<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
-----------------------------------
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
-------------------- --------------------
Commission File Number 0-6533
----------------------------------------------------------
BOSTON LIFE SCIENCES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 87-0277826
- --------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
31 Newbury Street, Suite 300, Boston, Massachusetts 02116
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
(617) 425-0200
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
(X) Yes ( ) No
As of August 8, 1997 there were 12,574,444 shares of Common Stock outstanding.
<PAGE>
BOSTON LIFE SCIENCES, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
Page(s)
-------
<S> <C> <C>
Part I - Financial Information:
Item 1 - Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of 1
June 30, 1997 and December 31, 1996
Condensed Consolidated Statements of Income 2
for the three and six months ended June 30, 1997 and 1996,
and for the period from inception (October 16, 1992) to
June 30, 1997
Condensed Consolidated Statements of Cash Flows 3
for the six months ended June 30, 1997 and 1996,
and for the period from inception (October 16, 1992) to
June 30, 1997
Notes to Condensed Consolidated Financial Statements 4 - 5
Item 2 - Management's Discussion and Analysis of 6 - 9
Financial Condition and Results of Operations
Part II - Other Information
Item 1 - Legal Proceedings 10
Item 2 - Changes in Securities 10
Item 3 - Defaults Upon Senior Securities 10
Item 4 - Submission of Matters to a Vote of 10
Security Holders
Item 5 - Other Information 11
Item 6 - Exhibits and Reports on Form 8-K 11
Signature (s) 12
</TABLE>
<PAGE>
Part I -- Financial Information
Item 1 -- Financial Statements
Boston Life Sciences, Inc.
(A Development Stage Enterprise)
Consolidated Balance Sheet
--------------------------
(Unaudited)
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
------------- -----------------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 4,730,185 $ 8,580,206
Short-term investments 13,442,893 12,995,022
Prepaid sponsored research & development expenses 40,000 431,000
Other current assets 99,644 430,231
------------ ---------------
Total current assets 18,312,722 22,436,459
Fixed assets, net 84,373 100,997
Technology acquired 3,500,000 3,500,000
Other assets 115,674 115,674
------------ ---------------
Total assets $ 22,012,769 $ 26,153,130
============ ===============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses 1,440,846 1,907,912
Deferred revenue 0 83,060
Notes payable 4,466 61,752
------------ ---------------
Total current liabilities 1,445,312 2,052,724
------------ ---------------
Stockholders' equity:
Series A Convertible Preferred stock, $.01 par value 541 1,336
1,000,000 shares authorized
54,123 shares outstanding on June 30, 1997 and
133,610 shares outstanding on December 31, 1996
Common stock, $0.01 par value; 125,172 111,049
25,000,000 shares authorized
12,517,237 shares outstanding on June 30, 1997 and
11,104,854 shares outstanding on December 31, 1996
Additional paid-in-capital 49,676,419 49,520,767
Unrealized losses on investments (33,905) 0
Deferred compensation (95,290) (240,290)
Deficit accumulated during development stage (29,105,480) (25,292,456)
------------ ---------------
Total stockholders' equity 20,567,457 24,100,406
------------ ---------------
Total liabilities and stockholders' equity $ 22,012,769 $ 26,153,130
============ ===============
</TABLE>
See Notes to Consolidated Financial Statements
1
<PAGE>
Boston Life Sciences, Inc.
(A Development Stage Enterprise)
Consolidated Statement of Operations
------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended From inception
June 30, June 30, (October 16, 1992
---------------------------- ---------------------------- to June 30,
1997 1996 1997 1996 1997
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues $ 33,060 $ 49,727 $ 83,060 $ 99,454 $ 700,000
Operating Expenses
Research and development expenses 1,355,762 528,913 2,329,754 844,286 9,352,634
Licensing fees 0 50,000 0 60,000 633,683
THERAFECTIN(R)related expenses 629,087 180,117 1,180,132 547,379 2,726,923
General and administrative expenses 479,580 630,899 996,580 1,406,320 7,046,150
Purchased research and development in-process 0 0 0 0 10,421,544
------------ ------------ ------------ ------------ ------------
Loss from operations (2,431,369) (1,340,202) (4,423,406) (2,758,531) (29,480,934)
Net interest income 283,233 236,466 610,382 109,198 375,454
------------ ------------ ------------ ------------ ------------
Net loss $ (2,148,136) $ (1,103,736) $ (3,813,024) $ (2,649,333) $(29,105,480)
============ ============ ============ ============ ============
Net loss per common share $ (0.17) $ (0.12) $ (0.32) $ (0.30)
============ ============ ============ ============
Weighted average shares outstanding 12,454,621 9,099,694 12,037,923 8,803,709
============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
Boston Life Sciences, Inc.
(A Development Stage Enterprise)
Consolidated Statement of Cash Flows
------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Period from
Six Months Ended June 30 inception (October
----------------------------------- 16, 1992) through
1997 1996 June 30, 1997
---------------- ---------------- ---------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (3,813,024) $ (2,649,333) $(29,105,480)
Adjustments to reconcile net loss to net cash
used for operating activities:
Purchased research and development in-process 0 0 10,421,544
Compensation charge related to options and warrants granted 185,144 158,677 781,540
Amortization and depreciation 40,000 249,368 1,315,637
Loss on disposal of fixed assets 0 0 15,589
Changes in assets and liabilities:
Prepaid sponsored research & development expenses 391,000 (125,375) (40,000)
Other current assets 330,587 75,628 395,884
Accounts payable and accrued expenses (467,066) (208,260) 493,181
Deferred revenue (83,060) 100,547 0
----------- ------------ -----------
Net cash used for operating activities (3,416,419) (2,398,748) (15,722,105)
----------- ------------ -----------
Cash flows from investing activities:
Net cash provided by acquisition of Greenwich Pharmaceuticals 0 0 1,758,037
Increase in fixed assets (23,376) (27,150) (206,067)
Proceeds from sale of fixed assets 0 0 9,800
Increase in other assets 0 0 (115,674)
Short term investments:
Purchases (5,983,119) 0 (28,556,180)
Sales and maturities 5,501,343 248,320 15,079,382
----------- ------------ -----------
Net cash provided by (used in) investing activities (505,152) 221,170 (12,030,702)
----------- ------------ -----------
Cash flows from financing activities:
Proceeds from issuance of common stock 128,836 5,590,180 13,054,979
Proceeds from issuance of convertible preferred stock 0 23,991,000 20,872,170
Proceeds from issuance of notes payable 0 0 2,585,000
Proceeds from issuance of convertible debt 0 0 1,000,000
Principal payments of notes payable (57,286) (1,574,832) (2,792,001)
Payment of note issuance costs 0 0 (399,702)
Payment of stock issuance and merger transaction costs 0 (3,251,199) (1,837,454)
----------- ------------ -----------
Net cash provided by financing activities 71,550 24,755,149 32,482,992
----------- ------------ -----------
Net increase (decrease) in cash and cash equivalents (3,850,021) 22,577,571 4,730,185
Cash and cash equivalents at beginning of period 8,580,206 2,125,838 0
----------- ------------ -----------
Cash and cash equivalents at end of period $ 4,730,185 $ 24,703,409 $ 4,730,185
=========== ============ ===========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
Boston Life Sciences, Inc.
(a development stage enterprise)
Notes to Unaudited Consolidated Financial Statements
(June 30, 1997)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and pursuant to the rules
and regulations of the Securities and Exchange Commission. Accordingly,
these financial statements do not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements.
