 and except as otherwise
determined by the Committee at the time of the grant of an Option other than a
Non-Employee Director's Formula Option, a Participant may not exercise an
Option during the period commencing on the date of the granting of such Option
to him or her and ending on the day next preceding the first anniversary of
such date. Except as otherwise set forth in Sections 9A and 17 and in the
preceding sentence, a Participant may (i) during the period commencing on the
first anniversary of the date of the granting of an Option to him or her and
ending on the day next preceding the second anniversary of such date, exercise
such Option with respect to one-fourth of the shares granted thereby, (ii)
during the period commencing on such second anniversary and ending on the day
next preceding the third anniversary of the date of the granting of such
Option, exercise such Option with respect to one-half of the shares granted
thereby, (iii) during the period commencing on such third anniversary and
ending on the date next preceding the fourth anniversary of the date of the
granting of such Option, exercise such Option with respect to three-fourths of
the shares granted thereby and (iv) during the period commencing on such
fourth anniversary and ending on the date of the expiration of such Option,
exercise such Option with respect to all of the shares granted thereby.
B. Except as hereinbefore otherwise set forth, an Option may be
exercised either in whole at any time or in part from time to time.
C. An Option may be exercised only by a written notice of intent to
exercise such Option with respect to a specific number of shares of the Common
Stock and payment to the Company of the amount of the option price for the
number of shares of the Common Stock so specified.
D. Except in the case of a Non-Employee Director's Formula Option, the
Board may, in its discretion, permit any Option to be exercised, in whole or
in part, prior to the time when it would otherwise be exercisable.
E. Notwithstanding any other provision of the Plan to the contrary,
including, but not limited to, the provisions of Section 10D, if any
Participant shall have effected a "Hardship Withdrawal" from a "401(k) Plan"
maintained by the Company and/or one or more of the Subsidiaries, then, during
the period of one year commencing on the date of such Hardship Withdrawal,
such Participant may not exercise any Option. For the purpose of this
5
<PAGE>
paragraph E, a Hardship Withdrawal shall mean a distribution to a Participant
provided for in Reg. Sec. 1.401(k)-1(d)(1)(ii) promulgated under Section
401(k)(2)(B)(i)(iv) of the Code and a 401(k) Plan shall mean a plan which is a
"qualified plan" within the contemplation of section 401(a) of the Code which
contains a "qualified cash or deferred arrangement" within the contemplation
of section 401(k)(2) of the Code.
11. Transferability.
No Option shall be assignable or transferable except by will and/or by
the laws of descent and distribution and, during the life of any Participant,
each Option granted to him or her may be exercised only by him or her.
12. Termination of Employment.
A. In the event a Participant leaves the employ of the Company and the
Subsidiaries or ceases to serve as a consultant to the Company and/or as a
Non-Employee Director of the Company, whether voluntarily or otherwise, each
Option theretofore granted to him or her which shall not have theretofore
expired or otherwise been canceled shall, to the extent not theretofore
exercised, terminate upon the earlier to occur of the expiration of 90 days
after the date of such Participant's termination of employment or service and
the date of termination specified in such Option. Notwithstanding the
foregoing, if a Participant's employment by the Company and the Subsidiaries
or service as a consultant and/or as a Non-Employee Director of the Company is
terminated for "cause" (as defined herein), each Option theretofore granted to
him or her which shall not have theretofore expired or otherwise been
cancelled shall, to the extent not theretofore exercised, terminate forthwith.
B. For purposes of the foregoing, the term "cause" shall mean: (i) the
commission by a Participant of any act or omission that would constitute a
crime under federal, state or equivalent foreign law, (ii) the commission by a
Participant of any act of moral turpitude, (iii) fraud, dishonesty or other
acts or omissions that result in a breach of any fiduciary or other material
duty to the Company and/or the Subsidiaries or (iv) continued alcohol or other
substance abuse that renders a Participant incapable of performing his or her
material duties to the satisfaction of the Company and/or the Subsidiaries.
13. Adjustment of Number of Shares.
A. In the event that a dividend shall be declared upon the Common Stock
payable in shares of the Common Stock, the number of shares of the Common
Stock then subject to any Option and the number of shares of the Common Stock
reserved for issuance in accordance with the provisions of the Plan but not
yet covered by an Option and the number of shares set forth in Sections 6B and
9B shall be adjusted by adding to each share the number of shares which would
6
<PAGE>
be distributable thereon if such shares had been outstanding on the date fixed
for determining the stockholders entitled to receive such stock dividend. In
the event that the outstanding shares of the Common Stock shall be changed
into or exchanged for a different number or kind of shares of stock or other
securities of the Company or of another corporation, whether through
reorganization, recapitalization, stock split-up, combination of shares, sale
of assets, merger or consolidation in which the Company is the surviving
corporation, then, there shall be substituted for each share of the Common
Stock then subject to any Option and for each share of the Common Stock
reserved for issuance in accordance with the provisions of the Plan but not
yet covered by an Option and for each share of the Common Stock referred to in
Sections 6B and 9B, the number and kind of shares of stock or other securities
into which each outstanding share of the Common Stock shall be so changed or
for which each such share shall be exchanged.
B. In the event that there shall be any change, other than as specified
in Section 13, in the number or kind of outstanding shares of the Common
Stock, or of any stock or other securities into which the Common Stock shall
have been changed, or for which it shall have been exchanged, then, if the
Committee shall, in its sole discretion, determine that such change equitably
requires an adjustment in the number or kind of shares then subject to any
Option and the number or kind of shares reserved for issuance in accordance
with the provisions of the Plan but not yet covered by an Option and the
number or kind of shares referred to in Sections 6B and 9B, such adjustment
shall be made by the Committee and shall be effective and binding for all
purposes of the Plan and of each stock option agreement or certificate entered
into in accordance with the provisions of the Plan.
C. In the case of any substitution or adjustment in accordance with the
provisions of this Section 13, the option price in each stock option agreement
or certificate for each share covered thereby prior to such substitution or
adjustment shall be the option price for all shares of stock or other
securities which shall have been substituted for such share or to which such
share shall have been adjusted in accordance with the provisions of this
Section 13.
D. No adjustment or substitution provided for in this Section 13 shall
require the Company to sell a fractional share under any stock option
agreement or certificate.
E. In the event of the dissolution or liquidation of the Company, or a
merger, reorganization or consolidation in which the Company is not the
surviving corporation, then, except as otherwise provided in the second
sentence of Section 13A, each Option, to the extent not theretofore exercised,
shall terminate forthwith.
14. Purchase for Investment, Withholding and Waivers.
A. Unless the shares to be issued upon the exercise of an Option by a
Participant shall be registered prior to the issuance thereof under the
Securities Act of 1933, as amended, such Participant will, as a condition of
7
<PAGE>
the Company's obligation to issue such shares, be required to give a
representation in writing that he or she is acquiring such shares for his or
her own account as an investment and not with a view to, or for sale in
connection with, the distribution of any thereof.
B. In the event of the death of a Participant, a condition of
exercising any Option shall be the delivery to the Company of such tax waivers
and other documents as the Committee shall determine.
C. In the case of each non-incentive stock option, a condition of
exercising the same shall be the entry by the person exercising the same into
such arrangements with the Company with respect to withholding as the
Committee may determine.
15. No Stockholder Status.
Neither any Participant nor his or her legal representatives, legatees or
distributees shall be or be deemed to be the holder of any share of the Common
Stock covered by an Option unless and until a certificate for such share has
been issued. Upon payment of the purchase price thereof, a share issued upon
exercise of an Option shall be fully paid and non-assessable.
16. No Restrictions on Corporate Acts.
Neither the existence of the Plan nor any Option shall in any way affect
the right or power of the Company or its stockholders to make or authorize any
or all adjustments, recapitalizations, reorganizations or other changes in the
Company's capital structure or its business, or any merger or consolidation of
the Company, or any issue of bonds, debentures, preferred or prior preference
stock ahead of or affecting the Common Stock or the rights thereof, or
dissolution or liquidation of the Company, or any sale or transfer of all or
any part of its assets or business, or any other corporate act or proceeding
whether of a similar character or otherwise.
17. Options Granted in Connection With Acquisitions.
In the event that the Committee determines that, in connection with the
acquisition by the Company or a Subsidiary of another corporation which will
become a Subsidiary or division of the Company or a Subsidiary (such
corporation being hereafter referred to as an "Acquired Subsidiary"), Options
may be granted hereunder to employees and other personnel of an Acquired
Subsidiary in exchange for then outstanding options to purchase securities of
the Acquired Subsidiary. Such Options may be granted at such option prices,
may be exercisable immediately or at any time or times either in whole or in
part, and may contain such other provisions not inconsistent with the Plan, or
8
<PAGE>
the requirements set forth in Section 19 that certain amendments to the Plan
be approved by the stockholders of the Company, as the Committee, in its
discretion, shall deem appropriate at the time of the granting of such
Options.
18. No Employment or Service Right.
Neither the existence of the Plan nor the grant of any Option shall
require the Company or any Subsidiary to continue any Participant in the
employ of the Company or such Subsidiary or require the Company to continue
any Participant as a director of the Company.
19. Termination and Amendment of the Plan.
The Board may at any time terminate the Plan or make such modifications
of the Plan as it shall deem advisable; provided, however, that the Board may
not without further approval of the holders of a majority of the shares of the
Common Stock present in person or by proxy at any special or annual meeting of
the stockholders, increase the number of shares as to which Options may be
granted under the Plan (as adjusted in accordance with the provisions of
Section 13), or change the manner of determining the option prices, or extend
the period during which an Option may be granted or exercised; provided,
however, the provisions of the Plan governing the grant of Non-Employee
Director's Formula Options may not be amended except by the vote of a majority
of the members of the Board and by the vote of a majority of the members of
the Board who are employees of the Company or a Subsidiary and shall not be
amended more than once every six months, other than to comport with changes in
the Code, the Employee Retirement Income Security Act of 1974 or the Rules of
the Securities and Exchange Commission promulgated under Section 16 of the
Exchange Act. Except as otherwise provided in Section 13, no termination or
amendment of the Plan may, without the consent of the Participant to whom any
Option shall theretofore have been granted, adversely affect the rights of
such Participant under such Option.
20. Expiration and Termination of the Plan.
The Plan shall terminate on August 27, 2006 or at such earlier time as
the Board may determine. Options may be granted under the Plan at any time
and from time to time prior to its termination. Any Option outstanding under
the Plan at the time of the termination of the Plan shall remain in effect
until such Option shall have been exercised or shall have expired in
accordance with its terms.
9
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from financial
statements for the nine month period ended March 31, 1996 and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-1-1996
<PERIOD-END> MAR-31-1997
<CASH> 4,863,237
<SECURITIES> 0
<RECEIVABLES> 267,870
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,190,244
<PP&E> 408,182
<DEPRECIATION> 222,174
<TOTAL-ASSETS> 5,452,192
<CURRENT-LIABILITIES> 1,464,570
<BONDS> 1,090,506
0
0
<COMMON> 117,540
<OTHER-SE> 2,229,576
<TOTAL-LIABILITY-AND-EQUITY> 5,452,192
<SALES> 22,184
<TOTAL-REVENUES> 640,046
<CGS> 0
<TOTAL-COSTS> 4,040,794
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 301,200
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,525,506)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,525,506)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
