-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, H43N17AnlTbY305WzNxfOUXm/qvGqDMSM/Z0c7pxthfd5DsAFe+V29hnwmYF1jBn VYyG/UiwP38drA7WNVbiXw== 0000743884-97-000006.txt : 19970328 0000743884-97-000006.hdr.sgml : 19970328 ACCESSION NUMBER: 0000743884-97-000006 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970327 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MACROCHEM CORP CENTRAL INDEX KEY: 0000743884 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 042744744 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-13634 FILM NUMBER: 97564576 BUSINESS ADDRESS: STREET 1: 110 HARTWELL AVE CITY: LEXINGTON STATE: MA ZIP: 02173 BUSINESS PHONE: 6178624003 MAIL ADDRESS: STREET 1: 110 HARTWELL AVENUE CITY: LEXINGTON STATE: MA ZIP: 02173 10-K 1 1996 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 1996 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from ____ to ____ Commission file number 0-13634 MACROCHEM CORPORATION (Exact name of registrant as specified in its charter) Delaware 04-2744744 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 110 Hartwell Avenue Lexington, Massachusetts 02173-3134 (Address of principal executive offices) (617) 862-4003 (Telephone number) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value (Title of Class) Class A Warrants (Title of Class) Class AA Warrants (Title of Class) Class X Warrants (Title of Class) 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 shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the 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. [ ] The aggregate market value of the shares of Common Stock held by non-affiliates, based upon the closing price for such stock on February 28, 1997 was approximately $110,375,000. As of February 28, 1997, 15,767,875 shares of common stock, $.01 par value, were outstanding. Documents Incorporated By Reference Portions of the registrant's definitive Proxy Statement (the "Proxy Statement") for its 1997 Annual Meeting of Stockholders presently intended to be filed with the Securities and Exchange Commission by April 30, 1997 are incorporated by reference into Part III of this Form 10-K. PART I ITEM 1. BUSINESS. THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED OR REFERRED TO IN "RISK FACTORS". MacroChem's primary business is the development and commercialization of transdermal drug delivery compounds and systems designed to promote the delivery of drugs from the surface of the skin into the skin or into the bloodstream. SEPA(R) compounds, the Company's proprietary transdermal penetration enhancers, when properly combined with particular drugs, create pharmaceutical formulations (creams, gels, solutions, etc.) that enhance the transdermal delivery of drugs into the skin or into the bloodstream. SEPA formulations combined with the Company's polymers and adhesives can also be used with patch formats to achieve the transdermal delivery of selected drugs. The Company believes that SEPA compounds enhance the diffusion of drugs into and through the skin by making the outer layer of the skin (stratum corneum) more permeable to the drug molecule. Transdermal delivery provides an alternative to other methods of drug administration (injection, oral dosage forms, inhalation), and may allow selected drugs to be administered more effectively, at lower doses, with fewer adverse events and improved patient compliance. The Company is developing specific SEPA formulations for use with non-proprietary and proprietary drugs manufactured by pharmaceutical companies, and plans to commercialize these products through the formation of partnerships, strategic alliances and license agreements with those companies. In order to attract strategic partners, the Company is conducting clinical testing of certain SEPA-enhanced pharmaceuticals. The Company believes that if the clinical trials are successful the results will aid the Company in attracting partners to assist in the promotion of the product. Because of the substantial costs involved in bringing a new pharmaceutical product or a new formulation of an old drug to the market, the Company may be required to rely on pharmaceutical companies to conduct all or part of the clinical trials necessary to gain regulatory approval to manufacture and to market any resulting product. The Company has also developed a series of new low molecular weight polymers, termed MacroDerm,TM for cosmetic use and the topical delivery of pharmaceuticals. The Company does not maintain general product liability insurance, since the Company does not market drug products. The Company recently commenced clinical studies and obtained specific liability insurance relating to such studies. As of December 31, 1996, no asserted liability claims exist against the Company. However, in the future, incidents could give rise to claims which could exceed the Company's insurance coverage and resources. BUSINESS AGREEMENTS On January 22, 1997 the Company signed a license and supply agreement with Cytopharm, Inc., a California corporation. Cytopharm invented and is the owner of certain patent rights covering a photo-activated compound for the treatment of certain dermatological diseases. The Company will make available its enhancer for use by Cytopharm and its licensee in the agreed to photo-activated formulation. Cytopharm agrees to pay or cause its licensee to pay royalties to the Company on all license fees, milestone payments, advance royalty payments and other lump-sum payments with respect to license and sale of such formulation for a period equal to the longer of the life of the Company's patent or ten years from the commencement of commercial marketing of the formulation in each country where the formulation is marketed. In September 1990, the Company entered into a license agreement with Ascent Pharmaceuticals, Inc. ("Ascent") in which Ascent received an exclusive license to develop, test and market the Company's SEPA compounds in combination with catecholamine bronchodilators for the treatment of respiratory disorders and, in combination with cromolyn sodium, to treat allergic disorders. Ascent is in the clinical stage of its development program. However, no assurances can be given that the work conducted by Ascent will lead to the marketing of SEPA-containing products for these indications. RESEARCH AND DEVELOPMENT The Company conducts its research and development activities through its own staff and facilities, as well as through collaborative arrangements with universities, contract research organizations and independent consultants. As of March 1, 1997, the Company had 19 full-time employees, 11 of whom are devoted to research and development and regulatory affairs. In addition, two Company officers devote approximately 75% of their time to research and development. Research and developmental expenditures aggregated $1,736,600, $1,238,100 and $864,100 during the years ended December 31, 1996, 1995 and 1994, respectively. The Company is also dependent upon third parties to conduct clinical studies, obtain FDA and other regulatory approvals and manufacture and market a finished product. The Company anticipates incurring significant development expenditures in the future as the Company continues its efforts to develop its present compounds and new drug formulations and as it begins to research other technologies and to expand its toxicological and clinical studies of certain drugs. The Company conducts stability studies, tests its unique formulations and designs manufacturing processes for its SEPA compounds and adhesive and polymer technologies at its facility and other facilities. The Company has cGMP (current Good Manufacturing Practices) facilities for the manufacture of dosage forms for clinical evaluations. PRODUCTS AND TECHNOLOGIES BACKGROUND To be effective, drugs must reach an intended site in the body, at an effective concentration, and for an appropriate length of time. Traditional methods of drug administration, such as oral ingestion, intramuscular and intravenous injections and inhalation, are effective for a wide variety of drugs. However, depending upon the given drug, each method may have disadvantages. For example, in oral administration, a drug must pass through the gastrointestinal system to be absorbed and may be metabolized or broken down, resulting in a lower amount of effective drug being therapeutically available. As a result, higher dosages of the drug must be used to produce the desired effect, which may cause irritation of the gastrointestinal tract and systemic toxicity. In addition, the rate at which orally administered drugs are absorbed may vary depending on several factors, including the drug's chemical properties, the length of time the drug remains in the gastrointestinal tract and the patient's meal patterns. Although the pharmaceutical industry has investigated a variety of alternative approaches for dealing with drug adverse events and loss of efficacy following oral dosing, through enteric coating of tablets, formulating with various waxes and cellulosic materials, microencapsulation and compressing tablets in various layers, the desired effects of these approaches are not always reproducible from patient to patient or effective in modifying metabolic effects produced in the liver. TRANSDERMAL DRUG DELIVERY Transdermal drug delivery is the process of delivering drugs into the skin so that they can be effective in the treatment of dermatological conditions and diseases or through the skin and into the bloodstream for the treatment of systemic diseases. The skin is made up of three layers: the outer layer, the stratum corneum, the middle layer or viable epidermis, and the inner layer, the dermis. The stratum corneum, which serves as the skin's primary barrier to the external environment, consists of closely packed dead cells and fatty (lipid) material. The epidermis is composed of several layers of active cells and the dermis consists, in part, of tissue containing hair follicles, nerve endings and blood capillaries. Within the stratum corneum, lipid layers bind the dead cells together to form a protective barrier. Research conducted by MacroChem shows that SEPA compounds affect drug delivery by acting, in part, upon the stratum corneum to disrupt the alignment of the lipid molecules within the lipid layers. This disruption increases the porosity of the lipid-cell layers, allowing drugs to diffuse through the stratum corneum through the more porous epidermis to the dermis, where they enter the blood stream through the capillaries. The rate and amount of drug absorbed can be controlled by varying the formulation used. THE COMPANY'S DRUG-DELIVERY SYSTEMS AND OTHER PROPOSED PRODUCTS SEPA COMPOUNDS The delivery of a drug through the skin depends on the drug's physical and chemical characteristics (molecular size and shape, the drug's solubility in lipids and water, its melting point and whether it is lipophilic or hydrophilic). Since some drugs move through the skin too rapidly, the transdermal system must retard the rate of drug absorption to ensure optimal efficacy with minimum toxicity. Other drugs move through the skin with difficulty, so the transdermal system must be formulated to increase the drug's rate of absorption through the skin. Common methods of transdermal delivery use common chemicals such as ethanol or fatty compounds to enhance penetration. Although certain delivery methods using chemicals have proven to be somewhat effective with specific drugs, such as drugs used for the treatment of motion sickness or hormone deficiencies, they have caused adverse events, such as skin irritation and sensitivity at the site of application. Some drugs, because of their physical characteristics or the amount of drug necessary to achieve the desired therapeutic effect, have not been successfully delivered transdermally to date. The Company has developed SEPA compounds that are designed to enhance the transport, penetration and controlled delivery of drugs through the skin. SEPA compounds are generally colorless, clear liquids that are intended to promote drug delivery by aiding drug molecules to penetrate the skin, diffuse into or through the skin layers and become absorbed into the bloodstream. The Company has set up its own facility for the in vitro testing of drug formulations containing SEPA, and is currently less dependent on outside laboratories for this type of testing. The Company is conducting in vitro studies to evaluate the transdermal enhancing effect of SEPA in combination with a variety of drugs with differing physical and chemical characteristics, representing a broad spectrum of potential drug products. Although the Company's research and development efforts with SEPA are at an advanced stage, the Company must still conduct substantial additional studies to demonstrate the efficacy and safety of any SEPA-drug formulation. The Company has found that specific drugs administered transdermally with SEPA demonstrated increased transdermal absorption. Some of the drug formulations tested by the Company with SEPA contain compounds generally recognized as unlikely or difficult candidates for transdermal delivery because of their physical and chemical properties and molecular size. As these drug formulations are further developed, the Company plans to conduct additional studies to investigate the efficacy and safety of some of these formulations. Although in vivo testing has been conducted on SEPA compounds, more studies will be needed to demonstrate the safety and efficacy of SEPA in formulations with specific drugs. The Company is currently conducting clinical trials with a topical SEPA formulation of alprostadil, for the treatment of erectile dysfunction. The Company intends to begin clinical trials of a topical formulation of SEPA and testosterone in early 1997 and plans additional clinical studies of SEPA in a topical gel formulation with ibuprofen for the treatment of muscle pain. In addition to the ongoing clinical development programs cited above, the Company, in association with third parties, is currently conducting pre-clinical studies with SEPA formulations in combination with specific drugs for a variety of applications. The Company believes that SEPA compounds can be used with a broad variety of new and existing drugs to enhance their commercial value. The improved therapeutic effectiveness and convenience of a transdermal SEPA product may substantially expand the existing market for a drug. In addition, a formulation containing a SEPA compound may prove to be a superior alternative to the existing methods of administering certain drugs. MACRODERM(TM) DRUG DELIVERY SYSTEM The Company has developed a series of new low molecular weight polymers, termed MacroDerm,TM for use in cosmetics and in the superficial dermal delivery of pharmaceuticals. Potential applications include their use with sunscreens, moisturizers, and insect repellents. COMPETITION The Company competes with numerous firms, many of which are large, multi-national organizations with worldwide distribution. The Company believes that its major competitors in the drug-delivery sector of the health care industry include ALZA Corporation, Cygnus Therapeutic Systems, Elan Corporation, plc., Ciba-Geigy Limited and Sandoz Limited. These firms have substantially greater capital resources, research and development and technical staffs, facilities and experience in obtaining regulatory approvals, as well as in manufacturing, marketing and distribution of products, than the Company. Recent trends in this area are toward further market consolidation of large drug companies into a smaller number of very large entities, further concentrating financial, technical and market strength and increasing competitive pressure in the industry. Academic institutions, hospitals, governmental agencies and other public and private research organizations are also conducting research and seeking patent protection and may develop competing products or technologies of their own through joint ventures or other arrangements. In addition, recently developed technologies or technologies that may be developed in the future may or could be the basis for competitive products. No assurance can be given that the Company's competitors will not succeed in developing technologies and products that are more effective or less costly to use than any that are currently being developed by the Company. Alprostadil, a synthetic prostaglandin E1, is the only drug approved for marketing in the U.S. for erectile dysfunction. It is available in two dosage forms. Caverject,AE marketed by Pharmacia & Upjohn, is administered by needle injection directly into the penis. The second product, developed by Vivus, is a pellet form of the drug administered through a tube inserted into the urethra. In contrast to the invasive forms now available, MacroChem believes that a topical gel formulation applied to the penis will be the preferred dosage form for treatment of this disorder. The Company expects products approved for sale, if any, to compete primarily on the basis of product efficacy, safety, patient compliance, reliability, price and patent position. Generally, the first pharmaceutical product to reach the market in a therapeutic or preventative area is often at a significant advantage relative to later entrants to the market. The Company's competitive position will also depend on its ability to attract and retain qualified scientific and other personnel, develop effective proprietary products, implement production and marketing plans, obtain patent protection and secure adequate capital resources. EMPLOYEES As of March 1, 1997, the Company had 19 full time employees, 11 of whom are devoted to research and development and regulatory affairs. In addition, two Company officers devote approximately 75% of their time to research and development. GOVERNMENT REGULATION The production and marketing of the Company's drug delivery systems and pharmaceutical products are subject to regulation for safety, efficacy and quality by numerous federal, state and local agencies and comparable agencies in foreign countries. In the United States, the Federal Food, Drug and Cosmetics Act, the Public Health Service Act, the Controlled Substances Act and other federal statutes and regulations govern or influence the testing, manufacture, safety, labeling, storage, record keeping, approval, advertising and promotion of the Company's proposed products and technologies. Non-compliance with applicable requirements can result in fines and other judicially imposed sanctions including recalls and criminal prosecutions based on products, promotional practices, or manufacturing practices that violate statutory requirements. In addition, administrative remedies can involve voluntary recalls or cessation of sale of products, administrative detention, public notice, voluntary changes in labeling, manufacturing or promotional practices, as well as refusal of the government to approve NDAs. The FDA also has the authority to withdraw approval of drugs in accordance with statutory procedures. The FDA approval procedure involves completion of certain pre-clinical and manufacturing/stability studies and the submission of the results of these studies to the FDA in an IND application in support of performing clinical trials. IND allowance is then followed by performance of human clinical trials, and additional pre-clinical and manufacturing quality control studies, supporting safety, efficacy and manufacturing quality control. The information developed under the IND is compiled into an NDA or ANDA and submitted to FDA for approval to market. Pre-clinical studies involve laboratory evaluation of product characteristics and animal studies to assess the efficacy and safety of the product. Human clinical trials are typically conducted in three sequential phases, but the phases may overlap. Phase I trials consist of testing of the product in a small number of normal volunteers primarily for safety. In Phase II, in addition to safety, the efficacy of the product is evaluated in a small patient population. Phase III trials typically involve multicenter testing for safety and clinical efficacy in an expanded population of patients at geographically dispersed test sites. A clinical plan, or "protocol," accompanied by the approval of the institutions participating in the trials, must be submitted to the FDA prior to commencement of each clinical trial. The FDA may order the temporary or permanent discontinuation of a clinical trial at any time if adverse events that endanger patients in the trials are observed. In addition, the FDA may request Phase IV clinical trials, to be performed after marketing approval, to resolve any lingering questions. A 30-day waiting period after the filing of each IND application is required by the FDA prior to the commencement of clinical testing in human subjects. If the FDA has not commented on or questioned the IND application within 30 days, initial clinical studies may begin. However, any FDA comments or questions must be answered to the satisfaction of the FDA before initial clinical testing can begin. In some instances, this process could result in substantial delay and expense. The results of the pre-clinical and clinical studies on new drugs are submitted to the FDA in the form of NDAs for approval to commence commercial sales. Following extensive review, the FDA may grant marketing approval, require additional testing or information or deny the application. Continued compliance with all FDA requirements and the conditions in an approved application, including product specifications, manufacturing process and labeling requirements, are necessary for all products. Failure to comply, or the occurrence of unanticipated adverse events during commercial marketing, could lead to the need for labeling changes, product recall, seizure, injunctions against distribution or other FDA-initiated action, which could delay further marketing until the products are brought into compliance. In certain cases, an ANDA may be filed in lieu of filing an NDA. An ANDA relies on bioequivalency tests that compare the applicant's drug with an already approved reference drug, rather than on clinical trials. An ANDA may be available to the Company for a new formulation of a drug which has already been approved by the FDA in other topical dosage forms. By concentrating on drug delivery systems employing existing drugs, the Company expects that the time for regulatory approval of certain products should be shorter than for entirely new substances. The NDA itself is a complicated and detailed document and must include the results of extensive animal, clinical and other testing, the cost of which is substantial. Although the FDA is required to review applications within 180 days of filing, in the process of reviewing applications the FDA frequently requests that additional information be submitted and starts the 180 day regulatory review period anew when the requested additional information is submitted. The effect of such requests and subsequent submissions can significantly extend the time for the NDA review process. Until an NDA is actually approved, no assurance can be given that the information requested and submitted will be considered adequate by the FDA to justify approval. In addition to the above, packaging and labeling of most of the Company's proposed products are subject to FDA regulation. The Company must get FDA approval for all labeling and packaging prior to marketing of a regulated product. Whether or not FDA approval has been obtained, approval of a product by a comparable regulatory authority must be obtained in most foreign countries prior to the commencement of marketing of the product in that country. The approval procedure varies from country to country and may involve additional testing, and the time required may differ from that required for FDA approval. Although some procedures for unified filings exist for certain European countries, in general each country has its own procedure and requirements, many of which are time consuming and expensive. Thus, substantial delays in obtaining required approvals from foreign regulatory authorities can result after the relevant applications are filed. After such approvals are obtained, further delays may be encountered before the products become commercially available. No assurance can be given that any required FDA or other governmental approval will be granted or, if granted, will not be withdrawn. Governmental regulation may prevent or substantially delay the marketing of the Company's proposed products, cause the Company to undertake costly procedures and furnish a competitive advantage to the more substantially capitalized companies with which the Company plans to compete. In addition, the extent of potentially adverse government regulations that may arise from future administrative action or legislation cannot be predicted. PATENTS AND LICENSE RIGHTS The Company was granted a new U.S. patent in 1996 based on the combination of various different classes of enhancer compounds in conjunction with iontophoresis. In addition, the corresponding European application has also been found allowable and will cover the combination of iontophoresis with SEPA as well as other enhancer compounds. The Company's U.S. patent applications filed in 1995 for the use of SEPA with minoxidil for once-a-day treatment and covering its MacroDerm(TM) technology were allowed in 1996 and patents are expected to issue in 1997. Applications covering modified forms of the MacroDerm polymers were filed during 1996. Also allowed in 1996 were the Company's patent applications for low molecular weight polyvinyl pyrrolidone molecules and their use in stabilizing enzymes and other types of proteins (U.S.); and for SEPA in Japan. This technology no longer fits within the product development and technology focus of the Company, and it intends to sublicense the technology, if possible. No assurance can be given, however, that a sublicensee can be identified who will be willing to license the technology. The Company was granted a U.S. patent in 1994 relating to certain compounds useful for the treatment of osteoporosis and hypercalcemia. Corresponding foreign patents have also issued in several European countries and Canada. A related U.S. patent issued in 1995 for the use of these compounds in the treatment of hypercalcemia. The Company holds patents on its SEPA compounds in the United States, Canada, throughout Europe and in Japan. The Company owns a U.S. patent on a transdermal medicator. The Company believes that patent protection of its technologies, processes and products is important to its future operations. The success of the Company's proposed products may depend, in part, upon the Company's ability to obtain patent protection. The Company intends to enforce its patent position and intellectual property rights vigorously. The cost of enforcing the Company's patent rights in lawsuits, if necessary, may be significant and could interfere with the Company's operations. Although the Company intends to file additional patent applications as management believes appropriate with respect to any new products or technological developments, no assurance can be given that any additional patents will be issued or, if issued, will be of commercial benefit to the Company. In addition, to anticipate the breadth or degree of protection that any such patents may afford is impossible. To the extent that the Company relies on unpatented proprietary technology, no assurance can be given that others will not independently develop or obtain substantially equivalent or superior technology or otherwise gain access to the Company's trade secrets, that any obligation of confidentiality will be honored or that the Company will be able to effectively protect its rights to proprietary