The interim unaudited consolidated financial statements contained herein
include, in management's opinion, all adjustments (consisting of normal
recurring adjustments) necessary for a fair presentation of the
financial position, results of operations, and cash flows for the
periods presented. The results of operations for the interim period
shown on this report are not necessarily indicative of results for a
full year. These financial statements should be read in conjunction with
the Company's consolidated financial statements and notes for the year
ended December 31, 1996, appearing in the Company's Annual Report on
Form 10-K for such year.
2. Net Loss Per Share
Net loss per share has been calculated by dividing net loss by the
weighted average number of common shares outstanding during the period.
All common stock equivalents have been excluded from the calculation of
weighted average common shares outstanding since their inclusion would
be anti-dilutive.
3. Reverse Stock Split
On June 6, 1997, the Company's stockholders approved a one-for-ten
reverse split of the common stock effective as of June 9, 1997. All
share and per share amounts have been retroactively restated to reflect
the terms of the split.
4. New Accounting Standard
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 128, "Earnings per
Share". The standard will be effective for both interim and annual
periods, beginning with the Company's fiscal year ending December 31,
1997. The adoption of this standard is not expected to have a material
effect on the Company's financial statements.
4
<PAGE>
Boston Life Sciences, Inc.
(a development stage enterprise)
Notes to Unaudited Consolidated Financial Statements
(June 30, 1997)
5. Investments
At June 30, 1997, the cost basis of short-term investments exceeded
their fair value by approximately $34,000. These investments, which are
classified as available-for-sale, are reported at fair value, with the
unrealized loss excluded from the statement of operations and reported
as a separate component of stockholders' equity.
6. Supplemental disclosure of non-cash investing and financing activities:
During the six months ended June 30, 1997, the Company issued 1,394,020
shares of common stock resulting from the conversion of 79,487 shares of
preferred stock.
During the six months ended June 30, 1996, $1 million of convertible
subordinated debentures were converted into 156,605 shares of common
stock.
5
<PAGE>
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
(June 30, 1997)
This Quarterly Report on Form 10-Q contains forward-looking
statements. Specifically, any statements contained herein that are not
statements of historical fact may be deemed to be forward-looking statements.
Without limiting the foregoing, the words "believes," "anticipates," "plans,"
"expects," and similar expressions are intended to identify forward-looking
statements. There are a number of meaningful factors that could cause the
Company's actual results to differ materially from those indicated by any such
forward-looking statements. These factors include, without limitation, the
duration and results of clinical trials and their effect on the FDA regulatory
process, uncertainties regarding receipt of approvals for any possible products
and any commercial acceptance of such products, possible difficulties with
obtaining necessary patent protection, and uncertainties regarding the outcome
of any of the Company's collaborations or alliances with third parties. Other
factors include those set forth under the caption "Forward-Looking Statements"
in the Company's Annual Report on Form 10-K for the year ended December 31, 1996
and the documents referred to under such caption.
Results of Operations
Overview
The Company is a biotechnology company engaged in the research and
development of novel therapeutic and diagnostic products to treat chronic
debilitating diseases such as cancer, central nervous system disorders and
autoimmune diseases. The Company expects that its research and development costs
will continue to increase as the Company attempts to gain regulatory approval
for commercial introduction of its proposed products. At June 30, 1997, the
Company is considered a "development stage enterprise" as defined in Statement
of Financial Accounting Standards No. 7.
Three Months Ended June 30, 1997 and 1996
The Company's net loss was $2,148,136 during the three months ended
June 30, 1997 as compared with $1,103,736 during the three months ended June 30,
1996. Net loss per common share equaled $.17 per share for the 1997 period as
compared to $.12 per share for the 1996 period. The higher net loss in the 1997
period was primarily due to increased research and development expenses, and
higher costs associated with the Phase III clinical trial for THERAFECTIN(R).
These increased expenses were partially offset by lower general and
administrative expenses.
Revenue was $33,060 during the three months ended June 30, 1997 as
compared with $49,727 during the comparable 1996 period. Revenue for both
periods was attributable to a research and development agreement (the
"Agreement") entered into with Zeneca Pharmaceuticals, Ltd. ("Zeneca
Pharmaceuticals") in 1995. The Agreement expired in June 1997. The parties are
presently discussing an extension of the Agreement, the terms and conditions of
which are under negotiation.
Research and development expenses were $1,355,762 during the three
months ended June 30, 1997 as compared with $528,913 during the three months
ended June 30, 1996. The increase was primarily attributable to an expansion in
the number of technologies under development as well as an increased level of
expenditures for technologies which were under development during both periods.
During the 1997 period, the Company incurred expenses totaling $276,000 for a
technology which had not yet been licensed to the Company during the comparable
1996 period. In addition, the Company increased the funding for two of its
programs from approximately $152,000 during the 1996 period to approximately
$573,000 during the 1997 period. Finally, the Company increased the number of
6
<PAGE>
personnel supporting its research and development activities from two to four.
The majority of the Company's research and development expenses were sponsored
research obligations paid to Harvard University and its affiliated hospitals.
The Company expects to incur research and development costs between $5 million
and $6 million during 1997.
Licensing fees were zero during the three months ended June 30, 1997
as compared with $50,000 during the three months ended June 30, 1996. The
Company did not execute any new licensing agreements during the 1997 period or
incur any obligations under its existing licensing agreements. The Company
entered into two new licensing agreements during the 1996 period. The Company
expects to pay future licensing fees, the timing and amounts of which will
depend upon the terms of agreements which may be executed for technologies
currently being developed or which may be developed in the future. There can be
no assurance regarding the likelihood or materiality of any such future
licensing agreements.
THERAFECTIN(R) related expenses were $629,087 during the three
months ended June 30, 1997 as compared with $180,117 during the three months
ended June 30, 1996. This increase was primarily due to the higher number of
patients enrolled in the Phase III clinical trial for THERAFECTIN(R) during the
1997 period as compared to the 1996 period. Enrollment in the trial, which began
in March 1996, was completed in March 1997 and the trial is expected to be
completed in August 1997 with results available at the end of September 1997.
Before any commercially viable product from THERAFECTIN(R) may be developed, and
any revenue generated therefrom, the Company currently expects that at least
$500,000 to $1.0 million of additional future expense will be necessary. There
can be no assurance, however, that the expenditure of these additional amounts
will result in the regulatory approval of any compounds or that such approval
will ever be able to be obtained by the Company. Moreover, if the current Phase
III trial for THERAFECTIN(R) provides unsatisfactory or disappointing results,
the Company may be required to write off all or some portion of the $3.5 million
asset value represented by the THERAFECTIN(R) technology acquired in the Merger
with Greenwich Pharmaceuticals, Inc. as reflected on the Company's balance
sheet.
General and administrative expenses were $479,580 during the three months
ended June 30, 1997 as compared with $630,899 during the comparable 1996 period.
This decrease was primarily due to lower professional services costs.
Net interest income was $283,233 during the three months ended June
30, 1997 as compared with net interest income of $236,466 during the three
months ended June 30, 1996. The higher net interest income recognized during the
1997 period primarily related to a decrease in interest expense which totaled
approximately $1,000 during the 1997 period as compared to approximately $41,000
during the 1996 period. The higher net interest expense incurred during the 1996
period related to the issuance of $2.175 million of notes payable during the
first quarter of 1995 and the amortization of the debt issuance costs thereon.
The Company paid the remaining principal on the notes payable at the beginning
of the second quarter of 1996.
Six Months Ended June 30, 1997 and 1996
The Company's net loss was $3,813,024 during the six months ended
June 30, 1997 as compared with $2,649,333 during the six months ended June 30,
1996. Net loss per common share equaled $.32 per share for the 1997 period as
compared to $.30 per share for the 1996 period. The higher net loss in the 1997
period was primarily due to increased research and development expenses, and
higher costs associated with the Phase III clinical trial for THERAFECTIN(R).
These increased expenses were partially offset by lower general and
administrative expenses, and a greater amount of net interest income in the 1997
period as compared to the 1996 period.
7
<PAGE>
Revenue was $83,060 during the six months ended June 30, 1997 as
compared with $99,454 during the comparable 1996 period. Revenue for both
periods was attributable to the Agreement entered into with Zeneca in 1995. The
Agreement expired in June 1997. The parties are presently discussing an
extension of the Agreement, the terms and conditions of which are under
negotiation.
Research and development expenses were $2,329,754 during the six
months ended June 30, 1997 as compared with $844,286 during the six months ended
June 30, 1996. The increase was primarily attributable to an expansion in the
number of technologies under development as well as an increased level of
expenditures for technologies which were under development during both periods.
During the 1997 period, the Company incurred expenses totaling approximately
$485,000 for a technology which had not yet been licensed to the Company during
the comparable 1996 period. In addition, the Company increased the funding for
two of its programs from approximately $247,000 during the 1996 period to
approximately $1,042,000 during the 1997 period. Finally, the Company increased
the number of personnel supporting its research and development activities from
two to four. The majority of the Company's research and development expenses
were sponsored research obligations paid to Harvard University and its
affiliated hospitals. The Company expects to incur research and development
costs between $5 million and $6 million during 1997.
Licensing fees were zero during the six months ended June 30, 1997
as compared with $60,000 during the six months ended June 30, 1996. The Company
did not execute any new licensing agreements during the 1997 period or incur any
obligations under its existing licensing agreements. The Company entered into
two new licensing agreements during the 1996 period and made a contractual
payment under an existing licensing agreement. The Company expects to pay future
licensing fees, the timing and amounts of which will depend upon the terms of
agreements which may be executed for technologies currently being developed or
which may be developed in the future. There can be no assurance regarding the
likelihood or materiality of any such future licensing agreements.
THERAFECTIN(R) related expenses were $1,180,132 during the six
months ended June 30, 1997 as compared with $547,379 during the six months ended
June 30, 1996. This increase was primarily due to the higher number of patients
enrolled in the Phase III clinical trial for THERAFECTIN(R) during the 1997
period as compared to the 1996 period. Enrollment in the trial, which began in
March 1996, was completed in March 1997 and the trial is expected to be
completed in August 1997 with results available at the end of September 1997.
Before any commercially viable product from THERAFECTIN(R) may be developed, and
any revenue generated therefrom, the Company currently expects that at least
$500,000 to $1.0 million of additional future expense will be necessary. There
can be no assurance, however, that the expenditure of these additional amounts
will result in the regulatory approval of any compounds or that such approval
will ever be able to be obtained by the Company. Moreover, if the current Phase
III trial for THERAFECTIN(R) provides unsatisfactory or disappointing results,
the Company may be required to write off all or some portion of the $3.5 million
asset value represented by the THERAFECTIN(R) technology acquired in the Merger
with Greenwich Pharmaceuticals, Inc. as reflected on the Company's balance
sheet.
General and administrative expenses were $996,580 during the six
months ended June 30, 1997 as compared with $1,406,320 during the comparable
1996 period. This decrease was primarily due to (i) the incurrence, during the
1996 period, of contractual obligations totaling $175,000 associated with the
employment contract between the Company and its Chief Executive Officer and (ii)
lower professional services costs.
Net interest income was $610,382 during the six months ended June
30, 1997 as compared with net interest income of $109,198 during the six months
ended June 30, 1996. Interest income totaled approximately $612,000 during the
1997 period as compared to approximately $436,000 during the comparable 1996
period. Interest expense totaled approximately $3,000 during the 1997 period as
8
<PAGE>
compared to approximately $327,000 in the comparable 1996 period. The higher
amount of interest income recognized during the 1997 period primarily related to
higher average cash balances associated with the Company raising net proceeds of
approximately $25.7 million from two private placements completed in the first
half of 1996. The interest expense incurred during the 1996 period related to
(i) the issuance of $2.175 million of notes payable during the first quarter of
1995, (ii) the issuance of $1.0 million of convertible subordinated debentures
during the fourth quarter of 1995, and (iii) the amortization of the debt
issuance costs associated with both financings. The debentures were converted
into common stock in February 1996 and the Company paid the remaining principal
on the notes payable at the beginning of the second quarter of 1996.
Liquidity and Capital Resources
Since its inception, the Company has satisfied its working capital
requirements from the sale of the Company's securities through private
placements. In January and February 1996, the Company raised approximately $20.7
million of net proceeds by completing a private placement of units consisting of
(i) shares of its Series A Convertible Preferred Stock and (ii) warrants to
purchase shares of the Company's common stock. In June 1996, the Company raised
approximately $5 million of net proceeds by completing a private placement of
500,000 shares of common stock (See Notes 8 and 9 of Notes to the Consolidated
Financial Statements in the Company's Annual Report on Form 10-K for the year
ended December 31, 1996). In the future, the Company's ability to meet, and the
level of, its working capital and capital requirements will depend on numerous
factors, including the progress of the Company's research and development
activities, the level of resources that the Company devotes to the
developmental, clinical, and regulatory aspects of its products, and the extent
to which the Company enters into collaborative relationships with pharmaceutical
and biotechnology companies.
At June 30, 1997, the Company had available cash, cash equivalents
and short term investments of approximately $18.2 million and working capital of
approximately $16.9 million. The Company believes that the level of financial
resources available at June 30, 1997 will provide sufficient working capital to
meet its anticipated expenditures for more than the next twelve months. The
Company may raise additional capital in the future through collaboration
agreements with other pharmaceutical or biotechnology companies, debt financings
and equity offerings. There can be no assurance, however, that the Company will
be successful in such efforts or that additional funds will be available on
acceptable terms, if at all.
9
<PAGE>
PART II -- OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS.
None.
ITEM 2: CHANGES IN SECURITIES.
On June 6, 1997, the Company's stockholders approved a
one-for-ten reverse common stock split, which became effective on June 9, 1997.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The annual meeting of stockholders was held on June 6, 1997.
The holders of more than a majority of the shares entitled to
vote were represented at the meeting in person or by proxy,
constituting a quorom. At the meeting, the following matters
were voted upon by the stockholders, receiving the number of
affirmative and witheld or negative ("withheld") votes set
forth below each matter.
1. Proposal to elect directors each to serve until the
date of the 1997 annual meeting of stockholders and until their successors are
elected and qualified:
For Withheld
Colin B. Bier, Ph.D. 87,265,084 627,399
Edson D. de Castro 87,058,980 833,503
S. David Hillson, Esq. 87,196,055 696,427
Steve H. Kanzer, CPA, Esq. 86,048,838 1,843,645
Marc E. Lanser, M.D. 87,258,227 634,256
Ira W. Lieberman, Ph.D. 87,262,284 630,199
E. Christopher Palmer 87,256,829 635,654
2. Proposal to amend the Company's Certificate of
Incorporation to effectuate a one-for-ten reverse common stock split:
For Withheld
84,712,362 3,180,120
10
<PAGE>
ITEM 5: OTHER INFORMATION.
(a) Exhibits.
None.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
3.1 Certificate of Amendment of Certificate of Incorporation of Boston
Life Sciences, Inc., as amended.
(b) Reports on Form 8-K: The Registrant filed the following reports on
Form 8-K during the quarter ended June 30, 1997 and through August 12, 1997.
Date of Report Item Reported
1 Form 8-K filed June 5, 1997 5, 7
2 Form 8-K filed June 9, 1997 5, 7
3 Form 8-K filed June 13, 1997 5,7
4 Form 8-K filed July 7, 1997 5,7
5 Form 8-K filed July 16, 1997 5,7
11
<PAGE>
SIGNATURE
Pursuant to the requirements 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.
