Item 1 hereof and is incorporated by reference in this Part III.
Item 11.
Item 11. Executive Compensation.
The information called for by this item is incorporated herein by reference to the definitive Proxy Statement to be filed by the Company pursuant to Regulation 14A within 120 days after the close of the 1999 fiscal year.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information called for by this item is incorporated herein by reference to the definitive Proxy Statement to be filed by the Company pursuant to Regulation 14A within 120 days after the close of the 1999 fiscal year.
Item 13.
Item 13. Certain Relationships and Related Transactions.
The information called for by this item is incorporated herein by reference to the definitive Proxy Statement to be filed by the Company pursuant to Regulation 14A within 120 days after the close of the 1999 fiscal year.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) 1. Financial Statements.
An Index to Financial Statements appears on page.
2. Schedules.
None
3. Exhibits.
3.1 Restated Certificate of Incorporation of Registrant, filed December 26, 1991, as amended. (1)
3.1(a) Amendment to Restated Certificate of Incorporation, dated August 21, 1992. (1)
3.2 By-Laws of Registrant. (1)
10 The 2000 Stock Option. Plan* (17)
10.1 Amended and Restated 1992 Stock Option Plan of Registrant. (14) (15)
10.2 Form of Non-Qualified Option Agreement granted outside of a Plan to certain Directors and Officers.*(17)
10.3 Agreement, dated June 14, 1991, between Registrant and Yissum Research Development Company of the Hebrew University of Jerusalem ("Yissum"). (1)
10.4 Form of Indemnification Agreement entered into between Registrant and certain officers and directors of Registrant. (2)
10.5 Agreement, dated June 1991, between Registrant and the Technion Research and Development Foundation, Ltd. (the "Technion") as assigned by the Technion to Dimotech, Ltd. (1)
10.6 Agreement, dated as of April 14, 1992, between Registrant and Mr. Joel Gold. (1) (15)
10.7 Assignment of rights relating to a patent on wound dressing to Registrant by Dimotech, Ltd. (3)
10.8 Assignment of certain rights relating to the polymer technology to Registrant by Yissum. (3)
10.9 Form of Non-Qualified Stock Option Agreement. (4) (15)
10.10 Form of Incentive Stock Option Agreement. (4) (15)
10.11 Asset Purchase Agreement between Registrant and MedChem Products, Inc. dated as of July 29, 1994. (5)
10.12 Underwriting Agreement between Registrant and D.H. Blair Investment Banking Corp. (7)
10.13 Agreement, dated as of February 3, 1994, between Registrant and Dimotech, Ltd. (7)
10.14 Warrant Agreement among Registrant, D. H. Blair Investment Banking Corp. and American Stock Transfer & Trust Company including forms of Class A and Class B Warrants. (7)
10.15 Warrant Agreement between Registrant and American Stock Transfer and Trust Company. (7)
10.16 Agreement, dated as of February 1994, between Registrant and Yissum. (7)
10.18 Employment Agreement dated June 12, 1995 between Registrant and Eli Pines, Ph.D. (8) (15)
10.19 Amendment No. 2 dated as of January 1, 1996 to the Agreement between the Registrant and Yissum. (2)
10.20 Agreement dated July 16, 1995 between the Registrant and Dimotech, Ltd. (2)
10.21 Amendment No. 2 dated February 11, 1996 to the Agreement between the Registrant and Dimotech, Ltd. (2)
10.22 Assignment of rights relating to a patent for treatment of Keloid and Hypertrophic scars to Registrant from Dimotech, Ltd. (2)
10.23 Warrant Agreement between Registrant and Wedbush Morgan Securities. (13)
10.24 Underwriting Agreement between Registrant and Wedbush Morgan Securities. (13)
10.25 Employment Agreement dated May 29, 1996 between Registrant and Robert P. Hickey. (10) (15)
10.26 Lease Agreement dated August 13, 1996 between Registrant and Metro Four Associates, LP, 8th Floor of 379 Thornall Street. (11)
10.27 Amendment No. 3 dated as of October 1, 1996 to the Agreement between the Registrant and Yissum.
10.28 Agreement, dated April 22, 1998, between Registrant and CP&S.(16)
23.1 Consent of Richard A. Eisner & Company, LLP. *
27. Financial Data Schedule.*
* Filed herewith.
