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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended July 31, 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 1-10615
EMISPHERE TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3306985
(State or jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
15 Skyline Drive 10532
Hawthorne, New York (Zip Code)
(Address of principal executive offices)
(914) 347-2220
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock - $.01 par value
Preferred Stock Purchase Rights
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
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.045 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated be reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
As of October 15, 1997 the aggregate market value of registrant's common stock
held by non-affiliates was approximately $235,000,000 based on a closing sale
price of $22.25 per share. The number of outstanding shares of the registrant's
common stock as of October 15, 1997 was 10,699,049.
DOCUMENTS INCORPORATED BY REFERENCE
Definitive proxy statement to be filed by the registrant on or before
November 28, 1997.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements under the captions Business and Management's Discussion
and Analysis of Financial Conditions and Results of Operations and elsewhere in
this Annual Report on Form 10-K constitute forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995 (the Reform
Act ). Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of the Company to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the following:
uncertainties related to future test results and viability of the Company's
product candidates, which are in the early stages of development; the need to
obtain regulatory approval for the Company's product candidates; the Company's
dependence on partnerships with pharmaceutical companies to develop, manufacture
and commercialize products using the Company's drug delivery technologies; the
Company's dependence on the success of the Elan Joint Venture for the
development and commercialization of oral heparin and low molecular weight
heparin products and the Lilly Strategic Alliance for the development and
commercialization of certain of Lilly therapeutic proteins; the risk of
technological obsolescence and risks associated with the Company's highly
competitive industry; the Company's dependence on patents and proprietary
rights; the Company's absence of profitable operations and need for additional
capital; the Company's dependence on others to manufacture the Company's
chemical compounds; the risk of product liability and policy limits of product
liability insurance; potential liability for human clinical trials;the Company's
dependence on key personnel; the quality, judgment and strategic decisions of
management and other personnel; uncertain availability of third-party
reimbursement for commercial medical products; and general business and economic
conditions.
PART I
ITEM 1. BUSINESS.
Overview
Emisphere Technologies, Inc. ("Emisphere" or the "Company" or the
"Registrant")is a drug delivery company focused on the discovery and application
of proprietary synthetic chemical compounds ("carriers") that enable the oral
delivery of therapeutic macromolecules and other compounds that are not
currently deliverable by oral means. To date, the biotechnology industry
has developed therapeutic macromolecules, including proteins, that are
administered by injection. It is expected that research efforts in the genomics
field will accelerate the discovery of new therapeutic proteins. The Company's
carriers enable the transport of therapeutic macromolecules and other compounds
through biological membranes, including intestinal, nasal, buccal, sublingual,
subcutaneous and intraocular membranes.
Emisphere has designed and synthesized a library of potential carriers
and evaluated them for their ability to enable the oral delivery of
therapeutic compounds. The Company has used its carriers to deliver heparin, an
antithrombotic/anticoagulant, orally in humans and to deliver a variety of
compounds, including heparin, insulin, human growth hormone, calcitonin,
human parathyroid hormone, cromolyn and deferoxamine, orally in animals. The
Company believes that total 1995 worldwide sales of the injectable formulations
of these compounds were over $5.0 billion and that the market for these
compounds will expand if they are available in oral form.
Recent Collaborations
The Company's strategy is to facilitate the development of products
utilizing its drug delivery technologies by entering into collaboration
agreements with pharmaceutical companies. In September 1996, the Company entered
into a 50/50 joint venture with Elan Corporation plc ("Ela"n) to develop oral
formulations of heparin products (the "Elan Joint Venture") and in February 1997
has entered into a strategic alliance with Eli Lilly and Company ("Lilly") for
the delivery of two proteins with a focus in the area of endocrinology
(the "Lilly Strategic Alliance").
The Elan Joint Venture was established to further research,
develop and market oral formulations of heparin products. Three Phase I clinical
trials data indicated that the formulation for the oral heparin product was
tolerated. The heparin Phase I clinical trials evidenced the oral delivery of
heparin at clinically relevant levels. As of July 31, 1997, Elan has provided
$7.5 million to the project of which $6.4 million has been paid in cash to the
Company (including $3.0 million paid by Elan to the Company prior to the
creation of the Elan Joint Venture). In addition, an affiliate of Elan purchased
600,000 shares of Common Stock of the Company and warrants to purchase 250,000
additional shares of Common Stock at an exercise price of $16.25 per share for
total consideration of $7.5 million.
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The Lilly Strategic Alliance is intended to utilize Emisphere's technologies
for the improved delivery of certain Lilly therapeutic proteins with a focus on
oral delivery. The major therapeutic focus of the collaboration is in the area
of endocrinology, including growth disorders. Initially, Lilly is committing
limited funds to the Company for research on delivery of two proteins.
The Lilly Strategic Alliance contemplates that Lilly may ultimately exercise
options to license the applicable carriers and market the products utilizing the
combined technologies. If the options are exercised, the Company may receive
from Lilly milestone and other payments aggregating, together with initial
funding, up to $60 million, as well as future royalty payments. The Lilly
Strategic Alliance also contemplates that the Company could receive further
payments for other delivery applications if the focus of the Lilly Strategic
Alliance is expanded beyond the two specified therapeutic proteins or to
non-oral applications.
See "Collaboration Agreements" for more information regarding the Elan Joint
Venture and the Lilly Strategic Alliance.
Business Strategy
The Companys objective is to become a leader in providing orally administered
therapeutic compounds that are not currently deliverable by oral means. The
Companys strategy to achieve its objective incorporates the following principal
elements:
Identify appropriate therapeutic compounds that address large markets.
Discover and design improved carriers for the oral delivery of
therapeutic compounds.
Establish collaborative arrangements with leading pharmaceutical companies.
Enhance and protect the Company's proprietary technology base.
Expand the Company's internal product development capabilities.
The Drug Delivery Industry
Companies involved in drug delivery are seeking to enhance the use of
therapeutic agents by expanding the available dosage forms. Traditional drug
delivery companies develop technologies that control the release of drugs.
Examples of products in this category include transdermal patches and tablets
for drugs that can be taken once-a-day versus multiple daily dosing.
There is an emerging group of drug delivery companies, including the
Company, developing novel technologies that offer alternatives to such dosage
forms. These companies are seeking technologies to increase the potential for
therapeutics that have not been commercially developed, used effectively or
successfully marketed because of limited practical means of administration. For
example, macromolecules such as proteins or other poorly absorbed therapeutics
currently are mainly administered by injection.
Oral Drug Delivery
The Company believes that the market for orally administered
pharmaceuticals represents the largest product segment of the pharmaceutical
industry and that the potential market for many drugs could be significantly
expanded if novel delivery systems are developed for therapeutics that are
currently available only as injectable drugs. The Company believes that
oral administration would represent the preferred modality of delivery for many
pharmaceuticals, including a broad range of biotechnology derived therapeutics
and drugs that require chronic dosing.
The three main barriers to effective oral drug delivery for humans are:
Degradation of Drugs by Acid and Enzymes: The high acid content and the
enzyme activity of the digestive tract can degrade some drugs well before
they reach the site of absorption into the bloodstream. All natural and
recombinant peptides, as well as certain compounds with carbohydrate
and lipid components, are susceptible to this degradation, limiting the
commercial potential for these compounds.
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Poor Absorption of Drugs Through Epithelium Tissue: Many macromolecules
and polar compounds cannot effectively traverse the cells of the
epithelium in the small intestine to reach the bloodstream. Thus, some
drugs with beneficial medicinal properties are often limited to
injectable formulations, which may not be commercially viable for the
treatment of chronic disease because of poor patient compliance.
Development and commercialization of many macromolecules and other
poorly absorbed compounds may become practical with an effective new
delivery system.
Transition of Drugs to Insoluble Form at Acidic pH: Many drugs become
insoluble at the low pH encountered in the digestive tract. Since only the
soluble form of the drug can be absorbed into the bloodstream, the
transition of the drug to the insoluble form can significantly reduce the
amount absorbed.
Emisphere s Drug Delivery Technologies
The core of the Company's delivery technology is the design and synthesis of
compounds that maximize the transport of drugs across biological membranes.
The Company's technologies exploit the properties of supramolecular complexes,
which are formed when two or more compounds are held together in a discrete
geometry by relatively weak molecular interactions. A supramolecular complex
will have a number of properties that are measurably different from its
constituent parts. Many of the drugs that are currently used to treat diseases
must be administered by injection due to their inability to survive the
environment of the gastrointestinal tract and/or to be transported from the
gastrointestinal tract. The Company believes that the supramolecular complexes
formed when its proprietary compounds are formulated with many injectable drugs
render them transportable from the gastrointestinal tract to the blood in
quantities that are clinically useful and commercially attractive. The Company
believes that certain conformations of some drugs appear to render them
transportable across biological membranes. The Company believes that an
effective carrier significantly increases the population of naturally occurring
transportable conformations of the drug to be delivered. The Company has
identified characteristics of supramolecular complexes that it believes
correlate with in vivo performance.
The Company has synthesized a library of well-defined, proprietary carrier
compounds that are single molecular entities which can form supramolecular
complexes with a diverse array of injectable therapeutics. These carrier
molecules vary widely in their chemical structure, solubility, hydrophobicity,
electrostatic and other physical/chemical properties. The Company believes
that, in many cases, an individual therapeutic agent will require its own
unique carrier for optimal oral delivery. Based upon an individual therapeutics
characteristics, the Company seeks to identify the optimal carrier by in vitro
and in vivo screening of the Companys expanding library of carrier compounds.
The Company believes that technologies are available that could allow high
throughput synthesis and in vitro screening of carrier compounds, thereby
reducing the time required for identifying the optimal carrier for a given
injectable therapeutic.
On the basis of the limited clinical and preclinical trials to date, the
Company believes that its oral drug delivery technologies have the potential
to achieve the key properties essential for effective and reproduceable
effective oral drug delivery, including: (i) absorption of the drug in an
effective manner, (ii) consistent release of the drug into the bloodstream,
(iii) lack of toxicity and (iv) maintenance of the biological effects of the
drug.
The Company believes that the supramolecular complex formed by the
Company's carriers and certain therapeutic compounds may have applications in
the delivery of drugs through other biological membranes, including intestinal,
nasal, buccal, sublingual, subcutaneous and intraocular membranes.
Key Characteristics of the Company's Technologies
The Company believes that its oral delivery approach may have
potential competitive advantages,including:
Broad applicability: The Company's carriers are applicable across a
diverse group of molecules (proteins, carbohydrates, peptides and other
poorly absorbed compounds).
Stand-alone delivery approach: Oral drug delivery using the Company's
carriers does not rely upon addition of other agents that can have
adverse effects on the intestinal membranes or digestion process.
Versatility of formulation: The Company believes that various types
of oral formulations, including suspensions, tablets and capsules, can
be created.
Ease of manufacture: The technology and manufacturing equipment
required to produce the Companys carrier material in commercial
quantities are readily available.
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Market Opportunity
The table below lists a representative sample of product candidates
for which the Company has demonstrated oral delivery in mammals using its
carrier technologies.
ESTIMATED 1995 PRIMARY
PRODUCT CANDIDATE WORLDWIDE SALES (1) INDICATIONS
- ------------------------------------ ------------------- ------------------
Heparins $900 million Clotting Disorders
Insulin $1.8 billion Diabetes
Human Growth Hormone $850 million Growth Disorders
Calcitonin $675 million Osteoporosis
Human Parathyroid Hormone (analogues) (in clinical trials) Osteoporosis
Cromolyn $800 million Asthma/Allergy
Deferoxamine $ 35 million Iron Overload
__________
(1) Based upon data from IMS Global Services.
Because the terms of the Lilly Strategic Alliance require the Company to
keep confidential the identity of the compounds that are the subject of the
Lilly Strategic Alliance, the information below is provided without giving
effect to the Lilly Strategic Alliance. For a description of the Lilly Strategic
Alliance, see -"Collaboration Agreements -Eli Lilly".
Therapeutic Macromolecules
Heparin. Heparin is a widely used anticoagulant/antithrombotic
drug prescribed primarily for cardiovascular conditions, including acute
myocardial infarction, coronary angioplasty, coronary artery bypass graft,
pulmonary embolus, stroke, unstable angina and deep vein thrombosis ("DVT").
The Elan Joint Venture completed a number of Phase I clinical trials
with liquid oral heparin preparation and intends to pursue additional clinical
trials with an initial focus on prophylaxis and treatment of DVT patients.
The Company believes that its oral heparin product will ultimately be applicable
for a wide range of anticoagulant/antithrombotic uses and that an oral
alternative may significantly expand the overall heparin market, currently
constrained by injectable-only administration.
In March 1996, the Company submitted an investigational new drug (IND)
application for an oral liquid formulation of heparin to the FDA for review. In
order to prepare the IND, the Company engaged in preclinical testing which
included, among other things, (i) maximum tolerated dosing experiments, (ii)
acute and subacute toxicity testing, (iii) a pharmacological screen, (iv)
mutagenicity testing, (v) dosing preparation stability analysis, and (vi)
absorption, distribution, metabolism, excretion (ADME) studies. The results of
these tests demonstrated, in part, that the carriers dosed at quantities
substantially greater than the quantities that the Company proposed to
administer to humans (i) caused no damage to intestinal tissue, (ii) produced
no pharmacological activity on its own, (iii) was not sequestered in any body
tissue, and (iv) caused no genetic alterations.The IND was prepared based on the
compilation of these preclinical testing results.
After the required thirty day waiting period had expired, the Company
began its double-blind, controlled Phase I clinical trial. The trial involved
30 human subjects and approximately 100 exposures and consisted of three parts:
(1) escalating doses of carrier only; (2) escalating doses of carrier with
a fixed dose of heparin; and (3) escalating doses of heparin with a fixed dose
of the carrier. Each dose was administered by oral gavage because taste-masking
had not yet been undertaken and because it was desirable to control more
precisely the dose delivered to the stomach. Oral delivery was measured in
all of the limited number of subjects who participated in Part 3 who received
heparin by measuring blood clotting times (activated partial thromboplastin time
or "APTT"), serum levels of anti-factor IIa and Xa, and lipoprotein-associated
coagulation inhibitor ("LACI") assays. The heparin activity in this trial
occurred at a substantially lower relative dose of administered heparin than
predicted by previous animal testing. A summary of the study results was
presented at the American Heart Association meeting in November 1996 and a paper
about the Phase I clinical trial has been submitted to a peer reviewed
publication.There has been two additional Phase 1 trials with a taste masked
preparation. There can be no assurance that the FDA will approve the intended
additional trials or that the limited trial results to date are predictive of
future results. Substantial additional trials will be required. No assurance can
be given that the Company's formulation of oral heparin,if approved, will be
approved for all indications of heparin or only certain indications. See
"Collaboration Agreements-Elan plc."
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The second Phase 1 clinical trial demonstrated oral delivery of clinically
relevent levels of heparin in a formulated liquid preparation. The trial
consisted of five arms, four of which were with a fixed amount of Emisphere's
carrier and escalating doses of heparin, administered as a drink in a 30 ml
(two tablespoon) solution. All formulations were well tolerated, and none of the
subjects reported any treatment-related gastrointestinal effects or other
adverse experiences. Moreover, the trial demonstrated evidence of the oral
delivery of clinically relevant levels of heparin, as measured by blood clotting
times (activated partial thromboplastin time, or APTT). Dose-dependent increases
in clotting times for the oral heparin were observed, and were well within the
therapeutic range for heparin.
The second trial confirmed the results of the first trial, which utilized
an unformulated version of the Emisphere-Elan oral heparin product.
Therapeutic Protein and Peptide Products
Among the protein and peptide products to which the Company is seeking to
apply its carriers are insulin, calcitonin, human growth hormone and parathyroid
hormone analogues. All of these products, with the exception of the parathyroid
hormone analogues (in clinical development), are currently being marketed as
injectable products.
Insulin. Studies performed by groups such as the Diabetes Control and
Complications Trial Research Group (the "DCCT Research Group") have shown that
the risk of degenerative complications can be greatly reduced if people with
Type I diabetes (insulin dependent diabetes) lower their average
blood-glucose toward the concentrations typical for non-diabetic individuals.
However, a patient needs to inject insulin several times per day in order
to properly regulate his glucose. This level of compliance is difficult to
achieve with an injectable formulation of insulin and the Company believes
an oral formulation would increase compliance. Emisphere has demonstrated that
its lead carrier for insulin is able to achieve therapeutic utility through oral
delivery in a diabetic rat model comparable to that obtained following
subcutaneous injection of the compound in the same model. However, there can
be no assurance that the results achieved in rodents are predictive of future
test results in humans. Substantial additional testing will be required.
Human Growth Hormone. While a number of new indications are being
explored, the majority of human growth hormone sold is used to treat children
with growth deficiencies. The current preferred dosing regimen in children
entails daily injections for up to 10 years or more.
The Companys lead carriers for recombinant human growth hormone have been
tested in rodents and non-human primates and the tests indicated oral
delivery of therapeutic drug levels was achieved in these animals. In addition,
growth studies conducted in animal models have demonstrated that the drug is
active after delivery to the blood when the drug is dosed with the Company's
carrier into the gastrointestinal tract when compared to subcutaneous delivery.
There can be no assurance that test results achieved in rodents and non-human
primates are predictive of future results in humans. Substantial additional
testing will be required.
Calcitonin. Osteoporosis is a disease that afflicts many post-menopausal
women and older men. Calcitonin is used to treat osteoporosis as an injectable
solution or nasal spray. The Company has demonstrated the oral delivery of
therapeutic drug levels of calcitonin in non-human primates. There can be no
assurance that test results achieved in non-human primates are predictive of
future results in humans. Substantial additional testing will be required.
Human Parathyroid Hormone. Currently, a number of pharmaceutical
companies are in various stages of clinical testing to determine whether certain
analogues of human parathyroid hormone (hPTH) are effective in reducing the bone
fractures which are associated with osteoporosis. The Company has demonstrated
oral delivery of three different hPTH analogues in non-human primates. There can
be no assurance that the results of tests in non-human primates are predictive
of results in humans. Substantial additional testing will be required.
Poorly Absorbed Organic Compounds
The majority of pharmaceutical products are small organic molecules.
Pharmaceutical companies often identify biologically active compounds that
cannot be delivered orally due to poor absorption. The Company believes that its
carriers may be useful for oral delivery of such compounds.
Cromolyn. Cromolyn is a mast cell stabilizer used in the treatment of
asthma and allergies. The Company demonstrated oral delivery of cromolyn in
rodents. There can be no assurance, however, that such results are predictive of
results in humans. Substantial additional testing will be required.
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Deferoxamine. Deferoxamine (DFO) is the only approved iron chelator for
use in treating iron overload resulting from frequent blood transfusions in the
treatment of illnesses such as beta thalassemia and sickle cell anemia.
Currently, dosing involves a 12-hour subcutaneous infusion 5 days per week.
The Company has demonstrated oral delivery of therapeutic levels of DFO in
non-human primates. There can be no assurance that test results achieved in
non-human primates are predictive of future results in humans. Substantial
additional testing will be required.
Vaccines
The Company is exploring the applicability of its carriers for
humans and animals in the field of vaccines. The Company has conducted
experiments with a number of antigens. The results of dosing rodents orally with
antigens combined with the Company s carriers were an increased secretory
Immunoglobulin A (sIgA) response, increased Immunoglobulin G (IgG) response and
CD4 T-cell proliferation. These results indicate that oral vaccination may be
possible using the Company's carriers.There can be no assurance that test
results achieved in rodents are predictive of future results in humans.
Substantial additional testing will be required.
Collaboration Agreements
The Companys strategy is to facilitate the development of products
utilizing its drug delivery technologies by entering into collaboration
agreements with pharmaceutical and biotechnology companies that have the
financial, scientific and marketing resources to fund development of specific
products through clinical trials, to obtain regulatory approval, to manufacture
the final products in commercially viable quantities and to market the products
through their sales and marketing organizations.
The Company is currently having discussions with a number of pharmaceutical
companies regarding potential applications of the Company's drug delivery
technologies for their proprietary drugs. There can be no assurance, however,
that any agreements will be consummated as a result of these discussions,
that any resulting agreements will yield revenues to the Company, that
any such companies will pursue product development until a commercial product
is achieved or that, once achieved, any such companies will continue to produce
and sell the product and pay royalties to the Company.
Eli Lilly. In February 1997, the Company and Lilly entered into a
Research Collaboration and Option Agreement (the "Lilly Agreemen"t) to combine
Lilly's therapeutic protein and formulation capabilities with the Company
carrier technologies.
The Lilly Agreement provides initially for payments to the Company to
fund a research and development program (the "Program") to study the use of the
Companys technologies to develop oral and non-oral methods of delivering
formulations of two of Lilly's therapeutic proteins (the "Subject Proteins") in
the area of endocrinology, including growth disorders. The Lilly Agreement
represents the vehicle through which Lilly and the Company may together develop
and market orally deliverable products based on the Subject Proteins and the
Companys carrier technologies (the "Lilly Products"). The initial term of the
Program is 18 months, which term will be extended automatically for an
additional six months unless the Company and Lilly agree not to extend the term.
Any extensions beyond 24 months must be approved by the Company and Lilly. If
Lilly decides to expand the scope of the Program, payments will be increased.
Pursuant to the Lilly Agreement, the Company has granted to Lilly a
series of options (the "Options"), each to acquire an exclusive, worldwide
license to use the Company's technologies to develop one of the Lilly Products.
Options relating to the two Subject Proteins expire from one to two years
from the date of the Lilly Agreement, subject to certain extensions. Lilly's
exercise of the Options as to one of the Subject Proteins is mandatory upon
satisfaction of specified conditions. During the respective option periods, the
Company has agreed not to license its technologies to anyone other than Lilly
for the purpose of delivering the Subject Proteins.
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Upon exercise of an Option, the Company and Lilly will enter into a license
agreement (each a "License Agreement") granting Lilly a license to use the
Companys technologies to develop Lilly Products to deliver the Subject Protein
by a particular route of delivery. The Lilly Agreement and the License Agreement
will provide for payments of initial fees and milestone payments of up to $60
million in the aggregate as well as royalty payments if a Lilly Product, to
which the License Agreement relates,is sold commercially. The License Agreements
will further provide that Lilly is obligated to seek to market the Lilly Product
and that the Company is obligated to provide a material portion of the supply
of carrier necessary for the production of any such Lilly Products.
The Lilly Agreement further provides Lilly with a right of first refusal to
make an offer to enter into a license to use the Company's technologies for the
delivery of a limited number of other therapeutic proteins and peptides, or,
after the expiration of the option period, for the delivery of the Subject
Proteins (if not already licensed). The right of first refusal allows Lilly to
obtain the license if it exceeds a third party offer by a specified premium.
The right of first refusal expires on February 26, 1998, subject to certain
rights to extend. The Lilly Agreement also contemplates the possibility of a
continuing relationship for the development of delivery systems for other
therapeutic proteins.
Under the Lilly Agreement, the Company will own all patents, patent
applications, and other proprietary expertise relating to its technologies
that it develops as well as any material Lilly improvements or additions to
the Companys technologies, and Lilly will own all patents, patent applications
and other proprietary expertise relating to the therapeutic uses of its
proteins (to the extent invented during the Program). If Lilly makes
recommendations, suggestions or has discussions with the Company that result in
a material addition to or improvement of the Company s technologies, then Lilly
may, in certain circumstances, obtain limited preferences with respect to
licenses for Emisphere technology covering Lilly proteins or products not
included in the Lilly Products.
In addition, the Lilly Agreement includes a standstill provision pursuant to
which Lilly has agreed, with certain exceptions, not to acquire shares of the
Company's outstanding voting stock above a specified limit during a period
ending less than five years from the date of the Lilly Agreement.
Elan Corporation plc. In September 1996, the Company entered into the
Elan Joint Venture ("JV Company") to combine Elans drug delivery and formulation
capabilities with the Companys carrier technologies to research, develop and
market oral formulations of heparin and heparinoids.The Company believes that
there are significant synergies between Emisphere's novel technologies and
Elan's development and formulation expertise. As of July 31, 1997, Elan has
provided $7.5 million to the project of which $6.4 million has been paid in cash
to Emisphere (excluding certain amounts due to the Company for work performed to
date).
The JV Company is an Irish corporation, the equity of which is owned 50% by
the Company and 50% by Elan. The Company and Elan have equal representation on
the Board of Directors of the JV Company.
The key provisions of the Elan Joint Venture structure include:(i) the grant
by the Company to the JV Company of an exclusive, worldwide license of the
Company's carrier technology for new dosage forms of heparin and heparinoids
(the Field); (ii) the grant by Elan to the JV Company of an exclusive, worldwide
license of its formulation technology for the Field; (iii) the grant by the
Company to the JV Company of a right of first refusal to license the Company's
carrier technology to commercialize additional anticoagulant compounds other
than heparin and heparinoids; (iv) the grant by the Company and Elan to the
JV Company of exclusive royalty-free licenses to use their respective trademarks
in connection with products in the Field; (v) the requirement for the Company
and Elan to make contributions in equal portions to the extent needed to fund
the JV Company's financial requirements; and (vi) the sharing by the Company and
Elan of the financial benefits and expense obligations of the Elan Joint
Venture on a 50/50 basis, although there are certain limited circumstances under
which Elan has a $4.5 million limited preference over the Company in returns
from the Elan Joint Venture.
Whenever commercially or technically feasible, the JV Company will contract
with the Company or Elan to perform research and development services on
behalf of the JV Company. The Company and Elan will be reimbursed by the
JV Company for all such research and development work at the conclusion of each
stage of the research and development program.
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If the JV Company elects to proceed with commercialization of any
product candidate, the parties anticipate that the Company will enter into a
supply agreement pursuant to which it will sell carriers to the JV Company and
that Elan or one of its affiliates will enter into a supply agreement with the
JV Company for the commercial production of the product candidate by Elan
on behalf of the JV Company. Such supply agreements would be on customary
commercial terms and negotiated in good faith by the parties. The Company shall
also supply the JV Company with such carriers as are required by the JV Company
for its research and development programs. Unless otherwise agreed by Elan
and the Company, the supply of the carriers for the research and development
programs shall be at cost so long as the Company holds at least a 45% equity
interest in the JV Company.
The Elan Joint Venture is considering entering into an alliance with a
corporate partner to develop an oral form of low molecular weight heparin.
Several pharmaceutical companies market various forms of low molecular weight
heparin, all of which are proprietary compounds, and some have expressed
interest in the Joint Venture's oral delivery technology. The Elan Joint
Venture is considering the extent to which it should focus on developing an oral
formulation of low molecular weight heparin, and possibly give it priority over
generic heparin.
Upon the occurrence of an event of default in the Elan Joint Venture
agreement, the non-defaulting shareholder will be entitled to make an offer
to purchase the defaulting shareholders' interest in the JV Company. The
defaulting shareholder will then be obliged to sell its interest to the
non-defaulting shareholder at the offered price or to make a counteroffer
to purchase the non-defaulting shareholders' interest at a price that is at
least 10% higher than the previous offer. Each side may make one additional
counteroffer provided its offer is at least 10% higher, as adjusted, than the
previous offer. The Elan Joint Venture also provides the JV Company with a
right of first refusal with respect to the use of the Company's technologies for
the delivery of anticoagulant compounds.
Pursuant to an agreement between the Company an Elan International Services
Ltd. (Elan International), the affiliate of Elan that purchased 600,000
shares of Common Stock and warrants to acquire 250,000 additional shares of
Common Stock, Elan International and Elan have agreed, subject to certain
exceptions, not to acquire additional shares of the Company's voting securities
until September 26, 2001. During the term of such agreement, Elan International
and its affiliates have the opportunity, in the event the Company issues and
sells voting securities, to purchase newly issued voting securities in an amount
that would enable Elan International and its affiliates to own the same
percentage of the Company's voting securities as it owned before such issuance
and sale.
Patents
The Companys strategy is to apply for patent protection on all aspects of its
proprietary chemical and pharmaceutical delivery technologies, including
materials and compositions of matter for both the carrier and complexes of a
carrier with a pharmaceutical or chemical agent, processes for manufacturing the
carrier, new carriers, uses of the carriers and improvements on its core
technology that are important for the success of the Companys business.
The Company has patents or pending patent applications for carriers
currently used by the Company to deliver heparin, insulin, calcitonin, human
parathyroid hormone, human growth hormone, interferon alpha, deferoxamine and
cromolyn. The Company has been granted 15 patents on its drug delivery
technologies in the United States which will expire beginning in 2007, and has
certain patents issued or applications pending in various countries around the
world. Three U.S. patent applications were allowed by the U.S. Patent and
Trademark Office in 1997, including an application relating to the Companys
heparin carrier. The Company has 41 patent applications relating to its drug
delivery technologies pending in the United States, including the allowed
applications and the applications relating to the therapeutic proteins that are
the subject of the Lilly Strategic Alliance. In addition, the Company has
pending or expects to file patent applications corresponding to most of its
U.S. patents and patent applications in various countries around the world. The
Company has applied to have one of its granted U.S. patents reissued in an
attempt to obtain certain broader claims to which the Company believes it was
entitled in the original patent grant.
Although the Company has patents for some of its product candidates
and has applied for additional patents, there can be no assurance that
patents applied for will be granted, that patents granted to or acquired by the
Company now or in the future will be valid and enforceable and provide the
Company with meaningful protection from competition or that the Company will
possess the financial resources necessary to enforce any of its patents. There
can also be no assurance that any products developed by the Company
(or a licensee) will not infringe upon any patent or other intellectual property
right of a third party.
- -------------------------------------------------------------------------------
The Company also relies upon trade secrets, know-how and continuing
technological advances to develop and maintain its competitive position. To
maintain the confidentiality of trade secrets and proprietary information,
the Company maintains a policy of requiring employees, Science Advisory
Board members, consultants and collaborators to execute confidentiality and
invention assignment agreements upon commencement of a relationship with the
Company. These agreements are designed both to enable the Company to protect its
proprietary information by controlling the disclosure and use of technology
to whichit has rights and to provide for ownership in the Company of proprietary
technology developed at the Company. There can be no assurance, however, that
these agreements will provide meaningful protection for the Company's trade
secrets in the event of unauthorized use or disclosure of such information.
Manufacturing
An important step in taking a pharmaceutical product from preclinical
research to the marketplace is scaling up the process required to produce
commercial quantities. This process frequently entails custom design and
engineering that can add significantly to the costs of goods. The primary raw
materials used in making the carriers currently under consideration by the
Company for its new formulations are non-alpha amino acids and other organic
compounds. The Company currently produces these carriers in batch sizes of
up to two hundred grams. The Company has no internal capability for the
production of any of these carriers in larger batch sizes. A third-party
manufacturer whose facility complies with the FDAs GMP regulations was recently
successful in scaling up production of the Company's carrier for its heparin
Phase I clinical trial.
The Company is conducting feasibility studies for engineering and
location of its own manufacturing facility. The Company believes that there are
multiple sources for the raw materials used to synthesize its carriers. The
Company has identified numerous commercial manufacturers meeting the FDAs GMP
regulations that have the capability of producing the Company's carriers. The
Company will continue to manufacture carriers on a small scale for research
purposes and contract out with third-party producers for clinical testing. Once
the engineering studies for the Company's production facility are completed,
the Company would be in a position to decide whether to make or buy the carriers
for future needs.
Competition
Based on the preliminary results obtained with Emisphere's proprietary
carriers in its oral heparin Phase I clinical trial, the Company believes
that it has developed a strong competitive position with respect to the
development of a new oral anticoagulant/antithrombotic. Drug delivery,
biotechnology and pharmaceutical science are evolving fields in which
developments are expected to continue at a rapid pace. The Company's success
depends, in part, upon maintaining a competitive position in the development
of products and technologies in its areas of focus.The Company is in competition
with other drug delivery, biotechnology and pharmaceutical companies, research
organizations, individual scientists and non-profit organizations engaged in the
development of alternative drug delivery technologies or new drug research and
testing, as well as with entities developing new drugs which may be orally
active. The Company is aware that a number of companies are seeking to develop
new products and alternatives to injectable drug delivery, including, but not
limited to, intranasal delivery, pulmonary systems, transdermal systems and
colonic absorption systems. The Company also is aware of other companies
currently engaged in the development and commercialization of oral drug delivery
technologies and enhanced injectable systems. Many of these companies and
entities have substantially greater research and development capabilities,
experience and marketing, financial and managerial resources, and represent
significant competition for the Company. Acquisitions of or investments in
competing biotechnology companies by large pharmaceutical companies could
enhance competitors financial, marketing and other resources. In addition,
a number of these competing drug delivery and biotechnology companies have
entered into collaboration or other agreements with large pharmaceutical
companies which could similarly enhance these competitors resources.
Accordingly, the Company's competitors may succeed in developing competing
technologies and obtaining governmental approval for products more rapidly
than the Company. There can be no assurance that developments by others
will not render the Company's product candidates or the therapeutic compounds
used in combination with the Company's product candidates noncompetitive or
obsolete.
- --------------------------------------------------------------------------------
Government Regulation
The Company's operations and products under development are subject to
extensive regulation by the FDA and other governmental authorities in the
United States and other governmental authorities in other countries.
The duration of the governmental approval process for marketing new
pharmaceutical substances, from the commencement of preclinical testing to the
receipt of a governmental final letter of approval for marketing a new
substance,varies with the nature of the product and with the country in which
such approval is sought. For entirely new drugs, the approval process could
take five years or more; however, for reformulations of existing drugs, the
process is typically shorter. In either case, the procedures required to
obtain governmental approval to market new drug products is a costly and
time-consuming process requiring rigorous testing of the new drug product.
There can be no assurance that even after such time and expenditures, regulatory
approval will be obtained for any products developed by the Company.
The steps required before a new human pharmaceutical product can be
marketed or shipped commercially in the United States include, in part,
preclinical testing, the filing of an IND, the conduct of clinical trials and
the filing with the FDA of either a New Drug Application (NDA) for drugs
or a Product License Application (PLA) for biologics.
In order to conduct the clinical investigations necessary to obtain
eventual regulatory approval, an applicant must file an IND with the FDA
to permit the shipment and use of the drug for investigational purposes. The
IND sets forth, in part, the results of preclinical (laboratory and animal)
toxicology and efficacy testing and the applicants plans for clinical
(human) testing. If the FDA does not deny the exemption to ship or use the
investigative drug or place a hold on clinical testing within 30 days of the
submission of the IND, it becomes effective and clinical testing may begin.
Under the FDA's regulations, the clinical testing program required for
marketing approval of a new drug typically involves a three-phase process. In
Phase I, safety studies are conducted on normal, healthy human volunteers to
determine the maximum dosages and side effects associated with increasing
doses of the substance being tested. In Phase II, studies are conducted on
small groups of patients afflicted with a specific disease to gain preliminary
evidence of efficacy and to determine the common short-term side effects and
risks associated with the substance being tested. Phase III involves
large-scale studies conducted on disease-afflicted patients to provide
statistical evidence of efficacy and safety and to provide an adequate basis for
physician labeling. Frequent reports are required in each phase and, if
unwarranted hazards to subjects are found, the FDA may request modification
or discontinuance of clinical testing until further preclinical work has been
done. Additional testing (Phase IV) may be conducted after FDA approval is
granted and would be designed to evaluate alternative utilizations of drug
products prior to their being marketed for such additional utilizations. Phase
IV testing is often similar to Phase II evaluation of efficacy testing using a
carefully selected clinical population.
Once clinical testing has been completed pursuant to an IND, the applicant
files an NDA or PLA with the FDA seeking approval for marketing the drug
product. The FDA reviews the NDA or PLA to determine if the drug is safe and
effective, and adequately labeled, and if the applicant can demonstrate proper
and consistent manufacture of the drug. The time required for FDA action on an
NDA or PLA varies considerably, depending on the characteristics of the drug,
whether the FDA needs more information than is originally provided in the NDA or
PLA and whether the FDA finds problems with the evidence submitted.
The facilities of each company involved in the manufacturing, processing,
testing, control and labeling must be registered with and approved by the
FDA. Continued registration requires compliance with GMP regulations. The FDA
conducts periodic establishment inspections to confirm continued compliance with
its regulations.
The Company is subject to the regulation of the United States Department
of Labor, Occupational Safety and Health Administration (OSHA). In a June
1995 OSHA audit of the Company, the Company was cited for violations of OSHA
regulations involving storage of materials, training and documentation of
policies and procedures. In addition, numerous matters (not amounting to
violations) were noted which require additional attention by the Company. As a
result, the Company was fined a small amount which was not material to the
Company. The Company has since taken steps to ensure compliance with all
applicable OSHA regulations and believes that its current operations and
procedures comply in all material respects with OSHA regulations.
- -------------------------------------------------------------------------------
The Company is also subject to various federal, state and local laws,
regulations and recommendations relating to such matters as laboratory and
manufacturing practices and the use, handling and disposal of hazardous or
potentially hazardous substances used in connection with the Companys research
and development work. Although the Company believes it is in compliance with
these laws and regulations in all material respects, there can be no assurance
that the Company will not be required to incur significant costs to comply with
environmental and other laws or regulations in the future.
Employees
As of October 15, 1997, the Company had 64 employees, 51 engaged in
scientific research and technical functions and 13 performing administrative and
clerical functions. Of the 64 employees, 19 hold Ph.D. or M.D. degrees. The
Company believes that its relationship with its employees is good.
- --------------------------------------------------------------------------------
Directors and Officers
Set forth below is certain information regarding the officers and directors
of the Company.
Name Age Position with the Company
- --------------------------------------- ----- --------------------------------------
Michael M. Goldberg, M.D. 38 Chairman of the Board of Directors
and Chief Executive Officer
Sam J. Milstein, Ph.D. 48 Director, President, Chief Scientific
Officer and Secretary
Robert A. Baughman, Jr., Pharm D. Ph.D. 48 Senior Vice President and Director of
Development
Lewis H. Bender, M.B.A. 38 Senior Vice President of Business
Development
Joseph D. Poveromo, C.P.A. 33 Controller and Chief Accounting Officer
John E. Smart, Ph.D. 53 Vice President, Director of Research
Lilian S. Stern, Esq. 39 Vice President, Corporate Planning and
Investor Relations
Jere E. Goyan, Ph.D. 67 Director
Mark I. Greene, M.D., Ph.D. 49 Director and member of Scientific
Advisory Board
Peter Barton Hutt, Esq. 62 Director
Howard M. Pack 79 Director
Joseph R. Robinson, Ph.D. 58 Director and member of Scientific
Advisory Board
Michael M. Goldberg, M.D. has served as Chairman of the Board of Directors
since November 1991 and as Chief Executive Officer and a director of the Company
since August 1990.In addition, Dr. Goldberg served as President from August 1990
to October 1995. Dr. Goldberg received a B.S. degree from Rensselaer Polytechnic
Institute and an M.D. from Albany Medical College of Union University in 1982
and an M.B.A. from Columbia University Graduate School of Business in 1985.
Sam J. Milstein, Ph.D. has been with the Company since September 1990, as a
director and Chief Scientific Officer since November 1991, as President since
October 1995, as Secretary since December 1990 and as a Co-Director of Science
and of Research and Development prior to November 1991.In addition, Dr. Milstein
served as Executive Vice President from November 1990 to October 1995.
Dr. Milstein received a B.S. degree from The City College of New York in 1970,
an M.S. in physical chemistry from the University of New Brunswick in 1975 and a
Ph.D. in biochemistry from New York University in 1980.
Robert A. Baughman, Jr., Pharm. D., Ph.D. has been with the Company since
September 1991, as Senior Vice President since September 1993, Director of
Development since June 1994 and Vice President and Director, Research and
Development of the Company prior thereto. Dr. Baughman received a B.S. degree
from Loyola University in 1974, a Pharm.D. from the University of California,
San Francisco in 1978 and a Ph.D.in pharmaceutical chemistry from the University
of California, San Francisco in 1982.
Lewis H. Bender, M.B.A. has been with the Company since 1993, as Senior Vice
President of Business Development since April 1997, Vice President of Business
Development since October 1995 and as Director of Business Development prior
thereto. Mr. Bender received a B.S. degree in 1981 and an M.S. in chemical
engineering in 1982 from the Massachusetts Institute of Technology, an M.A. in
international studies from the University of Pennsylvania and an M.B.A. from the
University of Pennsylvania, Wharton School of Management in 1993.
Joseph D. Poveromo, C.P.A., Controller and Chief Accounting Officer of Emisphere
since July of 1994, and has been with the Company since 1993. Prior thereto, he
was Controller of a private pet food company and held senior accounting
positions with the public accounting firms of Marshall Granger & Company and
Rayfield & Licata. Mr. Poveromo received a B.B.A. degree in public accounting
from Pace University in 1987 and was awarded his C.P.A. in February 1991.
- --------------------------------------------------------------------------------
John E. Smart, Ph.D. joined the Company in 1996 as Vice President, Director of
Research. He received his Ph.D. in biochemistry and biophysics from the
California Institute of Technology and has over 20 years experience in academia
and the health care industry. He was most recently the Vice President of
Research at Creative Biomolecules, Inc. a biopharmaceutical company.
Lilian S. Stern, Esq. has been with the Company since July 1996. From October
1990 to July 1996, she served as Director of Investor Relations at Burns,
McClellan, an investor relations firm specializing in biopharmaceutical
companies and from May 1995 through July 1996 served, in addition, as
Executive Vice President and Chief Operating Officer of such firm. Ms. Stern
received an A.B. in molecular biology from Cornell University in 1980 and a J.D.
from Harvard Law School in 1983.
Jere E. Goyan, Ph.D. is President, Chief Operating Officer, and a director of
Alteon, Inc., a development stage pharmaceutical company, where he started as
Senior Vice President Research and Development in January 1993. Prior thereto he
was a Professor of Pharmacy and Pharmaceutical Chemistry and the Dean of the
School of Pharmacy at the University of California, San Francisco, and has
served in various other academic, administrative and advisory positions,
including that of Commissioner of the FDA. He currently serves as a director of
the biopharmaceutical companies Atrix Laboratories Inc.,SciClone Pharmaceuticals
and Boehringer Ingelheim.
Mark I. Greene, M.D., Ph.D. has served as a director of the Company since
October 1995 and has been Professor of Medicine, Department of Pathology, School
of Medicine at the University of Pennsylvania for more than the past five years.
Peter Barton Hutt, Esq. has for more than the past five years been a partner of
the law firm of Covington & Burling in Washington, D.C., where he specializes in
the practice of food and drug law. He currently serves as a director of the
biopharmaceutical companies IDEC Pharmaceuticals, Inc., Cell Genesys, Inc.,
Interneuron Pharmaceuticals, Inc., Vivus Inc. and Sparta Pharmaceuticals, Inc.
Howard M. Pack has served as a director of the Company since its inception in
April 1985 and served as Executive Vice President of Finance from the Companys
inception until October 1988. For more than five years until November 1992, Mr.
Pack served as Chairman of the Board for Seatrain Lines, Inc., a cargo company
that filed a consent to an involuntary petition for reorganization under the
Federal Bankruptcy Code in February 1981 and a plan of complete liquidation
under Chapter 7 thereof in November 1992.
Joseph R. Robinson, Ph.D.has been Professor of Pharmacy and Ophthalmology at the
University of Wisconsin for more than the past five years. He currently serves
as a director of Cima Laboratories, Inc., a pharmaceutical company.
Scientific Advisory Board
The Company s scientific advisors consult with the Company on developments
relating to current and future forms of drug delivery technology, chemistry,
gastro-intestinal physiology and protein structure. As a group, the scientific
advisors possess substantial experience in biomaterials, controlled release
and polymeric delivery systems, proteins, liposomes, microencapsulation,
pharmaceutics, analytical techniques and immunology. The scientific advisors
also consult with the Company on aspects of drug delivery product planning and
feasibility studies and assist Company scientists in establishing research
priorities, provide guidance for the Companys clinical evaluation programs,
advise Company scientists of new developments and alert the Company to potential
collaborators. In addition, the Company has funded various research projects and
collaborations with a number of its Scientific Advisory Board members and it
intends to continue to expand its scientific collaborations with current and
future Scientific Advisory Board members. None of the scientific advisors are
employees of the Company. Scientific advisors devote only a small portion of
their time to the affairs of the Company and have other commitments to, or
consulting or advisory contracts with, other institutions which may compete with
their obligations to the Company. The Company requires each of its scientific
advisors to execute a confidentiality agreement upon the commencement of his or
her relationship with the Company. The agreements generally provide that
all confidential information made known to the individual during the term of
the relationship shall be the exclusive property of the Company and shall be
kept confidential and not disclosed to third parties except in specified
circumstances. Scientific advisors receive annual compensation, are reimbursed
for their expenses for each meeting attended and are granted stock options on a
case-by-case basis. Drs. Greene and Robinson also serve as directors of the
Company.
- ------------------------------------------------------------------------------
Set forth below are the names, positions and areas of expertise
of individuals on the Companys Scientific Advisory Board.
Name and Position Area of Expertise
- ------------------------------------- ---------------------------------
Raymond J. Bergeron, Ph.D. Drug design, polyamines and
Professor of Chemistry, chemotherapeutics
Department of Medicinal Chemistry,
College of Pharmacy
University of Florida
Mark I. Greene, M.D., Ph.D. Monoclonal antibodies, immunology
Professor of Medicine,
Department of Pathology,
School of Medicine
University of Pennsylvania
Raphael M. Ottenbrite, Ph.D. Synthesis and structure of polymers
Professor of Chemistry
Department of Chemistry and
High Technology Materials Division,
Virginia Commonwealth University
Joseph R. Robinson, Ph.D. Mucoadhesives, pharmaceutics and
Professor, School of Pharmacy gastrointestinal physiology
University of Wisconsin
Ernest Freire, Ph.D. Protein chemistry, analytical
Professor techniques and calorimetry
Johns Hopkins University
ITEM 2. PROPERTIES
The registrant currently leases 21,500 square feet of office space at 11
and 15 Skyline Drive, Hawthorne, New York for use as executive offices and
laboratories. In addition, the Registrant has entered into a ten-year lease for
new office and laboratory space at 777 Old Saw Mill River Road, Tarrytown, New
York and expects to occupy the space in May of 1998.No difficulty is anticipated
in negotiating renewals as the current leases expire or in finding satisfactory
space at a reasonable cost if the existing space becomes unavailable or
additional space is needed to meet expansion requirements.
ITEM 3. LEGAL PROCEEDINGS
The Company is not party to any litigation that is expected to have a
material effect on the operations or business of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
- -------------------------------------------------------------------------------
PART II
ITEM 5. MARKET REGISTRANT S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the over-the-counter market and
prices are quoted on the Nasdaq National Market under the symbol EMIS.
The following sets forth the range of high and low sale prices for the
common stock for the periods indicated, as reported by Nasdaq.
Fiscal Year
Ended July 31, High Low
-------------- ------- ---------
1996
-------
First quarter .................... 11 1/8 6 1/4
Second quarter ................... 9 7/8 5 1/8
Third quarter .................... 13 3/4 9 1/2
Fourth quarter ................... 16 1/2 6 1/4
1997
------
First quarter .................... 17 7/8 7 3/8
Second quarter ................... 25 1/2 12 3/4
Third quarter ................... 27 1/2 13 1/8
Fourth quarter ................... 24 1/2 14 1/2
As of October 15, 1997 there were 288 stockholders of record and 10,699,049
shares of the Companys Common Stock outstanding. The closing price for the
Companys Common Stock on October 15, 1997 was $22.25.
The Company has never paid cash dividends and does not intend to pay cash
dividends in the foreseeable future. The Company intends to retain earnings, if
any, to finance the growth of its business.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
financial statements and related notes which appear elsewhere herein. The
financial data for each of the five years in the period ended July 31, 1997 have
been derived from audited financial statements.
Fiscal Year Ended July 31,
---------------------------------------------------------------------
1993 1994 1995 1996 1997
(in thousands, except per share amounts)
Statement of Operations Data:
Contract research revenue $ 292 $ 85 $ 33 $ 3,131 $ 5,401
------------ -------------- ------------ -------------- ------------
Costs and expenses:
Research and development 5,521 5,855 5,802 6,605 7,724
Loss in Ebbisham Ltd. - - - - 2,550
General and administrative 2,025 2,619 2,404 3,337 3,416
------------ ------------- ------------ -------------- ------------
Total costs and expenses 7,546 8,474 8,206 9,942 13,690
------------ ------------- ------------ -------------- ------------
Operating loss (7,254) (8,389) (8,173) (6,811) (8,289)
Other income:
Investment income 571 608 389 703 968
Miscellaneous income 33 90 - - -
------------ -------------- ------------ -------------- ------------
Net loss $ (6,650) $ (7,691) $ (7,784) $ (6,108) $ (7,321)
============ ============== ============ =============== =============
Net loss per share $ (0.99) $ (1.01) $ (1.03) $ (0.72) $ (0.77)
============ ============== ============= =============== =============
Weighted average number of
shares outstanding 6,706 7,607 7,588 8,457 9,519
============ ============== ============= =============== =============
As of July 31,
----------------------------------------------------------------------------
1993 1994 1995 1996 1997
Balance Sheet Data: (in thousands)
Cash, cash equivalents and marketable securities $ 20,254 $ 12,694 $ 5,620 $ 18,237 $ 33,690
Working capital 19,939 12,597 5,173 17,799 31,323
Total assets 22,837 15,210 7,549 20,039 36,897
Long-term liabilities 85 87 55 45 35
Accumulated deficit (21,153) (28,844) (36,628) (42,736) (50,057)
Stockholders' equity 22,171 14,674 6,899 19,267 33,398
- --------------------------------------------------------------------------------
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
Emisphere is a drug delivery company focused on the discovery and application
of proprietary synthetic chemical compounds that enable the oral delivery of
therapeutic macromolecules and other compounds that are not currently
deliverable by oral means. Since its inception in 1986, the Company has devoted
substantially all of its efforts and resources to research and development
conducted on its own behalf and through collaborations with corporate partners
and academic research institutions.The Company has had no product sales to date.
The major sources of the Company's working capital have been proceeds from its
initial public offering in 1989, a second public offering in February 1993, a
third public offering in July 1997,private equity financing, the latest of which
occurred with an affiliate of Elan in October 1995, reimbursement of expenses
and other payments from corporate partners, the registered sale of one million
shares of common stock to two institutional investors in April 1996, and income
earned on the investment of available funds. The Company's operations are not
significantly affected by inflation or seasonality.
On February 27,1997, the Company and Lilly announced that they entered into
a strategic alliance (the "Lilly Strategic Alliance") to utilize Emisphere's
technologies for the improved delivery of certain Lilly therapeutic proteins
with a focus on oral delivery. The major therapeutic focus of the collaboration
is in the area of endocrinology, including growth disorders. Initially, Lilly is
committing limited funds to the Company for research on delivery of two
proteins. The Lilly Strategic Alliance contemplates that Lilly may ultimately
exercise options to license the applicable carriers and market the products
utilizing the combined technologies. If the options are exercised, the Company
may receive from Lilly milestone and other payments aggregating, together with
initial funding, up to $60 million, as well as future royalty payments.The Lilly
Strategic Alliance also contemplates that the Company could receive further
payments for other delivery applications if the focus of the Lilly Strategic
Alliance is expanded beyond the two specified therapeutic proteins or to
non-oral applications.
Results of Operations
The Company has since its inception generated significant losses from
operations. The Company does not expect to achieve profitability in the
foreseeable future. Profitability will ultimately depend on the Company's
ability to develop its lead products,in conjunction with the Elan Joint Venture
and the Lilly Strategic Alliance or to develop other products in
conjunction with other partners. There can be no assurance that the development
will be completed or if completed, any regulatory agency will approve the final
product. Even if final products are developed and approved,there is no assurance
that sales will be sufficient to achieve profitability. If development of such
products is not achieved or approval not granted, the Company's prospects will
be materially affected.
The ability of the Company to reduce its operating losses in the near term
will be dependent upon, among other things, its ability to attract new
pharmaceutical and other companies who are willing to provide funding to the
Company for a portion of the Company's research and development with respect to
specific projects. While the Company is constantly engaged in discussions with
pharmaceutical and other companies, there can be no assurance that the Company
will enter into any additional agreements or that the agreements will provide
research and development revenues to the Company.
Fiscal 1997 Compared to Fiscal 1996
Revenues increased by approximately $2,270,000. The majority of the 1997
increase in contract research revenue was attributable to increased revenues
from the Elan Joint Venture of $4.0 million as the Company provided additional
services to the joint venture. The Company also recognized contract
revenues from the Lilly Strategic Alliance, and from two pharmaceutical
companies for which the Company performed feasibility studies.
Total operating expenses for the fiscal year ended July 31, 1997 increased
by $3,748,000, or 38%, as compared to fiscal 1996. The details of the increase
are as follows:
Research and development costs increased by approximately $1,119,000, or
17%, in fiscal 1997 as compared to fiscal 1996. This increased is mainly
attributable to increased personnel and related expenses associated with the
Company's development of an oral heparin formulation and work performed in
connection with the Lilly Strategic Alliance. The Company also experienced an
increase in funding of outside consultants and universities engaged to conduct
studies to help advance the Company s scientific research efforts. The Company
believes that this level of research and development spending will continue for
the foreseeable future and may increase if operations are expanded.
- -------------------------------------------------------------------------------
The increase of $2,550,000 in the loss in Elan-Emisphere Joint Venture
represents the Company's pro-rata portion of the ventures loss for the period.
No loss was experienced in the comparable period as the venture did not commence
operations until September 1996.
General and administrative expenses increased by approximately $79,000, or
2%, in the fiscal 1997 as compared to fiscal 1996. This increase is primarily
attributable to an increase in legal and professional fees incurred in
connection with the finalization of the Elan-Emisphere Joint Venture and the
agreement with Lilly. The Company also experienced an increase in personnel and
related expenses.The increase was partially offset by a decrease in expenses
relating to services provided by outside consultants. The Company recorded
expenses of approximately $250,000 in connection with the granting of options as
compensation to business consultants in the fiscal year 1997 compared to
$730,000 in fiscal 1996.
As a result of these factors, the Company's operating loss increased by
1,478,000 or 22%, from fiscal 1996 to fiscal 1997. The Company does not expect
to generate an operating profit, and may possibly generate larger losses, in the
foreseeable future.
The Company's other income for the fiscal 1997 increased by approximately
$264,000, or 38%,from fiscal 1996. This was primarily due to a larger investment
portfolio. Based on the above factors, the Company sustained a net loss for
fiscal 1997 of $7,321,000, a 20% increase over fiscal 1996 loss of $6,108,000.
Fiscal 1996 Compared to Fiscal 1995
Revenue increased by approximately $3,098,000. The 1996 revenue consisted
of a payment of $3,000,000 from Elan to reimburse the Company for certain
research and development costs, and payments from two other pharmaceutical
companies for which the Company performed feasibility studies. The recognition
of the revenue from Elan was for work Emisphere performed on development of an
oral formulation of heparin.
Total operating expenses for the fiscal year ended July 31,1996 increased
by approximately $1,735,000 or 21%, as compared to fiscal 1995. The details of
the increase are as follows:
Research and development costs increased by approximately $803,000, or 14%,
in fiscal 1996 as compared to fiscal 1995. The increase is mainly attributable
to the Company's clinical development program for heparin. The clinical
development program consisted of work performed to file an investigational new
drug application ("IND Application") with the FDA for the commencement of a
Phase I clinical trial, and the performance of a double-blind controlled dose
escalation study in humans, as well as other studies undertaken to support the
development of an oral formulation of heparin. The higher costs associated with
the clinical development program relating to heparin were partially offset by a
decrease in funding of outside consultants and universities, not associated
with the clinical program, engaged to conduct studies to help advance the
Company's scientific research efforts. The Company also experienced a decrease
in personnel and related expenses due,in part, to a staff reduction in May 1995.
The Company believes that this level of research and development spending will
continue for the foreseeable future and may increase if operations are expanded.
General and administrative expenses increased by approximately $933,000, or
39%, in fiscal 1996 as compared to fiscal 1995. This increase is primarily
attributable to an increase in expenses relating to services provided by outside
business consultants. The Company recorded expenses of approximately $730,000 in
connection with the granting of stock and options as compensation to business
consultants for assisting the Company in discussions and negotiations with
pharmaceutical companies. The Company also experienced an increase in legal and
other professional fees incurred in connection with, among other things, the
settlement of a class action lawsuit and the Elan Joint Venture.
As a result of these factors, the Company's operating loss decreased by
approximately $1,362,000, or 17%, from fiscal 1995 to fiscal 1996. The Company
does not expect to generate an operating profit, and may possibly generate
larger operating losses, in the foreseeable future.
The Company's other income for fiscal 1996 increased by approximately
$314,000,or 81%, from fiscal 1995. This was primarily due to a larger investment
portfolio as a result of recent equity financing and research and development
revenues of $3,000,000 received from Elan.
Based on the above, the Company's net loss for fiscal 1996 was $6,108,000,
a 22% decrease over fiscal 1995's loss of $7,784,000.
- --------------------------------------------------------------------------------
Liquidity and Capital Resources
As of July 31, 1997 the Company had working capital of approximately
$31,323,000. Total cash, cash equivalents and marketable securities were
approximately $33,690,000, an increase of $15,453,000 compared to the Company's
position at July 31, 1996. The increase in the Company's cash, cash equivalents
and marketable securities was primarily due to the proceeds of approximately
$20,000,000 in a public offering of 1,150,000 shares of the Company's common
stock in July 1997, receipt of approximately $4,000,000 from the Elan Joint
Venture to reimburse the Company for research and development costs,
receipt of approximately $1,400,000 in payments under the Lilly Agreement and
feasibility studies revenue, partially offset by cash used to fund operations in
fiscal 1997.
The Company entered into a ten-year noncancelable lease for new office and
laboratory space commencing August 1997. The annual minimum rental is
approximately $1,300,000. The Company also anticipates capital expenditures of
approximately $6,000,000 in connection with the occupation of the new space
during the next twelve months.
The Company expects to continue to incur substantial research and
development expenses associated with the development of the Company's oral drug
delivery system. As a result of the ongoing research and development efforts of
the Company, management believes that the Company will continue to incur
operating losses and that, potentially, such losses could increase. The Company
expects to need substantial resources to continue its research and development
efforts. In addition, the Company is obligated to fund one-half of the
Elan Joint Venture's cash needs upon the Venture's request. The Company
expects to commence funding the Venture during the next quarter. Funding
requirements are established to initially be $500,000 over the next six months
and depending upon the agreed timing and scope of future research and
development efforts may increase substantially thereafter. Pursuant to the Elan
Joint Venture, The Company and Elan share the financial benefits and expense
obligations of the Venture on a 50/50 basis. The Company expects the research
funding from Lilly to approximate the costs to be incurred by the Company in
connection with the development of the Lilly therapeutic proteins.
(See "Collaboration Agreements") Under present operating assumptions, the
Company expects that cash, cash equivalents and marketable securities will be
adequate to meet its liquidity and capital requirements through fiscal 1999.
Thereafter, the Company would need to seek additional funds, primarily in the
public and private equity markets and, to the extent necessary and available,
through debt financing. The Company has no firm agreements with respect to any
additional financing and there can be no assurance that the Company would be
able to obtain adequate funds on acceptable terms. If adequate funds were not
available, the Company would be required to delay, scale back , or eliminate one
or more of its research and development programs, or obtain funds, if available,
through arrangements with collaborative partners or others that may require the
Company to relinquish rights to certain of its technologies, product candidates,
or products that the Company would not otherwise relinquish. The Company does
not maintain any credit lines with financial institutions.
Impact of The Adoption of Recently Issued Accounting Standards
In February 1997, the Financial Accounting Standards Board issued Financial
Accounting Standard No.128. Earnings Per Share ("SFAS 128"). SFAS 128 will
require the Company to replace the current presentation of primary per share
data with basic and diluted per share data. Currently, outstanding common stock
equivalents are antidilutive and therefore management estimates that the future
adoption of SFAS 128 will not have a material impact on the Company's per share
data. SFAS 128 will be adopted by the Company for periods ending after December
15, 1997.
ITEM 7A. Not Applicable
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and financial statement schedule are set forth
starting on page F-1 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
- --------------------------------------------------------------------------------
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information with respect to the Company's executive officers is
contained in Part I hereof. All other information required by this Item is
incorporated by reference to the Company's definitive proxy statement to be
filed no later then November 28, 1997 (the "1997 Proxy Statement").
Item 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
1997 Proxy Statement.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item is incorporated by reference to the
1997 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
1997 Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 10-K
(a) A list of the financial statements and financial statement schedule
filed as a part of this report is set forth on page F-1 hereof. A list of the
exhibits filed as a part of this report is set forth in the Exhibit Index
starting after page F-30 hereof.
(b) Reports on Form 8-K
During the last quarter of the period covered by this report,the registrant
filed a Current Report on Form 8-K dated July 21, 1997 reporting the public
offering of 1,150,000 shares of Common Stock under "Item 5 Other Events" and
included no financial statements in such report.
- -------------------------------------------------------------------------------
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.
EMISPHERE TECHNOLOGIES, INC.
By: /s/ Michael M. Goldberg
--------------------------
Michael M. Goldberg, M.D.
Chairman of the Board and
Chief Executive Officer
Date: October 28, 1997
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.
/s/ Michael M. Goldberg Director, Chairman of the Board and October 28, 1997
- ------------------------- Chief Executive Officer
Michael M. Goldberg, M.D.
/s/ Joseph D. Poveromo Controller and Chief Accounting October 28, 1997
- ------------------------- Officer (Principal Financial
Joseph D. Poveromo CPA and Accounting Officer)
/s/ Jere E. Goyan Director October 28, 1997
- -------------------------
Jere E. Goyan, Ph.D.
/s/ Peter Barton Hutt Director October 28, 1997
- -------------------------
Peter Barton Hutt
/s/ Sam J. Milstein Director, President, Chief Scientific October 28, 1997
- ------------------------- Officer and Secretary
Sam J. Milstein, Ph.D.
/s/ Howard M. Pack Director October 28, 1997
- ------------------------
Howard M. Pack
/s/ Mark I. Greene Director October 28, 1997
- -----------------------
Mark I. Greene
/s/ Joseph R. Robinson Director October 28, 1997
- ------------------------
Joseph R Robinson, Ph.D.
- --------------------------------------------------------------------------------
EMISPHERE TECHNOLOGIES, INC.
INDEX
Emisphere Technologies, Inc Page (s)
- ---------------------------
Report of Independent Accountants F-2
Financial Statements:
Balance Sheets as of July 31, 1996 and 1997 F-3
Statements of Operations for the years ended
July 31, 1995, 1996 and 1997 F-4
Statements of Stockholders' Equity for the years
ended July 31, 1995, 1996 and 1997 F-5
Statements of Cash Flows for the years ended
July 31, 1995, 1996 and 1997 F-6
Notes to Financial Statements F-7 - F-21
Report of Independent Accountants F-22
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts F-23
Ebbisham Limited
- -----------------
Report of Independent Chartered Accountants F-24
Financial Statements:
Balance Sheet as of July 31, 1997 F-25
Statement of Operations for the period from the commencement
of operations (September 26, 1996) to July 31, 1997 F-26
Statement of Shareholders' Equity for the period from the
commencement of operations (September 26, 1996)
to July 31, 1997 F-27
Statements of Cash Flows for the period from the commencement of
operations (September 26, 1996) to July 31, 1997 F-28
Notes to Financial Statements F-29 - F-30
F-1
- -------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Emisphere Technologies, Inc.:
We have audited the balance sheets of Emisphere Technologies,Inc. (the"Company")
as of July 31, 1996 and 1997, and the related statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended July 31, 1997. 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 did not audit the financial
statements of Ebbisham Limited, a partly-owned investment accounted for in
accordance with the equity method of accounting, which statements reflect total
assets of $708,424 as of July 31, 1997, and total expenses of $5,171,956 for the
period from the commencement of operations (September 26, 1996) to July 31,1997.
Those statements were audited by the other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to the amounts included
for Ebbisham Limited, is based solely on the report of the other auditors.
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
misstatements. 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 and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of the Company as of July 31, 1996 and 1997, and the
results of its operations and its cash flows for each of the three years in the
period ended July 31, 1997 in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
New York, New York
October 28, 1997.
F-2
- -------------------------------------------------------------------------------
EMISPHERE TECHNOLOGIES, INC.
BALANCE SHEETS
July 31, 1996 and 1997
Assets: 1996 1997
----------------- ------------------
Current assets:
Cash and cash equivalents $ 11,904,674 $ 22,398,967
Marketable securities 6,332,817 11,291,255
Receivable due from Ebbisham Ltd. 648,786
Prepaid expenses and other current assets 289,769 448,114
----------------- ------------------
Total current assets 18,527,260 34,787,122
Equipment and leasehold improvements, at cost, net of
accumulated depreciation and amortization 1,450,862 2,046,087
Other assets 61,243 64,243
----------------- ------------------
Total assets $ 20,039,365 $ 36,897,452
================= ==================
Liabilities and Stockholders' Equity:
Current liabilities:
Accounts payable $ 191,038 $ 254,715
Accrued compensation 211,826 215,000
Accrued professional fees 263,000 288,000
Accrued expenses 61,923 166,858
Investment deficiency in Ebbisham Ltd. 2,539,958
----------------- ------------------
Total current liabilities 727,787 3,464,531
Deferred lease liability 44,823 34,542
----------------- ------------------
Total liabilities 772,610 3,499,073
----------------- ------------------
Commitments and contingencies (Note 5)
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares authorized, none
issued and outstanding
Common stock, $.01 par value; 20,000,000 shares authorized;
9,450,760 shares issued (9,407,260 outstanding) in 1996;
10,733,877 shares issued (10,690,377 outstanding) in 1997 94,508 107,339
Additional paid-in capital 62,129,161 83,516,461
Accumulated deficit (42,735,810) (50,057,115)
Net unrealized (loss) gain on marketable securities (28,291) 24,507
------------------ -------------------
19,459,568 33,591,192
Less, common stock held in treasury, at cost; 43,500 shares in
1996 and 1997 (192,813) (192,813)
------------------ -------------------
Total stockholders' equity 19,266,755 33,398,379
------------------ -------------------
Total liabilities and stockholders' equity $ 20,039,365 $ 36,897,452
================== ===================
See accompanying notes to financial statements
F-3
- --------------------------------------------------------------------------------
EMISPHERE TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
For the years ended July 31, 1995, 1996 and 1997
1995 1996 1997
-------------- -------------- --------------
Contract research revenues $ 33,333 $ 3,130,893 $ 5,400,880
-------------- -------------- --------------
Costs and expenses:
Research and development 5,802,453 6,605,031 7,723,995
Loss in Ebbisham Ltd. 2,549,956
General and administrative expenses 2,404,166 3,336,910 3,416,061
-------------- -------------- --------------
8,206,619 9,941,941 13,690,012
-------------- -------------- --------------
Operating loss (8,173,286) (6,811,048) (8,289,132)
-------------- -------------- --------------
Other income:
Investment income 389,027 703,447 967,827
-------------- -------------- --------------
Net loss $ (7,784,259) $ (6,107,601) $ (7,321,305)
============== ============== ==============
Net loss per share $ (1.03) $ (0.72) $ (0.77)
=============== =============== ===============
Weighted average number of shares
outstanding 7,588,447 8,457,438 9,519,028
============== =============== ===============
See accompanying notes to financial statements
F-4
- -------------------------------------------------------------------------------
EMISPHERE TECHNOLOGIES, INC.
STATEMENTS OF STOCKHOLDERS EQUITY
For the years ended July 31, 1995, 1996 and 1997
Net Unrealized Common Stock
Common Stock Additional Gain (Loss) on Held In Treasury
------------------- Paid-in Accumulated Marketable ----------------------
Shares Amount Capital Deficit Securities Shares Amount Total
--------- -------- ----------- ------------- --------- -------- --------- ----------
Balance, July 31, 1994 7,615,242 $76,152 $43,511,534 ($28,843,950) 15,000 ($69,375) $14,674,361
Sale of common stock under
employee stock purchase plans 72,062 721 115,123 115,844
Treasury stock purchase 28,500 (123,438) (123,438)
Net unrealized gain on
marketable securities $ 16,191 16,191
Net loss (7,784,259) (7,784,259)
--------- ------- ------------ ------------ -------- ------ --------- -----------
Balance, July 31, 1995 7,687,304 76,873 43,626,657 (36,628,209) 16,191 43,500 (192,813) 6,898,699
Sale of common stock under employee
stock purchase plans and exercise of
options 125,956 1,260 427,735 428,995
Issuance of common stock and warrants
to Elan International Services Ltd.,
net of expenses 600,000 6,000 7,457,000 7,463,000
Issuance of common stock in connection
with a public offering, net of expense 1,000,000 10,000 9,888,456 9,898,456
Issuance of common stock and stock
options in exchange for services
rendered 37,500 375 729,313 729,688
Change in net unrealized gain
(loss) on marketable securities (44,482) (44,482)
Net loss (6,107,601) (6,107,601)
--------- ------- --------- ----------- -------- ------ --------- ----------
Balance, July 31, 1996 9,450,760 94,508 62,129,161 (42,735,810) (28,291) 43,500 (192,813) 19,266,755
Sale of common stock under employee
stock purchase plans and exercise of
options 133,117 1,331 1,178,278 1,179,609
Issuance of common stock in connection
with a public offering, net of expenses 1,150,000 11,500 19,959,022 19,970,522
Issuance of stock options in exchange
for services rendered 250,000 250,000
Change in net unrealized gain
(loss) on marketable securities 52,798 52,798
Net loss (7,321,305) (7,321,305)
---------- -------- ----------- ------------- ------- ------ ---------- ----------
Balance, July 31, 1997 10,733,877 $107,339 $83,516,461 ($50,057,115) $24,507 43,500 ($192,813) $33,398,379
========== ======== =========== ============= ======= ====== ========== ===========
See accompanying notes to financial statements
F-5
- -------------------------------------------------------------------------------
EMISPHERE TECHNOLOGIES, INC
STATEMENTS OF CASH FLOWS
For the years ended July 31, 1995, 1996 and 1997
Increase (Decrease) in Cash and Cash Equivalents
1995 1996 1997
------------- ------------- -------------
Cash flows from operating activities
Net loss $ (7,784,259) $ (6,107,601) $ (7,321,305)
------------- ------------- -------------
Adjustments to reconcile net loss to net
cash used in operating activities:
Loss in Ebbisham Ltd. 2,549,956
Depreciation and amortization 524,863 571,485 441,768
Decrease in deferred lease liability (32,431) (10,277) (10,281)
Net realized loss (gain) on sale of
marketable securities 36,015 (25,562) (60)
Non cash compensation in connection
with the issuance of equity securities 729,688 250,000
Changes in assets and liabilities:
Receivable due from Ebbisham Ltd. (648,786)
Prepaid expenses and other current assets 203,578 (141,300) (158,345)
Investment in Ebbisham Ltd. (9,998)
Other assets 5,000 (3,000)
Accounts payable and accrued expenses 146,571 133,014 196,786
----------- --------- -----------
Total adjustments 878,596 1,262,048 2,608,040
----------- ----------- -----------
Net cash used in operting activities (6,905,663) (4,845,553) (4,713,265)
----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures (140,920) (318,038) (1,036,993)
Purchases of marketable securities (12,402,830) (14,701,266) (13,550,937)
Proceeds from sales of marketable securities 21,410,556 11,742,924 8,645,357
Other 10,000
------------ ------------ ------------
Net cash provided by (used in)
investing activities 8,866,806 (3,266,380) (5,942,573)
------------ ------------ ------------
Cash flows from financing activities:
Net proceeds from issuance of common stock
and warrants to Elan International Sevices Ltd. 7,463,000
Net proceeds from issuance of common stock in
a public offering 9,898,456 19,970,522
Proceeds from exercise of options and
employee stock purchases 115,844 428,995 1,179,609
Purchases of treasury stock (123,438)
----------- ------------ ------------
Net cash (used in) provided by
financing activities (7,594) 17,790,451 21,150,131
----------- ------------ ------------
Net increase in cash and cash
equivalents 1,953,549 9,678,518 10,494,293
----------- ------------ -----------
Cash and cash equivalents, beginning of year 272,607 2,226,156 11,904,674
----------- ------------ -----------
Cash and cash equivalents, end of year $ 2,226,156 $ 11,904,674 $ 22,398,967
=========== ============ ============
For noncash transactions, see Notes 2 and 9.
See accompanying notes to financial statements
F-6
- -------------------------------------------------------------------------------
EMISPHERE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
-------------------
1. Organization and Business:
Emisphere Technologies, Inc. (the"Company"),is developing a novel
technology for the oral drug delivery of pharmaceuticals that are
currently effectively administered only by injection. To date the
Company has no product sales.
The Company has limited capital resources and recurring net operating
losses. The Company is dependent upon receipt of additional capital
investment or other financing to fund its long-term planned research
activities. Assuming that the Company can obtain sufficient financing
to complete development of its oral drug delivery technology, the
Company will need to attract pharmaceutical companies willing to enter
into commercialization agreements with the Company to produce and
market their drugs utilizing the Company's drug delivery technology.
In addition to the normal risks associated with a new business venture,
there can be no assurance that the Company's research and development
will be successfully completed or that the Company's drug delivery
technology will be commercially viable. In addition, the Company
operates in an environment of rapid change in technology, and is
dependent upon the services of its employees and its consultants.
2. Summary of Significant Accounting Policies:
Equipment and Leasehold Improvements:
-------------------------------------
Equipment and leasehold improvements are stated at cost. Depreciation
and amortization are provided for on the straight-line basis over the
estimated useful life of the asset.Leasehold improvements are amortized
over the life of the lease or of the improvements, whichever is
shorter. Expenditures for maintenance and repairs which do not
materially extend the useful lives of the respective assets are charged
to expense as incurred. The cost and accumulated depreciation or
amortization of assets retired or sold are removed from the respective
accounts and any gain or loss is recognized in operations.
Cash and Cash Equivalents:
--------------------------
The Company considers all highly liquid, interest-bearing, debt
instruments which, when acquired, have a maturity of three months or
less to be cash equivalents. The carrying amount reported in the
balance sheet for cash and cash equivalents approximates its fair value
(see Note 3 for fair value of marketable securities).
Patent Costs:
-------------
As a result of research and development efforts conducted by the
Company, it has received, applied for, or is in the process of applying
for, a number of patents to protect proprietary inventions. Costs
incurred in connection with patent applications have been expensed as
incurred.
Continued
F-7
- --------------------------------------------------------------------------------
EMISPHERE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS , CONTINUED
-------------------
Revenue Recognition:
--------------------
The Company is currently engaged in research and development of its
proprietary technology. Revenue derived from contract research and
feasibility studies is recognized as the related services are
performed. Certain contracts also contain provisions whereby the
Company may receive additional payments if certain events occur. Such
amounts will be recognized as revenue when earned.
Loss per Share:
---------------
Net loss per share is computed based on the loss for the period divided
by the weighted average number of shares of common stock outstanding
during the period. The loss per share for all periods presented
excludes the number of common shares issuable upon the exercise of
outstanding options and warrants, since such inclusion would be
anti-dilutive.
Income Taxes:
-------------
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes
("SFAS 109"). SFAS 109 requires recognition of deferred tax liabilities
and assets for the expected future tax consequences of events that have
been included in the financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined on the basis
of the difference between the tax basis of assets and liabilities and
their respective financial reporting amounts ("temporary differences")
at enacted tax rates in effect for the year in which the temporary
differences are expected to reverse.
Concentration of Credit Risk:
-----------------------------
Financial instruments which potentially subject the Company to
concentrations of credit risk consist of cash equivalents and
marketable securities. The Company generally invests its excess funds
in obligations of the U.S. government and its agencies, bank deposits,
mortgage backed securities, and investment grade debt securities issued
by corporations and financial institutions. The Company holds no
collateral for these financial instruments.
Use of Estimates:
-----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from
those estimates.
Stock-based Employee Compensation:
-----------------------------------
The acompanying financial position and results of operations of the
Company have been prepared in accordance with APB Opinion No. 25,
Accounting for Stock Issued to Employee ("APB No. 25"). Under APB
No. 25, generally, no compensation expense is recognized in the
accompanying financial statements in connection with the awarding of
stock option grants to employees provided that, as of the grant date,
all terms associated with the award are fixed and the quoted market
price of the Company's stock, as of the grant date, is equal to or
less then the amount an employee must pay to acquire the stock as
defined.
Disclosure required by Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"),
including pro forma operating results had the Company prepared its
financial statements in accordance with the fair value based method
of accounting for stock-based compensation, have been included in note
9.
Statement of Cash Flows:
------------------------
Supplemental disclosure of noncash investing and financing activities:
During April 1996, the Company issued a total of 37,500 shares of
common stock and granted 50,000 immediately exercisable stock options
to certain individuals as compensation for services rendered to the
Company. The fair market value of such shares and options at the date
of issuance or grant aggregated approximately $730,000.
During August 1996 and January 1997, the Company granted a total of
55,000 immediately exercisable stock options to seven outside
consultants, including members of the Scientific Advisory Board, as
compensation for services rendered to the Company. The fair market
value of such options at the date of grant was $250,000.
Continued
F-8
- --------------------------------------------------------------------------------
EMISPHERE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS , CONTINUED
----- ---------------------
Impact of the Future Adoption of Recently Issued Accounting Standards:
----------------------------------------------------------------------
In February 1997,the Financial Accounting Standards Board issued
Financial Accounting Standard No. 128. Earnings Per Share ("SFAS 128").
SFAS 128 will require the Company to replace the current presentation
of primary per share data with basic and diluted per share data.
Currently, outstanding common stock equivalents are antidilutive and
therefore management estimates that the future adoption of SFAS 128
will not have a material impact on the Company's per share data. SFAS
128 will be adopted by the Company for periods ending after December
15, 1997.
3. Marketable Securities:
The Company considers its marketable securities to be "available-for-
sale", as defined by Statement of Financial Accounting Standards No.
115, Accounting for Certain Investments in Debt and Equity Securities
and, accordingly, unrealized holding gains and losses are excluded from
operations and reported as a net amount in a separate component of
stockholders equity. The following tables summarize the amortized cost
basis and aggregate fair value of marketable securities, and the gross
unrealized holding gains and losses, at July 31,1996 and 1997,
respectively.
Amortized Fair Unrealized Holding
Cost Basis Value Gains (Losses) Net
------------- -------- -------- ----------- --------
1996
------
Maturities within one year:
Corporate debt securities $ 2,982,918 $ 2,983,544 $ 626 $ 626
Maturities between one and
two years:
U.S. Government securities 1,397,601 1,378,314 $ (19,287) (19,287)
Mortgage backed securities 1,980,589 1,970,959 (9,630) (9,630)
------------- ----------- ------------ ------------- ------------
$ 6,361,108 $ 6,332,817 $ 626 $ (28,917) $ (28,291)
============= ============ ============ ============= ============
1997
------
Maturities between one and
two years:
U.S. Government securities $ 3,893,219 $ 3,907,160 $ 16,523 $(2,582) $ 13,941
Corporate debt securities 3,598,491 3,603,579 5,088 5,088
Mortgage backed securities 3,775,038 3,780,516 5,823 (345) 5,478
-------------- ------------ ------------ -------- ------------
$ 11,266,748 $ 11,291,255 $ 27,434 $(2,927) $ 24,507
============== ============ ============ ======== ============
Continued
F-9
- -------------------------------------------------------------------------------
EMISPHERE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
-------------------------
Realized gains and losses are included as a component of investment
income. For the years ended July 31, 1995 and 1996, gross realized
losses were approximately $46,000 and $22,000,respectively, while gross
realized gains were approximately $10,000 and $48,000, respectively.
For the year ended July 31, 1997, gross realized gains and losses were
not significant. In computing realized gains and losses, the Company
determines the cost of its marketable securities on a specific
identification basis. Such cost includes the direct costs to acquire
the securities, adjusted for the amortization of any discount or
premium. The fair value of marketable securities has been estimated
based on quoted market prices.
4. Equipment and Leasehold Improvements:
Equipment and leasehold improvements consist of the following:
Useful Lives
in Years 1996 1997
------------- ------------- -------------
Equipment 5-7 $ 2,826,666 $ 3,863,659
Leasehold improvements Life of lease 1,214,567 1,214,567
------------ --------------
4,041,233 5,078,226
Less, Accumulated
depreciation and amortization 2,590,371 3,032,139
------------ --------------
$ 1,450,862 $ 2,046,087
============ ==============
5. Commitments and Contingencies:
(a) The Company leases office and laboratory space under noncancelable
leases expiring in various years through 2007. The leases provide
for rental holidays and escalations of the minimum rent during the
lease term as well as additional rent based upon increases in real
estate taxes and common maintenance charges ("Additional Charges").
As of July 31, 1997, future minimum rental payments are as follows:
Minimum
Years Ending Rental
July 31 Payments
------------ ---------------
1998 $ 666,000
1999 877,000
2000 1,034,000
2001 1,188,000
2002 1,122,000
Thereafter 6,752,000
--------------
$ 11,639,000
==============
Continued
F-10
- ------------------------------------------------------------------------------
EMISPHERE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
------------------------
The Company records rent expense from leases with rental holidays
and escalations using the straight-line method, thereby prorating
the total rental commitment over the term of the leases. Under this
method, the deferred lease liability represents the difference
between the minimum cash rental payments and the rent expense
computed on a straight-line basis.
Rent expense for the years ended July 31, 1995, 1996 and 1997 was
approximately $256,000, $256,000 and $256,000 respectively.
Additional charges were not material for these periods.
(b) The Company, for the years ended July 31,1995, 1996 and 1997 made
payments for research totaling approximately $319,000, $426,000 and
$847,000 respectively, to seven universities and a research
organization ("entities"). Certain members of the Company's
Scientific Advisory Board are affiliated with these entities.
Under various agreements, as amended, the Company is obligated to
pay minimum fees totaling approximately $1,074,000 during the
year ending July 31, 1998.
6. Research and Development Contracts:
The Company enters into research and development contracts with
pharmaceutical companies (" customers"). These contracts provide for,
among other things, the services the Company is to perform and the
related fee and payment terms. Certain contracts contain provisions
whereby the Company may be required to perform additional services in
consideration for amounts defined in the respective agreements. In
certain instances, the Company is entitled to the receipt of additional
payments in the event certain testing results are achieved.In addition,
the contracts contain provisions which require the Company to
negotiate, with the customer, the terms of a licensing agreement. These
licensing agreements contemplate the exclusive worldwide use of the
Company's proprietary technology with the specific product under
contract.
7. Stockholders Equity:
The Company's certificate of incorporation provides for the issuance of
one million shares of preferred stock with the rights, preferences,
qualifications and terms to be determined by the Company's Board of
Directors. As of July 31, 1997, there were no shares of preferred stock
outstanding (see Note 8).
8. Stockholders Rights Plan:
On February 23, 1996, the Company's Board of Directors ("the Board")
declared a dividend of one preferred share purchase right (a "Right")
for each outstanding share of common stock. Each Right entitles the
registered holder to purchase from the Company one one-hundredth of a
share of Series A Junior Participating Cumulative Preferred Stock ("A
Preferred Stock") at an exercise price of $80.
Continued
F-11
- -------------------------------------------------------------------------------
EMISPHERE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS , CONTINUED
----------------------------
The Rights are not exercisable, or transferable apart from the common
stock, until the earlier to occur of (i) ten days following a public
announcement that a person or group of affiliated or associated
persons have acquired beneficial ownership of 20% or more of the
outstanding common stock of the Company or (ii) ten business days (or
such later date, as defined) following the commencement of, or
announcement of an intention to make, a tender offer or exchange offer
the consummation of which would result in the beneficial ownership be a
person or group of 20% or more of the outstanding common stock of the
Company. Furthermore, if the Company enters into consolidation, merger,
or other business combination, as defined, each Right would entitle the
holder upon exercise to receive, in lieu of shares of A Preferred
Stock, that number of shares of common stock of the acquiring company
having a value of two times the exercise price of the Right,as defined.
The Rights contain antidilutive provisions, are redeemable at the
Company's option, subject to certain defined restrictions, for $.01 per
Right, and expire on February 23, 2006.
As a result of the Rights dividend, the Board designated 200,000 shares
of preferred stock as A Preferred Stock. A Preferred Stockholders will
be entitled to a preferential cumulative quarterly dividend of the
greater of $1.00 per share or 100 times the per share dividend declared
on the Company's common stock. The A Preferred shares have a
liquidation preference, as defined. In addition, each share will have
100 votes and will vote together with the common shares.
9. Stock Option and Employee Stock Purchase Plans:
Stock Option Plans:
The Company currently has two option plans, the 1991 Stock Option Plan
and the 1995 Non-Qualified Stock Option Plan, (individually the "91
Plan" and "95 Plan" respectively, or collectively, the Plans).Under the
91 Plan and the 95 Plan, a maximum of 1,400,000 and 1,900,000 shares of
Common Stock, respectively, are available for awards to employees,
consultants and other individuals who render services to the Company
(collectively,"Optionees").The 91 Plan provides for the grant of either
incentive stock options ("ISOs"), as defined by the Internal Revenue
Code, or options which do not qualify as ISOs ("non ISOs"). The options
are awarded by an independent committee of the Board who determine the
terms including exercise price and vesting period. Generally, the
options expire within a five to ten-year period as determined by the
committee and as defined by the Plans. The terms of the 95 Plan
provide for the granting to officers and other key employees the option
to purchase the Company's common stock. The number and terms of each
grant will be determined by an independent committee of the Board who
will determine option exercise price, termination date, vesting and
expiration date. Options granted under the Plans generally vest over a
five year period. As of July 31, 1997, shares available for future
grant under the Plans amount to 63,942.
Continued
F-12
- --------------------------------------------------------------------------------
EMISPHERE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS , CONTINUED
-------------------
The following table summarizes stock option information for the Plans
as of July 31, 1997:
Options Outstanding Options Exercisable
------------------------------------------------------------ ---------------------------------
Weighted Average
Range of Number Remaining Weighted Average Number Weighted Average
Exercise Price Outstanding Contractual Life Exercise Price Exercisable Exercise Price
--------------- ------------ ----------------- --------------- ------------- -----------------
$1.50 - $1.65 97,066 7.76 Yrs $1.50 40,246 $1.51
$2.63 - $2.89 5,442 7.81 $2.70 4,992 $2.71
$4.00 - $6.00 76,285 6.82 $4.02 44,437 $4.02
$6.63 - $9.75 1,408,250 8.22 $8.64 565,550 $8.65
$10.00 - $13.75 1,446,433 6.39 $12.01 1,153,260 $12.34
$15.13 - $22.00 124,150 7.69 $17.71 57,200 $19.06
$23.00 - $23.25 8,000 7.91 $23.09 2,400 $23.25
---------- ---------
$1.50 - $23.25 3,165,626 7.31 $10.23 1,868,085 $10.98
========== =========
Transactions involving stock options awarded under the Plans during 1995,
1996 and 1997 are summarized as follows:
Number Weighted Average Number Weighted Average
Outstanding Exercise Price Exercisable Exercise Price
------------ ---------------- ------------ ----------------
Balance, July 31, 1994................ 512,100 $10.33 110,099 $14.16
1995: Granted......................... 134,023 $ 1.76
Canceled........................ (21,862) $ 8.58
----------
Balance Outstanding July 31,1995 624,261 $ 8.55 225,967 $11.88
1996: Granted......................... 1,545,024 $ 8.92
Canceled........................ (158,258) $ 8.70
Excercised...................... (29,609) $ 3.60
----------
Balance Outstanding July 31,1996 1,981,418 $ 8.90 506,962 $9.75
1997: Granted......................... 1,260,531 $12.43
Canceled........................ (43,000) $13.75
Excercised...................... (33,323) $ 9.86
----------
Balance Outstanding July 31,1997 3,165,626 $10.23 1,868,085 $10.98
==========
Continued
F-13
- -------------------------------------------------------------------------------
EMISPHERE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
Outside Directors Plan:
The Company adopted a stock option plan for outside directors (the
"Outside Director's Plan"). The Outside Directors Plan provides for the
Company to grant to directors, who are neither officers nor consultants
and who do not own 5% or more of the Company's common stock, options to
purchase 70,000 shares of the Company's common stock on the date of
initial election or appointment to the board ("Director's Grant"). The
Directors Grants vest over a five year period, as defined, with 20,000
options expiring ten years from the date of grant and the balance
expiring eleven years from the date of grant. The Board approved an
amendment to the Plan effective January 29, 1997 that (i) reduces from
70,000 to 35,000 the initial grant (ii) provides for the grant of
options to purchase 21,000 shares on the fifth anniversary of each
director's initial election or appointment to the Board and every three
years thereafter.
The following table summarizes stock option information for the Outside
Directors Plan as of July 31, 1997:
Options Outstanding Options Exercisable
--------------------------------------------------------- --------------------------------
Weighted Average
Range of Number Remaining Weighted Average Number Weighted Average
Exercise Price Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ---------------- ----------- ----------------- ---------------- ------------ -----------------
$8.63 70,000 8.89 Yrs $ 8.63 33,333 $8.63
$13.00 -$13.75 273,000 6.45 $13.17 210,000 $13.00
$23.50 35,000 9.50 $23.50
--------- --------
$8.63 - $23.50 378,000 7.19 $13.29 243,333 $12.40
========= =======
Transactions involving stock options awarded under the Outside Directors Plan
during 1995, 1996 and 1997 are summarized as follows:
Number Weighted Average Number Weighted Average
Outstanding Exercise Price Exercisable Exercise Price
----------- ---------------- ------------ -----------------
Balance, July 31,1994................... 210,000 $13.00 99,999 $13.00
---------
1995: Balance Outstanding July 31, 1995 210,000 $13.00 150,000 $13.00
1996: Granted........................... 70,000 $ 8.63
--------
Balance Outstanding July 31, 1996 280,000 $11.91 196,666 $12.63
1997: Granted........................... 98,000 $17.23
--------
Balance Outstanding July 31, 1997 378,000 $13.29 243,333 $12.40
========
Continued
F-14
- --------------------------------------------------------------------------------
EMISPHERE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS , CONTINUED
------------------------
Non-Plan Options:
The Company's Board of Directors has issued options to two senior
executive officers, the Emisphere Charitable Foundation and a
consultant not covered by the Plans or the Outside Director's Plan
("Non-Plan Options"). Outstanding Non-Plan Options at July 31, 1994
included 909,031 options granted during 1992 to two senior executive
officers ("Executives")in connection with their respective employment
agreements. Each option entitles the holder to purchase one share of
the Company's common stock at an exercise price per share of $12.38.
These options were exercisable as of July 31, 1996 and had an original
expiration date of July 31, 1997. On August 27, 1996, the Board agreed
to cancel and regrant these options with all terms and provisions
remaining the same except that the option expiration date was extended
to July 31, 2002. In addition, 409,031 of these options were deemed to
be granted from the 1991 Plan; the balance were deemed to be granted
from the 1995 Plan. The fair market value of the Company's common stock
on August 27, 1996 was below the exercise price of these options. The
respective employment agreements for the Executives also contain
provisions whereby the Executives are allowed to borrow defined amounts
from the Company in connection with exercise of options. Outstanding
loans bear interest at rates as defined. The number and terms of each
grant (option exercise price, termination date, vesting and expiration
date) was determined by the Board. Non-Plan Options generally vest over
a five year period.
The following table summarizes stock option information for the Non-Plan
Options as of July 31, 1997:
Options Outstanding Options Exercisable
------------------------------------------------------------ --------------------------------
Weighted Average
Range of Number Remaining Weighted Average Number Weighted Average
Exercise Price Outstanding Contractual Life Exercise Price Exercisable Exercise Price
---------------- ------------ ---------------- ---------------- ------------ ------------------
$ 6.25 - $ 9.25 407,822 3.00 Yrs $ 8.55 407,822 $ 8.55
$ 9.75 - $13.75 15,000 6.02 $ 9.75 15,000 $ 9.75
$17.25 - $20.00 1,000 0.26 $18.50 1,000 $18.50
----------- ---------
$ 6.25 - $20.00 423,822 3.10 $ 8.62 423,822 $ 8.62
=========== =========
Continued
F-15
- --------------------------------------------------------------------------------
EMISPHERE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS , CONTINUED
------------------------
Transactions involving awards of Non-Plan Options during 1995, 1996
and 1997 are summarized as follows:
Number WeightedAverage Number Weighted Average
Outstanding Exercise Price Exercisable Exercise Price
----------- -------------- ----------- --------------
Balance, July 31, 1994................. 1,572,567 $12.05 1,208,595 $11.20
1995: Canceled......................... (136,714) $19.05
----------
Balance Outstanding July 31, 1995 1,435,853 $11.50 1,228,595 $11.15
1996: Granted.......................... 56,000 $ 8.09
Canceled......................... (15,000) $12.38
Exercised........................ (6,000) $ 3.63
----------
Balance Outstanding July 31, 1996 1,470,853 $11.28 496,822 $ 9.59
1997: Canceled......................... (987,031) $12.61
Exercised........................ (60,000) $ 8.23
----------
Balance Outstanding July 31, 1997 423,822 $ 8.62 423,822 $ 8.62
=========
Employee Stock Purchase Plans:
During December 1994, the Company's stockholders approved the adoption
of two employee stock purchase plans (the "Purchase Plans"):the
Emisphere Technologies, Inc. Employee Stock Purchase Plan (the
"Qualified Plan") and the Emisphere Technologies, Inc. Non-Qualified
Employee Stock Purchase Plan (the "Non-Qualified Plan"). The terms and
provisions of the Qualified Plan provide for all employees, excluding
employees who control 5% or more of the Company, to receive a grant
("Grant") of up to 15% of their compensation, as such percentage is
determined by the Board prior to the date of grant not to exceed
quarterly limits as defined. Each Grant, upon exercise, entitles the
employee to purchase shares of the Company's common stock at a price
per share equal to the lesser of the fair market value of the Company's
common stock on the date of grant or 85% of the fair market value on
the date the Grant is exercised, as defined. Grants expire six months
from the date of issuance.The terms and provisions of the Non-Qualified
Plan are identical to the Qualified Plan except that excluded
employees, as defined above, are permitted to acquire shares of common
stock and there are no quarterly limitations which would limit the
total number of shares which may be purchased. At the inception of the
Purchase Plans, the number of shares of common stock available for
issuance under the Qualified Plan and Non-Qualified Plan were 500,000
and 100,000, respectively.
Purchases of common stock during the years ended July 31, 1995, 1996 and 1997
are summarized as follows:
Qualified Plan Nonqualified Plan
------------------------------ -----------------------------
Shares Shares
Purchased Price Range Purchased Price Range
------------- -------------- ---------- ------------
1995 66,982 $1.13 - $ 3.13 5,080 $1.43
1996 72,975 $1.50 - $ 9.00 17,372 $1.50 - $ 7.38
1997 31,348 $6.30 - $17.75 8,111 $6.26 - $13.18
At July 31, 1997, shares reserved for future purchases under the
Qualified and Non-Qualified Plans were 328,695 and 69,437,respectively.
Continued
F-16
- ------------------------------------------------------------------------------
EMISPHERE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
--------------------------------
The following table summarizes the pro forma operating results of
the Company had compensation costs for the Plans, Outside Directors
Plan, the Non-Plan Options and the Employee Stock Purchase Plan been
determined in accordance with the fair value based method of accounting
for stock based compensation as prescribed by SFAS No. 123.Since option
grants awarded during 1996 and 1997 vest over several years and
additional awards are expected to be issued in the future, the pro
forma results shown below are not likely to be representative of the
effects on the future years of the application of the fair value based
method. Except as noted above, the options exercise price equals the
quoted market price of the Company's common stock on the date of grant.
Years ended July 31,
----------------------------------
1996 1997
-------------- ----------------
Pro forma net loss.......... $ (7,570,740) $ (15,408,336)
============== ================
Pro forma net loss per share $ (0.90) $ (1.53)
============== ================
For the purpose of the above pro forma calculation, the fair value of
each option granted was estimated on the date of grant using the Black-
Scholes option pricing model. The weighted-average fair value of the
options granted during 1996 and 1997 was $5.97 and $6.82, respectively.
The following assumptions were used in computing the fair value of options
granted: expected volatility of 80%, expected lives of 5 years, except for
the Employee Stock Purchase Plans where the expected lives are 6 months;
zero dividend yield and weighted-average risk-free interest rate of 5.8% in
1996 and 6.4% 1997.
Continued
F-17
- --------------------------------------------------------------------------------
EMISPHERE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS , CONTINUED
-------------------------------
10. Major Customers:
During the year ended July 31,1995, all revenue from research
contracts was derived from a single customer. During the
year ended July 31, 1996, approximately 96% of the revenue from
contract research was derived from Elan Corporation plc ("Elan").
During the year ended July 31, 1997, approximately 74% of the revenue
from contract research was derived from Ebbisham Ltd.(See note 14).
The remainder consisted of payments from Eli Lilly and Company
("Lilly") (23%) and from two pharmaceutical companies for which the
Company performed feasibility studies.
11. Income Taxes:
There is no provision (benefit) for federal or state income taxes for
the years ended July 31, 1995, 1996 and 1997, since the Company has
incurred operating losses and has established a valuation allowance
equal to the total deferred tax asset.
The tax effect of temporary differences, net operating loss carry-
forwards and research and experimental tax credit carry-forwards as of
July 31, 1996 and 1997 was as follows:
1996 1997
-------------- --------------
Deferred tax assets and valuation allowance:
Accrued liabilities $ 105,483 $ 102,292
Equipment and leasehold improvements 157,672 181,863
Net operating loss carry-forwards 16,529,182 19,217,509
Research and experimental tax credit
carry-forwards 1,902,150 2,454,215
Valuation allowance (18,694,487) (21,955,879)
-------------- ---------------
--- ---
============== ===============
As of July 31, 1997, the Company has available, for tax reporting
purposes, unused net operating loss carry-forwards of approximately $47
million which will expire in various years from 2001 to 2012. The
Company's research and experimental tax credit carry-forwards expire in
various years from 2001 to 2012. Future ownership changes may limit the
future utilization of these net operating loss and research and
development tax credit carry-forwards as defined by the Internal
Revenue Code.
12. Retirement Plan:
The Company adopted the provisions of a defined contribution retirement
plan (the"Plan"). The terms of the Plan,as amended, allow eligible
employees who have met certain age and service requirements to
participate by electing to contribute to the Plan, a percentage of
their compensation to be set aside to pay their future retirement
benefits as defined by the Plan. The Company has agreed to make
discretionary contributions to the Plan. For the years ended July 31,
1995,1996 and 1997 the Company made contributions to the Plan totaling
approximately $46,000, $36,000 and $58,000, respectively.
Continued
F-18
- -------------------------------------------------------------------------------
EMISPHERE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS , CONTINUED
----------------------------
13. The Emisphere Charitable Foundation, Inc.:
During 1993, the Board authorized the incorporation of The Emisphere
Charitable Foundation, Inc. (The "Foundation"). The Foundation has
since been incorporated and intends to seek tax exempt status under
section 501(c)(3) of the Internal Revenue Code. The Foundation's
charitable purpose is to grant financial assistance to pay expenses
incurred by persons or their families who are suffering from serious,
debilitating or prolonged illnesses. The Company intends to make
contributions to the Foundation in the form of cash and Company stock
options. Three officers of the Company are directors of the Foundation.
During the year ended July 31, 1994, the Company granted the Foundation
15,000 options to acquire an equal number of shares of the Company's
common stock at an exercise price, per share, of $9.75.
14. Joint Venture with Elan Corporation plc:
During October 1995, the Company and Elan reached agreement which
provided for, among other things, the formation of an equally owned
joint venture ("Ebbisham Ltd" or the "JV") to jointly research,
develop and market products. The terms of the agreement provide for
Elan to initially finance the JV,with the Company and Elan both
contributing technology. It is anticipated that future financing needs
of the JV will be shared equally by the Company and Elan. The
agreement also provided for Elan to reimburse the Company $3 million
for certain research and development costs incurred prior to December
1995 and for the JV to reimburse the Company for services performed by
the Company on behalf of the JV. Subseqent to December 1995, such
reimbursement totaled approximately $4.0 million for the year ended
July 31, 1997.
The Company also entered into a Purchase Agreement with Elan
International Services Ltd., an affiliate of Elan, during 1995.
Pursuant to the Purchase Agreement, the Company sold 600,000 shares
of its common stock and issued 250,000 warrants to purchase shares of
the Company's common stock at $16.25 per share for total consideration
of $7.5 million. The warrants contain antidilutive provisions, are
exercisable upon issuance, and expire on October 18, 2000.
During September 1996, the Company and Elan finalized the formation of
the JV and entered into a license agreement. The license agreement
provides for the JV to license certain technology from the Company
and for the Company to perform certain research and development on
behalf of the JV in consideration for defined amounts. In connection
with the license agreement, the Company is also entitled to royalty
income based on future sales of licensed products by the JV, as
defined.
Continued
F-19
- --------------------------------------------------------------------------------
EMISPHERE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS , CONTINUED
-------------------------------
Selected financial data of the JV is as follows:
Balance Sheet Data at July 31, 1997
Assets:
Cash $ 708,424
===============
Liabilities and Shareholders' Deficit:
Accounts payable (1) $ 1,288,335
Subordinated debt 4,500,000
Shareholders' deficit 5,079,911
---------------
$ 708,424
===============
(1) Includes $648,786 due the Company
Statement of Operations Data for the period from the commencement
of operations (September 26, 1996) to July 31, 1997
Total revenue $ 72,045
Total expenses (2) 5,171,956
---------------
Net loss $ (5,099,911)
===============
(2) Includes $4,002,106 related to services performed by the
Company on behalf of the JV for the period ended
July 31, 1997.
15. Research Collaboration and Option Agreement with Eli Lilly and Company:
During February 1997 (the "Effective Date") the Company and Lilly
entered into a Research Collaboration and Option Agreement (the "Lilly
Agreement") to combine Lilly's therapeutic protein and formulation
capabilities with the Company's technologies ("Research Program"). The
initial term of the Lilly Agreement is eighteen months from the
Effective Date, with an option for an extension of an additional six
months. Any extensions beyond twenty-four months must be approved by
the Company and Lilly.
Continued
F-20
- --------------------------------------------------------------------------------
EMISPHERE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS , CONTINUED
-----------------------------
Pursuant to the Lilly Agreement, the Company granted to Lilly a series
of options, each to acquire an exclusive, worldwide license (the
"License Agreements") to use the Company's technologies to develop
products using two of Lilly's therapeutic proteins (the "Lilly
Proteins"). Options relating to the Lilly proteins expire from one to
two years from the Effective Date, subject to certain extensions.
During the initial term, and if applicable, the extension period, Lilly
will provide quarterly payments in advance to the Company for work
performed by the Company in connection with the Research Program. Such
payments are recorded by the Company as deferred revenue when received
and as revenue as the related work is performed. For the year ended
July 31, 1997,revenue recognized from the Lilly Agreement totalled
$ 1,250,000. If Lilly decides to expand the scope of the research
program, payments will increase, as defined. In addition, the License
Agreement provide for future payments in the event certain milestones
are achieved, as defined, as well as royalty payments if a commercial
product results from the collaboration. However, if Lilly contributes
to the Company's technology, Lilly will be entitle to a reduction in
milestone and royalty payments, as defined.
Either party may terminate the Lilly Agreement upon written notice to
the other party that such party has breached the Agreement if, within
60 days of receipt of such notice, such breach has not been cured.
F-21
- ------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Emisphere Technologies, Inc.:
Our report, which is based in part on work performed by other auditors, on
the financial statements of Emisphere Technologies, Inc. is included on page
F-2 of this Form 10-K. In connection with our audits of such financial
statements, we have also audited the related financial statements schedule
listed in the index on page F-1 of this Form 10-K.
In our opinion, based on our audits and the report of other auditors, the
financial statements schedule referred to above, when considered in relation
to the basic financial statements taken as a whole, present fairly,in all
material respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
New York, New York
October 28, 1997
F-22
- -------------------------------------------------------------------------------
EMISPHERE TECHNOLOGIES, INC.
VALUATION and QUALIFYING ACCOUNTS and RESERVES
For years ended July 31, 1995, 1996 and 1997
Col. A Col. B Col. C Col. D Col. E
-------------- ---------- ------------- ------------ -----------
Additions
------------------------
Charged to Charged
Balance at Costs and to Other Balance at
Beginning Expenses Accounts- Deductions- End of
Description of Period Describe Describe Period
- --------------------------------- ------------ ------------ ---------- ------------ -----------
For the year ended July 31, 1995
Allowance for Bad Debts -
CTA Bio Services, Inc. $ 109,530 $ 109,530 (1) $ -0-
For the year ended July 31, 1996
Allowance for Bad Debts -
CTA Bio Services, Inc. $ -0- $ -0-
For the year ended July 31, 1997
Allowance for Bad Debts -
CTA Bio Services, Inc. $ -0- $ -0-
(1) In February 1995, CTA Bio Services, Inc. ceased operations. The loan was
declared uncollectible and written off.
F-23
- --------------------------------------------------------------------------------
Report of Independent Chartered Accountants to the shareholders' of
Ebbisham Limited:
We have audited the accompanying balance sheet of Ebbisham Limited as of
July 31,1997, and the related statement of operations, shareholders deficit
and cash flows for the period from the commencement of operations
(September 26,1996) to July 31, 1997. These financial statements are the
responsibility of the company's directors and management.Our responsibility
is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. 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 principals used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We
believe that our audit provides reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Ebbisham Limited at
July 31, 1997, and the results of its operations and its cash flows for the
period from the commencement of operations (September 26, 1996) to July 31,
1997, in conformity with accounting principles generally accepted in the
United States.
KPMG
Chartered Accountants
Dublin, Ireland
October 28,1997
F-24
- --------------------------------------------------------------------------------
EBBISHAM LIMITED
BALANCE SHEET
July 31, 1997
July 31,1997
Note
Assets
Current assets:
Cash and cash equivalents $ 708,424
------------
Total assets $ 708,424
============
Liabilities and shareholders' deficit
Current liabilities
Accounts payable 2 $ 1,288,335
-----------
Total current liabilities 1,288,335
------------
Subordinated debt 3 4,500,000
------------
Shareholders deficit
"A" Ordinary shares, par value $1.00 per share,
5,000,000 authorized, 10,000 shares issued and
outstanding at July 31,1997 10,000
"B" Ordinary shares, par value $1.00 per share,
5,000,000 authorized, 10,000 shares issued and
outstanding at July 31, 1997 10,000
Accumulated deficit (5,099,911)
-----------
Shareholders' deficit (5,079,911)
-----------
Total liabilities and shareholders' deficit $ 708,424
=============
The accompanying notes are an integral part of these financial statements
F-25
- --------------------------------------------------------------------------------
EBBISHAM LIMITED
STATEMENT OF OPERATIONS
Period from the
commencement of
operations (September
26, 1996) to
July 31, 1997
--------------------
Cost and expenses
Research and development $ (5,171,956)
---------------
Operating loss (5,171,956)
---------------
Interest income 72,045
---------------
Net loss $ (5,099,911)
===============
The accompanying notes are an integral part of these financial statements
F-26
- -------------------------------------------------------------------------------
EBBISHAM LIMITED
STATEMENT OF SHAREHOLDERS DEFICIT
Period from the commencement of operations
(September 26, 1996) to July 31,1997
Number of Share Accumulated
Shares capital deicit Total amount
---------- ---------- ------------ -------------
Balance at September 26, 1996 - - - -
Share capital issued 20,000 $ 20,000 - $ 20,000
Net loss for period - - $ (5,099,911) (5,099,911)
---------- --------- -------------- --------------
Balance at 31 July 1997 20,000 $ 20,000 $ (5,099,911) $ (5,079,911)
========== ========= ============== ==============
The accompanying notes are an integral part of these financial statements
F-27
- --------------------------------------------------------------------------------
EBBISHAM LIMITED
STATEMENT OF CASH FLOWS
Period from the
commencement of
operations
(September 26, 1996)
to
July, 31 1997
Cash flows from operating activities
Net loss $ (5,099,911)
Change in assets and liabilities:
Increase in accounts payable 1,288,335
----------------
Net cash provided by operating activities (3,811,576)
-----------------
Cash flows from financing activities
Proceeds from issuance of share capital 20,000
Proceeds from issuance of subordinated debt 4,500,000
---------------
Net cash provided by financing activities 4,520,000
---------------
Net increase in cash and cash equivalents 708,424
Cash and cash equivalents at beginning of year -
---------------
Cash and cash equivalents at end of year $ 708,424
===============
The accompanying notes are an integral part of these financial statements
F-28
- --------------------------------------------------------------------------------
Ebbisham Limited
Notes to the financial statements
1. Statement of accounting policies:
Basis of preparation:
---------------------
The accounting policies followed in the preparation of the accompanying
financial statements are in conformity with generally accepted
accounting principles in the United States.
The preparation of the financial statements in conformity with
generally accepted accounting principles in the United States requires
management to make estimates and assumptions that effect reported
amounts and disclosures in these financial statements. Actual results
could differ from those estimates.
The directors of the company are satisfied that the shareholders will
make sufficient resources available to the company to ensure that it
will continue in operation for a period of at least twelve months from
the date of approval of these financial statements.
Research and development:
-------------------------
Research and development is charged to operations as incurred.
Cash and cash equivalents:
---------------------------
Cash and cash equivalents include cash and highly liquid investments
with initial maturities of three months or less.
Taxation:
---------
The Company did not earn a profit in the period and incurred no tax
liability. The Company is currently developing an oral heparin product.
Assuming this development is successful and the Company earns profits,
they will not be subject to tax under Irish law, as the profits will
be derived from products developed under patents.
2. Accounts payable:
July 31,1997
------------
Amounts owed to related parties $ 1,288,335
============
3. Subordinated debt:
On September 26, 1996 the Company issued $4,500,000 of subordinated
debt to Elan Corporation plc which is repayable on September 26, 2006.
Interest is payable on the debt only when the company has sufficient
accumulated distributable reserves and has earned a profit,
after tax, in the preceding financial year of not less the $100,000.
The rate of interest in a given financial year is as follows:
(a) 5% if profits after tax for that financial year exceed $100,000
but do not exceed $5,000,000
(b) 10% if profits after tax for that financial year exceed
$5,000,000 but do not exceed $10,000,000.
(c) 15% if profits after tax for that financial year exceed
$10,000,000.
The debt is subordinated to the claims of all other creditors of
Ebbisham Limited.
F-29
- --------------------------------------------------------------------------------
Ebbisham Limited
Notes to the financial statements, continued
4. Fair Value of financial instruments:
The following methods and assumptions were used to estimate the fair value
of each material class of financial instruments:
The carrying amount of the following financial instruments approximates
fair value due to the short term maturity of these instruments - cash and
cash equivalents and accounts payable.
The carrying amount of the subordinated debt equates to its fair value as
it is redeemable at face value.
5. Concentration of risk and related parties:
The Company will require significant amounts of finance to fund its
operations. To date, all funding has been provided by the Company's
shareholders, Elan Corporation, plc and Emisphere Technologies, Inc.
However, as of July 31, 1997, there is no formal agreement in place
which would require either shareholder to provide further funding. The
directors of the Company are satisfied that the shareholders will make
sufficient resources available to the Company to ensure that it will
continue in operation for a period of at least twelve months from the
date of approval of these financial statements.
The Company has entered into certain agreements with Elan and Emisphere
relating to research and development activities. In the period from
September 26, 1996 to July 31, 1997 the Company incurred research and
development cost of $ 1,172,223 payable to Elan and further research and
development cost of approximately $4,000,000 payable to Emisphere.
F-30
- -------------------------------------------------------------------------------
EXHIBIT INDEX
Incorporated by
Exhibit Reference (1)
(3) - Restated Certificate of Incorporation of
the Company
- By-Laws of the Company A
(4) - Rights Agreement dated as of February 23, B
1996 between the Company and Continental
Stock Transfer & Trust Company
(10) - 1991 Stock Option Plan, as amended (2)
- Stock Option Plan for Outside Directors, as (2)
amended
- Employee Stock Purchase Plan C (2)
- Non-Qualified Employee Stock Purchase Plan C (2)
- 1995 Non-Qualified Stock Option Plan, as (2)
amended
- Employment Agreement dated as of October 6, C (2)
1995 between Michael M. Goldberg and the
Company
- Stock Option Agreements dated as of January C (2)(3)
1, 1991, February 15, 1991, December 1,
1991, August 1, 1992 and October 6, 1995
between Michael M. Goldberg and the
Company
- Employment Agreement dated as of October 6, C (2)
1995 between Sam J. Milstein and the
Company
- Stock Option Agreements dated as of January C (2)(3)
1, 1991, February 15, 1991, December 1,
1991, August 1, 1992 and October 6, 1995
between Sam J. Milstein and the Company
- Purchase Agreement dated as of October 18, C
1995 by and between the Company and Elan
International Services Limited
- Letter Agreement dated as of September 26, D
1996 amending said Purchase Agreement
- Warrant Agreement dated as of October 18, C
1995 by and between the Company and Elan
International Services Limited
- Registration Rights Agreement dated as of C
October 18, 1995 by and between the
Company and Elan International Services
Limited
- Joint Venture Agreement dated as of D
September 26, 1996 by and among Elan
Corporation plc, the Company and Ebbisham
Limited
- License Agreement dated as of September 26, D
1996 by and between Ebbisham Limited and
Elan Corporation plc
- License Agreement dated as of September 26, D
1996 by and between Ebbisham Limited and
the Company
- Stock Instrument dated as of September 26, D
1996 by and between Ebbisham Limited and
Elan Corporation plc
- Memorandum and Articles of Association of D
Ebbisham Limited
- Letter Agreement dated as of September 26, D
1996 by and among Elan Corporation plc,
the Company and Ebbisham Limited
- Research Collaboration and Option Agreement A
dated as of February 26, 1997 between the
Company and Eli Lilly and Company
(11) - Statement re computation of per share
earnings
(23) - Consent of Coopers & Lybrand L.L.P.
- Consent of KPMG
(27) - Financial Data Schedule
___________________
(1) If not filed herewith, filed with a corresponding
exhibit number as an exhibit to the document referred
to by letter as follows:
A. Quarterly Report on Form 10-Q/A (Amendment No.1) for
the quarter ended January 31, 1997.
B. Current Report on Form 8-K dated March 5, 1996.
C. Annual Report on Form 10-K for the fiscal year ended
July 31, 1995.
D. Annual Report on Form 10-K for the fiscal year ended
July 31, 1996.
(2) Management contract or compensatory plan or arrangement
(3) Omitted in part pursuant to Instruction 2 of Item 601
of Regulation S-K.
- -------------------------------------------------------------------------------
Exhibit 3
Restated Certificate of Incorporation of the Company
- -----------------------------------------------------------------------------
Exhibit 3
RESTATED CERTIFICATE OF INCORPORATION
OF
EMISPHERE TECHNOLOGIES, INC.
Under Section 245 of the General Corporation Law
The undersigned President and Secretary of Emisphere
Technologies, Inc. (the "Corporation"), a corporation that was
originally incorporated under the name Clinical Technologies
Associates, Inc., that had its original certificate of incorporation
filed with the Secretary of State of the State of Delaware on July 21,
1986 and that is currently existing under and by virtue of the General
Corporation Law of the State of Delaware, DOES HEREBY CERTIFY that, in
accordance with the provisions of Section 245 of the General
Corporation Law of the State of Delaware, this Restated Certificate of
Incorporation restates and integrates and does not further amend the
Corporation's certificate of incorporation as heretofore amended or
supplemented and that there is no discrepancy between those provisions
and the provisions of this Restated Certificate of Incorporation:
FIRST: The name of the corporation (hereinafter sometimes
called the "Corporation") is Emisphere Technologies, Inc.
SECOND: The address of the Corporation's registered office in
the State of Delaware is 1013 Centre Road, Wilmington, County of New
Castle, Delaware 19805. The name of its registered agent at such
address is United States Corporation Company.
THIRD: The nature of the business and of the purposes to be
conducted and promoted by the Corporation, which shall be in addition
to the authority of the Corporation to conduct any lawful business, to
promote any lawful purpose, and to engage in any lawful act or
activity for which corporations may be organized under the General
Corporation Law of the State of Delaware, is as follows:
To acquire by purchase, subscription, contract or otherwise, and
to invest in, hold for investment or otherwise, to pledge and
otherwise realize upon and to sell, contract to sell and dispose of
all forms of securities, real and personal property, including, but
not limited to, shares, stocks, bonds, debentures, notes, warrant,
rights, options, certificates of deposit, mortgages, evidences of
indebtedness, certificates of indebtedness and certificates of
interest issued or created, or to be issued or created in any and all
parts of the world by corporations, associations, partnerships,
trustees, syndicates, individuals, governments, states, municipalities
and other political and governmental divisions and subdivisions, or by
any combinations, organizations or entities whatsoever, irrespective
of their form or the name by which they may be described, and all
trust, participation, and other certificates of, and receipts
evidencing interest in, any such securities, to exercise any and all
rights, powers and privileges of individual ownership or interest in
respect of any and all such securities, real and personal property,
and options or other evidences of interest, including the right to
vote thereon and to consent and otherwise act with respect thereto; to
operate and manage the business of any entity whose securities it
holds, to do. any and all acts and things for the preservation,
protection, improvement and enhancement in value of any and all such
securities, or evidences of interest therein.
To purchase, receive, taken by grant, gift, devise, bequest or
otherwise, lease or otherwise acquire, own, hold, improve, employ, use
and otherwise deal in and with real or personal property, or any
interest therein; wherever situated, and to sell, convey, lease,
exchange, transfer or otherwise dispose of, or mortgage or pledge, all
or any of its property and assets, or any interest therein, wherever
situated.
To engage generally in the real estate business as principal,
agent, broker, and in any lawful capacity, and generally to take,
lease, purchase, or otherwise handle, manage, operate, deal in and
dispose of, real estate, real property, lands, multiple-dwelling
structures, houses, buildings and other works and any interest or
right therein; to take, lease, purchase or otherwise acquire, and to
own, use, hold, sell, convey, exchange, hire, lease, pledge, mortgage,
and otherwise handle, and deal in and dispose of, as principal, agent,
broker, and in any lawful capacity, such personal property, chattels,
chattels real, rights, easements, privileges, choses in action, notes,
bonds, mortgages and securities as may lawfully be acquired, held, or
disposed of; and to acquire, purchase, sell, assign, transfer, dispose
of, and generally deal in and with, as principal, agent, broker, and
in any lawful capacity, mortgages and other interests in real,
personal, and mixed properties; to carry on a general construction,
contracting, building and realty management business as principal,
agent, representative, contractor, subcontractor, and in any other
lawful capacity.
To carry on a general mercantile, industrial, investing, and
trading business in all its branches; to devise, invent, manufacture,
fabricate, assemble, install, service, maintain, alter, buy, sell,
import, export, license as licensor or licensee, lease as lessor or
lessee, distribute, job, enter into, negotiate, execute, acquire, and
assign contracts in respect of acquire, receive, grant and assign
licensing arrangements, as principal, and as sales, business, special,
-2-
or general agent, representative broker, factor, merchant,
distributor, jobber, advisor, and in any other lawful capacity, goods,
wares, merchandise, commodities, and unimproved, furnished, processed,
and other real, personal, and mixed property of any and all kinds,
together with the components, resultants, and by-products thereof.
To apply for, register, obtain, purchase, lease, take licenses
in respect of, or otherwise acquire, and to hold, own, use, operate,
develop, enjoy, turn to account, grant licenses, franchises and
immunities in respect of, manufacture under and to introduce, sell,
assign, mortgage, pledge or otherwise dispose of, and, in any manner
deal with and contract with reference to:
(i) inventions, devices, formulae, processes, and any
improvements and modifications thereof;
(ii) letters patent, patent rights, patented processes,
copyrights, designs and similar rights, trade-marks, trade
names, trade symbols and other indications of origin and
ownership granted by or recognized under the laws of the United
States of America, the District of Columbia, any state or
subdivision thereof, and any commonwealth, territory,
possession, dependency, colony, agency or instrumentality of the
United States of America and of any foreign country, and all
rights connected therewith or appertaining thereunto;
(iii) franchises, licenses, grants and concessions.
To guarantee, purchase, take, receive, subscribe for, and
otherwise acquire, own, hold, use, and otherwise, employ, sell, lease,
exchange, transfer, and otherwise dispose of, mortgage, lend, pledge,
and otherwise deal in and with, securities (which term, for the
purpose of this Article THIRD, includes, without limitation of the
generality thereof, any shares of stock, bonds, debentures, notes,
mortgages, other obligations, and any certificates, receipts or other
instruments representing rights to receive, purchase or subscribe for
the same, or representing any other rights or interests therein or in
any property or assets) of any persons, domestic and foreign firms,
associations, and corporations, and by any government or agency or
instrumentality thereof; to make payment therefor in any lawful
manner; and, while owner of any such securities, to exercise any and
all rights, powers and privileges in respect thereof, including the
right to vote.
To make, enter into, perform and carry out contracts of every
kind and description with any person, firm, association, corporation
or government or agency or instrumentality thereof.
To acquire by purchase, exchange or otherwise, all, or any part
of, or any interest in, the properties, assets, business and good will
of any one or more persons, firms, associations or corporations
heretofore or hereafter engaged in any business for which a
corporation may now or hereafter be organized under the laws of the
State of Delaware; to pay for the same in cash, property or its own or
other securities; to hold, operate, reorganize, liquidate, sell or in
any manner dispose of the whole or any part thereof; and in connection
-3-
therewith, to assume or guarantee performance liabilities, obligations
or contracts of such persons, firms, associations or corporations, and
to conduct the whole or in part of any business thus acquired.
To lend money in furtherance of its corporate purposes and to
invest and reinvest its funds from time to time to such extent, to
such persons, firms, associations, corporations, governments or
agencies or instrumentalities thereof, and on such terms and on such
security, if any, as the Board of Directors of the Corporation may
determine.
To make contracts of guaranty and suretyship of all kinds and
endorse or guarantee the payment of principal, interest or dividends
upon, and to guarantee the performance of sinking fund or other
obligations of, any securities, and to guarantee in any way permitted
by law the performance of any of the contracts or other undertakings
in which the Corporation may otherwise be or become interested, of any
persons, firm, association, corporation, government or agency or
instrumentality thereof, or of any other combination, organization or
entity whatsoever.
To borrow money without limit as to amount and at such rates of
interest as it may determine; from time to time to issue and sell its
own securities, including its shares of stock, notes, bonds,
debentures, and other obligations, in such amounts, on such terms and
conditions, for such purposes and for such prices, now or hereafter
permitted by the laws of the State of Delaware and by this Certificate
of Incorporation, as the Board of Directors of the Corporation may
determine; and to secure any of its obligations by mortgage, pledge or
other encumbrance of all or any of its property, franchises and
income.
To be a promoter or manager of other corporations of any type or
kind; and to participate with others in any corporation, partnership,
limited partnership, joint venture, or other association of any kind,
or in any transaction, undertaking or arrangement which the
Corporation would have power to conduct by itself, whether or not such
participation involves sharing or delegation of control with or to
others.
To draw, make, accept, endorse, discount, execute, and issue
promissory notes, drafts, bills of exchange, warrants, bonds,
debentures, and other negotiable or transferable instruments and
evidences of indebtedness whether secured by mortgage or otherwise, as
well as to secure the same by mortgage or otherwise, so far as may be
permitted by the laws of the State of Delaware.
To purchase, receive, take, reacquire or otherwise acquire, own
and hold, sell, lend, exchange, reissue, transfer or otherwise dispose
of, pledge, use, cancel, and otherwise deal in and with its own shares
and other securities from time to time to such an extent and in such
manner and upon such terms as the Board of Directors of the
Corporation shall determine; provided that the Corporation shall not
use its funds or property for the purchase of its own shares of
capital stock when its capital is impaired or when such use would
-4-
cause any impairment of its capital, except to the extent permitted by
law.
To organize, as an incorporator, or cause to be organized under
the laws of the State of Delaware, or of any other state of the United
States of America, or of the District of Columbia, or of any
commonwealth, territory, dependency, colony, possession, agency or
instrumentality of the United States of America, or of any foreign
country, a corporation or corporations for the purpose of conducting
and promoting any business or purpose for which corporations may be
organized, and to dissolve, wind up, liquidate, merge or consolidate
any such corporation or corporations or to cause the same to be
dissolved, wound up, liquidated, merged or consolidated.
To conduct its business, promote its purposes, and carry on its
operations in any and all of its branches and maintain offices both
within and without the State of Delaware, in any and all States of the
United States of America, in the District of Columbia, and in any or
all commonwealths, territories, dependencies, colonies, possessions,
agencies or instrumentalities of the United States of America and of
foreign governments.
To promote and exercise all or any part of the foregoing
purposes and powers in any and all parts of the world, and to conduct
its business in all or any of its branches as principal, agent,
broker, factor, contractor, and in any other lawful capacity, either
alone or through or in conjunction with any corporations,
associations, partnerships, firms, trustees, syndicates, individuals,
organizations, and other entities in any part of the world, and, in
conducting its business and promoting any of its purposes, to maintain
offices, branches and agencies in any part of the world, to make and
perform any contracts and to do any acts and things, and to carry on
any business, and to exercise any powers and privileges suitable,
convenient, or proper for the conduct, promotion, and attainment of
any of the business and purposes herein specified or which at any time
may be incidental thereto or may appear conducive to, or expedient
for, the accomplishment of any of such business and purposes and which
might be engaged in or carried on by a corporation incorporated or
organized under the General Corporation Law of the State of Delaware,
and to have and exercise all of the powers conferred by the laws of
the State of Delaware upon corporations incorporated or organized
under the General Corporation Law of the State of Delaware.
The foregoing provisions of this Article THIRD shall be
construed both as purposes and powers and each as an independent
purpose and power. The foregoing enumeration of specific purposes and
powers of the Corporation, and the purposes and powers herein
specified shall, except when otherwise provided in this Article THIRD,
be in no wise limited or restricted by reference to, or interference
from the terms of any provision of this Article of this Certificate of
Incorporation; provided, that the Corporation shall not conduct any
business, promote any purpose, or exercise any power or privilege
within the State of Delaware which, under the laws thereof, the
Corporation may not lawfully conduct, promote, or exercise.
-5-
FOURTH: The total number of shares of stock which the
Corporation shall have the authority to issue is Twenty-One Million
(21,000,000), consisting of 20,000,000 shares of common stock, $.01
par value per share, and 1,000,000 shares of preferred stock, $.01 par
value per share.
FIFTH: The Board of Directors is hereby authorized to issue
the Preferred Stock in series, and to fix and determine the voting
powers, designate preferences, rights, qualifications and other terms
of the Preferred Stock pursuant to Section 151 of the Delaware General
Corporation Law.
SIXTH: By resolution adopted by the Board of Directors of the
Corporation (hereinafter called the "Board of Directors" or the
"Board") at a meeting of the Board duly held on February 23, 1996, the
Board of Directors has created a series of Preferred Stock with the
designation and number of shares and the relative rights, preferences,
and limitations thereof as follows:
Series A Junior Participating Cumulative Preferred Stock:
Section 1. Designation and Amount. The shares of such
series shall be designated as "Series A Junior Participating
Cumulative Preferred Stock" (the "Series A Preferred Stock").
The number of shares initially constituting the Series A
Preferred Stock shall be 200,000; provided, however, that if more
than a total of 200,000 shares of Series A Preferred Stock shall
be issuable upon the exercise of Rights (the "Right") issued
pursuant to the Rights Agreement dated as of February 23, 1996,
between the Corporation and Continental Stock Transfer & Trust
Company, as Rights Agent (the "Rights Agreement"), the Board of
Directors of the Corporation, pursuant to Section 151(g) of the
General Corporation Law of the State of Delaware, shall direct by
resolution or resolutions that a certificate be properly
executed, acknowledged, filed and recorded, in accordance with
the provisions of Section 103 thereof, providing for the total
number of shares of Series A Preferred Stock authorized to be
issued to be increased (to the extent that the Certificate of
Incorporation then permits) to the largest number of whole shares
(rounded up to the nearest whole number) issuable upon exercise
of such Rights. Such number of shares may be decreased by
resolution of the Board of Directors; provided, that no decrease
shall reduce the number of shares of Series A Preferred Stock to
a number less than the number of shares then outstanding plus the
number of shares reserved for issuance upon the exercise of
outstanding options, rights or warrants or upon the conversion of
any outstanding securities issued by the Corporation convertible
into Series A Preferred Stock.
Section 2. Dividends and Distributions.
(A) Subject to the rights of the holders of any shares of
any series of Preferred Stock (or any similar stock) ranking
prior and superior to the Series A Preferred Stock with
respect to dividends, the holders of shares of Series A
Preferred Stock, in preference to the holders of Common Stock,
-6-
par value $.01 per share (the "Common Stock"), of the
Corporation, and of any other junior stock, shall be entitled
to receive, when, as and if declared by the Board of Directors
out of funds legally available for the purpose, quarterly
dividends payable in cash on the first day of March, June,
September and December in each year (each such date being
referred to herein as a "Quarterly Dividend Payment Date"),
commencing on the first Quarterly Dividend Payment Date after
the first issuance of a share or fraction of a share of Series
A Preferred Stock, in an amount per share (rounded to the
nearest cent) equal to the greater of (a) $1 or (b) subject to
the provision for adjustment hereinafter set forth, 100 times
the aggregate per share amount of all cash dividends, and 100
times the aggregate per share amount (payable in kind) of all
non-cash dividends or other distributions, other than a
dividend payable in shares of Common Stock or a subdivision of
the outstanding shares of Common Stock (by reclassification or
otherwise), declared on the Common Stock since the immediately
preceding Quarterly Dividend Payment Date or, with respect to
the first Quarterly Dividend Payment Date, since the first
issuance of any share or fraction of a share of Series A
Preferred Stock. In the event the Corporation shall at any
time declare or pay any dividend on the Common Stock payable
in shares of Common Stock (by reclassification or otherwise
than by payment of a dividend in shares of Common Stock) into
a greater or lesser number of shares of Common Stock, then in
each such case the amount to which holders of shares of Series
A Preferred Stock were entitled immediately prior to such
event under clause (b) of the preceding sentence shall be
adjusted by multiplying such amount by a fraction, the
numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator
of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(B) The Corporation shall declare a dividend or
distribution on the Series A Preferred Stock as provided in
paragraph (A) of this Section immediately after it declares a
dividend or distribution on the Common Stock (other than a
dividend payable in shares of Common Stock); provided that, in
the event no dividend or distribution shall have been declared
on the Common Stock during the period between any Quarterly
Dividend Payment Date and the next subsequent Quarterly
Dividend Payment Date, a dividend of $1 per share on the
Series A Preferred Stock shall nevertheless be payable on such
subsequent Quarterly Dividend Payment Date.
(C) Dividends shall begin to accrue and be cumulative on
outstanding shares of Series A Preferred Stock from the
Quarterly Dividend Payment Date next preceding the date of
issue of such shares, unless the date of issue of such shares
is prior to the record date for the first Quarterly Dividend
Payment Date, in which case dividends on such shares shall
begin to accrue from the date of issue of such shares, or
unless the date of issue is a Quarterly Dividend Payment Date
or is a date after the record date for the determination of
-7-
holders of shares of Series A Preferred Stock entitled to
receive a quarterly dividend and before such Quarterly
Dividend Payment Date, in either of which events such
dividends shall begin to accrue and be cumulative from such
Quarterly Dividend Payment Date. Accrued but unpaid dividends
shall not bear interest. Dividends paid on the shares of
Series A Preferred Stock in an amount less than the total
amount of such dividends at the time accrued and payable on
such shares shall be allocated pro rata on a share-by-share
basis among all such shares at the time outstanding. The
Board of Directors may fix a record date for the determination
of holders of shares of Series A Preferred Stock entitled to
receive payment of a dividend or distribution declared
thereon, which record date shall be not more than 60 days
prior to the date fixed for the payment thereof, and shall be
the same as the record date for any corresponding dividend or
distribution on the Common Stock.
(D) So long as any shares of the Series A Preferred Stock
are outstanding, no dividends or other distributions shall be
declared, paid or distributed, or set aside for payment or
distribution, on the Common Stock unless, in each case, the
dividend required by this Section 2 to be declared on the
Series A Preferred Stock shall have been declared.
(E) The holders of the shares of Series A Preferred Stock
shall not be entitled to receive any dividends or other
distributions except as provided herein.
Section 3. Voting Rights. The holders of shares of Series
A Preferred Stock shall have the following voting rights:
(A) Subject to the provision for adjustment hereinafter set
forth, each share of Series A Preferred Stock shall entitle
the holder thereof to 100 votes on all matters submitted to a
vote of the stockholders of the Corporation. In the event the
Corporation shall at any time declare or pay any dividend on
the Common Stock payable in shares of Common Stock, or effect
a subdivision or combination or consolidation of the
outstanding shares of Common Stock (by reclassification or
otherwise than by payment of a dividend in shares of Common
Stock into a greater or lesser number of shares of Common
Stock), then in each such case the number of votes per share
to which holders of shares of Series A Preferred Stock were
entitled immediately prior to such event shall be adjusted by
multiplying such number by a fraction, the numerator of which
is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is
the number of shares of Common Stock that were outstanding
immediately prior to such event.
(B) Except as otherwise provided herein, in any other
Certificate of Designations creating a series of Preferred
Stock or any similar stock, or by law, the holders of shares
of Series A Preferred Stock and the holders of shares of
Common Stock and any other capital stock of the Corporation
-8-
having general voting rights shall vote together as one class
on all matters submitted to a vote of stockholders of the
Corporation.
(C) If, at the time of any annual meeting of stockholders
for the election of directors, the equivalent of six quarterly
dividends (whether or not consecutive) payable on any share or
shares of Series A Preferred Stock are in default, the number
of directors constituting the Board of Directors of the
Corporation shall be increased by two. In addition to voting
together with the holders of Common Stock for the election of
other directors of the Corporation, the holders of record of
the Series A Preferred Stock, voting separately as a class to
the exclusion of the holders of Common Stock, shall be
entitled at said meeting of stockholders (and at each
subsequent annual meeting of stockholders), unless all
dividends in arrears have been paid or declared and set apart
for payment prior thereto, to vote for the election of two
directors of the Corporation, the holders of any Series A
Preferred Stock being entitled to cast that number of votes
per share of Series A Preferred Stock as specified in clause
(A) of this Section 3. Until the default in payments of all
dividends which permitted the election of said directors shall
cease to exist, any director who shall have been so elected
pursuant to the next preceding sentence may be removed at any
time, either with or without cause, only by the affirmative
vote of the holders of the shares of Series A Preferred Stock
at the time entitled to cast a majority of the votes entitled
to be cast for the election of any such director at a special
meeting of such holders called for that purpose, and any
vacancy thereby created may be filled by the vote of such
holders. If and when such default shall cease to exist, the
holders of the Series A Preferred Stock shall be divested of
the foregoing special voting rights, subject to revesting in
the event of each and every subsequent like default in
payments of dividends. Upon the termination of the foregoing
special voting rights, the terms of office of all persons who
may have been elected directors pursuant to said special
voting rights shall forthwith terminate, and the number of
directors constituting the Board of Directors shall be reduced
by two. The voting rights granted by this Section 3(C) shall
be in addition to any other voting rights granted to the
holders of the Series A Preferred Stock in this Section 3.
(D) Except as set forth herein, or as otherwise provided by
law, holders of Series A Preferred Stock shall have no special
voting rights and their consent shall not be required (except
to the extent they are entitled to vote with holders of Common
Stock as set forth herein) for taking any corporate action.
Section 4. Certain Restrictions.
(A) Whenever quarterly dividends or other dividends or
distributions payable on the Series A Preferred Stock as
provided in Section 2 are in arrears, thereafter and until all
accrued and unpaid dividends and distributions, whether or not
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declared, on shares of Series A Preferred Stock outstanding
shall have been paid in full, the Corporation shall not:
(i) declare or pay dividends, or make any other
distributions, on any shares of stock ranking junior
(either as to dividends or upon liquidation, dissolution or
winding up) to the Series A Preferred Stock;
(ii) declare or pay dividends, or make any other
distributions, on any shares of stock ranking on a parity
(either as to dividends or upon liquidation, dissolution or
winding up) with the Series A Preferred Stock, except
dividends paid ratably on the Series A Preferred Stock and
all such parity stock on which dividends are payable or in
arrears in proportion to the total amounts to which the
holders of all such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for
consideration shares of any stock ranking junior (either as
to dividends or upon liquidation, dissolution or winding
up) to the Series A Preferred Stock, provided that the
Corporation may at any time redeem, purchase or otherwise
acquire shares of any such junior stock in exchange for
shares of any stock of the Corporation ranking junior
(either as to dividends or upon dissolution, liquidation or
winding up) to the Series A Preferred Stock; or
(iv) redeem or purchase or otherwise acquire for
consideration any shares of Series A Preferred Stock, or
any shares of stock ranking on a parity with the Series A
Preferred Stock, except in accordance with a purchase offer
made in writing or by publication (as determined by the
Board of Directors) to all holders of such shares upon such
terms as the Board of Directors, after consideration of the
respective annual dividend rates and other relative rights
and preferences of the respective series and classes, shall
determine in good faith will result in fair and equitable
treatment among the respective series or classes.
() The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration
any shares of stock of the Corporation unless the Corporation
could, under paragraph (A) of this Section 4, purchase or
otherwise acquire such shares at such time and in such manner.
Section . Reacquired Shares. Any shares of Series A
Preferred Stock purchased or otherwise acquired by the
Corporation in any manner whatsoever shall be retired and
canceled promptly after the acquisition thereof. All such shares
shall upon their cancellation become authorized but unissued
shares of Preferred Stock and may be reissued as part of a new
series of Preferred Stock subject to the conditions and
restrictions on issuance set forth herein, in the Certificate of
Incorporation, or in any other Certificate of Designations
creating a series of Preferred Stock or any similar stock or as
otherwise required by law.
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Section 6. Liquidation, Dissolution or Winding Up. Upon
any liquidation, dissolution or winding up of the Corporation, no
distribution shall be made (1) to the holders of shares of stock
ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series A Preferred Stock
unless, prior thereto, the holders of shares of Series A
Preferred Stock shall have received $100 per share, plus an
amount equal to accrued and unpaid dividends and distributions
thereon, whether or not declared, to the date of such payment,
provided that the holders of shares of Series A Preferred Stock
shall be entitled to receive an aggregate amount per share,
subject to the provision for adjustment hereinafter set forth,
equal to 100 times the aggregate amount to be distributed per
share to holders of shares of Common Stock, or (2) to the holders
of shares of stock ranking on a parity (either as to dividends or
upon liquidation, dissolution or winding up) with the Series A
Preferred Stock, except distributions made ratably on the Series
A Preferred Stock and all such parity stock in proportion to the
total amounts to which the holders of all such shares are
entitled upon such liquidation, dissolution or winding up. In
the event the Corporation shall at any time declare or pay any
dividend on the Common Stock payable in shares of Common Stock,
or effect a subdivision or combination or consolidation of the
outstanding shares of Common Stock (by reclassification or
otherwise than by payment of a dividend in shares of Common
Stock) into a greater or lesser number of shares of Common Stock,
then in each such case the aggregate amount to which holders of
shares of Series A Preferred Stock were entitled immediately
prior to such event under the proviso in clause (1) of the
preceding sentence shall be adjusted by multiplying such amount
by a fraction the numerator of which is the number of shares of
Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that
were outstanding immediately prior to such event.
Section 7. Consolidation, Merger, etc. In case the
Corporation shall enter into any consolidation, merger,
combination or other transaction in which the shares of Common
Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, then in any such case
each share of Series A Preferred Stock shall at the same time be
similarly exchanged or changed into an amount per share, subject
to the provision for adjustment hereinafter set forth, equal to
100 times the aggregate amount of stock, securities, cash and/or
any property (payable in kind), as the case may be, into which or
for which each share of Common Stock is changed or exchanged. In
the event the Corporation shall at any time declare or pay any
dividend on the Common Stock payable in shares of Common Stock,
or effect a subdivision or combination or consolidation of the
outstanding shares of Common Stock (by reclassification or
otherwise than by payment of a dividend in shares of Common
Stock) into a greater or lesser number of shares of Common Stock,
then in each such case the amount set forth in the preceding
sentence with respect to the exchange or change of shares of
Series A Preferred Stock shall be adjusted by multiplying such
amount by a fraction, the numerator of which is the number of
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shares of Common Stock outstanding immediately after such event
and the denominator of which is the number of shares of Common
Stock that were outstanding immediately prior to such event. In
the event both this Section 7 and Section 2 appear to apply to a
transaction, this Section 7 shall control.
Section 8. No Redemption. The shares of Series A
Preferred Stock shall not be redeemable; provided, however, that
the Corporation may purchase or otherwise acquire outstanding
shares of Series A Preferred Stock in the open market or by offer
to any holder or holders of shares of Series A Preferred Stock.
Section 9. Rank. The Series A Preferred Stock shall rank,
with respect to the payment of dividends and the distribution of
assets, junior to all series of any other class of the
Corporation's Preferred Stock, unless the Board of Directors
shall specifically determine otherwise in fixing the powers,
preferences and relative, participating, optional and other
special rights of the shares of such series and the
qualifications, limitations and restrictions thereof.
Section 10. Fractional Shares. The Series A Preferred
Stock shall be issuable upon exercise of the Rights issued
pursuant to the Rights Agreement in whole shares or in any
fraction of a share that is one one-hundredths (1/100ths) of a
share or any integral multiple of such fraction which shall
entitle the holder, in proportion to such holder's fractional
shares, to receive dividends, exercise voting rights, participate
in distributions and to have the benefit of all other rights of
holders of Series A Preferred Stock. In lieu of fractional
shares, the Corporation, prior to the first issuance of a share
or a fraction of a share of Series A Preferred Stock, may elect
(l) to make a cash payment as provided in the Rights Agreement
for fractions of a share other than one one-hundredths (1/100ths)
of a share or any integral multiple thereof or (2) to issue
depository receipts evidencing such authorized fraction of a
share of Series A Preferred Stock pursuant to an appropriate
agreement between the Corporation and a depository selected by
the Corporation; provided that such agreement shall provide that
the holders of such depository receipts shall have all the
rights, privileges and preferences to which they are entitled as
holders of the Series A Preferred Stock.
Section 11. Amendment. The Certificate of Incorporation of
the Corporation shall not be amended in any manner which would
materially alter or change the powers, preferences or special
rights of the Series A Preferred Stock so as to affect them
adversely without the affirmative vote of the holders of at least
two-thirds of the outstanding shares of Series A Preferred Stock,
voting together as a single class.
SEVENTH: No holder of any of the shares of the stock of the
Corporation, whether now or hereafter authorized and issued, shall be
entitled as of right to purchase or subscribe for (i) any unissued
stock of any class, or (ii) any additional shares of any class to be
issued by reason of any increase in the authorized capital stock of
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the Corporation of any class, or (iii) bonds, certificates of
indebtedness, debentures or other securities convertible into stock of
the Corporation, or carrying any right to purchase stock of any class,
but any such unissued stock or such additional authorized issue of any
stock or of other securities convertible into stock, or carrying any
right to purchase stock, may be issued and disposed of pursuant to
resolution of the Board of Directors to such persons, firms,
corporation or associations and upon such terms as may be deemed
advisable by the Board of Directors in the exercise of its discretion.
EIGHTH: The Corporation is to have perpetual existence.
NINTH: Whenever a compromise or arrangement is proposed
between the Corporation and its creditors or any class of them and/or
between the Corporation and its stockholders or any class of them, any
court of equitable jurisdiction within the State of Delaware may, on
the application in a summary way of the Corporation or of any creditor
or stockholder thereof or on the application of any receiver or
receivers appointed for the Corporation under the provisions of
Section 291 of Title 8 of the Delaware Code or on the application of
trustees in dissolution of Section 279 of Title 8 of the Delaware Code
order a meeting of the creditors or class of creditors, and/or the
stockholders or class of stockholders of the Corporation, as the case
may be to be summoned in such manner as the said court directs. If a
majority in number representing three-fourth in value of the creditors
or class of creditors, and/or of the stockholders or class of
stockholders of the Corporation, as the case may be, agree to any
compromise or arrangement and to any reorganization of the Corporation
as consequence of such compromise or arrangement, the said compromise
or arrangement and the said reorganization shall, if sanctioned by the
court to which the said application has been made, be binding on all
the creditors or class of creditors, and/or on all the stockholders or
class of stockholders, of the Corporation, as the case may be, and
also on the Corporation.
TENTH: For the management of the business and for the conduct
of the affairs of the Corporation, and in further definition,
limitation and regulation of the powers of the corporation and of its
directors and of its stockholders or any class thereof, as the case
may be, it is further provided:
(a) The management of the business and the conduct of the
affairs of the Corporation, including the election of the Chairman of
the Board of Directors, if any, the President, the Treasurer, the
Secretary, and other principal officers of the Corporation, shall be
vested in its Board of Directors. The number of directors which shall
constitute the whole Board of Directors shall be fixed by, or in the
manner provided in, the By-Laws. The phrase "whole Board" and the
phrase "total number of directors" shall be deemed to have the same
meaning, to wit, the total number of directors which the Corporation
would have if there were no vacancies. No election of directors need
be by written ballot.
(b) The power to make, alter, or repeal the By-Laws, and to
adopt any new By-Law, except a By-Law classifying directors for
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election for staggered terms, shall be vested in the Board of
Directors.
(c) Whenever the Corporation shall be authorized to issue only
one class of stock, each outstanding share shall entitle the holder
thereof to notice of, and the right to vote at, any meeting of
stockholders. Whenever the Corporation shall be authorized to issue
more than one class of stock, no outstanding share of any class of
stock which is denied voting power under the provisions of the
Certificate of Incorporation shall entitle the holder thereof to
notice of, and the right to vote at, any meeting of stockholders,
except as the provisions of paragraph (c) (2) of Section 242 of the
General Corporation Law shall otherwise require.
(d) In lieu of taking any permissive or requisite action by vote
at a meeting of stockholders, any such vote and any such meeting may
be dispensed with if stockholders holding at least the minimum
percentage of the votes required to be cast to authorize any such
action under the provisions of the General Corporation Law shall
consent in writing, setting forth the action so taken, to any such
corporate action being taken; provided, that prompt notice be given to
all stockholders entitled to vote on any such action who have not
consented in writing.
ELEVENTH: No contract or transaction between the Corporation
and one or more of its directors or officers, or between the
Corporation and any other corporation, partnership, association, or
other organization in which one or more of its directors or officers
are directors or officers or have a financial interest, shall be void
solely for this reason, or solely because the director or officer is
present at, or participates in, the meeting of the Board of Directors
or a committee thereof which authorizes the contract or transaction,
or solely because his or their votes are counted for such purpose, if:
(i) The material facts as to his interest and as to the
contract or transaction are disclosed or are known to the Board
of Directors or the committee, and the Board or committee in
good faith authorizes the contract or transaction by a vote
sufficient for such purpose without counting the vote of the
interested director or directors; or
(ii) The material facts as to his interest and as to the
contract or transaction are disclosed or are known to the
stockholders entitled to vote thereon, and the contract or
transaction is specifically approved in good faith by vote of
the stockholders; or
(iii) The contract or transaction is fair as to the
Corporation as of the time it is authorized, approved or
ratified, by the Board of Directors, a committee thereof, or the
stockholders.
Common or interested directors may be counted in determining the
presence of a quorum at a meeting of the Board of Directors or of a
committee which authorizes the contract or transaction.
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TWELFTH: (a) The Corporation shall have power to indemnify any
person who was or is a party or is threatened to be made a party to
any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than
an action by or in the right of the Corporation) by reason of the fact
that he is or was a director, officer, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as
a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against
expenses (including attorney's fees), judgments, fines and amounts
paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if he acted in good
faith and in a manner he reasonably believed to be in, or not opposed
to, the best interests of the Corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. The termination of any action, suit or
proceeding by judgment, order, settlement, conviction, or upon a plea
of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner
which he reasonably believed to be in, or not opposed to, the best
interests of the Corporation, and, with respect to any criminal action
or proceeding, had reasonable cause to believe that his conduct was
unlawful.
(b) The Corporation shall have power to indemnify any person who
was or is party or is threatened to be made a party to any threatened
pending or completed action or suit by or in the right of the
Corporation to procure a judgment in its favor by reason of the fact
that he is or was a director, officer, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as
a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he
acted in good faith and in a manner he reasonably believed to be in,
or not opposed to, the best interests of the Corporation and except
that no indemnification shall be made in respect of any claim, issue
or matter as to which such person shall have been adjudged to be
liable for negligence or misconduct in the performance of his duty to
the Corporation unless, and only to the extent that, the Court of
Chancery or the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of
liability, but in view of all the circumstances of the case, such
person is fairly and reasonably entitled to indemnity for such
expenses which the Court of Chancery or such other court shall deem
proper.
(c) To the extent that a director, officer, employee or agent of
the Corporation has been successful on the merits or otherwise in
defense of any action, suit or proceeding referred to in paragraphs
(a) and (b), or in defense of any claim, issue or matter therein, he
shall be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection therewith.
(d) Any indemnification under paragraphs (a) and (b) (unless
ordered by a court) shall be made by the Corporation only as
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authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper
in the circumstances because he has met the applicable standard of
conduct set forth in paragraphs (a) and (b). Such determination shall
be made (1) by the Board of Directors by a majority vote of a quorum
consisting of director who were not parties to such action, suit or
proceeding, or (2) if such a quorum is not obtainable, or, even if
obtainable a quorum of disinterested directors so directs, by
independent legal counsel in a written opinion, or (3) by the
stockholders.
(e) Expenses incurred in defending a civil or criminal action,
suit or proceeding may be paid by the Corporation in advance of the
final disposition of such action, suit or proceeding as authorized by
the Board of Directors in the specific case upon receipt of an
undertaking by or on behalf of the director, officer, employee or
agent to repay such amount unless it shall ultimately be determined
that he is entitled to be indemnified by the Corporation as authorized
in this Article.
(f) The indemnification provided by this Article shall not be
deemed exclusive of any other rights to which those seeking
indemnification may be entitled under any By-Law, agreement, vote of
stockholders or disinterested directors or otherwise, both as to
action in his official capacity and as to action in another capacity
while holding such office, and shall continue as to a person who has
ceased to be a director, officer, employee or agent and shall inure to
the benefit of the heirs, executors and administrators of such a
person.
(g) The Corporation shall have power to purchase and maintain
insurance on behalf of any person who is or was a director, officer,
employee or agent of the Corporation, or is or was serving at the
request of the Corporation as a director, officer, employee or agent
of another corporation, partnership, joint venture, trust or other
enterprise against any liability asserted against and incurred by him
in any such capacity or arising out of his status as such, whether or
not the Corporation would have the power to indemnify him against such
liability under the provisions of this Article.
(h) The personal liability of the directors of the Corporation
is hereby eliminated to the fullest extent permitted by paragraph 7 of
subsection (b) of Section 102 of the General Corporation Law of the
State of Delaware, as same may be amended and supplemented.
THIRTEENTH: To the fullest extent permitted by the Delaware
General Corporation Law as the same exists or may hereafter be
amended, a director of the Corporation shall not be liable to the
corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director.
FOURTEENTH: From time to time any of the provisions of this
Certificate of Incorporation may be amended, altered or repealed, and
other provisions authorized by the laws of the State of Delaware at
the time in force may be added or inserted in the manner and at the
time prescribed by said laws, and all rights at any time conferred
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upon the stockholders of the Corporation by this Certificate of
Incorporation are granted subject to the provisions of this Article
FOURTEENTH.
IN WITNESS WHEREOF, this Restated Certificate of Incorporation
is executed on behalf of the Corporation by its President and
Secretary this 24th day of June, 1997.
/s/ Sam J. Milstein
Sam J. Milstein, Ph.D.
President, Chief Scientific
Officer and Secretary
- ------------------------------------------------------------------------------
Exhibit 10
1991 Stock Option Plan, as amended
- ------------------------------------------------------------------------------
Exhibit 10
EMISPHERE TECHNOLOGIES, INC.
1991 STOCK OPTION PLAN
as amended
January 29, 1997
1. Purpose. The purpose of the Emisphere Technologies, Inc. 1991
Stock Option Plan (the "Plan") is to enable Emisphere Technologies,
Inc. (the "Company") and its stockholders to secure the benefits of
common stock ownership by key personnel of the Company and its subsid-
iaries. The Board of Directors of the Company (the "Board") believes
that the granting of options under the Plan will foster the Company's
ability to attract, retain and motivate those individuals who will be
largely responsible for the continued profitability and long-term
future growth of the Company.
2. Stock Subject to the Plan. The Company may issue and sell a
total of 1,400,000 shares of its common stock, $.01 par value (the
"Common Stock"), pursuant to the Plan. Such shares may be either
authorized and unissued or held by the Company in its treasury. New
options may be granted under the Plan with respect to shares of Common
Stock which are covered by the unexercised portion of an option which
has terminated or expired by its terms, by cancellation or otherwise.
3. Administration. The Plan will be administered by a committee
(the "Committee") consisting of at least two directors appointed by
and serving at the pleasure of the Board. If a Committee is not so
established, the Board will perform the duties and functions ascribed
herein to the Committee. To the extent required by the applicable
provisions of Rule 16(b)-3 under the Securities Exchange Act of 1934,
no member of the Committee shall have received an option under the
Plan or any other plan within one year before his or her appointment
or such other period as may be prescribed by said Rule. Subject to
the provisions of the Plan, the Committee, acting in its sole and
absolute discretion, will have full power and authority to grant
options under the Plan, to interpret the provisions of the Plan and
option agreements made under the Plan, to supervise the administration
of the Plan, and to take such other action as may be necessary or
desirable in order to carry out the provisions of the Plan. A
majority of the members of the Committee will constitute a quorum.
The Committee may act by the vote of a majority of its members present
at a meeting at which there is a quorum or by unanimous written
consent. The decision of the Committee as to any disputed question,
including questions of construction, interpretation and
administration, will be final and conclusive on all persons. The
Committee will keep a record of its proceedings and acts and will keep
or cause to be kept such books and records as may be necessary in
connection with the proper administration of the Plan.
4. Eligibility. Options may be granted under the Plan to present
or future key employees of the Company or a subsidiary of the Company
(a "Subsidiary") within the meaning of Section 424(f) of the Internal
Revenue Code of 1986 (the "Code"), and to consultants to the Company
or a Subsidiary who are not employees. Options may not be granted to
directors of the Company or a Subsidiary who are not also employees of
or consultants to the Company and/or a Subsidiary. Subject to the
provisions of the Plan, the Committee may from time to time select the
persons to whom options will be granted, and will fix the number of
shares covered by each such option and establish the terms and
conditions thereof (including, without limitation, exercise price and
restrictions on exercisability of the option or on the shares of
Common Stock issued upon exercise thereof and whether or not the
option is to be treated as an incentive stock option within the
meaning of Section 422 of the Code (an "Incentive Stock option")).
5. Terms and Conditions of Options. Each option granted under the
Plan will be evidenced by a written agreement in a form approved by
the Committee. Each such option will be subject to the terms and
conditions set forth in this paragraph and such additional terms and
conditions not inconsistent with the Plan (and, in the case of an
Incentive Stock Option, not inconsistent with the provisions of the
Code applicable thereto) as the Committee deems appropriate.
(a) Option Exercise Price. In the case of an option which is
not treated as an Incentive Stock Option, the exercise price per
share may not be less than the par value of a share of Common
Stock on the date the option is granted; and, in the case of an
Incentive Stock Option, the exercise price per share may not be
less than 100% of the fair market value of a share of Common Stock
on the date the option is granted (110% in the case of an optionee
who, at the time the option is granted, owns stock possessing more
than 10% of the total combined voting power of all classes of
stock of the Company or a Subsidiary (a "ten percent
shareholder")). For purposes hereof, the fair market value of a
share of Common Stock on any date will be equal to the closing
sale price per share as published by a national securities
exchange on which shares of the Common Stock are traded on such
date or, if there is no sale of Common Stock on such date, the
average of the bid and asked prices on such exchange at the close
of trading on such date or, if shares of the Common Stock are not
listed on a national securities exchange on such date, the average
of the bid and asked prices in the over the counter market at the
close of trading on such date, or if the Common Stock is not
traded on a national securities exchange or the over the counter
market, the fair market value of a share of the Common Stock on
such date as determined in good faith by the Committee.
(b) Option Period. The period during which an option may be
exercised will be fixed by the Committee and will not exceed ten
years from the date the option is granted (five years in the case
of an Incentive Stock Option granted to a "ten percent
shareholder").
(c) Exercise of Options. No option will become exercisable
unless the person to whom the option was granted remains in the
continuous employ or service of the Company or a Subsidiary for at
least one year (or for such other period as the Committee may
designate) from the date the option is granted. Subject to
earlier termination of the option as provided herein, unless the
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Committee determines otherwise, the option will become exercisable
in accordance with the following schedule based upon the number of
full years of the optionee's continuous employment or service with
the Company or a Subsidiary following the date of grant:
Full Years of Incremental Cumulative
Continuous Percentage Percentage
Employment/ of Option of Option
Service Exercisable Exercisable
Less than 1 0% 0%
1... 20% 20%
2... 20% 40%
3... 20% 60%
4... 20% 80%
5 or more 20% 100%
All or part of the exercisable portion of an option may be
exercised at any time during the option period, except that,
without the consent of the Committee, no partial exercise of an
option may be for less than 100 shares. An option may be
exercised by transmitting to the Company (1) a written notice
specifying the number of shares to be purchased, and (2) payment
of the exercise price (or, if applicable, delivery of a secured
obligation therefor), together with the amount, if any, deemed
necessary by the Committee to enable the Company to satisfy its
income tax withholding obligations with respect to such exercise
(unless other arrangements acceptable to the Company are made with
respect to the satisfaction of such withholding obligations).
(d) Payment of Exercise Price. The purchase price of shares
of Common Stock acquired pursuant to the exercise of an option
granted under the Plan may be paid in cash and/or such other form
of payment as may be permitted under the option agreement,
including, without limitation, previously-owned shares of Common
Stock. The Committee may permit the payment of all or a portion of
the purchase price in installments (together with interest) over a
period of not more than five years.
(e) Rights as a Stockholder. No shares of Common Stock will
be issued in respect of the exercise of an option granted under the
Plan until full payment therefor has been made (and/or provided for
where all or a portion of the purchase price is being paid in
installments). The holder of an option will have no rights as a
stockholder with respect to any shares covered by an option until
the date a stock certificate for such shares is issued to him or
her. Except as otherwise provided herein, no adjustments shall be
made for dividends or distributions of other rights for which the
record date is prior to the date such stock certificate is issued.
(f) Nontransferability of Options. No option granted under
the Plan may be assigned or transferred except by will or by the
applicable laws of descent and distribution; and each such option
may be exercised during the optionee's lifetime only by the
optionee.
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(g) Termination of Employment or Other Service. If an
optionee ceases to be employed by or to perform services for the
Company and any Subsidiary for any reason other than death or
disability (defined below), then each outstanding option granted to
him or her under the Plan will terminate on the date three months
after the date of such termination of employment or service (or, if
earlier, the date specified in the option agreement). If an
optionee's employment or service is terminated by reason of the
optionee's death or disability (or if the optionee's employment or
service is terminated by reason of his or her disability and the
optionee dies within one year after such termination of employment
or service), then each outstanding option granted to the optionee
under the Plan will terminate on the date one year after the date
of such termination of employment or service (or one year after the
later death of a disabled optionee) or, if earlier, the date
specified in the option agreement. For purposes hereof, the term
"disability" means the inability of an optionee to perform the
customary duties of his or her employment or other service for the
Company or a Subsidiary by reason of a physical or mental
incapacity which is expected to result in death or be of indefinite
duration.
(h) Incentive Stock Options. In the case of an Incentive
Stock Option granted under the Plan, at the time the option is
granted, the aggregate fair market value (determined at the time of
grant) of the shares of Common Stock with respect to which
Incentive Stock Options are exercisable for the first time by the
optionee during any calendar year may not exceed $100,000.
(i) Other Provisions. The Committee may impose such other
conditions with respect to the exercise of options, including,
without limitation, any conditions relating to the application of
federal or state securities laws, as it may deem necessary or
advisable.
6. Capital Changes, Reorganization, Sale.
(a) Adjustments Upon Changes in Capitalization. The aggregate
number and class of shares for which options may be granted under
the Plan, the number and class of shares covered by each
outstanding option and the exercise price per share shall all be
adjusted proportionately for any increase or decrease in the number
of issued shares of Common Stock resulting from a split-up or
consolidation of shares or any like capital adjustment, or the
payment of any stock dividend.
(b) Cash, Stock or Other Property for Stock. Except as
provided in subparagraph (c) below, upon a merger (other than a
merger of the Company in which the holders of Common Stock
immediately prior to the merger have the same proportionate
ownership of Common Stock in the surviving corporation immediately
after the merger), consolidation, acquisition of property or stock,
separation, reorganization (other than a mere reincorporation or
the creation of a holding company) or liquidation of the Company,
as a result of which the shareholders of the Company receive cash,
stock or other property in exchange for or in connection with their
-4-
shares of Common Stock, any option granted hereunder shall
terminate, but the optionee shall have the right immediately prior
to any such merger, consolidation, acquisition of property or
stock, separation, reorganization or liquidation to exercise his or
her option in whole or in part, whether or not the vesting
requirements set forth in the option agreement have been satisfied.
(c) Conversion of Options on Stock for Stock Exchange. If the
shareholders of the Company receive capital stock of another
corporation ("Exchange Stock") in exchange for their shares of
Common Stock in any transaction involving a merger (other than a
merger of the Company in which the holders of Common Stock
immediately prior to the merger have the same proportionate
ownership of Common Stock in the surviving corporation immediately
after the merger), consolidation, acquisition of property or stock,
separation or reorganization (other than a mere reincorporation or
the creation of a holding company), all options granted hereunder
shall be converted into options to purchase shares of Exchange
Stock unless the Company and the corporation issuing the Exchange
Stock, in their sole discretion, determine that any or all such
options granted hereunder shall not be converted into options to
purchase shares of Exchange Stock but instead shall terminate in
accordance with the provisions of subparagraph (b) above. The
amount and price of converted options shall be determined by
adjusting the amount and price of the options granted hereunder in
the same proportion as used for determining the number of shares of
Exchange Stock the holders of the Common Stock receive in such
merger, consolidation, acquisition of property or stock, separation
or reorganization. Unless the Board determines otherwise, the
converted options shall be fully vested whether or not the vesting
requirements set forth in the option agreement have been satisfied.
(d) Fractional Shares. In the event of any adjustment in the
number of shares covered by any option pursuant to the provisions
hereof, any fractional shares resulting from such adjustment will
be disregarded and each such option will cover only the number of
full shares resulting from the adjustment.
(e) Determination of Board to be Final. All adjustments under
this paragraph 6 shall be made by the Board, and its determination
as to what adjustments shall be made, and the extent thereof, shall
be final, binding and conclusive. Unless an optionee agrees
otherwise, any change or adjustment to an Incentive Stock Option
shall be made in such a manner so as not to constitute a
"modification" as defined in Section 424(h) of the Code and so as
not to cause the optionee's Incentive Stock Option issued hereunder
to fail to continue to qualify as an Incentive Stock Option.
7. Amendment and Termination of the Plan. The Board may amend or
terminate the Plan. Except as otherwise provided in the Plan with
respect to equity changes, any amendment which would increase the
aggregate number of shares of Common Stock as to which options may be
granted under the Plan, materially increase the benefits under the
Plan, or modify the class of persons eligible to receive options under
the Plan shall be subject to the approval of the holders of a majority
of the Common Stock issued and outstanding. No amendment or
-5-
termination may affect adversely any outstanding option without the
written consent of the optionee.
8. No Rights Conferred. Nothing contained herein will be deemed
to give any individual any right to receive an option under the Plan
or to be retained in the employ or service of the Company or any
Subsidiary.
9. Governing Law. The Plan and each option agreement shall be
governed by the laws of the State of Delaware.
10. Term of the Plan. The Plan shall be effective as of November
12, 1991, the date on which it was initially adopted by the Board,
subject to the approval of the stockholders of the Company, which
approval was granted on January 21, 1992. The amendment to the Plan
increasing the number of shares available for issuance thereunder from
400,000 to 1,200,000 was adopted by the Board on May 9, 1994 and
approved by the stockholders of the Company on December 20, 1994. The
amendment to the Plan increasing the number of shares available for
issuance thereunder from 1,200,000 to 1,400,000 was adopted by the
Board on January 29, 1997 and approved by the stockholders of the
Company on March 20, 1997. The Plan will terminate on November 11,
2001, unless sooner terminated by the Board. The rights of optionees
under options outstanding at the time of the termination of the Plan
shall not be affected solely by reason of the termination and shall
continue in accordance with the terms of the option (as then in effect
or thereafter amended).
- -----------------------------------------------------------------------------
Exhibit 10
Stock Option Plan for Outside Directors, as amended
- -----------------------------------------------------------------------------
Exhibit 10
EMISPHERE TECHNOLOGIES, INC.
STOCK OPTION PLAN FOR OUTSIDE DIRECTORS
as amended
January 29, 1997
1. Purpose
The purpose of the Stock Option Plan for Outside Directors
(the "Plan") of Emisphere Technologies, Inc. (the "Company") is
to enable the Company to attract and compensate eligible
directors of the Company and to encourage the highest level of
performance by providing such persons with a proprietary interest
in the Company's success and progress.
2. Shares Subject to the Plan
The Company may issue and sell a maximum of 450,000 shares of
the Company's Common Stock, par value $.0l per share (the "Common
Stock"), pursuant to options granted under the Plan. Such shares
may include shares that have been subject to unexercised options,
whether terminated or expired by their terms, by cancellation or
otherwise.
3. Administration of the Plan
The Plan shall be administered by the Board of Directors of
the Company (the "Board") or by a committee of the Board
consisting of two or more members of the Board appointed by the
Board. The interpretation and construction by the Board or such
committee of any provisions of the Plan or of any other matters
related to the Plan shall be final. The Board or such committee
may from time to time adopt such rules and regulations for
carrying out the Plan as it may deem advisable. No member of the
Board shall be liable for any action or determination made in
good faith with respect to the Plan.
4. Eligibility
Options under the Plan shall be granted only to directors of
the Company who (i) are neither officers nor employees of the
Company or any of its subsidiaries, (ii) do not beneficially own
five percent or more of the Common Stock outstanding on the date
of grant and (iii) are not affiliated with any person referred to
in (i) or (ii) above.
5. Stock Option Grants
(a) Each eligible director who is first elected or
appointed to the Board on or after January 29, 1997 shall be
1
granted an option to purchase 35,000 shares of the Common Stock
on the date of such initial election or appointment.
(b) On the fifth anniversary of the date that is the later
of (i) each director's initial election or appointment to the
Board or (ii) April 29, 1992, and on the date every three years
thereafter, such director shall, if he or she is an eligible
director on such date and has continuously served as a director
since the date of such initial election or appointment, be
granted an option to purchase 21,000 shares of the Common Stock.
(c) All options granted under the Plan shall (i) have an
exercise price per share equal to the Fair Market Value of the
Common Stock as of the date of grant, (ii) expire ten years from
the date of grant and (iii) vest and become exercisable with
respect to 7,000 shares on each anniversary of the date of grant.
(d) As used herein, the Fair Market Value of the Common
Stock as of any date shall be (i) the closing price per share
thereof on such date on the American Stock Exchange or the New
York Stock Exchange, whichever exchange on which the Common Stock
is then admitted to trading, or otherwise on the Nasdaq National
Market if then quoted thereon, and (ii) if no such closing price
is available, the value as determined in good faith by the Board.
(e) Options granted under the Plan and held by directors
who were initially elected or appointed to the Board prior to
January 29, 1997 shall continue in full force and effect and
nothing hereunder shall adversely affect the rights of the
holders thereof.
6. Regulatory Compliance and Listing
The exercise of any option granted under the Plan may be
postponed by the Company for such period as may be required to
comply with federal securities laws, state "blue sky" laws, any
applicable listing requirements of any applicable securities
exchange or any other law or regulation applicable to the
issuance or delivery of shares of the Common Stock and the
Company shall not be obligated to issue or deliver any such
shares if such issuance or delivery would constitute a violation
of any law or any regulation of any governmental authority or
applicable securities exchange.
7. Change of Control
In the event of a "Change in Control of the Company," all
options granted under the Plan and outstanding at the time
thereof shall become immediately exercisable. A "Change in
Control of the Company" shall be deemed to have occurred if (i)
there is 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 Common Stock are
converted into cash, securities or other property, other than a
2
merger of the Company in which the holders of the 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, (ii) the stockholders of the Company approve any plan or
proposal for liquidation or dissolution of the Company, (iii) any
person (as such term is used in Section 13(d) and 14(d)(2) of the
Securities Exchange Act of 1934, as amended (the "Exchange
Act")), becomes the beneficial owner (within the meaning of Rule
13d-3 under the Exchange Act) of 40% or more of the Common Stock
outstanding other than pursuant to a plan or arrangement entered
in by such person and the Company or (iv) during any period of
two consecutive years, individuals who at the beginning of such
period constitute the entire Board 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.
8. Death and Other Cessation as Director
In the event the holder of an option granted under the Plan
dies, his or her estate, personal representative or beneficiary
may exercise such option, to the extent otherwise exercisable as
of the date of his or her death, within twelve months after that
date. In the event the holder of an option granted under the
Plan ceases to be a director of the Company for any reason other
than the director's death, such holder may exercise such option,
to the extent otherwise exercisable on the date he or she ceases
to be a director of the Company, within six months after that
date. In no event may an option be exercised after the date of
expiration thereof.
9. Stock Splits, Mergers, etc.
In the event of any stock split, stock dividend or similar
transaction which increases or decreases the number of shares of
the Common Stock outstanding, appropriate adjustment shall be
made by the Board, whose determination shall be final, to the
number of shares and exercise price per share under any options
outstanding. In the case of a merger, consolidation or similar
transaction which results in a replacement of the Common Stock
with stock of another corporation but does not constitute a
Change in Control of the Company, the Company will make a
reasonable effort, but shall not be required, to replace any
options granted under the Plan with comparable options to
purchase the stock of such other corporation, or will provide for
the immediate maturity of all options outstanding and the
termination of options not thereafter exercised within the time
period specified by the Board.
3
10. Transferability
An option granted under the Plan may not be assigned or
transferred except by will or the laws of descent and
distribution and may be exercised during a director's lifetime
only by the director.
11. Exercise of Options
The holder of an option granted under the Plan electing to
exercise the option shall deliver to the Company written notice
of such election, setting forth the number of shares of the
Common Stock with respect to which the option is being exercised,
together with payment of the option exercise price. The option
exercise price shall be paid in cash, check or shares of the
Common Stock. If shares of the Common Stock are tendered as
payment of the option exercise price, the value of such shares
shall be the Fair Market Value as of the date of exercise. If
such tender would result in the issuance of fractional shares of
the Common Stock, the Company shall instead return the difference
in cash or by check. The holder of an option under the Plan
shall have none of the rights of a stockholder with respect to
shares of the Common Stock covered by the option until the option
has been exercised and a stock certificate representing such
number of shares has been issued and delivered to him.
12. Term of Plan
The Plan shall terminate on January 29, 2007 and no option
shall be granted under the Plan after that date. Termination of
the Plan shall not affect options granted under the Plan prior to
termination.
13. No Obligation to Exercise or Right to Continue as a Director
The grant of an option under the Plan shall impose no
obligation on the director to exercise such option and nothing in
the Plan shall be deemed to create a right to continue as a
director or an obligation on the part of the Board to nominate
any director for reelection by the Company's stockholders.
14. Effectiveness of the Plan
The Plan was initially adopted by the Board on April 29, 1992
and approved by the stockholders of the Company on April 19,
1993. As amended and restated hereby, the Plan shall become
effective as of January 29, 1997, the date of its approval by the
Board, except that Section 5(b) hereof shall become effective
only upon approval by a majority of the total votes cast with
respect to shares of the Common Stock present in person or
represented by proxy at a meeting at which a quorum is present
and entitled to vote thereon, or by such greater percentage as
may from time to time be required under the laws of the State of
Delaware.
4
15. Amendment of the Plan
The Board may at any time and from time to time alter, amend,
suspend or terminate the Plan in whole or in part, provided,
however, that (i) no alteration, amendment, suspension or
termination shall adversely affect the rights of the holder of
any outstanding option granted under the Plan and (ii) any
amendment which must be approved by the stockholders of the
Company in order to ensure that option grants under the Plan
continue to be exempt transactions under Rule 16b-3 under the
Exchange Act or any successor provision or to comply with any
rule or regulation of a governmental authority, applicable
securities exchange or Nasdaq National Market shall not be
effective unless and until such stockholder approval has been
obtained in compliance with such rule or regulation.
16. Withholding of taxes
The Company shall have the right, prior to the delivery of
any certificate evidencing shares of the Common Stock acquired
upon exercise of an option, to require payment of an amount in
cash sufficient to satisfy any Federal, state, or local tax
withholding requirements.
5
- --------------------------------------------------------------------------
Exhibit 10
1995 Non-Qualified Stock Option Plan
- ----------------------------------------------------------------------------
Exhibit 10
EMISPHERE TECHNOLOGIES, INC.
1995 NON-QUALIFIED STOCK OPTION PLAN
as amended
January 29, 1997
1. Purpose
The purpose of the 1995 Non-Qualified Stock Option Plan (the
"Plan") of Emisphere Technologies, Inc. (the "Company") is to attract,
compensate and retain well qualified officers and other key executive
employees by providing them with an equity interest in the Company and
a stake in its success.
2. Shares Subject to the Plan
The Company may issue a total of 1,900,000 shares of its Common
Stock, par value $.01 per share (the "Common Stock"), pursuant to the
Plan. Such shares may include shares that have been subject to
unexercised options, whether terminated or expired by their terms, by
cancellation or otherwise.
3. Option Grants under the Plan
Option grants under the Plan may be made to present and future
officers and other key executive employees of the Company. Directors
of the Company who are not also employees of the Company or a
subsidiary shall not be eligible for an option grant under the Plan.
Each option shall be to purchase a number of shares of the Common
Stock pursuant to an option agreement setting forth the option
exercise price, option termination date, vesting period and other
terms and conditions as may be determined by the Committee (as defined
below) at the time of the grant. In no event may any option be
granted at an exercise price per share lower than the fair market
value per share on the date of grant or with an option exercise period
of more than ten years.
4. Administration
The Plan shall be administered by a committee (the "Committee")
designated by the Board of Directors of the Company and consisting of
two or more nonemployee directors. The Committee shall have the power
and authority as may be necessary to carry out the provisions of the
Plan, including the interpretation and construction of the Plan and
the grants made under the Plan, the adoption of such rules and
regulations as it may deem advisable and the termination of further
grants under the Plan. The Committee shall also have the total
discretion to determine the individuals to whom grants are to be made
under the Plan, the form of each grant, the number of shares of the
Common Stock subject thereto, the terms and conditions thereof and the
form of agreement reflecting the terms and conditions of the grant.
For purposes of option grants under the Plan, the fair market value of
the Common Stock on the date of grant shall be (i) the closing price
per share thereof on such date if traded on a national securities
exchange or the National Market System of NASDAQ, (ii) the average of
the bid and asked price thereof at the close of trading on such date
if traded on the over-the-counter market or (iii) as determined in
good faith by the Committee if not so traded.
5. Rights as a Stockholder
Until such time as an option granted under the Plan has been
exercised and the shares acquired thereby have been issued and
delivered pursuant to such exercise, the optionee shall have no rights
as a shareholder with respect to the shares subject to the option.
6. Nontransferability
Options granted under the Plan may not be assigned or transferred
except by will or by the laws of descent and distribution and are
exercisable during the lifetime of the optionee only by the optionee.
7. Compliance with Securities Laws
If any shares to be issued under the Plan have not been
registered under any applicable securities laws, the Company's
obligation to issue such shares shall be conditioned upon receipt of a
representation in writing that the optionee is acquiring such shares
for his or her own account and not with a view to the distribution
thereof and the certificate representing such shares shall bear a
legend in such form as the Company's counsel deems necessary or
desirable. In no event shall the Company be obligated to issue any
shares under the Plan if, in the opinion of the Company's counsel,
such issuance would result in a violation of any applicable securities
laws.
8. Stock Adjustments
(a) In the event of a stock dividend, stock split,
recapitalization, merger in which the Company is the surviving
corporation or other capital adjustment affecting the Common Stock, an
appropriate adjustment shall be made, as determined by the Board of
Directors of the Company, to the number of shares subject to the Plan
and the number of shares and the exercise price per share with respect
to any option outstanding under the Plan.
(b) In the event of the complete liquidation of the Company or
of a reorganization, consolidation or merger in which the Company is
not the surviving corporation, any option outstanding under the Plan
shall become fully and immediately exercisable unless either (i) the
Board of Directors of the Company otherwise modifies such option or
(ii) the surviving corporation issues or assumes a stock option
providing for equitable adjustment of the terms and conditions of the
option outstanding under the Plan.
9. Effectiveness of the Plan
The Plan was initially approved on January 5, 1996 by resolution
of the Board of Directors of the Company and became effective on
February 6, 1996 upon the approval by the stockholders of the Company.
The amendment to the Plan increasing the number of shares available
for issuance thereunder from 1,800,000 to 1,900,000 was approved by
the Board of Directors of the Company on January 29, 1997 and approved
by the stockholders of the Company on March 20, 1997.
10. Amendment of the Plan
The Board may at any time alter, amend, suspend or terminate the
Plan in whole or in part, provided, however, that (i) no alteration,
-2-
amendment, suspension or termination shall adversely affect the rights
of an optionee with respect to any outstanding option granted under
the Plan, (ii) the provisions of the Plan governing the terms of each
option grant shall not be amended more than once every six months,
other than to comport with changes in applicable law or the rules
thereunder and (iii) any material amendment to the Plan shall become
effective only upon approval of stockholders of the Company.
-3-
- -----------------------------------------------------------------------------
Exhibit 11
EMISPHERE TECHNOLOGIES, INC.
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
Fiscal Year Ended July 31,
-----------------------------------------------------------------------------------------------------
1995 1996 1997
-------------------------------- ----------------------------- --------------------------------
Primary Fully Primary Fully Primary Fully Diluted
Diluted Diluted
------------ ------------ ------------ ------------ ------------- --------------
Net loss $ (7,784,259) $(7,784,259) $(6,107,601) $ (6,107,601) $ 7,321,305 $ (7,321,305)
Interest earned on
excess proceeds 83,441
------------ ------------- ------------ ------------- ------------ --------------
Adjusted net loss $ (7,784,259) $ (7,784,259) $(6,107,601) $ (6,107,601) $ (7,321,305) $ (7,238,191)
============= ============== ============ ============= ============= ===============
Weighted average
number of common
shares outstanding 7,588,447 7,588,447 8,457,438 8,457,438 9,519,028 9,519,028
Shares issuable upon
exercise of outstanding
options and warrants 316,683 1,841,884 4,085,811
Shares assumed to be
repurchased under
the treasury stock method (144,254) (1,550,574) (2,138,075)
------------ ------------- ---------- ------------- ------------- ------------
Weighted average
number of common
shares used in
computing per
share data 7,588,447 7,760,876 8,457,438 8,748,748 9,519,028 11,466,764
============ =========== ========== ========= =========== ===========
Net loss per share $ (1.03) $ (1.00) $ (0.72) $ (0.70) $ (0.77) $ (0.63)
============= ============= ========== ========== =========== ===========
- -------------------------------------------------------------------------------
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements
of Emisphere Technologies, Inc. on Form S-8 (File Nos. 33-44516, 33-46026,
33-62226, 33-88598, 333-2751, and 333-29981) and Form S-3 (File Nos. 33-62224
and 333-23423) of our reports dated October 28, 1997 on our audits of the
financial statements and the financial statement schedule of Emisphere
Technologies, Inc. as of July 31, 1997 and 1996, and for each of the three years
in the period ended July 31, 1997, which reports are included in this Annual
Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
New York, New York
October 28, 1997
- -----------------------------------------------------------------------------
CONSENT OF INDEPENDENT CHARTERED ACCOUNTANTS
We consent to the incorporation by reference in the registration statements
of Emisphere Technologies, Inc. on Form S-8 (File Nos. 33-44516, 33-46026,
33-62226, 33-88598, 333-2751, and 333-29981) and Form S-3 (File Nos. 33-62224
and 333-23423) of our report dated October 28, 1997 on our audit of the
financial statements and the financial statement schedule of Ebbisham Ltd.
as of July 31, 1997 and 1996, and for the period ended July 31, 1997, which
report is included in this Annual Report on Form 10-K.
KPMG
Dublinn, Ireland
October 28, 1997