technology. Further, no assurance can be given that any products developed by the Company will not infringe patents held by third parties or that, in such case, licenses from such third parties would be available on commercially acceptable terms, if at all. In connection with the prior research and development efforts of the Company, the Company owns several patents and possesses certain license rights in connection with other technologies, which it is not currently pursuing. RISK FACTORS IN ADDITION TO THE OTHER INFORMATION IN THIS REPORT, THE FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY AND ITS BUSINESS. THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS IN THIS REPORT AND IN FORWARD-LOOKING STATEMENTS MADE FROM TIME TO TIME BY THE COMPANY ON THE BASIS OF MANAGEMENT'S THEN-CURRENT EXPECTATIONS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED OR REFERRED TO BELOW. HISTORY OF OPERATING LOSSES; NEED FOR CONTINUED WORKING CAPITAL The Company has been engaged primarily in research and development since its inception in 1981 and has derived limited revenues from the commercial sale of its products and licensing of certain technology. The Company has had no revenues relating to the sale of any products currently under development. The Company has incurred net losses every year since its inception and the Company anticipates that losses may continue for the foreseeable future. At December 31, 1996, the Company's accumulated deficit was approximately $18.1 million. The Company's ability to continue operations after its current capital resources are exhausted depends on its ability to obtain additional financing and achieve profitable operations, as to which no assurance can be given. However, the Company believes that its financial resources are sufficient to meet planned operating activities for the next twelve months. The Company continues to pursue the commercialization of its SEPA technology through discussion and presentation of its technology to potential licensees. No assurance can be given that these discussions will lead to any licenses. No assurance can be given that any license fees will be received by the Company in the current fiscal year. For the foreseeable future, and until marketing approvals are obtained, and/or license agreements are entered into, if ever, the Company anticipates limited licensing revenue and no royalties from sales of products using SEPA for pharmaceutical purposes. TECHNOLOGY UNCERTAINTY AND EARLY STAGE DEVELOPMENT Although several systems have been developed by various pharmaceutical companies to enhance the transdermal delivery of specific drugs, relatively limited research has been conducted in the expansion of transdermal delivery systems to a wider range of pharmaceutical products. Although the Company has demonstrated in preclinical and clinical studies that its SEPA transdermal compounds may have applicability with a broad range of drugs, transdermal delivery systems are currently marketed for only a limited number of products. In addition, transdermal delivery systems used to date have often demonstrated adverse side effects for users, such as skin irritation and delivery difficulties. The Company's proposed products are in the early development stage, require significant further research, development, testing and regulatory clearances and are subject to the risks of failure inherent in the development of products based on innovative technologies. These risks include the possibilities that any or all of the proposed products may be found to be ineffective or toxic, or otherwise may fail to receive necessary regulatory clearances; that the proposed products, although effective, may be uneconomical to market; or that third parties may market superior or equivalent products. Due to the extended testing and regulatory review process required before marketing clearance can be obtained, the Company does not expect to be able to realize revenues from the sale of any drugs in the near term. NEED FOR SIGNIFICANT PRODUCT DEVELOPMENT EFFORTS AND ADDITIONAL FINANCING Before the Company or any licensees of the Company may market any products based upon the Company's technology, significant additional development efforts and substantial preclinical and clinical testing will be necessary. Unless substantial additional financing is obtained, the Company may not have sufficient working capital to complete clinical studies on any proposed products. No assurance can be given that the Company will be able to secure such financing on favorable terms, if at all. UNCERTAINTIES RELATED TO CLINICAL TRIALS Before obtaining regulatory approval for the commercial sale of any of its pharmaceutical products under development, the Company must demonstrate that the product is safe and efficacious for use in each proposed indication. The results of preclinical studies and early clinical trials may not be predictive of results that will be obtained in large-scale testing, and there can be no assurance that clinical trials of the Company's products will demonstrate the safety and efficacy of its products or will result in marketable products. A number of companies in the pharmaceutical industry have suffered significant setbacks in advanced clinical trials, even after promising results in earlier trials. If the Company were unable to demonstrate the safety and efficacy of certain of its products, the Company may be adversely affected. DEPENDENCE ON THIRD PARTIES FOR DEVELOPMENT; NO ASSURANCE OF LICENSED AGREEMENTS The Company intends to rely on licensees and joint venture arrangements to fund most of the costs relating to product development and clinical trials. Licensees may be expected to have the legal right to terminate funding a product at any time for any reason without significant penalty. The resources and attention devoted by a licensee to a product are not within the Company's control, and this can result in delays in clinical testing, the preparation and prosecution of regulatory filings and commercialization efforts. Further, no assurance can be given that the Company will be able to enter into new collaborative arrangements or that existing or future collaborative arrangements will be successful. PRIOR DEVELOPMENT EFFORTS Since the Company's inception in 1981, the Company has engaged in research and development activities with respect to a variety of technologies and products, including polymers for medical and industrial use, dental adhesives, osteoporotic drugs and transdermal drug-delivery products. Although the Company has generated differing levels of revenue over the last several years, none of the Company's products or technologies has ever generated sustained revenues and the Company has never had profitable operations. The Company has expended a substantial amount of its resources in researching and developing technology relating to these products as well as in connection with the research and development of its transdermal delivery systems. No assurance can be given that the Company's development activities with respect to its transdermal delivery systems will be successful or that these efforts, as well, will not be eventually abandoned. LACK OF MARKETING EXPERIENCE; DEPENDENCE ON THIRD PARTIES FOR MARKETING AND DISTRIBUTION OF PRODUCTS The Company intends to market and distribute its proposed products through others pursuant to licensing, joint venture, or similar collaborative arrangements or distribution agreements. The Company has no sales force or marketing organization. If the Company directly markets and sells any of such products, it will, among other things, have to attract and retain qualified or experienced marketing and sales personnel. No assurance can be given that the Company will be able to attract and retain qualified or experienced marketing and sales personnel or that any efforts undertaken by such personnel will be successful. Any contractual arrangements with others may result in a lack of control by the Company over any or all of the marketing and sales of such products. DEPENDENCE ON THIRD PARTIES FOR MANUFACTURING The Company currently does not have facilities capable of manufacturing any proposed products in commercial quantities. Accordingly, the Company expects that it will be dependent to a significant extent on licensees, corporate partners or contract manufacturers for such manufacturing and for compliance with regulatory requirements for good manufacturing practices. The Company's dependence on third parties for manufacturing may adversely affect the Company's ability to develop and deliver products on a timely and competitive basis. If the Company decides to establish a commercial manufacturing facility, it will require substantial additional funds, will be required to hire and retain significant additional personnel and will be required to comply with extensive government regulations. No assurance can be given that the Company will be able to obtain additional capital to conduct such activities directly. RELIANCE ON KEY EMPLOYEES; LIMITED PERSONNEL; ABILITY TO ATTRACT AND RETAIN QUALIFIED SCIENTISTS The success of the Company is dependent on the efforts and abilities of Dr. Carlos M. Samour, its Chairman of the Board of Directors and Scientific Director, Alvin J. Karloff, its Chief Executive Officer and President and Dr. Stephen J. Riggi, its Vice President of Operations. Dr. Samour, Mr. Karloff and Dr. Riggi are employed by the Company under employment agreements that are of indefinite length and include non-disclosure and non-competition provisions. The loss of Dr. Samour, Mr. Karloff or Dr. Riggi could have a material adverse effect on the Company's business. The Company's business also depends on access to scientific talent, competition for which is intense and can be expected to increase. There can be no assurances that the Company will be able to retain its existing personnel or to attract additional qualified employees. COMPETITION, GOVERNMENT REGULATION, PATENTS AND LICENSE RIGHTS See these sections, above, for a description of risk factors relating to these matters. PRODUCT LIABILITY; NO GENERAL INSURANCE The design, development, manufacture and sale of the Company's products involve an inherent risk of liability claims and associated adverse publicity. The Company currently has liability insurance to cover claims that may result from clinical trials, but does not maintain product liability insurance and may need to acquire such insurance coverage prior to the commercial introduction of its products. No assurance can be given that the coverage limits of the Company's insurance policies will be adequate. Such insurance is expensive, difficult to obtain and may not be available in the future on acceptable terms or at all. A successful claim brought against the Company if it is uninsured, or which is in excess of the Company's insurance coverage, if any, could have a material adverse effect upon the Company and its financial condition. UNCERTAINTY OF PHARMACEUTICAL PRICING AND RELATED MATTERS The future revenues and profitability of, and availability of capital for bio-medical and pharmaceutical companies may be affected by the continuing efforts of governmental and third-party payors to contain or reduce the costs of health care through various means. For example, in certain foreign markets pricing or profitability of prescription pharmaceuticals is subject to government control and to reform in the health care system. In the United States, there have been, and the Company expects there will continue to be, a number of federal and state proposals to implement similar government control. While the Company cannot predict whether any such legislative or regulatory proposals will be adopted, the announcement or adoption of such proposals could have a material adverse effect on the Company's prospects. If the Company or one of its partners succeeded in bringing one or more of its products, based upon the Company's technology, to market, there can be no assurance that these products will be cost effective and that reimbursement to the consumer will be available or will be sufficient to allow the Company or its partners to sell such products on a profitable basis. ITEM 2. PROPERTIES. The Company leases 9,702 square feet of office and laboratory space in Lexington, Massachusetts. Details of the lease agreements are set out in Note 7 of the Financial Statements included in Item 8 of this Report and in the forms of lease and amendment included as exhibits to this Report. ITEM 3. LEGAL PROCEEDINGS. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of security holders during the three months ended December 31, 1996, through the solicitation of proxies or otherwise. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. MARKET PRICE OF SECURITIES AND RELATED MATTERS The following chart sets forth the range of high and low bid prices for the Common Stock, Class A Warrants, Class AA Warrants and Class X Warrants for the periods indicated as obtained from NASDAQ and the NASD Electronic Bulletin Board:
COMMON STOCK CLASS A WARRANTS CLASS AA WARRANTS CLASS X WARRANTS MCHM MCHML MCHMM MCHMN YEAR ENDED HIGH LOW HIGH LOW HIGH LOW HIGH LOW DECEMBER 31, 1995 First Quarter $2 15/16 $1 1/8 $ 3/4 $ 1/4 $ 5/8 $ 1/8 $1 1/2 $ 1/2 Second Quarter 4 5/16 2 1/16 1 7/8 1/2 1 3/8 1/4 2 1/4 1/2 Third Quarter 6 1/2 3 3/8 3 3/8 1 1/2 2 3/8 7/8 4 1 Fourth Quarter 4 15/16 3 2 1/2 1 1/8 1 5/8 3/4 3 1 3/4 DECEMBER 31, 1996 First Quarter 7 11/16 3 3/4 4 1/2 2 3 1/2 1 5 3 1/2 Second Quarter 6 3/4 4 7/8 4 1/4 2 5/8 3 1/4 1 3/4 4 1/2 3 1/2 Third Quarter 5 3/4 3 11/16 3 5/8 1 3/4 2 3/4 1 1/4 3 1/2 3 1/4 Fourth Quarter 6 5/8 3 1/2 3 1/2 1 5/8 2 1/4 1 1/8 4 3/4 3 1/2
The above quotations represent prices between dealers and do not include retail markups, markdowns or commissions and may not necessarily reflect actual transactions. As of December 31, 1996, there were 391 record holders of the Company's Common Stock. The Company has never paid dividends on its Common Stock and its Board of Directors does not contemplate declaring any dividends in the foreseeable future. The Company presently intends to retain earnings, if any, to finance research, development, and expansion of its business. RECENT SALES OF UNREGISTERED SECURITIES During 1996, the Company issued the following securities which were not registered under the Securities Act of 1933: -On June 17, 1996, the Company issued a warrant to its investment banker, expiring June 17, 1999, for the purchase of 145,800 shares of the Company's Common Stock at a price of $6.075 per share in consideration of services to the Company. -On September 3, 1996, 925 shares of the Company's Common Stock were issued to a consultant in consideration of services to the Company. The transactions described above were effected in reliance upon the exemption from the registration requirements of the Securities Act of 1933 provided by section 4(2) thereof on the basis that such transactions did not involve any public offering. ITEM 6. SELECTED FINANCIAL DATA.
FISCAL TRANSITION YEAR PERIOD FROM ENDED APRIL 1 TO MARCH 31 DECEMBER 31 YEAR ENDED DECEMBER 31 - ----------------------------------------------------------------------------------------------- 1993 1993 1994 1995 1996 ---- ---- ---- ---- ---- (Note) STATEMENTS OF OPERATIONS DATA: Total revenue $1,027,730 $ 123,819 $ 44,710 $ 17,493 $ 129,786 Net loss ( 2,539) (1,465,454) (1,969,442) (2,465,837) (3,139,796) Net loss per share 0.00 (0.13) (0.17) (0.20) (.21) Weighted average common shares outstanding 7,929,629 10,874,172 11,558,105 12,331,560 15,239,080 BALANCE SHEET DATA: Working capital $6,508,411 $5,321,837 $3,615,608 $4,532,623 $7,127,252 Current assets 6,664,117 5,633,155 3,955,357 4,962,562 7,495,715 Total assets 6,914,246 5,956,850 4,437,600 5,462,625 8,063,750 Current liabilities 155,706 311,318 339,749 429,939 368,463 Capital lease obligations -0- -0- 59,715 91,861 57,038 Total liabilities 165,378 324,188 387,792 486,198 386,871 Stockholders' equity 6,748,868 5,632,662 4,049,808 4,976,427 7,676,879 Note: Effective January 1, 1996, the Company adopted the Statement of Financial Accounting Standards No. 123 "Accounting for Stock Based Compensation." As a result, the net loss and net loss per share for the year ended December 31, 1996 includes approximately $543,000, or $.04 per share, for non-employee stock option compensation. See Note 6 to the Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion of the financial condition and results of operations for the Company should be read in conjunction with the accompanying financial statements and related footnotes. GENERAL MacroChem's primary business is the development and commercialization of transdermal drug delivery compounds and systems designed to promote the delivery of drugs from the surface of the skin into the skin or bloodstream. The Company currently derives no significant revenue from product sales, royalties or license fees. The Company plans to develop specific SEPA(R) formulations for use with proprietary and non-proprietary drugs manufactured by pharmaceutical companies, and to commercialize these products through the formation of partnerships, strategic alliances and license agreements with those companies. In order to attract strategic partners the Company is conducting limited clinical testing of certain SEPA-enhanced pharmaceuticals. The Company's results of operations vary significantly from year to year and quarter to quarter, and depend, among other factors, on the signing of new licenses and product development agreements, the timing of revenues recognized pursuant to license agreements, the achievement of milestones by licensees, the progress of clinical trials conducted by licensees and the Company, and the degree of research, marketing and administrative effort. The timing of the Company's revenues may not match the timing of the Company's associated product development expenses. To date, research and development expenses have generally exceeded revenues in any particular period and/or fiscal year. RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31, 1995 The Company has continued to incur losses from operations. For the year ended December 31, 1996, the net loss was approximately $3,139,800 as compared to a loss of $2,465,800 for the previous year, a 27% increase. For the 1996 and 1995 years, the Company realized operating revenues of approximately $129,800 and $17,500, respectively, which were from the completion of feasibility studies. Marketing, general and administrative expenses for 1996 aggregated approximately $1,892,600, an increase of $480,100 or 34% , from 1995's total of $1,412,500. The increase was due primarily to the adoption in 1996 of Statement of Financial Accounting Standards No. 123 "Accounting for Stock Based Compensation." Adopting this rule increased expenses approximately $491,200, of which appproximately $433,100 is attributable to the grant of a warrant to the Company's investment banker. Research and development costs increased by approximately $498,500 from $1,238,100 in 1995 to $1,736,600 for 1996, a 40% increase. The Company has continued its emphasis on research and development of expanded uses of the Company's proprietary products. 1996 costs increased due to the hiring of a director of research and development and to increased clinical study costs and internal research and development efforts. The adoption of SFAS 123 increased expenses approximately $35,300. The Company expects that research and development costs will continue to increase in 1997, reflecting increased clinical testing of the Company's products. Other income increased from a net amount of $203,300 in 1995 to $371,600 in 1996. This increase reflects greater cash on hand. Interest expense was approximately $12,000 in 1996, a reduction of $30,600 from 1995, reflecting the lower capital lease debt outstanding. YEAR ENDED DECEMBER 31, 1995 COMPARED TO THE YEAR ENDED DECEMBER 31, 1994 For the year ended 1995, the net loss was approximately $2,465,800 as compared to a loss of $1,969,400 for the previous year, a 25% increase. For the 1995 and 1994 years the Company realized operating revenues of approximately $17,500 and $44,700, respectively, which were from the completion of feasibility studies. Marketing, general and administrative expenses for 1995 aggregated approximately $1,413,500, an increase of $122,500 or 9%, from 1994's total of $1,291,000. During 1995, the Company used outside service providers for certain administrative functions, incurred increased recruiting expenses for the replacement of several executive level employees, and increased marketing its technology to potential licensees and strategic alliance partners. Research and development costs increased by approximately $374,000 from $864,100 in 1994 to $1,238,100 for 1995, a 43% increase. The Company has continued its emphasis on research and development of expanded uses of the Company's proprietary products. The construction of a pilot scale manufacturing facility, conforming to the FDA's current Good Manufacturing Practices (cGMP), during 1995, has increased the Company's internal research and development capabilities. This facility will allow for improvements in the manufacture and testing of its chemical compounds. Other income increased from a net amount of $177,000 in 1994 to $203,300 in 1995. This increase reflected greater cash on hand, offset in part by the effect of the flattening of US Treasury rates in the latter part of 1995. Interest expense was approximately $42,600 in 1995, reflecting management's decision to maximize available cash resources by acquiring new equipment through capital lease arrangements, rather than outright purchase. LIQUIDITY AND CAPITAL RESOURCES Since inception, the primary source of funding for the Company's operations has been the private and public sale of its securities, and to a lesser extent, the licensing of its proprietary technology and products, government grants and the limited sales of products and test materials. During 1996, the Company received aggregate net proceeds of approximately $5.3 million from the exercise of stock options, stock warrants, and unit purchase options, compared to approximately $3.4 million in 1995. At December 31, 1996 working capital was approximately $7.1 million compared to $4.5 million at December 31, 1995. The increase in the Company's working capital, based upon the receipt of these net proceeds from the issuance of its securities was somewhat offset by the net cash used by operating activities for the year ended December 31, 1996. Until such time as the Company obtains agreements with third-party licensees or partners to provide funding for the Company's anticipated business activities or the Company is able to obtain funds through the private or public sale of its securities, the Company's working capital will be utilized to fund its activities. Capital expenditures and additional patent development costs for the year ended December 31, 1996 were approximately $185,000. The Company anticipates capital expenditures of approximately $55,000 during the fiscal year ended December 31,1997. The Company's long term capital requirements will depend upon numerous factors including the progress of the Company's research and development programs; the resources that the Company devotes to self-funded early stage clinical testing of SEPA enhanced compounds, proprietary manufacturing methods and advanced technologies; the ability of the Company to enter into additional licensing arrangements or other strategic alliances; the ability of the Company to manufacture products under those arrangements and the demand for its products or the products of its licensees or strategic partners if and when approved for sale by regulatory authorities. In any event substantial additional funds will be required before the Company is able to generate revenues sufficient to support its operations. There is no assurance that the Company will be able to obtain such additional funds on favorable terms, if at all. The Company's inability to raise sufficient funds could require it to delay, scale back or eliminate certain research and development programs. The Company believes that its existing cash and cash equivalents, marketable securities and other investments will be sufficient to meet its operating expenses and capital expenditure requirements for at least the next twelve months. The Company's cash requirements may vary materially from those now planned because of changes in focus and direction of the Company's research and development programs, competitive and technical advances, patent developments or other developments. It is not believed that inflation will have any significant effect on the results of the Company's operations. RECENT ACCOUNTING PRONOUNCEMENT In March 1997, the Financial Accounting Standards Board released Statement of Financial Accounting Standards No. 128, "Earning Per Share", which will be effective for fiscal 1997. SFAS No. 128 will require the Company to restate amounts previously reported as earnings per share to comply with the requirements of SFAS No. 128; while the Company is in the process of evaluating the impact of SFAS No. 128, it does not expect that adoption will have a material effect on previously reported earnings per share. THE FOREGOING STATEMENTS IN THIS REPORT INCLUDE FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED OR REFERRED TO IN ITEM 1, BUSINESS - "RISK FACTORS". ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The information required under this Item 8 is set forth on pages 21 through 37 of this report. INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of MacroChem Corporation: We have audited the accompanying balance sheets of MacroChem Corporation as of December 31, 1996 and 1995, and the related statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of MacroChem Corporation at December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Boston, Massachusetts March 6, 1997
MACROCHEM CORPORATION BALANCE SHEETS DECEMBER 31, ASSETS 1996 1995 LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995 - ------ ---- ---- ------------------------------------- ---- ---- CURRENT ASSETS: CURRENT LIABILITIES: Cash and cash equivalents $7,329,881 $3,591,779 Current portion of capitalized lease Marketable securities 21,824 1,258,492 obligations $ 38,630 $ 36,616 Accounts receivable 43,977 --- Accounts payable and accrued expenses 281,769 290,345 Prepaid expenses and other Deferred compensation 47,050 97,050 current assets 100,033 112,291 Deferred rent 1,014 5,928 --------- --------- ----------- ----------- TOTAL CURRENT LIABILITIES 368,463 429,939 ----------- ----------- TOTAL CURRENT ASSETS 7,495,715 4,962,562 CAPITALIZED LEASE OBLIGATIONS, Net of --------- --------- current portion 18,408 55,245 PROPERTY AND EQUIPMENT (NET) 345,343 307,390 --------- --------- DEFERRED RENT, Noncurrent portion --- 1,014 ----------- ----------- OTHER ASSETS: Patents, net 218,232 188,213 TOTAL LONG-TERM LIABILITIES 18,408 56,259 ----------- ----------- Deposits 4,460 4,460 --------- --------- TOTAL LIABILITIES 386,871 486,198 ----------- ----------- TOTAL OTHER ASSETS 222,692 192,673 --------- --------- COMMITMENTS & CONTINGENCIES (Notes 6,7,8) STOCKHOLDERS' EQUITY: Preferred stock --- --- Common stock, $.01 par value; authorized 60,000,000 shares; issued and outstanding, 15,601,274 shares and 13,129,321 shares at December 31, 1996 and 1995, respectively 156,013 131,293 Additional paid-in capital 25,839,675 19,801,473 Unearned compensation ( 222,674) --- Accumulated deficit (18,096,135) (14,956,339) ----------- ---------- TOTAL STOCKHOLDERS' EQUITY 7,676,879 4,976,427 ---------- ---------- TOTAL LIABILITIES AND TOTAL ASSETS $8.063,750 $5,462,625 STOCKHOLDERS' EQUITY $ 8,063,750 $5,462,625 ========= ========= ========== ========== See notes to financial statements.