- ---------- (1) Incorporated by reference to the Registrant's Registration Statement on Form S-1 (File No. 33-94008) declared effective on September 22, 1992. (2) Incorporated by reference to Registrant's Registration Statement on Form S-1 (File No. 333-02588) declared effective on May 3, 1996. (3) Incorporated by reference to the Registrant's report on Form 10-Q for the quarter ended September 30, 1992. (4) Incorporated by reference to the Registrant's report on Form 10-K for the year ended December 31, 1993. (5) Incorporated by reference to the Registrant's report on Form 8-K filed by the Company on August 12, 1994. (6) Incorporated by reference to the Registrant's report on Form 10-Q for the quarter ended September 30, 1994. (7) Incorporated by reference to the Registrant's report on Form 10-K for the year ended December 31, 1994. (8) Incorporated by reference to the Registrant's report on Form 10-Q for the quarter ended June 30, 1995. (9) Intentionally omitted (10) Incorporated by reference to the Registrant's report on Form 10-Q for the quarter ended June 30, 1996. (11) Incorporated by reference to the Registrant's report on Form 10-Q for the quarter ended September 30, 1996. (12) Incorporated by reference to the Registrant's Registration Statement on Form S-3 (File No. 333-19195) declared effective on January 3, 1997. (13) Incorporated by reference to the Registrant's report on Form 10-K for the year ended December 31, 1996. (14) Incorporated by reference to the Registrant's report on Form 10-Q for the quarter ended June 30, 1997. (15) Includes compensatory plan and or arrangements required to be filed pursuant to item 14 (c) of Form 10-K. (16) Incorporated by reference to the Registrant's report on Form 10-K for the year ended December 31, 1998. (17) Incorporated by reference to the Registrant's S-8 filed in January 2000.
(b) Reports on Form 8-K
None
(c) See (a) 3.
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.
Life Medical Sciences, Inc. (Registrant)
By: /s/ Robert P. Hickey ------------------------------------------- Robert P. Hickey Chairman, President, CEO and Acting CFO (principal executive, financial and accounting officer)
Dated: March 20, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signatures Title Date ---------- ----- ----
/s/ Robert P. Hickey Director, Chairman of the Board, March 20, 2000 - -------------------------- President, CEO and Acting CFO Robert P. Hickey (principal executive, financial and accounting officer)
/s/ Edward A. Celano Director March 20, 2000 - -------------------------- Edward A. Celano
/s/ Coy Eklund Director March 20, 2000 - -------------------------- Coy Eklund
/s/ Joel L. Gold Director March 20, 2000 - -------------------------- Joel L. Gold
/s/ Walter R. Maupay Director March 20, 2000 - -------------------------- Walter R. Maupay
/s/ Irwin M. Rosenthal Director March 20, 2000 - -------------------------- Irwin M. Rosenthal
Page Number ----------- Report of Independent Auditors ...................................... Balance Sheets ...................................................... Statements of Operations ............................................ Statements of Changes In Stockholders' Equity (Deficiency) .......... Statements of Cash Flows ............................................ Notes to Financial Statements .......................................
Independent Auditors' Report
Board of Directors and Stockholders Life Medical Sciences, Inc. Edison, New Jersey
We have audited the accompanying balance sheets of Life Medical Sciences, Inc. as of December 31, 1998 and 1999 and the related statements of operations, changes in stockholders' equity (deficiency) and cash flows for each of the years in the three-year period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present fairly, in all material respects, the financial position of Life Medical Sciences, Inc. as of December 31, 1998 and 1999 and the results of its operations and cash flows for each of the years in the three-year period ended December 31, 1999 in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note A to the financial statements, the Company has sustained recurring losses from operations, and has both a working capital and stockholders' deficiency at December 31, 1999. As a result, the Company has limited capital resources for its continuing operations, which raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also discussed in Note A. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Richard A. Eisner & Company, LLP
New York, New York March 21, 2000
LIFE MEDICAL SCIENCES, INC.
BALANCE SHEETS
(In thousands, except per share data)
See accompanying notes to financial statements.
LIFE MEDICAL SCIENCES, INC.
STATEMENTS OF OPERATIONS (In thousands, except per share data)
See accompanying notes to financial statements.
LIFE MEDICAL SCIENCES, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY) (In thousands)
See accompanying notes to financial statements.
LIFE MEDICAL SCIENCES, INC.
STATEMENTS OF CASH FLOWS ( In thousands )
See accompanying notes to financial statements.