BOSTON LIFE SCIENCES, INC.
(Registrant)
DATE: August 12, 1997 /s/ S. David Hillson
--------------------
S. David Hillson
President and Chief Executive
Officer
(Principal Executive Officer)
/s/ Joseph Hernon
Joseph Hernon
Chief Financial Officer
(Principal Financial and Accounting
Officer)
12
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
BOSTON LIFE SCIENCES, INC
Pursuant to Section 242 of the
Delaware General Corporation Law
BOSTON LIFE SCIENCES, INC. (the "Corporation"), a corporation
organized and existing under and by virtue of the General Corporation Law of the
State of Delaware, DOES HEREBY CERTIFY:
FIRST: That at a meeting of the Board of Directors of the
Corporation, resolutions were duly adopted proposing and declaring advisable the
following amendment to the Certificate of Incorporation of the Company:
RESOLVED, that the Board of Directors hereby approves and recommends
to the Company's stockholders that Article FOURTH of the Articles of
Incorporation of the Company be, and it hereby is, subject to stockholder
approval at the Meeting, amended and restated in its entirety to read as
follows:
"FOURTH: The aggregate number of shares which the Corporation
shall have authority to issue is 26,000,000 to be divided into (a)
25,000,000 shares of Common Stock, par value $.01 per share, (b)
1,000,000 shares of Preferred Stock, par value $.01 per share, of
which 264,000 shares are designated as Series A Convertible Preferred
Stock, par value $.01 per share, with the powers, preferences and
other rights as described on Exhibit A attached hereto and made a
part hereof.
The Board of Directors is hereby empowered to cause the
Preferred Stock to be issued from time to time for such consideration
as it may from time to time fix, and to cause such Preferred Stock to
be issued in series with such voting powers, designations,
preferences and relative, participating, optional or other special
rights, if any, or the qualifications, limitations or restrictions
thereof, as designated by
<PAGE>
the Board of Directors in the resolution providing for the issue of
such series. Shares of Preferred Stock of any one series shall be
identical in all respects.
Effective as of 5:00 p.m., Eastern time, on June 9, 1997, all
outstanding shares of Common Stock held by each holder of record on
such date shall be automatically combined at the rate of one-for-ten
without any further action on the part of the holders thereof or this
Corporation. No fractional shares shall be issued. All fractional
shares for one-half share or more shall be increased to the next
higher whole number of shares and all fractional shares less than
one-half share shall be decreased to the next lower whole number of
shares, respectively."
SECOND: That thereafter a majority of the holders of the stock of the
Corporation entitled to vote thereon voted in favor of the amendment at a
meeting of the stockholders duly held on June 6, 1997.
THIRD: That the foregoing amendment to the Certificate of
Incorporation was duly adopted in accordance with the provisions of Section 242
of the General Corporation Law.
IN WITNESS WHEREOF, said Boston Life Sciences, Inc. has caused this
Certificate to be executed by its duly authorized officers this 6th day of June,
1997.
BOSTON LIFE SCIENCES, INC.
By: /s/ Joseph Hernon
--------------------------
Name: Joseph Hernon
Title: Chief Financial Officer
2
<PAGE>
EXHIBIT A
---------
Series A Convertible Preferred Stock
------------------------------------
1. Designation and Amount. There shall be a series of Preferred Stock
----------------------
designated as "Series A Convertible Preferred Stock" and the number of shares
constituting such series shall be 264,000. Such series is referred to herein as
the "Series A Convertible Preferred Stock". Such number of shares may be
increased or decreased by resolution of the Board of Directors of the
Corporation; provided, however, that no decrease shall reduce the number of
shares of Series A Convertible Preferred Stock to less than the number of shares
then issued and outstanding.
2. Dividends. Subject to the prior and superior rights of the holders
---------
of any shares of any series of Preferred Stock ranking and superior to the
shares of Series A Convertible Preferred Stock with respect to dividends and
distributions, the holders of shares of Series A Convertible Preferred Stock,
shall be entitled to receive dividends and distributions, when, as and if
declared by the Board of Directors out of funds legally available for such
purpose. If the Corporation declares a dividend
[CONTINUED ON NEXT PAGE]
<PAGE>
or distribution on the common stock, par value $.01 per share (the "Common
Stock"), of the Corporation, the holders of shares of Series A Convertible
Preferred Stock shall be entitled to receive for each share of Series A
Convertible Preferred Stock a dividend or distribution in the amount of the
dividend or distribution that would be received by a holder of the Common Stock
into which such share of Series A Convertible Preferred Stock is convertible on
the record date for such dividend or distribution. If the Corporation declares a
dividend or distribution on any other class or series of preferred stock, the
holders of shares of Series A Convertible Preferred Stock shall be entitled to
receive a dividend or distribution in an amount per share in proportion to the
dividend or distribution declared on a share of such other class or series based
upon the liquidation preference of a share of the Series A Convertible Preferred
Stock relative to that of a share of such other class or series, unless the
holders of at least 66-2/3% of the outstanding shares of Series A Convertible
Preferred Stock consent otherwise. In any such case, the Corporation shall
declare a dividend or distribution on the Series A Convertible Preferred Stock
at the same time that it declares a dividend or distribution on the Common Stock
or such other class or series of preferred stock and shall establish the same
record date for the dividend or distribution on the Series A Convertible
Preferred Stock as is established for such dividend or distribution on the
Common Stock or such other class or series of preferred stock. Each such
dividend or distribution will be payable to holders of record of the Series A
Convertible Preferred Stock as they appeared on the records of the Corporation
at the close of business on the record date declared for such dividend or
distribution, as shall be fixed by the Board of Directors. If the corporation
declares or pays a dividend or distribution on the Series A Convertible
Preferred Stock as a result of the declaration or payment of a dividend or
distribution on the Common Stock or any other class or series of preferred stock
as described above, the holders of the Series A Convertible Preferred Stock
shall not be entitled to any additional dividend or distribution solely because
such first dividend or distribution also required the declaration or payment of
a dividend or distribution on any other class or series of preferred stock. Any
reference to "distribution" contained in this Section 2 shall not be deemed to
include any distribution made in connection with any liquidation, dissolution or
winding up of the Corporation, whether voluntary or involuntary.
3. Liquidation Preference. (a) In the event of a (i) liquidation,
----------------------
dissolution or winding up of the Corporation, whether voluntary or involuntary
or (ii) a sale or other disposition of all or substantially all of the assets of
the Corporation (a "Liquidation Event"), after payment or provision for payment
of debts and other liabilities of the Corporation, the holders of the Series A
Convertible Preferred Stock then outstanding shall be entitled to be paid out of
the assets of the Corporation available for distribution to its shareholders,
whether such assets are capital, surplus, or earnings, before any payment or
declaration and setting apart for payment of any amount shall be made in respect
of the stock junior to the Series A Convertible Preferred Stock, an amount equal
to $130.00 per share plus an amount equal to all declared and unpaid dividends
thereon. If upon any Liquidation Event, whether voluntary or involuntary, the
assets to be distributed to holders of the Series A Convertible Preferred Stock
shall be insufficient to permit the payment to such shareholders of the full
preferential amounts aforesaid, then all of the assets of the Corporation to be
distributed shall be so distributed ratably to the holders of the Series A
Convertible Preferred Stock on the basis of the number of shares of Series A
Convertible Preferred Stock held. A consolidation or merger of the Corporation
with or into another corporation shall not be considered a liquidation,
dissolution or winding up of the Corporation or a sale or other disposition of
all or substantially all of the assets of the Corporation. All shares of Series
A Convertible Preferred Stock shall rank as to payment upon the occurrence of
any of the events described in clauses (i) and (ii) above senior to the Common
Stock as provided herein and, unless the terms of such series shall provide
otherwise, senior to all other series of the Corporation's preferred stock.
2
<PAGE>
(b) After the payment or distribution to the holders of the Series A
Preferred Stock of the full preferential amounts aforesaid, the holders of
shares of the Common Stock and any other shares of participating preferred stock
then outstanding will be entitled to receive, pro rata an amount per share equal
--- ----
to $13 plus accrued but unpaid dividends, if any, paid to the holders of the
Series A Convertible Preferred Stock. After the payment or distribution pursuant
to the immediately preceding sentence, the holders of shares of the Series A
Convertible Preferred Stock, the Common Stock and any other shares of
participating preferred stock then outstanding will share any remaining assets
of the Corporation on a pari passu, as converted basis.
---- -----
4. Conversion.
----------
(a) Right of Conversion. The shares of Series A Convertible Preferred
-------------------
Stock shall be convertible, in whole or in part, at the option of the holder
thereof and upon notice to the Corporation as set forth in paragraph (b) below,
into fully paid and nonassessable shares of Common Stock and such other
securities and property as hereinafter provided. The shares of Series A
Convertible Preferred Stock shall be convertible initially at the rate of
175.3771 shares of Common Stock for each full share of Series A Convertible
Preferred Stock and shall be subject to adjustment as provided herein. The
initial conversion price per share of Common Stock is $.5702 and shall be
subject to adjustment as provided herein. For purposes of this resolution, the
"conversion rate" applicable to a share of Series A Convertible Preferred Stock
shall be the number of shares of Common Stock and number or amount of any other
securities and property as hereinafter provided into which a share of Series A
Convertible Preferred Stock is then convertible and shall be determined by
dividing the then existing conversion price into $100.00.
Subject to adjustment pursuant to the provisions of paragraph (c)
below, in the event that the conversion price in effect at the time of each
Interim Closing Date (as defined below) and the Final Closing Date (as defined
below) is greater than 85% of the average closing bid price of the Common Stock
for the thirty consecutive trading days immediately preceding (x) any interim
closing date of the issuance and sale of the Series A Convertible Preferred
Stock (each an "Interim Closing Date") or (y) the final closing date of the
issuance and sale of the Series A Convertible Preferred Stock (the "Final
Closing Date"), then the conversion price shall be adjusted to equal the lesser
of any such average closing bid price. If there is any change in the conversion
price as a result of the preceding sentence, then the conversion rate shall be
changed accordingly, and shall be determined by dividing the new conversion
price into $100.00. The Corporation shall prepare a certificate signed by the
principal financial officer of the Corporation setting forth the conversion rate
as of the Final Closing Date, showing in reasonable detail the facts upon which
such conversion rate is based, and such certificate shall forthwith be filed
with the transfer agent of the Series A Convertible Preferred Stock.
Notwithstanding the provisions of subparagraph (vi) of paragraph (c) below, a
notice stating that the conversion rate has been adjusted pursuant to this
paragraph, or that no adjustment is necessary, and setting forth the conversion
rate in effect as of the Final Closing Date shall be mailed as promptly as
practicable after the Final Closing Date by the Corporation to all record
holders of Series A Convertible Preferred Stock at their last addresses as they
shall appear in the stock transfer books of the Corporation.
Subject to adjustment pursuant to the provisions of paragraph (c)
below, the conversion price in effect immediately prior to the date that is 12
months after the Final Closing Date of the issuance and sale of the Series A
Convertible Preferred Stock (the "Reset Date") shall be adjusted and reset
effective as of the Reset Date if the average closing bid price of the Common
Stock for the 30
3
<PAGE>
consecutive trading days immediately preceding the Reset Date (the "12-Month
Trading Price") is less than 130% of the then applicable conversion price (a
"Reset Event"). Upon the occurrence of a Reset Event, the conversion price shall
be reduced to be equal to the greater of (A) the 12-Month Trading Price divided
by 1.3, (B) 50% of the then applicable conversion price and (C) $.375 (subject
to a proportional adjustment in the event of an adjustment to the conversion
price pursuant to paragraph 4(c) below). If there is any change in the
conversion price as a result of the preceding sentence, then the conversion rate
shall be changed accordingly, and shall be determined by dividing the new
conversion price into $100.00. The Corporation shall prepare a certificate
signed by the principal financial officer of the Corporation setting forth the
conversion rate as of the Reset Date, showing in reasonable detail the facts
upon which such conversion rate is based, and such certificate shall forthwith
be filed with the transfer agent of the Series A Convertible Preferred Stock.
Notwithstanding the provisions of subparagraph (vi) of paragraph (c) below, a
notice stating that the conversion rate has been adjusted pursuant to this
paragraph, or that no adjustment is necessary, and setting forth the conversion
rate in effect as of the Reset Date shall be mailed as promptly as practicable
after the Reset Date by the Corporation to all record holders of the Series A
Convertible Preferred Stock at their last addresses as they shall appear in the
stock transfer books of the Corporation.
The "closing bid price" for each trading day shall be the reported
closing bid price on the NASDAQ Small-Cap Market or the NASDAQ National Market
System (collectively referred to as, "NASDAQ") or, if the Common Stock is not
quoted on NASDAQ, on the principal national securities exchange on which the
Common Stock is listed or admitted to trading (based on the aggregate dollar
value of all securities listed or admitted to trading) or, if not listed or
admitted to trading on any national securities exchange or quoted on NASDAQ, the
closing bid price in the over-the-counter market as furnished by any NASD member
firm selected from time to time by the Corporation for that purpose, or, if such
prices are not available, the fair market value set by, or in a manner
established by, the Board of Directors of the Corporation in good faith.
"Trading day" shall mean a day on which the national securities exchange or
NASDAQ used to determine the closing bid price is open for the transaction of
business or the reporting of trades or, if the closing bid price is not so
determined, a day on which NASDAQ is open for the transaction of business.
(b) Conversion Procedures. Any holder of shares of Series A
---------------------
Convertible Preferred Stock desiring to convert such shares into Common Stock
shall surrender the certificate or certificates evidencing such shares of Series
A Convertible Preferred Stock at the office of the transfer agent for the Series
A Convertible Preferred Stock, which certificate or certificates, if the
Corporation shall so require, shall be duly endorsed to the Corporation or
in blank, or accompanied by proper instruments of transfer to the Corporation or
in blank, accompanied by irrevocable written notice to the Corporation that the
holder elects so to convert such shares of Series A Convertible Preferred Stock
and specifying the name or names (with address) in which a certificate or
certificates evidencing shares of Common Stock are to be issued. The Corporation
need not deem a notice of conversion to be received unless the holder complies
with all the provisions hereof. The Corporation will instruct the transfer agent
(which may be the Corporation) to make a notation of the date that a notice of
conversion is received, which date shall be deemed to be the date of receipt for
purposes hereof.
The Corporation shall, as soon as practicable after such deposit of
certificates evidencing shares of Series A Convertible Preferred Stock
accompanied by the written notice and compliance with any other conditions
herein contained, deliver at such office of such transfer agent to the person
for whose account such share of Series A Convertible Preferred Stock were so
surrendered, or to the nominee or nominees of such person, certificates
evidencing the number of full shares of Common Stock to which such person shall
be entitled as aforesaid, together with a cash adjustment of any fraction of a
4
<PAGE>
share as hereinafter provided. Subject to the following provisions of this
paragraph, such conversion shall be deemed to have been made as of the date of
such surrender of the shares of Series A Convertible Preferred Stock to be
converted, and the person or persons entitled to receive the Common Stock
deliverable upon conversion of such Series A Convertible Preferred Stock shall
be treated for all purposes as the record holder or holders of such Common
Stock on such date; provided, however, that the Corporation shall not be
required to convert any shares of Series A Convertible Preferred Stock while the
stock transfer books of the Corporation are closed for any purpose, but the
surrender of Series A Convertible Preferred Stock for conversion during any
period while such books are so closed shall become effective for conversion
immediately upon the reopening of such books as if the surrender had been made
on the date of such reopening, and the conversion shall be at the conversion
rate in effect on such date. No adjustments in respect of any dividends on
shares surrendered for conversion or any dividend on the Common Stock issued
upon conversion shall be made upon the conversion of any shares of Series A
Convertible Preferred Stock.
All notices of conversion shall be irrevocable; provided, however,
that if the Corporation has sent notice of an event pursuant to Section 4(g)
hereof, a holder of Series A Convertible Preferred Stock may, at its election,
provide in its notice of conversion that the conversion of its shares of Series
A Convertible Preferred Stock shall be contingent upon the occurrence of the
record date or effectiveness of such event (as specified by such holder),
provided that such notice of conversion is received by the Corporation prior to
such record date or effective date, as the case may be.
(c) Certain Adjustments of Conversion Rate. In addition to adjustment
--------------------------------------
pursuant to paragraph (a) above, the conversion rate (and the corresponding
conversion price) shall be subject to adjustment from time to time as follows:
(i) In case the Corporation shall (A) pay a dividend in Common Stock
or make a distribution in Common Stock, (B) subdivide its outstanding
Common Stock, (C) combine its outstanding Common Stock into a smaller
number of shares of Common Stock or (D) issue by reclassification of its
Common Stock other securities of the Corporation, then in each such case
the conversion rate in effect immediately prior thereto shall be adjusted
so that the holder of any shares of Series A Convertible Preferred Stock
thereafter surrendered for conversion shall be entitled to receive the kind
and number of shares of Common Stock or other securities of the Corporation
which such holder would have owned or would have been entitled to receive
immediately after the happening of any of the events described above had
such shares of Series A Convertible Preferred Stock been converted
immediately prior to the happening of such event or any record date with
respect thereto. Any adjustment made pursuant to this subparagraph (i)
shall become effective immediately after the effective date of such event
retroactive to the record date, if any, for such event.
(ii) In case the Corporation shall issue or sell Common Stock or
rights, options, warrants or other securities convertible into Common
Stock, excluding those rights, options, warrants or other securities
convertible into Common Stock already outstanding and disclosed in the
Offering Memorandum, at a price per share which is lower than both (A) the
then effective conversion price and (B) the closing bid price (as defined
in Section 4) for the trading day immediately prior to such record date
(the "Current Market Price"), then the conversion rate shall be determined
by multiplying the conversion rate theretofore in effect by a fraction, of
which the numerator shall be the number of shares of Common Stock
outstanding immediately prior to the issuance of such shares, rights,
options, warrants or convertible securities plus the number of additional
shares of Common Stock offered for subscription or purchase, and of which
the
5
<PAGE>
denominator shall be the number of shares of Common Stock outstanding
immediately prior to the issuance of such rights, options, warrants or
convertible securities plus the number of shares which the aggregate offering
price of the total number of shares offered would purchase at the then effective
conversion price. Such adjustment shall be made whenever such rights, options,
warrants or convertible securities are issued, and shall become effective
immediately and retroactive to the record date for the determination of
stockholders entitled to receive such rights, options, warrants or convertible
securities.
(iii) In case the Corporation shall distribute to all or substantially all
holders of its Common Stock evidences of its indebtedness or assets (excluding
cash dividends or distributions out of earnings) or rights, options, warrants or
convertible securities containing the right to subscribe for or purchase Common
Stock (excluding those referred to in subparagraph (ii) above), then in each
case the conversion rate shall be determined by multiplying the conversion rate
theretofore in effect by a fraction, of which the numerator shall be the then
fair value as determined in good faith by the Corporation's Board of Directors
on the date of such distribution, and of which the denominator shall be such
fair value on such date minus the then fair value (as so determined) of the
portion of the assets or evidences of indebtedness so distributed or of such
subscription rights, options, warrants or convertible securities applicable to
one share. Such adjustment shall be made whenever any such distribution is made
and shall become effective on the date of distribution retroactive to the record
date for the determination of stockholders entitled to receive such
distribution.
(iv) Upon the expiration of any rights, options, warrants or conversion
privileges, if such shall not have been exercised, the conversion rate shall,
upon such expiration, be readjusted and shall thereafter be such as it would
have been had it been originally adjusted (or had the original adjustment not
been required, as the case may be) on the basis of (A) the fact that Common
Stock, if any, actually issued or sold upon the exercise of such rights,
options, warrants or conversion privileges, and (B) the fact that such shares of
Common Stock, if any, were issued or sold for the consideration actually
received by the Corporation upon such exercise plus the consideration, if any,
actually received by the Corporation for the issuance, sale or grant of all such
rights, options, warrants or conversion privileges whether or not exercised.
(v) No adjustment in the conversion rate shall be required unless such
adjustment would require an increase or decrease of at least 1% in such rate;
provided, however, that the Corporation may make any such adjustment at its
election; and provided, further, that any adjustments which by reason of this
subparagraph (v) are not required to be made shall be carried forward and taken
into account in any subsequent adjustment. All calculations under this Section 4
shall be made to the nearest cent or to the nearest one-hundredth of a share, as
the case may be.
(vi) Whenever the conversion rate is adjusted as provided in any
provision of this Section 4;
(A) the Corporation shall compute (or may retain a firm of
independent public accountants of recognized national standing (which may
be any such firm regularly employed by the Corporation) to compute) the
adjusted conversion rate in accordance with this Section 4 and shall
prepare a certificate signed by the principal financial officer of the
Corporation (or cause any such independent public accountants to execute a
certificate) setting forth the adjusted conversion rate and showing in
reasonable detail the
6
<PAGE>
facts upon which each adjustment is based, and such certificate shall
forthwith be filed with the transfer agent of the Series A
Convertible Preferred Stock; and
(B) a notice stating that the conversion rate has been
adjusted and setting forth the adjusted conversion rate shall
forthwith be required, and as soon as practicable after it is
required, such notice shall be mailed by the Corporation to all
record holders of Series A Convertible Preferred Stock at their last
addresses as they shall appear in the stock transfer books of the
Corporation.
(vii) In the event that at any time, as a result of any adjustment
made pursuant to this Section 4, the holder of any shares of Series A
Convertible Preferred Stock thereafter surrendered for conversion shall
become entitled to receive any shares of the Corporation other than shares
of Common stock or to receive any other securities, the number of such
other shares or securities so receivable upon conversion of any share of
Series A Convertible Preferred Stock shall be subject to adjustment from
time to time in a manner and on terms as nearly equivalent as practicable
to the provisions contained in this Section 4 with respect to the Common
Stock.
(d) No fractional Shares. No fractional shares or scrip
--------------------
representing fractional shares of Common stock shall be issued upon conversion
of Series A Convertible Preferred Stock. If more than one certificate
evidencing shares of Series A Convertible Preferred Stock shall be surrendered
for conversion at one time by the same holder, the number of full shares
issuable upon conversion thereof shall be computed on the basis of the aggregate
number of shares of Series A Convertible Preferred Stock so surrendered.
Instead of any fractional share of Common stock which would otherwise be
issuable upon conversion of any shares of Series A Convertible Preferred Stock,
the Corporation shall pay a cash adjustment in respect of such fractional
interest in an amount equal to the same fraction of the market price per share
of Common Stock (which shall be the closing price as defined in Section 5) at
the close of business on the day of conversion.