MACROCHEM CORPORATION STATEMENTS OF OPERATIONS Years Ended December 31, ------------------------ 1996 1995 1994 ---- ---- ---- REVENUES Research contracts $ 129,786 $ 17,493 $ 44,710 ----------- --------- ---------- OPERATING EXPENSES Marketing, general and administrative 1,892,572 1,412,537 1,291,040 Research and development 1,736,561 1,238,070 864,123 Consulting fees with related parties 12,000 36,000 36,000 ----------- ---------- ---------- TOTAL OPERATING EXPENSES 3,641,133 2,686,607 2,191,163 ----------- ---------- ---------- LOSS FROM OPERATIONS ( 3,511,347) ( 2,669,114) ( 2,146,453) ----------- ---------- ---------- OTHER INCOME (EXPENSE) Interest income 383,596 246,018 170,950 Interest expense ( 12,045) ( 42,644) ( 1,199) Other --- ( 97) 7,260 ----------- ---------- ---------- TOTAL OTHER INCOME 371,551 203,277 177,011 ----------- ----------- ---------- NET LOSS $( 3,139,796) $( 2,465,837)$( 1,969,442) ========== =========== ========== NET LOSS PER SHARE $( .21) $( .20)$( .17) ========== =========== ========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 15,239,080 12 ,331,560 11,558,105 ========== =========== ========== See notes to financial statements.
MACROCHEM CORPORATION STATEMENTS OF STOCKHOLDERS' EQUITY Preferred Stock Common Stock --------------- ---------------- Number Number Additional of Par of Par Paid-In Unearned Accumulated Shares Value Shares Value Capital Compensation Deficit Total - --------------------------------------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1993 95,000 $ 950 11,123,543 $ 111,235 $ 16,041,537 $ --- $(10,521,060) $5,632,662 Issuance of common stock for services rendered and in settlement of accounts payable --- --- 6,600 66 11,709 --- --- 11,775 Conversion of preferred stock to common stock (95,000) (950) 190,000 1,900 ( 950) --- --- --- Exercise of common stock warrants --- --- 246,500 2,465 371,035 --- --- 373,500 Exercise of common stock options --- --- 3,000 30 1,283 --- --- 1,313 Net loss --- --- --- --- --- --- ( 1,969,442) (1,969,442) ------ ----- ---------- -------- ---------- ------- ---------- --------- BALANCE, DECEMBER 31, 1994 --- --- 11,569,643 115,696 16,424,614 --- (12,490,502) 4,049,808 Issuance of common stock --- --- 1,000,000 10,000 2,740,000 --- --- 2,750,000 Issuance of common stock for services rendered --- --- 4,145 42 16,270 --- --- 16,312 Exercise of common stock warrants --- --- 51,700 517 90,358 --- --- 90,875 Exercise of common stock options --- --- 203,833 2,038 531,231 --- --- 533,269 Exercise of unit purchase options --- --- 300,000 3,000 522,000 --- --- 525,000 Costs associated with issuance of common stock and warrants --- --- --- --- ( 523,000) --- --- ( 523,000) Net loss --- --- --- --- --- --- ( 2,465,837) (2,465,837) ------ ----- ---------- --------- ---------- ------- ---------- --------- BALANCE, DECEMBER 31, 1995 --- --- 13,129,321 131,293 19,801,473 --- (14,956,339) 4,976,427 Issuance of common stock for services rendered --- --- 925 9 4,500 --- --- 4,509 Exercise of common stock warrants --- --- 726,667 7,267 2,227,984 --- --- 2,235,251 Exercise of common stock options --- --- 251,861 2,519 442,887 --- --- 445,406 Exercise of unit purchase options --- --- 1,492,500 14,925 2,596,950 --- --- 2,611,875 Stock option compensation --- --- --- --- 765,881 (222,674) --- 543,207 Net loss --- --- --- --- --- --- ( 3,139,796) (3,139,796) ------ ----- ---------- --------- ----------- ------- ---------- --------- BALANCE, DECEMBER 31, 1996 --- $ --- 15,601,274 $ 156,013 $ 25,839,675 $(222,674) $(18,096,135) $7,676,879 ====== ===== ========== ========= ========== ======= ========== ========= See notes to financial statements.
MACROCHEM CORPORATION STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, -------------------------------------- 1996 1995 1994 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(3,139,796) $(2,465,837) $(1,969,442) --------- --------- --------- Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization 116,967 79,475 60,738 (Gain) loss on disposal of equipment --- ( 3,925) 3,740 Abandoned patent costs --- 22,592 --- Issuance of common stock in exchange for services 4,509 16,312 11,775 Stock-based compensation 543,207 --- --- Amortization of discounts on marketable securities ( 70,845) ( 152,316) ( 88,108) Increase (decrease) in cash from: Accounts receivable ( 43,977) --- 34,000 Prepaid expenses and other current assets 12,258 ( 21,767) ( 46,508) Accounts payable and accrued expenses ( 8,576) 136,388 ( 22,933) Deferred compensation ( 50,000) ( 64,200) 32,750 Deferred rent ( 5,928) ( 5,928) ( 5,928) Deposits --- ( 150) --- --------- --------- --------- Total adjustments 497,615 6,481 ( 20,474) --------- --------- --------- Net cash used by operating activities (2,642,181) (2,459,356) (1,989,916) --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of equipment --- 4,800 --- Purchases of marketable securities (5,743,755) (3,516,801) (5,491,267) Purchase of certificates of deposit ( 734,732) ( 287,000) --- Proceeds from maturities of marketable securities 6,771,000 5,977,000 2,300,000 Proceeds from maturities of certificates of deposit 1,015,000 --- --- Expenditures for property and equipment ( 136,306) ( 54,916) ( 130,666) Additions to patents ( 48,633) ( 16,558) ( 27,740) --------- --------- --------- Net cash provided (used) by investing activities 1,122,574 2,106,525 (3,349,673) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on capital lease ( 34,823) ( 16,992) ( 4,905) Proceeds from issuance of common stock --- 2,750,000 --- Proceeds from exercise of common stock options 445,406 533,269 1,313 Proceeds from exercise of common stock warrants 2,235,251 90,875 373,500 Proceeds from exercise of unit purchase options 2,611,875 525,000 --- Costs associated with the registration and issuance of common stock and warrants --- ( 523,000) --- --------- --------- --------- Net cash provided by financing activities 5,257,709 3,359,152 369,908 --------- --------- --------- See notes to financial statements. (Continued)
MACROCHEM CORPORATION STATEMENTS OF CASH FLOWS (Continued) Years Ended December 31, ------------------------------------- 1996 1995 1994 ---- ---- ---- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $3,738,102 $3,006,321 $(4,969,681) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 3,591,779 585,458 5,555,139 --------- --------- --------- CASH AND CASH EQUIVALENTS, END OF YEAR $7,329,881 $3,591,779 $ 585,458 ========= ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for interest aggregated $9,226, $5,022 and $1,199, respectively, for the years ended December 31, 1996, 1995 and 1994. The Company did not pay any income taxes during those periods. SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Equipment acquired in exchange for capital lease obligation $ --- $ 49,138 $ 64,620 ========= ========= ========== See notes to financial statements. (Concluded) MACROCHEM CORPORATION NOTES TO FINANCIAL STATEMENTS THREE YEARS ENDED DECEMBER 31, 1996 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES MACROCHEM Corporation (the "Company") develops and licenses transdermal drug delivery compounds and systems intended to promote the delivery of drugs from the surface of the skin into the skin or the bloodstream. The Company has been engaged primarily in research and development since its inception in 1981 and has derived limited revenues from the commercial sale of its products and licensing of certain technology. The Company has had no revenues relating to the sale of any products currently under development. The Company has incurred net losses every year since its inception and the Company anticipates that losses may continue for the foreseeable future. At December 31, 1996, the Company's accumulated deficit was approximately $18.1 million. The Company's ability to continue operations after its current capital resources are exhausted depends on its ability to obtain additional financing and achieve profitable operations, as to which no assurances can be given. However, the Company believes that its financial resources are sufficient to meet planned operating activities for the next twelve months. REVENUE RECOGNITION - Revenues are earned and recognized based upon completion of a contract, upon the sale or licensing of product rights, upon shipment of product, or upon the attainment of benchmarks specified in the related agreements. RESEARCH AND DEVELOPMENT - Research and development costs are charged to operations as incurred. Such costs include proprietary research and development activities and expenses associated with research and development contracts. In 1996, the Company changed its definition of research and development to more properly reflect personnel efforts and other resources previously included in general and administrative expenses. This change had the effect of increasing research and development and decreasing general and administrative costs from amounts previously reported by approximately $129,000 for the year ended December 31, 1995. This change in definition also had the effect of reducing research and development and increasing general and administrative costs by approximately $67,000 for the year ended December 31, 1994. CASH EQUIVALENTS - Cash equivalents consist of short-term, highly liquid investments purchased with remaining maturities of three months or less. MARKETABLE SECURITIES - The Company intends to hold until maturity its investments and accordingly, such investments are reported at amortized cost in the accompanying financial statements. The fair market value of marketable securities is disclosed in a subsequent note. PROPERTY AND EQUIPMENT - Property and equipment are stated at cost. Depreciation and amortization are provided on the straight-line method over the estimated useful lives of the related assets which range from five to ten years. PATENTS - The Company has filed applications for United States and foreign patents covering aspects of its technology. Costs and expenses incurred in connection with pending patent applications are deferred. Costs related to successful patent applications are amortized over the estimated useful lives of the patents, not exceeding 20 years, using the straight-line method. Accumulated costs related to patents or deferred patent application costs that are considered to have limited future value are charged to expense. Accumulated amortization aggregated approximately $47,000 and $28,000, respectively, at December 31, 1996 and 1995. On an on-going basis, the Company evaluates the recoverability of the net carrying value of various patents by reference to the patent's expected use in drug and other research activities as measured by outside interest in the Company's patented technologies and management's determination of potential future uses of such technologies. As a result of such evaluations, during 1995 the Company wrote off approximately $22,600 of costs associated with patents no longer having value. INCOME TAXES - The Company accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes", which requires the use of the liability method. The objective of this method is to establish deferred tax assets and liabilities for the temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities using tax rates in effect in the year(s) in which the differences are expected to reverse. NET LOSS PER COMMON SHARE - Net loss per common share is computed based on the weighted average number of common shares outstanding during each year. Common equivalent shares from convertible preferred stock, common stock options and common stock warrants are excluded from the computations as their effect is antidilutive. ACCOUNTING ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The primary estimates underlying the Company's financial statements include the useful lives of the Company's patents, the valuation allowance established for the Company's deferred tax assets, and the underlying assumptions to apply the pricing model to value stock options under SFAS No. 123. Management bases its estimates on certain assumptions, which it believes are reasonable in the circumstances, and while actual results could differ from those estimates, management does not believe that any change in those assumptions in the near term would have a significant effect on financial position or the results of operations. RECENTLY ADOPTED ACCOUNTING STANDARDS - During 1996, the Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." This statement establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles and goodwill related to those assets to be held and used and for long-lived assets and certain identifiable intangibles which are to be disposed of. The effect of implementing SFAS No. 121 on the Company's financial position and results of operations was not material. STOCK-BASED COMPENSATION - During 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation". SFAS No. 123 addresses the financial accounting and reporting standards for stock or other equity-based compensation arrangements. The Company has elected to continue to use the intrinsic value based method to account for employee stock option plans and provide disclosures based on the fair value method in the notes to the financial statements as permitted by SFAS No. 123. Stock or other equity based compensation for non-employees must be accounted for under the fair value based method as required by SFAS No. 123. Under this method, the equity based instrument is valued at either the fair value of the consideration received or equity instrument issued on the date of grant. The resulting compensation cost is recognized and charged to operations over the service period, which is usually the vesting period. In 1996, the net loss reflects compensation costs of approximately $543,200 associated with the issuance of warrants and stock options to non employees. In addition, the Company recorded unearned compensation of approximately $222,700 which will be amortized over the remaining vesting period of the stock-based compensation arrangements. RECENT ACCOUNTING PRONOUNCEMENT - In March 1997, the Financial Accounting Standards Board released SFAS No. 128, " Earnings Per Share", which will be effective for fiscal 1997. SFAS No. 128 will require the Company to restate amounts previously reported as earnings per share to comply with the requirements of SFAS No. 128; while the Company is in the process of evaluating the impact of SFAS No. 128, it does not expect that adoption will have a material effect on previously reported earnings per share. OTHER - Certain items in the financial statements for the periods ended December 31, 1995 and 1994 have been reclassified to conform with current presentation. 2. MARKETABLE SECURITIES As of December 31, 1996, all marketable securities are classified as investment securities and carried at amortized cost. The maturities of investment securities held at December 31, 1996 and 1995 are all one year or less. The carrying amounts and approximate market value of investment securities are as follows as of December 31: Amortized Cost Unrealized Gain Market Value -------------- ---------------- ------------ 1996 U.S. Treasury Securities $ 21,824 --- $ 21,824 ========= ====== ========= 1995 U.S. Treasury Securities $ 971,492 $2,746 $ 974,238 Certificates of deposit (bearing interest rates ranging from 3.5% to 5.4%) 287,000 --- 287,000 --------- ----- --------- $1,258,492 $2,746 $1,261,238 ========= ===== ========= 3. PROPERTY AND EQUIPMENT Property and equipment consists of the following as of December 31: 1996 1995 ---- ---- Laboratory equipment $562,183 $448,577 Office equipment 158,929 142,549 Leasehold improvements 96,882 90,564 ------- ------- Total 817,994 681,690 Less: accumulated depreciation and amortization (472,651) (374,300) ------- ------- Property and equipment, net $345,343 $307,390 ======= ======= 4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses consists of the following as of December 31: 1996 1995 ---- ---- Accounts payable $ 58,179 $ 20,863 Payroll taxes 19,313 14,670 Accrued interest expense 40,431 37,612 Insurance payable --- 17,447 Accrued professional fees 130,046 130,339 Accrued clinical trial costs 33,800 69,414 ------- ------- $281,769 $290,345 ======= ======= 5. CAPITALIZED LEASE OBLIGATIONS Equipment held under capital lease obligations included with owned property on the balance sheet consists of the following as of December 31: 1996 1995 ---- ---- Laboratory equipment $ 113,758 $113,758 Less: accumulated amortization ( 39,468) ( 16,716) ------- ------ $ 74,290 $ 97,042 ======= ======= Future minimum lease payments under capital leases are as follows: 1997 $ 43,193 1998 19,653 ------- Total minimum lease payments 62,846 Less: imputed interest (approximately 11%) ( 5,808) ------- Present value of minimum lease payments 57,038 Less: current portion 38,630 ------- Capital lease obligation, net of current portion $ 18,408 ======= 6. STOCKHOLDERS' EQUITY AUTHORIZED CAPITAL STOCK - Authorized capital stock consists of 60,000,000 shares of $.01 par value common stock of which 15,601,274 shares are issued and 10,491,581 are reserved for conversion of common stock warrants, options and unit purchase options at December 31, 1996. Authorized undesignated preferred stock totals 5,500,000 shares. STOCK ISSUANCES - On May 30, 1995, the Company sold 1,000,000 shares of common stock, par value $.01 per share, to a single investor (the "Investor") in a private placement. The sale price was $2.75 per share. Pursuant to the Common Stock Purchase Agreement between the Company and the Investor, the Investor had the right to designate one person to serve on the Company's Board of Directors. The firm of Janssen-Meyers, L.P. ("J-M") received a brokers fee of $357,500 from the company for this private placement. Mr. Janssen and Mr. Meyers are principals of J-M and each own, or have the rights to acquire, more than 10% of the Company's voting securities. In January 1993, the Company completed a private placement offering whereby 142 units (the Units), each consisting of 30,000 shares of common stock, 10,000 Class A common stock warrants and 10,000 Class AA common stock warrants, were sold, or issued in exchange for certain notes payable, for $52,500 per Unit. Additionally, options were issued to affiliates of the placement agent of the offering which are exercisable for 118 and one-third of these Units at a price of $52,500 per Unit. These options expire in December 1997. During 1995, options to purchase 10 Units were exercised by an affiliate of the placement agent, and 49 and three-quarters options to purchase Units were exercised during 1996. At December 31, 1996, options to purchase 58 and seven-twelfths of these Units remain outstanding. WARRANTS - As part of the January 1993 private placement, the Company issued 1,420,000 Class A and 1,420,000 Class AA common stock warrants. Each Class A and Class AA warrant is exercisable for one share of common stock at a price per share, subject to adjustment, of $3.00 and $4.50, respectively. As of November 9, 1994, under certain circumstances, based primarily upon the trading price of the Company's common stock, each Class A and AA common stock warrant is redeemable by the Company at a price of $.05 per warrant. The Class A and Class AA common stock warrants expire in December 1997. At December 31, 1996, 1,339,733 and 1,936,400 Class A and Class AA warrants were outstanding, respectively. In connection with the issuance of $300,000 of subordinated notes payable in August 1992 (certain of the notes were issued to affiliates of the placement agent), of which $155,000 was repaid in January 1993 and $145,000 was converted to Units in the January 1993 offering described above, the Company issued warrants to purchase 300,000 shares of common stock at an initial exercise price of $1.75 per share. These warrants expire in September 1997. At December 31, 1996, exercisable warrants to purchase 185,500 shares of common stock remain outstanding. In June 1991, the Company sold 350,000 shares of common stock at a price of $1.25 per share. The price per share also included a warrant to purchase one share of common stock at a price of $2.50 per share. These warrants expired March 31, 1995. Warrants issued in connection with the Company's initial public offering in 1985 expired March 31, 1995. In July 1995, the Company issued 240,000 four-year warrants to J-M to permit the holder to acquire 80,000 shares of the Company's common stock at an exercise price of $3,00, $4.00, and $5.00, respectively. Exercise of these warrants was permitted only if the Company and J-M entered into a new consulting agreement on or before April 1, 1996. The warrants expired April 1, 1996. In June 1996, in connection with services performed for the Company, J-M received a warrant, exercisable immediately and expiring June 17, 1999, for the purchase of 145,800 shares of the Company's common stock at a price of $6.075 per share. The market price per share on the grant date was $5.125. Effective January 1, 1996, the Company adopted SFAS No. 123 "Accounting for Stock-Based Compensation" which establishes fair value as the measurement basis for transactions in which an entity acquires goods or services from non-employees in exchange for equity instruments As a result, the 1996 net loss reflects compensation costs of $433,133 associated with the granting of this warrant. The compensation cost is based upon the fair value method calculated on the grant date using the Black/Scholes option pricing model. Key assumptions in applying this pricing model include an expected life of three years, expected volatility of the underlying stock of approximately 94%, and a risk free interest rate of 5.25%. Pursuant to an informal understanding, the Company is paying J-M a monthly fee of $5,000 for consulting services from December 1996 through April 1997. Class A and Class AA warrants, exclusive of the unexercised Unit Purchase Options, aggregated 3,461,633 at December 31, 1996. STOCK OPTION PLANS - The Company has three stock option plans, the 1984 Incentive Stock Option Plan (ISO Plan), the 1984 Non-Qualified Stock Option Plan (Non-qualified Plan) and the 1994 Equity Incentive Plan (1994 Plan). Under the terms of the 1984 Plans the Company may no longer award any options. All options previously granted may be exercised at any time up to ten years from date of award. Under the terms of the 1994 Plan, the Company may grant options to purchase up to a maximum of 2,500,000 shares of common stock to certain employees, directors and consultants. The options may be awarded as incentive stock options (employees only) and non-incentive stock options (certain employees, directors and consultants). The exercise price of options under the ISO Plan and incentive options from the 1994 Plan may not be less than fair market value at the date of grant. The exercise price of the Non-Qualified options and the non-incentive options from the 1994 Plan is determined by the Board of Directors. All options become exercisable as specified at the date of grant. The following table presents activity under all stock option plans: Weighted Average Number of Options Exercise Price ----------------- ---------------- Outstanding December 31, 1993 2,013,675 $1.178 Granted 848,100 3.360 Exercised ( 3,000) .438 Expired ( 181,000) 3.543 --------- Outstanding December 31, 1994 2,677,775 $1.558 Granted 325,000 3.197 Exercised ( 203,833) 2.616 Expired ( 13,000) 6.023 Canceled ( 141,401) 3.460 --------- Outstanding December 31, 1995 2,644,541 $1.554 Granted 1,180,845 5.573 Exercised ( 251,861) 1.768 Canceled ( 20,000) 4.250 --------- Outstanding December 31, 1996 3,553,525 $2.850 ========= Exerciseable at December 31: 1996 2,312,501 $1.610 ========= 1995 2,161,841 $1.216 ========= 1994 1,994,276 $1.016 ========= The weighted average fair values of options granted during 1996 and 1995 were $2.37 and $4.93, respectively. All options granted during the three year period ended December 31, 1996 were granted at the market price of the stock except for 10,000 in 1995 which were issued at an option price higher than market with a weighted average exercise price of $6.75 and a market price of $3.75. The fair value of options on their grant date was measured using the Black/Scholes option pricing model. Key assumptions used to apply this pricing model are as follows: 1996 1995 ---- ---- Risk-free interest rate 5.25% 5.25% Expected life of option grants 5-10 years 5-10 years Expected volatility of underlying stock 59.3%-99.2% 48.2%-112.5% Expected dividend payment rate, as a percentage of the stock price on the date of grant --- --- It should be noted that the option pricing model used was designed to value readily tradable stock options with relatively short lives. The options granted to employees are not tradable and have contractual lives of up to ten years. The following table sets forth information regarding options outstanding at December 31, 1996:
Weighted Ave. Weighted Ave. Range of Number of Number Exercise Price- Weighted Ave. Exercise Price- Exercise Options Currently Options Remaining Currently Prices Outstanding Exerciseable Outstanding Life Exerciseable ---------------------------------------------------------------------------------------- $.43 1,373,080 1,373,080 $ .43 4.17 years $ .43 $1.50-$2.00 182,500 107,501 $1.78 6.05 years $1.76 $2.75-$4.00 808,920 711,920 $3.20 7.09 years $3.13 $4.875-$5.875 1,184,025 115,000 $5.56 9.35 years $5.83 $7.75 5,000 5,000 $7.75 3.83 years $7.75
The Company uses the intrinsic value method to measure compensation expense associated with grants of stock options to employees and, prior to December 15, 1995, to suppliers of goods and services. Had the Company used the fair value method to measure compensation, the reported net loss and loss per share would have been as follows: 1996 1995 ---- ---- Net loss as reported ($3,139,796) ($2,465,837) Compensation costs: Employee ( 2,560,760) ( 108,735) Non-Employee ( 58,273) ( 100,278) ---------- ---------- Proforma net loss ($5,758,829) ($2,674,850) ========== ========== Proforma net loss per share ($ 0.38) ($ 0.22) ========== ========== It should be noted that the proforma amounts presented above are inexact in that the pricing model was designed to value freely-traded options rather than employee stock options. Proforma charges for 1996 and 1995 may be understated in relation to future years since the 1996 and 1995 charges do not reflect the financial impact of options granted prior to 1995. OTHER STOCK, STOCK OPTION AND WARRANT ISSUANCES - In May 1993, the Company issued a warrant to purchase 75,000 shares of common stock at a price of $1.50 per share. The warrant was issued for services provided in selling shares of the Company's preferred stock in 1991. These warrants were exercised during the fiscal year ended December 31, 1994. During 1995, the Company issued 4,145 common shares and recorded compensation of $16,312 for services rendered. The Company issued 925 common shares and recorded compensation of $4,509 for services rendered in 1996. 7. COMMITMENTS AND CONTINGENCIES LEASE COMMITMENTS - The Company has a lease expiring on February 28, 2000 for its operating facility. At December 31, 1996, future minimum lease payments under this lease agreement are as follows: 1997, $163,416, 1998, $174,816, 1999, $174,816 and 2000, $29,136. Total rental expense under all operating leases was approximately $106,000, $104,000 and $107,000 for the years ended December 31, 1996, 1995, and 1994, respectively. EMPLOYMENT AND CONSULTING AGREEMENTS - The Company has employment and consulting agreements with various consultants and certain key employees, with terms ranging from one year to an indefinite period of time. These agreements provide for annual payments of approximately $654,000. In addition, certain consulting agreements also provide for additional payments to certain consultants related to obtaining a financial placement, sale or licensing of the Company's product or technology to third parties. During the periods ended December 31, 1996, 1995 and 1994, no such additional amounts were earned by the related consultants. ROYALTY AGREEMENTS - The Company has entered into various license agreements which require the Company to pay royalties based upon a set percentage of certain product sales and license fee revenue. There were no such amounts paid in 1996, 1995 and 1994. CLINICAL TRIAL LIABILITY INSURANCE - A clinical liability policy was obtained as of November, 1995 and renewed in 1996. 8. AGREEMENT WITH PLACEMENT AGENT In connection with the January 1993 private placement offering (Note 6), the placement agent received a fee equal to 13% of the proceeds received by the Company in the offering. In addition, the Company entered into an agreement with the placement agent of that offering whereby the Company granted to the placement agent the right of first refusal with respect to participating in all future financings by the Company within the five-year period expiring December 1997. This right of first refusal was terminated for a fee of $150,000, paid in connection with the issuance of one million shares of the Company's common stock, in May 1995. The placement agent is entitled to receive 4% of the proceeds collected (under certain circumstances) in conjunction with the exercise of the Class A and Class AA common stock warrants sold in the private placement. 9. INCOME TAXES No income tax provision or benefit has been provided for federal income tax purposes as the Company has incurred losses since inception. As of December 31, 1996, the Company has available net operating loss carryforwards of approximately $17,200,000 for federal income tax purposes, expiring through 2010 and $8,800,000 for state income tax purposes, expiring through 2000. In addition, the Company, for federal and state income tax purposes, has unused investment and research and development tax credits aggregating $270,000 and $60,000, respectively. The use of approximately $8,300,000 of the federal net operating losses is restricted to approximately $550,000 per year due to a change in ownership, which occurred in December 1992, in accordance with definitions as stated in the Internal Revenue Code. Deferred income taxes consist of the aggregate operating loss and tax credit carryforward and reflect the net tax effect of differences in the timing of certain revenue and expense items and the related carrying amounts of assets and liabilities for financial reporting and tax purposes are not material and, accordingly, are not displayed in the table below. The components of the Company's deferred tax assets and liabilities as of December 31, 1996 and December 31, 1995 are as follows: 1996 1995 ---- ---- Deferred Tax Assets: Net operating loss carryforwards $6,700,000 $5,400,000 Tax credit carryforwards 330,000 306,000 Other 23,000 34,000 --------- --------- 7,053,000 5,740,000 Valuation allowance (7,053,000) (5,740,000) --------- --------- Deferred tax asset, net $ --- $ --- ========= ========= For the years ended December 31, 1996, 1995 and 1994, the valuation allowance was increased by approximately $1,313,000, $660,000, and $851,000, respectively, due to the uncertainty of future realization of currently generated net operating loss carryforwards. 10. UNAUDITED QUARTERLY FINANCIAL INFORMATION The following is a summary of quarterly financial information for 1996 (in thousands, except per share amounts): First Second Third Fourth Quarter Quarter Quarter Quarter Year --------------------------------------------------- Total revenue $ --- $ 83 $ 3 $ 44 $ 130 Operating expenses 812 1,355 689 785 3,641 Net loss $( 749) $(1,148) $(620) $(623) $(3,140) ===== ===== === === ===== Net loss per share $( .05) $( .07) $(.04) $(.05) $( .21) ===== ===== === === ===== The 1996 quarterly financial information has been restated to reflect compensation costs associated with non-employee stock based compensation arrangements. As a result of the adoption of SFAS No. 123, these compensation costs included in the restated quarterly financial information are $438,000, $34,000 and $56,000 for the second, third and fourth quarters, respectively. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information requested by this item is incorporated by reference from the Company's Proxy Statement. Item 11. EXECUTIVE COMPENSATION. The information requested by this item is incorporated by reference from the Company's Proxy Statement. Item 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information requested by this item is incorporated by reference from the Company's Proxy Statement. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information requested by this item is incorporated by reference from the Company's Proxy Statement. PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a)(1) The following Financial Statements as of December 31, 1996 and 1995 and for the three years in the period ended December 31, 1996 are filed herewith: Page Independent Auditors' Report 21 Balance Sheets 22 Statements of Operations 23 Statements of Stockholders' Equity 24 Statements of Cash Flows 25-26 Notes to Financial Statements 27-37 (a)(2) The following Financial Statement Schedules are filed herewith: None. Schedules not included herein are omitted because they are not applicable or the required information appears in the Financial Statements or Notes thereto. (a)(3) The following exhibits are filed herewith: 3a Certificate of Incorporation as amended. 4 Stock Purchase Warrant 10.10.2 1984 Non-Qualified Stock Option Plan as amended November 15, 1996* 10.10.3 1984 Incentive Stock Option Plan as amended November 15, 1996* 10.11.1 Second Amendment to Lease Agreement between Lexington BGK Associates, Limited Partnership and MacroChem Corporation for space located at 110 Hartwell Avenue, Lexington, MA 02173 10.13 Form of Employment Agreement between the Company and Dr. Stephen J. Riggi* 11. Statement of Earnings Per Share 23.1 Consent of Deloitte & Touche LLP 27 Financial Data Schedule 99.1 1994 Equity Incentive Plan as amended November 15, 1996* The following exhibits to be filed herewith are incorporated by reference to the exhibits to the Company's Annual Report on Form 10-K for the year ended December 31, 1995: 4(b) Amendment to warrant agreement. 10.12 Agreement between the Company and Janssen/Meyers Associates, L.P. The following exhibit required to be filed herewith is incorporated by reference to the exhibits to the Company's Annual Report on Form 10-K for the year ended December 31, 1993: 10.11 Lease agreement between MacroChem Corporation and Phoenix Home Life Mutual Insurance Company for space located at 110 Hartwell Avenue, Lexington, MA 02173. The following exhibits required to be filed herewith are incorporated by reference to the exhibits to the Company's Registration Statement on Form S-1 (No. 33-62042): 1a Agency Agreement between the Company and D.H. Blair Investment Banking Corp. 1b Unit Purchase Options 1c M/A Agreement between the Company and D.H. Blair Investment Banking Corp. 3b Bylaws 3c State of Delaware Certificate of Agreement of Merger 4a Included in exhibits 3a, 3b and 3c 4b Specimen Class X Warrant Certificate 4c Specimen Class A Warrant Certificate 4d Specimen Class AA Warrant Certificate 4e Warrant Agreement among the Company, American Stock Transfer and Trust Company of New York and D.H. Blair Investment Banking Corp. 10a Form of Employment Agreement between the Company and Dr. Carlos M. Samour* 10b Form of Employment Agreement between the Company and Mr. Alvin J. Karloff* The following exhibits required to be filed herewith are incorporated by reference to the exhibits to the Company's Annual Report on Form 10-K for the year ended March 31, 1988: 4.1 Form of Common Stock Certificate (b) No current reports on Form 8-K were filed in the three-month period ended December 31, 1996. -------------------------- *Management contract or compensatory plan or arrangement 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. MACROCHEM CORPORATION Dated: March 28, 1997 By: /s/ Alvin J. Karloff Alvin J. Karloff President, Chief Executive Officer and Principal Financial 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 in the capacities indicated on March 28, 1997. /s/ Alvin J. Karloff Chief Executive Officer, Alvin J. Karloff President, Principal Financial Officer and Director /s/ Dr. Carlos M. Samour Chairman of the Board of Directors Dr. Carlos M. Samour and Scientific Director /s/ Dr. Stephen J. Riggi Vice President, Operations and Dr. Stephen J. Riggi Director /s/ D. Ray Taylor Director D. Ray Taylor /s/ Dr. Willard M. Bright Director Dr. Willard M. Bright /s/ Peter G. Martin Director Peter G. Martin EX-3.(I) 2 CERTIFICATE OF INCORPORATION AS AMENDED. CERTIFICATE OF INCORPORATION OF MACROCHEM CORPORATION ***** 1. The name of the Corporation is MacroChem Corporation. 2. The address of its registered office in the State of Delaware is 1209 Orange Street, in the City of Wilmington, County of New Castle. The name of its registered agent at such address is The Corporation Trust Company. 3. The nature of the business or purposes to be conducted or promoted is: To engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. 4. The total number of shares of stock which the corporation shall have authority to issue is sixty-six million (66,000,000) shares, 60,000,000 of which shall be Common Stock, of the par value of One Cent ($.01) per share; 6,000,000 of which shall be Preferred Stock, of the par value of One Cent ($.01) per share, 500,000 of which shall be designated as "Series A Convertible Preferred Stock", of the par value of One Cent ($.01), amounting in the aggregate to Six Hundred Sixty Thousand and 00/100 Dollars ($660,000.00). Additional designations and powers, preferences and rights and qualifications, limitations or restrictions thereof of the shares of stock shall be determined by the Board of Directors of the Corporation from time to time. 5. The name and mailing address of the Corporation's incorporator is George A. Stevens, 110 Hartwell Avenue, Lexington, Massachusetts 02173. 6. The names and addresses of the following are to serve as the directors until the first annual meeting of the stockholders or until his successor are elected and qualified: Alvin J. Karloff George A. Stevens 13 Clara Road 66 Fifar Lane Framingham, MA 01701 Lexington, MA 02173 Carlos M. Samour D. Raymond Taylor 254 Ocean Avenue Docugraphix, Inc. Newport, RI 02840 1601 Saratoga Sunnyvale Road Cupertino, CA 95014 7. The Corporation is to have perpetual existence. 8. In furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized: To make, alter or repeal the bylaws of the Corporation, To authorize and cause to be executed mortgages and liens upon the real and personal property of the Corporation. To set apart out of any the funds of the Corporation available for dividends a reserve or reserves for any proper purpose and to abolish any such reserve in the manner in which it was created. By a majority of the whole board, to designate one or more committees, each committee to consist of one or more of the directors of the Corporation. The board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. The bylaws may provide that in the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the board of directors to act at the meeting in place of any such agent or disqualified member. Any such committee, to the extent provided in the resolution of the board of directors, or in the bylaws of the Corporation, shall have and may exercise all the powers and authority of the board of directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to amending the Certificate of Incorporation, adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease, or exchange of all or substantially all of the Corporation's property and assets, recommending to the stockholders a dissolution of the Corporation or a revocation of a dissolution, or amending the bylaws of the Corporation; and, unless the resolution or bylaws expressly so provide, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of stock. When and as authorized by the stockholders in accordance with statute, to sell, lease or exchange all or substantially all of the property and assets of the Corporation, including its goodwill and its corporate franchises, upon such terms and conditions and for such consideration, which may consist in whole or in part of money or property, including shares of stock in, and/or other securities of, any other Corporation or Corporations, as its board of directors shall deem expedient and for the best interests of the Corporation. 9. To the maximum extent permitted by Section 102(b)(7) of the General Corporation Law of Delaware, a director of this Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit. 10. Whenever a compromise or arrangement is proposed between this Corporation and its creditors or any class of them and/or between this Corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of this Corporation or of any creditor or stockholder thereof, or on the application of any receiver or receivers appointed for this Corporation under the provisions of Section 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for this Corporation under the provisions of Section 279 of Title 8 of the Delaware Code, order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, agree to any compromise or arrangement to any reorganization of this Corporation as consequences of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders of this Corporation, as the case may be, and also on this Corporation. 11. Meetings of the stockholders may be held within or without the State of Delaware, as the bylaws may provide. The books of the Corporation may be kept (subject to any provision contained in the statutes) outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the bylaws of the Corporation. Elections of directors need not be by written ballot unless the bylaws of the Corporation shall so provide. 12. The Corporation reserves the right to amend, alter, change, or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation. THE UNDERSIGNED, being the incorporator named hereinbefore, for the purposes of forming a Corporation pursuant to the General Corporation Law of the State of Delaware, does make this certificate, hereby declaring and certifying that this is his act and deed and the facts herein stated are true, and accordingly, has hereunto set his hand this 14th day of May, 1992. /s/George A. Stevens -------------------- George A. Stevens COMMONWEALTH OF MASSACHUSETTS) ) ss.: COUNTY OF MIDDLESEX ) BE IT REMEMBERED that on the 14th day of May, 1992, personally came before me, a Notary Public for the Commonwealth of Massachusetts, George A. Stevens, the party to the foregoing Certificate of Incorporation, known to me personally to be such, and acknowledged the said certificate to be his act and deed and that the facts stated therein are true. GIVEN under my hand and seal of office this day and year aforesaid. /s/Jane M. Davenport --------------------- Notary Public My commission expires: 03/04/94 EX-4 3 FORM OF JANSSEN-MEYERS STOCK PURCHASE WARRANT JM-4 VOID AFTER 5:00 P.M., New York Time, on June 17, 1999 Warrant to Purchase 145,800 Shares of Common Stock. THIS WARRANT, AND THE COMMON STOCK ISSUABLE UPON ITS EXERCISE, HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED, DISPOSED OF OR OFFERED FOR SALE, IN WHOLE OR IN PART, IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THAT ACT COVERING THIS WARRANT AND/OR THE COMMON STOCK ISSUABLE UPON EXERCISE THEREOF, OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO MACROCHEM CORPORATION THAT AN EXEMPTION FROM REGISTRATION IS AVAILABLE. WARRANT TO PURCHASE COMMON STOCK OF MACROCHEM CORPORATION This is to Certify That, FOR VALUE RECEIVED, JANSSEN-MEYERS ASSOCIATES, L.P., or assigns ("Holder"), is entitled to purchase, subject to provisions of this Warrant, from MacroChem Corporation, a Delaware corporation ("Company"), One Hundred Forty-Five Thousand Eight Hundred (145,800) fully paid, validly issued and nonassessable shares of Common Stock, $.01 par value, of the Company ("Common Stock") at a price of $6.075 per share. This Warrant is exercisable at any time or from time to time from the date hereof until 5:00 p.m. New York City time on June 17, 1999. The number of shares of Common Stock to be received upon the exercise of this Warrant and the price to be paid for each share of Common Stock underlying this Warrant may be adjusted from time to time as hereinafter set forth. The shares of Common Stock deliverable upon exercise of this Warrant, and as adjusted from time to time, are hereinafter sometimes referred to as "Warrant Shares" and the exercise price of a share of Common Stock in effect at any time and as adjusted from time to time is hereinafter referred to as the "Exercise Price." (a) EXERCISE OF WARRANT. Provided this Warrant becomes exercisable in accordance with the terms hereof, this Warrant may be exercised in whole or in part at any time or from time to time on or after the date hereof until June 17, 1999; provided, however, that (i) if such day is a day on which banking institutions in the State of New York are authorized by law to close, then on the next succeeding day which shall not be such a day, and (ii) in the event of any merger, consolidation or sale of substantially all the assets of the Company as an entirety, resulting in any distribution to the Company's stockholders, the Holder shall have the right to exercise this Warrant through June 17, 1999 into the kind and amount of shares of stock and other securities and property (including cash) receivable by a holder of the number of shares of Common Stock into which this Warrant might have been exercisable immediately prior thereto. This Warrant may be exercised by presentation and surrender hereof to the Company at its principal office, or, at the Company's option, at the office of its stock transfer agent, if any, with the Purchase Form annexed hereto duly executed and accompanied by payment of the Exercise Price for the number of Warrant Shares specified in such forms. As soon as practicable after each such exercise of the Warrant, but not later than seven (7) days from the date of such exercise, the Company shall issue and deliver to the Holder a certificate or certificates for the Warrant Shares issuable upon such exercise, registered in the name of the Holder or its designee. If this Warrant should be exercised in part only, the Company shall, upon surrender of this Warrant for cancellation, execute and deliver a new Warrant evidencing the rights of the Holder thereof to purchase the balance of the Warrant Shares purchasable thereunder. Upon receipt by the Company of this Warrant at its office, or by the stock transfer agent of the Company at its office, in proper form for exercise, the Holder shall be deemed to be the holder of record of the shares of Common Stock issuable upon such exercise, notwithstanding that the stock transfer books of the Company shall then be closed or that certificates representing such shares of Common Stock shall not then be physically delivered to the Holder. (b) RESERVATION OF SHARES. The Company shall at all times reserve for issuance and/or delivery upon exercise of this Warrant such number of shares of its Common Stock as shall be required for issuance and delivery upon exercise of this Warrant. (c) FRACTIONAL SHARES. No fractional shares of scrip representing fractional shares shall be issued upon the exercise of this Warrant. With respect to any fraction of a share called for upon exercise hereof, the Company shall pay to the Holder an amount in cash equal to such fraction multiplied by the current market value of a share, determined as follows: (1) If the Common Stock is listed on a National Securities Exchange or admitted to unlisted trading privileges on such exchange or listed for trading on the NASDAQ system, the current market value shall be the last reported sale price of the Common Stock on such exchange or system on the last business day prior to the date of exercise of this Warrant or if no such sale is made on such day, the average closing bid and asked prices for such day on such exchange or system; or (2) If the Common Stock is not so listed or admitted to unlisted trading privileges, the current market value shall be the mean of the last reported bid and asked prices reported by the National Quotation Bureau, Inc. on the last business day prior to the date of the exercise of this Warrant; or (3) If the Common Stock is not so listed or admitted to unlisted trading privileges and bid and asked prices are not so reported, the current market value shall be an amount determined in such reasonable manner as may be prescribed by the Board of Directors of the Company. (d) TRANSFER, ASSIGNMENT OR LOSS OF WARRANT. This Warrant is not transferable or assignable without the prior written consent of the Company. Upon receipt by the Company or evidence satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and (in the case of loss, theft or destruction) of reasonably satisfactory indemnification, and upon surrender and cancellation of this Warrant, if mutilated, the Company will execute and deliver a new Warrant of like tenor and date. Any such new Warrant executed and delivered shall constitute an additional contractual obligation on the part of the Company, whether or not this Warrant so lost, stolen, destroyed, or mutilated shall be at any time enforceable by anyone. (e) RIGHTS OF THE HOLDER. The Holder shall not, by virtue hereof, be entitled to any rights of a shareholder in the Company, either at law or equity, and the rights of the Holder are limited to those expressed in the Warrant and are not enforceable against the Company except to the extent set forth herein. (f) ADJUSTMENTS. The Exercise Price in effect at any time and the number and kind of securities purchasable upon the exercise of this Warrant shall be subject to adjustment from time to time upon the happening of certain events as follows: (1) In case the Company shall (i) declare a dividend or make a distribution on its outstanding shares of Common Stock in shares of Common Stock, (ii) subdivide or reclassify its outstanding shares of Common Stock into a greater number of shares, or (iii) combine of reclassify its outstanding shares of Common Stock into a smaller number of shares, the Exercise Price of this Warrant in effect at the time of the record date for such dividend or distribution or of the effective date of such subdivision, combination or reclassification shall be proportionately adjusted so that the Holder of this Warrant exercised after such date shall be entitled to receive the aggregate number and kind of shares which, if this Warrant had been exercised by such Holder immediately prior to such date, he would have owned upon such exercise and been entitled to receive upon such dividend, subdivision, combination or reclassification. (2) All calculations under this Section (f) shall be made to the nearest cent or to the nearest one-hundredth of a share, as the case may be. Anything in this Section (f) to the contrary notwithstanding, the Company shall be entitled, but shall not be required, to make such changes in the Exercise Price, in addition to those required by this Section (f), as it shall determine, in its sole discretion, to be advisable in order that any dividend or distribution in shares of Common Stock, or any subdivision, reclassification or combination of Common Stock, hereafter made by the Company shall not result in any Federal Income tax liability to the holders of Common Stock or securities convertible into Common Stock (including Warrants). (3) In the event that at any time, as a result of an adjustment made pursuant to Subsection (1) above, the Holder of this Warrant thereafter shall become entitled to receive any shares of the Company, other than Common Stock, thereafter the number of such other shares so receivable upon exercise of this Warrant shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Common Stock contained in Subsections (1) and (2), above. (g) OFFICER'S CERTIFICATE. Whenever the Exercise Price shall be adjusted as required by the provisions of the foregoing Section, the Company shall forthwith file in the custody of its Secretary or an Assistant Secretary at its principal office and with the stock transfer agent responsible for this Warrant, if any, an officer's certificate showing the adjusted Exercise Price determined as herein provided, setting forth in reasonable detail the facts requiring such adjustment, including a statement of the number of additional shares of Common Stock, if any, and such other facts as shall be necessary to show the reason for and the manner of computing such adjustment. Each such officer's certificate shall be made available at all reasonable times for inspection by the Holder or any holder of a Warrant executed and delivered pursuant to Section (a) and the Company shall, forthwith after each such adjustment, mail a copy by certified mail of such certificate to the Holder or any such holder. In the event of a failure by the Company to deliver an officer's certificate within thirty (30) days of the occurrence of an event requiring an adjustment under the provisions of the foregoing Section, the Termination Date shall be extended by the length of time equal to the time between the thirtieth day after the adjustment event and the date the officer's certificate is delivered. (h) NOTICES TO THE WARRANT HOLDER. So long as this Warrant shall be outstanding, (i) if the Company shall pay any dividend or make any distribution upon the Common Stock or (ii) if the Company shall offer to the holders of Common Stock for subscription or purchase by them any share of any class or any other rights or (iii) if any capital reorganization of the Company, reclassification of the capital stock of the Company, consolidation or merger of the Company with or into another corporation, sale, lease or transfer of all or substantially all of the property and assets of the Company to another corporation, or voluntary or involuntary dissolution, liquidation or winding up of the Company shall be effected, then in any such case, the Company shall cause to be mailed by certified mail to the Holder, at least ten days prior to the date specified in (x) or (y) below, as the case may be, a notice containing a brief description of the proposed action and stating the date on which (x) a record is to be taken for the purpose of such dividend, distribution or rights, or (y) such reclassification, reorganization, consolidation, merger, conveyance, lease, dissolution, liquidation or winding up is to take place and the date, if any is to be fixed, as of which the holders of Common Stock or other securities shall receive cash or other property deliverable upon such reclassification, reorganization, consolidation, merger, conveyance, dissolution, liquidation or winding up. Notwithstanding the foregoing, the failure to provide the notice required by this Section shall not invalidate any proceedings or actions taken by the Company pursuant to a sufficient vote of the stockholders entitled to vote on any such proceeding or action. (i) RECLASSIFICATION, REORGANIZATION OR MERGER. In case of any reclassification, capital reorganization or other change of outstanding shares of Common Stock of the Company, or in case of any consolidation or merger of the Company with or into another corporation (other than a merger with a subsidiary in which merger the Company is the continuing corporation and which does not result in any reclassification, capital reorganization or other change of outstanding shares of Common Stock of the class issuable upon exercise of this Warrant) or in case of any sale, lease or conveyance to another corporation of the property of the Company as an entirety, the Company shall, as a condition precedent to such transaction, cause effective provisions to be made so that the Holder shall have the right thereafter by exercising this Warrant at any time prior to the expiration of the Warrant, to purchase the kind and amount of shares of stock and other securities and property receivable upon such reclassification, capital reorganization and other change, consolidation, merger, sale or conveyance by a holder of the number of shares of Common Stock which might have been purchased upon exercise of this Warrant immediately prior to such reclassification, change, consolidation, merger, sale or conveyance. Any such provision shall include provision for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Warrant. The foregoing provisions of this Section (i) shall similarly apply to successive reclassifications, capital reorganizations and changes of shares of Common Stock and to successive consolidations, mergers, sales or conveyances. In the event that in connection with any such capital reorganization or reclassification, consolidation, merger, sale or conveyance, additional shares of Common Stock shall be issued in exchange, commission, substitution or payment, in whole or in part, for a security of the Company other than Common Stock, any such issue shall be treated as an issue of Common Stock covered by the provisions of Subsection (1) of Section (f) hereof. (j) "PIGGYBACK" REGISTRATION RIGHTS. If, on or after the first anniversary of the date hereof and prior to the Termination Date, the Company shall determine to proceed with the actual preparation and filing of a registration statement under the Securities Act of 1933, as amended (the "Act") in connection with the proposed offer and sale of any of its securities by it or any of its security holders (other than a registration statement of Form S-4, S-8 or other limited purpose form), the Company will give written notice of its determination to the Holder. Upon the written request from the Holder within twenty (20) days after receipt of any such notice from the Company, the Company will, except as herein provided, cause that number of shares of Common Stock then issuable upon exercise of this Warrant (collectively, the "Registrable Securities") requested by the Holder to be included in such registration statement to be so included, all to the extent requisite to permit the sale or other disposition by the prospective seller or sellers of the Registrable Securities to be so registered; provided, further, that nothing herein shall prevent the Company from, at any time, abandoning or delaying any registration. If any registration pursuant to this section shall be underwritten in whole or in part, the Company may require that the Registrable Securities requested for inclusion pursuant to this section be included in the underwriting on the same terms and conditions as the securities otherwise being sold through the underwriters. Notwithstanding the foregoing, if the managing underwriter determines and advises in writing that the inclusion of all Registrable Securities proposed to be included in the underwritten public offering, together with any other issued and outstanding securities proposed to be included therein by holders other than the Holder of Registrable Securities, would interfere with the successful marketing of such securities, then the number of such shares that the managing underwriter believes may be sold in such underwritten public offering shall be allocated for inclusion in the registration statement in the following order of priority: (i) the securities being offered by the Company, (ii) securities being offered by holders having registration rights senior in right to the registration rights set forth in this Warrant, (iii) the number of Registrable Securities then owned by each such holder of such Registrable Securities on a pro rata basis, based upon the number of Registrable Securities sought to be registered by each such holder; and (iv) the number of securities held by holders other than the holders of Registrable Securities, on a pro rata basis, based upon the number of securities sought to be registered by each such holder. The securities that are excluded from the underwritten public offering shall be withheld from the market by the holders thereof for a period, not to exceed 180 days, that the managing underwriter reasonably determines is necessary in order to effect the underwritten public offering. The Company shall pay all expenses for registration statements filed pursuant to this section. (k) INVESTMENT REPRESENTATIONS. By its acceptance of this Warrant, the Holder represents and covenants that: (1) This Warrant and any shares issuable upon exercise of this Warrant shall be acquired for the Holder's own account for investment and not with a view toward resale or redistribution in violation of the Act, or any rule or regulation under the Act; (2) The Holder has made such investigation and obtained such information as is necessary to permit the Holder to evaluate the merits and risks of the Holder's investment in the Company; (3) The Holder has sufficient experience in business, financial and investment matters to be able to evaluate the risks involved in the purchase of shares issuable upon exercise of this Warrant and to make an informed investment decision with respect to such purchase; (4) The Holder is able to afford a complete loss of the value of the shares issuable upon exercise of this Warrant and is able to bear the economic risk of holding such shares for an indefinite period; and (5) The Holder understands that (A) the shares acquired by the exercise of this Warrant will not have been registered under the Act and, therefore, cannot be sold, transferred or otherwise disposed of unless they are subsequently registered under the Act or an exemption from registration is then available and (B) except as provided in paragraph (j) the Company has no obligation to register the shares under the Act. (l) LEGEND ON STOCK CERTIFICATE. All stock certificates representing shares of Common Stock issued upon exercise of this Warrant shall have affixed thereto a restrictive legend in the following form, in addition to any other legend required by applicable law: THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAWS. SUCH SHARES MAY NOT BE OFFERED, SOLD OR TRANSFERRED UNLESS THEY HAVE BEEN REGISTERED UNDER SUCH ACT OR APPLICABLE STATE SECURITIES LAWS OR UNLESS AN EXEMPTION FROM REGISTRATION IS AVAILABLE. The Holder consents to the Company making a notation on its records and giving instructions to any transfer agent of the shares in order to implement the restrictions on transfer established in this Warrant. (m) RESTRICTION OF TRANSFERABILITY OF SECURITIES; COMPLIANCE WITH THE ACT. (1) This Warrant and the Warrant Shares shall not be sold, assigned, transferred or pledged except upon the conditions specified in Section (d) and in this Section (m). The Holder will cause any proposed purchaser, assignee, transfere, or pledgee of the Warrant or the Warrant Shares to agree to take and hold such securities subject to the provisions and upon the conditions of Section (d) and this Section (m). (2) The Holder of this Warrant or any certificate representing Warrant Shares, by acceptance thereof, agrees to comply in all respects with the provisions of this Section (m). Prior to any proposed sale, assignment, transfer or pledge of this Warrant or any Warrant Shares (other than a transfer not involving a change in beneficial ownership) unless there is in effect a registration statement under the Act covering the proposed transfer, the holder thereof shall give written notice to the Company of such holder's intention to effect such transfer, sale, assignment or pledge. Each such notice shall describe the manner and circumstances of the proposed transfer, sale, assignment or pledge in sufficient detail, and shall be accompanied, at such holder's expense by either (i) an unqualified written opinion of legal counsel, who shall (and whose legal opinion shall) be reasonably satisfactory to the Company, addressed to the Company, to the effect that the proposed transfer of the Warrant Shares, as the case may be, may be effected without registration under the Act, or (ii) a "no action" letter from the Securities and Exchange Commission to the effect that the transfer of such securities without registration will not result in a recommendation by the staff of the Commission that action be taken with respect thereto, whereupon, if the Company consents, the holder of such securities shall be entitled to transfer such securities in accordance with the terms of the notice delivered by the holder to the Company. Each certificate evidencing the Warrant Shares transferred as above provided shall bear, except if such transfer is made pursuant to Rule 144 or pursuant to an effective registration statement under the Act covering the transfer, the appropriate restrictive legend set forth in Section (l) above. MACROCHEM CORPORATION By: /s/ Alvin J. Karloff ----------------------- Alvin J. Karloff, President and Chief Executive Officer - -------------------------------- [SEAL] Dated: As of June 17, 1996 Attest: /s/Pierrette E. Samour - -------------------------------- Secretary & Treasurer PURCHASE FORM Dated __________________, 19____ The undersigned hereby irrevocably elects to exercise the within Warrant to the extent of purchasing _______________ shares of Common Stock and hereby makes payment of ____________________ in payment of the actual exercise price thereof. ------------------- INSTRUCTIONS FOR REGISTRATION OF STOCK Name __________________________________________________________________ (Please typewrite or print in block letters) Address _______________________________________________________________ Signature _____________________________________________________________ ASSIGNMENT FORM FOR VALUE RECEIVED, ______________________________________________ hereby sells, assigns and transfers unto Name _______________________________________________________________ (Please typewrite or print in block letters) Address _______________________________________________________________ pursuant to the within Warrant the right to purchase Common Stock represented by this Warrant to the extent of ___________ shares as to which such right is exercisable and does hereby irrevocably constitute and appoint ___________________________Attorney, to transfer the same on the books of the Company with full power of substitution in the premises. Date _______________, 19_______ Signature _______________________________________________ EX-10 4 1984 NON-QUALIFIED STOCK OPTION PLAN AS AMENDED As Amended and Approved by the Board of Directors as of March 1, 1991, and as amended November 15, 1996 MacroChem Corporation 1984 NON-QUALIFIED STOCK OPTION PLAN 1. PURPOSE. The purpose of the MacroChem Corporation 1984 Non-Qualified Stock Option Plan (the "Plan") is to advance the interests of MacroChem Corporation (the "Company") by enhancing the Company's ability to reward selected key employees, directors, and consultants of the Company and of any future subsidiary of the Company, Scientific Sentinels and members of the Company's Scientific Advisory Council for their contributions to the success of the Company and to encourage such persons to accept or continue association with the Company and its subsidiaries. Accordingly, the Company will offer to sell shares of common stock of the Company, $0.005 par value, (the "Stock") as hereinafter provided to such persons as are designated in accordance with the provisions of the Plan. 2. ADMINISTRATION. The Plan shall be administered by the Board of Directors of the Company (the "Board") which shall (a) determine which of the employees, directors, and consultants of the Company and its subsidiaries, Scientific Sentinels and Scientific Advisory Council members shall be granted options; (b) determine the time or times when options shall be granted and the number of shares of Stock to be subject to each option; (c) determine the time or times when each option becomes exercisable and the duration of the exercise period; (d) prescribe the form or forms of the instruments evidencing any options granted under the Plan and of any other instruments required under the Plan and change such forms from time to time; (e) adopt, amend and rescind rules and regulations for the administration of the Plan; and (f) interpret the Plan and decide all questions and settle all controversies and disputes which may arise in connection with the Plan. All decisions, determinations and interpretations of the Board of Directors shall be binding on all parties concerned. The Board may, in its discretion, delegate its powers with respect to the Plan to a Compensation Committee or any other committee (the "Committee"), in which event all references to the Board hereunder shall be deemed to refer to the Committee. The Committee shall consist of at least two directors. A majority of members of the Committee shall constitute a quorum, and all determinations of the Committee shall be made by a majority of its members. Any determination of the Committee under the Plan may be made without notice or meeting of the Committee by a writing signed by a majority of Committee members. 3. PARTICIPANTS. The Participants in the Plan shall be such key employees, directors and consultants of the Company or of any of its subsidiaries, Scientific Sentinels and members of the Company's Scientific Advisory Council, whether or not also directors, as may be selected from time to time by the Board of Directors in its discretion as being in a post to contribute substantially to the success of the Company or such subsidiaries. 4. PERIOD OF GRANT. No option shall be granted under the Plan after March 31, 1994 but options previously granted may extend beyond that date. 5. TERMS AND CONDITIONS OF OPTIONS. All options granted under the Plan shall be subject to the following terms and conditions (except as provided in Sections 7 and 8 below) and to such other terms and conditions as the Board of Directors shall determine to be appropriate to accomplish the purpose of the Plan: (a) OPTION PRICE. The purchase price for shares issuable upon exercise of options shall be determined by the Board of Directors. (b) PERIOD OF OPTIONS. An option, by its terms, shall not be exercisable after the expiration of 10 years from the date of grant of such option. (c) EXERCISE OF OPTIONS. (1) Each option shall be exercisable at such time or times, whether or not in installments, as the Board of Directors shall have prescribed at the time the option was granted. In the case of an option not immediately exercisable in full, the Board of Directors may at any time accelerate the time at which all or part of the option may be exercised. (2) A person electing to exercise an option shall give written notice to the Company, as specified by the Board of Directors, of his election and of the number of shares he has elected to purchase, such notice to be accompanied by: (i) the instrument evidencing such option; (ii) payment for all shares then being purchased thereunder in full in the form of cash, check or, through the delivery of shares of Common Stock (duly owned by the holder of the option and for which the holder has good title free and clear of any liens and encumbrances) having a fair market value on the last business day preceding the date of exercise equal to the purchase price, or a combination of cash and Common Stock or in such other form as the Board shall designate at the time an option is granted; (iii) payment from the appropriate person in (A) cash, (B)check or, (C) if the Board determines at the time an option is exercised, through the delivery ofshares of Common Stock (duly owned by the Participant and for which the Participant has good title free and clear of any liens and encumbrances), having a fair market value on the last business day preceding the date of exercise, of an amount equal to all applicable local, state or federal withholding taxes, if any, or such other assurance of the payment to the Company of such amount as shall be satisfactory to the Board of Directors in their sole discretion (for such purposes, the participation of a person exercising an option in a so-called "cashless exercise program", pursuant to which a broker sells the shares underlying an option, and delivers a portion of the proceeds after the sale to the Company in payment of the option exercise price and tax liability shall be deemed to be sufficient assurance of payment hereunder); (iv) any other documents required by the Board of Directors. The date of receipt by the Company of such notice, accompanied by the instruments, other documents, undertakings and payments referred to in or required by Sections 5(c) and 5(d) hereof shall be the date of exercise. (3) A person exercising an option shall execute and deliver to the Company any shareholder's agreement or other agreements which are required by the terms of the option being exercised, and, unless and until such agreements have been executed and delivered, the Company shall not be obligated to deliver any shares hereunder. (d) DELIVERY OF STOCK. Stock to be delivered under the Plan may constitute an original issue of authorized stoic or may consist of previously issued stock acquired by the Company, as shall be determined by the Board. The Board and the proper officers of the Company shall take any appropriate action required for such delivery. The Company shall not be obligated to deliver any shares unless and until, in the opinion of the Company's counsel, all applicable federal and state laws and regulations have been complied with, nor, in the event the Stock is at the time listed upon any stock exchange, unless and until the shares to be delivered have been listed or authorized to be added to the list upon official notice of issuance upon such exchange, nor unless or until all other legal matters in connection with the issuance and delivery of shares have been approved by the Company's counsel. Without limiting the generality of the foregoing, the Company may require from the person exercising an option such investment representation or such agreement, if any, as counsel for the Company may consider necessary in order to comply with the Securities Act of 1933, as amended, and any applicable Blue Sky or state securities laws and may require that the person agree that any sale of the shares will be made only on the stock exchange or in such other manner as is permitted by the Board and that he will notify the Company when he makes any disposition of the shares whether by sale, gift or otherwise. The Company shall use its best efforts to effect any such compliance and listing, and the person exercising the option shall take any action reasonably requested by the Company in such connection. A person exercising an option shall have the rights of a shareholder only as to shares actually acquired by him under the Plan. (e) NONTRANSFERABILITY OF OPTIONS. Each option, by its terms, shall not be transferable by the Participant otherwise than by will or by the laws of descent and distribution, and during the Participant's lifetime the option shall be exercisable only by him, except that options awarded to employees or members of the Board of Directors which are not incentive stock options may be transferred by a participant to (i) the spouse, children or grandchildren of the participant ("Immediate Family Members"), (ii) a trust or trusts for the exclusive benefit of such Immediate Family Members, or (iii) a partnership in which such Immediate Family Members are the only partners, provided that (x) there may be no consideration for any such transfer, and (y) subsequent transfers of options shall be prohibited except those in accordance with Section 5(e) hereof. Following any such transfer, the transferred option shall continue to be subject to all the terms and conditions of the instrument evidencing the option, including without limitation any provisions thereof with respect to exercise of the option following the death or termination of employment of the participant to whom the option was originally granted, and the provisions of the Plan, including Section 5(c) hereof. 6. REPLACEMENT OPTIONS. The Company may grant options under the Plan in substitution for options held by employees of other corporations who concurrently become employees of the Company or a subsidiary as the result of a merger or consolidation of another corporation with the Company or subsidiary, or the acquisition by the Company or a subsidiary of property or stock of another corporation. 7. MAXIMUM NUMBER OF SHARES. Subject to adjustment as provided in Section 8 of the Plan, the number of shares of the Stock of the Company which may be delivered under the Plan shall not exceed $1,550,000 in the aggregate. To the extent that any options granted under the Plan shall lapse or be terminated, the shares with respect to which the option has lapsed or been terminated shall thereafter be available for option under the Plan, within the limit specified above. 8. CHANGES IN STOCK. In the event of a stock dividend, split-up or combination of shares, recapitalization or merger in which the Company is the surviving corporation, or other similar capital change, the number and kind of shares of stock or securities of the Company to be subject to options then outstanding, the maximum number of shares or securities which may be issued or sold under the Plan, the option price and other relevant provisions shall be appropriately adjusted by the Board of Directors of the Company, whose determination shall be binding on all persons. In the event of a consolidation or a merger in which the Company is not the surviving corporation, or in the event of complete liquidation of the Company, the Board of Directors shall make all outstanding options immediately exercisable or arrange to have any surviving corporation grant replacement options, of substantially equivalent value to those replaced, to the Participants. 9. EMPLOYMENT RIGHTS. The adoption of the Plan does not confer upon any Participant any right to continued association with the Company or a subsidiary, as the case may be, nor does it interfere in any way with the right of the Company or a subsidiary to terminate the employment of any of its employees at any time. 10. AMENDMENTS. The Board of Directors may at any time discontinue granting options under the Plan and may at any time amend the Plan or any outstanding options for the purpose of satisfying the requirements of any changes in applicable laws or regulations or for any other purpose which may at the time be permitted by law, provided, however, that no such amendment shall adversely affect the rights of any Participant (without his consent) under any option theretofore granted. 11. EFFECTIVE DATE. The Plan and any amendments thereto shall become effective on the date on which it is approved by the Board of Directors of the Company. The original plan became effective in April, 1984. This Amendment became effective in March, 1991. EX-10 5 1984 INCENTIVE STOCK OPTION PLAN AS AMENDED As Amended February 11, 1994 and November 15, 1996 MACROCHEM CORPORATION 1984 INCENTIVE STOCK OPTION PLAN 1. PURPOSE. The purpose of the MacroChem Corporation Incentive Stock Option Plan (hereinafter referred to as the "Plan") is to provide a special incentive to selected key employees of MacroChem Corporation (hereinafter referred to as the "Company") or of any future subsidiary of the Company to improve operations and to increase profits and to encourage such persons to accept or continue employment with the Company or any subsidiary of the Company. Accordingly, the Company will offer to sell shares of common stock of the Company, $0.01 par value, (the "Stock") as hereinafter provided to such employees of the Company or of any subsidiary as are designated in accordance with the provisions of the Plan. For purposes of the Plan, a subsidiary is any corporation in which the Company owns, directly or indirectly, stock possessing 50% or more of the total combined voting power of all classes of stock. 2. ADMINISTRATION. The Plan shall be administered by the Board of Directors of the Company (the "Board") which shall (a) determine which of the employees of the Company and its subsidiaries shall be granted options; (b) determine the time or times when options shall be granted and the number of shares of stock to be subject to each option; (c) determine the exercise price of the shares subject to each option and the method of payment of such price; (d) determine the times or times when each option becomes exercisable and the duration of the exercise period; (e) prescribe the form or forms of the instruments evidencing any options granted under the Plan and of any other instruments required under the Plan and change such forms from time to time; (f) adopt, amend and rescind rules and regulations for the administration of the Plan; and (g) interpret the Plan and decide all questions and settle all controversies and disputes which may arise in connection with the Plan. All decisions, determinations and interpretations of the Board of Directors shall be binding on all parties concerned. The Board may, in its discretion delegate its powers with respect to the Plan to a Compensation Committee or any other committee (the "Committee"), in which event all references to the Board hereunder shall be deemed to refer to the Committee. The Committee shall consist of at least two directors. A majority of members of the Committee shall constitute a quorum, and all determinations of the Committee shall be made by a majority of its members. Any determination of the Committee under the Plan may be made without notice or meeting of the Committee by a writing signed by a majority of Committee members. Following registration of the Common Stock of the Company under the Securities Exchange Act of 1934, no person shall serve on the Committee unless he is a non-employee director within the meaning of Rule 16b-3 under that Act. 3. PARTICIPANTS. The Participants in the Plan shall be key salaried employees of the Company or of any of its subsidiaries. 4. LIMITATIONS ON GRANTING OF OPTIONS. The granting of options under the Plan shall be subject to the following limitations: (a) PERIOD OF GRANT. No option shall be granted under the Plan after the expiration of 10 years from the earlier of the date on which the Plan is adopted or the date on which it is approved by the shareholders of the Company. (b) QUALIFIED PARTICIPANT. Except as hereinafter provided, no option shall be granted to a Participant if, at the time of the grant, the Participant owns stock possessing more than 10 percent of the total combined voting power of all classes of stock of the Company or of its subsidiaries. For purposes of determining a Participant's ownership of stock for purposes of the preceding sentence, the ownership attribution rules of Section 424(d) of the Internal Revenue Code of 1986, as amended (the "Code") will apply. The foregoing limitations will not apply if (i) the option price is at least 110 percent of the fair market value of the stock subject to the option at the time it is granted and (ii) the period of the option does not exceed five years from the date of grant. (c) MAXIMUM ANNUAL LIMIT. The aggregate fair market value, determined at the time the option is granted, of the stock for which any Participant may be granted options in any calendar year under the Plan (and under all other incentive stock option plans of the Company and of its subsidiaries) may not exceed the sum of (i) $100,000 plus (ii) any unused limit carryover to such year as determined under the applicable provisions of the Code and Treasury Regulations for incentive stock options. 5. TERMS AND CONDITIONS OF OPTIONS. All options granted under the Plan shall be subject to the following terms and conditions (except as provided in Sections 7 and 8 below) and to such other terms and conditions consistent with the applicable provisions of the Internal Revenue Code and Treasury Regulations for incentive stock options as the Board of Directors shall determine to be appropriate to accomplish the purposes of the Plan. (a) OPTION PRICE. The option price under each option shall be determined by the Board of Directors and shall not be less than 100% of the fair market value per share at the time the option is granted; nor shall the option price be less, in the case of an original issue of authorized stock, than par value. However, if at the time of grant, the Participant owns stock possessing more than 10 percent of the total combined voting power of all classes of stock of the Company or of its subsidiaries, the option price shall not be less than 110% of the fair market value of the stock subject to the option. (b) PERIOD OF OPTIONS. An option, by its terms, shall not be exercisable after the expiration of 10 years from the date of grant of such option. However, if at the time of grant, the Participant owns stock possessing more than 10 percent of the total combined voting power of all classes of stock of the Company or of its subsidiaries, the option, by its terms, shall not be exercisable after the expiration of 5 years from the date of grant of such option. (c) EXERCISE OF OPTIONS. (1) Each option shall be made exercisable at such time or times, whether or not in installments, as the Board of Directors shall prescribe at the time the option is granted. In the case of an option not immediately exercisable in full, the Board of Directors may at any time accelerate the time at which all or any part of the option may be exercised. However, every option, by its terms, shall not be exercisable while there is outstanding (within the meaning of Section 422A(c)(7) of the Internal Revenue Code) any incentive stock option previously granted to the Participant to purchase stock in the Company or in a corporation which (at the time of grant of such option) is a parent or subsidiary of the Company, or is a predecessor corporation of any such corporation. (2) A person electing to exercise an option shall give written notice to the Company, as specified by the Board of Directors, of his election and of the number of shares he has elected to purchase, such notice to be accompanied by: (i) the instrument evidencing such option; (ii) payment for all shares then being purchased thereunder in full in the form of cash, a certified check or cashier's check or, unless the Board otherwise determines at the time an option is granted, through the delivery of shares of Common Stock (duly owned by the Participant and for which the Participant has good title free and clear of any liens and encumbrances which have been held by the Participant for at least six months (or such shorter period as the Board may determine) having a fair market value on the last business day preceding the date of exercise equal to the purchase price, or a combination of cash and Common Stock or in such other form as the Board shall designate at the time an option is granted; (iii) payment in cash or by certified or bank check of an amount equal to all applicable local, state or federal withholding taxes, if any, or such other assurance of the payment to the Company of such amount as shall be satisfactory to the Board of Directors in their sole discretion, including if the Board of Directors so determines in the case of an incentive stock option such provision as the Board deems appropriate for the payment of any withholding taxes that may be due upon a later disposition of the stock acquired upon exercise of the option; and (iv) any other documents required by the Board of Directors. (3) A person exercising an option shall execute and deliver to the Company any shareholder's agreement or other agreements which the Board of Directors, in its sole discretion, may require at the time of exercise, and unless and until such agreements have been executed and delivered, the Company shall not be obligated to deliver any shares hereunder. (d) DELIVERY OF STOCK. Stock to be delivered under the Plan may constitute an original issue of authorized stock or may consist of previously issued stock acquired by the Company, as shall be determined by the Board. The Board and the proper officers of the Company shall take any appropriate action required for such delivery. The Company shall not be obligated to deliver any shares unless and until in the opinion of the Company's counsel, all applicable federal and state laws and regulations have been complied with, nor, in the event the Stock is at the time listed upon any stock exchange, unless and until the shares to be delivered have been listed or authorized to be added to the list upon official notice of issuance upon such exchange, nor unless or until all other legal matters in connection with the issuance and delivery of shares have been approved by the Company's counsel. Without limiting the generality of the foregoing, the Company may require from the person exercising an option such investment representation or such agreement, if any, as counsel for the Company may consider necessary in order to comply with the Securities Act of 1933 and may require that the person agree that any sale of the shares will be made only on the stock exchange or in such other manner as is permitted by the Board and that he will notify the Company when he makes any disposition of the shares whether by sale, gift or otherwise. The Company shall use its best efforts to effect any such compliance and listing, and the person exercising the option shall take any action reasonably requested by the Company in such connection. A person exercising an option shall have the rights of a shareholder only as to shares actually acquired by him under the Plan. (e) NONTRANSFERABILITY OF OPTIONS. Each option, by its terms, shall not be transferable by the Participant otherwise than by will or by the laws of descent and distribution, and during the Participant's lifetime the option shall be exercisable only by him. (f) TERMINATION OF EMPLOYMENT. Except as otherwise provided in subparagraphs (g) and (h) below, if the employment of a Participant terminates for any reason, his option shall expire immediately and he shall not be entitled to purchase any shares. (g) DISABILITY AND RETIREMENT. In the event of termination of employment as a result of disability within the meaning of section 105(d)(4) of the Internal Revenue Code, retirement on or after age 65, or retirement on or after age 55 after 10 years of continuous employment by the Company, that portion of a Participant's option that was exercisable immediately prior to termination will continue to be exercisable for the original term of the option, and that portion of the option that was not exercisable immediately prior to termination will expire, unless otherwise determined by the Board of Directors. (h) DEATH. If a Participant dies at a time when he is entitled to exercise an option, then at any time or times within ninety days after his death such option may be exercised, as to all or any of the shares which the Participant was entitled to purchase immediately prior to his death, by his executor or administrator or the person or persons to whom the option is transferred by will or the applicable laws of descent and distribution, and except as so exercised such option shall expire at the end of such period. In no event, however, may any option be exercised after the expiration of the option period. If any notice of election to exercise an option is given by the executor or administrator of a deceased Participant, or by the person or persons to whom the option has been transferred by the Participant's will or the applicable laws of descent and distribution, the Company shall be under no obligation to deliver shares pursuant to such exercise unless and until the Company is satisfied that the person or persons giving such notice is or are entitled to exercise the option and unless and until the persons have executed and delivered any other agreements or documents which the Board of Directors may require. 6. REPLACEMENT OPTIONS. The Company may grant options under the Plan in substitution for options held by employees of other corporations who concurrently become employees of the Company or a subsidiary as the result of a merger or consolidation of another corporation with the Company or subsidiary, or the acquisition by the Company or a subsidiary of property or stock of another corporation. 7. MAXIMUM NUMBER OF SHARES. Subject to adjustment as provided in Section 8 of the Plan, the number of shares of the Stock of the Company which may be delivered under the Plan shall not exceed 2,000,000 in the aggregate. To the extent that any options granted under the Plan shall lapse or be terminated, the shares with respect to which the option has lapsed or been terminated shall thereafter be available for option under the Plan, within the limit specified above. The maximum number of shares (subject to adjustment as provided in Section 8) for which options may be granted to any individual during the term of the Plan is ________ shares. The preceding sentence shall be construed consistent with the regulations under Section 162(m) of the Code. 8. CHANGES IN STOCK. In the event of a stock dividend, split-up or combination of shares, recapitalization or merger in which the Company is the surviving corporation, or other similar capital change, the number and kind of shares of stock or securities of the Company to be subject to options then outstanding, the maximum number of shares or securities which may be issued or sold under the Plan, the option price and other relevant provisions shall be appropriately adjusted by the Board of Directors of the Company, whose determination shall be binding on all persons. In the event of a consolidation or a merger in which the Company is not the surviving corporation, or which results in the acquisition of substantially all the Company's outstanding stock by a single person or entity or by a group of persons and/or entities acting in concert or in the event of the sale or transfer of substantially all the Company's assets or a complete liquidation of the Company, all outstanding options shall thereupon terminate, provided that the Board of Directors may, in its discretion, make all outstanding options immediately exercisable or arrange to have any surviving corporation grant replacement options to the Participants. 9. EMPLOYMENT RIGHTS. The adoption of the Plan does not confer upon any employee of the Company or a subsidiary any right to continued employment with the Company or a subsidiary, as the case may be, nor does it interfere in any way with the right of the Company or a subsidiary to terminate the employment of any of its employees at any time. 10. AMENDMENTS. The Board of Directors may at any time discontinue granting options under the Plan and may at any time amend the Plan or any out- standing options for the purpose of satisfying the requirements of any changes in applicable laws or regulations or for any other purpose which may at the time be permitted by law, provided, however, that (except to the extent required or permitted under Sections 7 or 8) no amendments shall, without the approval of the shareholders of the Company (a) increase the maximum number of shares available under the Plan, (b) change the class of employees eligible for options, (c) reduce the minimum option price of options thereafter to be granted below the price provided for in Section 5(a), (d) reduce the option price of outstanding options, (e) extend the time within which options may be granted, (f) extend the period of an outstanding option beyond ten years from the date of grant, (g) alter the restriction on exercising subsequent incentive stock options which is contained in Section 5(c)(1) or (h) alter the maximum annual limit of option grants contained in Section 4(c), and no such amendment shall adversely affect the rights of any Participant (without his consent) under any option theretofore granted. 11. EFFECTIVE DATE. The Plan shall become effective as of April 1, 1984, subject to the approval of the Board of Directors and subject to the vote of the holders of at least a majority of the shares of the outstanding voting stock of the Company. EX-10 6 SECOND AMENDMENT TO LEASE AGREEMENT SECOND AMENDMENT TO LEASE 110 HARTWELL AVENUE, LEXINGTON, MA. AT PREMISES ON PORTION OF FIRST FLOOR LEASE DATED JANUARY 17, 1992 DATE OF AMENDMENT: DECEMBER 9, 1996 LANDLORD: LEXINGTON BGK ASSOCIATES, LIMITED PARTNERSHIP TENANT: MACROCHEM CORPORATION Whereas pursuant to the Lease of January 17, 1992, as amended on December 21, 1993 (the "Lease"), the Landlord: Lexington BGK Associates, Limited Partnership and the Tenant: MacroChem Corporation desire to enter into this second amendment to the Lease; NOW, THEREFORE, in consideration of the mutual promise herein contained and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree that the Lease shall be further amended as follows: 1. Landlord and Tenant hereby incorporate all terms and provisions of the Lease herein as it is specifically set forth, except as said terms are modified herein. Any capitalized term not defined herein and defined in the Lease is used herein with the meaning set forth in the Lease. 2. Article II, INITIAL TERM shall be modified and amended to extend the expiration of the Lease term from February 28, 1997 to February 28, 2000. 3. Article III, RENT, Section 3.1 shall be modified and amended as follows. Basic Annual Rent shall be paid as follows: March 1, 1997 - February 28, 2000 $17.55/rsf $14,567.96/Month $174,815.55/Yr. Section 3.2 shall be modified and amended to reflect a Base Year for Real Estate Taxes of Fiscal Year 1997, with Tenant's prorated share of 18.89% (9,961 rsf as a percentage of 52,721 total building rentable area). Section 3.3 shall be modified and amended to reflect a Base Year for Operation Expenses of the Calendar Year 1997, with Tenant's prorated share of 18.89% (9,961 rsf as a percentage of 52,721 total building rentable area). 4. Article III, RENT, shall be modified and amended as follows. "In addition to paying the Basic Annual Rent as specified in Section 3.1 hereof, Tenant shall pay an additional rent as determined below: Where Tenant is not separately metered, Tenant shall be responsible for payment of electricity utilized in `lights and plugs' of the Demised Premises. Use will be calculated on a building standard rate per month and paid in addition to the Basic Annual Rent. Currently estimated at $1.00/rsf/yr, electricity costs for lights and plugs may be adjusted annually to reflect current market conditions and actual electric expenses." Article XXI, LANDLORD IMPROVEMENTS, shall be modified and amended to include the following items of work to be performed at Landlord's expense: Replacement of the existing carpets, Replace and repair damaged baseboards and vinyl floor tiles, Replace and repair damaged window sills, Repaint existing space with new paint to match, Provide a sink for the existing lunch room, Replace water stained or otherwise damaged ceiling tiles. Landlord improvements will comply with all federal, state and local codes, as applicable, and be consistent with building standards. All work will be completed in a timely and workmanlike fashion on or before February 28, 1997. Tenant will be responsible for the handling of its own possessions and equipment throughout any improvement work. In all other respects, the Lease is hereby ratified, confirmed and approved. In witness whereof, the parties hereto have executed this Second Amendment to Lease as of the date set forth above. LANDLORD: TENANT: LEXINGTON BGK ASSOCIATES, L.P. MACROCHEM CORPORATION BY: /s/ Cheryl S. Willoughby BY: /s/ Alvin J. Karloff ITS: Sr. Vice President ITS: President & C.E.O. EX-10 7 KEY EMPLOYEE AGREEMENT KEY EMPLOYEE AGREEMENT To: Stephen J. Riggi, Ph.D. 58 Skytop Road Ipswich, MA 01938 March 25, 1996 The undersigned, MacroChem Corporation, a Delaware corporation (the "Company"), hereby agrees with you as follows: 1. Position and Responsibilities. 1.1 You shall serve as Vice President of Operations for the Company, (or in such other executive capacity as shall be designated by the Board of Directors and reasonably acceptable to you) and shall perform the duties customarily associated with such capacity from time to time and at such place or places as the Company shall designate are appropriate and necessary in connection with such employment. 1.2 You will, to the best of your ability, devote your full time and best efforts to the performance of your duties hereunder and the business and affairs of the Company. You agree to perform such executive duties as may be assigned to you by or on authority of the Company's Board of Directors from time to time. 1.3 You will duly, punctually and faithfully perform and observe any and all reasonable rules and regulations which the Company may now or shall hereafter establish governing the conduct of its business. 2. Term of Employment. 2.1 Subject to the provisions hereof, specifically including, without limitation, Section 2.2, the term of your employment shall be indefinite. 2.2 The Company shall have the right to terminate your employment at any time under this Agreement in any of the following ways: (a) on thirty (30) days prior written notice to you upon your disability (disability shall be defined as your inability to perform duties under this Agreement for an aggregate of sixty (60) days, which need not be consecutive, out of any one hundred twenty (120) day period due to mental or physical disability or incapacity); you shall be provided benefits under the Company's workers compensation and disability insurance policies, to the extent and upon the terms and conditions of such plans that are in effect at the time; (b) immediately without prior notice to you by the Company for "Cause", as hereinafter defined, provided however, that prior to any such termination for Cause, you have had a reasonable opportunity to be heard thereon; (c) immediately without prior notice to you in the event of the bankruptcy or liquidation of the Company or the appointment of a receiver of the assets of the Company instigated by a creditor of the Company that is not an affiliate thereof. (d) at any time without Cause, provided the Company shall be obligated to pay to you after such termination an amount equal to six (6) month's Base Salary, plus benefits provided by the Company to you at the time of such termination for such period, less applicable taxes and other required withholdings and any amounts you may owe to the Company. If the financial condition of the Company so warrants, the Board of Directors of the Company may, in its sole discretion, delay payment of such amounts due under this paragraph 2.2(d) until such time as the Board of Directors deems that such monies are available. 2.3 You shall have the right to terminate your employment hereunder for any reason, upon not less than two (2) weeks' prior written notice to the Company. 2.4 "Cause" for the purpose of Section 2 of this Agreement shall include: (i) the falseness or material inaccuracy of any of your warranties or representations herein; (ii) your willful failure or refusal to comply with explicit directives of the Board of Directors of the Company or to render the services required herein; (iii) fraud or embezzlement involving assets of the Company, its customers, suppliers or affiliates or other misappropriation of the Company's assets or funds; (iv) your conviction of a criminal offense carrying a potential sentence of more than twelve months in jail; (v) the willful breach or habitual neglect of your obligations under this Agreement or your duties as an employee of the Company; and (vi) use of non-prescription or illegal drugs affecting your ability to perform the duties hereunder. 2.5 If your employment is terminated because of your death, all obligations of the Company hereunder shall cease, except with respect to amounts and obligations accrued to you, including accrued vacation pay, insurance, vested stock options, and out-of-pocket expenses, through the last day of the month during which your death has occurred. 3. Compensation. You shall receive the compensation and benefits set forth on Exhibit A hereto ("Compensation") for all services to be rendered by you hereunder and for your transfer of property rights if any, pursuant to an agreement relating to proprietary information and inventions of even date herewith attached hereto as Exhibit C between you and the Company (the "Proprietary Information and Inventions Agreement"). 4. Other Activities During Employment. 4.1 You will not, during the term of this Agreement, undertake or engage in any other employment, occupation or business enterprise, other than one in which you are an inactive investor, that would interfere with your obligations to the Company. 4.2 You hereby agree that during your employment hereunder, you will not, directly or indirectly, engage (a) individually, (b) as an officer, (c) as a director, (d) as an employee, (e) as a consultant, (f) as an advisor, (g) as an agent (whether a salesperson or otherwise), (h) as a broker, or (i) as a partner, coventurer, stockholder or other proprietor owning directly or indirectly more than five percent (5%) interest in any firm, corporation, partnership, trust, association, or other organization which is engaged in the development and licensing of transdermal delivery products or any other line of business in competition with, or engaged in or under demonstrable development by the Company (such firm, corporation, partnership, trust, association, or other organization being hereinafter referred to as a "Prohibited Enterprise"), without the consent of the Company, which consent will not be unreasonably withheld. Except as may be shown on Exhibit B hereto, you hereby represent that you are not engaged in any of the foregoing capacities (a) through (i) in any Prohibited Enterprise. 5. Former Employers. 5.1 You represent and warrant that your employment by the Company will not conflict with and will not be constrained by any prior employment or relationship whether oral or written. You represent and warrant that you do not possess confidential information arising out of any such employment or relationship which, in your best judgment, would be utilized in connection with your employment by the Company in the absence of Section 5.2. 