LIFE MEDICAL SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS
(NOTE A)-- The Company and Basis of Presentation:
Life Medical Sciences, Inc. (the "Company") was incorporated on August 1, 1990. The Company is engaged in the development of cost-effective medical products. The Company is developing REPEL and REPEL-CV, its resorbable adhesion barrier films used to prevent surgical adhesions; RESOLVE and RELIEVE, its resorbable adhesion barrier coatings used to prevent surgical adhesions. In February 2000, the Company completed a U.S. pilot clinical trial of REPEL-CV in cardiovascular surgical procedures. During 1999, the Company marketed the CLINICEL line of scar management products. Effective February 29, 2000, the Company discontinued the manufacture and sale of CLINICEL and transferred the patent rights back to Dimotech, Ltd.
The accompanying financial statements have been prepared on a going concern basis. As shown in the accompanying financial statements, the Company has incurred recurring losses from operations. As a result, the Company has limited capital resources for its continuing operations and has both a working capital and stockholders' deficiency at December 31, 1999, which raises substantial doubt about the Company's ability to continue as a going concern. The Company is pursuing various financing alternatives, including collaborative arrangements with strategic partners, licensing arrangements for certain of its proposed products and additional public or private financings including equity financings, which management believes could result in the infusion of sufficient capital to alleviate this concern. In December 1999, the Company received $817,000 from the sale of certain New Jersey State tax net operating losses and anticipates receiving similar funds during 2000 and future years contingent upon approvals from the State Division of Taxation. There is no assurance that these initiatives will be successful or that other financing arrangements will be available. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
(NOTE B)--Summary of Significant Accounting Policies:
[1] Revenue Recognition:
Revenue is recognized when product is shipped to customers.
[2] Cash equivalents:
The Company considers all highly liquid investment instruments purchased with a maturity of three months or less to be cash equivalents.
[3] Investments:
Investments purchased with a maturity of more than three months, and which mature less than twelve months from the balance sheet date, are classified as short-term investments. Long-term investments are those with maturities greater than twelve months from the balance sheet date. The Company classifies its investments as available-for-sale as defined by Statement of Financial Accounting Standard ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Available-for-sale securities are carried at market value with unrealized gains and losses reported as a separate component of stockholders' equity. Gross realized gains and losses on the sales of investment securities are determined on the specific identification method.
[4] Financial Instruments:
The carrying amounts of cash, investments, accounts receivable, inventories, accounts payable, accrued expenses and capitalized lease obligations approximate their fair values.
LIFE MEDICAL SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
[5] Inventory:
Inventory is valued at the lower of cost or market. Cost is determined using an average cost method.
[6] Advertising:
Advertising costs are charged to expense as they are incurred. Total expenditures in 1998 and 1999 were $2,266,000 and $196,000, respectively.
[7] Depreciation:
Furniture and equipment are recorded at cost, and are depreciated using the straight-line method based upon an estimated useful life of 5 years.
[8] Research and development:
Research and development costs, including those payments described in Note G, are charged to expense as incurred.
[9] Patent costs:
Costs incurred in connection with acquiring patent rights and the protection of proprietary technologies are charged to expense as incurred.
[10] Royalty income:
Royalty income is based on the quarterly sales of the Sure-Closure System and any line extensions or embodiments thereof. Royalties are calculated and credited to the Company within forty-five days after the last day of each quarter. The Company recognizes such income when the amounts earned become fixed and determinable. Royalties earned by the Company are applied to the outstanding deferred royalty income balance.
[11] Use of estimates in the preparation of financial statements:
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 revenue and expenses during the reporting period. Actual results could differ from those estimates.
[12] Stock based compensation:
The Company accounts for stock-based employee compensation under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations. The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation".
LIFE MEDICAL SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
[13] Earnings(Loss) per share:
The Company calculates its earnings (loss) per share under the provisions of SFAS No. 128, "Earnings Per Share". SFAS No. 128 requires a dual presentation of "basic" and "diluted" earnings (loss) per share on the face of the statements of operations. Basic earnings (loss) per share is computed by dividing the income or loss by the weighted average number of shares of common stock outstanding during each period. Diluted earnings (loss) per share includes the effect, if any, from the potential exercise or conversion of securities, such as stock options and warrants, which would result in the issuance of incremental shares of common stock. However, such potential common shares (see Note E) have not been included in the calculation of diluted loss per share since the effect would be anti-dilutive.
(NOTE C)--Investments:
The Company had no short-term or long-term investments as of either December 31, 1998 or 1999.
