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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, 1998
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)
765 Old Saw Mill River Road
Tarrytown, New York 10591
(Address of principal executive (Zip Code)
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 (Sect. 229.405 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 by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
As of October 21, 1998, the aggregate market value of registrant's common
stock held by non-affiliates was approximately $81,000,000, based on a closing
sale price of $7.50 per share, and 10,999740 shares of registrant's common
stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Definitive proxy statement to be filed by the registrant on or before November
28, 1998...............................................................Part III
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.
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 its joint venture with
Elan Corporation plc ("Elan") for the development and commercialization of an
oral heparin and low molecular weight heparin product, its strategic alliance
with Eli Lilly and Company ("Lilly") for the development and commercialization
of certain of Lilly's therapeutic proteins and its research collaboration with
Novartis Pharma AG ("Novartis") to investigate the Company's technology for
oral delivery of two selected Novartis compounds; 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 and the quality, judgment and strategic decisions of management and
other personnel; uncertain availability of third-party reimbursement for
commercial medical products; general business and economic conditions; and
other factors referenced or incorporated by reference herein.
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 worldwide sales of the injectable formulations of these
compounds are over $5.0 billion and that the market for these compounds will
expand if they are available in oral form.
-2-
The Company's strategy is to facilitate the development of products utilizing
its drug delivery technologies by entering into collaboration agreements with
pharmaceutical companies. The Company's collaborations currently consist of a
joint venture with Elan to develop oral formulations of heparin products, a
strategic alliance with Lilly for the delivery of several proteins with a focus
in the area of endocrinology and a research collaboration with Novartis to
investigate the Company's technology for oral delivery of two selected Novartis
compounds.
Under the joint venture with Elan, the parties have formed Ebbisham Limited,
an Irish corporation owned 50% by Elan and 50% by the Company ("Ebbisham"), for
the purpose of exploiting Elan's drug delivery and formulation capabilities and
the Company's carrier technologies in the research, development and marketing
of oral formulations of heparin products. The Company has completed eight
Phase I clinical trials on behalf of Ebbisham, which trials have indicated that
an oral formulation of heparin was well tolerated with no unexpected adverse
drug reactions. In May 1998 the Company announced that it had initiated a
Phase II clinical study for the use of its oral heparin product for the
prevention of deep vein thrombosis. In August 1998 Elan and the Company each
contributed an additional $5 million to Ebbisham, resulting in total
contributions of $9.5 million by Elan and $5 million by the Company. As of
July 31, 1998, the Company's revenues from Elan or Ebbisham under the joint
venture agreements totaled $14.1 million. In addition, in May 1998 an
affiliate of Elan exercised warrants to purchase 250,000 shares of the
Company's Common Stock at an exercise price of $16.25 per share.
The strategic alliance with Lilly is intended to utilize the Company'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. The
agreement with Lilly grants Lilly options to license applicable carriers and
market the products utilizing the combined technologies. In March 1998 Lilly
exercised its options with respect to two of its therapeutic proteins, one in
the field of osteoporosis and the other in the area of endocrinology including
growth disorders. In September 1998 Lilly formally selected one of the
Company's proprietary carriers for clinical testing of an oral formulation of
Lilly's therapeutic protein for the treatment of osteoporosis. Upon completion
of all required toxicology testing, an Investigative New Drug application is
expected to be filed with the Food and Drug Administration.
The Company and Novartis entered into their research collaboration in
December 1997. It provides for an initial research collaboration period of at
least 12 months and an option on the part of Novartis to acquire an exclusive
license to use the Company's technologies for the development and
commercialization of oral formulations of the Novartis compounds. Upon
exercise of its option to acquire a technology license from the Company,
Novartis has the obligation (which may be waived by the Company) to purchase in
four tranches up to $16 million of the Company's Common Stock at prices based
on market prices at the time of exercise (subject to certain price limitations
with respect to the first tranch). Under the agreement, Novartis is to make
quarterly payments to the Company for work performed by the Company in
connection with the collaboration and is to make future payments in the event
certain milestones are achieved.
Business Strategy
The Company's objective is to become a leader in providing orally
administered therapeutic compounds that are not currently deliverable by oral
means. The Company's strategy to achieve its objective incorporates the
following principal elements:
-3-
- Identify appropriate therapeutic compounds that address large markets.
- Discover and design carriers for the oral delivery of the therapeutic
compounds identified.
- 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
that can be once-a-day versus multiple daily dosing. Such tablets are for
drugs that have already demonstrated oral absorption.
There is an emerging group of drug delivery companies, including the Company,
developing novel technologies that offer alternatives to the existing route for
administration of that drug. 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 administered predominantly
by injection.
Oral Drug Delivery
The Company believes that oral dosage forms of pharmaceuticals are 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.
- Poor Absorption of Drugs Through Epithelial 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.
-4-
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
renders 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
therapeutic's characteristics, the Company seeks to identify the optimal
carrier by in vitro and in vivo screening of the Company's 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 oral drug
delivery, including: (i) absorption of the drug in an appropriate 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, and 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 Company's carrier material in commercial quantities are
readily available.
-5-
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.
PRIMARY
PRODUCT CANDIDATE INDICATIONS
------------------------------------- ---------------
Heparins Clotting
Insulin Diabetes
Human Growth Hormone Growth
Calcitonin Osteoporosis
Human Parathyroid Hormone (analogues) Osteoporosis
Cromolyn Asthma/Allergy
Deferoxamine Iron Overload
Erythropoietin Anemia
Because the collaboration agreements with Lilly and Novartis require the
Company to keep confidential the identity of the compounds that are the subject
of those agreements, the information below is provided without giving effect to
those agreements. For a description of those agreements, see "Collaboration
Agreements".
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 Company has completed eight Phase I clinical trials with a liquid oral
heparin preparation, has initiated a Phase II clinical study for its oral
heparin preparation for the prevention of DVT and intends to pursue additional
clinical with initial on DVT in 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.
The Phase II clinical study, which was begun in May 1998, involves three arms
of approximately 40 patients each. Each patient will have undergone surgery
for hip replacement. Two different doses of the Company's oral heparin
formulation are being compared to a dose of heparin administered
subcutaneously. The study is being conducted in the United States. The
objective of the study is to demonstrate that orally administered heparin
utilizing the Company's proprietary technology is well-tolerated and is
comparable to heparin administered subcutaneously in preventing deep vein
thrombosis.
In March 1996, the Company submitted an investigational new drug ("IND")
application for an oral liquid formulation of heparin to the Food and Drug
Administration (the "FDA"). 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.
A summary of the study results from the first three Phase I results was
presented at the American Heart Association meeting in November 1996 and a
paper about these Phase I clinical trials is expected to appear in the journal
Circulation in October 1998.
-6-
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 (which is 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 properly to
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 Company's 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 has 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.
-7-
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 Company's 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.
Ebbisham Limited. In September 1996, the Company and Elan formed Ebbisham
Limited, an Irish corporation owned 50% by Elan and 50% by the Company
("Ebbisham"), for the purpose of utilizing Elan's drug delivery and formulation
capabilities and the Company's carrier technologies in the research,
development and marketing of oral formulations of heparin and heparinoids.
The agreements with Elan and Ebbisham provide for: (i) the grant by the
Company to Ebbisham 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 Ebbisham of an exclusive, worldwide license of its
formulation technology for the Field, (iii) the grant by the Company to
Ebbisham 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 Ebbisham 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
Ebbisham's financial requirements, (vi) the sharing by the Company and Elan of
the financial benefits and expense obligations of Ebbisham 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 Ebbisham, and (vii)
equal representation by the Company and Elan on the Board of Directors of
Ebbisham.
-8-
Whenever commercially or technically feasible, Ebbisham will contract with
the Company or Elan to perform research and development services on behalf of
Ebbisham. The Company and Elan will be reimbursed by Ebbisham for all such
research and development work at the conclusion of each stage of the research
and development program. As of July 31, 1998, research and development
services performed by the Company on behalf of Ebbisham had generated an
aggregate of $14.1 million in revenues to the Company. On August 5, 1998, Elan
and the Company each contributed an additional $5 million to Ebbisham.
If Ebbisham 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 Ebbisham and that Elan or
one of its affiliates will enter into a supply agreement with Ebbisham for the
commercial production of the product candidate by Elan on behalf of Ebbisham.
Such supply agreements would be on customary commercial terms and negotiated in
good faith by the parties. The Company will also supply Ebbisham with such
carriers as are required by Ebbisham 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 will be at cost so long as the Company
holds at least a 45% equity interest in Ebbisham.
Upon the occurrence of an event of default under the joint venture agreement
with Elan, the non-defaulting shareholder will be entitled to make an offer to
purchase the defaulting shareholder's interest in Ebbisham. 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 shareholder's 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 Ebbisham 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 and an affiliate of Elan, Elan
and its affiliates 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 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 and
its affiliates to own the same percentage of the Company's voting securities as
it owned before such issuance and sale. In the Company's public offering of
1,150,000 shares of the Common Stock in July 1997, an affiliate of Elan
purchased 90,000 shares for $19.00 per share.
Eli Lilly. In February 1997, 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 carrier
technologies.
The Lilly Agreement provides for periodic payments to the Company to fund a
research and development program to study the use of the Company's technologies
to develop oral and non-oral formulations for delivering two of Lilly's
therapeutic proteins (the "Subject Proteins") in the areas of osteoporosis and
endocrinology including growth disorders. The initial term of the program was
18 months, which term was extended automatically for an additional six months.
Any extensions beyond February 1999 must be approved by the Company and Lilly.
Also, if Lilly decides to expand the scope of the program, the amount of the
payments will be increased.
Under the Lilly Agreement, the Company granted to Lilly a series of options,
each to acquire an exclusive, worldwide license to use the Company's
technologies in conjunction with oral and non-oral formulations of the Subject
Proteins. In March 1998 Lilly exercised two of its options and entered into
two license agreements granting Lilly the right to use the Company's
technologies in connection with oral formulations of the Subject Proteins. The
license agreements provide that Lilly is obligated to seek to market the oral
formulations of the Subject Proteins and that the Company is obligated to
provide a material portion of the supply of carrier necessary for the
production of any such formulations. For so long as Lilly continues to develop
oral formulations of the Subject Proteins, Lilly will continue to have options
to acquire licenses to use the Company's technologies in conjunction with non-
oral formulations of the Subject Proteins.
-9-
In September 1998 Lilly formally selected one of the Company's proprietary
carriers for clinical testing of an oral formulation of Lilly's therapeutic
protein for the treatment of osteoporosis. Upon completion of all required
toxicology testing, an IND application is expected to be filed with the FDA.
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. 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
August 26, 1999. 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
Company's 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 other than for the
Subject Proteins.
In addition, the Lilly Agreement includes a standstill provision pursuant to
which Lilly has agreed, with certain exceptions and limitations, not to acquire
shares of the Company's outstanding voting stock above a specified limit.
Novartis Pharma AG. In December 1997, the Company and Novartis entered into
a research collaboration to investigate the Company's technology for oral
delivery of two selected Novartis compounds. The agreement with Novartis
provides for an initial research collaboration period of at least 12 months and
an option on the part of Novartis to acquire an exclusive license to use the
Company's technologies for the development and commercialization of oral
formulations of the Novartis compounds.