(e) Consolidation; Merger; Etc. If the Corporation shall enter
--------------------------
into any consolidation, merger, combination or other transaction in which shares
of Common Stock constituting in excess of 50% of the voting power of the
Corporation are exchanged for or changed into other stock or securities, cash
and/or any other property (a "Merger Transaction"), then in any such case the
shares of Series A Convertible Preferred Stock shall at the same time be
similarly exchanged or changed in an amount per share equal to (i) the
conversion rate in effect at such time multiplied by (ii) the aggregate fair
market value, as determined in good faith by the Board of Directors of the
Corporation, of stock, securities, cash and/or any other property (payable in
kind), as the case may be, into which or for which each share of Common stock is
changed or exchanged (the "Per Share Merger Consideration"); provided, however,
-------- -------
that if any stock of securities received in the Merger Transaction are traded on
a securities exchange or quotation system, the fair market value of such stock
or securities shall be the closing sales price of such stock or securities as
reported by the principal exchange or quotation system for such stock or
securities the business day immediately preceding the execution of the merger
agreement or other transaction agreement for such Merger Transaction, and if no
such trading market exists for such stock or securities, the aggregate fair
market value shall be as determined in good faith by the Board of Directors of
the Corporation; provided, further, however, that if any such Merger Transaction
-------- ------- -------
is effected on or before the Reset Date, and if the Per Share Merger
Consideration (assuming conversion of all outstanding convertible stock,
including the Series A Convertible Preferred Stock, at the conversion rate for
such stock in effect at the time of the execution and delivery of the merger
agreement relating to such Merger Transaction) is less than 130% of the then
applicable conversion price relating to the Series A Convertible Preferred
Stock, then the conversion price will be reduced to equal the greater of (x) the
Per Share
7
<PAGE>
Merger Consideration divided by 1.3, (y) 50% of the then applicable conversion
price and (z) $.375 (subject to a proportional adjustment in the event of an
adjustment to the conversion price pursuant to paragraph 4(c) above).
(f) Reservation of Shares; Transfer Taxes; Etc. The
------------------------------------------
Corporation shall at all times reserve and keep available, out of its authorized
unissued stock, solely for the purpose of effecting the conversion of the Series
A Convertible Preferred Stock, such number of shares of its Common Stock free of
preemptive rights as shall from time to time be sufficient to effect the
conversion of all shares of Series A Convertible Preferred Stock from time to
time outstanding. The Corporation shall use its best efforts from time to time,
in accordance with the laws of the State of Delaware, to increase the authorized
number of shares of Common Stock if at any time the number of shares of Common
Stock not outstanding shall not be sufficient to permit the conversion of all
the then-outstanding shares of Series A Convertible Preferred Stock.
The Corporation shall pay any and all issue or other taxes that
may be payable in respect of any issue or delivery of shares of Common Stock on
conversion of the Series A Convertible Preferred Stock. The Corporation shall
not, however, be required to pay any tax which may be payable in respect of any
transfer involved in the issue or delivery of Common Stock (or other securities
or assets) in a name other than that in which the shares of Series A Convertible
Preferred Stock so converted were registered, and no such issue or delivery
shall be made unless and until the person requesting such issue has paid to the
Corporation the amount of such tax or has established, to the satisfaction of
the Corporation, that such tax has been paid.
Notwithstanding anything to the contrary herein, before taking
any action that would cause an adjustment reducing the conversion rate or before
any such adjustment is made as a result of a Reset Event, in either event, such
that the effective conversion price (for all purposes an amount equal to $100.00
divided by the conversion rate as in effect at such time) would be below the
then par value of the Common Stock, the Corporation shall take any corporate
action which may, in the opinion of its counsel, be necessary in order that the
Corporation may validly and legally issue fully paid and nonassessable shares of
Common Stock at the conversion rate as so adjusted.
(g) Prior Notice of Certain Events. In case:
------------------------------
(i) the Corporation shall declare any dividend (or any other
distribution) on its Common Stock; or
(ii) the Corporation shall authorize the granting to the
holders of Common Stock of rights or warrants to subscribe for or purchase any
shares of stock of any class or of any other rights or warrants; or
(iii) of any reclassification of Common Stock (other than a
subdivision or combination of the outstanding Common Stock, or a change in par
value, or from par value to no par value, or from no par value to par value), or
of any consolidation or merger to which the Corporation is a party and for which
approval of any stockholders of the Corporation shall be required, or of the
sale or transfer of all or substantially all of the assets of the Corporation or
of any compulsory share exchange whereby the Common Stock is converted into
other securities, cash or other property; or
8
<PAGE>
(iv) of the voluntary or involuntary dissolution, liquidation or
winding up of the Corporation;
then the Corporation shall cause to be filed with the transfer agent for the
Series A Convertible Preferred Stock, and shall cause to be mailed to the
holders of record of the Series A Convertible Preferred Stock, at their last
addresses as they shall appear upon the stock transfer books of the Corporation,
at least 10 days prior to the applicable record date hereinafter specified, a
notice stating (x) the date on which a record (if any) is to be taken for the
purpose of such dividend, distribution or granting of rights or warrants or, if
a record is not to be taken, the date as of which the holders of Common Stock of
record to be entitled to such dividend, distribution, rights or warrants are to
be determined and a description of the cash, securities or other property to be
received by such holders upon such dividend, distribution or granting of rights
or warrants or (y) the date on which such reclassification, consolidation,
merger, sale, transfer, share exchange, dissolution, liquidation or winding up
is expected to become effective, the date as of which it is expected that
holders of Common Stock of record shall be entitled to exchange their shares of
Common Stock for securities or other property deliverable upon such exchange,
dissolution, liquidation or winding up and the consideration, including
securities or other property, to be received by such holders upon such exchange;
provided, however, that no failure to mail such notice or any defect therein or
in the mailing thereof shall affect the validity of the corporate action
required to be specified in such notice.
(h) Other Changes in Conversion Rate. The Corporation from time to
--------------------------------
time may increase the conversion rate by any amount for any period of time if
the period is at least 20 days and if the increase is irrevocable during the
period. Whenever the conversion rate is so increased, the Corporation shall mail
to holders of record of the Series A Convertible Preferred Stock a notice of the
increase at least 10 days before the date the increased conversion rate takes
effect, and such notice shall state the increased conversion rate and the period
it will be in effect.
The Corporation may make such increases in the conversion rate, in
addition to those required or allowed by this Section 4, as shall be determined
by it, as evidence by a resolution of the Board of Directors, to be advisable in
order to avoid or diminish any income tax to holders of Common Stock resulting
from any dividend or distribution of stock or issuance or rights or warrants to
purchase or subscribe for stock or from any event treated as such for income tax
purposes.
(i) Ambiguities/Errors. The Board of Directors of the Corporation
------------------
shall have the power to resolve any ambiguity or correct any error in the
provisions relating to the convertibility of the Series A Convertible Preferred
Stock, and its actions in so doing shall be final and conclusive.
5. Mandatory Conversion at Option of Corporation. At any time on or
---------------------------------------------
after the Reset Date, the Corporation, as its option, may cause the Series A
Convertible Preferred Stock to be converted in whole, or in part, on a pro rata
--- ----
basis, into fully paid and nonassessable shares of Common Stock and such other
securities and property as herein provided if the closing price of the Common
Stock shall have exceeded 150% of the then applicable conversion price for at
least 20 trading days in any 30 consecutive trading day period. Any shares of
Series A Convertible Preferred Stock so converted shall be treated as having
been surrendered by the holder thereof for conversion pursuant to Section 4 on
the date of such mandatory conversion (unless previously converted at the option
of the holder).
No more than 60 nor less than 10 days prior to the date of any such
mandatory conversion, notice by first class mail, postage prepaid, shall be
given to the holders of record of the Series A Convertible Preferred Stock to be
converted, addressed to such holders at their last addresses
9
<PAGE>
as shown on the stock transfer books of the Corporation. Each such notice shall
specify the date fixed for conversion, the place or places for surrender of
shares of Series A Convertible Preferred Stock, and the then effective
conversion rate pursuant to Section 4.
The "closing price" for each trading day shall be the reported
last sales price regular way or, in case no such reported sale takes place on
such day, the average of the reported closing bid and asked prices regular way,
in either case on the NASDAQ Small-Cap Market or the NASDAQ National Market
System (collectively referred to as, "NASDAQ") or, if the Common Stock is not
quoted on NASDAQ, on the principal national securities exchange on which the
Common Stock is listed or admitted to trading (based on the aggregate dollar
value of all securities listed or admitted to trading) or, if not listed or
admitted to trading on any national securities exchange or quoted on NASDAQ, the
average of the closing bid and asked prices in the over-the-counter market as
furnished by any NASD member firm selected from time to time by the Corporation
for that purpose, or, if such prices are not available, the fair market value
set by, or in a manner established by, the Board of Directors of the Corporation
in good faith. "Trading day" shall have the meaning given in Section 4 hereof.
Any notice which is mailed as herein provided shall be
conclusively presumed to have been duly given by the Corporation on the date
deposited in the mail, whether or not the holder of the Series A Convertible
Preferred Stock receives such notice; and failure properly to give such notice
by mail, or any defect in such notice, to the holders of the shares to be
converted shall not affect the validity of the proceedings for the conversion of
any other shares of Series A Convertible Preferred Stock. On or after the date
fixed for conversion as stated in such notice, each holder of shares called to
be converted shall surrender the certificate evidencing such shares to the
Corporation at the place designated in such notice for conversion.
Notwithstanding that the certificates evidencing any shares properly called for
conversion shall not have been surrendered, the shares shall no longer be deemed
outstanding and all rights whatsoever with respect to the shares so called for
conversion (except the right of the holders to convert such shares upon
surrender of their certificates therefor) shall terminate.
6. Voting Rights.
-------------
(a) General. Except as otherwise provided herein, in the
-------
Amended and Restated Certificate of Incorporation or by law, the holders of
shares of Series A Convertible Preferred Stock, the holders of shares of Common
Stock and the holders of any other class or series of shares entitled to vote
with the Common Stock shall vote together as one class on all matters submitted
to a vote of stockholders of the Corporation. In any such vote, each share of
Series A Convertible Preferred Stock shall entitle the holder thereof to cast
the number of votes equal to the number of votes which could be cast in such
vote by a holder of the Common Stock into which such share of Series A
Convertible Preferred Stock is convertible on the record date for such vote, or
if no record date has been established, on the date such vote is taken. Any
shares of Series A Convertible Preferred Stock held by the Corporation or any
entity controlled by the Corporation shall not have voting rights hereunder and
shall not be counted in determining the presence of a quorum.
(b) Class Voting Rights. In addition to any vote specified in
-------------------
paragraph (a) of this Section 6, so long as 50% of the shares of Series A
Convertible Preferred Stock (including those shares of Series A Convertible
Preferred Stock issued or issuable upon the exercise of the placement agent
warrants issued in connection with the offer and sale of the Series A
Convertible Preferred Stock) shall be outstanding, the Corporation shall not,
without the affirmative vote or consent of the holders of at least 66-2/3% of
all outstanding Series A Convertible Preferred Stock voting separately as a
class, (i) amend, alter or repeal any provision of the Amended and Restated
Certificate of Incorporation, as amended, or
10
<PAGE>
the Bylaws of the Corporation so as adversely to affect the relative rights,
preferences, qualifications, limitations or restrictions of the Series A
Convertible Preferred Stock, (ii) declare any dividend or distribution on the
Common Stock or any other class or series of preferred stock or authorize the
repurchase of any securities of the Corporation or (iii) authorize or issue, or
increase the authorized amount of, any additional class or series of stock, or
any security convertible into stock of such class or series, (A) ranking prior
to, or on a parity with, the Series A Convertible Preferred Stock upon
liquidation, dissolution or winding up of the Corporation or a sale of all or
substantially all of the assets of the Corporation or (B) providing for the
payment of any dividends or distributions. A class vote on the part of the
Series A Convertible Preferred Stock shall, without limitation, specifically not
be deemed to be required (except as otherwise required by law or resolution of
the Corporation's Board of Directors) in connection with: (a) the authorization,
issuance or increase in the authorized amount of Common Stock or of any shares
of any other class or series of stock ranking junior to the Series A Convertible
Preferred Stock in respect of distributions upon liquidation, dissolution or
winding up of the Corporation; (b) the authorization, issuance or increase in
the amount of the Series A Convertible Preferred Stock or any bonds, mortgages,
debentures or other obligations of the Corporation (other than bonds, mortgages,
debentures or other obligations convertible into or exchangeable for or having
option rights to purchase any shares of stock of the Corporation the
authorization issuance or increase in amount of which would require the consent
of the holders of the Series A Preferred Stock); or (c) any consolidation or
merger of the Corporation with or into another corporation, a sale or transfer
of all or part of the Corporation's assets for cash, securities or other
property, or a compulsory share exchange.
7. Outstanding Shares. For purposes of this Certificate of
------------------
Designations, all shares of Series A Convertible Preferred Stock shall be deemed
outstanding except (i) from the date, or the deemed date, of surrender of
certificates evidencing shares of Series A Convertible Preferred Stock, all
shares of Series A Convertible Preferred Stock converted into Common Stock, (ii)
from the date of registration of transfer, all shares of Series A Convertible
Preferred Stock held of record by the Corporation or any subsidiary of the
Corporation and (iii) any and all shares of Series A Convertible Preferred Stock
held in escrow prior to delivery of such stock by the Corporation to the initial
beneficial owners thereof.
8. Status of Acquired Shares. Shares of Series A Convertible
-------------------------
Preferred Stock received upon conversion pursuant to Section 4 or Section 5 or
otherwise acquired by the Corporation will be restored to the status of
authorized but unissued shares of Preferred Stock, without designation as to
class, and may thereafter be issued, but not as shares of Series A Convertible
Preferred Stock.
9. Preemptive Rights. The Series A Convertible Preferred Stock is
-----------------
not entitled to any preemptive or subscription rights in respect of any
securities of the Corporation.
10. Severability of Provisions. Whenever possible, each provision
--------------------------
hereof shall be interpreted in a manner as to be effective and valid under
applicable law, but if any provision hereof is held to be prohibited by or
invalid under applicable law, such provision shall be ineffective only to the
extent of such prohibition or invalidity, without invalidating or otherwise
adversely affecting the remaining provisions hereof. If a court of competent
jurisdiction should determine that a provision hereof would be valid or
enforceable if a period of time were extended or shortened or a particular
percentage were increased or decreased, then such court may make such change as
shall be necessary to render the provision in question effective and valid under
applicable law.
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS AS REPORTED ON FORM 10Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 4,730,185
<SECURITIES> 13,442,893
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 18,312,722
<PP&E> 212,324
<DEPRECIATION> 127,951
<TOTAL-ASSETS> 22,012,769
<CURRENT-LIABILITIES> 1,445,312
<BONDS> 0
0
541
<COMMON> 125,172
<OTHER-SE> 20,441,744
<TOTAL-LIABILITY-AND-EQUITY> 22,012,769
<SALES> 83,060
<TOTAL-REVENUES> 83,060
<CGS> 0
<TOTAL-COSTS> 4,506,466
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,114
<INCOME-PRETAX> (3,813,024)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,813,024)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,813,024)
<EPS-PRIMARY> (0.32)
<EPS-DILUTED> (0.32)
</TABLE>