(NOTE D) - Accrued Expenses:
Accrued expenses is comprised of the following (in thousands):
December 31, --------------- 1998 1999 ---- ---- Research agreements .............. $873 $ 56 Other ............................ 118 39 ---- ----
Total ............................ $991 $ 95 ==== ====
(NOTE E) -- Stockholders' Equity (Deficiency):
[1] Common stock:
In May 1996, the Company completed a public offering of 2,300,000 shares of common stock at $6.625 per share (initial offering of 2,000,000 shares plus an additional 300,000 issued due to the exercise of the underwriters' over-allotment option) and received net proceeds of approximately $13.4 million, including proceeds received upon the exercise of the underwriters' over-allotment option and after deducting underwriting discounts and commissions and offering expenses.
On June 28, 1999, the Company completed a private placement in which 1,505,003 shares of common stock were sold to "accredited investors" as defined in Rule 501 of Regulation D in consideration for cash proceeds of $750,000.
[2] Warrants:
In 1992, the Company consummated its initial public offering of 1,150,000 units, each unit consisting of one share of common stock and two warrants. The warrants included in each unit consist of a redeemable Class A Warrant and a redeemable Class B Warrant. Each Class A Warrant entitles the holder to purchase, at an exercise price of $8.40, subject to adjustment, 1.071474 shares of Common Stock and one Class B Warrant. Each Class B Warrant entitles the holder to purchase, at an exercise price of $12.60, subject to adjustment, 1.071474 shares of Common Stock. The warrants are redeemable by the Company for $.05 per warrant on 30 days written notice under certain circumstances.
LIFE MEDICAL SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
In 1993, the Company consummated a public offering of 500,000 units; each unit consisting of two shares of common stock and one Class A Warrant.
At December 31, 1999 there were 1,650,000 Class A Warrants and 1,150,000 Class B Warrants outstanding. The warrants'expiration date has been extended to September 21, 2000.
The Company sold to the underwriter of its public offering in May 1996, for nominal consideration, a warrant to purchase 200,000 shares of Common Stock. The warrant has an exercise price of $7.95 per share and is exercisable for a period of five years commencing May 3, 1997.
[3] Options:
The Company may issue options to purchase up to an aggregate of 1,407,500 shares of Common Stock pursuant to its 1992 Stock Option Plan, as amended (the "Plan"). Options to purchase shares may be granted under the Plan to persons who, in the case of incentive stock options, are employees of the Company; or, in the case of SARs and nonstatutory stock options, are officers and key employees of the Company, or agents, medical and scientific advisors, directors of or consultants to the Company, whether or not otherwise employed by the Company. The exercise price is determined by the Stock Option Committee of the Board of Directors at the time of the granting of an option, but in the case of an incentive stock option, the exercise price shall not be less than the fair market value of the stock on the date of grant. Options and SARs vest over a period not greater than five years, and expire no later than ten years from the date of grant.
Options to purchase up to 695,813 shares of Common Stock pursuant to the Plan are outstanding as of December 31, 1999. In addition to the shares of Common Stock reserved for issuance pursuant to the Plan, at December 31, 1999, the Company had reserved 3,769,649 shares of Common Stock for issuance upon exercise of outstanding options pursuant to other agreements. These options vest over various periods and expire no later than seven years from the date of vesting.
The Company applies APB Opinion 25 and related Interpretations in accounting for its options to employees. In 1999, the Company expensed compensation of $322,000 for stock option issued in lieu of compensation. In addition the Company has included stock based compensation costs associated with options granted under consulting agreements, in research and development expenses of $159,000 for 1998 and in research and development, general and administrative and sales and marketing expenses of $96,000, $31,000 and $23,000, respectively for 1999.
Had compensation cost for the Company's stock option grants to employees been determined based on the fair value at the grant dates for awards consistent with the method of FASB Statement 123, the Company's net loss and loss per share would have been increased to the pro forma amounts indicated below (in thousands, except per share data).
1997 1998 1999 --------- --------- --------- Net loss As reported $ (7,666) $ (7,602) $ (955) Pro forma $ (9,268) $ (8,992) $ (1,297) Net loss per share- basic & diluted As reported $ (0.97) $ (0.96) $ (0.11) Pro forma $ (1.17) $ (1.13) $ (0.15)
LIFE MEDICAL SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1997 and 1998: no dividend yield, expected volatility of 76%, a risk-free interest rate of 5.5% to 6.0% and an expected life of 2.5 to 3.3 years. For 1999, these assumptions are: no dividend yield, expected volatility of 82%, a risk-free interest rate of 5.5% to 6.3% and an expected life of 2.5 years.