5.2 If, in spite of the second sentence of Section 5.1, you should find that confidential information belonging to any former employer might be usable in connection with the Company's business, you will not intentionally disclose to the Company or use on behalf of the Company any such confidential information; but during your employment by the Company you will use in the performance of your duties all information which is generally known and used by persons with training and experience comparable to your own, which is common knowledge in the industry or otherwise legally in the public domain. 6. Proprietary Information and Inventions. You agree to execute, deliver and be bound by the provisions of the Proprietary Information and Inventions Agreement attached hereto as Exhibit C. 7. Post-Employment Activities. 7.1 For a period of two (2) years after the termination or expiration, for any reason, of your employment with the Company hereunder, absent the Company's prior written approval, you will not directly or indirectly engage in activities similar or reasonably related to those in which you shall have engaged hereunder during the two years immediately preceding termination or expiration, nor render services similar or reasonably related to those which you shall have rendered hereunder during such time to, any person or entity whether now existing or hereafter established which directly competes with (or proposes or plans to directly compete with) the Company, or in other areas where the Company carries on a substantial amount of business ("Direct Competitor"). Nor shall you entice, induce or encourage any of the Company's other employees to engage in any activity which, were it done by you, would violate any provision of the Proprietary Information and Inventions Agreement or this Section 7. 7.2 The provisions of this Section 7 shall be of no force or effect if the Agreement is terminated as set forth in Section 2.2(c) hereof. No provision of this Agreement shall be construed to preclude you from performing the same services which the Company hereby retains you to perform for any person or entity which is not a Direct Competitor of the Company upon the expiration or termination of your employment (or any post-employment consultation) so long as you do not thereby violate any term of this Agreement or the Proprietary Information and Inventions Agreement. 8. Remedies. Your obligations under the Proprietary Information and Inventions Agreement and the provisions of Sections 6, 7, 8 and 9 of this Agreement (as modified by Section 10, if applicable) shall survive the expiration or termination of your employment with the Company in accordance with the terms thereof. You acknowledge that a remedy at law for any breach or threatened breach by you of the provisions of the Proprietary Information and Inventions Agreement or Section 7 hereof would be inadequate and you therefore agree that the Company shall be entitled to injunctive relief in case of any such breach or threatened breach. 9. Assignment. Subject to Section 2.2(c), this Agreement and the rights and obligations of the parties hereto shall bind and inure to the benefit of any successor or successors of the Company by reorganization, merger or consolidation and any assignee of all or substantially all of its business and properties, but, except as to any such successor or assignee of the Company, neither this Agreement nor any rights or benefits hereunder may be assigned by the Company or by you, except by operation of law or by a further written agreement by the parties hereto. 10. Interpretation. IT IS THE INTENT OF THE PARTIES THAT in case any one or more of the provisions contained in this Agreement shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect the other provisions of this Agreement, and this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein. MOREOVER, IT IS THE INTENT OF THE PARTIES THAT if any one or more of the provisions contained in this Agreement is or becomes or is deemed invalid, illegal or unenforceable or in case any provision shall for any reason be held to be excessively broad as to duration, geographical scope, activity or subject, such provision shall be construed by amending, limiting and/or reducing it to conform to applicable laws so as to be valid and enforceable or, if it cannot be so amended without materially altering the intention of the parties, it shall be stricken and the remainder of this Agreement shall remain in full force and effect. 11. Notices. Any notice which the Company is required to or may desire to give you shall be given by personal delivery or registered or certified mail, return receipt requested, addressed to you at your address of record with the Company, or at such other place as you may from time to time designate in writing. Any notice which you are required or may desire to give to the Company hereunder shall be given by personal delivery or by registered or certified mail, return receipt requested, addressed to the Company at its principal office, or at such other office as the Company may from time to time designate in writing. The date of personal delivery or five (5) days after the date of mailing any notice under this Section 11 shall be deemed to be the date of delivery thereof. 12. Waivers. No waiver of any right under this Agreement shall be deemed effective unless contained in a writing signed by the party charged with such waiver, and no waiver of any right arising from any breach or failure to perform shall be deemed to be a waiver of any future such right or of any other right arising under this Agreement. If either party should waive any breach of any provision of this Agreement, he or it shall not thereby be deemed to have waived any preceding or succeeding breach of the same or any other provision of this Agreement. 13. Counsel. You acknowledge that you have had the opportunity to read this Agreement in its entirety and to obtain the advice of counsel regarding its terms and conditions. 14. Complete Agreement; Amendments. The foregoing including Exhibits A, B and C attached hereto, is the entire agreement of the parties with respect to the subject matter hereof, superseding any previous oral or written communications, representations, understandings, or agreements with the Company or any officer or representative thereof. Any amendment to this Agreement or waiver by the Company of any right hereunder shall be effective only if evidenced by a written instrument executed by the parties hereto, upon authorization of the Company's Board of Directors. 15. Headings. The headings of the Sections contained in this Agreement are inserted for convenience and reference only and in no way define, limit, extend or describe the scope of this Agreement or the intent of any provisions hereof, and shall not be deemed to constitute a part hereof or to affect the meaning of this Agreement in any way. 16. Counterparts. This Agreement may be signed in two counterparts, each of which shall be deemed an original and both of which shall together constitute one agreement. 17. Governing Law. This Agreement shall be governed by and construed in accordance with the internal laws of the Commonwealth of Massachusetts, excluding its conflict of law principles. If you are in agreement with the foregoing, please sign your name below and also at the bottom of the Proprietary Information and Inventions Agreement, whereupon both Agreements shall become binding in accordance with their terms. Please then return this Agreement to the Company. (You may retain for your records the accompanying counterpart of this Agreement enclosed herewith). Very truly yours, MACROCHEM CORPORATION, a Delaware corporation By: /s/ Alvin J. Karloff --------------------- Alvin J. Karloff President & C.E.O. Read, Accepted and Agreed: /s/ Stephen J. Riggi, Ph.D. - --------------------------- Stephen J. Riggi, Ph.D. EXHIBIT A TO KEY EMPLOYEE AGREEMENT COMPENSATION AND BENEFITS OF STEPHEN J. RIGGI, Ph.D. 1. Compensation. Your Base Salary shall be $150,000 per year, payable in accordance with the Company's payroll policies. An increase in your Base Salary shall be reviewed and adjusted from time to time by the Board of Directors of the Company. 2. Vacation. You shall be entitled to all state statutory holidays, and four (4) weeks paid vacation for the first year of employment. Thereafter, any additional vacation time, over and above the vacation time already referred to herein shall be determined by the Board of Directors. 3. Insurance and Benefits. You shall be eligible for participation in all employee benefit plans which have been or may be established by the Company or which the Company is required to maintain by law. Presently the Company pays 70% of your premiums under a group medical insurance plan. This percentage shall be the same percentage as is paid for all employees under such group medical insurance plan and therefore is subject to change if, in the discretion of the Board of Directors, the Company changes the percentage paid for all employees. 4. Sick Days and Excused Absence Days. You shall be entitled to compensation for sick days and excused absence days in accordance with Company policy. 5. Stock Options. You shall be granted an incentive stock option to purchase up to 180,000 shares of the Common Stock of the Company, $.01 par value per share, upon the terms and conditions set forth in the form of stock option grant letter attached hereto. Future stock options may be granted by the Company based in part on your performance. EXHIBIT B TO KEY EMPLOYEE AGREEMENT OUTSIDE EMPLOYMENTS AND DIRECTORSHIPS OF STEPHEN J. RIGGI, Ph.D. NONE EXHIBIT C TO KEY EMPLOYEE AGREEMENT PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT OF STEPHEN J. RIGGI, Ph.D. OMITTED EX-11 8 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
MacroChem Corporation Calculation for Weighted Average Number of Common Shares Outstanding Weighted Common Common Days Average Share Shares Out- Number of Date Description Activity Outstanding standing Shares - ------------------------------------------------------------------------------------------- December 31, 1993 Balance 11,123,543 11,123,543 January 3, 1994 Preferred Stock Conversion 228,750 11,352,293 363 11,351,040 January 10, 1994 Warrants Exercised 150,000 11,502,293 356 11,497,341 January 14, 1994 Warrants Exercised 1,500 11,503,793 352 11,498,788 January 18, 1994 Preferred Stock Conversion 56,250 11,560,043 348 11,552,418 February 17, 1994 Options Exercised 3,000 11,563,043 318 11,555,031 July 15, 1994 Issuance 6,600 11,569,643 170 11,558,105 DECEMBER 31, 1994 11,569,643 11,558,105 January 1, 1995 Balance 11,569,643 11,569,643 May 12, 1995 Issuance 1,000,000 12,569,643 234 12,210,739 June 28, 1995 Options Exercised 5,000 12,574,643 187 12,213,301 July 12, 1995 Options Exercised 25,000 12,599,643 173 12,225,150 July 18, 1995 Options Exercised 1,000 12,600,643 167 12,225,607 July 24, 1995 Options Exercised 5,000 12,605,643 161 12,227,813 July 31, 1995 Options Exercised 10,000 12,615,643 154 12,232,032 August 1, 1995 Options Exercised 17,000 12,632,643 153 12,239,158 August 8, 1995 Options Exercised 5,000 12,637,643 146 12,241,158 August 9, 1995 Options Exercised 35,000 12,672,643 145 12,255,062 August 10, 1995 Options Exercised 53,333 12,725,976 144 12,276,103 August 21, 1995 X Warrants Exercised 46,500 12,772,476 133 12,293,047 August 31, 1995 Options Exercised 44,500 12,816,976 123 12,308,043 September 14, 1995 Options Exercised 3,000 12,819,976 109 12,308,939 September 14, 1996 X Warrants Exercised 3,500 12,823,476 109 12,309,984 September 20, 1995 A Warrants Exercised 100 12,823,576 103 12,310,012 September 20, 1995 AA Warrants Exercised 100 12,823,676 103 12,310,040 September 25, 1995 X Warrants Exercised 1,000 12,824,676 98 12,310,309 November 6, 1995 Issuance 4,145 12,828,821 56 12,310,945 November 13, 1995 X Warrants Exercised 500 12,829,321 49 12,311,012 December 7, 1995 Unit Purchase Options Exercised 300,000 13,129,321 25 12,331,560 DECEMBER 31, 1995 13,129,321 12,331,560 January 1, 1996 Balance 13,129,321 13,129,321 January 22, 1996 Options Exercised 5,000 13,134,321 345 13,134,034 January 31, 1996 Unit Purchase Options Exercised 810,000 13,944,321 336 13,877,641 February 1, 1996 Unit Purchase Options Exercised 210,000 14,154,321 335 14,069,854 February 2, 1996 Unit Purchase Options Exercised 455,000 14,609,321 334 14,485,072 February 2, 1996 A Warrants Exercised 151,667 14,760,988 334 14,623,479 February 2, 1996 Options Exercised 15,000 14,775,988 334 14,637,167 February 5, 1996 Options Exercised 2,861 14,778,849 331 14,639,755 February 7, 1996 A Warrants Exercised 1,000 14,779,849 329 14,640,654 February 8, 1996 Options Exercised 1,000 14,780,849 328 14,640,914 February 9, 1996 AA Warrants Exercised 81,000 14,861,849 327 14,713,283 February 15, 1996 X Warrants Exercised 3,750 14,865,599 321 14,716,572 February 29, 1996 Options Exercised 30,000 14,895,599 307 14,741,736 February 29, 1996 A Warrants Exercised 200,000 15,095,599 307 14,909,498 February 29, 1996 X Warrants Exercised 1,000 15,096,599 307 14,910,337 March 1, 1996 X Warrants Exercised 1,000 15,097,599 306 14,911,173 March 4, 1996 Options Exercised 2,500 15,100,099 303 14,913,243 March 7, 1996 A Warrants Exercised 140,000 15,240,099 300 15,027,997 March 14, 1996 X Warrants Exercised 10,000 15,250,099 293 15,036,002 March 19, 1996 Options Exercised 5,000 15,255,099 288 15,039,937 March 21, 1996 A Warrants Exercised 100,000 15,355,099 286 15,118,079 April 4, 1996 Options Exercised 31,500 15,386,599 271 15,141,402 April 25, 1996 Options Exercised 120,000 15,506,599 250 15,223,370 May 7, 1996 Options Exercised 5,000 15,511,599 238 15,226,621 July 22, 1996 Options Exercised 12,500 15,524,099 162 15,232,154 August 19, 1996 Options Exercised 1,500 15,525,599 134 15,232,703 September 3, 1996 Issuance 925 15,526,524 120 15,233,006 November 5, 1996 Options Exercised 10,000 15,536,524 56 15,234,536 November 14, 1996 X Warrants Exercised 25,000 15,561,524 44 15,237,542 December 3, 1996 X Warrants Exercised 12,250 15,573,774 28 15,238,479 December 19, 1996 Unit Purchase Option Exercised 17,500 15,591,274 12 15,239,053 DECEMBER 31, 1996 Options Exercised 10,000 15,601,274 1 15,239,080
EX-23 9 INDEPENDENT AUDITORS' CONSENT INDEPENDENT AUDITORS' CONSENT MacroChem Corporation: We consent to the incorporation by reference in (i) Registration Statement No. 33-48876 on Form S-8, (ii) Registration Statement No. 33-85818 on Form S-8 and (iii) Registration Statement No. 33-82298 on Form S-3 of our report dated March 6, 1997, appearing in this Annual Report on Form 10-K of MacroChem Corporation for the year ended December 31, 1996. DELOITTE & TOUCHE LLP Boston, Massachusetts March 21, 1997 EX-27 10 FDS TO 1996 10-K
5 This schedule contains summary financial information extracted from the Company's balance sheet, statement of operations, statement of stockholder's equity and statement of cash flows and is qualified it its entirety by reference to such financial statements. 0000743884 MacroChem Corporation 1 U.S. Dollars 12-MOS Dec-31-1996 Jan-1-1996 Dec-31-1996 1 $7,329,881 21,824 43,977 0 0 7,495,715 817,994 472,651 8,063,750 368,463 18,408 0 0 156,013 7,520,866 8,063,750 0 129,786 0 0 0 0 12,045 (3,139,796) 0 (3,139,796) 0 0 0 (3,139,796) (0.21) (0.21)
EX-10 11 1994 EQUITY INCENTIVE PLAN AS AMENDED As amended November 15, 1996 MACROCHEM CORPORATION 1994 EQUITY INCENTIVE PLAN 1. PURPOSE. The purpose of this 1994 Equity Incentive Plan (the "Plan") is to advance the interests of MacroChem Corporation (the "Company") by enhancing its ability to attract and retain employees and other persons or entities who are in a position to make significant contributions to the success of the Company and its subsidiaries through ownership of shares of the Company's common stock ("Stock"). The Plan is intended to accomplish these goals by enabling the Company to grant Awards in the form of Options, Stock Appreciation Rights, Restricted Stock or Unrestricted Stock Awards, Deferred Stock Awards, Performance Awards, Loans or Supplement Grants, or combinations thereof, all as more fully described below. 2. ADMINISTRATION. Unless otherwise determined by the Board of Directors of the Company (the "Board"), the Plan will be administered by a Committee of the Board designated for such purpose (the "Committee"). The Committee shall consist of at least two directors. A majority of the members of the Committee shall constitute a quorum, and all determinations of the Committee shall be made by a majority of its members. Any determination of the Committee under the Plan may be made without notice or meeting of the Committee by a writing signed by a majority of the Committee members. So long as the Stock is registered under the Securities Exchange Act of 1934 (the "1934 Act"), all members of the Committee shall be non-employee directors within the meaning of Rule 16b-3 under the 1934 Act. The Committee will have authority, not inconsistent with the express provisions of the Plan and in addition to other authority granted under the Plan, to (a) grant Awards at such time or times as it may choose; (b) determine the size of each Award, including the number of shares of Stock subject to the Award; (c) determine the type or types of each Award; (d) determine the terms and conditions of each Award; (e) waive compliance by a Participant (as defined below) with any obligations to be performed by the Participant under an Award and waive any term or condition of an Award; (f) amend or cancel an existing Award in whole or in part (and if an award is canceled, grant another Award in its place on such terms as the Committee shall specify), except that the Committee may not, without the consent of the holder of an Award, take any action under this clause with respect to such Award if such action would adversely affect the rights of such holder; (g) prescribe the form or forms of instruments that are required or deemed appropriate under the Plan, including any written notices and elections required of Participants, and change such forms from time to time; (h) adopt, amend and rescind rules and regulations for the administration of the Plan; and (i) interpret the Plan and decide any questions and settle all controversies and disputes that may arise in connection with the Plan. Such determinations and actions of the Committee, and all other determinations and actions of the Committee made or taken under authority granted by any provision of the Plan, will be conclusive and will bind all parties. Nothing in this paragraph shall be construed as limiting the power of the Committee to make adjustments under Section 7.3 or Section 8.6. With respect to persons subject to Section 16 of the 1934 Act, transactions under this plan are intended to comply with all applicable conditions of Rule 16b-3 or its successors under the 1934 Act. To the extent any action by the Committee or Board fails to so comply, it shall be deemed null and void, to the extent permitted by law and deemed advisable by the Committee. 3. EFFECTIVE DATE AND TERM OF PLAN. The Plan will become effective on the date on which it is approved by the stockholders of the Company. Grants of Awards under the Plan may be made prior to that date, subject to such approval of the Plan. No Award may be granted under the Plan after February 11, 2004, but Awards previously granted may extend beyond that date. 4. SHARES SUBJECT TO THE PLAN. Subject to the adjustment as provided in Section 8.6 below, the aggregate number of shares of Stock that may be delivered under the Plan will be 2,500,000. If any Award requiring exercise for delivery of Stock terminates without having been exercised in full, or if any Award payable in Stock or cash is satisfied in cash rather than Stock, the number of shares of Stock as to which such Award was not exercised or for which cash was substituted will be available for future grants. The maximum number of shares (subject to adjustment as provided in Section 8.6 below) with respect to which Awards may be made to any one Participant during the term of the Plan shall be 750,000 shares. The preceding sentence shall be construed consistent with the regulations under Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"). Stock delivered under the Plan may be either authorized but unissued Stock or previously issued Stock acquired by the Company and held in treasury. No fractional shares of Stock will be delivered under the Plan. 5. ELIGIBILITY AND PARTICIPATION. Those eligible to receive Awards under the Plan ("Participants") will be persons in the employ of the Company or any of its subsidiaries ("Employees") and other persons or entities (including without limitation non-Employee directors of the Company or a subsidiary of the Company) who, in the opinion of the Committee, are in a position to make a significant contribution to the success of the Company or its subsidiaries. A "subsidiary" for purposes of the Plan will be a corporation in which the Company owns, directly or indirectly, stock possessing 50% or more of the total combined voting power of all classes of stock. 6. TYPES OF AWARDS 6.1. OPTIONS (a) NATURE OF OPTIONS. An Option is an Award entitling the holder on exercise thereof to purchase Stock at a specified exercise price. Both "incentive stock options," as defined in Section 422 of the Code (any Option intended to qualify as an incentive stock option being hereinafter referred to as an "ISO"), and Options that are not incentive stock options, may be granted under the Plan. ISOs shall be awarded only to Employees. (b) EXERCISE PRICE. The exercise price of an Option will be determined by the Board subject to the following: (1) The exercise price of an ISO shall not be less than 100% (110% in the case of an ISO granted to a ten-percent stockholder) of the fair market value of the Stock subject to the Option, determined as of the time the Option is granted. A "ten-percent stockholder" is any person who at the time of grant owns, directly or indirectly, or is deemed to own by reason of the attribution rules of section 424(d) of the Code, stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or of any of its subsidiaries. (2) In no case may the exercise price paid for Stock which is part of an original issue of authorized Stock be less than the par value per share of the Stock. (3) The Committee may reduce the exercise price of an Option at any time after the time of grant, but in the case of an Option originally awarded as an ISO, only with the consent of the Participant. (c) DURATION OF OPTIONS. The latest date on which an Option may be exercised will be the tenth anniversary (fifth anniversary, in the case of an ISO granted to a ten-percent stockholder) of the day immediately preceding the date the Option was granted, or such earlier date as may have been specified by the Committee at the time the Option was granted. (d) EXERCISE OF OPTIONS. Options granted under any single Award will become exercisable at such time or times, and on such conditions, as the Committee may specify. The Committee may at any time and from time to time accelerate the time at which all or any part of the Option may be exercised. Any exercise of an Option must be in writing, signed by the proper person and delivered or mailed to the Company, accompanied by (1) any documents required by the Committee and (2) payment in full in accordance with paragraph (e) below for the number of shares for which the Option is exercised. (e) PAYMENT FOR STOCK. Stock purchased on exercise of an Option must be paid for as follows: (1) in cash or by check (acceptable to the Company in accordance with guidelines established for this purpose), bank draft or money order payable to the order of the Company or (2) if so permitted by the instrument evidencing the Option (or in the case of an Option which is not an ISO, by the Committee at or after grant of the Option), (i) through the delivery of shares of Stock which have been outstanding for at least six months (unless the Committee expressly approves a shorter period) and which have a fair market value on the last business day preceding the date of exercise equal to the exercise price, or (ii) by delivery of a promissory note of the Option holder to the Company, payable on such terms as are specified by the Committee, or (iii) by delivery of an unconditional and irrevocable undertaking by a broker to deliver promptly to the Company sufficient funds to pay the exercise price, or (iv) by any combination of the permissible forms of payment; provided, that if the Stock delivered upon exercise of the Option is an original issue of authorized Stock, at least so much of the exercise price as represents the par value of such Stock must be paid other than by the Option holder's promissory note. (f) DISCRETIONARY PAYMENTS. If the market price of shares of Stock subject to an Option (other than an Option which is in tandem with a Stock Appreciation Right as described in Section 6.2 below) exceeds the exercise price of the Option at the time of its exercise, the Committee may cancel the Option and cause the Company to pay in cash or in shares of Common Stock (at a price per share equal to the fair market value per share) to the person exercising the Option an amount equal to the difference between the fair market value of the Stock which would have been purchased pursuant to the exercise (determined on the date the Option is canceled) and the aggregate exercise price which would have been paid. The Committee may exercise its discretion to take such action only if it has received a written request from the person exercising the Option, but such a request will not be binding on the Committee. 6.2. STOCK APPRECIATION RIGHTS. (a) NATURE OF STOCK APPRECIATION RIGHTS. A Stock Appreciation Right is an Award entitling the recipient on exercise of the Right to receive an amount, in cash or Stock or a combination thereof (such form to be determined by the Committee), determined in whole or in part by reference to appreciation in Stock value. In general, a Stock Appreciation Right entitles the Participant to receive, with respect to each share of Stock as to which the Right is exercised, the excess of the share's fair market value on the date of exercise over its fair market value on the date the Right was granted. However, the Committee may provide at the time of grant that the amount the recipient is entitled to receive will be adjusted upward or downward under rules established by the Committee to take into account the performance of the Stock in comparison with the performance of other stocks or an index or indices of other stocks. The Committee may also grant Stock Appreciation Rights providing that following a change in control of the Company, as determined by the Committee, the holder of such Right will be entitled to receive, with respect to each share of Stock subject to the Right, an amount equal to the excess of a specified value (which may include an average of values) for a share of Stock during a period preceding such change in control over the fair market value of a share of Stock on the date the Right was granted. (b) GRANT OF STOCK APPRECIATION RIGHTS. Stock Appreciation Rights may be granted in tandem with, or independently of, Options granted under the Plan. A Stock Appreciation Right granted in tandem with an Option which is not an ISO may be granted either at or after the time the Option is granted. A Stock Appreciation Right granted in tandem with an ISO may be granted only at the time the Option is granted. (c) RULES APPLICABLE TO TANDEM AWARDS. When Stock Appreciation Rights are granted in tandem with Options, the following will apply: (1) The Stock Appreciation Right will be exercisable only at such time or times, and to the extent, that the related Option is exercisable and will be exercisable in accordance with the procedure required for exercise of the related Option. (2) The Stock Appreciation Right will terminate and no longer be exercisable upon the termination or exercise of the related Option, except that a Stock Appreciation Right granted with respect to less than the full number of shares covered by an Option will not be reduced until the number of shares as to which the related Option has been exercised or has terminated exceeds the number of shares not covered by the Stock Appreciation Right. (3) The Option will terminate and no longer be exercisable upon the exercise of the related Stock Appreciation Right. (4) The Stock Appreciation Right will be transferable only with the related Option. (5) A Stock Appreciation Right granted in tandem with an ISO may be exercised only when the market price of the Stock subject to the Option exceeds the exercise price of such option. (d) EXERCISE OF INDEPENDENT STOCK APPRECIATION RIGHTS. A Stock Appreciation Right not granted in tandem with an Option will become exercisable at such time or times, and on such conditions, as the Committee may specify. The Committee may at any time accelerate the time at which all or any part of the Right may be exercised. Any exercise of an independent Stock Appreciation Right must be in writing, signed by the proper person and delivered or mailed to the Company, accompanied by any other documents required by the Committee. 6.3. RESTRICTED AND UNRESTRICTED STOCK. (a) NATURE OF RESTRICTED STOCK AWARD. A Restricted Stock Award entitles the recipient to acquire, for a purchase price equal to par value, shares of Stock subject to the restrictions described in paragraph (d) below ("Restricted Stock"). (b) ACCEPTANCE OF AWARD. A Participant who is granted a Restricted Stock Award will have no rights with respect to such Award unless the Participant accepts the Award by written instrument delivered or mailed to the Company accompanied by payment in full of the specified purchase price, if any, of the shares covered by the Award. Payment may be by certified or bank check or other instrument acceptable to the Committee. (c) RIGHTS AS A STOCKHOLDER. A Participant who receives Restricted Stock will have all the rights of a stockholder with respect to the Stock, including voting and dividend rights, subject to the restrictions described in paragraph (d) below and any other conditions imposed by the Committee at the time of grant. Unless the Committee otherwise determines, certificates evidencing shares of Restricted Stock will remain in the possession of the Company until such shares are free of all restrictions under the Plan. (d) RESTRICTIONS. Except as otherwise specifically provided by the Plan, Restricted Stock may not be sold, assigned, transferred, pledged or otherwise encumbered or disposed of, and if the Participant ceases to be an Employee or otherwise suffers a Status Change (as defined at Section 7.2(a) below) for any reason, must be offered to the Company for purchase for the amount of cash paid for the Stock, or forfeited to the Company if no cash was paid. These restrictions will lapse at such time or times, and on such conditions, as the Committee may specify. The Committee may at any time accelerate the time at which the restrictions on all or any part of the shares will lapse. (e) NOTICE OF ELECTION. Any Participant making an election under Section 83(b) of the Code with respect to Restricted Stock must provide a copy thereof to the Company within 10 days of the filing of such election with the Internal Revenue Service. (f) OTHER AWARDS SETTLED WITH RESTRICTED STOCK. The Committee may, at the time any Award described in this Section 6 is granted, provide that any or all the Stock delivered pursuant to the Award will be Restricted Stock. (g) UNRESTRICTED STOCK. The Committee may, in its sole discretion, approve the sale to any Participant of shares of Stock free of restrictions under the Plan for a price which is not less than the par value of the Stock. 6.4. DEFERRED STOCK. A Deferred Stock Award entitles the recipient to receive shares of Stock to be delivered in the future. Delivery of the Stock will take place at such time or times, and on such conditions, as the Committee may specify. The Committee may at any time accelerate the time at which delivery of all or any part of the Stock will take place. At the time any Award described in this Section 6 is granted, the Committee may provide that, at the time Stock would otherwise be delivered pursuant to the Award, the Participant will instead receive an instrument evidencing the Participant's right to future delivery of Deferred Stock. 6.5. PERFORMANCE AWARDS; PERFORMANCE GOALS. (a) NATURE OF PERFORMANCE AWARDS. A Performance Award entitles the recipient to receive, without payment, an amount in cash or Stock or a combination thereof (such form to be determined by the Committee) following the attainment of Performance Goals. Performance Goals may be related to personal performance, corporate performance, departmental performance or any other category of performance deemed by the Committee to be important to the success of the Company. The Committee will determine the Performance Goals, the period or periods during which performance is to be measured and all other terms and conditions applicable to the Award. (b) OTHER AWARDS SUBJECT TO PERFORMANCE CONDITION. The Committee may, at the time any Award described in this Section 6 is granted, impose the condition (in addition to any conditions specified or authorized in this Section 6 or any other provision of the Plan) that Performance Goals be met prior to the Participant's realization of any payment or benefit under the Award. 6.6. LOANS AND SUPPLEMENTAL GRANTS. (a) LOANS. The Company may make a loan to a Participant ("Loan"), either on the date of or after the grant of any Award to the Participant. A Loan may be made either in connection with the purchase of Stock under the Award or with the payment of any Federal, state and local income tax with respect to income recognized as a result of the Award. The Committee will have full authority to decide whether to make a Loan and to determine the amount, terms and conditions of the Loan, including the interest rate (which may be zero), whether the Loan is to be secured or unsecured or with or without recourse against the borrower, the terms on which the Loan is to be repaid and the conditions, if any, under which it may be forgiven. However, no Loan may have a term (including extensions) exceeding ten years in duration. (b) SUPPLEMENTAL GRANTS. In connection with any Award, the Committee may at the time such Award is made or at a later date, provide for and grant a cash award to the Participant ("Supplemental Grant") not to exceed an amount equal to (1) the amount of any federal, state and local income tax on ordinary income for which the Participant may be liable with respect to the Award, determined by assuming taxation at the highest marginal rate, plus (2) an additional amount on a grossed-up basis intended to make the Participant whole on an after-tax basis after discharging all the Participant's income tax liabilities arising from all payments under this Section 6. Any payments under this subsection (b) will be made at the time the Participant incurs Federal income tax liability with respect to the Award. 7. EVENTS AFFECTING OUTSTANDING AWARDS 7.1. DEATH. If a Participant dies, the following will apply: (a) All Options and Stock Appreciation Rights held by the Participant immediately prior to death, to the extent then exercisable, may be exercised by the Participant's executor or administrator or the person or persons to whom the Option or Right is transferred by will or the applicable laws of descent and distribution, and all Options originally issued to the Participant and transferred pursuant to Section 8.5 hereof may be exercised by the person or persons to whom the Option has been so transferred, at any time within the one year period ending with the first anniversary of the Participant's death (or such shorter or longer period as the Committee may determine), and shall thereupon terminate. In no event, however, shall an Option or Stock Appreciation Right remain exercisable beyond the latest date on which it could have been exercised without regard to this Section 7. Except as otherwise determined by the Committee, all Options originally issued to a Participant and all Stock Appreciation Rights held by a Participant immediately prior to death that are not then exercisable shall terminate at death. (b) Except as otherwise determined by the Committee, all Restricted Stock held by the Participant must be transferred to the Company (and, in the event the certificates representing such Restricted Stock are held by the Company, such Restricted Stock will be so transferred without any further action by the Participant) in accordance with Section 6.3 above. (c) Any payment or benefit under a Deferred Stock Award, Performance Award, or Supplemental Grant to which the Participant was not irrevocably entitled prior to death will be forfeited and the Award canceled, as of the time of death, unless otherwise determined by the Committee. 7.2. TERMINATION OF SERVICE (OTHER THAN BY DEATH). If a Participant who is an Employee ceases to be an Employee for any reason other than death, or if there is a termination (other than by reason of death) of the consulting, service or similar relationship in respect of which a non-Employee Participant was granted an Award hereunder (such termination of the employment or other relationship being hereinafter referred to as a "Status Change"), the following will apply: (a) Except as otherwise determined by the Committee, all Options and Stock Appreciation Rights originally issued to the Participant that were not exercisable immediately prior to the Status Change shall terminate at the time of the Status Change. Any Options or Rights that were exercisable immediately prior to the Status Change will continue to be exercisable for a period of six months (or such longer period as the Committee may determine), and shall thereupon terminate, unless (i) the Award provides by its terms for immediate termination in the event of a Status Change, (ii) the Status Change results from (w) retirement of the Participant on or after age 65, (x) retirement on or after age 55 after 10 years of continuous employment by the Company, (y) disability (as determined by the Company), or (z) termination of the Participant's service as a director if the Participant is a non-Employee director, in which cases that portion of the Options originally issued to the Participant that was exercisable immediately prior to the Status Change will continue to be exercisable for the original term of the Option or (iii) unless the Status Change results from a discharge for cause which in the opinion of the Committee casts such discredit on the Participant as to justify immediate termination of the Award. In no event, however, shall an Option or Stock Appreciation Right remain exercisable beyond the latest date on which it could have been exercised without regard to this Section 7. For purposes of this paragraph, in the case of a Participant who is an Employee, a Status Change shall not be deemed to have resulted by reason of (i) a sick leave or other bona fide leave of absence approved for purposes of the Plan by the Committee, so long as the Employee's right to reemployment is guaranteed either by statute or by contract, or (ii) a transfer of employment between the Company and a subsidiary or between subsidiaries, or to the employment of a corporation (or a parent or subsidiary corporation of such corporation) issuing or assuming an option in a transaction to which section 424(a) of the Code applies. (b) Except as otherwise determined by the Committee, all Restricted Stock held by the Participant at the time of the Status Change must be transferred to the Company (and, in the event the certificates representing such Restricted Stock are held by the Company, such Restricted Stock will be so transferred without any further action by the Participant) in accordance with Section 6.3 above. (c) Any payment or benefit under a Deferred Stock Award, Performance Award, or Supplemental Grant to which the Participant was not irrevocably entitled prior to the Status Change will be forfeited and the Award canceled as of the date of such Status Change unless otherwise determined by the Committee. 7.3. CERTAIN CORPORATE TRANSACTIONS. 7.3.1. MERGERS, SALES ETC. In the event of a consolidation or merger in which the Company is not the surviving corporation or which results in the acquisition of substantially all the Company's outstanding Stock by a single person or entity or by a group of persons and/or entities acting in concert, or in the event of the sale or transfer of substantially all the Company's assets or a dissolution or liquidation of the Company (a "covered transaction"), all outstanding Awards will terminate as of the effective date of the covered transaction, and the following rules shall apply: (a) Subject to paragraphs (b) and (c) below, the Committee shall, at least twenty (20) days prior to the effective date of the covered transaction, (1) make each outstanding Option and Stock Appreciation Right exercisable in full, (2) remove the restrictions from each outstanding share of Restricted Stock, (3) cause the Company to make any payment and provide any benefit under each outstanding Deferred Stock Award, Performance Award, and Supplemental Grant which would have been made or provided with the passage of time had the transaction not occurred and the Participant not suffered a Status Change (or died), and (4) forgive all or any portion of the principal of or interest on a Loan. (b) If an outstanding Award is subject to performance or other conditions (other than conditions relating only to the passage of time and continued employment) which will not have been satisfied at the time of the covered transaction, the Committee may in its sole discretion remove such conditions. If it does not do so, however, such Award will terminate as of the date of the covered transaction notwithstanding paragraph (a) above. (c) With respect to an outstanding Award held by a participant who, following the covered transaction, will be employed by or otherwise providing services to a corporation which is a surviving or acquiring corporation in such transaction or an affiliate of such a corporation, the Committee may, in lieu of the action described in paragraph (a) above, arrange to have such surviving or acquiring corporation or affiliate grant to the Participant a replacement award which, in the judgment of the Committee, is substantially equivalent to the Award. 7.3.2. LIQUIDATION AND DISSOLUTION. In the event of a dissolution or liquidation of the Company, all outstanding Awards will terminate as of the effective date of such dissolution or liquidation, and the following rules shall apply: (a) Subject to paragraphs (b) and (c) below, the Committee may, prior to the effective date of such liquidation or dissolution, (1) make each outstanding Option and Stock Appreciation Right exercisable in full, (2) remove the restrictions from each outstanding share of Restricted Stock, (3) cause the Company to make any payment and provide any benefit under each outstanding Deferred Stock Award, Performance Award, and Supplemental Grant which would have been made or provided with the passage of time had the transaction not occurred and the Participant not suffered a Status Change (or died), and (4) forgive all or any portion of the principal of or interest on a Loan. (b) If an outstanding Award is subject to performance or other conditions (other than conditions relating only to the passage of time and continued employment) which will not have been satisfied at the time of such liquidation or dissolution, the Committee may in its sole discretion remove such conditions. If it does not do so, however, such Award will terminate as of the date of such liquidation or dissolution notwithstanding paragraph (a) above. (c) With respect to an outstanding Award held by a participant who, following such liquidation or dissolution, will be employed by or otherwise providing services to a corporation which is a surviving or acquiring corporation in such transaction or an affiliate of such a corporation, the Committee may, in lieu of the action described in paragraph (a) above, arrange to have such surviving or acquiring corporation or affiliate grant to the Participant a replacement award which, in the judgment of the Committee, is substantially equivalent to the Award. 8. GENERAL PROVISIONS 8.1. DOCUMENTATION OF AWARDS. Awards will be evidenced by such written instruments, if any, as may be prescribed by the Committee from time to time. Such instruments may be in the form of agreements to be executed by both the Participant and the Company, or certificates, letters or similar instruments, which need not be executed by the Participant but acceptance of which will evidence agreement to the terms thereof. 8.2. RIGHTS AS A STOCKHOLDER, DIVIDEND EQUIVALENTS. Except as specifically provided by the Plan, the receipt of an Award will not give a holder rights as a stockholder; the holder will obtain such rights, subject to any limitations imposed by the Plan or the instrument evidencing the Award, upon actual receipt of Stock. However, the Committee may, on such conditions as it deems appropriate, provide that a holder will receive a benefit in lieu of cash dividends that would have been payable on any or all Stock subject to the holder's Award had such Stock been outstanding. Without limitation, the Committee may provide for payment to the holder of amounts representing such dividends, either currently or in the future, or for the investment of such amounts on behalf of the holder. 8.3. CONDITIONS ON DELIVERY OF STOCK. The Company will not be obligated to deliver any shares of Stock pursuant to the Plan or to remove restrictions from shares previously delivered under the Plan (a) until all conditions of the Award have been satisfied or removed, (b) until, in the opinion of the Company's counsel, all applicable federal and state laws and regulations have been complied with, (c) if the outstanding Stock is at the time listed on any stock exchange, until the shares to be delivered have been listed or authorized to be listed on such exchange upon official notice of notice of issuance, and (d) until all other legal matters in connection with the issuance and delivery of such shares have been approved by the Company's counsel. If the sale of Stock has not been registered under the Securities Act of 1933, as amended, the Company may require, as a condition to exercise of the Award, such representations or agreements as counsel for the Company may consider appropriate to avoid violation of such Act and may require that the certificates evidencing such Stock bear an appropriate legend restricting transfer. If an Award is exercised by the Participant's legal representative, the Company will be under no obligation to deliver Stock pursuant to such exercise until the Company is satisfied as to the authority of such representative. 8.4. TAX WITHHOLDING. The Company will withhold from any cash payment made pursuant to an Award an amount sufficient to satisfy all federal, state and local withholding tax requirements (the "withholding requirements"). In the case of an Award pursuant to which Stock may be delivered, the Committee will have the right to require that the Participant or other appropriate person remit to the Company an amount sufficient to satisfy the withholding requirements, or make other arrangements satisfactory to the Committee with regard to such requirements, prior to the delivery of any Stock. If and to the extent that such withholding is required, the Committee may permit the Participant or such other person to elect at such time and in such manner as the Committee provides to have the Company hold back from the shares to be delivered, or to deliver to the Company, Stock having a value calculated to satisfy the withholding requirement. The Committee may make such share withholding mandatory with respect to any Award at the time such Award is made to a Participant. If at the time an ISO is exercised the Committee determines that the Company could be liable for withholding requirements with respect to a disposition of the Stock received upon exercise, the Committee may require as a condition of exercise that the person exercising the ISO agree (a) to inform the Company promptly of any disposition (within the meaning of section 424(c) of the Code) of Stock received upon exercise, and (b) to give such security as the Committee deems adequate to meet the potential liability of the Company for the withholding requirements and to augment such security from time to time in any amount reasonably deemed necessary by the Committee to preserve the adequacy of such security. 8.5. TRANSFERABILITY OF AWARDS. No Award (other than an Award in the form of an outright transfer of cash or Unrestricted Stock) may be transferred other than by will or by the laws of descent and distribution, and during an employee's lifetime an Award requiring exercise may be exercised only by the Participant (or in the event of the Participant's incapacity, the person or persons legally appointed to act on the Participant's behalf), except that Options awarded to Employees or members of the Board which are not ISOs may be transferred by a Participant to (i) the spouse, children or grandchildren of the Participant ("Immediate Family Members"), (ii) a trust or trusts for the exclusive benefit of such Immediate Family Members, or (iii) a partnership in which such Immediate Family Members are the only partners, provided that (x) there may be no consideration for any such transfer, and (y) subsequent transfers of Options shall be prohibited except those in accordance with Section 8.5 hereof. Following any such transfer, the transferred Option shall continue to be subject to all the terms and conditions of this Plan, including without limitation the provisions of Section 7 with respect to exercise of the Option following the death or termination of employment of the Participant to whom the Option was originally granted, and Section 8.4 with respect to tax withholding. 8.6. ADJUSTMENTS IN THE EVENT OF CERTAIN TRANSACTIONS. (a) In the event of a stock dividend, stock split or combination of shares, recapitalization or other change in the Company's capitalization, or other distribution to common stockholders other than normal cash dividends, after the effective date of the Plan, the Committee will make any appropriate adjustments to the maximum number of shares that may be delivered under the Plan, or with respect to which Awards may be made to any one Participant, under Section 4 above. (b) In any event referred to in paragraph (a), the Committee will also make any appropriate adjustments to the number and kind of shares of stock or securities subject to Awards then outstanding or subsequently granted, any exercise prices relating to Awards and any other provision of Awards affected by such change. The Committee may also make such adjustments to take into account material changes in law or in accounting practices or principles, mergers, consolidations, acquisitions, dispositions or similar corporate transactions, or any other event, if it is determined by the Committee that adjustments are appropriate to avoid distortion in the operation of the Plan. 8.7. EMPLOYMENT RIGHTS, ETC. Neither the adoption of the Plan nor the grant of Awards will confer upon any person any right to continued retention by the Company or any subsidiary as an Employee or otherwise, or affect in any way the right of the Company or subsidiary to terminate an employment, service or similar relationship at any time. Except as specifically provided by the Committee in any particular case, the loss of existing or potential profit in Awards granted under the Plan will not constitute an element of damages in the event of termination of an employment, service or similar relationship even if the termination is in violation of an obligation of the Company to the Participant. 8.8. DEFERRAL OF PAYMENTS. The Committee may agree at any time, upon request of the Participant, to defer the date on which any payment under an Award will be made. 8.9. PAST SERVICES AS CONSIDERATION. Where a Participant purchases Stock under an Award for a price equal to the par value of the Stock the Committee may determine that such price has been satisfied by past services rendered by the Participant. 9. EFFECT, DISCONTINUANCE, CANCELLATION, AMENDMENT AND TERMINATION Neither adoption of the Plan nor the grant of Awards to a Participant will affect the Company's right to grant to such Participant awards that are not subject to the Plan, to issue to such Participant Stock as a bonus or otherwise, or to adopt other plans or arrangements under which Stock may be issued to Employees. The Committee may at any time or times amend the Plan or any outstanding Award for any purpose which may at the time be permitted by law, or may at any time terminate the Plan as to any further grants of Awards, provided that (except to the extent expressly required or permitted by the Plan) no such amendment will, without the approval of the stockholders of the Company, effectuate a change for which stockholder approval is required in order for the Plan to continue to qualify for the award of ISOs under section 422 of the Code. -----END PRIVACY-ENHANCED MESSAGE-----