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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 1999
[ ] 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: 000-23145
ZYMETX, INC.
(Name of small business issuer in its charter)
DELAWARE 75-731444040
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
800 RESEARCH PARKWAY, SUITE 100
OKLAHOMA CITY, OKLAHOMA 73104
(Address of principal executive offices) (Zip Code)
(405) 271-1314
(Issuer's telephone number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON
STOCK, $.001 PAR VALUE
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 registrant was required to file such reports), and (2)
has been subject to such filing requirements for at least the past 90 days.
YES [X] NO [ ]
Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.
Issuer's revenues for its most recent fiscal year $544,293.
As of September 22, 1999 the aggregate market value of voting stock
held by non-affiliates of such stock was $13,392,710 (based on the closing price
for the common stock on the Nasdaq National Market System on such date). As of
September 22, 1999 there were 6,696,355 shares of Common Stock, $.001 par value,
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Following is a list of documents incorporated by reference and the Part
of the Form 10-KSB into which the document is incorporated:
The Company's Proxy Statement in connection with its Annual Meeting of
Shareholders to be held on November 17, 1999 is incorporated by
reference in Part III, Items 10, 11 and 12.
Transitional Small Business Disclosure Format (check one):
YES [ ] NO [X]
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ZYMETX, INC.
FORM 10-KSB
For the fiscal year ended June 30, 1999
TABLE OF CONTENTS
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PART I........................................................................ 2
Item 1. Description of Business.............................................. 2
Item 2. Description of Properties............................................ 9
Item 3. Legal Proceedings.................................................... 9
Item 4. Submission of Matters to a Vote of Security Holders.................. 9
PART II....................................................................... 9
Item 5. Market for Common Equity and Related Stockholder Matters............. 9
Item 6. Management's Discussion and Analysis or Plan of Operation............ 10
Item 7. Financial Statements................................................. 15
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................. 15
PART III...................................................................... 16
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.................... 16
Item 13. Exhibits and Reports on Form 8-K..................................... 19
Signatures.................................................................... 21
Index to Financial Statements................................................. F-1
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
ZymeTx, Inc. is a development stage biotechnology company engaged in
the discovery, development and commercialization of unique products for the
diagnosis and treatment of viruses. The scientific foundation for our business
is based upon the role of enzymes in the process of viral infection. Our
strategy is to:
o develop diagnostic and therapeutic products for a range of
viral diseases; and
o earn revenues from marketing ZstatFlu, our first diagnostic
product, continue our diagnostic research and development
program and sustain a comprehensive viral therapeutic research
and development program.
ViraZyme(R), our core technology, exploits the subtle structural
differences and characteristics of enzymes to create viral diagnostic and
therapeutic products. Our diagnostic technology is a proprietary two-part
compound that will split when the compound contacts a specific target site (an
enzyme). As a result of this split, one part of the compound becomes visible to
the naked eye when collected in the testing device, permitting the user to
determine whether the virus targeted by the test is present. For therapeutic
products, we use a modified version of the diagnostic compound that will bind to
a specific enzyme and prevent the enzyme from contributing to the infection
process.
The initial viral targets of our diagnostic products are respiratory
infections including influenza A and influenza B, respiratory syncytial virus
(commonly called RSV), parainfluenza and adenovirus. There are three genera of
influenza virus, A, B, C; A and B are most common to humans, while C rarely
causes significant infection. RSV infects humans, usually children, which is an
important cause of acute respiratory disease. Adenovirus can cause respiratory
disease, keratoconjunctivitis, diarrhea, cystitis and other diseases.
ZymeTx was incorporated under the laws of the State of Delaware in
1994. ViraZyme(R), ViraSTAT(R) and ZstatFlu(TM) are trademarks owned or licensed
by ZymeTx.
ZYMETX TECHNOLOGY
SCIENTIFIC BACKGROUND. Significant advances made in the field of
microbiology in recent years have increased scientists' understanding of cell
biology, disease process and disease progression. These advances have opened the
field of virology to new approaches. Historically, many scientific leaders
believed that enzyme structure is based primarily on the function and not on the
origin of the enzyme. We believe, however, that enzymes are encoded with genes
and possess exploitable differences based upon their origin. The prevailing body
of science, while not in direct conflict with our premise, has maintained that
if such differences in fact exist they would be too insignificant to be
exploited. We have demonstrated the ability to exploit these subtle differences
and to identify enzymes unique to the host virus.
The ViraZyme technology focuses on the development of highly
specific/selective molecules that will interact only with an enzyme of specific
origin (such as viral, mammalian or bacterial). This permits interaction with
one enzyme while preventing activity with a similar enzyme of different origin.
We can identify the fingerprint of critical enzymes and then build molecules
having great preference for only the targeted form of the enzyme. We build such
molecules using a proprietary series and sequence of assays supported by X-ray
crystallography which analyzes the enzyme structure using crystals grown and
analyzed from the enzyme with 3-dimensional computer aided designs, and by
"rational design" which is a method of designing a molecule based upon the
foreknowledge of the desired structural characteristics being sought.
The core of the ViraZyme approach is the identification of essential
target sites of viral enzymes and synthetic production of molecules that have
selective action at an identified target site. We believe that this approach can
be used to develop both diagnostic and therapeutic programs.
VIRAZYME TECHNOLOGY. Virus particles contain proteins essential for the
virus to infect its host. For example, the influenza virus has eight proteins,
several of which function as structural components while others function as
enzymes. Enzymes are biological catalysts that can transform one biochemical
substance into another, specifically and rapidly, without being consumed in the
reaction. Because of the enzyme's location on the virus particle and the
importance of catalytic reactions to the virus' function, such sites would
typically make an attractive target for diagnostic compounds or therapeutic
inhibitors. However, similar enzymes of bacterial and mammalian origin are also
present in the body and are necessary to perform normal and vital cell
functions.
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The ViraZyme technology uses a methodology for discovering the subtle,
origin-dependent differences of enzymes and exploiting such differences through
the use of proprietary substrate and inhibitor molecules specific to viral
enzymes. A substrate is a molecule that is acted upon by an enzyme resulting in
a change to the molecule; an inhibitor is a molecule that is recognized by an
enzyme and locks into that portion of the enzyme that acts upon and changes the
molecule through the action (known as the "active site"), thus reducing the
ability of the enzyme to act upon other molecules.
By introducing a ViraZyme substrate linked to a molecule or compound
capable of absorbing light in the visible spectrum (known as a "chromogen") to a
virus in a clinical specimen, only the targeted viral enzyme will continuously
cleave the chromogen from the substrate, causing a visible color to appear or
causing the molecule's absorption characteristics to be capable of measurement
by an instrument.
The ViraZyme technology utilizes the naturally occurring enzyme to
produce thousands of reactions at the catalytic site while other methods, such
as monoclonal antibodies and gene probes (which are molecules that react with
the genetic material of a cell and detect the presence of the cell by the unique
map of the genetic material) employ secondary reactions which require additional
steps to produce multiple reactions. For therapeutic applications of this
technology, specifically designed inhibitor molecules are administered to a
person infected with a virus to inhibit the natural enzyme activity critical to
the infection process, theoretically stopping the course of the illness.
We select viral diseases other than influenza to be targeted for
commercialization of our products based on the following criteria:
o potential market size;
o the viral disease's incidence, morbidity/mortality;
o the availability of diagnostics and therapeutics; and
o the existence of possible corporate partners.
Developing any additional products will require significant ongoing
research and development and capital resources not currently available to us.
During fiscal 1998 and fiscal 1999, we incurred research and
development expenses of approximately $1.1 million and $1.4 million,
respectively, and in fiscal 1998 acquired in-process technology of approximately
$.2 million, none in fiscal 1999.
ZSTATFLU
BACKGROUND. The first product we developed was ZstatFlu. ZstatFlu
permits physicians to, for the first time, detect the influenza virus directly
from a patient specimen in the physicians' office laboratories. ZstatFlu targets
the amplifying capability of the influenza neuraminidase enzyme which acts upon
neuraminic acid and like compounds. The ViraZyme technology incorporates
patented substrate molecules which react with the influenza neuraminidase enzyme
and allows the presence of the influenza virus to be detected.
These substrate molecules include two parts:
o a "recognition" portion which is a chemical entity capable of
acting with the active site of an enzyme, and which enters
into the catalytic site of the enzyme; and
o a chromogen "reporter" portion which gives a visible signal
after the enzyme has cleaved it from the recognition portion.
A single influenza virus particle contains over 400 neuraminidase
enzyme molecules on its surface. The cavity in this viral enzyme is not present
in the same form as that of neuraminidase of a mammalian or bacterial origin and
is the "catalytic site" or the place where the enzyme causes the reaction to
proceed. The enzyme, when placed in a solution containing the substrate, causes
a cascade of reactions where the "reporter" portion generates a visible color
indicating the presence of the virus.
PRODUCT STATUS. ZstatFlu was cleared by the FDA in September 1997.
During fiscal 1999, we reduced the incubation time for the test from 60 minutes
to 30 minutes. The FDA approved the product as "portable," which allows offices
that are not certified under the Clinical Laboratory Improvement Act of 1988 to
send the patient's specimen to a reference laboratory for analysis.
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In early fiscal 2000 we reduced the test time from 30 minutes to 20 minutes.
This format improved the sensitivity and specificity of the original test and
further reduced the incubation time. In addition, portability of patient
specimens was also maintained. As a result of this improvement, we do not intend
to market the 30-minute format and elected to re-work existing inventory into
the 20-minute format. These cumulative incubation improvements resulted in a
total inventory write-down of $1,341,761 in fiscal 1999.
OTHER CURRENT PRODUCTS CLEARED BY THE FDA
We have a history of successfully gaining FDA clearances; however, we
have chosen not to expend resources to market certain products which we have
developed and there can be no assurance that markets for these products will be
significant or that we will ever market them.
VIRAZYME CULTURE SCREEN. ViraZyme Culture Screen, cleared by the FDA in
June 1996, is a product available to clinical labs, in contrast to the use of
ZstatFlu, which may be used both in physician office laboratories and clinical
labs. We believe the Culture Screen product reduces labor-intensive procedures
in the clinical laboratory, thereby reducing costs.
VIRASTAT PARAINFLUENZA 1, 2 AND 3. ViraSTAT Parainfluenza 1, 2 and 3,
cleared by the FDA in 1995, is the first of a series of clinical lab products we
developed using monoclonal antibody technology. An antibody is a protein
molecule produced by lymphocytes following introduction of a foreign entity and
assists in the elimination of the foreign entity from the body. A monoclonal
antibody is derived from a single B-cell raised against a single localized area
on the molecular surface of a protein, nucleic acid or polysaccharide. These
antibodies are highly specific for a particular part of a macromolecule. This
product has several distinct advantages over time and labor-intensive tests of
other clinical lab products currently available. We intend to develop other
monoclonal antibody-based products for the detection of adenovirus and RSV, and
the influenza A/B products which comprise the respiratory panel.
OTHER DIAGNOSTIC PRODUCTS IN DEVELOPMENT
VIRAZYME INFLUENZA ID A/B. ZstatFlu is designed to accurately detect
the presence of the influenza virus. However, this product does not
differentiate between Type A and Type B influenza. The identification of
influenza as either Type A or Type B is important for segments of the
marketplace which require definitive diagnosis for epidemiological purposes. We
may utilize its proprietary antibodies which target the influenza virus to
create a ViraZyme Influenza ID A/B test which would specifically and rapidly
identify the particular type of influenza present in a specimen should the
market support such a product.
VIRASTAT FITC LABELED MONOCLONAL ANTIBODIES. Our scientific staff has
developed an improved proprietary method for directly labeling monoclonal
antibodies with the commonly used fluorescent dye molecule fluorescein
isothiocynate ("FITC"). Microscopy utilizing fluorescent antibodies represents
the most efficient and currently accepted method employed by clinical
laboratories to culture and identify viruses. Using our improved methods for
directly labeling monoclonal antibodies with fluorescent dye, we developed
labeled monoclonal antibodies for both Type A and Type B influenza. These
antibodies may be marketed separately or in a panel with other monoclonal
antibodies for detection of respiratory viruses. In-house testing of these
monoclonal antibodies comparing them to those commercially available has found
ViraSTAT monoclonal antibodies to be superior. Both influenza Type A and B
monoclonal antibodies were successfully tested separately and as a pool in
clinical studies during the fall of 1996. These monoclonal antibodies will be
submitted for clearance under the FDA 510(k) process.
THERAPEUTIC RESEARCH PROGRAM
INFLUENZA THERAPEUTIC DEVELOPMENT. Historically, we have pursued the
discovery of therapeutic compounds for influenza. However, we are currently
dedicating the resources previously used in influenza therapeutic development to
the enhancement of the ZstatFlu diagnostic product. We will re-examine the
feasibility of our therapeutic program once we determine the sales results of
ZstatFlu in our fiscal 2000 influenza season.
SALES AND MARKETING
PRIMARY CARE MARKET. The principal market for ZstatFlu is physicians'
office laboratories, of which there are an estimated 27,000 certified by CLIA to
run moderately complex tests, such as ZstatFlu. The focus of our sales efforts
for fiscal 2000 is the primary care market and the acute-care/hospital market.
In 1999 we established the National Flu Surveillance Network, or NFSN. The NFSN
is a network of approximately 220 physician laboratories that purchase ZstatFlu
and report influenza outbreak information to us. This network allows us to
rapidly identify influenza outbreaks in communities and inform physicians,
promoting early diagnosis and therapeutic intervention. We also use the
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network's surveillance information for clinical trials of new influenza
therapeutics, and we post summary incidence information on the Internet at
www.fluwatch.com for use by the public.
The availability of in-office diagnostic tests enables the physician to
identify and run additional tests that help establish the basis for a firm
diagnosis and a sound therapeutic decision. We use two approaches to reach this
market:
o direct sales to physicians in outbreak areas identified by the
NFSN; and
o distributor relationships with Bergen Brunswig, McKesson
General Medical, LABSCO, Fischer Scientific and InfoLab.
OVERUSE OF ANTIBIOTICS. It is estimated that 50% of upper respiratory
infections are caused by viruses and not bacterium. Studies have shown that
physicians routinely over-diagnose and treat bacterial infections with
antibiotics. Antibiotics have no affect on viruses and are typically given for
secondary infections. The overuse of antibiotics is the subject of much study
and is cause for elevated professional awareness of bacteria resistant to
antibiotics. The availability of a definitive rapid influenza diagnostic will
allow the physician to properly diagnose influenza and allow for the
administration of a new family of anti-viral therapies.
AVAILABILITY OF INFLUENZA THERAPEUTICS. Historically, the use of
diagnostic testing follows the availability of therapeutic products. In the case
of influenza, disease symptoms resemble those of bacterial infections resulting
in the overuse of antibiotics. We expect that during the fiscal 2000 influenza
season a new family of antiviral therapeutic neuraminidase inhibitors will
become available to treat influenza. Neuraminidase inhibitors are currently
limited to influenza and inhibit viral replication thus slowing the disease
process. In July 1999, the FDA cleared GlaxoWellcome's therapeutic Relenza(TM),
the first of the new family of influenza neurominidase inhibitors, and during
the same month, Roche Laboratories announced that an influenza therapeutic,
TamiFlu(TM) (another neuraminidase inhibitor), would be subject to the FDA's
fast track approval process. We anticipate that the Roche influenza therapeutic
will also be available for the fiscal 2000 influenza season. We believe that the
availability of influenza therapeutics will increase the need for accurate
diagnosis of influenza and contribute to the marketability and awareness of
ZstatFlu.
MANAGED CARE MARKET. For physicians that practice in the managed care
setting, our strategy is to:
o demonstrate a significant savings through accurate diagnosis,
thus significantly reducing unneeded treatment; and
o demonstrate the proper use of anti-viral therapeutics.
We have targeted ZstatFlu to the managed care (HMO/PPO/PPM) segment
where specific controls can be readily put in place for insurers, physicians and
patients that will lead to both improved quality of care and reduced costs for
management of upper respiratory infections.
MANUFACTURING ARRANGEMENTS; SOURCES OF RAW MATERIAL
We have contracted with two manufacturers to produce the chemical
compounds comprising ZstatFlu for the fiscal 2000 influenza season, should
additional product be necessary beyond that presently on-hand. One of the
manufacturers also assembles, packages and ships the product. We may, however,
establish our own production facility located in Oklahoma if production costs
per unit do not increase and the availability of the principal chemical compound
for ZstatFlu does not make outsourcing advantageous relative to our production.
We believe we have adequate quantities of the chemical compounds
necessary for the 1999-2000 influenza season production requirements, and other
material is currently available in quantities and within delivery schedules that
meet our fiscal year requirements.
We have the technical capability with our existing personnel to produce
the chemical for ZstatFlu in the event we establish our own production facility.
Additional technicians, facilities and equipment would be required, however, for
us to conduct our own production operation.
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EUROPEAN AND OTHER FOREIGN MARKETS
Requirements for marketing a diagnostic product in Europe are generally
less stringent than in the U.S. Once an application for marketing clearance is
submitted to the FDA, the product covered by such application may be marketed in
certain European countries. We received clearances to market ZstatFlu in
Switzerland, New Zealand, Canada and Australia. Without specific registration we
can market our diagnostic in the European Union, Hong Kong, Singapore, Mexico
and Middle Eastern countries.
COMPETITION
Competition in our markets is intense. We compete with a large number
of companies ranging from very small businesses to large diagnostic, healthcare,
pharmaceutical, biomedical and chemical companies, many of which have
substantially greater financial, manufacturing, marketing and product research
resources than ZymeTx. Academic institutions, governmental agencies and other
public and private research organizations are also conducting research
activities and may commercialize products on their own or through joint
ventures. We intend to compete primarily on the basis of the clinical utility,
accuracy, speed, ease of use and other performance characteristics of our
products and, to a lesser degree, on the price of our products.
DIAGNOSTICS. Other companies are developing influenza diagnostics which
may compete with our products. The existence of these and other competing
products or procedures that may be developed in the future may adversely affect
the marketability of products which we develop.
Although our existing licensed patent rights cover a broad field of
viral diagnostics, we are aware of the efforts of others to develop diagnostics
for viral disease. Quidel, working with GlaxoWellcome, and Biostar, working
with Biota Holdings, Ltd., have each publicly announced influenza diagnostic
programs. Biostar/Biota began selling their influenza diagnostic in the
1998-1999 influenza season, and Quidel announced the filing of a 510(k) on its
influenza diagnostic in May 1999. We believe the primary methods being used by
these competitors and others to develop such diagnostics are substantially
different than our methods and do not offer the anticipated market advantages of
the ViraZyme system. We cannot assure, however, that we will be successful in
fully developing our products so that such expected marketing advantages will be
realized or that the competitive advantages of products of competitors will not
exceed those of our products.
THERAPEUTICS. GlaxoWellcome's influenza therapeutic received FDA
clearance in July 1999; Roche submitted its influenza therapeutic for FDA
approval in May 1999 and was granted fast track approval which would allow for
clearance in time for the 1999-2000 influenza season; and R.W. Johnson
Pharmaceutical Research Institute and Ortho-McNeil Pharmaceuticals, Inc.,
Johnson & Johnson companies, have an influenza program in later stage clinical
research. Programs underway at GlaxoWellcome, Roche and Johnson & Johnson
involve inhibition of enzymes in a manner similar to our approach. These three
competitors are further advanced in the development of influenza therapeutics
than we are, and may come to the market with a therapeutic product earlier than
we can, which could be a barrier to market acceptance of our product, if
developed.
A therapeutic product developed by GlaxoWellcome, Roche or Johnson &
Johnson will be a strong competitor for any therapeutic which we may develop,
because of the substantially greater resources and marketing capabilities of
these companies. In the event we develop a therapeutic product, we plan to
contract with large pharmaceutical companies. We cannot assure that such a
contract can be secured on terms satisfactory to us, or at all.
Our competitive position will also depend on our ability to attract and
retain qualified scientific and other personnel, develop effective proprietary
products, implement production and marketing plans, obtain patent protection and
obtain adequate capital resources.
INTELLECTUAL PROPERTY
LICENSES FROM OMRF. Oklahoma Medical Research Foundation previously
granted ZymeTx an exclusive, perpetual, worldwide license covering all of the
patents which comprise the ViraZyme technology and all foreign patents and
patent applications corresponding to those patent applications. The issued U.S.
patents covered by that license expire in the U.S. from 2010 to 2013 and relate
to the methods for use of naturally occurring viral enzymes to detect the
presence of a specific virus from a patient specimen with the test yielding a
visible reaction, as well as patents on specific novel compounds, synthesis
pathways and composition of matter. The license grants ZymeTx the perpetual,
exclusive worldwide right to manufacture, have manufactured, use, sell or have
sold, products made under those patent rights. In consideration for the OMRF
license, we: (i) paid OMRF a license fee of $825,000; (ii) executed a note in
the principal amount of $425,000; (iii) granted OMRF a 2.0% royalty on net sales
of products derived from patents held by
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OMRF and covered by the license; (iv) granted to OMRF a warrant to purchase
5,667 shares of ZymeTx common stock at $3.20 per share; and (v) issued to OMRF
165,130 shares of common stock.
Under the terms of the license, we assumed responsibility to pay Biota
a royalty of 4.0% of the revenues derived from sales of diagnostic products
utilizing intellectual property developed during a research collaboration
between Symex Corp. and Biota. We do not believe that the ZstatFlu product
utilizes intellectual property developed during that collaboration and,
therefore, do not believe that a royalty will be due to Biota. However, there
can be no assurance that Biota will not be successful in establishing that a
royalty will be due to Biota. In the event that a royalty is payable, royalty
payments to OMRF will be offset by any royalties payable to Biota. We do not
believe that such obligation to Biota would materially adversely affect our
capitalization or operations.
We believe that the family of compounds we are developing for
therapeutic use are not within the claims of any other company, including
GlaxoWellcome or Roche, who has filed patent applications for certain
therapeutic products based upon the review of patent disclosures made by such
companies.
OTHER PROPRIETARY RIGHTS. In addition to patent rights, we rely on
trade secrets, trademarks and nondisclosure agreements to establish and protect
our proprietary rights. Despite these precautions, it may be possible for
unauthorized third parties to utilize our technology or to obtain and use
information that we regard as proprietary. The laws of some foreign countries do
not protect our proprietary rights in our processes and products to the same
extent as do the laws of the U.S.
We rely substantially on certain technologies which are not patentable
or proprietary and therefore may be available to our competitors. In addition,
many of the processes and much of the know-how of importance to our technology
are dependent upon the skills, knowledge and experience of its scientific and
technical personnel, which are not patentable. To protect our rights in these
areas, we require all employees, significant consultants and advisors, and
collaborators to enter into confidentiality agreements. We cannot assure,
however, that these agreements will provide meaningful protection for our trade
secrets, know-how or other proprietary information in the event of unauthorized
use or disclosure. Further, in the absence of patent protection, we may be
exposed to competitors who independently develop substantially equivalent
technology or otherwise gain access to our trade secrets, knowledge or other
proprietary information. ViraZyme and ViraSTAT are trademarks registered to OMRF
and licensed to ZymeTx under the terms of the OMRF license.
GOVERNMENT REGULATION
The following summarizes principal areas of governmental regulation
which affect ZymeTx and our operations. Any change in governmental regulations
or in the interpretation thereof could have a material adverse effect on us.
REGULATION OF DIAGNOSTIC PRODUCTS. The manufacture, distribution and
sale of any of our products in the U.S. for clinical diagnostic purposes will
require prior authorization by the FDA. The FDA and similar agencies in foreign
countries, especially Japan, have promulgated substantial regulations which
apply to the testing, marketing, export and manufacturing of diagnostic
products. To obtain FDA clearance of a new product for diagnostic purposes, we
will in most cases be required to submit proof of the safety and efficacy of the
product. Such proof typically entails clinical and laboratory tests. The
testing, preparation of necessary applications and processing of those
applications by the FDA is expensive and time consuming.
The clinical testing required by our diagnostic products is expected to
be significantly less extensive than that typically required for the development
of a drug or therapeutic product or for an invasive procedure. Nevertheless,
these clinical testing protocols may take several months or even years to
complete, depending on the nature of the filing. We cannot assure that the FDA
will act favorably or quickly in making its review, and we may encounter
significant difficulties or costs in our effort to obtain FDA clearances that
could delay or preclude us from marketing our products for diagnostic purposes.
Furthermore, we cannot assure that the FDA will not request the development of
additional data following the original submission. Based upon the data submitted
to it, the FDA may also limit the scope of the labeling or permitted use of the
product or deny the application all together. With respect to patented products
or technologies, delays imposed by the governmental approval process may
materially reduce the period during which we will have the exclusive right to
exploit those products or technologies.
The marketability of our diagnostic products may also be affected by
certain state and Federal legislation covering the use of diagnostic tests in
physician offices. CLIA, the Clinical Laboratory Improvement Act of 1988,
established quality standards for all laboratory testing regardless of where the
tests are performed, and requires
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physicians' offices conducting tests with sophisticated instruments or specially
trained personnel to be certified or licensed thereunder.
Our currently contemplated diagnostic products are regulated as medical
devices. Prior to entering commercial distribution, all medical devices must
undergo FDA review under one of two basic review procedures: a Section 510(k)
pre-market notification or a pre-market approval application. A 510(k) is
submitted to demonstrate that the product in question is "substantially
equivalent" to another legally marketed device. In the event any of our
diagnostic products do not qualify for clearance under the 510(k) procedure, we
may be required to file a pre-market approval application which shows: (i) that
the product is safe and effective based on extensive clinical testing among
several diverse testing sites and population groups; and (ii) that the product
has acceptable sensitivity and specificity. Sensitivity is the measure of actual
positives versus the sum of false positives and false negatives in a diagnostic
test. A high value indicates that the test detects even low levels of the
desired target. A low value indicates that detection occurs at higher levels of
infection. Specificity is the measure of actual negatives versus the sum of
actual negatives and false positives in a diagnostic test. A high value
indicates that the test detects only the desired target. A low value is
indicative of detection of similar but not targeted entities. A pre-market
approval application requires much more extensive testing than does the 510(k)
procedure and involves a significantly longer FDA review filing date. In
response to a pre-market approval application, the FDA may grant marketing
clearance, may request additional information, may set restrictive limits on
claims for use or may deny the application all together.
After product clearance has been received, such clearance may still be
withdrawn if compliance with regulatory standards is not maintained or if
problems occur after the product reaches the market. The FDA may require
surveillance programs to monitor the effect of products which have been
commercialized, and can prevent or limit further marketing of the products based
on the results of these post-marketing programs. In addition to obtaining FDA
approval for each product, the FDA must, under the pre-market approval
application guidelines, approve the manufacturing facilities and procedures for
the product. The FDA will also inspect diagnostic companies on a routine basis
for regulatory compliance with Good Manufacturing Procedures ("GMP's"), which is
a set of standards to which the FDA requires adherence in order for an
organization to sell its products to consumers. We believe that the use of our
diagnostic products will not be restricted in physician office laboratories
located within our target markets.
REGULATION BY FOREIGN GOVERNMENTS. Sales of our products outside the
U.S. are also subject to certain regulatory requirements imposed by foreign
governments. Regulatory requirements for diagnostic products vary significantly
from country to country. Regulations in Western Europe, Canada, Australia, Japan
and other developed (non third-world) countries are often less stringent than
are the regulatory requirements in the U.S. The time to meet such regulatory
requirements outside the U.S. may be longer or shorter than that required to
achieve U.S. clearance.
OTHER GOVERNMENT REGULATION. In addition to regulations enforced by the
FDA, we also are or will be subject to regulation under CLIA, the Occupational
Safety and Health Act, the Environmental Protection Act, the Resource
Conservation and Recovery Act and other present and future Federal, state or
local regulations. Our research and development activities involve the
controlled use of hazardous materials, chemicals and viruses. Although we
believe that our safety procedures for handling and disposing of such materials
comply with the standard prescribed by state and Federal regulations, the risk
of accidental contamination or injury from these materials cannot be completely
eliminated. In the event of such an accident, we could be held liable for any
damages that result, and any such liability could exceed our resources.
8
<PAGE> 10
EMPLOYEES
ZymeTx had 29 employees as of September 22, 1999, comprising 12
laboratory personnel, five manufacturing employees, four marketing employees and
eight employees in administration and finance. Ten employees have advanced
degrees (nine Ph.D's and one M.D.) We believe that our relations with our
personnel are excellent. Our future success will depend in large part upon our
continued ability to attract and retain highly skilled and qualified personnel.
Competition for such personnel is intense.
ITEM 2. DESCRIPTION OF PROPERTIES.
We lease approximately 12,000 square feet of laboratory and office
space located at 800 Research Parkway, Suite 100, Oklahoma City, Oklahoma,
pursuant to the terms of a lease with Presbyterian Health Foundation. This lease
expires March 1, 2007, with no rent payable before March 1, 1999; thereafter,
annual rent is payable at the rate of $15.00 per square foot. As additional
consideration for the lease, we issued to Presbyterian warrants to purchase
20,000 shares of our common stock at an exercise price of $3.20 per share. The
Presbyterian lease warrant has a term expiring March 1, 2002. In April 1998 we
signed an amendment to the referenced lease with an effective date of December
1, 1998, with lease payments beginning upon substantial completion of tenant
improvements. The lease rate for additional space occupied will be $12.00 per
square foot. As of September 1999, we had occupied an additional 10,000 square
feet. We believe that the facilities available under the Presbyterian Lease are
in superior condition and, if we take possession of the additional space in
fiscal 2000, that the facilities will be adequate to meet our foreseeable space
requirements.
ITEM 3. LEGAL PROCEEDINGS.
From time to time, we may be involved in litigation relating to claims
arising out of our normal business operation. We do not have any material legal
proceedings pending against it, or any of our properties.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of stockholders during our
fourth quarter of fiscal 1999.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
Our common stock trades on the Nasdaq National Market under the symbol
"ZMTX." The following table shows the high and low closing sales prices per
share for the common stock from October 29, 1997, when the common stock was
first listed on Nasdaq, through June 30, 1999.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
FISCAL 1998
Second Quarter $12.38 $ 8.00
Third Quarter $10.00 $ 3.75
Fourth Quarter $12.63 $ 4.13
FISCAL 1999
First Quarter $ 8.81 $ 3.13
Second Quarter $ 5.38 $ 3.00
Third Quarter $ 5.63 $ 2.19
Fourth Quarter $ 2.81 $ 1.67
</TABLE>
STOCKHOLDERS
As of September 22, 1999, there were 243 holders of record of common
stock according to the records maintained by our transfer agent. As of that
date, we had approximately 2,321 stockholders, including beneficial owners
holding shares in street or nominee names.
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<PAGE> 11
DIVIDENDS
We have not paid dividends on our common stock and do not intend to pay
any dividends in the foreseeable future.
USE OF PROCEEDS OF INITIAL PUBLIC OFFERING
The net proceeds of our initial public offering were approximately
$18,337,000. Since the filing of our Form 10-QSB for the quarterly period ended
September 30, 1997, we have used the balance of such proceeds for the purposes
indicated below:
<TABLE>
<CAPTION>
Direct or indirect payments to
directors, officers, general
partners of the Registrant or their
associates; to persons owning ten
percent or more of any class of
equity securities of the issuer;
and to affiliates of the Registrant
-----------------------------------
<S> <C>
Temporary investments $8,700,000
Inventory $2,234,000
Other expenses $ 265,000
Operating expenses $7,138,000
</TABLE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
From time to time, we may publish forward-looking statements relating
to certain matters, including anticipated financial performance, business
prospects, the progress and goals for our research and development program,
marketing strategies and other similar matters. The Private Securities
Litigation Reform Act of 1995 provides a safe harbor for forward-looking
statements. To comply with the terms of that safe harbor, a variety of factors
could cause our actual results and experience to differ materially from the
anticipated results or other expectations expressed in our forward-looking
statements. In addition, we disclaim any intent or obligation to update those
forward-looking statements.
When used in this discussion, the words "believes," "anticipated" and
similar expressions are intended to identify forward-looking statements. Such
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from those projected. Readers are cautioned
not to place undue reliance on these forward-looking statements that speak only
as of the date hereof. We undertake no obligation to publicly release the result
of any revisions to these forward-looking statements that may be made to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
OVERVIEW
In July 1999, we agreed to return to OMRF the anti-HIV compound
designated ZX-0851 which we had previously licensed after we determined that the
development of ZX-0851 would take longer than originally planned. In
consideration of the return of the compound, OMRF has agreed in principle to
reimburse us for the license fee paid by ZymeTx in connection with the use and
development of such compound, and certain other expenses. For further discussion
see "Note 4 - Related Party Transactions" in Notes to the Financial Statements.
In June 1999, we announced that we had entered into a strategic
partnership with Research Clinical Services, a clinical trial decision support
company that assists companies in accelerating the clinical development process.
In May 1999, we announced two research study results. The first
independent study conducted by researchers at two major medical centers,
Vanderbilt Medical Center and Baylor College of Medicine, had concluded that
using ZstatFlu in the emergency room can save money, eliminate unneeded medical
tests and reduce the time a patient spends in the emergency room. The second
study conducted by a large family practice indicated that ZstatFlu is
substantially more accurate in diagnosing influenza than the physician's
clinical judgement, which is based on symptoms, exam and blood test.
In February 1999, the Board of Directors adopted a rights plan designed
to protect the long-term interest of ZymeTx and its stockholders in the event of
an unsolicited takeover attempt.
10
<PAGE> 12
In December 1998, we formed the National Flu Surveillance Network at
the International Symposium on Influenza and Respiratory Viruses, the first
network to track and monitor outbreaks of all known strains of influenza in
virtual real-time.
In September 1998, we received FDA clearance for two improvements to
ZstatFlu. The time required to obtain the test result was cut in half, from 60
to 30 minutes, significantly enhancing the product's ease of use at the
point-of-care. In addition, the sample stability has been extended to 30 hours
from the time the sample is obtained. This stability clearance makes the product
highly portable, allowing any physician, including those without on-site CLIA
certified moderately complex office labs, to benefit from use of the test.
RESULTS OF OPERATIONS
PRODUCT SALES. Since inception ZymeTx has been a development stage
company engaged primarily in research and product development activities, and
has not generated significant revenues. We began shipping ZstatFlu to
distributors late in the second quarter of fiscal 1998. The distribution
agreements contain right of return provisions for product meeting certain
requirements. Inasmuch as we cannot presently estimate the amount of future
returns, merchandise shipped to and held by the distributors is not reported as
revenue until it is shipped from the distributors' warehouses to the end users.
We had revenues of $544,000 and $52,000 in 1999 and 1998, respectively.
In 1999 revenues consisted mainly of ZstatFlu sales from orders resulting from
the national influenza surveillance program and other sales activity initiated
during the North American influenza season.
We intend to market ZstatFlu during fiscal 2000 through direct
marketing to the point of care, acute care and hospital markets. Additional
distributors have been added that increase the product distribution channels to
the hospital and laboratory markets.
RESEARCH AND DEVELOPMENT. Research and development spending for fiscal
1999 and 1998 totaled $1.4 million and $1.1 million respectively. Increases in
research spending consisted of the hiring of additional research staff,
additional contract research and other laboratory operating expenses.
PRODUCT DEVELOPMENT. Product development costs were expended in the
manufacturing processes for the production of ZstatFlu, totaling $ 1.6 million
for each of fiscal 1999 and 1998. These costs were incurred for ZstatFlu
scale-up manufacturing processes, technology transfer and the development of
improved diagnostic delivery platforms. Product development expenditures
consisted of improvements in sensitivity of ZstatFlu, manufacturing process
issues and chemical process improvements.
INVENTORY WRITE-DOWN. Inventory write-downs totaled $1.3 million for
fiscal year 1999. The write-downs were primarily due to improvements in ZstatFlu
incubation times from one hour to twenty minutes and other qualitative test
improvements. The improvements required write-downs of obsolete materials,
additional labor costs for reworking kit components, repackaging costs, and
additional quality assurance costs.
SALES AND MARKETING. Sales and marketing expenses totaled $3.1 and $1.2
million for fiscal 1999 and 1998 respectively. The expenditures were for
increased ZstatFlu marketing and product samples sent to physicians for our
sample program and promotional expenses relating to the ZstatFlu sales efforts.
Additionally, a contract sales organization was employed to promote ZstatFlu to
physicians in fiscal 1999. The total cost of the contract was $1.3 million. It
is not anticipated that a contract sales organization will be used in fiscal
2000.
GENERAL AND ADMINISTRATIVE. General and administrative costs totaled
$2.0 million for fiscal 1999 compared with $1.4 million in fiscal 1998. The
increase was principally due to increased staff levels in accounting and finance
and the medical department. Additional costs were also incurred to support our
efforts in such areas as contract labor and legal patent costs.
OTHER INCOME (EXPENSE). Interest and dividend income for fiscal 1999
totaled $.7 million compared with $.8 million for fiscal 1998. The decrease is
due to decreases in short term cash investments resulting from our use of funds
for operating expenses.
LIQUIDITY AND CAPITAL RESOURCES. We have relied principally on equity
financing to fund our operations and capital expenditures. Working capital at
June 30, 1999, was $9.6 million compared to $20.1 million at June 30, 1998. The
decrease in working capital is primarily due to the net loss for fiscal 1999
totaling $8.6 million. We believe that
11
<PAGE> 13
liquidity is adequate to meet the cash requirements for fiscal 2000 due to cost
reductions already affected in research and development, product development and
sales and marketing.
We believe that additional financing may be required to meet the
planned operating needs beyond fiscal year 2000 if significant positive cash
flows are not generated from commercial activities on a timely basis. Such needs
would include the expenditure of substantial funds to continue and expand
research and development activities, conduct existing and planned pre-clinical
studies and human clinical trials and to support the increasing working capital
requirements of a growing commercial infrastructure including manufacturing,
sales and marketing. As a result, we anticipate pursuing various financing
alternatives such as collaborative arrangements and additional public offerings
or private placements of our securities. If such alternatives are not available,
we may be required to defer or restrict certain commercial activities, delay or
eliminate expenditures for certain of our potential products under development
or to license third parties to commercialize products or technologies that we
would otherwise seek to develop or commercialize in-house.
We have an outstanding note relating to a license of intellectual
property from OMRF. In consideration of the termination of the HIV license in
July, 1999, we have reached an agreement in principle with OMRF to reduce the
outstanding balance of our note payable to reflect OMRF's reimbursement of the
license fee and other specific expenses and re-amortize the remaining face
amount of the note totaling $215,258 over the same term and interest rate of the
original note. The new terms will require fully amortized quarterly principal
and interest payments beginning November 15, 1999 of $16,753 and continuing
thereafter until the note is repaid in full.
Manufacturing expenses for ZstatFlu will depend on market acceptance of
the product. We currently have adequate substrate (the essential chemical
compound for our principal diagnostic product) on hand to manufacture an
additional 4,000,000 units. We also have an adequate number of kit components on
hand to assemble 500,000 diagnostic kits to further augment finished goods
inventory. Thus, no significant expenditures are expected in fiscal 2000 in
order to meet anticipated sales levels.
As of June 30, 1999, we had Federal and state income tax net operating
loss carryforward of approximately $13.9 million, which expires between 2010 and
2014. We also had Federal and state research tax credit carryforward of
approximately $408,000. The Federal credits expire between 2012 and 2014; the
state credits have no expiration date.
IMPACT OF INFLATION AND CHANGING PRICES
Though not significant, inflation continues to cause increases in
product, occupancy and operating expenses, as well as the cost of acquiring
capital assets. The effect of higher costs is minimized by achieving operating
efficiencies and passing vendor price increases along to consumers.
FACTORS AFFECTING OPERATIONS
The following is a discussion of factors that we believe could have an
impact on future operations and financial performance:
HISTORY OF OPERATING LOSSES; WORKING CAPITAL NEEDS. For fiscal 1998 and
fiscal 1999, we incurred net losses of $4.6 million and $8.6 million
respectively. As of June 30, 1999, our working capital was $9.6 million. We
believe that our existing working capital will meet our needs for at least the
next 12 months and we have implemented cost reductions in an effort to preserve
our working capital. In fiscal 2000, we expect a significant reduction in
research and development and product development costs due, in part, to a
reduction in employees in first quarter fiscal 2000. It is anticipated that the
remaining resources will be dedicated to the enhancement of the ZstatFlu
diagnostic product.
We will examine the feasibility of our therapeutic program once sales
results of our fiscal 2000 influenza season have been determined. We believe the
introduction of influenza therapeutics by other pharmaceutical companies will
enhance the sales of ZstatFlu for the fiscal 2000 influenza season; however, if
sales do not exceed the level of $544,000 from fiscal 1999, we will likely
require additional working capital to sustain operations beyond calendar 2000.
If at that time additional working capital is required, we cannot assure that
financing will be available on terms satisfactory to us, or that such financing
will be available at all. Additionally, our ability to conduct research and
development beyond that planned for fiscal 2000 will be dependent on our ability
to generate cash flow from operations adequate to finance these activities. The
lack of adequate capital resources to conduct research and development could
limit our ability to introduce new products or make improvements in our existing
product line.
TECHNOLOGY AND COMPETITION. The viral diagnostic and therapeutic field
is rapidly evolving, and the pace of technological advancement is expected to
continue. Rapid technological development may result in our products becoming
obsolete before we recoup a significant portion of related research, development
and commercialization
12
<PAGE> 14
expenses. Quidel and Biostar each have introduced influenza diagnostic products
during 1999 that compete directly with ZstatFlu.
NO ASSURANCE OF MARKET ACCEPTANCE. There can be no assurance that
ZstatFlu or other diagnostic products will achieve market acceptance during the
next influenza season, which is not expected to commence until the second or
third quarter of fiscal 2000. During the 1998-1999 influenza season we had
limited success in realizing sales of that product, due principally to the lack
of therapeutic products to treat influenza. In addition, there can be no
assurance that any of our other potential products, if approved or cleared by
the FDA, will achieve market acceptance. The degree of market acceptance of our
products will depend upon a number of factors, including the receipt and timing
of regulatory approvals or clearances of companion therapeutic products, the
availability of third-party reimbursement and the establishment and
demonstration in the medical community of the clinical safety, efficacy and
cost-effectiveness of our products and their advantages over existing
technologies and products. We cannot assure we will be able to successfully
market our potential products even if such products perform successfully in
clinical trials. Furthermore, we cannot assure that physicians or the medical
community in general will accept and utilize ZstatFlu or any other products
currently cleared or under development by ZymeTx.
NO ASSURANCE OF SUCCESSFUL OR TIMELY DEVELOPMENT OF THE COMPANY'S
THERAPEUTIC OR OTHER DIAGNOSTIC PRODUCTS. Our business strategy involves the
discovery and development of products in addition to our currently FDA cleared
diagnostic products, particularly therapeutic products. These products are in
early stages of research and development and further research, development and
extensive testing will be required to determine their technical feasibility and
commercial viability. Until the development process for these products is
complete, we cannot assure that such products will perform in the manner we
anticipate, be commercially viable or even if commercially viable, that such
products will receive FDA clearance. We may experience delays in the commercial
introduction of these products, and such delays could be significant. The
proposed development schedules for our other diagnostic and therapeutic products
may be affected by a variety of factors, many of which will not be within our
control, including technological difficulties, proprietary technology of others,
possible changes in government regulation and the availability of funding
sources. Any delay in the development, introduction and marketing of our
products could result either in such products being marketed at a time when
their cost and performance characteristics would not be competitive in the
marketplace or in the shortening of their commercial lives. For fiscal 2000, we
will be concentrating our efforts on completing developments of improvements to
ZstatFlu. We plan to devote greater efforts to the development of our
therapeutic and other diagnostic products in fiscal 2001 and beyond if capital
resources are available to justify expenditures for those products.
NO MANUFACTURING CAPABILITY; RELIANCE ON THIRD-PARTY MANUFACTURERS. We
have limited experience in product manufacturing and currently have no facility
capable of manufacturing products on the scale necessary for adequate market
penetration. Because we do not currently have a manufacturing facility, we have
engaged third-party manufacturers to produce finished units of ZstatFlu. Delays
by third-party manufacturers in delivering finished products in time for future
influenza seasons could have a material adverse effect on ZymeTx.
LIMITATIONS ON PROTECTION OF INTELLECTUAL PROPERTY. Our success will
depend, in part, on our ability to obtain patents and license patent rights, to
maintain trade secret protection and to operate without infringing on the rights
of other patent holders. The patent position of biotechnology firms for such
types of patents generally is highly uncertain and involves complex legal and
factual issues. Certain of our competitors may have filed applications for or
have been issued patents and may obtain additional patents and other proprietary
rights relating to virus substrates, chromogens, inhibitors or processes
competitive with our patents. The ultimate scope and validity of such patents
are presently unknown. If the courts uphold existing or future patents obtained
by competitors as valid, we may be required to obtain licenses from such
competitors. The extent to which such licenses will be available to us and the
costs thereof cannot currently be determined.
GOVERNMENT REGULATION. Regulation by Federal, state, local and foreign
governmental authorities of our research and development activities, as well as
the use and sale of our products at such time as they are commercially viable,
is currently, and is expected to remain, significant. The introduction of our
products is governed by strict FDA rules and regulations. Our diagnostic
products are governed by FDA 510(k) application requiring a clinical trial that
compares our products to a certain standard or to a prior cleared methodology.
The testing, manufacturing, labeling, distribution, marketing and advertising of
therapeutic products are subject to extensive regulation by governmental
regulatory authorities in the U.S. and other countries. The FDA and comparable
agencies in foreign countries impose substantial requirements on the
introduction of new pharmaceutical products through lengthy and detailed
clinical testing procedures and other costly and time-consuming compliance
procedures. Our therapeutic compounds will require substantial clinical trials
and FDA review as new drugs and such products are in the discovery stage of
development, requiring significant further research, development, clinical
testing and regulatory clearances. Due to the extended testing and regulatory
review process required for therapeutic products before marketing clearance can
be obtained, we
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<PAGE> 15
do not expect to be able to commercialize any therapeutic drug for at least
several years, either directly or through any potential corporate partners or
licensees. A delay in obtaining or failure to obtain such approvals could have a
material adverse effect on our business and results of operations. ZymeTx and
its third-party manufacturers are subject to GMPs regulations promulgated by the
FDA. The FDA will also inspect our manufacturing facilities and the facilities
of our third-party manufacturers on a routine basis for regulatory compliance
with GMP regulations. Although our employees have experience with GMP protocols,
there can be no assurance that we or our third-party manufacturers can satisfy
these requirements. We would not be allowed to manufacture our approved or
cleared products in the event such GMP protocols could not be met.
MANAGEMENT OF GROWTH AND INCREASING PRODUCTION REQUIREMENTS. Our
success will depend on our ability to expand and manage our operations and
facilities. There can be no assurance that we will be able to manage our growth,
meet the staffing requirements of manufacturing scale-up or for current or
additional collaborative relationships or successfully assimilate and train our
new employees. In addition, to manage our growth effectively, we will be
required to expand our management base and enhance our operating and financial
systems. If we continue to grow, there can be no assurance that the management
skills and systems currently in place will be adequate or that we will be able
to manage any additional growth effectively. Failure to achieve any of these
goals could have a material adverse effect on our business, financial condition
or results of operations.
PRODUCT LIABILITY AND INSURANCE. The testing, marketing and sale of
therapeutic products and, to a lesser degree, diagnostic products, entails an
inherent risk of adverse effects and/or medical complications to patients and,
as a result, product liability claims may be asserted against us. A product
liability claim or product recall could have a material adverse effect on our
financial condition. We have secured limited product liability insurance in the
aggregate amount of $11.0 million for products that we market. There can be no
assurance that liability will not exceed the insured amount. In the event of a
successful suit against us, insufficient insurance or lack of insurance would
have a material adverse effect on us.
UNCERTAINTIES RELATING TO CLINICAL TRIALS. We must demonstrate through
preclinical studies and clinical trials that our proposed therapeutic products
are safe and effective for use in each target indication before we can obtain
regulatory approvals for the commercial sale of those products. These studies
and trials may be very costly and time-consuming. The rate of completion of
clinical trials for either diagnostic or therapeutic products is dependent upon,
among other factors, the rate of enrollment of patients. Failure to enroll an
adequate number of clinical patients during the appropriate season could cause
significant delays and increased costs. The cost to conduct human clinical
trials for any potential product can vary dramatically based on a number of
factors, including whether the product is a diagnostic or a therapeutic product,
the order and timing of clinical indications pursued and the extent of
development and financial support, if any, from corporate partners.
GENERAL DESCRIPTION OF THE YEAR 2000 ISSUE AND THE NATURE AND EFFECTS OF THE
YEAR 2000 ON INFORMATION TECHNOLOGY (IT) AND NON-IT SYSTEMS (NON-IT)
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of our
computer programs or hardware that have date-sensitive software or embedded
chips may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities.
We are continuing to assess our software and hardware systems to
evaluate if they will properly utilize dates beyond December 31, 1999. We
believe that no significant modifications or replacements of existing software
or hardware will be necessary to address the Year 2000 issue.
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<PAGE> 16
Our plan to resolve the Year 2000 issue has involved the following four
phases: assessment, remediation, testing, and implementation. To date we have
completed 100% of its assessment of all systems (IT and non-IT) that could be
significantly affected by the Year 2000. We are currently implementing a new
integrated accounting and financial reporting system which is Year 2000
compliant. This implementation is expected to be completed by October 31, 1999.
We have determined that our primary product line will not require remediation to
be Year 2000 compliant. Accordingly, we believe that Year 2000 does not present
a material exposure as it relates to our products. We are gathering information
about the Year 2000 compliance status of our significant suppliers and
subcontractors and continue to monitor their compliance.
NATURE AND LEVEL OF IMPORTANCE OF THIRD PARTIES AND THEIR EXPOSURE TO THE
YEAR 2000
We currently have no system interfaces directly with our significant
third-party vendors. We are in the process of querying our significant suppliers
and subcontractors that do not share information systems with us (external
agents). To date, we are not aware of any external agent with a Year 2000 issue
that would materially impact our results of operations, liquidity, or capital
resources. However, we have no means of ensuring that external agent will be
Year 2000 ready. The inability of external agents to complete their Year 2000
resolution process in a timely fashion could materially impact us. The effect of
non-compliance by external agents is not determinable.
We have and will utilize both internal and external resources to
reprogram, or replace, test, and implement any software and operating equipment
for Year 2000 modifications. Due to our growth, scale up of product
manufacturing and increased accounting transactions since inception, the
accounting software was scheduled to be replaced in fiscal year 1999.
Accordingly, the costs of the accounting software will be capitalized. The total
cost to replace the accounting software and determine the Year 2000 projects
effect on operating equipment is estimated to be less than $100,000.
Our management believes we have an effective program in place to
resolve the Year 2000 issue in a timely manner. As noted above, we have not yet
completed all necessary phases of the Year 2000 program. In the event we do not
complete any additional phases, ZymeTx or its external agents may be unable to
process customer orders, manufacture and ship product, invoice customers or
collect payments. In addition, disruptions in the economy generally resulting
from Year 2000 issues could also materially adversely affect us. The amount of
potential liability and lost revenue cannot be reasonably estimated at this
time.
We anticipate maintaining a sufficient inventory of raw material and
packaged, salable product at a number of distributors, adequate to overcome in a
reasonable period of time, any Year 2000 difficulty encountered by our raw
material manufacturer with respect to production for the 2000-2001 influenza
season. We believe that we will have adequate time to address our third-party
suppliers' and distributors' Year 2000 issues in advance of the 2000-2001
influenza season.
ITEM 7. FINANCIAL STATEMENTS.
The financial statements required by this Item are set forth beginning
on page F-l hereof.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
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<PAGE> 17
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The executive officers, scientific advisory board and clinical advisory
board of ZymeTx are as follows:
EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
NAME AGE TITLE
---- --- -----
<S> <C> <C>
Norman R. Proulx 52 President, Chief Executive Officer and
Director
Craig D. Shimasaki, Ph.D. 43 Vice President of Research
G. Carl Gibson 40 Vice President, Controller, Secretary,
Treasurer
Robert J. Hudson, M.D. 60 Vice President, Medical and Marketing
</TABLE>
Norman Proulx has served as a member of the Board of Directors since
June 1999, and as President and Chief Executive Officer since August 1999. Mr.
Proulx previously served as the Managing Director of Spencer Trask Securities
Incorporated, a private equity investment firm. From 1990 to 1996, he served as
President and Chief Executive Officer of Seymour Housewares Corporation. From
1984 to 1990 he served as President of Wilkinson Sword Limited. From 1978 to
1984 he served first as the Chief Financial Officer, then as General Manager
United States for Scripto/Wilkinson Sword. Mr. Proulx received his B.S. degree
from Boston College.
Craig D. Shimasaki, Ph.D., has served as Vice President of Research
since 1996. From 1993 to 1996 he was employed by OMRF as Visiting Research
Scientist. From 1987 until 1993, he served as Executive Director of Research and
Department Head of Biochemistry of Symex. From 1983 to 1987 he worked at
Genentech, Inc. as a research associate on the purification, characterization
and epitope mapping of its gp120 AIDS vaccine. Dr. Shimasaki established the
ZymeTx Biochemistry Department and co-developed and implemented a GMP
manufacturing documentation system and manufacturing area. He has developed and
optimized fluorescent antibody coupling procedures which have resulted in the
investigational ViraSTAT parainfluenza MAb kit. His work includes the
co-development of the format of the ViraZyme assay. He is a co-inventor of the
patent for the method of the ViraZyme influenza viral detection in clinical
specimens. Dr. Shimasaki received his B.S. in Biochemistry from the University
of California at Davis and his Ph.D. in Molecular Biology and Biotechnology from
the University of Tulsa.
G. Carl Gibson has served as Vice President, Controller, Treasurer and
Secretary since 1997. From 1989 to 1997, he was the Chief Operating Officer of
First Commercial Bank, Oklahoma. From 1985 to 1989 he was the Chief Financial
Officer at Citizens Bank, Oklahoma. Mr. Gibson received his B.A. in Accounting
from the University of Oklahoma and is a Certified Public Accountant.
Robert J. Hudson, M.D., has served as Medical Director since 1997 and
was elected as Vice President of Medical and Marketing in October 1999. He
trained in Pediatrics with a focus on infectious disease at the University of
Texas Southwestern Medical School. He had a clinical practice and teaching
appointments for 20 years. In 1989 he entered the Managed Care arena full-time
and most recently as the Chief Medical Officer of MetraHealth/United Healthcare.
He comes to ZymeTx, Inc. from his own consulting firm after completing projects
for General Electric, Healthsource and Community Care of Oklahoma.
CHAIRMAN OF THE BOARD OF DIRECTORS
James R. Tolbert III has served as Chairman of the Board of Directors
since June 1999. Mr.Tolbert is Chairman and President of First Oklahoma
Corporation, a company that manages a diversified real estate portfolio and
distributes insurance and investment products through regional banks. Mr.
Tolbert is a member of the Board of Trustees of the Presbyterian Health
Foundation and Chairman of the Dean A. McGee Eye Institute, both in Oklahoma
City. He is also a member of the Board of Directors of Sun Healthcare Group,
Inc.
SCIENTIFIC ADVISORY BOARD
ZymeTx established a Scientific Advisory Board to assist in our
research direction and augment the quality of science we conduct. These members
have expertise in the fields of human viral diseases, protein chemistry,
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<PAGE> 18
transcription and translation, clinical and laboratory virology, infectious
disease, oncology and pediatric medicine. The Scientific Advisory Board consults
with management and key scientific employees of ZymeTx to assist in identifying
scientific and product development opportunities, review the progress of
specific projects, and help recruit and evaluate our scientific staff. The
nature, scope and frequency of consultations between management and each
scientific advisor may vary depending upon our current activities, the need for
specific assistance and the individual scientific advisor.
The Scientific Advisory Board is comprised of:
Ronald C. Conaway, Ph.D., is a Member of the Program in Molecular and
Cell Biology at OMRF. His research is focused on mechanisms of transcriptional
regulation, the relationship between transcription factors, tumor suppressors,
and human disease, and he has published extensively on these topics. Dr. Conaway
is a consulting editor of the Journal Biochemistry and a member of the Editorial
Board of the Journal of Biological Chemistry. In 1997, Dr. Conaway received the
American Society for Biochemistry and is also a recipient of the Molecular
Biology Amgen Award.
Joan W. Conaway, Ph.D., is a Member in the Program in Molecular and
Cell Biology at OMRF and an Associate Investigator of the Howard Hughes Medical
Institute. She received her A.B. in Chemistry and Biology from Bryn Mawr College
in 1978 and her Ph.D. in 1987 for work done in the laboratory of Dr. Roger
Kornberg in the Department of Cell Biology, Stanford University School of
Medicine. She was a post-doctoral fellow at the DNAX Research Institute for
Molecular and Cellular Biology. She and her collaborator, Dr. Ronald C. Conaway,
moved to OMRF in 1989. In 1997, the Conaways jointly received the ASBMB-Amgen
Prize for their research on mechanisms of transcription initiation and
elongation by RNA polymerase II and on the mechanism of action of the von
Hippel-Lindau tumor suppressor.
J. Vernon Knight, M.D., received his M.D. degree from Harvard Medical
School in 1943 and later, he joined the faculty at Cornell University Medical
School and Vanderbilt Medical School. Subsequently, he served as Clinical
Director of the National Institute of Allergy and Infectious Diseases in
Bethesda, Maryland. Dr. Knight has been at the Baylor College of Medicine since
1966 and has served as Chairman of the Department of Microbiology and
Immunology, and Director of the Department of the Center for Biotechnology. He
is now Acting Chairman of the Department of Molecular Physiology and Biophysics
and Professor of the Department of Medicine at Baylor. He is the author of more
than 200 articles in scientific journals, primarily on the subject of virus
diseases. Dr. Knight has also served as a member of the ZymeTx Board of
Directors since 1996.
Gilbert M. Schiff, M.D., is currently the Associate Chairman for the
Department of Pediatrics and Director of the Gamble Program, Division of
Infectious Diseases at the Children's Hospital Medical Center in Cincinnati,
Ohio and Professor of Medicine and Pediatrics at University of Cincinnati
College of Medicine. He received his M.D. from the University of Cincinnati in
1957, and completed his residency in internal medicine at the University of
Iowa. He later served with the U.S. Public Health Service, and held positions at
the Centers for Disease Control, Atlanta, Georgia, and the National Institutes
of Health, Bethesda, Maryland. In 1974, he became President of the James N.
Gamble Institute of Medical Research. His scientific contributions are best
known in the area of development and evaluation of rubella vaccines, as well as
in the prevention and treatment of viral diseases. Dr. Schiff is currently the
Principal Investigator of the Vaccine, Treatment, and Evaluation Unit in
Cincinnati, which is one of five NIH-designated centers for vaccine and
antiviral evaluations in the U.S. He has served as a member of the ZymeTx Board
of Directors since 1994.
Jordan J.N. Tang, Ph.D., is currently Member and Head of the Protein
Studies Program at OMRF where he also occupies the J. G. Peuterbough Chair of
Medical Research. He is also an OMRF Professor of Biochemistry and Molecular
Biology at the University of Oklahoma Health Sciences Center. Dr. Tang is known
for his pioneering research in the field of the aspartic proteases, the
discovery of human gastricsin, and first to determine the amino acid sequence of
pepsin in 1971. His work in the active-site structure and catalytic mechanism of
pepsin paved the way to the understanding of this group of enzymes including the
discovery of a major principle now successfully used to develop HIV protease
inhibitor drugs. Dr. Tang has published approximately 200 papers. Among his
professional honors are: John Simon Guggenheim Fellowship, and NIH Career Award,
NIH Study Physiological Chemistry Study Section and AIDS Study Section, Journal
of Biological Chemistry Editorial Board, Honorary Professor of Chinese Academy
of Science, Beijing Institute of Microbiology and International Advisor to the
Chinese Academy of Science, Shanghai Institute of Biochemistry and Molecular
Biology.
William G. Thurman, M.D., is currently President Emeritus of OMRF. He
received his M.D. from the McGill School of Medicine at Montreal, Quebec and
later served as professor at various Schools of Medicine including Tulane
University, Emory University, Cornell University and the University of Virginia.
He served as Dean at Tulane University School of Medicine from 1973 until 1975
when he became Provost and Vice President for Medical Affairs at
17
<PAGE> 19
the University of Oklahoma Health Sciences Center ("OUHSC"). He continues to
practice medicine as a Pediatric Hematologist/Oncologist. Dr. Thurman has been a
member of the ZymeTx Board of Directors since 1997.
CLINICAL ADVISORY BOARD
We established our Clinical Advisory Board to provide leadership and
credibility to ZymeTx by suggesting product design, application refinement,
clinical studies, industry contacts and future direction for the relationship of
our products to the needs of practicing physicians. Each member named below
brings at least two major experience and skill sets as well as industry presence
to the group:
<TABLE>
<CAPTION>
NAME CURRENT POSITION EXPERTISE/AREA OF INTEREST
- ---- ---------------- --------------------------
<S> <C> <C>
Gail Demmler, M.D. Director, Diagnostic Virology, Associate Pediatric diseases
Professor of Pediatric and Pathology, Texas
Children's Hospital, Baylor College of
Medicine
Heinz Eichenwald, M.D. William Buchanan Professor of Pediatrics, Pediatric infectious diseases;
University of Texas Southwestern Medical consultant to health
School organizations; active in World
Health Organization
Gregory Gahm, M.D. Practicing Geriatrician, faculty member, Nursing home medical director;
University of Colorado clinical investigator;
guidelines consultant
Paul Glezen, M.D. Professor, Department of Microbiology and Viral respiratory diseases and
Immunology, Pediatrics, Head of Preventive vaccines, particularly
Medicine, Baylor University influenza
Tom Halipin, M.D. Pediatrics, Epidemiology former Chief Pediatrics and Epidemiology
Division of Preventive Medicine, Ohio
Department of Health, President, Council of
State and Territorial Epidemiologists
Michael Hendry, D.Sc. Chief of Respiratory, AIDS and Support Viral diagnostics
Section, Viral and Rickettsial Disease
Laboratory, California Department of Health
Services
David James, M.D. Family Practice 3 years of clinical trial
experience
Steven R. Mostow, M.D. Chairman, Department of Medicine, Rose Designer of "Denver Model"
Medical Center, University of Colorado community coalition for
influenza vaccine
Gilbert M. Schiff, M.D. President, Gamble Institute for Medical Viral clinical investigator,
Research infection control
Seth Wright, M.D. Associate Professor of Emergency Medicine,
Vanderbilt University Medical Center
</TABLE>
In accordance with General Instruction E(3), a presentation of
information required in response to Items 10, 11 and 12 shall appear in our
definitive proxy statement to be filed pursuant to Regulation 14A within 120
days of the year end covered hereby, and shall be incorporated herein when
filed.
18
<PAGE> 20
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS. The exhibits listed below are included with this report.
All employment contracts and compensatory plans or arrangements are marked with
an asterisk (*).
<TABLE>
<CAPTION>
Exhibit
Number Name of Exhibit
- ------ ---------------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation, incorporated
herein by reference to Exhibit 3.1 to the Form SB-2 Registration
Statement No. 333-33563 (the "Registration Statement").
3.2 Amended and Restated Bylaws, incorporated herein by reference to
Exhibit 3.2 to the Registration Statement.
4.1 Specimen Certificate of Common Stock, incorporated herein by
reference to Exhibit 4.1 to the Registration Statement.
4.2 Form of Warrant Agreement between ZymeTx and Capital West
Securities, Inc. the Underwriters, incorporated herein by reference
to Exhibit 4.2 to the Registration Statement.
*4.3 ZymeTx, Inc. Stock Option Plan, incorporated herein by reference to
Exhibit 4.3 to the Registration Statement.
*4.4 ZymeTx, Inc. Directors Stock Option Plan, incorporated herein by
reference to Exhibit 4.4 to the Registration Statement.
*4.5 ZymeTx, Inc. Employee Stock Purchase Plan incorporated by reference
to Exhibit 4.5 of the ZymeTx Annual Statement on Form 10-KSB for the
fiscal year ended June 30, 1999.
*4.6 Rights Agreement dated February 3, 1999, by and between ZymeTx, Inc.
and American Stock Transfer and Trust Company incorporated herein by
reference to Exhibit 99.1 of the ZymeTx Current Report on Form 8-K
filed February 5, 1999.
10.1 Recapitalization Letter of Intent dated December 22, 1995, by and
among ZymeTx, ZymeTx Purchase Partners, ML Oklahoma Venture
Partners, L.P., Oklahoma Medical Research Foundation, and
Presbyterian Health Foundation, incorporated herein by reference to
Exhibit 10.1 to the Registration Statement.
10.2 Closing Memorandum in connection with the Recapitalization Letter of
Intent, incorporated herein by reference to Exhibit 10.2 to the
Registration Statement.
10.3 Form of Common Stock Purchase Warrant issued in connection with
Bridge Loan Agreement, incorporated herein by reference to Exhibit
10.5 to the Registration Statement.
10.4 Placement Agency Agreement dated May 22, 1996, by and between ZymeTx
and Spencer Trask Securities, Incorporated ("Spencer Trask"),
incorporated herein by reference to Exhibit 10.6 to the Registration
Statement.
10.5 Placement Agent Warrant Agreement dated July 29, 1996, by and
between ZymeTx and Spencer Trask, incorporated herein by reference
to Exhibit 10.7 to the Registration Statement.
10.6 License Agreement dated as of May 1, 1996, by and between ZymeTx and
OMRF, incorporated herein by reference to Exhibit 10.8 to the
Registration Statement.
</TABLE>
19
<PAGE> 21
<TABLE>
<S> <C>
10.7 Promissory Note dated May 15, 1996, in the principal amount of
$425,000, issued in favor of OMRF, incorporated herein by reference
to Exhibit 10.9 to the Registration Statement.
10.8 Common Stock Purchase Warrant dated May 15, 1996, granted to OMRF,
incorporated herein by reference to Exhibit 10.10 to the
Registration Statement.
10.9 Employee Services Agreement dated July 24, 1996, by and between
ZymeTx and OMRF, incorporated herein by reference to Exhibit 10.11
to the Registration Statement.
10.10 Right of First Refusal Agreement dated July 29, 1996, by and between
ZymeTx and Spencer Trask, incorporated herein by reference to
Exhibit 10.13 to the Registration Statement.
10.11 Merger and Acquisition Agreement dated July 29, 1996, by and among
ZymeTx and Spencer Trask, incorporated herein by reference to
Exhibit 10.14 to the Registration Statement.
*10.12 Executive Services Agreement dated July 1, 1997 by and between
ZymeTx and Peter G. Livingston, incorporated herein by reference to
Exhibit 10.15 to the Registration Statement.
10.13 Placement Agency Agreement dated July 2, 1997, by and between ZymeTx
and Spencer Trask, incorporated herein by reference to Exhibit 10.16
to the Registration Statement.
10.14 Placement Agent Warrant Agreement dated August 5, 1997, by and
between ZymeTx and Spencer Trask, incorporated herein by reference
to Exhibit 10.17 to the Registration Statement.
10.15 Registration Rights Agreement dated July 29, 1996, by and among
ZymeTx and certain investors identified therein, incorporated herein
by reference to Exhibit 10.19 to the Registration Statement.
10.16 Registration Rights Agreement dated August 5, 1997, by and among
ZymeTx and certain investors identified therein, incorporated herein
by reference to Exhibit 10.20 to the Registration Statement.
10.17 License Agreement dated May 22, 1998, by and between ZymeTx and OMRF
incorporated herein by reference to Exhibit 10.17 of the ZymeTx
Annual Statement on Form 10-KSB for the fiscal year ended June 30,
1998.
10.18 Lease Agreement (the "Lease Agreement") dated May 10, 1996, by and
between ZymeTx and Presbyterian Health Foundation, incorporated by
reference to Exhibit 10.22 to the Registration Statement.
*10.19 Non-Competition Agreement between ZymeTx and Craig D. Shimasaki,
Ph.D., incorporated by reference to Exhibit 10.21 to the
Registration Statement.
10.20 Amendment to Lease Agreement dated effective December 1, 1998 (filed
electronically herewith).
*10.21 Amendment No. 1 to Executive Services Agreement, dated as of July 1,
1999, by and between ZymeTx and Peter G. Livingston (filed
electronically herewith).
*10.22 Severance Compensation Agreement, dated April 14, 1999, by and
between ZymeTx and Peter G. Livingston (filed electronically
herewith)
*10.23 Severance Compensation Agreement, dated April 14, 1999, by and
between ZymeTx and Craig D. Shimasaki (filed electronically
herewith)
*10.24 Severance Compensation Agreement, dated April 14, 1999, by and
between ZymeTx and Charles E. Seeney (filed electronically herewith)
*10.25 Severance Compensation Agreement, dated April 14, 1999, by and
between ZymeTx and Gary W. Pedersen (filed electronically herewith)
</TABLE>
20
<PAGE> 22
<TABLE>
<S> <C>
*10.26 Severance Compensation Agreement, dated April 14, 1999, by and
between ZymeTx and Robert Hudson, M.D. (filed electronically
herewith)
*10.27 Severance Compensation Agreement, dated April 14, 1999, by and
between ZymeTx and G. Carl Gibson (filed electronically herewith)
23.1 Consent of Independent Auditors (filed electronically herewith)
27.1 Financial Data Schedule (filed electronically herewith).
</TABLE>
(b) REPORTS ON FORM 8-K. During the last quarter of fiscal 1999 ZymeTx
filed no Current Reports on Form 8-K.
21
<PAGE> 23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
REGISTRANT: ZYMETX, INC.
Date: October 13, 1999 By: /s/ Norman R. Proulx
-------------------------------------
Norman R. Proulx
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Norman R. Proulx President; Chief Executive October 13, 1999
- ------------------------------ Officer; Director
Norman R. Proulx
Principal Executive Officer
/s/ G. Carl Gibson V.P., Controller; Secretary; October 13, 1999
- ------------------------------ Treasurer
G. Carl Gibson
Principal Financial and
Accounting Officer
/s/ James R. Tolbert, III Chairman of the Board; October 13, 1999
- ------------------------------ Director
James R. Tolbert, III
/s/ William I. Bergman Director October 13, 1999
- ------------------------------
William I. Bergman
/s/ Christopher M. Salyer Director October 13, 1999
- ------------------------------
Christopher M. Salyer
/s/ J. Vernon Knight, M.D. Director October 13, 1999
- ------------------------------
J. Vernon Knight, M.D.
/s/ David E. Rainbolt Director October 13, 1999
- ------------------------------
David E. Rainbolt
/s/ Gilbert M. Schiff, M.D. Director October 13, 1999
- ------------------------------
Gilbert M. Schiff, M.D.
/s/ William G. Thurman, M.D. Director October 13, 1999
- ------------------------------
William G. Thurman, M.D.
</TABLE>
22
<PAGE> 24
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Name of Exhibit
- ------ ---------------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation, incorporated
herein by reference to Exhibit 3.1 to the Form SB-2 Registration
Statement No. 333-33563 (the "Registration Statement").
3.2 Amended and Restated Bylaws, incorporated herein by reference to
Exhibit 3.2 to the Registration Statement.
4.1 Specimen Certificate of Common Stock, incorporated herein by
reference to Exhibit 4.1 to the Registration Statement.
4.2 Form of Warrant Agreement between ZymeTx and Capital West
Securities, Inc. the Underwriters, incorporated herein by reference
to Exhibit 4.2 to the Registration Statement.
*4.3 ZymeTx, Inc. Stock Option Plan, incorporated herein by reference to
Exhibit 4.3 to the Registration Statement.
*4.4 ZymeTx, Inc. Directors Stock Option Plan, incorporated herein by
reference to Exhibit 4.4 to the Registration Statement.
*4.5 ZymeTx, Inc. Employee Stock Purchase Plan incorporated by reference
to Exhibit 4.5 of the ZymeTx Annual Statement on Form 10-KSB for the
fiscal year ended June 30, 1999.
*4.6 Rights Agreement dated February 3, 1999, by and between ZymeTx, Inc.
and American Stock Transfer and Trust Company incorporated herein by
reference to Exhibit 99.1 of the ZymeTx Current Report on Form 8-K
filed February 5, 1999.
10.1 Recapitalization Letter of Intent dated December 22, 1995, by and
among ZymeTx, ZymeTx Purchase Partners, ML Oklahoma Venture
Partners, L.P., Oklahoma Medical Research Foundation, and
Presbyterian Health Foundation, incorporated herein by reference to
Exhibit 10.1 to the Registration Statement.
10.2 Closing Memorandum in connection with the Recapitalization Letter of
Intent, incorporated herein by reference to Exhibit 10.2 to the
Registration Statement.
10.3 Form of Common Stock Purchase Warrant issued in connection with
Bridge Loan Agreement, incorporated herein by reference to Exhibit
10.5 to the Registration Statement.
10.4 Placement Agency Agreement dated May 22, 1996, by and between ZymeTx
and Spencer Trask Securities, Incorporated ("Spencer Trask"),
incorporated herein by reference to Exhibit 10.6 to the Registration
Statement.
10.5 Placement Agent Warrant Agreement dated July 29, 1996, by and
between ZymeTx and Spencer Trask, incorporated herein by reference
to Exhibit 10.7 to the Registration Statement.
10.6 License Agreement dated as of May 1, 1996, by and between ZymeTx and
OMRF, incorporated herein by reference to Exhibit 10.8 to the
Registration Statement.
</TABLE>
<PAGE> 25
<TABLE>
<S> <C>
10.7 Promissory Note dated May 15, 1996, in the principal amount of
$425,000, issued in favor of OMRF, incorporated herein by reference
to Exhibit 10.9 to the Registration Statement.
10.8 Common Stock Purchase Warrant dated May 15, 1996, granted to OMRF,
incorporated herein by reference to Exhibit 10.10 to the
Registration Statement.
10.9 Employee Services Agreement dated July 24, 1996, by and between
ZymeTx and OMRF, incorporated herein by reference to Exhibit 10.11
to the Registration Statement.
10.10 Right of First Refusal Agreement dated July 29, 1996, by and between
ZymeTx and Spencer Trask, incorporated herein by reference to
Exhibit 10.13 to the Registration Statement.
10.11 Merger and Acquisition Agreement dated July 29, 1996, by and among
ZymeTx and Spencer Trask, incorporated herein by reference to
Exhibit 10.14 to the Registration Statement.
*10.12 Executive Services Agreement dated July 1, 1997 by and between
ZymeTx and Peter G. Livingston, incorporated herein by reference to
Exhibit 10.15 to the Registration Statement.
10.13 Placement Agency Agreement dated July 2, 1997, by and between ZymeTx
and Spencer Trask, incorporated herein by reference to Exhibit 10.16
to the Registration Statement.
10.14 Placement Agent Warrant Agreement dated August 5, 1997, by and
between ZymeTx and Spencer Trask, incorporated herein by reference
to Exhibit 10.17 to the Registration Statement.
10.15 Registration Rights Agreement dated July 29, 1996, by and among
ZymeTx and certain investors identified therein, incorporated herein
by reference to Exhibit 10.19 to the Registration Statement.
10.16 Registration Rights Agreement dated August 5, 1997, by and among
ZymeTx and certain investors identified therein, incorporated herein
by reference to Exhibit 10.20 to the Registration Statement.
10.17 License Agreement dated May 22, 1998, by and between ZymeTx and OMRF
incorporated herein by reference to Exhibit 10.17 of the ZymeTx
Annual Statement on Form 10-KSB for the fiscal year ended June 30,
1998.
10.18 Lease Agreement (the "Lease Agreement") dated May 10, 1996, by and
between ZymeTx and Presbyterian Health Foundation, incorporated by
reference to Exhibit 10.22 to the Registration Statement.
*10.19 Non-Competition Agreement between ZymeTx and Craig D. Shimasaki,
Ph.D., incorporated by reference to Exhibit 10.21 to the
Registration Statement.
10.20 Amendment to Lease Agreement dated effective December 1, 1998 (filed
electronically herewith).
*10.21 Amendment No. 1 to Executive Services Agreement, dated as of July 1,
1999, by and between ZymeTx and Peter G. Livingston (filed
electronically herewith).
*10.22 Severance Compensation Agreement, dated April 14, 1999, by and
between ZymeTx and Peter G. Livingston (filed electronically
herewith)
*10.23 Severance Compensation Agreement, dated April 14, 1999, by and
between ZymeTx and Craig D. Shimasaki (filed electronically
herewith)
*10.24 Severance Compensation Agreement, dated April 14, 1999, by and
between ZymeTx and Charles E. Seeney (filed electronically herewith)
*10.25 Severance Compensation Agreement, dated April 14, 1999, by and
between ZymeTx and Gary W. Pedersen (filed electronically herewith)
</TABLE>
<PAGE> 26
<TABLE>
<S> <C>
*10.26 Severance Compensation Agreement, dated April 14, 1999, by and
between ZymeTx and Robert Hudson, M.D. (filed electronically
herewith)
*10.27 Severance Compensation Agreement, dated April 14, 1999, by and
between ZymeTx and G. Carl Gibson (filed electronically herewith)
23.1 Consent of Independent Auditors (filed electronically herewith).
27.1 Financial Data Schedule (filed electronically herewith).
</TABLE>
<PAGE> 27
Index to Financial Statements
<TABLE>
<S> <C>
Report of Independent Auditors.............................................. F-2
Balance Sheets at June 30, 1998 and 1999.................................... F-3
Statements of Operations for the years ended June 30, 1998 and 1999 and
for the period from February 24, 1994 (inception) to June 30, 1999....... F-4
Statements of Stockholders' Equity for the period from February 24, 1994
(inception) to June 30, 1999............................................. F-5
Statements of Cash Flows for the years ended June 30, 1998 and 1999 and
for the period from February 24, 1994 (inception) to June 30, 1999....... F-8
Notes to Financial Statements............................................... F-9
</TABLE>
F-1
<PAGE> 28
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND STOCKHOLDERS
ZYMETX, INC.
We have audited the accompanying balance sheets of ZymeTx, Inc. (a development
stage company) as of June 30, 1998 and 1999, and the related statements of
operations, stockholders' equity and cash flows for the years then ended and for
the period from February 24, 1994 (inception) through June 30, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ZymeTx, Inc. (a development
stage company) at June 30, 1998 and 1999, and the results of its operations and
its cash flows for the years then ended and for the period from February 24,
1994 (inception) through June 30, 1999 in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Oklahoma City, Oklahoma
July 30, 1999,
except for note 9, as to which the date is,
October 7, 1999
F-2
<PAGE> 29
ZymeTx, Inc.
(A Development Stage Company)
Balance Sheets
<TABLE>
<CAPTION>
JUNE 30,
1998 1999
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,112,552 $ 10,565
Marketable securities, available-for-sale 16,409,932 8,735,430
Accounts receivable 40,637 192,038
Inventory 2,307,544 1,500,000
Prepaid insurance and other 162,911 46,563
------------ ------------
Total current assets 21,033,576 10,484,596
Inventory not expected to be realized within one year -- 1,789,931
Property, equipment and leasehold improvements, net
(Notes 2 and 3) 555,191 673,934
Proprietary technology and other intangibles, net (Note 4) 97,023 77,220
------------ ------------
Total assets $ 21,685,790 $ 13,025,681
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 707,132 $ 435,178
Accrued salaries, wages and benefits 139,068 225,065
Accrued sales returns 59,737 66,164
Other 48,703 52,261
Current portion of note payable to stockholder (Note 4) -- 100,000
------------ ------------
Total current liabilities 954,640 878,668
Long term obligations --
Note payable to stockholder due after one year (Note 4) 319,884 227,390
Deferred lease rentals (Note 3) 197,680 241,173
Stockholders' equity (Notes 5 and 6):
Preferred stock $.001 par value; 12,000,000 shares authorized
(none issued or outstanding at June 30, 1998 or 1999) -- --
Common stock $.001 par value; 30,000,000 shares authorized
(6,636,880 shares and 6,692,572 issued and outstanding at
June 30, 1998 and June 30, 1999, respectively) 6,637 6,693
Additional paid-in capital 33,497,843 33,557,761
Deficit accumulated during the development stage (13,297,780) (21,893,966)
Unrealized holding gains on marketable securities available
for sale 6,886 7,962
------------ ------------
Total stockholders' equity 20,213,586 11,678,450
------------ ------------
Total liabilities and stockholders' equity $ 21,685,790 $ 13,025,681
============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE> 30
ZymeTx, Inc.
(A Development Stage Company)
Statements of Operations
<TABLE>
<CAPTION>
CUMULATIVE
YEAR ENDED JUNE 30, FROM
1998 1999 INCEPTION
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Sales, net $ 51,681 $ 544,293 $ 621,423
Other -- -- 1,303
------------ ------------ ------------
Total revenues 51,681 544,293 622,726
Operating expenses:
Research and development 1,054,035 1,421,938 3,853,312
Product development 1,578,594 1,589,053 3,184,465
Inventory write-down -- 1,341,761 1,341,761
Cost of sales 27,950 264,784 294,934
Sales and marketing 1,204,596 3,130,302 4,351,461
Acquired in-process technology and patent
costs from OMRF (Note 4) 150,000 -- 1,108,505
General and administrative 1,363,979 2,023,995 4,119,940
------------ ------------ ------------
Total operating expenses 5,379,154 9,771,833 18,254,378
------------ ------------ ------------
Loss from operations (5,327,473) (9,227,540) (17,631,652)
Other income (expense):
Interest and dividend income 835,145 697,662 1,629,852
Interest expense (Note 4) (58,298) (66,308) (195,902)
------------ ------------ ------------
Total other income 776,847 631,354 1,433,950
------------ ------------ ------------
Net loss (4,550,626) (8,596,186) (16,197,702)
Preferred stock dividends-Series B 3,211 -- 11,815
Preferred stock dividends-Series C (Note 5) 5,684,449 -- 5,684,449
------------ ------------ ------------
Net loss applicable to common stock $(10,238,286) $ (8,596,186) $(21,893,966)
============ ============ ============
Basic and diluted net loss per common share $ (2.20) $ (1.29) $ (8.13)
============ ============ ============
Weighted average common shares outstanding 4,657,808 6,665,883 2,693,063
============ ============ ============
</TABLE>
See accompanying notes.
F-4
<PAGE> 31
ZymeTx, Inc.
(A Development Stage Company)
Statements of Stockholders' Equity (Note 5)
<TABLE>
<CAPTION>
CONVERTIBLE CONVERTIBLE
PREFERRED STOCK -- PREFERRED STOCK --
SERIES A SERIES C COMMON STOCK
--------------------------- -------------------------- --------------------------
SHARES PAR VALUE SHARES PAR VALUE SHARES PAR VALUE
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock
at inception -- $ -- -- $ -- 43,500 $ 44
----------- ----------- ----------- ----------- ----------- -----------
Balance at June 30, 1994 -- -- -- -- 43,500 44
Net loss -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Balance at June 30, 1995 -- -- -- -- 43,500 44
Net loss -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Balance at June 30, 1996 -- -- -- -- 43,500 44
Issuance of common stock -- -- -- -- 876,068 876
Issuance of Series A Preferred
Stock, net of offering
expenses of $642,568 6,318,125 6,318 -- -- -- --
Unrealized holding gains
on marketable securities
available for sale -- -- -- -- -- --
Net loss -- -- -- -- -- --
Total comprehensive loss
----------- ----------- ----------- ----------- ----------- -----------
Balance at June 30, 1997 6,318,125 6,318 -- -- 919,568 920
<CAPTION>
DEFICIT
ACCUMULATED ACCUMULATED TOTAL
ADDITIONAL DURING THE OTHER STOCKHOLDERS'
PAID-IN DEVELOPMENT COMPREHENSIVE EQUITY
CAPITAL STAGE INCOME (DEFICIT)
----------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
Issuance of common stock
at inception $ 1,956 $ -- $ -- $ 2,000
----------- ----------- ----------- -----------
Balance at June 30, 1994 1,956 -- -- 2,000
Net loss -- (4,970) -- (4,970)
----------- ----------- ----------- -----------
Balance at June 30, 1995 1,956 (4,970) -- (2,970)
Net loss -- (369,650) -- (369,650)
----------- ----------- ----------- -----------
Balance at June 30, 1996 1,956 (374,620) -- (372,620)
Issuance of common stock 2,628 -- -- 3,504
Issuance of Series A Preferred
Stock, net of offering
expenses of $642,568 4,405,614 -- -- 4,411,932
Unrealized holding gains
on marketable securities
available for sale -- -- 6,612 6,612
Net loss -- (2,676,270) -- (2,676,270)
Total comprehensive loss (2,669,658)
----------- ----------- ----------- -----------
Balance at June 30, 1997 4,410,198 (3,050,890) 6,612 1,373,158
</TABLE>
(Continued on following page)
F-5
<PAGE> 32
ZymeTx, Inc.
(A Development Stage Company)
Statements of Stockholders' Equity (Note 5) (continued)
<TABLE>
<CAPTION>
CONVERTIBLE CONVERTIBLE
PREFERRED STOCK -- PREFERRED STOCK --
SERIES A SERIES C COMMON STOCK
---------------------------- ---------------------------- --------------------------
SHARES PAR VALUE SHARES PAR VALUE SHARES PAR VALUE
----------- ------------ ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of Series C Preferred
Stock, net of offering expenses
of $825,000 -- $ -- 1,437,500 $ 1,437 -- $ --
Issuance of common stock in
connection with initial public
offering, net of offering expenses
of $2,823,252 -- -- -- -- 2,645,000 2,645
Conversion of Series A
preferred stock to common
stock in connection with
initial public offering (6,318,125) (6,318) -- -- 1,579,531 1,580
Conversion of Series B
preferred stock to common
stock in connection with
initial public offering -- -- -- -- 39,062 39
Conversion of Series C
preferred stock to common
stock in connection with
initial public offering -- -- (1,437,500) (1,437) 1,437,504 1,437
Retirement of partial shares
in connection with
conversion of preferred
stock to common stock -- -- -- -- (35) --
Preferred C dividend in
connection with initial
public offering -- -- -- -- -- --
Preferred stock dividends --
Series B -- -- -- -- -- --
Stock options exercised by
employees -- -- -- -- 16,250 16
Unrealized holding gains on
marketable securities
available for sale -- -- -- -- -- --
Net loss -- -- -- -- -- --
Total comprehensive loss
----------- ------------ ----------- ------------ ----------- ------------
Balance at June 30, 1998 -- -- -- -- 6,636,880 6,637
<CAPTION>
DEFICIT
ACCUMULATED ACCUMULATED TOTAL
ADDITIONAL DURING THE OTHER STOCKHOLDERS'
PAID-IN DEVELOPMENT COMPREHENSIVE EQUITY
CAPITAL STAGE INCOME (DEFICIT)
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Issuance of Series C Preferred
Stock, net of offering expenses
of $825,000 $ 4,923,565 $ -- $ -- $ 4,925,002
Issuance of common stock in
connection with initial public
offering, net of offering expenses
of $2,823,252 18,334,103 -- -- 18,336,748
Conversion of Series A
preferred stock to common
stock in connection with
initial public offering 4,738 -- -- --
Conversion of Series B
preferred stock to common
stock in connection with
initial public offering 124,961 -- -- 125,000
Conversion of Series C
preferred stock to common
stock in connection with
initial public offering -- -- -- --
Retirement of partial shares
in connection with
conversion of preferred
stock to common stock (405) -- -- (405)
Preferred C dividend in
connection with initial
public offering 5,684,449 (5,684,449) -- --
Preferred stock dividends --
Series B -- (11,815) -- (11,815)
Stock options exercised by
employees 16,234 -- -- 16,250
Unrealized holding gains on
marketable securities
available for sale -- -- 274 274
Net loss -- (4,550,626) -- (4,550,626)
------------
Total comprehensive loss (4,550,352)
------------ ------------ ------------ ------------
Balance at June 30, 1998 33,497,843 (13,297,780) 6,886 20,213,586
</TABLE>
(Continued on following page)
F-6
<PAGE> 33
ZymeTx, Inc.
(A Development Stage Company)
Statements of Stockholders' Equity (Note 5) (continued)
<TABLE>
<CAPTION>
CONVERTIBLE CONVERTIBLE
PREFERRED STOCK -- PREFERRED STOCK --
SERIES A SERIES C COMMON STOCK
---------------------------- ---------------------------- --------------------------
SHARES PAR VALUE SHARES PAR VALUE SHARES PAR VALUE
----------- ------------ ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Stock options exercised by
employees and non-employee
directors -- $ -- -- $ -- 51,000 $ 51
Stock purchased through Employee
Stock Purchase Plan -- -- -- -- 4,692 5
Unrealized holding gains on
marketable securities
available for sale -- -- -- -- -- --
Net loss -- -- -- -- -- --
Total comprehensive loss
----------- ------------ ----------- ------------ ----------- ------------
Balance at June 30, 1999 -- $ -- -- $ -- 6,692,572 $ 6,693
=========== ============ =========== ============ =========== ============
<CAPTION>
DEFICIT
ACCUMULATED ACCUMULATED TOTAL
ADDITIONAL DURING THE OTHER STOCKHOLDERS'
PAID-IN DEVELOPMENT COMPREHENSIVE EQUITY
CAPITAL STAGE INCOME (DEFICIT)
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Stock options exercised by
employees and non-employee
directors $ 50,949 $ -- $ -- $ 51,000
Stock purchased through Employee
Stock Purchase Plan 8,969 -- -- 8,974
Unrealized holding gains on
marketable securities
available for sale -- -- 1,076 1,076
Net loss -- (8,596,186) -- (8,596,186)
------------
Total comprehensive loss (8,595,110)
------------ ------------ ------------ ------------
Balance at June 30, 1999 $ 33,557,761 $(21,893,966) $ 7,962 $ 11,678,450
============ ============ ============ ============
</TABLE>
See accompanying notes.
F-7
<PAGE> 34
ZymeTx, Inc.
(A Development Stage Company)
Statements of Cash Flows
<TABLE>
<CAPTION>
CUMULATIVE
YEAR ENDED JUNE 30, FROM
1998 1999 INCEPTION
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net loss $ (4,550,626) $ (8,596,186) $(16,197,702)
Adjustments to reconcile net loss to net cash used by operating
activities:
Depreciation and amortization 104,313 166,088 338,281
Inventory write-down -- 1,341,761 1,341,761
Acquired technology and patent costs from OMRF -- -- 336,422
Accretion of interest 54,048 32,506 147,733
Deferred lease rentals 128,651 43,493 241,173
Changes in operating assets and liabilities:
Accounts receivable (40,637) (151,401) (192,038)
Interest receivable on marketable securities (444,101) 317,555 (142,368)
Prepaid insurance and other (153,701) 116,348 (47,745)
Inventory (2,208,437) (2,324,148) (4,565,404)
Accounts payable 167,107 (271,954) 435,178
Other liabilities 225,764 95,982 331,675
------------ ------------ ------------
Total adjustments (2,166,993) (633,770) (1,775,332)
------------ ------------ ------------
Net cash used by operating activities (6,717,619) (9,229,956) (17,973,034)
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of marketable securities available for sale (20,943,123) (19,267,094) (41,782,165)
Proceeds from sale of marketable securities available for sale 6,571,948 26,625,117 33,197,065
Purchase of property, equipment and leasehold improvements (344,307) (265,028) (952,014)
Purchase of inventory, proprietary technology and other
intangibles (Note 4) -- -- (202,917)
------------ ------------ ------------
Net cash provided (used) by investing activities (14,715,482) 7,092,995 (9,740,031)
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from issuance of notes payable -- -- 392,510
Payments on notes payable -- (25,000) (336,271)
Retirement of fractional shares (405) -- (405)
Proceeds from issuance of common and preferred stock, net of
offering costs 23,303,496 -- 27,591,572
Exercise of employee stock options 16,250 51,000 67,250
Stock purchased through employee stock purchase plan -- 8,974 8,974
------------ ------------ ------------
Net cash provided by financing activities 23,319,341 34,974 27,723,630
------------ ------------ ------------
Net increase (decrease) in cash 1,886,240 (2,101,987) 10,565
Cash and cash equivalents at beginning of period 226,312 2,112,552 --
------------ ------------ ------------
Cash and cash equivalents at end of period $ 2,112,552 $ 10,565 $ 10,565
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF INTEREST PAID $ -- $ 32,583 $ 48,962
</TABLE>
See accompanying notes.
F-8
<PAGE> 35
ZymeTx, Inc.
(A Development Stage Company)
Notes to Financial Statements
June 30, 1998 and 1999
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
ZymeTx, Inc. ("the Company"), a Delaware corporation, was formed February 24,
1994. The Company had no significant operations from formation through June 30,
1994. The Company is a development stage biotechnology company engaged in the
discovery, development and commercialization of unique products for the
diagnosis and treatment of viruses. The scientific foundation of the Company is
based upon the role of enzymes in the process of viral infection.
The Company has initiated early stages of research regarding therapeutics
utilizing its ViraZyme technology for enzymes associated with certain viral
diseases; however, the Company will concentrate its efforts during fiscal 2000
on completing developments of improvements to its influenza diagnostic product,
ZstatFlu. The Company will devote greater efforts to therapeutic development in
fiscal 2001 and beyond, depending upon capital resource availability. These
projects which will involve experimental and unproven technology, may require
many years and substantial expenditures to complete, and may ultimately be
unsuccessful. Therefore, the Company will need to obtain additional funds from
outside sources to continue its research and development activities, fund
operating expenses, pursue regulatory approvals and establish production, sales
and marketing capabilities, as necessary. Management believes it has sufficient
capital to achieve planned business objectives including supporting pre-clinical
development and clinical testing, through at least fiscal year 2000. For periods
thereafter, the Company intends to raise additional capital through the issuance
of equity securities to existing or new investors or through alliances with
corporate partners. If adequate funds are not available, the Company may be
required to delay, reduce the scope of, or eliminate one or more of its
development programs or obtain funds through collaborative arrangements with
others that may require the Company to relinquish rights to certain of its
technologies, product candidates or products that the Company would otherwise
seek to develop or commercialize itself.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and highly liquid debt investments
with maturities of 90 days or less when purchased.
F-9
<PAGE> 36
ZymeTx, Inc.
(A Development Stage Company)
Notes to Financial Statements ( continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MARKETABLE SECURITIES
Based on the nature of the assets held by the Company and management's
investment strategy, the Company's investments in marketable securities have
been classified as available-for-sale. Management determines the appropriate
classification of debt securities at the time of purchase and reevaluates such
designation as of each balance sheet date. The securities mature within one year
and the amortized cost basis, aggregate fair value, and unrealized holding gains
at June 30, 1998 and 1999 are summarized below:
<TABLE>
<CAPTION>
AMORTIZED AGGREGATE UNREALIZED
COST FAIR HOLDING
BASIS VALUE GAINS
----------- ----------- -----------
<S> <C> <C> <C>
1998:
Corporate debt securities $12,918,267 $12,925,153 $ 6,886
U.S. states and political subdivision debt
securities 464,732 464,732 --
Certificates of deposit 3,020,047 3,020,047 --
----------- ----------- -----------
$16,403,046 $16,409,932 $ 6,886
=========== =========== ===========
1999:
Corporate debt securities $ 7,962,401 $ 7,970,363 $ 7,962
U.S. states and political subdivision debt
securities 765,067 765,067 --
----------- ----------- -----------
$ 8,727,468 $ 8,735,430 $ 7,962
=========== =========== ===========
</TABLE>
F-10
<PAGE> 37
ZymeTx, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORY
Inventories are carried at the lower of cost (first-in, first-out) or market.
The components of inventory consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
1998 1999
---------- ----------
<S> <C> <C>
Raw Materials $ 655,933 $2,052,534
Work in process 344,015 976,441
Finished goods 1,307,596 260,956
---------- ----------
2,307,544 3,289,931
Less amounts not expected to
be realized in one year -- 1,789,931
---------- ----------
$2,307,544 $1,500,000
========== ==========
</TABLE>
DEPRECIATION AND AMORTIZATION
Depreciation of property and equipment is computed using the straight-line
method over three to seven years. Amortization of leasehold improvements is
computed using the straight-line method over the shorter of the estimated useful
lives of the assets or the remaining lease term.
ADVERTISING COSTS
Advertising campaign costs are expensed the first time the target of the
campaign is contacted. Total advertising and promotion expenses were $267,790
and $497,190 for the years ended June 30, 1998 and 1999, respectively ($773,433
cumulative from inception). Prepaid insurance and other assets included $100,000
relating to prepaid advertising and promotional expenses at June 30, 1998 (none
at June 30, 1999).
PROPRIETARY TECHNOLOGY AND OTHER INTANGIBLES
Amortization of proprietary technology and other intangibles acquired is
computed using the straight-line method over periods of between five and ten
years. Accumulated amortization aggregated $39,606 and $59,409 as of June 30,
1998 and 1999, respectively.
STOCK COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its stock options. Under APB 25, because the
exercise price of the Company's employee stock options is not
F-11
<PAGE> 38
ZymeTx, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK COMPENSATION (CONTINUED)
less than the estimated fair value of the underlying stock on the date of grant,
no compensation is recorded.
CONCENTRATION OF CREDIT RISK
The Company invests its excess cash in debt instruments of the U.S. Government
and its agencies, institutions and other short-term investments with strong
credit ratings. The Company has established guidelines relative to
diversification and maturities that maintain safety and liquidity. These
guidelines are periodically reviewed and modified to take advantage of trends in
yields and interest rates. The Company has not experienced any realized losses
on its marketable securities.
USE OF ESTIMATES AND OTHER UNCERTAINTIES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The inventory at June 30, 1999, included in the accompanying balance sheet
consists of costs related to the Company's ZstatFlu, an influenza diagnostic.
The market for influenza diagnostics remains largely undeveloped at June 30,
1999 and there are no assurances that such market will be developed in the near
term; accordingly, there are no assurances that the Company's investment in its
ZstatFlu inventory will be recoverable. In addition, improvements in the
delivery of the Company's diagnostic as a result of its research and development
program or new products from competitors may render a portion of the inventory
on hand at June 30, 1999, obsolete in the near term. In fiscal 1999 the carrying
value of inventory was written down as a result of an improvement of the
Company's influenza diagnostic from a 60-minute to a 30-minute format. As a
result of the improvements, write-downs of certain raw materials and an accrual
for reworking certain components totaling $730,761 was incurred. An additional
inventory write-down was incurred as the result of a subsequent event relating
to a further improvement to the influenza diagnostic. See Note 9 - Inventory
write-down.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amount reported in the balance sheet for the fixed-rate note
payable has been discounted and approximates its fair value inasmuch as the
Company believes the discount rate approximates its incremental borrowing rate
at June 30, 1999 (Note 4 - Related Party Transactions). Other financial
F-12
<PAGE> 39
Zymetx, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
instruments have a fair value approximating their carrying amount due to the
short maturity of those instruments or due to the criteria used to determine
carrying value in the financial statements.
REVENUE RECOGNITION
The Company utilizes independent distributors in the dissemination of the
Company's diagnostic product, ZstatFlu. The independent distributors specify the
quantities which they hold for dissemination, assume the liability for damage or
loss of merchandise and retain the right of return of such merchandise at the
original purchase price less a restocking charge. Inasmuch as the Company cannot
estimate the amount of future returns, the merchandise shipped to and held by
the independent distributors is not reported as revenue until it is shipped from
the independent distributors' warehouses to the end users.
NET LOSS PER SHARE
Net loss per share applicable to common stock is computed by adjusting net loss
by the amount of preferred stock dividends, if any. Basic loss per common share
is based upon the weighted average number of common shares outstanding during
each period after giving appropriate effect to preferred stock dividends, if
any. Diluted loss per share is based on the weighted average number of common
shares and dilutive common equivalent shares outstanding and the assumed
conversion of dilutive convertible securities outstanding, if any. All
potentially dilutive securities were antidilutive for all periods presented and
have thus, been excluded from diluted loss per share. See Note 4 -- Related
Party Transactions, Note 5 -- Stockholders' Equity, and Note 6 -- Stock Option
and Purchase Plans for a full description of securities which may have a
dilutive effect in future periods.
In the Company's second fiscal quarter ended December 31, 1997 (the period in
which the Company consummated its initial public offering), the Company
recognized, as a charge to retained earnings, a non-cash dividend related to the
automatic conversion of its Series C Preferred Stock into Common Stock and the
rights of certain warrant holders to acquire shares of the Company's Common
Stock. The non-cash dividend of $5,684,449 represents the difference between the
price received per share for the Series C Preferred Stock and the price received
per share for the Company's Common Stock issued in the public offering. The
dividend reduced income applicable to common stock and, accordingly, reduced
earnings per share in the year ended June 30, 1998.
F-13
<PAGE> 40
ZymeTx, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
2. PROPERTY, EQUIPMENT, AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements, stated at cost, are summarized
as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1998 1999
--------- ---------
<S> <C> <C>
Laboratory equipment $ 264,187 $ 334,566
Manufacturing equipment 203,081 225,913
Computer equipment 131,690 243,944
Office furniture, equipment and leasehold improvements 88,028 147,591
--------- ---------
686,986 952,014
Less accumulated depreciation and amortization (131,795) (278,080)
--------- ---------
$ 555,191 $ 673,934
========= =========
</TABLE>
3. COMMITMENTS
OPERATING LEASES
In January 1997, the Company consolidated substantially all of its operations,
research, marketing and administrative functions into newly constructed
facilities leased from a stockholder of the Company. The Company's ten-year
lease on these facilities currently covers approximately 12,000 square feet with
options available on additional space. The lease provides for no rent payable
the first two years and a fixed rate thereafter for the remaining eight years
("Base Rent"). The Company incurred certain leasehold improvements that exceeded
the defined tenant improvement allowance (the "Tenant Allowance Overage")
provided for under the lease. This Tenant Allowance Overage bears interest at a
rate of 10% over the repayment term of 60 months, with interest only due for the
first 24 months and principal and interest due monthly over the final 36 months
of the repayment term. The Tenant Allowance Overage payments are due in addition
to the Base Rent. The Company is recognizing the total facility lease payments,
including the Tenant Allowance Overage, on a straight-line method over the
entire term of the lease agreement. Accordingly, as of June 30, 1998 and 1999,
the Company has accrued a deferred lease rental liability of $197,680 and
$241,173, respectively. As additional consideration for the lease, this
stockholder received warrants to purchase 20,000 shares of Common Stock at an
exercise price of $3.20 per share to which the Company attributed no value.
These lease warrants expire on January 1, 2002. The Company has granted the
lessor a security interest in all equipment, inventory fixtures, furniture and
other property now owned or hereafter acquired by the Company which is located
on the leased premises.
F-14
<PAGE> 41
ZymeTx, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
3. COMMITMENTS (CONTINUED)
In April 1998, the Company signed an amendment to the lease agreement with an
effective date of December 1, 1998. The amendment increases the amount of leased
space at the current facilities up to approximately 46,000 rentable square feet.
As of June 30, 1999, construction improvements on the increased space had not
been completed and, accordingly, the Company was not obligated to assume the
incremental lease cost. The lease cost for the additional space assuming full
occupancy is $405,960 annually through 2007.
Rental expense related to the leased facilities during 1998 and 1999 was
$157,920 and $157,918, respectively ($384,867 cumulative from inception). Prior
to January 1, 1997, the Company operated using a minimal amount of
administrative space provided rent-free by one of its stockholders.
Future minimum lease commitments as of June 30, 1999 are as follows, assuming
full occupancy of the additional leased space:
<TABLE>
<S> <C>
Year ended June 30:
2000 $ 592,098
2001 592,098
2002 592,098
2003 592,098
2004 592,098
Thereafter (laboratory and office space to 2007) 1,578,929
----------
Total minimum lease payments $4,539,419
==========
</TABLE>
LICENSE AGREEMENT COMMITMENTS
In connection with license agreements with a related party, the Company has
committed to make royalty and other technology product development progress
payments. See Note 4 - Related Party Transactions.
F-15
<PAGE> 42
ZymeTx, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
3. COMMITMENTS (CONTINUED)
OTHER
In April 1999, the Company entered into severance agreements with certain of its
executive officers that become effective after the occurrence of a change in
control, as defined, if the Company terminates the officer's employment or if
the officer terminates employment with the Company for good reason, as defined.
These agreements require the Company to make a severance payment to the
executive officers up to 2 times their Base Compensation, as defined, upon
termination. A provision for these benefits will not be made until a change in
control is probable.
In 1999, the Company established a severance plan for certain employees.
Employees are qualified for a severance payment based on their annual salary
exceeding the specified annual salary in the plan and involuntary termination.
Due to the uncertainty of future involuntary terminations, there is no accrual
at June 30, 1999 for future payments by the Company under this plan, if any. The
Company incurred a charge of approximately $117,000 related to employees
terminated under this plan in 1999.
4. RELATED PARTY TRANSACTIONS
Since January 1, 1996, the Company has performed scientific and product
development activities relating to the ViraZyme(R) technology; however, OMRF, a
stockholder, has provided, on a marginal cost basis, significant support and
collaborative resources permitting the Company to access state-of-the-art
facilities, equipment, services and personnel. For the years ended June 30, 1998
and 1999, OMRF charged the Company $794,879 and $137,153, respectively, related
to such arrangement ($2,201,601 cumulative from inception). Substantially all of
such costs have been charged to research and development and general and
administrative expenses in the accompanying statements of operations. The
Company internalized much of this expense during fiscal year 1999, thus reducing
expenditures to OMRF.
Effective July 1996, the Company entered into a license agreement (the "ViraZyme
License Agreement") with OMRF, a stockholder, whereby the Company was granted an
exclusive, perpetual, worldwide license covering all the patents which comprise
the ViraZyme(R) technology. The ViraZyme License Agreement grants the Company
the right to manufacture, use, and sell products made under the patent rights.
In exchange for the ViraZyme License Agreement, the Company paid OMRF $825,000,
executed a note payable (the "Note") in the principal amount of $425,000 (valued
at $210,918 at date of issuance with an accreted value of $319,884 and $327,390
at June 30, 1998 and 1999, respectively), issued 156,250 shares of Series B
Preferred Stock (the "Series B Preferred Stock") (initially valued at $.80 per
share aggregating $125,000, converted to Common Stock in
F-16
<PAGE> 43
ZymeTx, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
4. RELATED PARTY TRANSACTIONS (CONTINUED)
November 1997), issued 126,068 shares of common stock (valued at the then
existing par value of $.004 per share aggregating $504), granted the stockholder
a 2% royalty on net sales of products derived from the intellectual property
conveyed with the ViraZyme License Agreement and issued a warrant to purchase
5,667 shares of common stock at $3.20 per share (to which the Company attributed
no value). The aggregate value assigned to this transaction amounted to
$1,161,422 which was allocated as follows: inventory -- $66,288; developed
technology and assembled workforce -- $136,629; and technology in the research
and development stage -- $958,505. The Company, under the terms of the ViraZyme
License Agreement, has also agreed to assume responsibility to pay a third party
a royalty of 4% of the revenues derived by the Company from sales of diagnostic
products utilizing specific collaboration intellectual property, as defined. The
Note bore no interest for the first twenty-four months following issuance and
bears interest at an 8% rate per annum thereafter. This Note was discounted at
issuance from its face amount of $425,000 to $210,918 assuming a market rate of
interest of 20% per annum. Imputed interest for the years ended June 30, 1998
and 1999 included in the accompanying statements of operations aggregated
$54,048 and $32,506, respectively. As a result of the agreement in principle
with OMRF in July 1999, discussed below, the face amount of the Note is to be
reduced by $184,742. This will cause the quarterly principal and interest
payments to be reduced to $16,753 (previously required quarterly principal
payments of $25,000 plus interest) for the remaining term of the Note which runs
through May 2003.
In July 1996, OMRF purchased 406,250 shares of the Company's Series A Preferred
Stock in a private placement. The preferred stock was converted into 101,562
shares of Common Stock in connection with the Company's initial public offering
in November 1997.
In May 1998, the Company and OMRF entered into a licensing agreement (the "HIV
License Agreement") for technology that includes a family of compounds that have
demonstrated a reduction of HIV in laboratory tests. The HIV License Agreement
required an initial payment of $150,000 (which was made in May 1998). In July
1999, the Company and OMRF reached an agreement in principle whereby the Company
would return the HIV license and OMRF would reimburse the Company for its
initial license agreement fee and specific expenses. This reimbursement will
come in the form of reduced principal payments on the Note as described above.
The Company leases certain facilities from a stockholder, as discussed in Note 3
- - Commitments. The Company recognized rent expense totaling $157,920 and
$157,918 in 1998 and 1999, respectively, related to its facilities that are
leased from this stockholder. In management's opinion,
F-17
<PAGE> 44
ZymeTx, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
4. RELATED PARTY TRANSACTIONS (CONTINUED)
these license and lease transactions were conducted on no less favorable terms
than those which could have been obtained from unrelated third parties.
5. STOCKHOLDERS' EQUITY
COMMON AND PREFERRED STOCK
In February 1994, the Company issued 43,500 shares of Common Stock for $2,000 in
connection with the Company's formation.
In May 1996, the Company restated its Certificate of Incorporation increasing
the number of authorized shares of Common Stock from 2,000,000 shares to
16,500,000 shares. Simultaneously, it consummated a reverse split, 1 for .87, of
its Common Stock thereby reducing the then outstanding common shares from
200,000 shares to 173,999 shares. In July 1997, the Company filed a restated
Certificate of Incorporation to effect a one-for-four reverse split of its
Common Stock, Common Stock options and warrants. In July 1997, the stockholders
also approved (i) an amendment to the Company's Certificate of Incorporation
increasing the number of authorized shares of Common Stock from 16,500,000
shares to 30,000,000 shares and increasing the number of authorized shares of
Preferred Stock from 10,000,000 shares to 12,000,000 shares, (ii) an adjustment
to the rate of conversion of the Series A Convertible Preferred Stock and Series
B Convertible Preferred Stock to reflect the one-for-four reverse stock split,
and (iii) the establishment and designation of 1,750,000 shares of Series C
Preferred Stock. At June 30, 1999, the Company is authorized to issue 12,000,000
shares of Preferred Stock, par value $.001 per share. The Preferred Stock may be
issued in one or more series, with such voting powers, designations,
preferences, rights, qualifications, limitations and restrictions as shall be
set forth in a resolution of the Company's Board of Directors providing for the
issue thereof. All historical financial information included in the accompanying
financial statements has been adjusted retroactively to give effect to the
reverse stock splits.
In July 1996, the Company issued 750,000 shares of Common Stock for $3,000 in
connection with a recapitalization and, as discussed in Note 4 - Related Party
Transactions, the Company issued 126,068 shares of Common Stock as partial
consideration for the ViraZyme License Agreement.
In November 1996, the Company closed a private placement of 6,318,125 shares of
Series A Convertible Preferred Stock (the "Series A Preferred Stock") receiving
$4,411,932 in cash, net of offering expenses and issued warrants to purchase
236,930 shares of the Company's Common Stock at $3.20 per share. The Series A
stock was converted into 1,579,531 shares of Common Stock in
F-18
<PAGE> 45
ZymeTx, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
5. STOCKHOLDERS' EQUITY (CONTINUED)
connection with the Company's initial public offering in November 1997.
In August 1997, the Company closed a private placement of 1,437,504 shares of
Series C Preferred Stock (the "Series C Preferred Stock") receiving $4,925,002
in cash, net of offering expenses and issued warrants to purchase 215,625 shares
of the Company's Common Stock at $4.00 per share. The Series C stock was
converted into 1,437,504 shares of Common Stock in connection with the Company's
initial public offering in November 1997.
In November 1997, the Company closed an initial public offering of 2,300,000
shares of Common Stock, $.001 par value (2,645,000 shares including 345,000
shares issued in connection with the exercise of an underwriter overallotment
option) and issued warrants to purchase 230,000 shares of the Company's Common
Stock at $12.40 per share. As a consequence of the closing of the offering, all
of the Series A Preferred Stock, Series B Preferred Stock and Series C Preferred
Stock outstanding were automatically converted into shares of Common Stock. The
automatic conversion of Series C Preferred to Common Stock and the rights of
certain warrant holders to acquire shares of the Company's Common Stock resulted
in the recognition, as a charge to retained earnings, of a non-cash dividend.
The non-cash dividend of $5,684,449 represents the difference between the price
received per share for the Series C Preferred Stock and the price received per
share for the Company's Common Stock issued in the public offering. The dividend
reduced net income applicable to Common Stock and, accordingly, reduced earnings
per share in the twelve month period ended June 30, 1998.
In December, 1998, the Company filed a registration statement covering 2,384,431
shares of Common Stock prior to the expiration of the 13-month lock-up period
from the closing of the initial public offering associated with registration
rights granted to certain purchasers of original issuance of the Company's
Common Stock and investors of the Company's Series A and Series C Preferred
Stock.
WARRANTS
At June 30, 1999, there were warrants outstanding for the purchase of an
aggregate of 795,847 shares of the Company's common stock exercisable at prices
ranging from $3.20 to $12.40 (a weighted average of $6.08 per share) which
expire from November 2001 through July 2004 (Notes 3 and 4).
RIGHTS PLAN
In February 1999, the Company announced that its Board of Directors had adopted
a rights plan
F-19
<PAGE> 46
ZymeTx, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
5. STOCKHOLDERS' EQUITY (CONTINUED)
designed to protect the long-term interest of ZymeTx and its stockholders
in the event of an unsolicited takeover attempt. On February 3, 1999, the
Company declared, under the Plan, a tax-free dividend distribution of one share
purchase right ("Right") for each outstanding share of Common Stock to
stockholders of record as of the close of business. Each Right entitles the
holder to buy 1/1000 of a share of Series A Junior Preferred Stock of the
Company at an exercise price of $47.50 (a total of 20,000 shares of the
Company's Preferred Stock have been designated under the Rights Plan). The terms
of the plan provide that the Rights will be exercisable for Preferred Shares
only if a person or group acquires beneficial ownership of 20% or more of the
Company's common shares or commences an offer that would result in such person
or group owning 20% or more of the Common Shares without approval of the Board
of Directors. The holders of the Rights, other than the acquiring person(s)
would then have the right to receive upon exercise the Company's common stock
having a value equal to two times the exercise price. The Company will be
entitled to redeem the Rights at $.001 per Right at any time prior to the tenth
day following a public announcement that a person or group has acquired 20% or
more of the Company's Common Shares. The Rights will expire on February 3, 2009.
6. STOCK OPTION AND STOCK PURCHASE PLAN
STOCK OPTION PLANS
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is generally recognized.
Pro forma information regarding net income and earnings per share is required by
Statement 123, which also requires that the information be determined as if the
Company has accounted for its employee stock options granted subsequent to
December 31, 1994 under the fair value method of that Statement. The fair value
for options granted prior to the initial public offering were estimated at the
date of grant using a minimum value option pricing model. The fair value of
options granted subsequent to the initial public offering was estimated at the
date of grant using a Black-Scholes option pricing model with the following
weighted average assumptions for 1998 and 1999, respectively: risk free interest
rate of 6.0% and 5.3%; no dividend yield; a volatility factor of the expected
market price of the Company's stock of .93 and .64; and a weighted average
expected life
F-20
<PAGE> 47
ZymeTx, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
6. STOCK OPTION AND STOCK PURCHASE PLAN (CONTINUED)
of the option of seven years and six years.
Because option valuation models require the input of subjective assumptions
including the expected stock price volatility, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the qualified
and non-qualified options is amortized to expense over the options' vesting
period. The Company's pro forma information follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1998 1999
------------- -------------
<S> <C> <C>
Net loss applicable to common stock $ (10,301,338) $ (8,766,828)
Net loss per common and common equivalent share $ (2.21) $ (1.32)
</TABLE>
In 1997, the Company adopted stock option plans for employees, the ZymeTx, Inc.
Stock Option Plan (the "Employees' Plan") as well as for non-employees, the
ZymeTx, Inc. Director Stock Option Plan (the "Directors' Plan") (collectively,
the "Plans"). During 1997, the Company granted 350,000 shares and 100,000 shares
under the Employees' Plan and Directors' Plan, respectively. As of June 30,
1999, there are 338,776 shares of common stock available for issuance under both
the Employees' Plan and the Directors' Plan. There are two forms of options:
options intended to qualify as incentive stock options ("ISO Options") under the
Employees' Plan and the Internal Revenue Code of 1986, as amended (the "Code"),
and nonqualified options under the Directors' Plan (the "Nonqualified Options").
The options become exercisable 25% and 33% a year and are fully exercisable
after four years and three years for the Employees' Plan and Directors' Plan,
respectively. The options lapse ten years from the date of grant.
F-21
<PAGE> 48
ZymeTx, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
6. STOCK OPTION AND STOCK PURCHASE PLAN (CONTINUED)
Activity in the Company's Employees' Plan during 1998 and 1999 is as follows:
<TABLE>
<CAPTION>
1998 1999
-------------------- --------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Outstanding options at beginning of period 350,000 $ 1.14 364,250 $ 1.65
Granted 39,000 5.27 72,824 4.94
Exercised (16,250) 1.00 (26,000) 1.00
Surrendered, forfeited or expired (8,500) 4.55 (17,100) 3.45
-------- --------
Outstanding options at end of period 364,250 1.65 393,974 2.30
======== ========
Exercisable at end of period 141,250 1.09 199,125 1.24
======== ========
Weighted average fair value of options granted
during period $ 3.92 $ 2.69
</TABLE>
Outstanding options to acquire 295,250 shares of stock at June 30, 1999 had
exercise prices ranging from $1.00 to $2.00 per share (192,125 of which are
exercisable at a weighted average price of $1.08 per share) and had a weighted
average exercise price of $2.11 and remaining contractual life of 7.5 years. The
balance of options outstanding at June 30, 1999 had exercise prices ranging from
$4.22 to $6.00 per share (7,000 of which are exercisable at a weighted average
price of $5.55 per share) and had a weighted average exercise price of $5.41 and
remaining contractual life of 9 years.
F-22
<PAGE> 49
ZymeTx, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
6. STOCK OPTION AND STOCK PURCHASE PLAN (CONTINUED)
Activity in the Company's Directors' Plan during 1998 and 1999 is as follows:
<TABLE>
<CAPTION>
1998 1999
-------------------- --------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Outstanding options at beginning of period 100,000 $ 1.00 115,000 $ 1.42
Granted 15,000 4.22 115,000 3.82
Exercised -- (25,000) 1.00
Surrendered, forfeited or expired -- (5,000) 4.22
-------- --------
Outstanding options at end of period 115,000 1.42 200,000 2.79
======== ========
Exercisable at end of period 49,998 1.00 60,832 1.13
======== ========
Weighted average fair value of options granted
during period $ 3.46 $ 2.68
</TABLE>
Outstanding options to acquire 115,000 shares of stock at June 30, 1999 had
exercise prices ranging from $1.00 to $2.09 per share (58,332 of which are
exercisable at a weighted average price of $1.00 per share) and had a weighted
average exercise price of $1.38 and remaining contractual life of 8.3 years. The
balance of options outstanding at June 30, 1999, had exercise prices ranging
from $4.22 to $4.94 per share (2,500 of which are exercisable at a weighted
average price of $4.22 per share) and had a weighted average exercise price of
$4.69 and a remaining contractual life of 9.2 years.
STOCK PURCHASE PLAN
Effective July 1, 1998, the Company reserved 50,000 shares of its Common Stock
for issuance to employees under an employee stock purchase plan (the "ESPP").
Under the ESPP, eligible employees can purchase, through payroll deductions, a
specified number of shares of the Company's Common Stock at the lesser of (a)
85% of the official closing price of the Common Stock on the Offering
Termination Date, as defined, or (b) 85% of the official closing price of the
Common Stock on the Offering Commencement Date, as defined. The options will be
continually granted and automatically exercised each quarter in which the Plan
is in effect. For the year ended June 30, 1999, 4,692 shares of stock were
purchased though the Employee Stock Purchase Plan for a total of $8,974, or
$1.91 per share.
F-23
<PAGE> 50
ZymeTx, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
7. INCOME TAXES
The provision for income taxes differs from the expected income tax using the
federal statutory rate on loss before income taxes due to the following:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1998 1999
----------- -----------
<S> <C> <C>
Benefit at federal statutory rate $(1,547,213) $(2,922,703)
Other (53,975) (33,207)
State tax benefit (182,026) (321,729)
Operating loss not benefited 1,783,214 3,277,639
----------- -----------
$ -- $ --
=========== ===========
</TABLE>
Deferred tax assets and liabilities, resulting from differences in the timing of
recognition of revenues and expenses, consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
1998 1999
----------- -----------
<S> <C> <C>
Deferred tax liability:
Tax depreciation in excess of financial $ 35,488 $ 62,353
Deferred tax assets:
Net operating loss carryforward 2,086,437 5,247,590
Research and development credits 337,707 408,363
Capitalization of certain costs as inventory for tax
purposes 671,749 733,036
Other 21,556 32,964
----------- -----------
3,117,449 6,421,953
Valuation allowance (3,081,961) (6,359,600)
----------- -----------
Net deferred tax assets 35,488 62,353
----------- -----------
Net deferred tax liability $ -- $ --
=========== ===========
</TABLE>
F-24
<PAGE> 51
ZymeTx, Inc.
(A Development Stage Company)
Notes to Financial Statements (continued)
7. INCOME TAXES (CONTINUED)
As of June 30, 1999, the Company had a federal net operating loss carryforward
of approximately $12.8 million. The net operating loss carryforward will expire
from 2010 through 2014, if not utilized.
Because of the Company's lack of earnings history, the net deferred tax asset
comprised of its net operating loss carryforward has been fully offset by a
valuation allowance. The valuation allowance increased by $1.8 million and $3.0
million in 1998 and 1999, respectively.
8. EMPLOYEE BENEFIT PLAN
The Company sponsors a retirement plan under Section 401(k) of the Internal
Revenue Code under which participation is available to substantially all
full-time employees. Company contributions are made at the discretion of the
compensation committee. In 1999, the Company matched 2% of employee
contributions amounting to $9,369 (none in 1998).
9. INVENTORY WRITE-DOWN
In October 1999, the Company completed the necessary regulatory documentation to
manufacture and sell an improved version of ZstatFlu. The improvements allowed
for decreased incubation from 30-minutes to 20-minutes. The Company does not
intend to market the 30-minute format and elected to rework existing inventory
into the 20-minute format. As a result, an additional inventory write-down of
$611,000 was included in fiscal 1999 results of operations.
10. SUBSEQUENT EVENTS (UNAUDITED)
On August 17, 1999, the Company relieved its former President and Chief
Executive Officer of his duties and responsibilities. In connection therewith,
the Company agreed to severance payments under the above plan equal to
approximately $200,000. This charge will be recognized in operations for the
year ending June 30, 2000.
F-25
<PAGE> 1
AMENDMENT NO. 1
(dated April 21, 1998 for reference purposes only)
To Lease Dated May 10, 1996
Between Presbyterian Health Foundation, as Landlord
And ZymeTx, Inc. as Tenant
WHEREAS, Landlord and Tenant are the parties to the above described Lease for
the Building located at 800 N. Research Parkway; and,
Landlord and tenant mutually desire to amend the above described Lease, (amended
via Addendum No. 1) as follows:
The provisions of this Amendment No. 1 shall supersede and control any
inconsistent provisions contained in the Lease, regardless of whether such
inconsistent provisions are contained in the printed portion of the Lease or any
rider, addendum or exhibit annexed thereto.
1. Building: 800 Research Parkway Building 1, Oklahoma
City, OK
2. Amended Lease Premises: The Leased Premises will change to include
all of the 1st floor consisting of
approximately 22,833 rentable square feet
(RSF) and all of the 2nd floor consisting of
22,800 RSF. Tenant currently occupies 11,803
RSF. This equates to an overall increase of
approximately 33,830 RSF for a total of
45,633 RSF.
3. Effective Commencement: December 1, 1998 for the 2nd floor space
(22,800 RSF) and March 1, for the remaining
10,997 RSF of the 1st floor. Tenant shall
occupy space within the Premises upon the
substantial completion of the Tenant
Improvement's of said space.
4. Amended Tenant Improvement: Landlord will contribute a Tenant Improvement
Allowance for any new Allowance: space leased
greater than the existing space of 11,803
RSF, such allowance shall be the lesser of:
o ($0.166 x months remaining on lease) x
(rentable square feet leased greater than
11,803 RSF)
OR
o The actual cost of the Tenant Improvements.
Any excess cost of the Tenant Improvements
shall be the responsibility of the Tenant.
5. Lease Rate: The lease rate for any space greater than
11,803 RSF shall be $12.00 per RSF annually.
6. Amended Security Deposit: Tenant shall pay an amount that is equal to
one month's rent based on the additional
square footage.
7. Option to Expand: Landlord hereby grants Tenant a right of
first refusal to expand into the 3rd floor
("Additional space") of the Building as
provided in this paragraph. Landlord will
provide Tenant written notice of Landlord's
intent to lease any such space to a third
party. Tenant may exercise such right within
fifteen (15) days of receiving such notice by
executing a written amendment to this Lease
covering the Additional space, prior to the
time Landlord commits to lease such space to
a third party. Such amendment shall provide
for the leasing of such space on the same
terms and conditions contained in this
Amendment No. 1. In such event (a) the
Additional Space shall be included as part of
the Leased Premises, (b) the lease for the
Additional Space shall be co-terminous with
the lease for the Leased Premises, (c) the
lease rate shall be $12,00 per RSF annually
for an such Additional Space and (d) the
Tenant Improvements Allowance shall be based
on the lesser of: (i) ($0.166 x months
remaining on lease) x (rentable square feet
of Additional Space) or (ii) the actual cost
of such Tenant Improvements for the
Additional Space.
Both parties agree to the terms of this Lease Agreement as amended by Addendum
No. 1 and this Amendment No. 1 and the Lease Agreement shall continue in full
force.
Landlord: Presbyterian Health Foundation Tenant: ZYMETX, INC.
/s/ Dennis McGrath /s/ Peter G. Livingston
- ---------------------------------------- ----------------------------------
Dennis McGrath, Vice President Peter G. Livingston, President
<PAGE> 1
AMENDMENT NO. 1 TO
EXECUTIVE SERVICES AGREEMENT
THIS AMENDMENT NO. 1 (THE "AMENDMENT"), is made and entered into as of
July 1, 1999, to that certain Executive Services Agreement (the "Agreement"),
dated as of July 1, 1997, by and between ZymeTx, Inc., a Delaware corporation
(the "Company"), and Peter G. Livingston ("Livingston"). Unless otherwise
defined herein, capitalized terms used but not defined herein shall have the
meaning set forth in the Agreement and the Agreement shall be amended to
incorporate any additional definitions provided for in this Amendment.
W I T N E S S E T H
WHEREAS, Livingston is currently serving as President and Chief
Executive Officer of the Company; and
WHEREAS, on July 24, 1996, the Company and Oklahoma Medical Research
Foundation ("OMRF") entered into that certain Employee Services Agreement (the
"OMRF Agreement"), pursuant to which, among other things, OMRF has leased the
services of Livingston to the Company;
WHEREAS, on July 1, 1997, Livingston and the Company entered into the
Agreement, a copy of which is attached hereto as Annex "A";
WHEREAS, on April 14, 1999, the Company and Livingston entered into
that certain Severance Compensation Agreement (the "Severance Agreement"), a
copy of which is attached hereto as Annex "B";
WHEREAS, the Company and Livingston desire to enter into this Amendment
in order to ensure Livingston's continued service to the Company and to
acknowledge the terms of the Severance Agreement;
NOW THEREFORE, in consideration of the mutual promises and agreements
herein contained, and other good and valuable consideration, the adequacy of
which is hereby acknowledged, the parties hereby agree as follows:
1. AMENDMENT OF TERMINATION DATE. Section 2 of the Agreement is hereby
amended to read in its entirety as follows:
2. Term of Service. The term of Livingston's service
under this Agreement (the "Term"), which commenced on July 1,
1997 (the "Commencement Date"), shall continue through and
expire on July 1, 2000 (the "Termination Date"), unless
earlier terminated as herein provided.
2. ACKNOWLEDGMENT OF SEVERANCE AGREEMENT. The parties hereto: (i)
acknowledge the terms of the Severance Agreement; (ii) agree to the
incorporation of such terms herein by reference thereto; and (iii) agree that
the terms of the Severance Agreement shall govern the termination of
Livingston's employment following a "Change in Control" (as such term is defined
in the Severance Agreement).
3. SCOPE OF AMENDMENT. Except as amended hereby, all provisions of the
Agreement shall remain in full force and effect.
<PAGE> 2
4. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
5. HEADINGS. The headings in this Agreement are for reference purposes
only and shall not in any way affect the meaning or interpretation of this
Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
COMPANY: ZYMETX, INC.
By:
--------------------------------
James R. Tolbert III,
Chairman
LIVINGSTON:
-----------------------------------
Peter G. Livingston
-2-
<PAGE> 1
ANNEX "B"
SEVERANCE COMPENSATION AGREEMENT
SEVERANCE COMPENSATION AGREEMENT (the "Agreement") dated as of April
14, 1999, by and between ZymeTx, Inc., a Delaware corporation (the "Company"),
and Peter G. Livingston (the "Executive").
WHEREAS, the Company's Board of Directors has determined that it is
appropriate to reinforce and encourage the continued attention and dedication of
members of the Company's management, including the Executive, to their assigned
duties without distraction in potentially disturbing circumstances arising from
the possibility of a change in control of the Company.
WHEREAS, this Agreement sets forth the severance compensation, which
the Company agrees it, will pay to the Executive if the Executive's employment
with the Company terminates under one of the circumstances described herein
following a Change in Control of the Company (as defined herein).
WHEREAS, the Company and the Executive have entered into that certain
Executive Services Agreement, dated as of July 1, 1997 (the "Services
Agreement"), and the Company and the Executive desire to amend and supplement
said Services Agreement to address the circumstance of a Change in Control.
NOW THEREFORE, in consideration of the mutual promises and agreements
herein contained and other good and valuable consideration, the adequacy of
which is hereby acknowledged, the parties hereby agree as follows:
1. Term. This Agreement shall terminate, except to the extent that any
obligation of the Company hereunder remains unpaid as of such time, upon the
earlier of (i) the termination of the Executive's employment with the Company
based on death, Disability (as defined in Section 3(b)), Retirement (as defined
in Section 3(c)) or Cause (as defined in Section 3(d)) or by the Executive other
than for Good Reason (as defined in Section 3(e)); and (ii) three years from the
date of a Change in Control of the Company if the Executive has not terminated
his employment for Good Reason as of such time.
2. Change in Control. No compensation shall be payable under this
Agreement unless and until (a) there shall have been a Change in Control of the
Company, while the Executive is still an employee of the Company and (b) the
Executive's employment by the Company thereafter shall have been terminated in
accordance with Section 3. For purposes of this Agreement, a Change in Control
of the Company shall be deemed to have occurred if (i) there shall be
consummated (x) any consolidation or merger of the Company in which the Company
is not the continuing or surviving corporation or pursuant to which shares of
the Company's Common Stock would be converted into cash, securities or other
property, other than a merger of the Company in which the holders of the
Company's Common Stock immediately prior to the merger have the same
proportionate ownership of common stock of the surviving corporation immediately
after the merger, or (y) any sale, lease,
<PAGE> 2
exchange or other transfer (in one transaction or a series of related
transactions) of all, or substantially all, of the assets of the Company, or
(ii) the stockholders of the Company approved any plan or proposal for the
liquidation or dissolution of the Company, or (iii) any person (as such term is
used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) (hereinafter an "Acquiring Person"), shall become
the beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act)
(hereinafter "Beneficial Owner") of 20% or more of the combined voting power of
the Company's then outstanding securities, or (iv) during any period of two
consecutive years, individuals who at the beginning of such period constitute
the entire Board of Directors shall cease for any reason to constitute a
majority thereof unless the election, or the nomination for election by the
Company's stockholders, of each new director was approved by a vote of at least
two-thirds of the directors then still in office who were directors at the
beginning of the period.
3. Termination Following Change in Control.
(a) Generally. If a Change in Control of the Company shall have
occurred while the Executive is still an employee of the Company, the Executive
shall be entitled to the compensation provided in Section 4 upon the subsequent
termination of the Executive's employment with the Company by the Executive or
by the Company unless such termination is as a result of (i) the Executive's
death; (ii) the Executive's Disability (as defined in Section (3)(b) below);
(iii) the Executive's Retirement (as defined in Section 3(c) below); (iv) the
Executive's termination by the Company for Cause (as defined in Section 3(d)
below); or (v) the Executive's decision to terminate employment other than for
Good Reason (as defined in Section 3(e) below).
(b) Disability. If, as a result of the Executive's incapacity due to
physical or mental illness, the Executive shall have been absent from his duties
with the Company on a full-time basis for six months and within 30 days after
written notice of termination is thereafter given by the Company the Executive
shall not have returned to the full-time performance of the Executive's duties
("Disability"), the Company may terminate this Agreement.
(c) Retirement. The term "Retirement" as used in this Agreement shall
mean termination by the Company or the Executive of the Executive's employment
based on the Executive's having reached age 65 or such other age as shall have
been fixed in any arrangement established with the Executive's consent with
respect to the Executive.
(d) Cause. The Company may terminate the Executive's employment for
Cause. For purposes of this Agreement only, the Company shall have "Cause" to
terminate the Executive's employment hereunder only on the basis of fraud,
misappropriation or embezzlement on the part of the Executive. Notwithstanding
the foregoing, the Executive shall not be deemed to have been terminated for
Cause unless and until there shall have been delivered to the Executive a copy
of a resolution duly adopted by the affirmative vote of not less than
three-fourths of the entire membership of the Company's Board of Directors at a
meeting of the Board called and held for the purpose (after reasonable notice to
the Executive and an opportunity for the Executive, together with the
Executive's counsel, to be heard before the Board), finding that in the good
faith opinion of the Board
2
<PAGE> 3
the Executive was guilty of conduct set forth in the second sentence of this
Section 3(d) and specifying the particulars thereof in detail.
(e) Good Reason. The Executive may terminate the Executive's employment
for Good Reason at any time during the six-month period following a Change in
Control. For purposes of this Agreement "Good Reason" shall mean any of the
following (without the Executive's express written consent):
(i) the assignment to the Executive by the Company of duties
inconsistent with the Executive's position, duties, responsibilities
and status with the Company immediately prior to a Change in Control of
the Company, or a change in the Executive's titles or offices as in
effect immediately prior to a Change in Control of the Company, or any
removal of the Executive from or any failure to re-elect the Executive
to any of such positions, except in connection with the termination of
his employment for Disability, Retirement or Cause or as a result of
the Executive's death or by the Executive other than for Good Reason;
(ii) a reduction by the Company in the Executive's base salary
as in effect on the date hereof or as the same may be increased from
time to time during the term of this Agreement;
(iii) any failure by the Company to continue the participation
of the Executive in any benefit plan or arrangement (including, without
limitation, the Company's group life insurance plan and medical,
dental, accident and disability plans) in which the Executive is
participating at the time of a Change in Control of the Company (or any
other plans providing the Executive with substantially similar
benefits) (hereinafter referred to as "Benefit Plans"), or the taking
of any action by the Company which would adversely affect the
Executive's participation in or materially reduce the Executive's
benefits under any such Benefit Plan or deprive the Executive of any
material fringe benefit enjoyed by the Executive at the time of a
Change in Control of the Company, unless such failure to continue or
other action is applicable to all other executive officers of the
Company;
(iv) any failure by the Company to continue the participation
of the Executive in any incentive plan or arrangement in which the
Executive is participating at the time of a Change in Control of the
Company (or any other plans or arrangements providing him with
substantially similar benefits) and available to other executive
officers of the Company generally (hereinafter referred to as
"Incentive Plans") or the taking of any action by the Company which
would adversely affect the Executive's participation in any such
Incentive Plan or reduce the Executive's benefits under any such
Incentive Plan, expressed as a percentage of his base salary, by more
than ten percentage points in any fiscal year as compared to the
immediately preceding fiscal year unless such failure to continue or
other action is applicable to all other executive officers of the
Company;
(v) any failure by the Company to continue the participation
of the Executive in any plan or arrangement to receive securities of
the Company (including, without limitation, the Company's Stock Option
Plan, Employee Stock Purchase Plan and any other plan or
3
<PAGE> 4
arrangement to receive and exercise stock options, stock appreciation
rights, restricted stock or grants thereof) in which the Executive its
participating at the time of a Change in Control of the Company (or
plans or arrangements providing him with substantially similar
benefits) (hereinafter referred to as "Stock Plans") or the taking of
any action by the Company which would adversely affect the Executive's
participation in or materially reduce the Executive's benefits under
any such Stock Plan, unless such failure to continue or other action is
applicable to all other executive officers of the Company;
(vi) a relocation of the Company's principal executive offices
to location outside of Oklahoma City, Oklahoma, or the Executive's
relocation to any place other than the location at which the Executive
performed the Executive's duties prior to a Change in Control of the
Company, except for required travel by the Executive on the Company's
business to an extent substantially consistent with the Executive's
business travel obligations at the time of a Change in Control of the
Company;
(vii) any material breach by the Company of any provision of
this Agreement, the Services Agreement or any successor agreement
thereto;
(viii) any failure by the Company to obtain the assumption of
this Agreement by any successor or assign of the Company; or
(ix) any purported termination of the Executive's employment
that is not effected pursuant to a Notice of Termination satisfying the
requirements of Section 3(f), and for purposes of this Agreement, no
such purported termination shall be effective.