A summary of the status of the Company's stock options as of December 31, 1997, 1998 and 1999, and changes during the years ended on those dates is presented below (in thousands, except per share data):
The following table summarizes information about fixed stock options outstanding at December 31, 1999 (in thousands, except per share data):
LIFE MEDICAL SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
(NOTE F)-- Income Taxes:
At December 31, 1999, the Company has net operating loss carryforwards for federal income tax purposes of approximately $34,484,000 and approximately $592,000 of research and development tax credits available to offset future federal income tax, subject to limitations for alternative minimum tax. The net operating loss carryforwards and the research and development credit carryover are subject to examination by the tax authorities and expire in various years from 2005 through 2018. Certain other limitations may apply. Any significant issuance of the Company's stock, however, may trigger Section 382 limitations on the use of net operating loss carryforwards under the Internal Revenue Code of 1986.
Deferred tax benefits, which amounted to $13,976,000 and $14,526,000 at December 31, 1998 and 1999 are principally attributable to net operating loss carryforwards and have been offset by a valuation allowance due to management's uncertainty regarding the future profitability of the Company. The valuation allowance has been increased by $3,086,000, $3,020,000 and $550,000 in 1997, 1998, and 1999, respectively.
At December 31,1999, the Company has net operating loss carryforwards for New Jersey State income tax purposes of approximately $24,473,000 available to offset future tax liabilities. In 1999, the Company participated in the Tax Benefit Transfer Program administered by the State of New Jersey under which $11,002,000 in eligible loss carryforwards covering the tax years 1992 through 1994 and a portion of 1995 were sold to PSE&G in exchange for a cash payment of approximately $817,000. The Company anticipates similar transactions during 2000 and beyond contingent upon approvals from the State Department of Taxation.
(NOTE G)-- Research and License Agreements:
[1] Yissum agreement:
During June 1991, the Company entered into a research and license agreement with Yissum Research and Development Company of the Hebrew University of Jerusalem ("Yissum"), which was amended in February 1994, as of January 1996 and as of October 1996, pursuant to which the Company finances and Yissum conducts research and development at the Hebrew University of Jerusalem in the field of biomedical polymers. In connection with the agreement, Yissum assigned to the Company its worldwide rights to patents, patent applications and know-how to develop, manufacture and market products relating to this technology.
Pursuant to the agreement, the Company is obligated to pay a royalty of five percent of all net sales of the Company's products derived under the agreement. The maximum amount of royalties to be paid during the term of the agreement is $5,500,000. The agreement continues until the earlier of the last date upon which the patents expire, or at the end of fifteen years from the date of the first commercial sale pursuant to the assignment. Yissum has the right in its
LIFE MEDICAL SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
sole discretion to terminate the agreement if, among other things the Company does not attain certain milestones by specified dates. The January 1996 amendment gives the Company options for three one-year extensions, through 2004, of the periods in which certain milestones must be attained, each for a payment of $50,000. Upon termination of the agreement for any reason, the patents, patent applications and know-how assigned by Yissum to the Company will revert in full to Yissum.
The October 1996 amendment provides a research term of five years from the date of the amendment and required Yissum personnel to enter into confidentiality and non-competition agreements with the Company.
[2] Dimotech agreement:
During July 1995, the Company entered into an agreement with Dimotech Ltd., pursuant to which the Company financed and Dimotech conducted research and development with regard to the scar management program. In connection with the agreement, Dimotech has assigned to the Company its worldwide rights to the patents and know-how to develop, manufacture and market products relating to this technology.
Pursuant to the agreement, the Company is obligated to pay a royalty of five percent of all net sales of the Company's products derived under this agreement including CLINICEL. The agreement continues until the earlier of the last date upon which the patents expire, or at the end of fifteen years from the date of the first commercial sale pursuant to the assignment. Dimotech has the right in its sole discretion to terminate the agreement under certain circumstances. Upon termination of the agreement for any reason, the patents, license and know-how assigned by Dimotech to the Company will revert in full to Dimotech.
In November 1999, the Company was declared to be in breach of this agreement by Dimotech due to non-payment of royalties. The Company was unsuccessful in its efforts to divest the CLINICEL business; therefore, effective February 29, 2000, the Company discontinued the manufacture and sale of CLINICEL and allowed the patent rights to revert to Dimotech. The company does not plan on marketing the CLINICEL products subsequent to February 2000. Accordingly, a $186,000 reserve has been set up for all the inventories on hand at year end.