Upon exercise of its option to acquire a technology license from the Company,
Novartis has the obligation (which may be waived by the Company) to purchase in
four tranches up to $16 million of the Company's Common Stock at prices based
on market prices at the time of exercise (subject to certain price limitations
with respect to the first tranch).
Under the agreement, Novartis is to make quarterly payments to the Company
for work performed by the Company in connection with the collaboration and is
to make future payments in the event certain milestones are achieved.
Patents
The Company's 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 Company's business.
The Company has patents or pending patent applications for carriers currently
used by the Company in conjunction with heparin, insulin, calcitonin, human
parathyroid hormone, human growth hormone, alpha interferon, deferoxamine and
cromolyn. The Company has been granted 23 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. Eight U.S. original patents and one reissue patent were issued by the
U.S. Patent and Trademark Office during the 1998 fiscal year. The Company has
48 patent applications relating to its drug delivery technologies pending in
the United States. 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.
-10-
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, scientific advisors,
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
which it 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 FDA's 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 FDA's 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 trials, 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.
-11-
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 eight to ten 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 applicant's 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 three clinical phases. In
Phase I, safety studies are generally 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 patients are found, the FDA may request modification or
discontinuance of clinical testing until further studies have been conducted.
Phase IV testing is conducted either to meet FDA requirements for additional
information as a condition of approval or to expand market acceptance of the
pharmaceutical product.
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.
-12-
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 Company's 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 July 31, 1998, the Company had 72 employees, 55 engaged in scientific
research and technical functions and 17 performing administrative and clerical
functions. Of the 72 employees, 21 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. 39 Chairman of the Board of
Directors and Chief
Executive Officer
Sam J. Milstein, Ph.D. 49 Director, President, Chief
Scientific Officer and
Secretary
Robert A. Baughman, Jr., 49 Senior Vice President,
Pharm.D., Ph.D. Development
Lewis H. Bender, M.B.A. 39 Senior Vice President,
Business Development
Barry B. Kanarek, M.D., Ph.D 51 Senior Vice President,
Clinical Affairs and Chief
Medical Officer
Joseph D. Poveromo, C.P.A. 34 Controller and Chief
Accounting Officer
John E. Smart, Ph.D. 55 Vice President, Director of
Basic Research
Shepard M. Goldberg, M.B.A. 43 Vice President, Operations
Jere E. Goyan, Ph.D. 68 Director
Mark I. Greene, M.D., Ph.D. 50 Director and scientific
advisor
Peter Barton Hutt, Esq. 63 Director
Howard M. Pack 80 Director
Joseph R. Robinson, Ph.D. 59 Director and scientific
advisor
Robert J. Levenson 57 Director
-13-
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.
Barry B. Kanarek, M.D., Ph.D. joined the Company in May of 1998. He was
previously Vice President, Medical Operations for the Americas at ClinTrials
Research Inc. Prior thereto he was with Glaxo Wellcome, most recently as Vice
President of Medical Affairs, where he also served as acting head of Medical
Operations, sat on the U.S. site Operating Committee, co-chaired the Product
Strategy committee and acted as Chief Medical Officer during the integration
phase of Glaxo Wellcome. Dr. Kanarek received his M.D. and Ph.D. in 1977 from
the University of Salamanca in Spain.
Joseph D. Poveromo, C.P.A., the Company's Controller and Chief Accounting
Officer since July of 1994, 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 and has been Director of Basic Research since 1998. 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 previously the Vice President of Research at Creative
Biomolecules, Inc. a biopharmaceutical company.
Shepard M. Goldberg, M.B.A. has been with the Company since April of 1998.
He was previously President and owner of two regional distribution businesses.
He received a B.S. in electrical engineering from Polytechnique Institute of
N.Y. and an M.B.A. from Adelphi University. Mr. Goldberg is a first cousin of
Michael M. Goldberg, M.D., Chairman and Chief Executive Officer of the Company.
-14-
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 been John Eckman Professor of Medical
Science, School of Medicine at the University of Pennsylvania for more than the
past five years. He currently serves as a director of Ribi ImmunoChem
Research, Inc., a biopharmaceutical company.
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 Interneuron Pharmaceuticals, 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 Company's
inception until October 1988.
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.
Robert J. Levenson has been Executive Vice President of First Data
Corporation for more than the past five years. He previously held positions as
Senior Executive Vice President and Chief Operating officer of Medco
Containment Services, Inc. and as Group President of Automatic Data Processing,
Inc. He currently serves as a director of First Data Corporation, Superior
Telecom Inc. and Vestcom International, Inc.
Scientific Advisors
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, 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
Company's 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 advisors and it intends to continue to expand its scientific
collaborations with current and future scientific advisors. 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.
-15-
Set forth below are the names, positions and areas of expertise of the
Company's scientific advisors.
Name and Position Area of Expertise
----------------------------------- -----------------------------
Mark I. Greene, M.D., Ph.D. Immunology, computer modeling
Professor of Medicine,
Department of Pathology,
School of Medicine
University of Pennsylvania
Joseph R. Robinson, Ph.D. Mucoadhesives, pharmaceutics
Professor, School of Pharmacy and gastrointestinal
University of Wisconsin physiology
Ernesto Freire, Ph.D. Protein chemistry, analytical
Professor techniques and calorimetry,
Johns Hopkins University computer modeling
Garret FitzGerald, M.D. Anticoagulants and
Robinette Professor of antithrombotics and clinical
Cardiovascular Medicine, Director, research
Center for Experimental
Therapeutics
Director, Clinical Research Center
University of Pennsylvania
Scott Berkowitz, M.D Disorders of hemostasis and
Associate Clinical Professor of thrombosis; clinical trial
Medicine design
Duke University
Elazer Edelman, M.D. Ph.D Indicators for
Director anticoagulant/antithrombotic
Harvard-MIT Biomedical Engineering therapy
Center
Robert Linhardt, Ph.D. Structure, activity, analysis
Professor and synthesis of complex
College of Pharmacy carbohydrates
University of Iowa
Sam Money, M.D. Indicators for nonclinical
Head of Vascular Surgery antithrombotic modeling
Ochsner Clinic
ITEM 2. PROPERTIES
The registrant currently leases 66,600 square feet of office space at 765 Old
Saw Mill River Road, Tarrytown, New York for use as executive offices and
laboratories. 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.
-16-
PART II
ITEM 5. MARKET FOR 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 system 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
--------------------------- ------- ------
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
1998
First quarter............. 24 15 3/8
Second quarter............ 22 5/16 14 3/4
Third quarter............. 21 15 1/2
Fourth quarter............ 17 5/8 10
As of October 21, 1998 there were 294 stockholders of record and 10,999,740
shares of Common Stock outstanding. The closing price for the Company's Common
Stock on October 21, 1998 was $7.50.
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.
-17-
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data for the five years ended July
31, 1998 have been derived from the financial statements of the Company and
notes thereto, which have been audited by independent accountants. There were
no dividends declared or paid by the Company during the five years ended July
31, 1998.
Fiscal Year Ended July 31,
-------------------------------------------------
1994 1995 1996 1997 1998
--------- -------- -------- -------- --------
(in thousands, except per share amounts)
Statement of Operations Data:
Contract research revenue $ 85 $ 33 $ 3,131 $ 5,401 $15,868
--------- -------- -------- -------- --------
Costs and expenses:
Research and development 5,855 5,802 6,605 7,724 15,190
Loss in Ebbisham Ltd. - - - 2,550 4,044
General and administrative 2,619 2,404 3,337 3,416 5,344
--------- -------- -------- -------- --------
Total costs and expenses 8,474 8,206 9,942 13,690 24,578
--------- -------- -------- -------- --------
Operating loss (8,389) (8,173) (6,811) (8,289) (8,710)
Other income and expense 698 389 703 968 1,644
--------- -------- -------- -------- --------
Net loss $(7,691) $(7,784) $(6,108) $(7,321) $(7,066)
========= ======== ======== ======== ========
Net loss per share-Basic
and diluted $(1.01) $(1.03) $(0.72) $(0.77) $(0.66)
======= ======= ======= ======= =======
As of July 31,
-------------------------------------------------
1994 1995 1996 1997 1998
--------- -------- -------- -------- --------
Balance Sheet Data: (in thousands)
Cash, cash equivalents and
marketable securities $ 12,694 $ 5,620 $ 18,237 $ 33,690 $ 34,828
Working capital 12,597 5,173 17,799 31,323 31,457
Total assets 15,210 7,549 20,039 36,897 53,690
Long-term liabilities 87 55 45 35 10,598
Accumulated deficit (28,844) (36,628) (42,736) (50,057) (57,123)
Stockholders' equity 14,674 6,899 19,267 33,398 31,281
-18-
ITEM 7. MANAGEMENT'S 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 no
product sales to date. The major sources of the Company's working capital has
been proceeds from its initial public offering in 1989, a second public
offering in 1993, a third public offering in 1997, private equity financing,
issuance to an affiliate of Elan Corporation plc of stock and warrants in 1995
and subsequent exercise of the warrants in April 1998, reimbursement of
expenses and other payments from corporate partners, the registered sale of one
million shares of common stock to two institutional investors in 1996, the
issuance on May 1, 1998 of three year, $13,500,000 aggregate principal, 5%
senior convertible notes, and income earned on the investment of available
funds. The Company's operations are not significantly affected by inflation or
seasonality.
In December 1997, the Company and Novartis Pharma AG ("Novartis") entered
into a research collaboration to investigate the Company's technology for oral
delivery of two selected Novartis compounds. The agreement with Novartis
provides for an initial research collaboration period of at least 12 months and
the option on the part of Novartis to acquire an exclusive license to use the
Company's technologies for the development and commercialization of an oral
formulation of the Novartis compounds.
In March 1998, Eli Lilly & Co. ("Lilly") and Emisphere executed two
license agreements granting Lilly the right to use Emisphere's technologies in
connection with the oral formulation of two of Lilly's therapeutic proteins (
the "subject proteins") in the areas of osteoporosis and endocrinology
including growth disorders. As a result, Lilly made two milestone payments to
Emisphere. The license agreements provide that Lilly is obligated to seek to
market the oral formulations of the subject proteins and that Emisphere is
obligated to provide a material portion of the supply of carrier necessary for
the production of any such formulation.
In May 1998, Emisphere initiated on behalf of Ebbisham Limited
("Ebbisham"), a joint venture between Emisphere and Elan Corporation plc, a
Phase II clinical trial for Ebbisham's oral heparin product. Prior to
initiating the Phase II trial, Emisphere had completed six single dosings and
two multiple dosing Phase I trials. The Phase I trials demonstrated that the
oral heparin was well-tolerated and retained the properties observed in the pre
clinical models. The Phase II trial was designed with three arms of
approximately forty patients each who have undergone surgery for hip
replacement. Two different doses of the oral heparin formulation will be
compared to subcutaneously administered heparin. The objective of the study is
to demonstrate that orally administered heparin utilizing Emisphere's
proprietary technology is well-tolerated and comparable to subcutaneous heparin
in preventing deep venous thrombosis. The results of the Phase II trial are
expected sometime before January 31, 1999.
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 Ebbisham, Lilly, and
Novartis, 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.
-19-
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 provided
research and development revenues to the Company.
Fiscal 1998 Compared to Fiscal 1997
The Company's contract research revenues increased to $15.9 million in
fiscal 1998 from $5.4 million in fiscal 1997. Such increase was the result of
the Company performing additional services on behalf of its collaborators.
Revenues in fiscal 1998 consisted of recognition of $7,061,000 from Ebbisham,
$6,560,000 from Lilly and $2,250,000 from Novartis.
Total operating expenses for the fiscal year ended July 31, 1998 increased
by $10,888,000, or 80%, as compared to fiscal 1997. The details of the increase
are as follows:
Research and development costs increased by approximately $7,466,000, or
97%, in fiscal 1998 as compared to fiscal 1997. This increase is mainly
attributable to increased personnel and laboratory supply costs in connection
with the collaborations with Lilly, Novartis and the ongoing clinical work for
heparin. 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, perform services related to the
manufacturing of the Company's carriers, and consult on the Company's ongoing
clinical studies with heparin. The Company also experienced an increase in
rent expense in connection with payments for a new lease for laboratory space.
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 loss in Ebbisham, increased by approximately $1,494,000, or 59%, in
fiscal 1998 as compared to fiscal 1997. This increase is attributable to
increased costs associated with ongoing clinical development of heparin. The
costs associated with Ebbisham may increase substantially depending upon the
agreed timing and scope of future research and development efforts.
General and administrative expenses increased by approximately $1,929,000,
or 56 %, in fiscal 1998 as compared to fiscal 1997. This increase is primarily
the result of outside consulting costs associated with an ongoing information
technology project the Company has undertaken. The Company also experienced an
increase in rent expense in connection with payments for a new lease for
administrative office space and an increase in personnel and related expenses
associated with an increase in administrative staff positions. This was
partially offset by a decrease in legal and professional fees paid in
connection with the finalization of the Ebbisham joint venture and the
agreement with Lilly during fiscal 1997. In connection with the relocation of
its operations, the Company incurred a charge of approximately $300,000 which
represented the write-down of leasehold improvements on its old facility. The
Company recorded expenses of approximately $295,000 in connection with the
granting of options as compensation to business consultants in the fiscal year
1998 compared to $250,000 in fiscal 1997.
As a result of these factors, the Company's operating loss increased by
$421,000, or 5%, from fiscal 1997 to fiscal 1998. 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 and expense for the fiscal year 1998 increased
by approximately $676,000, or 70%, from fiscal 1997. This was primarily the
result of increased returns on the Company's larger investment portfolio. This
increase was partially offset by interest expense which the Company accrued on
the $13,500,000, 5% senior convertible notes due May 1, 2001.
-20-
Based on the above factors, the Company sustained a net loss for fiscal
1998 of $7,066,000, a 3% decrease over the fiscal 1997 loss of $7,321,000.
Fiscal 1997 Compared to Fiscal 1996
Revenues increased by approximately $2,270,000. The majority of the 1997
increase in contract research revenues was attributable to increased revenues
from Ebbisham of $4.0 million as the Company provided additional services to
the joint venture. The Company also recognized contract revenues from Lilly,
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 increase 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 Lilly. 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 increase of $2,550,000 in the loss in Ebbisham represents the
Company's pro-rata portion of Ebbisham's 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 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 Ebbisham 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's investment income for 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.
Liquidity and Capital Resources
As of July 31, 1998 the Company had working capital of approximately
$31,457,000. Total cash, cash equivalents and marketable securities were
approximately $34,828,000, an increase of $1,138,000 compared to the Company's
position at July 31, 1997. The increase in the Company's cash, cash
equivalents and marketable securities was primarily due to receipt of
$13,500,000 in proceeds from senior convertible notes and $4,673,000 from the
exercise of warrants and options partially offset by cash used to fund capital
expenditures of $8.6 million and fiscal 1998 operations of $8.4 million.
-21-
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
Ebbisham's future cash needs upon the venture's request. The Company
anticipates funding requirements to initially be $5,000,000 and, depending upon
the agreed timing and scope of the future research and development efforts, may
be an additional $8,000,000 over the next twelve months. In August 1998, the
Company loaned Ebbisham Ltd. $ 5,000,000 to cover past costs incurred by
Ebbisham Ltd. The Company expects the research funding received from Lilly and
Novartis to approximate the costs to be incurred by the Company in connection
with the development of each of the Company's projects. (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 2000. 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.
Year 2000 Compliance
The "Year 2000" problem relates to many currently installed computers,
software, and other equipment that relies on embedded technology (collectively,
"Business systems"). These Business systems are not capable of distinguishing
21st century dates from 20th century dates. As a result, in less than two
years, Business systems used by many companies, in a very wide variety of
applications, will experience operating difficulties unless they are modified,
upgraded, or replaced to adequately process information involving, related to
or dependent upon the century change. If a Business system used by the Company
or a third party dealing with the Company fails because of the inability of the
Business system to properly read a 21st century date, the results could have a
material adverse effect on the Company.
The Company recognizes the need to ensure its operations will not be
adversely impacted by Year 2000 Business systems failures and has established a
team to address Year 2000 risk. The team is reviewing the Company' internal
infrastructure and believes that it has identified substantially all of the
major Business systems used in connection with its internal operations. The
Company has commenced the process of identifying and correcting the major
Business systems that may need to be modified, upgraded, or replaced, and
expects to complete this process, along with remedial actions before the end of
fiscal 1999. Costs incurred to date to correct Year 2000 problems have been
immaterial. The Company estimates the total cost to complete any required
modifications, upgrades, or replacements of affected Business systems will not
have a material impact on the Company's business or results of operations.
This estimate is being monitored and will be revised, if necessary, as
additional information becomes available.
The Company also recognizes the risk that suppliers of products, services,
and collaborators with whom the Company transacts business on a worldwide basis
may not comply with Year 2000 requirements. The Company has initiated formal
communications with significant suppliers and collaborators to determine the
extent to which the Company is vulnerable if these third parties fail to
remediate their own Year 2000 issues. The review is ongoing and the Company is
unable to determine, at this time, the probability that any material supplier
or collaborator will not be able to correct any Year 2000 problem in a timely
manner. In the event any such third parties cannot provide the Company with
products, services, or continue the collaborations with the Company, the
Company's results of operations could be materially adversely affected.
Based on the above, the Company has yet to develop a comprehensive
contingency plan with respect to the Year 2000 problem. The Company will
continue to monitor its own Business systems and, to the extent possible,
evaluate the Business systems of its third party suppliers and collaborators to
ensure progress on this critical matter. However, if the Company identifies
significant risk related to the Year 2000 compliance or progress deviates from
anticipated timelines, the Company will develop contingency plans as deemed
necessary at that time.
-22-
THE DISCUSSION OF THE COMPANY'S EFFORTS, ESTIMATES, AND CONCLUSIONS HEREIN
CONTAIN FORWARD-LOOKING STATEMENTS AND ARE BASED ON MANAGEMENTS BEST ESTIMATES
OF FUTURE EVENTS. THE COMPANY'S ABILITY TO ACHIEVE YEAR 2000 COMPLIANCE AND THE
LEVEL OF INCREMENTAL COSTS ASSOCIATED THEREWITH, COULD BE ADVERSELY IMPACTED
BY, AMONG OTHER THINGS, THE AVAILABILITY AND COST OF MODIFICATIONS, OUR ABILITY
TO DISCOVER AND CORRECT THE POTENTIAL YEAR 2000 PROBLEM, AND UNANTICIPATED
PROBLEMS IDENTIFIED IN THE ONGOING COMPLIANCE REVIEW.
Impact of the Future Adoption of Recently Issued Accounting Standards
The Financial Accounting Standards Board (the "FASB") issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
No. 130") in June of 1997. Comprehensive income represents the change in net
assets of a business enterprise as a result of nonowner transactions.
Management does not believe that the future adoption of "SFAS 130" will have a
material effect on the Company's financial position or results of operations.
The Company will adopt "SFAS No. 130" for the year ending July 31, 1999.
Also in June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS No. 131"). SFAS No. 131 requires that a business
enterprise report certain information about operation segments, products and
services, geographic areas of operation, and major customers in complete sets
of financial statements and in condensed financial statements for interim
periods. Management does not believe that the future adoption of SFAS No. 131
will have a material effect on the Company's financial statements. The Company
is required to adopt this standard for the year ending July 31, 1999.
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits." This statement modifies financial statement
disclosures related to pension and other postretirement plans, and therefore
will not have an effect on the Company's financial position or results of
operations, and is effective for periods beginning after December 15, 1997.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivatives and Hedging Activities" ("SFAS No. 133").
SFAS No. 133 establishes a comprehensive standard on accounting for derivatives
and hedging activities, and is effective for periods beginning after June 15,
1999. Management does not believe that the future adoption of SFAS No. 133
will have a material effect on the Company's financial position or results of
operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At July 31, 1998, the Company did not hold any market risk sensitive
instruments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements are set forth starting on page F-1 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On October 1, 1998 Emisphere Technologies, Inc. (the "Company") engaged
PricewaterhouseCoopers LLP as the independent accountants to audit the
financial statements of Ebbisham Limited ("Ebbisham"), the joint venture
company owned equally by the Company and Elan Corporation plc.
PricewaterhouseCoopers LLP has served as the Company's auditors since November
of 1991.
KPMG, Ebbisham's independent chartered accountants upon whose opinion
PricewaterhouseCoopers LLP relied for the period from the commencement of its
operations on September 26, 1996 to July 31, 1997, will continue as Ebbisham's
independent chartered accountants but has been dismissed by the Company with
respect to an opinion upon which PricewaterhouseCoopers LLP will rely for the
fiscal year ended July 31, 1998.
-23-
Neither PricewaterhouseCoopers LLP's report on the Company's financial
statements for the 1996 and 1997 fiscal years nor KPMG's report on Ebbisham for
the period from the commencement of its operations to July 31, 1997 contained
an adverse opinion or disclaimer of opinion and neither report was qualified or
modified as to uncertainty, audit scope or accounting principles. During the
Company's 1996 and 1997 fiscal years and the subsequent period preceding the
dismissal of KPMG, there were neither (i) disagreements with KPMG on any matter
of accounting principles or practice, financial statement disclosure or
auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of KPMG, would have caused it to make reference to the subject
matter thereof in connection with its report nor (ii) any of the reportable
events listed in paragraphs (a)(1)(v)(A) through (D) of Item 304 of
Regulation S-K promulgated under the Securities Exchange Act of 1934, as
amended.
Prior to the engagement of PricewaterhouseCoopers LLP as the independent
accountant to audit Ebbisham's financial statements, neither the Company nor
Ebbisham consulted with PricewaterhouseCoopers LLP regarding the application of
accounting principles to a specified transaction, either completed or proposed,
or the type of audit opinion that might be rendered on the Company's financial
statements. The Company's decision to change accountants with respect to the
audit of Ebbisham's financial statements was not recommended or approved by the
audit committee of the Company's Board of Directors.
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 herein by reference to the Company's definitive proxy statement to
be filed no later than November 28, 1998 (the "1998 Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference
to the 1998 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by reference
to the 1998 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference
to the 1998 Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) A list of the financial statements and financial statement schedules
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 on page 26 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 May 1, 1998 reporting Item
5 Other Events and including no financial statements.
-24-
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.
Date: October 28, 1998 by: /s/ Michael M. Goldberg
----------------------------
Michael M. Goldberg, M.D.
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Michael M. Goldberg Director, Chairman of the Board, October 28, 1998
- ------------------------- President and Chief Executive
Michael M. Goldberg, M.D. Officer
Director October 28, 1998
- -------------------------
Jere E. Goyan, Ph.D.
/s/ Peter Barton Hutt Director October 28, 1998
- -------------------------
Peter Barton Hutt
/s/ Sam J. Milstein Director, Executive Vice October 28, 1998
- ------------------------- President, Chief Scientific
Sam J. Milstein, Ph.D. Officer and Secretary
/s/ Howard M. Pack Director October 28, 1998
- -------------------------
Howard M. Pack
/s/ Mark I. Greene Director October 28, 1998
- -------------------------
Mark I. Greene, M.D., Ph.D.
/s/ Joseph R. Robinson Director October 28, 1998
- -------------------------
Joseph R. Robinson, Ph.D.
/s/ Robert J. Levenson Director October 28, 1998
- -------------------------
Robert J. Levenson
/s/ Joseph D. Poveromo Controller and Chief Accounting October 28, 1998
- ------------------------- Officer (Principal Financial and
Joseph D. Poveromo Accounting Officer)
-25-
EMISPHERE TECHNOLOGIES, INC.
FINANCIAL STATEMENTS
Index
Page(s)
-------
Emisphere Technologies, Inc.
- ----------------------------
Report of Independent Accountants F-2
Financial Statements:
Balance Sheets as of July 31, 1997 and 1998 F-3
Statements of Operations for the years ended July 31,
1996, 1997 and 1998 F-4
Statements of Stockholders' Equity for the year ended
July 31, 1996, 1997 and 1998 F-5
Statements of Cash Flows for the years ended July 31,
1996, 1997 and 1998 F-6
Notes to Financial Statements F-7 - F-24
Ebbisham Limited
- ----------------
Report of Independent Accountants F-25
Financial Statements:
Balance Sheets as of July 31, 1997 and 1998 F-26
Statements of Operations for the period from September
26, 1996 (inception) to July 31, 1997, the year
ended July 31, 1998 and the cumulative period from
September 26, 1996 (inception) to July 31, 1998 F-27
Statements of Stockholders' Deficit for the cumulative
period from September 26, 1996 (inception) to July
31, 1998 including the period from September 26,
1996 (inception) to July 31, 1997 and the year ended
July 31, 1998 F-28
Statements of Cash Flows for the period from September
26, 1996 (inception) to July 31, 1997, the year
ended July 31, 1998 and the cumulative period from
September 26, 1996 (inception) to July 31, 1998 F-29
Notes to Financial Statements F-30 - F-32
F-1
Report of Independent Accountants
New York, New York
October 12 , 1998
To the Board of Directors and Stockholders of
Emisphere Technologies, Inc.:
In our opinion, the accompanying balance sheets and the related
statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position
of EMISPHERE TECHNOLOGIES, INC. (the "Company") at July 31, 1997
and 1998, and the results of its operations and its cash flows
for each of the three years in the period ended July 31, 1998, in
conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted
auditing standards which 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, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers LLP
F-2
EMISPHERE TECHNOLOGIES, INC.
Balance Sheets
July 31, 1997 and 1998
1997 1998
------------- -------------
ASSETS:
Current assets:
Cash and cash equivalents $ 22,398,967 $ 21,358,308
Marketable securities 11,291,255 13,469,733
Receivable due from Ebbisham Ltd. 648,786 7,710,056
Prepaid expenses and other current assets 448,114 729,587
------------- -------------
Total current assets 34,787,122 43,267,684
Equipment and leasehold improvements, at
cost, net of accumulated depreciation
and amortization 2,046,087 9,619,856
Deferred finance costs, net of accumulated
amortization of $67,500 742,500
Other assets 64,243 59,970
------------- -------------
Total assets $ 36,897,452 $ 53,690,010
============= =============
LIABILITIES and STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable $ 254,715 $ 724,848
Accrued compensation 215,000 266,000
Accrued professional fees 288,000 203,000
Accrued interest 168,750
Accrued expenses 166,858 364,483
Senior convertible notes, current portion 3,500,000
Investment deficiency in Ebbisham Ltd. 2,539,958 6,583,670
------------- -------------
Total current liabilities 3,464,531 11,810,751
Senior convertible notes 10,000,000
Deferred lease liability 34,542 598,111
------------- -------------
Total liabilities 3,499,073 22,408,862
------------- -------------
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; 10,733,877 shares
issued (10,690,377 outstanding) in 1997;
11,037,238 shares issued (10,993,738
outstanding) in 1998 107,339 110,372
Additional paid-in capital 83,516,461 88,481,742
Accumulated deficit (50,057,115) (57,123,403)
Net unrealized gain on marketable
securities 24,507 5,250
------------- -------------
33,591,192 31,473,961
Less, common stock held in treasury, at
cost; 43,500 shares in 1997 and 1998 (192,813) (192,813)
------------- -------------
Total stockholders' equity 33,398,379 31,281,148
------------- -------------
Total liabilities and
stockholders' equity $ 36,897,452 $ 53,690,010
============= =============
The accompanying notes are an integral part of the financial statements.
F-3
EMISPHERE TECHNOLOGIES, INC.
Statements of Operations
For the years ended July 31, 1996, 1997 and 1998
1996 1997 1998
------------- ------------- -------------
Contract research revenues $ 3,130,893 $ 5,400,880 $ 15,868,310
------------- ------------- -------------
Costs and expenses:
Research and development 6,605,031 7,723,995 15,189,811
Loss in Ebbisham Ltd. 2,549,956 4,043,712
General and administrative expenses 3,336,910 3,416,061 5,344,665
------------- ------------- -------------
9,941,941 13,690,012 24,578,188
------------- ------------- -------------
Operating loss (6,811,048) (8,289,132) (8,709,878)
------------- ------------- -------------
Other income and expense:
Investment income 703,447 967,827 1,879,840
Interest expense (236,250)
------------- ------------- -------------
703,447 967,827 1,643,590
------------- ------------- -------------
Net loss $ (6,107,601) $ (7,321,305) $ (7,066,288)
============= ============= =============
Net loss per share, basic and diluted $ (0.72) $ (0.77) $ (0.66)
======== ======== ========
The accompanying notes are an integral part of the financial statements.
F-4
EMISPHERE TECHNOLOGIES, INC.
Statements of Stockholders' Equity
For the years ended July 31, 1996, 1997 and 1998
Net
Unrealized
Gain Common Stock
Common Stock Additional (Loss) on Held in Treasury
-------------------- Paid-in Accumulated Marketable ------------------
Shares Amount Capital Deficit Securities Shares Amount Total
---------- -------- ----------- ------------- ---------- ------ ---------- ------------
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 expenses 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
Sale of common stock under
employee stock purchase plans
and exercise of options 53,361 533 610,281 610,814
Exercise of warrants by Elan
International Services Ltd. 250,000 2,500 4,060,000 4,062,500
Issuance of stock options in
exchange for services rendered 295,000 295,000
Change in net unrealized gain
(loss) on marketable securities (19,257) (19,257)
Net loss (7,066,288) (7,066,288)
---------- -------- ----------- ------------- ---------- ------ ---------- ------------
Balance, July 31, 1998 11,037,238 $110,372 $88,481,742 $(57,123,403) $ 5,250 43,500 $(192,813) $31,281,148
========== ======== =========== ============= ========== ====== ========== ============
The accompanying notes are an integral part of the financial statements.
F-5
EMISPHERE TECHNOLOGIES, INC.
Statements of Cash Flows
For the years ended July 31, 1996, 1997 and 1998
Increase (Decrease) in Cash and Cash Equivalents
1996 1997 1998
------------- ------------- -------------
Cash flows from operating activities:
Net loss $ (6,107,601) $ (7,321,305) $ (7,066,288)
------------- ------------- -------------
Adjustments to reconcile net loss
in net cash used in operating
activities:
Loss in Ebbisham Ltd. 2,549,956 4,043,712
Depreciation 571,485 441,768 953,615
Amortization of (premium) discount
on marketable securities 13,440
Amortization of deferred
financing costs 67,500
Writeoff of leasehold improvements 337,961
(Decrease) increase in deferred
lease liability (10,277) (10,281) 563,569
Net realized gain on sale of
marketable securities (25,562) (60) (14,123)
Noncash compensation in
connection with the issuance
of equity securities 729,688 250,000 295,000
Changes in assets and liabilities:
(Increase) in receivable due
from Ebbisham Ltd. (648,786) (7,061,270)
(Increase) in prepaid expenses
and other current assets (141,300) (158,345) (281,473)
(Increase) in deferred
financing costs (810,000)
(Increase) in investment in
Ebbisham Ltd. (9,998)
Decrease (increase) in
other assets 5,000 (3,000) 4,273
Increase in accounts payable
and accrued expenses 133,014 196,786 539,018
------------- ------------- -------------
Total adjustments 1,262,048 2,608,040 (1,348,778)
------------- ------------- -------------
Net cash used in
operating activities (4,845,553) (4,713,265) (8,415,066)
------------- ------------- -------------
Cash flows from investing activities:
Capital expenditures (318,038) (1,036,993) (8,601,855)
Purchases of marketable securities (14,701,266) (13,550,937) (14,938,128)
Proceeds from sales of marketable
securities 11,742,924 8,645,357 12,741,076
Other 10,000
------------- ------------- -------------
Net cash used in
investing activities (3,266,380) (5,942,573) (10,798,907)
------------- ------------- -------------
Cash flows from financing activities:
Net proceeds from issuance of
common stock and warrants to
Elan International Services Ltd. 7,463,000 4,062,500
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 428,995 1,179,609 610,814
Proceeds from senior convertible
notes 13,500,000
------------- ------------- -------------
Net cash provided by
Financing activities 17,790,451 21,150,131 18,173,314
------------- ------------- -------------
Net increase in cash and cash
equivalents 9,678,518 10,494,293 (1,040,659)
Cash and cash equivalents,
beginning of year 2,226,156 11,904,674 22,398,967
------------- ------------- -------------
Cash and cash equivalents,
end of year $ 11,904,674 $ 22,398,967 $ 21,358,308
============= ============= =============
Supplemental disclosure of noncash
investing and financing activities:
Capital expenditures in accounts
payable $ 263,490
The accompanying notes are an integral part of the 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 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 the event the
Company is unable to raise adequate funds, operations would be scaled back
or discontinued. 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 Notes 3 and
7 for fair value of marketable securities and the 5% Senior Convertible
Note).
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.
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.
Impairment of Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events
or changes in circumstances, such as the manner in which an asset is used,
indicate that their carrying amount may not be recoverable. Impairment
losses are recognized when a long-lived asset's carrying value exceeds the
expected undiscounted cash flows related to that asset. The amount of the
impairment loss is the difference between the carrying value and the fair
market value of the asset. The fair market value of an asset is
determined based upon discounted cash flows.
Net Loss Per Share
For the year ended July 31, 1998, the Company adopted Statement of
Financial Accounting Standards No. 128, Earnings per Share ("SFAS No.
128"). As required by SFAS No. 128, the prior years' loss per share data
have been restated to conform to the provisions of SFAS No. 128; however,
the impact of the restatement was not material.
Net loss per share, basic and diluted, is computed on the basis of the net
loss for the period divided by the weighted average number of shares of
Common Stock outstanding during the period. The diluted net loss per
share for all periods presented excludes the number of shares issuable
upon exercise of outstanding stock options, warrants and convertible debt
since such inclusion would be antidilutive. Disclosures required by SFAS
No. 128 have been included in Note 10.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
("SFAS No. 109"). SFAS No. 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.
F-8
Emisphere Technologies, Inc.
Notes to Financial Statements, Continued
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 accompanying financial position and results of operations of the
Company have been prepared in accordance with APB Opinion No. 25,
"Accounting for Stock Issued to Employees" ("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 than the amount
an employee must pay to acquire the stock as defined.
Disclosure required by Statement of Financial Accounting Standards No. 123
("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, has been included in
Note 9.
The fair value of options and warrants granted to non-employees for goods
or services are included in the financial statements and expensed as the
goods are utilized or the services performed, respectively.
Deferred Financing Costs
Direct costs incurred in connection with obtaining financing have been
capitalized and are being amortized on a basis which approximates the
interest method over the term of the financing.
Impact of the Future Adoption of Recently Issued Accounting Standards
The Financial Accounting Standards Board (the "FASB") issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS No. 130") in June 1997. Comprehensive income represents the change
in net assets of a business enterprise as a result of nonowner
transactions. Management does not believe that the future adoption of
SFAS 130 will have a material effect on the Company's financial position
or results of operations. The Company will adopt SFAS No. 130 for the
year ending July 31, 1999.
Also in June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS No. 131"). SFAS No. 131 requires that a
business enterprise report certain information about operation segments,
products and services, geographic areas of operation, and major customers
in complete sets of financial statements and in condensed financial
statements for interim periods. Management does not believe that the
future adoption of SFAS No. 131 will have a material effect on the
Company's financial statements. The Company is required to adopt this
standard for the year ending July 31, 1999.
F-9
Emisphere Technologies, Inc.
Notes to Financial Statements, Continued
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits." This statement modifies financial statement
disclosures related to pension and other postretirement plans, and
therefore will not have an effect on the Company's financial position or
results of operations, and is effective for periods beginning after
December 15, 1997.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivatives and Hedging Activities" ("SFAS No.
133"). SFAS No. 133 establishes a comprehensive standard on accounting
for derivatives and hedging activities, and is effective for periods
beginning after June 15, 1999. Management does not believe that the
future adoption of SFAS No. 133 will have a material effect on the
Company's financial position or results of operations.
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" ("SFAS
No. 115") 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 table summarizes the
amortized cost basis and aggregate fair value of marketable securities,
and the gross unrealized holding gains and losses, at July 31, 1997 and
1998, respectively.
Amortized Fair Unrealized Holding
Cost Basis Value Gains (Losses) Net
------------ ------------ --------- ---------- --------
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
============ ============ ========= ========== ========
1998
Maturities less than
one year:
Corporate debt
securities $ 4,300,701 $ 4,301,393 $ 1,161 $ (469) $ 692
Maturities between
one and three years:
Corporate debt
securities 9,163,782 9,168,340 6,058 (1,500) 4,558
------------ ------------ --------- ---------- --------
$ 13,464,483 $ 13,469,733 $ 7,219 $ (1,969) $ 5,250
============ ============ ========= ========== ========
F-10
Emisphere Technologies, Inc.
Notes to Financial Statements, Continued
Realized gains and losses are included as a component of investment
income. For the year ended July 31, 1996, gross realized losses were
approximately $22,000, while gross realized gains were approximately
$48,000. For the year ended July 31, 1997, gross realized gains and
losses were not significant. For the year ended July 31, 1998, gross
realized gains were approximately $14,000. 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 1997 1998
------------- ----------- -----------
Equipment 3-7 $ 3,863,659 $ 4,674,232
Leasehold improvements Life of lease 1,214,567 9,269,339
----------- -----------
5,078,226 13,943,571
Less, Accumulated
Depreciation and amortization 3,032,139 4,323,715
----------- -----------
$ 2,046,087 $ 9,619,856
=========== ===========
During May 1998, the Company relocated its operations and subleased
certain office and laboratory space. In connection therewith, the Company
incurred a general and administrative charge of approximately $300,000
which represented the writedown of leasehold improvements at the subleased
space net of the excess of sublease rental income and related rental
expense.
5. Commitments and Contingencies:
a. The Company leases office and laboratory space under noncancelable
leases expiring in various years through 2008. 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. 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 differences between the minimum cash rental payments and
the rent expense computed on a straight-line basis.
F-11
Emisphere Technologies, Inc.
Notes to Financial Statements, Continued
As of July 31, 1998, future minimum rental payments are as follows:
Years Minimum
Ending Rental
July 31, Payments
-------- ------------
1999 $ 876,703
2000 1,034,120
2001 1,187,864
2002 1,121,826
2003 1,308,544
Thereafter 5,443,900
------------
$ 10,972,957
As described in Note 4, in July 1998, the Company entered into a
sublease (the "Sublease") for a portion of its former premises, which
extends to January 2002.
As of July 31, 1998, future minimum rentals to be received under the
Sublease are as follows:
Minimum
Years Rentals
Ending to be
July 31, Received
-------- ------------
1999 $ 184,000
2000 207,033
2001 218,866
2002 111,995
------------
$ 721,894
Rent expense for the years ended July 31, 1996, 1997 and 1998 was
approximately $256,000, $256,000 and $1,230,000, respectively.
Additional charges for real estate taxes and common maintenance charges
were not material for these periods.
b. The Company, for the years ended July 31, 1996, 1997 and 1998 made
payments for research totaling approximately $426,000, $847,000 and
$847,000, respectively, to eight universities and a research
organization ("entities"). Certain members of the Company's Board of
Directors are affiliated with these entities.
Under various agreements, as amended, the Company is obligated to pay
minimum fees totaling approximately $1,062,000, $111,000 and $6,000
during the years ending July 31, 1999, 2000 and 2001, respectively.
F-12
Emisphere Technologies, Inc.
Notes to Financial Statements, Continued
6. Research and Development Contracts:
The Company enters into research and development contracts with
pharmaceutical companies providing 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 the terms of a licensing agreement contemplating
the exclusive worldwide use of the Company's proprietary technology with
the specific product under contract.
7. Notes Payable:
On May 1, 1998 (the "Issuance Date"), the Company issued $13,500,000 of
its 5% Senior Convertible Notes, due May 1, 2001 (the "Notes"). Interest
on the outstanding Notes accrues from the Issuance Date and is payable
annually in arrears beginning on May 1, 1999 either in cash, or at the
election of the Company and subject to certain conditions, in shares of
the Company's common stock (the "Interest Shares"). Such Interest Shares
will have a value equal to the interest payment due in cash as defined.
At July 31, 1998, the Company had accrued $168,750 of interest on the
Notes.
Note holders may, at any time prior to the maturity date, convert any
outstanding and unpaid principal amount of the Notes and accrued and
unpaid interest into shares of the Company's common stock at a conversion
price (the "Conversion Price"), subject to certain floor prices as defined
during the first 180 days from the Issuance Date, equal to the lowest
trade price as reported on the NASDAQ National Market during the ten
trading days immediately preceding the date of conversion. In no event
may the holder convert at less than $10 per share (adjusted for stock
splits, stock dividends, combinations or capital reorganizations) and no
holder may convert if the conversion would result in the holder owning
more than 4.9% of the Company's common stock then outstanding.
The maximum number of shares that can be issued upon conversion of the
Notes is 1,000,000. If at any time the number of shares that would
otherwise be issuable upon conversion of the Notes exceeds 1,000,000, the
Company may be required by the holder to redeem, subject to certain
conditions, at a premium, up to $3.5 million of the Notes so that the
conversion of the remaining portion does not result in more than 1,000,000
shares being issued.
In the case of certain events which adversely affect the ability of the
holder to trade or sell shares of the Company's common stock resulting
from conversion of any portion of the Notes, as defined, the holder has
the right to require the Company to repurchase the outstanding principal
and interest on the Notes at a premium.
As long as any principal or interest on the Notes remains unpaid, the
Company is bound by certain covenants including a defined limit on the
amount of additional indebtedness the Company may incur. In the event of
default by the Company, as defined, principal, including premiums, and
accrued interest, become due immediately.
F-13
Emisphere Technologies, Inc.
Notes to Financial Statements, Continued
If any portion of the Notes has not been converted by May 1, 2001, the
holder may elect to convert the outstanding amount of principal and
interest into shares of the Company's common stock at the Conversion Price
subject to the limitations on the maximum number of shares and maximum
percentage ownership permitted. If, at maturity, the holder does not
elect to convert the outstanding principal and interest into shares of the
Company's common stock, the Company may at its option issue four-year
13.75% notes in exchange for the Notes.
As of July 31, 1998, the estimated fair value of the Notes approximated
their carrying value, based on replacement cost.
In connection with the issuance of the Notes, the Company incurred direct
cost to obtain this financing of approximately $800,000. Such amount has
been classified as deferred financing costs. Amortization of deferred
financing costs totaled $67,500 for the year ended July 31, 1998.
8. Stockholders' Equity and the Rights Plan:
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, 1998, there were no shares of preferred stock
outstanding.
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.
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 by 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 combinations,
as defined, each Right would entitle the holder upon exercise to receive,
in lieu of shares of A Preferred Stock, a 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.
F-14
Emisphere Technologies, Inc.
Notes to Financial Statements, Continued
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 1,700,000 and 2,100,000 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, vesting and expiration date. Options granted under
the Plans generally vest over a five-year period. As of July 31, 1998,
shares available for future grants under the Plans amounted to 236,489.
The following table summarizes stock option information for the Plans as
of July 31, 1998:
Options Outstanding Options Exercisable
---------------------------------- ---------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Price Outstanding Life Price Exercisable Price
--------------- ----------- ----------- -------- ----------- --------
$1.50 - $1.65 94,166 6.76 yrs $ 1.50 55,766 $ 1.51
$2.63 - $2.89 5,442 6.81 2.70 5,142 2.71
$4.00 - $6.00 73,494 5.81 4.01 56,200 4.01
$6.63 - $9.75 1,407,500 7.22 8.64 581,000 8.65
$10.00 - $13.75 1,439,305 5.38 12.01 1,223,605 12.26
$15.13 - $22.00 455,822 5.41 16.91 87,500 18.38
$23.00 - $23.25 8,000 6.91 23.09 3,000 23.25
--------- ---------
$1.50 - $23.25 3,483,729 6.18 10.85 2,012,463 10.95
========= =========
Transactions involving stock options awarded under the Plans during 1996,
1997 and 1998 are summarized as follows:
F-15
Emisphere Technologies, Inc.
Notes to Financial Statements, Continued
Weighted Weighted
Average Average
Number Exercise Number Exercise
Outstanding Price Exercisable Price
----------- -------- ----------- --------
Balance, July 31, 1995 624,261 $ 8.55 225,967 $11.88
1996 Granted 1,545,024 $ 8.92
Canceled (158,258) $ 8.70
Exercised (29,609) $ 3.60
-----------
Balance outstanding
July 31, 1996 1,981,418 $ 8.90 506,962 $ 9.75
1997 Granted 1,260,531(1) $12.43
Canceled (43,000) $13.75
Exercised (33,323) $ 9.86
-----------
Balance outstanding
July 31, 1997 3,165,626 $10.23 1,868,085 $10.98
1998 Granted 340,272 $17.08
Canceled (6,350) $15.50
Exercised (15,819) $ 5.98
-----------
Balance outstanding
July 31, 1998 3,483,729 $10.85 2,012,463 $10.95
===========
(1)Includes 909,031 options granted to two executive officers. The fair
market value of the Company's common stock on the date of grant was
below the exercise price of these options.
Outside Directors' Plan
The Company has adopted a stock option plan for outside directors (the
"Outside Directors' Plan") which, as amended, currently provides for the
grant to directors who are neither officers nor employees of the Company
nor holders of more than 5% of the Company's common stock, options (i) to
purchase 35,000 shares of the Common Stock on the date of initial election
or appointment to the Board and (ii) to purchase 21,000 shares of the
Common Stock on the fifth anniversary thereof and every three years
thereafter. The options have an exercise price equal to the fair market
value of the Common Stock on the date of grant, vest at the rate of 7,000
shares per year and expire ten years after the date of grant. Under the
Outside Directors' Plan in effect prior to January 29, 1997, options to
purchase 70,000 shares were granted to directors upon their initial
election or appointment to the Board.
F-16
Emisphere Technologies, Inc.
Notes to Financial Statements, Continued
The following table summarizes stock option information for the Outside
Directors' Plan as of July 31, 1998:
Options Outstanding Options Exercisable
---------------------------------- ---------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Price Outstanding Life Price Exercisable Price
--------------- ----------- ----------- -------- ----------- --------
$8.63 70,000 7.89 Yrs $ 8.63 53,332 $ 8.63
$13.00 - $13.75 273,000 5.45 $13.17 231,000 $13.07
$23.50 35,000 8.50 $23.50 7,000 $23.50
----------- -----------
$8.63 - $23.50 378,000 6.19 $13.29 291,332 $12.51
=========== ===========
Transactions involving stock options awarded under the Outside Directors'
Plan during 1996, 1997 and 1998 are summarized as follows:
Weighted Weighted
Average Average
Number Exercise Number Exercise
Outstanding Price Exercisable Price
----------- -------- ----------- --------
Balance, 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
-----------
Balance outstanding
July 31, 1998 378,000 $13.29 291,332 $12.51
===========
Non-Plan Options
The Company's Board of Directors has issued options to two senior
executive officers, ("Executives"), the Emisphere Charitable Foundation
and a consultant not covered by the Plans or the Outside Directors' Plan
("Non-Plan 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, vesting and expiration
date) were determined by the Board. Non-Plan Options generally vest
over a five-year period.
F-17
Emisphere Technologies, Inc.
Notes to Financial Statements, Continued
The following table summarizes stock option information for the Non-Plan
Options as of July 31, 1998:
Options Outstanding Options Exercisable
---------------------------------- ---------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Price Outstanding Life Price Exercisable Price
--------------- ----------- ----------- -------- ----------- --------
$6.25 - $9.25 407,822 2.00 yrs $ 8.55 407,822 $ 8.55
$9.75 - $13.75 15,000 5.02 $ 9.75 15,000 $ 9.75
----------- -----------
$6.25 - $13.75 422,822 2.11 $ 8.59 422,822 $ 8.59
=========== ===========
Transactions involving awards of Non-Plan Options during 1996, 1997 and
1998 are summarized as follows:
Weighted Weighted
Average Average
Number Exercise Number Exercise
Outstanding Price Exercisable Price
----------- -------- ----------- --------
Balance, July 31, 1995 1,453,853 $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
1998 Canceled (1,000) $18.50
----------
Balance outstanding
July 31, 1998 422,822 $ 8.59 422,822 $ 8.59
==========
Employee Stock Purchase Plans
The Company has adopted two employee stock purchase plans (the "Purchase
Plans"), the 1994 Employee Stock Purchase Plan (the "Qualified Plan") and
the 1994 Non-Qualified Employee Stock Purchase Plan (the "Non-Qualified
Plan"). The Purchase Plans provide for the grant to all employees of
options to use up to 15% of their quarterly compensation, as such
percentage is determined by the Board prior to the date of grant, to
purchase shares of the Common Stock at a price per share equal to the
lesser of the fair market value of the Common Stock on the date of grant
or 85% of the fair market value on the date of exercise. Options are
granted automatically on the first day of each fiscal quarter and expire
six months after the date of grant. The Qualified Plan is not available
for employees owning more than 5% of the Common Stock and imposes certain
other quarterly limitations on the option grants. Options under the Non-
Qualified plan are granted to the extent the option grants are restricted
under the Qualified Plan. The Plans provide for the issuance of up to
500,000 shares of the Common Stock under the Qualified Plan and 100,000
shares under the Non-Qualified Plan.
F-18
Emisphere Technologies, Inc.
Notes to Financial Statements, Continued
Purchases of Common Stock during the years ended July 31, 1996, 1997 and
1998 are summarized as follows:
Qualified Plan Non-Qualified Plan
----------------------------- ------------------------------
Shares Shares
Purchased Price Rage Purchased Price Range
--------- -------------- --------- ---------------
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
1998 34,851 $8.23 - $17.21 2,749 $13.76 - $16.47
At July 31, 1998, shares reserved for future purchases under the Qualified
and Non-Qualified Plans were 293,844 and 66,688, respectively.
Pro Forma Operating Results
The following tables summarizes the pro forma operating results of the
Company had compensation costs for the Plans, Outside Directors' Plan, the
Non-Plan Options and the Purchase Plans 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, 1997
and 1998 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 1998
------------ ------------- -------------
Pro forma net loss $(7,570,740) $(15,408,336) $(10,409,698)
============ ============= =============
Pro forma net loss per share $(0.90) $(1.53) $(0.97)
======= ======= =======
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, 1997 and 1998 was $5.97, $6.82 and $10.96,
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 Purchase Plans where the expected lives are 6
months; zero divided yield and weighted-average risk-free interest rate of
5.8% in 1996, 6.4% in 1997 and 5.9% in 1998.
F-19
Emisphere Technologies, Inc.
Notes to Financial Statements, Continued
10. Net Loss Per Share:
The Company's basic net loss per share amounts have been computed by
dividing net loss by the weighted average number of Common Shares
outstanding. For the years ended July 31, 1998, 1997, and 1996, the
Company reported net losses and, therefore, no common stock equivalents
were included in the computation of diluted net loss per share since such
inclusion would have been antidilutive. The calculations of basic and
diluted net loss per share are as follows:
Net Loss Shares Per Share
(Numerator) (Denominator) Amount
------------ ------------- ---------
1998
Basic and Diluted $(7,066,288) 10,777,728 $(0.66)
1997
Basic and Diluted $(7,321,305) 9,519,028 $(0.77)
1996
Basic and Diluted $(6,107,601) 8,457,438 $(0.72)
Options, warrants and shares of common stock issuable upon conversion of
Notes and related accrued interest which have been excluded from the
diluted per share amount because their effect would have been antidilutive
include the following:
1996 1997 1998
-------------------- -------------------- --------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Number Price Number Price Number Price
--------- --------- --------- --------- --------- ---------
Options and
warrants with
exercise prices
below the
average fair
market value of
the Company's
common stock for
the respective
year 2,111,075 $ 8.06 4,128,298 $10.47 4,029,129 $10.41
Options and
warrants with
exercise prices
above the
average fair
market value of
the Company's
common stock for
the respective
year 1,871,196 $13.15 89,150 $21.50 255,422 $19.66
Notes and accrued
interest 1,016,875
F-20
Emisphere Technologies, Inc.
Notes to Financial Statements, Continued
11. Major Customers:
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. The remainder consisted
of payments from Eli Lilly & Company ("Lilly") (25%), and from two
pharmaceutical companies for which the Company performed feasibility
studies. During the year ended July 31, 1998, approximately 41% of the
revenue from contract research was derived from Lilly. The remainder
consisted of payments from Ebbisham Ltd. (45%) and Novartis Pharma AG
("Novartis") (14%).
12. Income Taxes:
There is no provision (benefit) for federal or state income taxes for the
years ended July 31, 1996, 1997 and 1998, 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,
1997 and 1998 was as follows:
1997 1998
------------ -------------
Deferred tax assets and valuation allowance:
Accrued liabilities $ 102,292 $ 356,194
Equipment and leasehold improvements 181,863 70,132
Net operating loss carry-forwards 19,217,509 19,404,873
Research and experimental tax
credit carry-forwards 2,454,215 2,454,215
Valuation allowance (21,955,879) (22,285,414)
------------- -------------
$ - $ -
As of July 31, 1998, 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 2013. The
Company's research and experimental tax credit carry-forwards expire in
various years from 2001 to 2013. 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.
F-21
Emisphere Technologies, Inc.
Notes to Financial Statements, Continued
13. 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, 1996, 1997 and 1998 the Company made
contributions to the Plan totaling approximately, $36,000, $58,000 and
$139,000, respectively.
14. 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.
15. Ebbisham Limited:
Ebbisham Limited, an Irish corporation ("Ebbisham") owned jointly by Elan
and the Company, was formed in September 1996 to develop and market
heparin products utilizing technologies contributed by Elan and the
Company. The initial funding of $4.5 million for Ebbisham was provided by
Elan; all additional funding is to be provided equally by Elan and the
Company. On August 5, 1998, Elan and the Company each contributed an
additional $5 million to Ebbisham.
Pursuant to agreements with Elan and Ebbisham, the Company is to perform
certain research and development services on behalf of Ebbisham. In
connection therewith, the Company recognized contract research revenues
during each of the three fiscal years ended July 31, 1998 of approximately
$3.0 million, $4.0 million and $7.1 million, respectively. Such amounts
include $3 million recognized as revenue during the 1996 fiscal year for
certain research and development expenses incurred by the Company prior to
December 1996. As of July 31, 1997 and 1998, amounts due from Ebbisham
for services rendered totaled approximately $649,000 and $7.7 million,
respectively. On August 6, 1998, the Company received a payment from
Ebbisham of approximately $5.0 million.
In September 1995, the Company issued and sold to an affiliate of Elan
600,000 shares of the Common Stock and warrants to purchase for $16.25 per
share an additional 250,000 shares for a total of $7.5 million. In May
1998, Elan exercised its warrants and was issued the additional 250,000
shares.
F-22
Emisphere Technologies, Inc.
Notes to Financial Statements, Continued
Selected financial data of Ebbisham as of July 31, 1997 and 1998 and for
the period from September 26, 1996 (inception) to July 31, 1997 and for
the year ended July 31, 1998 is as follows:
Balance Sheet Data
July 31,
--------------------------------
1997 1998
------------- -------------
Assets:
Cash $ 708,424 $ 741,184
============= =============
Liabilities and Stockholders' Deficit:
Accounts payable (1) $ 1,288,335 $ 9,408,518
Subordinated debt 4,500,000 4,500,000
Stockholders' deficit (5,079,911) (13,167,334)
------------- -------------
Total liabilities and
stockholders' deficit $ 708,424 $ 741,184
============= =============
(1) Includes $648,786 and $7,710,056 due the Company at July 31,
1997 and 1998, respectively
Statement of Operations Data
Period from
September 26, 1996 Year Ended
(inception) to July 31,
July 31, 1997 1998
------------------ -------------
Total Revenue $ 72,045 $ 32,760
Total Expenses (2) (5,171,956) (8,120,183)
------------- -------------
Net loss $ (5,099,911) $ (8,087,423)
============= =============
(2) Includes $3,999,733 and $7,061,270 related to services
performed by the Company on behalf of Ebbisham for the period
from September 26, 1996 (inception) to July 31, 1997 and the
year ended July 31, 1998
F-23
Emisphere Technologies, Inc.
Notes to Financial Statements, Continued
16. Eli Lilly and Company:
In February 1997, the Company and Eli Lilly and Company ("Lilly") entered
into an agreement to combine Lilly's therapeutic protein and formulation
capabilities with the Company's carrier technologies. The agreement
provides for periodic payments to the Company to fund a research and
development program. Under the agreement, the Company granted to Lilly a
series of options to acquire licenses to use the Company's technologies.
In March 1998, Lilly exercised two of its options and entered into two
license agreements to use the Company's technologies in connection with
certain Lilly proteins. The license agreements 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. During the years ended July 31, 1997 and 1998, the
agreement with Lilly generated revenues to the Company of $1,365,000 and
$6,557,000, respectively.
17. Novartis Pharma AG:
In December 1997, the Company and Novartis Pharma AG ("Novartis") entered
into a research collaboration to investigate the Company's technology for
oral delivery of two selected Novartis compounds. The agreement provides
for an initial research collaboration period of at least 12 months and two
options on the part of Novartis to acquire exclusive licenses to use the
Company's technologies for the development and commercialization of oral
formulations of the Novartis compounds.
Upon exercise of its options to acquire technology licenses from the
Company, Novartis has the obligation (which may be waived by the Company)
to purchase in four tranches up to $16 million of the Company's Common
Stock at prices based on market prices at the time of exercise (subject to
certain price limitations with respect to the first tranche).
Under the agreement, Novartis is to make quarterly payments to the Company
for work performed by the Company in connection with the collaboration and
is to make future payments in the event certain milestones are achieved.
During the year ended July 31, 1998, the Company recognized $2,250,000 in
revenues under the Novartis agreement.
F-24
Report of Independent Accountants
New York, New York
October 8, 1998
To the Board of Directors and Stockholders of
Ebbisham Limited:
In our opinion, the accompanying balance sheets and the related
statements of operations, stockholders' deficit and cash flows
present fairly, in all material respects, the financial position
of EBBISHAM LIMITED ("Ebbisham") (a development stage enterprise)
at July 31, 1997 and 1998, and the results of its operations and
its cash flows for the period from September 26, 1996 (inception)
to July 31, 1997, the year ended July 31, 1998 and the cumulative
period from September 26, 1996 (inception) to July 31, 1998, in
conformity with generally accepted accounting principles. These
financial statements are the responsibility of Ebbisham's
management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted
auditing standards which 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, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers LLP
F-25
EBBISHAM LIMITED
(a development stage enterprise)
Balance Sheets
July 31,
---------------------------
ASSETS: 1997 1998
------------ -------------
Current assets:
Cash $ 708,424 $ 741,184
------------ -------------
Total assets $ 708,424 $ 741,184
============ =============
LIABILITIES and STOCKHOLDERS' DEFICIT:
Current liabilities:
Due to Elan Corporation plc $ 639,549 $ 1,698,462
Due to Emisphere Technologies, Inc. 648,786 7,710,056
------------ -------------
Total current liabilities 1,288,335 9,408,518
Subordinated debt 4,500,000 4,500,000
------------ -------------
Total liabilities 5,788,335 13,908,518
------------ -------------
Stockholders' deficit:
"A" Ordinary shares, par value $1.00 per
share, 5,000,000 shares authorized,
10,000 shares issued and outstanding
at July 31, 1997 and 1998 10,000 10,000
"B" Ordinary shares, par value $1.00 per
share, 5,000,000 shares authorized,
10,000 shares issued and outstanding
at July 31, 1997 and 1998 10,000 10,000
Deficit accumulated during the
development stage (5,099,911) (13,187,334)
------------ -------------
Total stockholders' deficit (5,079,911) (13,167,334)
------------ -------------
Total liabilities and
stockholders' deficit $ 708,424 $ 741,184
============ =============
The accompanying notes are an integral part of the financial statements.
F-26
EBBISHAM LIMITED
(a development stage enterprise)
Statements of Operations
For the Cumulative for
period from the period from
September 26, September 26,
1996 1996
(Inception) (Inception)
through Year Ended through
July 31, 1997 July 31, 1998 July 31, 1998
------------- ------------- ---------------
Revenues:
Interest income $ 72,045 $ 32,760 $ 104,805
Expenses:
Research and development (5,171,956) (8,120,183) (13,292,139)
------------- ------------- ---------------
Net loss $(5,099,911) $(8,087,423) $(13,187,334)
============ ============ =============
The accompanying notes are an integral part of the financial statements.
F-27
EBBISHAM LIMITED
(a development stage enterprise)
Statements of Stockholders' Deficit
For the period from September 26, 1996 (inception)
to July 31, 1998 including the period from
September 26, 1996 (inception) to July 31, 1997
and the year ended July 31, 1998
Number of Shares
------------------
Ordinary Ordinary Ordinary Ordinary Accumulated
"A" "B" "A" "B" Deficit Total Amount
-------- -------- --------- --------- ------------- -------------
Ordinary shares issued in
consideration for cash 10,000 10,000 $ 10,000 $ 10,000 $ 20,000
Net loss for the period
From September 26, 1996
(inception) to
July 31, 1997 $ (5,099,911) (5,099,911)
-------- -------- --------- --------- ------------- -------------
Balance at July 31, 1997 10,000 10,000 10,000 10,000 (5,099,911) (5,079,911)
Net loss for the year
Ended July 31, 1998 (8,087,423) (8,087,423)
-------- -------- --------- --------- ------------- -------------
Balance at July 31, 1998 10,000 10,000 $ 10,000 $ 10,000 $(13,187,334) $(13,167,334)
======== ======== ========= ========= ============= =============
The accompanying notes are an integral part of the financial statements.
F-28
EBBISHAM LIMITED
(a development stage enterprise)
Statements of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
For the Cumulative for
period from the period from
September 26, September 26,
1996 1996
(Inception) (Inception)
through Year Ended through
July 31, 1997 July 31, 1998 July 31, 1998
------------- ------------- --------------
Cash flows from operating activities:
Net loss $(5,099,911) $(8,087,423) $(13,187,334)
Changes in assets and liabilities:
Increase in payable to Elan Corporation plc 639,549 1,058,913 1,698,462
Increase in payable to Emisphere
Technologies, Inc. 648,786 7,061,270 7,710,056
------------- ------------- --------------
Net cash (used in) provided by
operating activities (3,811,576) 32,760 (3,778,816)
------------- ------------- --------------
Cash flows from financing activities:
Proceeds from issuance of share capital 20,000 20,000
Proceeds from issuance of
subordinated debt 4,500,000 4,500,000
------------- --------------
Net cash provided by
financing activities 4,520,000 4,520,000
------------- --------------
Net increase in cash 708,424 32,760 741,184
Cash at beginning of period - 708,424 -
------------- ------------- --------------
Cash at end of period $ 708,424 $ 741,184 $ 741,184
============= ============= ==============
The accompanying notes are an integral part of the financial statements.
F-29
EBBISHAM LIMITED
(a development stage enterprise)
Notes to Financial Statements
1. Organization and Business:
Ebbisham Limited ("Ebbisham"), an Irish corporation, is an
equally owned joint venture between Elan Corporation plc
("Elan") and Emisphere Technologies, Inc. ("Emisphere")
(collectively the "Partners") formed in September 1996 to
develop and market heparin products utilizing technologies
contributed by the Partners. Ebbisham is managed by a
committee ("Management Committee") consisting of equal
representation from the Partners. The purpose of the
Management Committee is to govern all activities of Ebbisham
including the research and development activities undertaken
by Ebbisham as well as the approval of budgets and determining
the necessary financing to be provided by the Partners. As a
development stage enterprise, Ebbisham's primary efforts to
date have been devoted to research and development and raising
capital.
Ebbisham has limited capital resources and recurring net
operating losses. Since inception, Ebbisham has received
financial support from the Partners and is dependent upon
receipt of additional capital investment from Elan and
Emisphere to fund planned research activities. Ebbisham has
received assurances from Emisphere that it will provide the
necessary financial support to enable Ebbisham to continue to
operate through December 1, 1999. On August 5, 1998, Elan and
Emisphere each contributed $5 million to Ebbisham. In
addition to the normal risks associated with a new business
venture, there can be no assurance 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 consultants.
2. Summary of Significant Accounting Policies:
Basis of Preparation
The accompanying financial statements of Ebbisham were
prepared in accordance with generally accepted accounting
principles in the United States.
Cash
The carrying amount reported in the balance sheet for cash
approximates its fair value. Cash subjects Ebbisham to
concentrations of credit risk.
Income Taxes
Ebbisham accounts for income taxes in accordance with the
provisions of Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109
requires that Ebbisham recognize 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
bases of assets and liabilities and their respective
financial-reporting amounts ("temporary differences") at
enacted tax rates in effect for the years in which the
temporary differences are expected to reverse.
F-30
EBBISHAM LIMITED
(a development stage enterprise)
Notes to Financial Statements, Continued
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.
3. Subordinated Debt:
On September 26, 1996 (inception) Ebbisham issued $4,500,000
of subordinated debt to Elan, which is due on September 26,
2006.
The subordinated debt is interest-free until Ebbisham has
sufficient equity, as defined, and has earned a profit after
tax in the preceding financial year of not less than $100,000.
The rate of interest in a given financial year is as follows:
- 5% if profits after tax for that financial year exceed
$100,000 but do not exceed $5,000,000.
- 10% if profits after tax for that financial year exceed
$5,000,000 but do not exceed $10,000,000.
- 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.
4. Stockholders' Deficit:
Ebbisham's certificate of incorporation provides for the
issuance of five million ordinary "A" shares and five million
ordinary "B" shares. The rights and terms of both types of
shares are identical except that Elan holds the ordinary "A"
shares and Emisphere holds the ordinary "B" shares.
F-31
EBBISHAM LIMITED
(a development stage enterprise)
Notes to Financial Statements, Continued
5. Income Taxes:
Ebbisham is subject to the provisions of tax laws in Ireland.
Accordingly, in the event that Ebbisham earns royalty income
for its patents in the future, such amounts may be exempt
from income tax under certain circumstances. In addition, in
the event that taxable profits are derived from Ebbisham's
manufacture of products, a tax would be imposed on profits
earned at tax rates ranging from 10% to 32%.
As of July 31, 1998, Ebbisham has available net operating
loss carry-forwards of approximately $13 million, which,
under certain circumstances, may be available to offset
taxable income arising in the future. As a result of the
uncertainty of whether Ebbisham will have future taxable
income and whether the net operating losses being carried
forward will be available to offset such taxable income,
Ebbisham has established a valuation allowance equal to the
total deferred tax asset. The total deferred tax asset, net
of the valuation allowance, was not material.
6. Related-Party Transactions:
On September 26, 1996 (inception), Ebbisham entered into
certain agreements with Elan and Emisphere relating to the
research and development of an oral heparin product under
development. In accordance with these agreements, the
Partners perform certain research and development activities
on behalf of Ebbisham. During the period from September 26,
1996 (inception) through July 31, 1997, Ebbisham incurred
research and development expenses for work performed by Elan
and Emisphere of $1,172,223 and $3,999,733, respectively. For
the year-ended July 31, 1998, Ebbisham incurred research and
development expenses for work performed by Elan and Emisphere
of $1,058,913 and $7,061,270, respectively. Cumulatively, for
the period from September 26, 1996 (inception) through July
31, 1998, Ebbisham incurred research and development expenses
for work performed by Elan and Emisphere of $2,231,136 and
$11,061,003, respectively.
7. Subsequent Event:
On August 5, 1998, Elan and Emisphere each advanced $5 million
to Ebbisham in exchange for notes payable which are due in
full on July 31, 1999. The notes payable do not bear
interest, and may be repaid by Ebbisham prior to July 31, 1999
without penalties or premiums. If the funds are not available
for Ebbisham to repay the notes by July 31, 1999, Emisphere
has agreed to extend the terms of the notes to December 1,
1999 and to provide the necessary funding to repay amounts due
Elan.
F-32
EXHIBIT INDEX
Incorporated
Exhibit by Reference (1)
(3) - Restated Certificate of Incorporation of the Company A
- By-Laws of the Company B
(4) - Rights Agreement dated as of February 23, 1996 C
between the Company and Continental Stock Transfer &
Trust Company
- form of the 5% Senior Convertible Notes due 2001 D
issued May 1, 1998 in the aggregate principal amount
of $13,500,000
- form of the Note Purchase Agreement dated as of May D
1, 1998 by and between the registrant and each of
Delta Opportunity Fund, Ltd., OTATO Limited
Partnership, Fisher Capital Ltd., Wingate Capital
Ltd., CCG Capital Ltd. and CCG Investment Fund Ltd.
(10) - 1991 Stock Option Plan, as amended (2)
- Stock Option Plan for Outside Directors, as amended A (2)
- Employee Stock Purchase Plan E (2)
- Non-Qualified Employee Stock Purchase Plan E (2)
- 1995 Non-Qualified Stock Option Plan, as amended (2)
- Directors' Deferred Compensation Stock Plan (2)
- Employment Agreement dated as of October 6, 1995 E (2)
between Michael M. Goldberg and the Company
- Stock Option Agreements dated as of January 1, 1991, E (2)(3)
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, 1995 E (2)
between Sam J. Milstein and the Company
- Stock Option Agreements dated as of January 1, 1991, E (2)(3)
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, 1995 by E
and between the Company and Elan International
Services Limited
- Letter Agreement dated as of September 26, 1996 F
amending said Purchase Agreement
- Joint Venture Agreement dated as of September 26, F
1996 by and among Elan Corporation plc, the Company
and Ebbisham Limited
- License Agreement dated as of September 26, 1996 by F
and between Ebbisham Limited and Elan Corporation
plc
- License Agreement dated as of September 26, 1996 by F
and between Ebbisham Limited and the Company
- Stock Instrument dated as of September 26, 1996 by F
and between Ebbisham Limited and Elan Corporation
plc
- Memorandum and Articles of Association of Ebbisham F
Limited
- Letter Agreement dated as of September 26, 1996 by F
and among Elan Corporation plc, the Company and
Ebbisham Limited
- Research Collaboration and Option Agreement dated as B
of February 26, 1997 between the Company and Eli
Lilly and Company
- Research Collaboration and Option Agreement dated as G
of December 3, 1997 between the Company and Novartis
Pharma AG
(23) - Consent of PricewaterhouseCoopers LLP
- Consent of PricewaterhouseCoopers LLP
(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. Annual Report on Form 10-K for the fiscal year ended July 31, 1997.
B. Quarterly Report on Form 10-Q/A (Amendment No.1) for the quarterly period
ended January 31, 1997.
C. Current Report on Form 8-K dated March 5, 1996.
D. Current Report on Form 8-K dated July 1, 1998.
E. Annual Report on Form 10-K for the fiscal year ended July 31, 1995.
F. Annual Report on Form 10-K for the fiscal year ended July 31, 1996.
G. Quarterly Report on Form 10-Q for the quarterly period ended October 31,
1997
(2) Management contract or compensatory plan or arrangement
(3) Omitted in part pursuant to Instruction 2 of Item 601 of Regulation S-K.
-26-
EMISPHERE TECHNOLOGIES, INC.
1991 STOCK OPTION PLAN
as amended
September 11, 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 subsidiaries. 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
1,700,000 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 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).
-2-
(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.
(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.
-3-
(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 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 termination may affect adversely any outstanding option without the written
consent of the optionee.
-4-
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).
-5-
EMISPHERE TECHNOLOGIES, INC.
1995 NON-QUALIFIED STOCK OPTION PLAN
as amended
September 11, 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 2,100,000 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. Notwithstanding the
foregoing, options, to the extent vested, may be transferred by an optionee to
any member or members of the family of the optionee or to any trust established
for their benefit.
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, 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.
-2-
EMISPHERE TECHNOLOGIES, INC.
DIRECTORS' DEFERRED COMPENSATION STOCK PLAN
25,000 Shares
1. Purpose
The purpose of the Directors' Deferred Compensation Stock Plan (the
"Plan") of Emisphere Technologies, Inc. (the "Company") is to attract,
compensate and retain well qualified directors by providing them with deferred
compensation for attending meetings of the Board of Directors or a committee
thereof and with an equity interest in the Company's success.
2. Stock Subject to the Plan
The Company may issue and deliver a total of 25,000 shares of its common
stock, par value $.01 per share (the "Common Stock"), pursuant to the Plan.
Such shares may be either authorized but unissued shares or treasury shares.
3. Administration
The Plan shall be administered by the Board of Directors of the Company.
The Board 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, the determination of the amount of compensation for attending each
meeting, the adoption of such rules and regulations as it may deem advisable
and the termination of further share issuances under the Plan.
4. Eligibility
Eligibility to participate in the Plan shall be open to only those
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 and (iii) are not affiliated with any
person who is such an officer, employee or owner.
5. Share Accounts
The Company shall set up and maintain for each eligible director an
account (each a "Share Account') representing the number of shares of the
Common Stock which the Company is obligated in the future to issue and deliver
to such director, determined as follows:
(a) for each meeting attended by an eligible director, a number of
shares of the Common Stock shall be added to his or her Share Account in an
amount equal to (i) the amount determined by the Board of Directors as
compensation for attending such meeting divided by (ii) the fair market
value of the Common Stock as of the date of such meeting;
(b) for each cash dividend or distribution paid by the Company with
respect to the Common Stock, a number of shares of the Common Stock shall
be added to each Share Account in an amount equal to (i) the amount of the
dividend that would be paid if the shares in the Share Account were issued
and outstanding shares of the Common Stock divided by (ii) the fair market
value of the Common Stock as of the date of payment of such dividend or
distribution;
(c) As used herein, the fair market value of the Common Stock as of any
date shall be the closing price of the Common Stock on the Nasdaq National
Market on such date. In the event the Common Stock ceases at any time to
be traded on the Nasdaq National Market, the fair market value of the
Common Stock shall be determined in such manner as may be set by the Board
of Directors of the Company
(d) All share calculations shall be made to the nearest one thousandth
of a share.
6. Issuance of Shares
The Company shall within six months following the date each participant in
the Plan ceases to be a director of the Company issue and deliver to such
person all of the shares in his or her Share Account. In the event of the
death of a director, such shares shall be delivered to the director's estate or
legal representative. Nothing herein shall be deemed to confer any right to
continue as a director of the Company or to limit the right of the Company to
remove a director.
7. Rights as a Stockholder
Until such time as the shares in a director's Share Account have been
issued and delivered to the director in accordance with the terms of the Plan,
the director shall have no rights as a stockholder with respect to the shares
of the Common Stock in his or her Share Account.
8. Nontransferability of the Share Account
The right to receive shares in a director's Share Account may not be
assigned or transferred except by will or by the laws of descent and
distribution and may be delivered during the life of the director only to the
director.
9. Compliance with Securities Laws
If the shares to be issued under the Plan have not been registered under
the Securities Act of 1933, as amended, the Company's obligation to issue such
shares shall be conditioned upon receipt of a representation in writing that
the director 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 federal or state securities laws.
10. 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 shares of the Common Stock outstanding, an appropriate
adjustment shall be made, as determined by the Board of Directors of the
Company, to the aggregate number of shares the Company may issue under the Plan
and the number of shares in each Share Account.
(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, the Company shall prior thereto issue and deliver to
each of the directors all of the shares in his or her Share Account.
11. Effectiveness of the Plan
The Plan was adopted on September 11, 1997 by resolution of the Board of
Directors of the Company and is effective as of such date. The Plan shall be
submitted to the Company's stockholders for approval by the affirmative votes
of the holders of a majority of the Common Stock present, or represented, and
entitled to vote at a meeting duly held in accordance with the applicable laws
of the State of Delaware.
12. 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
right of a director to receive the number of shares of the Common Stock in his
or her Share Account and (ii) any amendment which must be approved by the
stockholders of the Company in order to ensure that all transactions under the
Plan continue to be exempt 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.
-2-
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, 333-29981 and 333-52547) and Form S-3 (File Nos. 33-
62224, 333-19815, 333-23423 and 333-52461) of our report dated October 12,
1998, on our audits of the financial statements of Emisphere Technologies, Inc.
as of July 31, 1998 and 1997, and for each of the three years in the period
ended July 31, 1998, which report is included in this Annual Report on
Form 10-K.
PricewaterhouseCoopers LLP
New York, New York
October 28, 1998
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, 333-29981 and 333-52547) and Form S-3 (File Nos. 33-
62224, 333-19815, 333-23423 and 333-52461) of our report dated October 8,
1998, on our audits of the financial statements of Ebbisham Limited as of July
31, 1998 and 1997, and for the period from September 26, 1996 (inception) to
July 31, 1997, the year ended July 31, 1998 and the cumulative period from
September 26, 1996 (inception) to July 31, 1998, which report is included in
this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
New York, New York
October 28, 1998