(f) Notice of Termination. Any termination by the Company pursuant to
Section 3(b), 3(c) or 3(d) shall be communicated by a Notice of Termination. For
purposes of this Agreement, a "Notice of Termination" shall mean a written
notice which shall indicate those specific termination provisions in this
Agreement relied upon and which sets forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated. For purposes of this Agreement, no
such purported termination by the Company shall be effective without such Notice
of Termination.
(g) Date of Termination. "Date of Termination" shall mean (a) if this
Agreement is terminated by the Company for Disability, 30 days after Notice of
Termination is given to the Executive (provided that the Executive shall not
have returned to the performance of the Executive's duties on a full-time basis
during such 30-day period) or (b) if the Executive's employment is terminated by
the Company for any other reason, the date on which a Notice of Termination is
given; provided that if within 30 days after any Notice of Termination is given
to the Executive by the Company the Executive notifies the Company that a
dispute exists concerning the termination, the Date of Termination shall be the
date the dispute is finally determined, whether by mutual agreement by the
parties or upon final judgment, order or decree of a court of competent
jurisdiction (the time for appeal therefrom having expired and no appeal having
been perfected).
4
<PAGE> 5
4. Severance Compensation Upon Termination of Employment. If the
Company shall terminate the Executive's employment other than pursuant to
Section 3(b), 3(c) or 3(d) or if the Executive shall terminate his employment
for Good Reason, then the Company shall pay to the Executive as severance pay in
a lump sum, in cash, on the fifth day following the Date of Termination, an
amount determined as follows:
(i) an amount equal to the average of the aggregate annual
compensation paid by the Company and any of its subsidiaries to the
Executive during the two calendar years preceding the Change in Control
(the "Base Compensation") if the Change of Control event occurred under
Section 2(i), (ii) or (iii) and was approved by a vote of at least
two-thirds of the directors serving immediately prior to the time of
the Change of Control;
(ii) an amount equal to two times the Base Compensation if the
Change of Control event occurred under Sections 2(i), (ii) or (iii) and
was not approved by a vote of at least two-thirds of the directors
serving immediately prior to the time of the Change of Control;
(iii) an amount equal to two times the Base Compensation if
the Change of Control event occurred under Section 2(iv);
provided, however, that if the lump sum severance payment under this Section 4,
either alone or together with other payments which the Executive, has the right
to receive from the Company, would constitute a "parachute payment" (as defined
in Section 28OG of the Internal Revenue Code of 1954, as amended (the "Code")),
such lump sum severance payment shall be reduced to the largest amount as will
result in no portion of the lump sum severance payment under this Section 4
being subject to the excise tax imposed by Section 4999 of the Code. The
determination of any reduction in the lump sum severance payment under this
Section 4 pursuant to the foregoing proviso shall be made by the Executive in
good faith, and such determination shall be conclusive and binding on the
Company.
5. No Obligation To Mitigate Damages; No Effect on Other Contractual
Rights. (a) The Executive shall not be required to mitigate damages or the
amount of any payment provided for under this Agreement by seeking other
employment or otherwise, nor shall the amount of any payment provided for under
this Agreement be reduced by any compensation earned by the Executive as the
result of employment by another employer after the Date of Termination, or
otherwise.
(b) The provisions of this Agreement, and any payment provided for
hereunder, shall not reduce any amounts otherwise payable, or in any way
diminish the Executive's existing rights, or rights which would accrue solely as
a result of the passage of time, under any Benefit Plan, Incentive Plan or Stock
Plan, employment agreement or other contract, plan or arrangement.
6. Successor to the Company. (a) The Company will require any successor
or assign (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/ or assets of the
Company, by agreement in form and substance satisfactory to the Executive,
expressly, absolutely and unconditionally to assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to
5
<PAGE> 6
perform it if no such succession or assignment had taken place. Any failure of
the Company to obtain such agreement prior to the effectiveness of any such
succession or assignment shall be a material breach of this Agreement and shall
entitle the Executive to terminate the Executive's employment for Good Reason.
As used in this Agreement, "Company" shall mean the Company as hereinbefore
defined and any successor or assign to its business and/or assets as aforesaid
which executes and delivers the agreement provided for in this Section 6 or
which otherwise becomes bound by all the terms and provisions of this Agreement
by operation of law. If at any time during the term of this Agreement the
Executive is employed by any corporation a majority of the voting securities of
which is then owned by the Company, "Company" as used in Sections 3, 4, 11 and
12 hereof shall in addition include such employer. In such event, the Company
agrees that it shall pay or shall cause such employer to pay any amounts owed to
The Executive pursuant to Section 4 hereof.
(b) This Agreement shall inure to the benefit of and be enforceable by
the Executive's personal and legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. If the Executive should
die while any amounts are still payable to him hereunder, all such amounts,
unless otherwise provided herein, shall be paid in accordance with the terms of
this Agreement to the Executive's devisee, legatee, or other designee or, if
there be no such designee, to the Executive's estate.
7. Notice. For purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, as follows:
If to the Company, to:
ZymeTx, Inc.
800 N. Research Parkway, Suite 100
Oklahoma City, Oklahoma 73104
If to the Executive, to:
Peter G. Livingston
5500 S.E. 15th St.
Edmond, Oklahoma 73013
or such other address as either party may have furnished to the other in writing
in accordance herewith, except that notices of change of address shall be
effective only upon receipt.
8. Miscellaneous. No provisions of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing signed by the Executive and the Company. No waiver by either party
hereto at any time of any breach by the other party hereto of, or compliance
with, any condition or provision of this Agreement to be performed by such other
party shall be deemed a waiver of similar or dissimilar provisions or conditions
at the same or at any prior or subsequent time. No agreements or
representations, oral or otherwise, express or implied, with
6
<PAGE> 7
respect to the subject matter hereof have been made by either party which are
not set forth expressly in this Agreement. This Agreement shall be governed by
and construed in accordance with the laws of the State of Oklahoma.
9. Validity. The invalidity or unenforceability of any provisions of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
10. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be, deemed to be an original but all of which
together will constitute one and the same instrument.
11. Legal Fees and Expenses. The Company shall pay all legal tees and
expenses which the Executive may incur as a result of the Company's contesting
the validity, enforceability or the Executive's interpretation of, or
determinations under, this Agreement.
12. Confidentiality. The Executive shall retain in confidence any and
all confidential information known to the Executive concerning the Company and
its business so long as such information is not otherwise publicly disclosed.
13. Relationship with Services Agreement. By executing this Agreement,
the Company and the Executive hereby amend the Services Agreement, as provided
herein. Upon the event of a Change in Control, the provisions of this Agreement
shall supersede Section 6 of the Services Agreement, but all other provisions of
the Services Agreement shall remain in effect. The term of this Agreement shall
not be affected by termination of the Services Agreement or any subsequent
agreement thereto.
7
<PAGE> 8
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
COMPANY:
ZYMETX, INC.
By:
----------------------------------
EXECUTIVE:
-------------------------------------
Peter G. Livingston
8
<PAGE> 1
SEVERANCE COMPENSATION AGREEMENT
SEVERANCE COMPENSATION AGREEMENT (the "Agreement") dated as of April
14, 1999, by and between ZymeTx, Inc., a Delaware corporation (the "Company"),
and Craig D. Shimasaki, Ph.D. (the "Executive").
WHEREAS, the Company's Board of Directors has determined that it is
appropriate to reinforce and encourage the continued attention and dedication of
members of the Company's management, including the Executive, to their assigned
duties without distraction in potentially disturbing circumstances arising from
the possibility of a change in control of the Company.
WHEREAS, this Agreement sets forth the severance compensation, which
the Company agrees it, will pay to the Executive if the Executive's employment
with the Company terminates under one of the circumstances described herein
following a Change in Control of the Company (as defined herein).
NOW THEREFORE, in consideration of the mutual promises and agreements
herein contained and other good and valuable consideration, the adequacy of
which is hereby acknowledged, the parties hereby agree as follows:
1. Term. This Agreement shall terminate, except to the extent that any
obligation of the Company hereunder remains unpaid as of such time, upon the
earlier of (i) the termination of the Executive's employment with the Company
based on death, Disability (as defined in Section 3(b)), Retirement (as defined
in Section 3(c)) or Cause (as defined in Section 3(d)) or by the Executive other
than for Good Reason (as defined in Section 3(e)); and (ii) three years from the
date of a Change in Control of the Company if the Executive has not terminated
his employment for Good Reason as of such time.
2. Change in Control. No compensation shall be payable under this
Agreement unless and until (a) there shall have been a Change in Control of the
Company, while the Executive is still an employee of the Company and (b) the
Executive's employment by the Company thereafter shall have been terminated in
accordance with Section 3. For purposes of this Agreement, a Change in Control
of the Company shall be deemed to have occurred if (i) there shall be
consummated (x) any consolidation or merger of the Company in which the Company
is not the continuing or surviving corporation or pursuant to which shares of
the Company's Common Stock would be converted into cash, securities or other
property, other than a merger of the Company in which the holders of the
Company's Common Stock immediately prior to the merger have the same
proportionate ownership of common stock of the surviving corporation immediately
after the merger, or (y) any sale, lease, exchange or other transfer (in one
transaction or a series of related transactions) of all, or substantially all,
of the assets of the Company, or (ii) the stockholders of the Company approved
any plan or proposal for the liquidation or dissolution of the Company, or (iii)
any person (as such term is used in Sections 13(d) and 14(d)(2) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) (hereinafter
an "Acquiring Person"), shall become the beneficial owner (within the meaning of
Rule 13d-3 under the Exchange Act) (hereinafter "Beneficial Owner") of 20% or
more of the combined voting power of the Company's then outstanding securities,
or (iv) during any period
<PAGE> 2
of two consecutive years, individuals who at the beginning of such period
constitute the entire Board of Directors shall cease for any reason to
constitute a majority thereof unless the election, or the nomination for
election by the Company's stockholders, of each new director was approved by a
vote of at least two-thirds of the directors then still in office who were
directors at the beginning of the period.
3. Termination Following Change in Control.
(a) Generally. If a Change in Control of the Company shall have
occurred while the Executive is still an employee of the Company, the Executive
shall be entitled to the compensation provided in Section 4 upon the subsequent
termination of the Executive's employment with the Company by the Executive or
by the Company unless such termination is as a result of (i) the Executive's
death; (ii) the Executive's Disability (as defined in Section (3)(b) below);
(iii) the Executive's Retirement (as defined in Section 3(c) below); (iv) the
Executive's termination by the Company for Cause (as defined in Section 3(d)
below); or (v) the Executive's decision to terminate employment other than for
Good Reason (as defined in Section 3(e) below).
(b) Disability. If, as a result of the Executive's incapacity due to
physical or mental illness, the Executive shall have been absent from his duties
with the Company on a full-time basis for six months and within 30 days after
written notice of termination is thereafter given by the Company the Executive
shall not have returned to the full-time performance of the Executive's duties
("Disability"), the Company may terminate this Agreement.
(c) Retirement. The term "Retirement" as used in this Agreement shall
mean termination by the Company or the Executive of the Executive's employment
based on the Executive's having reached age 65 or such other age as shall have
been fixed in any arrangement established with the Executive's consent with
respect to the Executive.
(d) Cause. The Company may terminate the Executive's employment for
Cause. For purposes of this Agreement only, the Company shall have "Cause" to
terminate the Executive's employment hereunder only on the basis of fraud,
misappropriation or embezzlement on the part of the Executive. Notwithstanding
the foregoing, the Executive shall not be deemed to have been terminated for
Cause unless and until there shall have been delivered to the Executive a copy
of a resolution duly adopted by the affirmative vote of not less than
three-fourths of the entire membership of the Company's Board of Directors at a
meeting of the Board called and held for the purpose (after reasonable notice to
the Executive and an opportunity for the Executive, together with the
Executive's counsel, to be heard before the Board), finding that in the good
faith opinion of the Board the Executive was guilty of conduct set forth in the
second sentence of this Section 3(d) and specifying the particulars thereof in
detail.
(e) Good Reason. The Executive may terminate the Executive's employment
for Good Reason at any time during the six-month period following a Change in
Control. For purposes of this Agreement "Good Reason" shall mean any of the
following (without the Executive's express written consent):
2
<PAGE> 3
(i) the assignment to the Executive by the Company of duties
inconsistent with the Executive's position, duties, responsibilities
and status with the Company immediately prior to a Change in Control of
the Company, or a change in the Executive's titles or offices as in
effect immediately prior to a Change in Control of the Company, or any
removal of the Executive from or any failure to re-elect the Executive
to any of such positions, except in connection with the termination of
his employment for Disability, Retirement or Cause or as a result of
the Executive's death or by the Executive other than for Good Reason;
(ii) a reduction by the Company in the Executive's base salary
as in effect on the date hereof or as the same may be increased from
time to time during the term of this Agreement;
(iii) any failure by the Company to continue the participation
of the Executive in any benefit plan or arrangement (including, without
limitation, the Company's group life insurance plan and medical,
dental, accident and disability plans) in which the Executive is
participating at the time of a Change in Control of the Company (or any
other plans providing the Executive with substantially similar
benefits) (hereinafter referred to as "Benefit Plans"), or the taking
of any action by the Company which would adversely affect the
Executive's participation in or materially reduce the Executive's
benefits under any such Benefit Plan or deprive the Executive of any
material fringe benefit enjoyed by the Executive at the time of a
Change in Control of the Company, unless such failure to continue or
other action is applicable to all other executive officers of the
Company;
(iv) any failure by the Company to continue the participation
of the Executive in any incentive plan or arrangement in which the
Executive is participating at the time of a Change in Control of the
Company (or any other plans or arrangements providing him with
substantially similar benefits) and available to other executive
officers of the Company generally (hereinafter referred to as
"Incentive Plans") or the taking of any action by the Company which
would adversely affect the Executive's participation in any such
Incentive Plan or reduce the Executive's benefits under any such
Incentive Plan, expressed as a percentage of his base salary, by more
than ten percentage points in any fiscal year as compared to the
immediately preceding fiscal year unless such failure to continue or
other action is applicable to all other executive officers of the
Company;
(v) any failure by the Company to continue the participation
of the Executive in any plan or arrangement to receive securities of
the Company (including, without limitation, the Company's Stock Option
Plan, Employee Stock Purchase Plan and any other plan or arrangement to
receive and exercise stock options, stock appreciation rights,
restricted stock or grants thereof) in which the Executive its
participating at the time of a Change in Control of the Company (or
plans or arrangements providing him with substantially similar
benefits) (hereinafter referred to as "Stock Plans") or the taking of
any action by the Company which would adversely affect the Executive's
participation in or materially reduce the Executive's benefits under
any such Stock Plan, unless such failure to continue or other action is
applicable to all other executive officers of the Company;
3
<PAGE> 4
(vi) a relocation of the Company's principal executive offices
to location outside of Oklahoma City, Oklahoma, or the Executive's
relocation to any place other than the location at which the Executive
performed the Executive's duties prior to a Change in Control of the
Company, except for required travel by the Executive on the Company's
business to an extent substantially consistent with the Executive's
business travel obligations at the time of a Change in Control of the
Company;
(vii) any material breach by the Company of any provision of
this Agreement;
(viii) any failure by the Company to obtain the assumption of
this Agreement by any successor or assign of the Company; or
(ix) any purported termination of the Executive's employment
that is not effected pursuant to a Notice of Termination satisfying the
requirements of Section 3(f), and for purposes of this Agreement, no
such purported termination shall be effective.
(f) Notice of Termination. Any termination by the Company pursuant to
Section 3(b), 3(c) or 3(d) shall be communicated by a Notice of Termination. For
purposes of this Agreement, a "Notice of Termination" shall mean a written
notice which shall indicate those specific termination provisions in this
Agreement relied upon and which sets forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated. For purposes of this Agreement, no
such purported termination by the Company shall be effective without such Notice
of Termination.
(g) Date of Termination. "Date of Termination" shall mean (a) if this
Agreement is terminated by the Company for Disability, 30 days after Notice of
Termination is given to the Executive (provided that the Executive shall not
have returned to the performance of the Executive's duties on a full-time basis
during such 30-day period) or (b) if the Executive's employment is terminated by
the Company for any other reason, the date on which a Notice of Termination is
given; provided that if within 30 days after any Notice of Termination is given
to the Executive by the Company the Executive notifies the Company that a
dispute exists concerning the termination, the Date of Termination shall be the
date the dispute is finally determined, whether by mutual agreement by the
parties or upon final judgment, order or decree of a court of competent
jurisdiction (the time for appeal therefrom having expired and no appeal having
been perfected).
4. Severance Compensation Upon Termination of Employment. If the
Company shall terminate the Executive's employment other than pursuant to
Section 3(b), 3(c) or 3(d) or if the Executive shall terminate his employment
for Good Reason, then the Company shall pay to the Executive as severance pay in
a lump sum, in cash, on the fifth day following the Date of Termination, an
amount determined as follows:
(i) an amount equal to the average of the aggregate annual
compensation paid by the Company and any of its subsidiaries to the
Executive during the two calendar years preceding
4
<PAGE> 5
the Change in Control (the "Base Compensation") if the Change of
Control event occurred under Section 2(i), (ii) or (iii) and was
approved by a vote of at least two-thirds of the directors serving
immediately prior to the time of the Change of Control;
(ii) an amount equal to two times the Base Compensation if the
Change of Control event occurred under Sections 2(i), (ii) or (iii) and
was not approved by a vote of at least two-thirds of the directors
serving immediately prior to the time of the Change of Control;
(iii) an amount equal to two times the Base Compensation if
the Change of Control event occurred under Section 2(iv);
provided, however, that if the lump sum severance payment under this Section 4,
either alone or together with other payments which the Executive, has the right
to receive from the Company, would constitute a "parachute payment" (as defined
in Section 28OG of the Internal Revenue Code of 1954, as amended (the "Code")),
such lump sum severance payment shall be reduced to the largest amount as will
result in no portion of the lump sum severance payment under this Section 4
being subject to the excise tax imposed by Section 4999 of the Code. The
determination of any reduction in the lump sum severance payment under this
Section 4 pursuant to the foregoing proviso shall be made by the Executive in
good faith, and such determination shall be conclusive and binding on the
Company.
5. No Obligation To Mitigate Damages; No Effect on Other Contractual
Rights. (a) The Executive shall not be required to mitigate damages or the
amount of any payment provided for under this Agreement by seeking other
employment or otherwise, nor shall the amount of any payment provided for under
this Agreement be reduced by any compensation earned by the Executive as the
result of employment by another employer after the Date of Termination, or
otherwise.
(b) The provisions of this Agreement, and any payment provided for
hereunder, shall not reduce any amounts otherwise payable, or in any way
diminish the Executive's existing rights, or rights which would accrue solely as
a result of the passage of time, under any Benefit Plan, Incentive Plan or Stock
Plan, employment agreement or other contract, plan or arrangement.
6. Successor to the Company. (a) The Company will require any successor
or assign (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/ or assets of the
Company, by agreement in form and substance satisfactory to the Executive,
expressly, absolutely and unconditionally to assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform it if no such succession or assignment had taken place. Any
failure of the Company to obtain such agreement prior to the effectiveness of
any such succession or assignment shall be a material breach of this Agreement
and shall entitle the Executive to terminate the Executive's employment for Good
Reason. As used in this Agreement, "Company" shall mean the Company as
hereinbefore defined and any successor or assign to its business and/or assets
as aforesaid which executes and delivers the agreement provided for in this
Section 6 or which otherwise becomes bound by all the terms and provisions of
this Agreement by operation of law. If at any time during the term of this
Agreement the Executive is employed by any corporation a majority of the voting
securities of which
5
<PAGE> 6
is then owned by the Company, "Company" as used in Sections 3, 4, 11 and 12
hereof shall in addition include such employer. In such event, the Company
agrees that it shall pay or shall cause such employer to pay any amounts owed to
The Executive pursuant to Section 4 hereof.
(b) This Agreement shall inure to the benefit of and be enforceable by
the Executive's personal and legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. If the Executive should
die while any amounts are still payable to him hereunder, all such amounts,
unless otherwise provided herein, shall be paid in accordance with the terms of
this Agreement to the Executive's devisee, legatee, or other designee or, if
there be no such designee, to the Executive's estate.
7. Notice. For purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, as follows:
If to the Company, to:
ZymeTx, Inc.
800 N. Research Parkway, Suite 100
Oklahoma City, Oklahoma 73104
If to the Executive, to:
------------------------
------------------------
or such other address as either party may have furnished to the other in writing
in accordance herewith, except that notices of change of address shall be
effective only upon receipt.
8. Miscellaneous. No provisions of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing signed by the Executive and the Company. No waiver by either party
hereto at any time of any breach by the other party hereto of, or compliance
with, any condition or provision of this Agreement to be performed by such other
party shall be deemed a waiver of similar or dissimilar provisions or conditions
at the same or at any prior or subsequent time. No agreements or
representations, oral or otherwise, express or implied, with respect to the
subject matter hereof have been made by either party which are not set forth
expressly in this Agreement. This Agreement shall be governed by and construed
in accordance with the laws of the State of Oklahoma.
9. Validity. The invalidity or unenforceability of any provisions of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
6
<PAGE> 7
10. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be, deemed to be an original but all of which
together will constitute one and the same instrument.
11. Legal Fees and Expenses. The Company shall pay all legal tees and
expenses which the Executive may incur as a result of the Company's contesting
the validity, enforceability or the Executive's interpretation of, or
determinations under, this Agreement.
12. Confidentiality. The Executive shall retain in confidence any and
all confidential information known to the Executive concerning the Company and
its business so long as such information is not otherwise publicly disclosed.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
COMPANY:
ZYMETX, INC.
By:
----------------------------------
EXECUTIVE:
-------------------------------------
Craig D. Shimasaki, Ph.D.
7
<PAGE> 1
SEVERANCE COMPENSATION AGREEMENT
SEVERANCE COMPENSATION AGREEMENT (the "Agreement") dated as of April
14, 1999, by and between ZymeTx, Inc., a Delaware corporation (the "Company"),
and Charles E. Seeney (the "Executive").
WHEREAS, the Company's Board of Directors has determined that it is
appropriate to reinforce and encourage the continued attention and dedication of
members of the Company's management, including the Executive, to their assigned
duties without distraction in potentially disturbing circumstances arising from
the possibility of a change in control of the Company.
WHEREAS, this Agreement sets forth the severance compensation, which
the Company agrees it, will pay to the Executive if the Executive's employment
with the Company terminates under one of the circumstances described herein
following a Change in Control of the Company (as defined herein).
NOW THEREFORE, in consideration of the mutual promises and agreements
herein contained and other good and valuable consideration, the adequacy of
which is hereby acknowledged, the parties hereby agree as follows:
1. Term. This Agreement shall terminate, except to the extent that any
obligation of the Company hereunder remains unpaid as of such time, upon the
earlier of (i) the termination of the Executive's employment with the Company
based on death, Disability (as defined in Section 3(b)), Retirement (as defined
in Section 3(c)) or Cause (as defined in Section 3(d)) or by the Executive other
than for Good Reason (as defined in Section 3(e)); and (ii) three years from the
date of a Change in Control of the Company if the Executive has not terminated
his employment for Good Reason as of such time.
2. Change in Control. No compensation shall be payable under this
Agreement unless and until (a) there shall have been a Change in Control of the
Company, while the Executive is still an employee of the Company and (b) the
Executive's employment by the Company thereafter shall have been terminated in
accordance with Section 3. For purposes of this Agreement, a Change in Control
of the Company shall be deemed to have occurred if (i) there shall be
consummated (x) any consolidation or merger of the Company in which the Company
is not the continuing or surviving corporation or pursuant to which shares of
the Company's Common Stock would be converted into cash, securities or other
property, other than a merger of the Company in which the holders of the
Company's Common Stock immediately prior to the merger have the same
proportionate ownership of common stock of the surviving corporation immediately
after the merger, or (y) any sale, lease, exchange or other transfer (in one
transaction or a series of related transactions) of all, or substantially all,
of the assets of the Company, or (ii) the stockholders of the Company approved
any plan or proposal for the liquidation or dissolution of the Company, or (iii)
any person (as such term is used in Sections 13(d) and 14(d)(2) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) (hereinafter
an "Acquiring Person"), shall become the beneficial owner (within the meaning of
Rule 13d-3 under the Exchange Act) (hereinafter "Beneficial Owner") of 20% or
more of the combined voting power of the Company's then outstanding securities,
or (iv) during any period
<PAGE> 2
of two consecutive years, individuals who at the beginning of such period
constitute the entire Board of Directors shall cease for any reason to
constitute a majority thereof unless the election, or the nomination for
election by the Company's stockholders, of each new director was approved by a
vote of at least two-thirds of the directors then still in office who were
directors at the beginning of the period.
3. Termination Following Change in Control.
(a) Generally. If a Change in Control of the Company shall have
occurred while the Executive is still an employee of the Company, the Executive
shall be entitled to the compensation provided in Section 4 upon the subsequent
termination of the Executive's employment with the Company by the Executive or
by the Company unless such termination is as a result of (i) the Executive's
death; (ii) the Executive's Disability (as defined in Section (3)(b) below);
(iii) the Executive's Retirement (as defined in Section 3(c) below); (iv) the
Executive's termination by the Company for Cause (as defined in Section 3(d)
below); or (v) the Executive's decision to terminate employment other than for
Good Reason (as defined in Section 3(e) below).
(b) Disability. If, as a result of the Executive's incapacity due to
physical or mental illness, the Executive shall have been absent from his duties
with the Company on a full-time basis for six months and within 30 days after
written notice of termination is thereafter given by the Company the Executive
shall not have returned to the full-time performance of the Executive's duties
("Disability"), the Company may terminate this Agreement.
(c) Retirement. The term "Retirement" as used in this Agreement shall
mean termination by the Company or the Executive of the Executive's employment
based on the Executive's having reached age 65 or such other age as shall have
been fixed in any arrangement established with the Executive's consent with
respect to the Executive.
(d) Cause. The Company may terminate the Executive's employment for
Cause. For purposes of this Agreement only, the Company shall have "Cause" to
terminate the Executive's employment hereunder only on the basis of fraud,
misappropriation or embezzlement on the part of the Executive. Notwithstanding
the foregoing, the Executive shall not be deemed to have been terminated for
Cause unless and until there shall have been delivered to the Executive a copy
of a resolution duly adopted by the affirmative vote of not less than
three-fourths of the entire membership of the Company's Board of Directors at a
meeting of the Board called and held for the purpose (after reasonable notice to
the Executive and an opportunity for the Executive, together with the
Executive's counsel, to be heard before the Board), finding that in the good
faith opinion of the Board the Executive was guilty of conduct set forth in the
second sentence of this Section 3(d) and specifying the particulars thereof in
detail.
(e) Good Reason. The Executive may terminate the Executive's employment
for Good Reason at any time during the six-month period following a Change in
Control. For purposes of this Agreement "Good Reason" shall mean any of the
following (without the Executive's express written consent):
2
<PAGE> 3
(i) the assignment to the Executive by the Company of duties
inconsistent with the Executive's position, duties, responsibilities
and status with the Company immediately prior to a Change in Control of
the Company, or a change in the Executive's titles or offices as in
effect immediately prior to a Change in Control of the Company, or any
removal of the Executive from or any failure to re-elect the Executive
to any of such positions, except in connection with the termination of
his employment for Disability, Retirement or Cause or as a result of
the Executive's death or by the Executive other than for Good Reason;
(ii) a reduction by the Company in the Executive's base salary
as in effect on the date hereof or as the same may be increased from
time to time during the term of this Agreement;
(iii) any failure by the Company to continue the participation
of the Executive in any benefit plan or arrangement (including, without
limitation, the Company's group life insurance plan and medical,
dental, accident and disability plans) in which the Executive is
participating at the time of a Change in Control of the Company (or any
other plans providing the Executive with substantially similar
benefits) (hereinafter referred to as "Benefit Plans"), or the taking
of any action by the Company which would adversely affect the
Executive's participation in or materially reduce the Executive's
benefits under any such Benefit Plan or deprive the Executive of any
material fringe benefit enjoyed by the Executive at the time of a
Change in Control of the Company, unless such failure to continue or
other action is applicable to all other executive officers of the
Company;
(iv) any failure by the Company to continue the participation
of the Executive in any incentive plan or arrangement in which the
Executive is participating at the time of a Change in Control of the
Company (or any other plans or arrangements providing him with
substantially similar benefits) and available to other executive
officers of the Company generally (hereinafter referred to as
"Incentive Plans") or the taking of any action by the Company which
would adversely affect the Executive's participation in any such
Incentive Plan or reduce the Executive's benefits under any such
Incentive Plan, expressed as a percentage of his base salary, by more
than ten percentage points in any fiscal year as compared to the
immediately preceding fiscal year unless such failure to continue or
other action is applicable to all other executive officers of the
Company;
(v) any failure by the Company to continue the participation
of the Executive in any plan or arrangement to receive securities of
the Company (including, without limitation, the Company's Stock Option
Plan, Employee Stock Purchase Plan and any other plan or arrangement to
receive and exercise stock options, stock appreciation rights,
restricted stock or grants thereof) in which the Executive its
participating at the time of a Change in Control of the Company (or
plans or arrangements providing him with substantially similar
benefits) (hereinafter referred to as "Stock Plans") or the taking of
any action by the Company which would adversely affect the Executive's
participation in or materially reduce the Executive's benefits under
any such Stock Plan, unless such failure to continue or other action is
applicable to all other executive officers of the Company;
3
<PAGE> 4
(vi) a relocation of the Company's principal executive offices
to location outside of Oklahoma City, Oklahoma, or the Executive's
relocation to any place other than the location at which the Executive
performed the Executive's duties prior to a Change in Control of the
Company, except for required travel by the Executive on the Company's
business to an extent substantially consistent with the Executive's
business travel obligations at the time of a Change in Control of the
Company;
(vii) any material breach by the Company of any provision of
this Agreement;
(viii) any failure by the Company to obtain the assumption of
this Agreement by any successor or assign of the Company; or
(ix) any purported termination of the Executive's employment
that is not effected pursuant to a Notice of Termination satisfying the
requirements of Section 3(f), and for purposes of this Agreement, no
such purported termination shall be effective.
(f) Notice of Termination. Any termination by the Company pursuant to
Section 3(b), 3(c) or 3(d) shall be communicated by a Notice of Termination. For
purposes of this Agreement, a "Notice of Termination" shall mean a written
notice which shall indicate those specific termination provisions in this
Agreement relied upon and which sets forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated. For purposes of this Agreement, no
such purported termination by the Company shall be effective without such Notice
of Termination.
(g) Date of Termination. "Date of Termination" shall mean (a) if this
Agreement is terminated by the Company for Disability, 30 days after Notice of
Termination is given to the Executive (provided that the Executive shall not
have returned to the performance of the Executive's duties on a full-time basis
during such 30-day period) or (b) if the Executive's employment is terminated by
the Company for any other reason, the date on which a Notice of Termination is
given; provided that if within 30 days after any Notice of Termination is given
to the Executive by the Company the Executive notifies the Company that a
dispute exists concerning the termination, the Date of Termination shall be the
date the dispute is finally determined, whether by mutual agreement by the
parties or upon final judgment, order or decree of a court of competent
jurisdiction (the time for appeal therefrom having expired and no appeal having
been perfected).
4. Severance Compensation Upon Termination of Employment. If the
Company shall terminate the Executive's employment other than pursuant to
Section 3(b), 3(c) or 3(d) or if the Executive shall terminate his employment
for Good Reason, then the Company shall pay to the Executive as severance pay in
a lump sum, in cash, on the fifth day following the Date of Termination, an
amount determined as follows:
(i) an amount equal to the average of the aggregate annual
compensation paid by the Company and any of its subsidiaries to the
Executive during the two calendar years preceding
4
<PAGE> 5
the Change in Control (the "Base Compensation") if the Change of
Control event occurred under Section 2(i), (ii) or (iii) and was
approved by a vote of at least two-thirds of the directors serving
immediately prior to the time of the Change of Control;
(ii) an amount equal to two times the Base Compensation if the
Change of Control event occurred under Sections 2(i), (ii) or (iii) and
was not approved by a vote of at least two-thirds of the directors
serving immediately prior to the time of the Change of Control;
(iii) an amount equal to two times the Base Compensation if
the Change of Control event occurred under Section 2(iv);
provided, however, that if the lump sum severance payment under this Section 4,
either alone or together with other payments which the Executive, has the right
to receive from the Company, would constitute a "parachute payment" (as defined
in Section 28OG of the Internal Revenue Code of 1954, as amended (the "Code")),
such lump sum severance payment shall be reduced to the largest amount as will
result in no portion of the lump sum severance payment under this Section 4
being subject to the excise tax imposed by Section 4999 of the Code. The
determination of any reduction in the lump sum severance payment under this
Section 4 pursuant to the foregoing proviso shall be made by the Executive in
good faith, and such determination shall be conclusive and binding on the
Company.
5. No Obligation To Mitigate Damages; No Effect on Other Contractual
Rights. (a) The Executive shall not be required to mitigate damages or the
amount of any payment provided for under this Agreement by seeking other
employment or otherwise, nor shall the amount of any payment provided for under
this Agreement be reduced by any compensation earned by the Executive as the
result of employment by another employer after the Date of Termination, or
otherwise.
(b) The provisions of this Agreement, and any payment provided for
hereunder, shall not reduce any amounts otherwise payable, or in any way
diminish the Executive's existing rights, or rights which would accrue solely as
a result of the passage of time, under any Benefit Plan, Incentive Plan or Stock
Plan, employment agreement or other contract, plan or arrangement.
6. Successor to the Company. (a) The Company will require any successor
or assign (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/ or assets of the
Company, by agreement in form and substance satisfactory to the Executive,
expressly, absolutely and unconditionally to assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform it if no such succession or assignment had taken place. Any
failure of the Company to obtain such agreement prior to the effectiveness of
any such succession or assignment shall be a material breach of this Agreement
and shall entitle the Executive to terminate the Executive's employment for Good
Reason. As used in this Agreement, "Company" shall mean the Company as
hereinbefore defined and any successor or assign to its business and/or assets
as aforesaid which executes and delivers the agreement provided for in this
Section 6 or which otherwise becomes bound by all the terms and provisions of
this Agreement by operation of law. If at any time during the term of this
Agreement the Executive is employed by any corporation a majority of the voting
securities of which
5
<PAGE> 6
is then owned by the Company, "Company" as used in Sections 3, 4, 11 and 12
hereof shall in addition include such employer. In such event, the Company
agrees that it shall pay or shall cause such employer to pay any amounts owed to
The Executive pursuant to Section 4 hereof.
(b) This Agreement shall inure to the benefit of and be enforceable by
the Executive's personal and legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. If the Executive should
die while any amounts are still payable to him hereunder, all such amounts,
unless otherwise provided herein, shall be paid in accordance with the terms of
this Agreement to the Executive's devisee, legatee, or other designee or, if
there be no such designee, to the Executive's estate.
7. Notice. For purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, as follows:
If to the Company, to:
ZymeTx, Inc.
800 N. Research Parkway, Suite 100
Oklahoma City, Oklahoma 73104
If to the Executive, to:
------------------------
------------------------
or such other address as either party may have furnished to the other in writing
in accordance herewith, except that notices of change of address shall be
effective only upon receipt.
8. Miscellaneous. No provisions of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing signed by the Executive and the Company. No waiver by either party
hereto at any time of any breach by the other party hereto of, or compliance
with, any condition or provision of this Agreement to be performed by such other
party shall be deemed a waiver of similar or dissimilar provisions or conditions
at the same or at any prior or subsequent time. No agreements or
representations, oral or otherwise, express or implied, with respect to the
subject matter hereof have been made by either party which are not set forth
expressly in this Agreement. This Agreement shall be governed by and construed
in accordance with the laws of the State of Oklahoma.
9. Validity. The invalidity or unenforceability of any provisions of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
6
<PAGE> 7
10. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be, deemed to be an original but all of which
together will constitute one and the same instrument.
11. Legal Fees and Expenses. The Company shall pay all legal tees and
expenses which the Executive may incur as a result of the Company's contesting
the validity, enforceability or the Executive's interpretation of, or
determinations under, this Agreement.
12. Confidentiality. The Executive shall retain in confidence any and
all confidential information known to the Executive concerning the Company and
its business so long as such information is not otherwise publicly disclosed.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
COMPANY:
ZYMETX, INC.
By:
--------------------------------
EXECUTIVE:
-----------------------------------
Charles E. Seeney
7
<PAGE> 1
SEVERANCE COMPENSATION AGREEMENT
SEVERANCE COMPENSATION AGREEMENT (the "Agreement") dated as of April
14, 1999, by and between ZymeTx, Inc., a Delaware corporation (the "Company"),
and Gary W. Pedersen (the "Executive").
WHEREAS, the Company's Board of Directors has determined that it is
appropriate to reinforce and encourage the continued attention and dedication of
members of the Company's management, including the Executive, to their assigned
duties without distraction in potentially disturbing circumstances arising from
the possibility of a change in control of the Company.
WHEREAS, this Agreement sets forth the severance compensation, which
the Company agrees it, will pay to the Executive if the Executive's employment
with the Company terminates under one of the circumstances described herein
following a Change in Control of the Company (as defined herein).
NOW THEREFORE, in consideration of the mutual promises and agreements
herein contained and other good and valuable consideration, the adequacy of
which is hereby acknowledged, the parties hereby agree as follows:
1. Term. This Agreement shall terminate, except to the extent that any
obligation of the Company hereunder remains unpaid as of such time, upon the
earlier of (i) the termination of the Executive's employment with the Company
based on death, Disability (as defined in Section 3(b)), Retirement (as defined
in Section 3(c)) or Cause (as defined in Section 3(d)) or by the Executive other
than for Good Reason (as defined in Section 3(e)); and (ii) three years from the
date of a Change in Control of the Company if the Executive has not terminated
his employment for Good Reason as of such time.
2. Change in Control. No compensation shall be payable under this
Agreement unless and until (a) there shall have been a Change in Control of the
Company, while the Executive is still an employee of the Company and (b) the
Executive's employment by the Company thereafter shall have been terminated in
accordance with Section 3. For purposes of this Agreement, a Change in Control
of the Company shall be deemed to have occurred if (i) there shall be
consummated (x) any consolidation or merger of the Company in which the Company
is not the continuing or surviving corporation or pursuant to which shares of
the Company's Common Stock would be converted into cash, securities or other
property, other than a merger of the Company in which the holders of the
Company's Common Stock immediately prior to the merger have the same
proportionate ownership of common stock of the surviving corporation immediately
after the merger, or (y) any sale, lease, exchange or other transfer (in one
transaction or a series of related transactions) of all, or substantially all,
of the assets of the Company, or (ii) the stockholders of the Company approved
any plan or proposal for the liquidation or dissolution of the Company, or (iii)
any person (as such term is used in Sections 13(d) and 14(d)(2) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) (hereinafter
an "Acquiring Person"), shall become the beneficial owner (within the meaning of
Rule 13d-3 under the Exchange Act) (hereinafter "Beneficial Owner") of 20% or
more of the combined voting power of the Company's then outstanding securities,
or (iv) during any period
<PAGE> 2
of two consecutive years, individuals who at the beginning of such period
constitute the entire Board of Directors shall cease for any reason to
constitute a majority thereof unless the election, or the nomination for
election by the Company's stockholders, of each new director was approved by a
vote of at least two-thirds of the directors then still in office who were
directors at the beginning of the period.
3. Termination Following Change in Control.
(a) Generally. If a Change in Control of the Company shall have
occurred while the Executive is still an employee of the Company, the Executive
shall be entitled to the compensation provided in Section 4 upon the subsequent
termination of the Executive's employment with the Company by the Executive or
by the Company unless such termination is as a result of (i) the Executive's
death; (ii) the Executive's Disability (as defined in Section (3)(b) below);
(iii) the Executive's Retirement (as defined in Section 3(c) below); (iv) the
Executive's termination by the Company for Cause (as defined in Section 3(d)
below); or (v) the Executive's decision to terminate employment other than for
Good Reason (as defined in Section 3(e) below).
(b) Disability. If, as a result of the Executive's incapacity due to
physical or mental illness, the Executive shall have been absent from his duties
with the Company on a full-time basis for six months and within 30 days after
written notice of termination is thereafter given by the Company the Executive
shall not have returned to the full-time performance of the Executive's duties
("Disability"), the Company may terminate this Agreement.
(c) Retirement. The term "Retirement" as used in this Agreement shall
mean termination by the Company or the Executive of the Executive's employment
based on the Executive's having reached age 65 or such other age as shall have
been fixed in any arrangement established with the Executive's consent with
respect to the Executive.
(d) Cause. The Company may terminate the Executive's employment for
Cause. For purposes of this Agreement only, the Company shall have "Cause" to
terminate the Executive's employment hereunder only on the basis of fraud,
misappropriation or embezzlement on the part of the Executive. Notwithstanding
the foregoing, the Executive shall not be deemed to have been terminated for
Cause unless and until there shall have been delivered to the Executive a copy
of a resolution duly adopted by the affirmative vote of not less than
three-fourths of the entire membership of the Company's Board of Directors at a
meeting of the Board called and held for the purpose (after reasonable notice to
the Executive and an opportunity for the Executive, together with the
Executive's counsel, to be heard before the Board), finding that in the good
faith opinion of the Board the Executive was guilty of conduct set forth in the
second sentence of this Section 3(d) and specifying the particulars thereof in
detail.
(e) Good Reason. The Executive may terminate the Executive's employment
for Good Reason at any time during the six-month period following a Change in
Control. For purposes of this Agreement "Good Reason" shall mean any of the
following (without the Executive's express written consent):
2
<PAGE> 3
(i) the assignment to the Executive by the Company of duties
inconsistent with the Executive's position, duties, responsibilities
and status with the Company immediately prior to a Change in Control of
the Company, or a change in the Executive's titles or offices as in
effect immediately prior to a Change in Control of the Company, or any
removal of the Executive from or any failure to re-elect the Executive
to any of such positions, except in connection with the termination of
his employment for Disability, Retirement or Cause or as a result of
the Executive's death or by the Executive other than for Good Reason;
(ii) a reduction by the Company in the Executive's base salary
as in effect on the date hereof or as the same may be increased from
time to time during the term of this Agreement;
(iii) any failure by the Company to continue the participation
of the Executive in any benefit plan or arrangement (including, without
limitation, the Company's group life insurance plan and medical,
dental, accident and disability plans) in which the Executive is
participating at the time of a Change in Control of the Company (or any
other plans providing the Executive with substantially similar
benefits) (hereinafter referred to as "Benefit Plans"), or the taking
of any action by the Company which would adversely affect the
Executive's participation in or materially reduce the Executive's
benefits under any such Benefit Plan or deprive the Executive of any
material fringe benefit enjoyed by the Executive at the time of a
Change in Control of the Company, unless such failure to continue or
other action is applicable to all other executive officers of the
Company;
(iv) any failure by the Company to continue the participation
of the Executive in any incentive plan or arrangement in which the
Executive is participating at the time of a Change in Control of the
Company (or any other plans or arrangements providing him with
substantially similar benefits) and available to other executive
officers of the Company generally (hereinafter referred to as
"Incentive Plans") or the taking of any action by the Company which
would adversely affect the Executive's participation in any such
Incentive Plan or reduce the Executive's benefits under any such
Incentive Plan, expressed as a percentage of his base salary, by more
than ten percentage points in any fiscal year as compared to the
immediately preceding fiscal year unless such failure to continue or
other action is applicable to all other executive officers of the
Company;
(v) any failure by the Company to continue the participation
of the Executive in any plan or arrangement to receive securities of
the Company (including, without limitation, the Company's Stock Option
Plan, Employee Stock Purchase Plan and any other plan or arrangement to
receive and exercise stock options, stock appreciation rights,
restricted stock or grants thereof) in which the Executive its
participating at the time of a Change in Control of the Company (or
plans or arrangements providing him with substantially similar
benefits) (hereinafter referred to as "Stock Plans") or the taking of
any action by the Company which would adversely affect the Executive's
participation in or materially reduce the Executive's benefits under
any such Stock Plan, unless such failure to continue or other action is
applicable to all other executive officers of the Company;
3
<PAGE> 4
(vi) a relocation of the Company's principal executive offices
to location outside of Oklahoma City, Oklahoma, or the Executive's
relocation to any place other than the location at which the Executive
performed the Executive's duties prior to a Change in Control of the
Company, except for required travel by the Executive on the Company's
business to an extent substantially consistent with the Executive's
business travel obligations at the time of a Change in Control of the
Company;
(vii) any material breach by the Company of any provision of
this Agreement;
(viii) any failure by the Company to obtain the assumption of
this Agreement by any successor or assign of the Company; or
(ix) any purported termination of the Executive's employment
that is not effected pursuant to a Notice of Termination satisfying the
requirements of Section 3(f), and for purposes of this Agreement, no
such purported termination shall be effective.
(f) Notice of Termination. Any termination by the Company pursuant to
Section 3(b), 3(c) or 3(d) shall be communicated by a Notice of Termination. For
purposes of this Agreement, a "Notice of Termination" shall mean a written
notice which shall indicate those specific termination provisions in this
Agreement relied upon and which sets forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated. For purposes of this Agreement, no
such purported termination by the Company shall be effective without such Notice
of Termination.
(g) Date of Termination. "Date of Termination" shall mean (a) if this
Agreement is terminated by the Company for Disability, 30 days after Notice of
Termination is given to the Executive (provided that the Executive shall not
have returned to the performance of the Executive's duties on a full-time basis
during such 30-day period) or (b) if the Executive's employment is terminated by
the Company for any other reason, the date on which a Notice of Termination is
given; provided that if within 30 days after any Notice of Termination is given
to the Executive by the Company the Executive notifies the Company that a
dispute exists concerning the termination, the Date of Termination shall be the
date the dispute is finally determined, whether by mutual agreement by the
parties or upon final judgment, order or decree of a court of competent
jurisdiction (the time for appeal therefrom having expired and no appeal having
been perfected).
4. Severance Compensation Upon Termination of Employment. If the
Company shall terminate the Executive's employment other than pursuant to
Section 3(b), 3(c) or 3(d) or if the Executive shall terminate his employment
for Good Reason, then the Company shall pay to the Executive as severance pay in
a lump sum, in cash, on the fifth day following the Date of Termination, an
amount determined as follows:
(i) an amount equal to the average of the aggregate annual
compensation paid by the Company and any of its subsidiaries to the
Executive during the two calendar years preceding
4
<PAGE> 5
the Change in Control (the "Base Compensation") if the Change of
Control event occurred under Section 2(i), (ii) or (iii) and was
approved by a vote of at least two-thirds of the directors serving
immediately prior to the time of the Change of Control;
(ii) an amount equal to two times the Base Compensation if the
Change of Control event occurred under Sections 2(i), (ii) or (iii) and
was not approved by a vote of at least two-thirds of the directors
serving immediately prior to the time of the Change of Control;
(iii) an amount equal to two times the Base Compensation if
the Change of Control event occurred under Section 2(iv);
provided, however, that if the lump sum severance payment under this Section 4,
either alone or together with other payments which the Executive, has the right
to receive from the Company, would constitute a "parachute payment" (as defined
in Section 28OG of the Internal Revenue Code of 1954, as amended (the "Code")),
such lump sum severance payment shall be reduced to the largest amount as will
result in no portion of the lump sum severance payment under this Section 4
being subject to the excise tax imposed by Section 4999 of the Code. The
determination of any reduction in the lump sum severance payment under this
Section 4 pursuant to the foregoing proviso shall be made by the Executive in
good faith, and such determination shall be conclusive and binding on the
Company.
5. No Obligation To Mitigate Damages; No Effect on Other Contractual
Rights. (a) The Executive shall not be required to mitigate damages or the
amount of any payment provided for under this Agreement by seeking other
employment or otherwise, nor shall the amount of any payment provided for under
this Agreement be reduced by any compensation earned by the Executive as the
result of employment by another employer after the Date of Termination, or
otherwise.
(b) The provisions of this Agreement, and any payment provided for
hereunder, shall not reduce any amounts otherwise payable, or in any way
diminish the Executive's existing rights, or rights which would accrue solely as
a result of the passage of time, under any Benefit Plan, Incentive Plan or Stock
Plan, employment agreement or other contract, plan or arrangement.
6. Successor to the Company. (a) The Company will require any successor
or assign (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/ or assets of the
Company, by agreement in form and substance satisfactory to the Executive,
expressly, absolutely and unconditionally to assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform it if no such succession or assignment had taken place. Any
failure of the Company to obtain such agreement prior to the effectiveness of
any such succession or assignment shall be a material breach of this Agreement
and shall entitle the Executive to terminate the Executive's employment for Good
Reason. As used in this Agreement, "Company" shall mean the Company as
hereinbefore defined and any successor or assign to its business and/or assets
as aforesaid which executes and delivers the agreement provided for in this
Section 6 or which otherwise becomes bound by all the terms and provisions of
this Agreement by operation of law. If at any time during the term of this
Agreement the Executive is employed by any corporation a majority of the voting
securities of which
5
<PAGE> 6
is then owned by the Company, "Company" as used in Sections 3, 4, 11 and 12
hereof shall in addition include such employer. In such event, the Company
agrees that it shall pay or shall cause such employer to pay any amounts owed to
The Executive pursuant to Section 4 hereof.
(b) This Agreement shall inure to the benefit of and be enforceable by
the Executive's personal and legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. If the Executive should
die while any amounts are still payable to him hereunder, all such amounts,
unless otherwise provided herein, shall be paid in accordance with the terms of
this Agreement to the Executive's devisee, legatee, or other designee or, if
there be no such designee, to the Executive's estate.
7. Notice. For purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, as follows:
If to the Company, to:
ZymeTx, Inc.
800 N. Research Parkway, Suite 100
Oklahoma City, Oklahoma 73104
If to the Executive, to:
------------------------
------------------------
or such other address as either party may have furnished to the other in writing
in accordance herewith, except that notices of change of address shall be
effective only upon receipt.
8. Miscellaneous. No provisions of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing signed by the Executive and the Company. No waiver by either party
hereto at any time of any breach by the other party hereto of, or compliance
with, any condition or provision of this Agreement to be performed by such other
party shall be deemed a waiver of similar or dissimilar provisions or conditions
at the same or at any prior or subsequent time. No agreements or
representations, oral or otherwise, express or implied, with respect to the
subject matter hereof have been made by either party which are not set forth
expressly in this Agreement. This Agreement shall be governed by and construed
in accordance with the laws of the State of Oklahoma.
9. Validity. The invalidity or unenforceability of any provisions of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
6
<PAGE> 7
10. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be, deemed to be an original but all of which
together will constitute one and the same instrument.
11. Legal Fees and Expenses. The Company shall pay all legal tees and
expenses which the Executive may incur as a result of the Company's contesting
the validity, enforceability or the Executive's interpretation of, or
determinations under, this Agreement.
12. Confidentiality. The Executive shall retain in confidence any and
all confidential information known to the Executive concerning the Company and
its business so long as such information is not otherwise publicly disclosed.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
COMPANY:
ZYMETX, INC.
By:
----------------------------------
EXECUTIVE:
-------------------------------------
Gary W. Pedersen
7
<PAGE> 1
SEVERANCE COMPENSATION AGREEMENT
SEVERANCE COMPENSATION AGREEMENT (the "Agreement") dated as of April
14, 1999, by and between ZymeTx, Inc., a Delaware corporation (the "Company"),
and Robert Hudson, M.D. (the "Executive").
WHEREAS, the Company's Board of Directors has determined that it is
appropriate to reinforce and encourage the continued attention and dedication of
members of the Company's management, including the Executive, to their assigned
duties without distraction in potentially disturbing circumstances arising from
the possibility of a change in control of the Company.
WHEREAS, this Agreement sets forth the severance compensation, which
the Company agrees it, will pay to the Executive if the Executive's employment
with the Company terminates under one of the circumstances described herein
following a Change in Control of the Company (as defined herein).
NOW THEREFORE, in consideration of the mutual promises and agreements
herein contained and other good and valuable consideration, the adequacy of
which is hereby acknowledged, the parties hereby agree as follows:
1. Term. This Agreement shall terminate, except to the extent that any
obligation of the Company hereunder remains unpaid as of such time, upon the
earlier of (i) the termination of the Executive's employment with the Company
based on death, Disability (as defined in Section 3(b)), Retirement (as defined
in Section 3(c)) or Cause (as defined in Section 3(d)) or by the Executive other
than for Good Reason (as defined in Section 3(e)); and (ii) three years from the
date of a Change in Control of the Company if the Executive has not terminated
his employment for Good Reason as of such time.
2. Change in Control. No compensation shall be payable under this
Agreement unless and until (a) there shall have been a Change in Control of the
Company, while the Executive is still an employee of the Company and (b) the
Executive's employment by the Company thereafter shall have been terminated in
accordance with Section 3. For purposes of this Agreement, a Change in Control
of the Company shall be deemed to have occurred if (i) there shall be
consummated (x) any consolidation or merger of the Company in which the Company
is not the continuing or surviving corporation or pursuant to which shares of
the Company's Common Stock would be converted into cash, securities or other
property, other than a merger of the Company in which the holders of the
Company's Common Stock immediately prior to the merger have the same
proportionate ownership of common stock of the surviving corporation immediately
after the merger, or (y) any sale, lease, exchange or other transfer (in one
transaction or a series of related transactions) of all, or substantially all,
of the assets of the Company, or (ii) the stockholders of the Company approved
any plan or proposal for the liquidation or dissolution of the Company, or (iii)
any person (as such term is used in Sections 13(d) and 14(d)(2) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) (hereinafter
an "Acquiring Person"), shall become the beneficial owner (within the meaning of
Rule 13d-3 under the Exchange Act) (hereinafter "Beneficial Owner") of 20% or
more of the combined voting power of the Company's then outstanding securities,
or (iv) during any period
<PAGE> 2
of two consecutive years, individuals who at the beginning of such period
constitute the entire Board of Directors shall cease for any reason to
constitute a majority thereof unless the election, or the nomination for
election by the Company's stockholders, of each new director was approved by a
vote of at least two-thirds of the directors then still in office who were
directors at the beginning of the period.
3. Termination Following Change in Control.
(a) Generally. If a Change in Control of the Company shall have
occurred while the Executive is still an employee of the Company, the Executive
shall be entitled to the compensation provided in Section 4 upon the subsequent
termination of the Executive's employment with the Company by the Executive or
by the Company unless such termination is as a result of (i) the Executive's
death; (ii) the Executive's Disability (as defined in Section (3)(b) below);
(iii) the Executive's Retirement (as defined in Section 3(c) below); (iv) the
Executive's termination by the Company for Cause (as defined in Section 3(d)
below); or (v) the Executive's decision to terminate employment other than for
Good Reason (as defined in Section 3(e) below).
(b) Disability. If, as a result of the Executive's incapacity due to
physical or mental illness, the Executive shall have been absent from his duties
with the Company on a full-time basis for six months and within 30 days after
written notice of termination is thereafter given by the Company the Executive
shall not have returned to the full-time performance of the Executive's duties
("Disability"), the Company may terminate this Agreement.
(c) Retirement. The term "Retirement" as used in this Agreement shall
mean termination by the Company or the Executive of the Executive's employment
based on the Executive's having reached age 65 or such other age as shall have
been fixed in any arrangement established with the Executive's consent with
respect to the Executive.
(d) Cause. The Company may terminate the Executive's employment for
Cause. For purposes of this Agreement only, the Company shall have "Cause" to
terminate the Executive's employment hereunder only on the basis of fraud,
misappropriation or embezzlement on the part of the Executive. Notwithstanding
the foregoing, the Executive shall not be deemed to have been terminated for
Cause unless and until there shall have been delivered to the Executive a copy
of a resolution duly adopted by the affirmative vote of not less than
three-fourths of the entire membership of the Company's Board of Directors at a
meeting of the Board called and held for the purpose (after reasonable notice to
the Executive and an opportunity for the Executive, together with the
Executive's counsel, to be heard before the Board), finding that in the good
faith opinion of the Board the Executive was guilty of conduct set forth in the
second sentence of this Section 3(d) and specifying the particulars thereof in
detail.
(e) Good Reason. The Executive may terminate the Executive's employment
for Good Reason at any time during the six-month period following a Change in
Control. For purposes of this Agreement "Good Reason" shall mean any of the
following (without the Executive's express written consent):
2
<PAGE> 3
(i) the assignment to the Executive by the Company of duties
inconsistent with the Executive's position, duties, responsibilities
and status with the Company immediately prior to a Change in Control of
the Company, or a change in the Executive's titles or offices as in
effect immediately prior to a Change in Control of the Company, or any
removal of the Executive from or any failure to re-elect the Executive
to any of such positions, except in connection with the termination of
his employment for Disability, Retirement or Cause or as a result of
the Executive's death or by the Executive other than for Good Reason;
(ii) a reduction by the Company in the Executive's base salary
as in effect on the date hereof or as the same may be increased from
time to time during the term of this Agreement;
(iii) any failure by the Company to continue the participation
of the Executive in any benefit plan or arrangement (including, without
limitation, the Company's group life insurance plan and medical,
dental, accident and disability plans) in which the Executive is
participating at the time of a Change in Control of the Company (or any
other plans providing the Executive with substantially similar
benefits) (hereinafter referred to as "Benefit Plans"), or the taking
of any action by the Company which would adversely affect the
Executive's participation in or materially reduce the Executive's
benefits under any such Benefit Plan or deprive the Executive of any
material fringe benefit enjoyed by the Executive at the time of a
Change in Control of the Company, unless such failure to continue or
other action is applicable to all other executive officers of the
Company;
(iv) any failure by the Company to continue the participation
of the Executive in any incentive plan or arrangement in which the
Executive is participating at the time of a Change in Control of the
Company (or any other plans or arrangements providing him with
substantially similar benefits) and available to other executive
officers of the Company generally (hereinafter referred to as
"Incentive Plans") or the taking of any action by the Company which
would adversely affect the Executive's participation in any such
Incentive Plan or reduce the Executive's benefits under any such
Incentive Plan, expressed as a percentage of his base salary, by more
than ten percentage points in any fiscal year as compared to the
immediately preceding fiscal year unless such failure to continue or
other action is applicable to all other executive officers of the
Company;
(v) any failure by the Company to continue the participation
of the Executive in any plan or arrangement to receive securities of
the Company (including, without limitation, the Company's Stock Option
Plan, Employee Stock Purchase Plan and any other plan or arrangement to
receive and exercise stock options, stock appreciation rights,
restricted stock or grants thereof) in which the Executive its
participating at the time of a Change in Control of the Company (or
plans or arrangements providing him with substantially similar
benefits) (hereinafter referred to as "Stock Plans") or the taking of
any action by the Company which would adversely affect the Executive's
participation in or materially reduce the Executive's benefits under
any such Stock Plan, unless such failure to continue or other action is
applicable to all other executive officers of the Company;
3
<PAGE> 4
(vi) a relocation of the Company's principal executive offices
to location outside of Oklahoma City, Oklahoma, or the Executive's
relocation to any place other than the location at which the Executive
performed the Executive's duties prior to a Change in Control of the
Company, except for required travel by the Executive on the Company's
business to an extent substantially consistent with the Executive's
business travel obligations at the time of a Change in Control of the
Company;
(vii) any material breach by the Company of any provision of
this Agreement;
(viii) any failure by the Company to obtain the assumption of
this Agreement by any successor or assign of the Company; or
(ix) any purported termination of the Executive's employment
that is not effected pursuant to a Notice of Termination satisfying the
requirements of Section 3(f), and for purposes of this Agreement, no
such purported termination shall be effective.
(f) Notice of Termination. Any termination by the Company pursuant to
Section 3(b), 3(c) or 3(d) shall be communicated by a Notice of Termination. For
purposes of this Agreement, a "Notice of Termination" shall mean a written
notice which shall indicate those specific termination provisions in this
Agreement relied upon and which sets forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated. For purposes of this Agreement, no
such purported termination by the Company shall be effective without such Notice
of Termination.
(g) Date of Termination. "Date of Termination" shall mean (a) if this
Agreement is terminated by the Company for Disability, 30 days after Notice of
Termination is given to the Executive (provided that the Executive shall not
have returned to the performance of the Executive's duties on a full-time basis
during such 30-day period) or (b) if the Executive's employment is terminated by
the Company for any other reason, the date on which a Notice of Termination is
given; provided that if within 30 days after any Notice of Termination is given
to the Executive by the Company the Executive notifies the Company that a
dispute exists concerning the termination, the Date of Termination shall be the
date the dispute is finally determined, whether by mutual agreement by the
parties or upon final judgment, order or decree of a court of competent
jurisdiction (the time for appeal therefrom having expired and no appeal having
been perfected).
4. Severance Compensation Upon Termination of Employment. If the
Company shall terminate the Executive's employment other than pursuant to
Section 3(b), 3(c) or 3(d) or if the Executive shall terminate his employment
for Good Reason, then the Company shall pay to the Executive as severance pay in
a lump sum, in cash, on the fifth day following the Date of Termination, an
amount determined as follows:
(i) an amount equal to the average of the aggregate annual
compensation paid by the Company and any of its subsidiaries to the
Executive during the two calendar years preceding
4
<PAGE> 5
the Change in Control (the "Base Compensation") if the Change of
Control event occurred under Section 2(i), (ii) or (iii) and was
approved by a vote of at least two-thirds of the directors serving
immediately prior to the time of the Change of Control;
(ii) an amount equal to two times the Base Compensation if the
Change of Control event occurred under Sections 2(i), (ii) or (iii) and
was not approved by a vote of at least two-thirds of the directors
serving immediately prior to the time of the Change of Control;
(iii) an amount equal to two times the Base Compensation if
the Change of Control event occurred under Section 2(iv);
provided, however, that if the lump sum severance payment under this Section 4,
either alone or together with other payments which the Executive, has the right
to receive from the Company, would constitute a "parachute payment" (as defined
in Section 28OG of the Internal Revenue Code of 1954, as amended (the "Code")),
such lump sum severance payment shall be reduced to the largest amount as will
result in no portion of the lump sum severance payment under this Section 4
being subject to the excise tax imposed by Section 4999 of the Code. The
determination of any reduction in the lump sum severance payment under this
Section 4 pursuant to the foregoing proviso shall be made by the Executive in
good faith, and such determination shall be conclusive and binding on the
Company.
5. No Obligation To Mitigate Damages; No Effect on Other Contractual
Rights. (a) The Executive shall not be required to mitigate damages or the
amount of any payment provided for under this Agreement by seeking other
employment or otherwise, nor shall the amount of any payment provided for under
this Agreement be reduced by any compensation earned by the Executive as the
result of employment by another employer after the Date of Termination, or
otherwise.
(b) The provisions of this Agreement, and any payment provided for
hereunder, shall not reduce any amounts otherwise payable, or in any way
diminish the Executive's existing rights, or rights which would accrue solely as
a result of the passage of time, under any Benefit Plan, Incentive Plan or Stock
Plan, employment agreement or other contract, plan or arrangement.
6. Successor to the Company. (a) The Company will require any successor
or assign (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/ or assets of the
Company, by agreement in form and substance satisfactory to the Executive,
expressly, absolutely and unconditionally to assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform it if no such succession or assignment had taken place. Any
failure of the Company to obtain such agreement prior to the effectiveness of
any such succession or assignment shall be a material breach of this Agreement
and shall entitle the Executive to terminate the Executive's employment for Good
Reason. As used in this Agreement, "Company" shall mean the Company as
hereinbefore defined and any successor or assign to its business and/or assets
as aforesaid which executes and delivers the agreement provided for in this
Section 6 or which otherwise becomes bound by all the terms and provisions of
this Agreement by operation of law. If at any time during the term of this
Agreement the Executive is employed by any corporation a majority of the voting
securities of which
5
<PAGE> 6
is then owned by the Company, "Company" as used in Sections 3, 4, 11 and 12
hereof shall in addition include such employer. In such event, the Company
agrees that it shall pay or shall cause such employer to pay any amounts owed to
The Executive pursuant to Section 4 hereof.
(b) This Agreement shall inure to the benefit of and be enforceable by
the Executive's personal and legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. If the Executive should
die while any amounts are still payable to him hereunder, all such amounts,
unless otherwise provided herein, shall be paid in accordance with the terms of
this Agreement to the Executive's devisee, legatee, or other designee or, if
there be no such designee, to the Executive's estate.
7. Notice. For purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, as follows:
If to the Company, to:
ZymeTx, Inc.
800 N. Research Parkway, Suite 100
Oklahoma City, Oklahoma 73104
If to the Executive, to:
------------------------
------------------------
or such other address as either party may have furnished to the other in writing
in accordance herewith, except that notices of change of address shall be
effective only upon receipt.
8. Miscellaneous. No provisions of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing signed by the Executive and the Company. No waiver by either party
hereto at any time of any breach by the other party hereto of, or compliance
with, any condition or provision of this Agreement to be performed by such other
party shall be deemed a waiver of similar or dissimilar provisions or conditions
at the same or at any prior or subsequent time. No agreements or
representations, oral or otherwise, express or implied, with respect to the
subject matter hereof have been made by either party which are not set forth
expressly in this Agreement. This Agreement shall be governed by and construed
in accordance with the laws of the State of Oklahoma.
9. Validity. The invalidity or unenforceability of any provisions of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
6
<PAGE> 7
10. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be, deemed to be an original but all of which
together will constitute one and the same instrument.
11. Legal Fees and Expenses. The Company shall pay all legal tees and
expenses which the Executive may incur as a result of the Company's contesting
the validity, enforceability or the Executive's interpretation of, or
determinations under, this Agreement.
12. Confidentiality. The Executive shall retain in confidence any and
all confidential information known to the Executive concerning the Company and
its business so long as such information is not otherwise publicly disclosed.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
COMPANY:
ZYMETX, INC.
By:
----------------------------------
EXECUTIVE:
-------------------------------------
Robert Hudson, M.D.
7
<PAGE> 1
SEVERANCE COMPENSATION AGREEMENT
SEVERANCE COMPENSATION AGREEMENT (the "Agreement") dated as of April
14, 1999, by and between ZymeTx, Inc., a Delaware corporation (the "Company"),
and G. Carl Gibson (the "Executive").
WHEREAS, the Company's Board of Directors has determined that it is
appropriate to reinforce and encourage the continued attention and dedication of
members of the Company's management, including the Executive, to their assigned
duties without distraction in potentially disturbing circumstances arising from
the possibility of a change in control of the Company.
WHEREAS, this Agreement sets forth the severance compensation, which
the Company agrees it, will pay to the Executive if the Executive's employment
with the Company terminates under one of the circumstances described herein
following a Change in Control of the Company (as defined herein).
NOW THEREFORE, in consideration of the mutual promises and agreements
herein contained and other good and valuable consideration, the adequacy of
which is hereby acknowledged, the parties hereby agree as follows:
1. Term. This Agreement shall terminate, except to the extent that any
obligation of the Company hereunder remains unpaid as of such time, upon the
earlier of (i) the termination of the Executive's employment with the Company
based on death, Disability (as defined in Section 3(b)), Retirement (as defined
in Section 3(c)) or Cause (as defined in Section 3(d)) or by the Executive other
than for Good Reason (as defined in Section 3(e)); and (ii) three years from the
date of a Change in Control of the Company if the Executive has not terminated
his employment for Good Reason as of such time.
2. Change in Control. No compensation shall be payable under this
Agreement unless and until (a) there shall have been a Change in Control of the
Company, while the Executive is still an employee of the Company and (b) the
Executive's employment by the Company thereafter shall have been terminated in
accordance with Section 3. For purposes of this Agreement, a Change in Control
of the Company shall be deemed to have occurred if (i) there shall be
consummated (x) any consolidation or merger of the Company in which the Company
is not the continuing or surviving corporation or pursuant to which shares of
the Company's Common Stock would be converted into cash, securities or other
property, other than a merger of the Company in which the holders of the
Company's Common Stock immediately prior to the merger have the same
proportionate ownership of common stock of the surviving corporation immediately
after the merger, or (y) any sale, lease, exchange or other transfer (in one
transaction or a series of related transactions) of all, or substantially all,
of the assets of the Company, or (ii) the stockholders of the Company approved
any plan or proposal for the liquidation or dissolution of the Company, or (iii)
any person (as such term is used in Sections 13(d) and 14(d)(2) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) (hereinafter
an "Acquiring Person"), shall become the beneficial owner (within the meaning of
Rule 13d-3 under the Exchange Act) (hereinafter "Beneficial Owner") of 20% or
more of the combined voting power of the Company's then outstanding securities,
or (iv) during any period
<PAGE> 2
of two consecutive years, individuals who at the beginning of such period
constitute the entire Board of Directors shall cease for any reason to
constitute a majority thereof unless the election, or the nomination for
election by the Company's stockholders, of each new director was approved by a
vote of at least two-thirds of the directors then still in office who were
directors at the beginning of the period.
3. Termination Following Change in Control.
(a) Generally. If a Change in Control of the Company shall have
occurred while the Executive is still an employee of the Company, the Executive
shall be entitled to the compensation provided in Section 4 upon the subsequent
termination of the Executive's employment with the Company by the Executive or
by the Company unless such termination is as a result of (i) the Executive's
death; (ii) the Executive's Disability (as defined in Section (3)(b) below);
(iii) the Executive's Retirement (as defined in Section 3(c) below); (iv) the
Executive's termination by the Company for Cause (as defined in Section 3(d)
below); or (v) the Executive's decision to terminate employment other than for
Good Reason (as defined in Section 3(e) below).
(b) Disability. If, as a result of the Executive's incapacity due to
physical or mental illness, the Executive shall have been absent from his duties
with the Company on a full-time basis for six months and within 30 days after
written notice of termination is thereafter given by the Company the Executive
shall not have returned to the full-time performance of the Executive's duties
("Disability"), the Company may terminate this Agreement.
(c) Retirement. The term "Retirement" as used in this Agreement shall
mean termination by the Company or the Executive of the Executive's employment
based on the Executive's having reached age 65 or such other age as shall have
been fixed in any arrangement established with the Executive's consent with
respect to the Executive.
(d) Cause. The Company may terminate the Executive's employment for
Cause. For purposes of this Agreement only, the Company shall have "Cause" to
terminate the Executive's employment hereunder only on the basis of fraud,
misappropriation or embezzlement on the part of the Executive. Notwithstanding
the foregoing, the Executive shall not be deemed to have been terminated for
Cause unless and until there shall have been delivered to the Executive a copy
of a resolution duly adopted by the affirmative vote of not less than
three-fourths of the entire membership of the Company's Board of Directors at a
meeting of the Board called and held for the purpose (after reasonable notice to
the Executive and an opportunity for the Executive, together with the
Executive's counsel, to be heard before the Board), finding that in the good
faith opinion of the Board the Executive was guilty of conduct set forth in the
second sentence of this Section 3(d) and specifying the particulars thereof in
detail.
(e) Good Reason. The Executive may terminate the Executive's employment
for Good Reason at any time during the six-month period following a Change in
Control. For purposes of this Agreement "Good Reason" shall mean any of the
following (without the Executive's express written consent):
2
<PAGE> 3
(i) the assignment to the Executive by the Company of duties
inconsistent with the Executive's position, duties, responsibilities
and status with the Company immediately prior to a Change in Control of
the Company, or a change in the Executive's titles or offices as in
effect immediately prior to a Change in Control of the Company, or any
removal of the Executive from or any failure to re-elect the Executive
to any of such positions, except in connection with the termination of
his employment for Disability, Retirement or Cause or as a result of
the Executive's death or by the Executive other than for Good Reason;
(ii) a reduction by the Company in the Executive's base salary
as in effect on the date hereof or as the same may be increased from
time to time during the term of this Agreement;
(iii) any failure by the Company to continue the participation
of the Executive in any benefit plan or arrangement (including, without
limitation, the Company's group life insurance plan and medical,
dental, accident and disability plans) in which the Executive is
participating at the time of a Change in Control of the Company (or any
other plans providing the Executive with substantially similar
benefits) (hereinafter referred to as "Benefit Plans"), or the taking
of any action by the Company which would adversely affect the
Executive's participation in or materially reduce the Executive's
benefits under any such Benefit Plan or deprive the Executive of any
material fringe benefit enjoyed by the Executive at the time of a
Change in Control of the Company, unless such failure to continue or
other action is applicable to all other executive officers of the
Company;
(iv) any failure by the Company to continue the participation
of the Executive in any incentive plan or arrangement in which the
Executive is participating at the time of a Change in Control of the
Company (or any other plans or arrangements providing him with
substantially similar benefits) and available to other executive
officers of the Company generally (hereinafter referred to as
"Incentive Plans") or the taking of any action by the Company which
would adversely affect the Executive's participation in any such
Incentive Plan or reduce the Executive's benefits under any such
Incentive Plan, expressed as a percentage of his base salary, by more
than ten percentage points in any fiscal year as compared to the
immediately preceding fiscal year unless such failure to continue or
other action is applicable to all other executive officers of the
Company;
(v) any failure by the Company to continue the participation
of the Executive in any plan or arrangement to receive securities of
the Company (including, without limitation, the Company's Stock Option
Plan, Employee Stock Purchase Plan and any other plan or arrangement to
receive and exercise stock options, stock appreciation rights,
restricted stock or grants thereof) in which the Executive its
participating at the time of a Change in Control of the Company (or
plans or arrangements providing him with substantially similar
benefits) (hereinafter referred to as "Stock Plans") or the taking of
any action by the Company which would adversely affect the Executive's
participation in or materially reduce the Executive's benefits under
any such Stock Plan, unless such failure to continue or other action is
applicable to all other executive officers of the Company;
3
<PAGE> 4
(vi) a relocation of the Company's principal executive offices
to location outside of Oklahoma City, Oklahoma, or the Executive's
relocation to any place other than the location at which the Executive
performed the Executive's duties prior to a Change in Control of the
Company, except for required travel by the Executive on the Company's
business to an extent substantially consistent with the Executive's
business travel obligations at the time of a Change in Control of the
Company;
(vii) any material breach by the Company of any provision of
this Agreement;
(viii) any failure by the Company to obtain the assumption of
this Agreement by any successor or assign of the Company; or
(ix) any purported termination of the Executive's employment
that is not effected pursuant to a Notice of Termination satisfying the
requirements of Section 3(f), and for purposes of this Agreement, no
such purported termination shall be effective.
(f) Notice of Termination. Any termination by the Company pursuant to
Section 3(b), 3(c) or 3(d) shall be communicated by a Notice of Termination. For
purposes of this Agreement, a "Notice of Termination" shall mean a written
notice which shall indicate those specific termination provisions in this
Agreement relied upon and which sets forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the Executive's
employment under the provision so indicated. For purposes of this Agreement, no
such purported termination by the Company shall be effective without such Notice
of Termination.
(g) Date of Termination. "Date of Termination" shall mean (a) if this
Agreement is terminated by the Company for Disability, 30 days after Notice of
Termination is given to the Executive (provided that the Executive shall not
have returned to the performance of the Executive's duties on a full-time basis
during such 30-day period) or (b) if the Executive's employment is terminated by
the Company for any other reason, the date on which a Notice of Termination is
given; provided that if within 30 days after any Notice of Termination is given
to the Executive by the Company the Executive notifies the Company that a
dispute exists concerning the termination, the Date of Termination shall be the
date the dispute is finally determined, whether by mutual agreement by the
parties or upon final judgment, order or decree of a court of competent
jurisdiction (the time for appeal therefrom having expired and no appeal having
been perfected).
4. Severance Compensation Upon Termination of Employment. If the
Company shall terminate the Executive's employment other than pursuant to
Section 3(b), 3(c) or 3(d) or if the Executive shall terminate his employment
for Good Reason, then the Company shall pay to the Executive as severance pay in
a lump sum, in cash, on the fifth day following the Date of Termination, an
amount determined as follows:
(i) an amount equal to the average of the aggregate annual
compensation paid by the Company and any of its subsidiaries to the
Executive during the two calendar years preceding
4
<PAGE> 5
the Change in Control (the "Base Compensation") if the Change of
Control event occurred under Section 2(i), (ii) or (iii) and was
approved by a vote of at least two-thirds of the directors serving
immediately prior to the time of the Change of Control;
(ii) an amount equal to two times the Base Compensation if the
Change of Control event occurred under Sections 2(i), (ii) or (iii) and
was not approved by a vote of at least two-thirds of the directors
serving immediately prior to the time of the Change of Control;
(iii) an amount equal to two times the Base Compensation if
the Change of Control event occurred under Section 2(iv);
provided, however, that if the lump sum severance payment under this Section 4,
either alone or together with other payments which the Executive, has the right
to receive from the Company, would constitute a "parachute payment" (as defined
in Section 28OG of the Internal Revenue Code of 1954, as amended (the "Code")),
such lump sum severance payment shall be reduced to the largest amount as will
result in no portion of the lump sum severance payment under this Section 4
being subject to the excise tax imposed by Section 4999 of the Code. The
determination of any reduction in the lump sum severance payment under this
Section 4 pursuant to the foregoing proviso shall be made by the Executive in
good faith, and such determination shall be conclusive and binding on the
Company.
5. No Obligation To Mitigate Damages; No Effect on Other Contractual
Rights. (a) The Executive shall not be required to mitigate damages or the
amount of any payment provided for under this Agreement by seeking other
employment or otherwise, nor shall the amount of any payment provided for under
this Agreement be reduced by any compensation earned by the Executive as the
result of employment by another employer after the Date of Termination, or
otherwise.
(b) The provisions of this Agreement, and any payment provided for
hereunder, shall not reduce any amounts otherwise payable, or in any way
diminish the Executive's existing rights, or rights which would accrue solely as
a result of the passage of time, under any Benefit Plan, Incentive Plan or Stock
Plan, employment agreement or other contract, plan or arrangement.
6. Successor to the Company. (a) The Company will require any successor
or assign (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/ or assets of the
Company, by agreement in form and substance satisfactory to the Executive,
expressly, absolutely and unconditionally to assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform it if no such succession or assignment had taken place. Any
failure of the Company to obtain such agreement prior to the effectiveness of
any such succession or assignment shall be a material breach of this Agreement
and shall entitle the Executive to terminate the Executive's employment for Good
Reason. As used in this Agreement, "Company" shall mean the Company as
hereinbefore defined and any successor or assign to its business and/or assets
as aforesaid which executes and delivers the agreement provided for in this
Section 6 or which otherwise becomes bound by all the terms and provisions of
this Agreement by operation of law. If at any time during the term of this
Agreement the Executive is employed by any corporation a majority of the voting
securities of which
5
<PAGE> 6
is then owned by the Company, "Company" as used in Sections 3, 4, 11 and 12
hereof shall in addition include such employer. In such event, the Company
agrees that it shall pay or shall cause such employer to pay any amounts owed to
The Executive pursuant to Section 4 hereof.
(b) This Agreement shall inure to the benefit of and be enforceable by
the Executive's personal and legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. If the Executive should
die while any amounts are still payable to him hereunder, all such amounts,
unless otherwise provided herein, shall be paid in accordance with the terms of
this Agreement to the Executive's devisee, legatee, or other designee or, if
there be no such designee, to the Executive's estate.
7. Notice. For purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, as follows:
If to the Company, to:
ZymeTx, Inc.
800 N. Research Parkway, Suite 100
Oklahoma City, Oklahoma 73104
If to the Executive, to:
-------------------------
-------------------------
or such other address as either party may have furnished to the other in writing
in accordance herewith, except that notices of change of address shall be
effective only upon receipt.
8. Miscellaneous. No provisions of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing signed by the Executive and the Company. No waiver by either party
hereto at any time of any breach by the other party hereto of, or compliance
with, any condition or provision of this Agreement to be performed by such other
party shall be deemed a waiver of similar or dissimilar provisions or conditions
at the same or at any prior or subsequent time. No agreements or
representations, oral or otherwise, express or implied, with respect to the
subject matter hereof have been made by either party which are not set forth
expressly in this Agreement. This Agreement shall be governed by and construed
in accordance with the laws of the State of Oklahoma.
9. Validity. The invalidity or unenforceability of any provisions of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
6
<PAGE> 7
10. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be, deemed to be an original but all of which
together will constitute one and the same instrument.
11. Legal Fees and Expenses. The Company shall pay all legal tees and
expenses which the Executive may incur as a result of the Company's contesting
the validity, enforceability or the Executive's interpretation of, or
determinations under, this Agreement.
12. Confidentiality. The Executive shall retain in confidence any and
all confidential information known to the Executive concerning the Company and
its business so long as such information is not otherwise publicly disclosed.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
COMPANY:
ZYMETX, INC.
By:
--------------------------------
EXECUTIVE:
-----------------------------------
G. Carl Gibson
7
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-3 No. 333-68337) of ZymeTx, Inc. and in the related Prospectus of our report
dated July 30, 1999, except for Note 9, as to which the date is October 7, 1999,
with respect to the consolidated financial statements of ZymeTx, Inc. included
in this Annual Report (Form 10-KSB) for the year ended June 30, 1999.
ERNST & YOUNG LLP
Oklahoma City, Oklahoma
October 7, 1999
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<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 10,565
<SECURITIES> 8,735,430
<RECEIVABLES> 192,038
<ALLOWANCES> 0
<INVENTORY> 3,289,931
<CURRENT-ASSETS> 10,484,596
<PP&E> 952,014
<DEPRECIATION> 278,080
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<CURRENT-LIABILITIES> 878,668
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<COMMON> 6,693
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<TOTAL-LIABILITY-AND-EQUITY> 13,025,681
<SALES> 544,293
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<OTHER-EXPENSES> 8,165,288
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<INCOME-PRETAX> (8,596,186)
<INCOME-TAX> 0
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