[3] Technion agreements:
During June 1991, the Company entered into an agreement with Technion Research and Development Foundation, Ltd., in Haifa, Israel (the "Technion"), which was assigned to its wholly-owned subsidiary Dimotech, Ltd. ("Dimotech") and was amended in February 1994 and February 1996, pursuant to which the Company financed, and Dimotech conducted, research and development with regard to the Company's in-situ tissue culturing technology. In connection with the agreement, the Technion assigned to the Company its worldwide rights to patent applications, any patents which may be issued and know-how to develop, manufacture and market products relating to this technology. This agreement was terminated by the Company in September 1998.
LIFE MEDICAL SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
(NOTE H)-- Commitments and Other Matters:
[1] Leases:
The Company entered into an operating lease for its corporate offices in November 1996 for approximately 3,550 square feet at an annual fixed rent of $80,000. The initial term of this lease is for five years and includes one five-year renewal option.
The lease provides for future aggregate minimum annual rentals, as of December 31, 1999, as follows (in thousands):
2000 $80 2001 $67
The terms of the lease includes escalation for increases in real estate taxes and certain operating expenses.
Rent expense was $84,000, $84,000 and $88,000 for the years ended December 31, 1997, 1998 and 1999, respectively.
[2] Employment agreements:
The Company has employment agreements with two executives which expire at various dates from 2000 through 2001. Pursuant to such agreements, the Company's commitments regarding termination benefits aggregates $149,000 at December 31, 1999.
[3] Other:
In connection with an agreement with the Technion and Dimotech, which was assigned to MedChem in July 1994, the Company must invest $50,000 per year, for the five-year period ending December 31, 1999, in research and development programs in Israel if MedChem does not make such investments. The agreement also provides for a two percent royalty on sales of the Sure-Closure System to be paid to the Chief Scientist in Israel. In the event that MedChem does not pay these royalties the Company may be obligated to make such payments. In addition, the agreement contains certain commitments to favorably consider manufacture of future products in Israel, which if not met could result in the loss of technology and future royalty income.
(NOTE I)-- Sure-Closure System Sale:
In July 1994, the Company sold or assigned to MedChem substantially all of its assets related to the Sure-Closure System, including rights, agreements and licenses. The terms of the asset purchase agreement provide that the Company is entitled to royalties of 10% of the net sales (as defined in the agreement), through June 30, 2004, of the Sure-Closure System and any line extensions or future embodiments. In connection with this transaction, $644,000 was recorded as deferred royalty income and through December 31,1999 has been reduced by $305,000 of royalties earned after October 1, 1995.
A number of the Company's agreements with the Technion and Dimotech, related to the Sure-Closure System, were assigned to MedChem in connection with the sale.
LIFE MEDICAL SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
(NOTE J)-- Related Party:
The Company incurred expenses of approximately $189,000, $103,000 and $67,000 in the years ended December 31, 1997, 1998 and 1999, respectively, for legal services rendered by a firm, one of the partners at which is a director and a principal stockholder of the Company.
(NOTE K)-- 401(k) Plan:
Effective October 1992, the Company adopted a 401(k) pension plan available to all full time eligible employees. The Company at its discretion may make contributions to the plan. However, no such contributions have been made through December 31, 1999.
(NOTE L)---Extraordinary Item:
Net loss for the year ended December 31, 1999 includes an extraordinary gain of $432,000 attributable to the gain on extinguishment of amounts owed to a contract manufacturer by the transfer of title to equipment that had previously been charged to research and development expenses.
(NOTE M) - Benefit for Income Taxes:
The Company received $817,000 associated with the sale of certain accumulated New Jersey State tax operating losses.
LIFE MEDICAL SCIENCES, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
(NOTE N) - Fourth Quarter Adjustment:
In May 1999, the Chairman of the Company's Board of Directors chose not to stand for reelection. Pursuant to the employment agreement the Company owed $ 254,000 for accrued salary and severance, which was paid by repricing and extending existing stock options and issuing additional stock options. The Company recorded a $254,000 charge during the fourth quarter of 1999 and increased additional paid-in capital. The salary should have been accrued through the date of resignation and the severance should have been accrued on the date of resignation. The effect of such adjustment is summarized as follows: