-----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, NS/IIb17dtzdNUC1JA1HiFox5Y34B0NiHnvHRYMZvZQ5zJ3WGKN/YxBCAYkCO5Ud ATNIToNii6O8Adaubr4+Xw== 0000950134-02-010082.txt : 20020814 0000950134-02-010082.hdr.sgml : 20020814 20020814160750 ACCESSION NUMBER: 0000950134-02-010082 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SHEFFIELD PHARMACEUTICALS INC CENTRAL INDEX KEY: 0000894158 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 133808303 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-12584 FILM NUMBER: 02736600 BUSINESS ADDRESS: STREET 1: 425 WOODSMILL RD CITY: ST LOUIS STATE: MO ZIP: 63017 BUSINESS PHONE: 3145799899 MAIL ADDRESS: STREET 1: 425 WOODSMILL RD CITY: ST LOUIS STATE: MO ZIP: 63017 FORMER COMPANY: FORMER CONFORMED NAME: SHEFFIELD MEDICAL TECHNOLOGIES INC DATE OF NAME CHANGE: 19940606 10-Q 1 c71273e10vq.txt FORM 10-Q FOR QUARTER ENDING JUNE 30, 2002 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED JUNE 30, 2002 Commission file number 1-12584 SHEFFIELD PHARMACEUTICALS, INC. (Exact name of registrant as specified in its Charter) DELAWARE 13-3808303 (State of Incorporation) (IRS Employer Identification Number) 14528 SOUTH OUTER FORTY ROAD 63017 (314) 579-9899 ST. LOUIS, MISSOURI (Zip Code) (Registrant's telephone, (Address of principal executive offices) including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: Title of Class Name of each exchange on which registered Common Stock. $.01 par value American Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None 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 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [ X ]Yes [ ] No The number of shares outstanding of the Registrant's Common Stock is 29,563,712 shares as of August 14, 2002. SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES (a development stage enterprise) FORM 10-Q For the Quarter Ended June 30, 2002 Table of Contents
Page ---- PART I Item 1. Financial Statements Consolidated Balance Sheets as of June 30, 2002 and December 31, 2001................................................................. 3 Consolidated Statements of Operations for the three and six months ended June 30, 2002 and 2001 and for the period from October 17, 1986 (inception) to June 30, 2002 ......................................... 4 Consolidated Statements of Stockholders' Equity (Net Capital Deficiency) for the period from October 17, 1986 (inception) to June 30, 2002 .......................................................... 5 Consolidated Statements of Cash Flows for the six months ended June 30, 2002 and 2001 and for the period from October 17, 1986 (inception) to June 30, 2002.......................................... 6 Notes to Consolidated Financial Statements .............................................. 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................... 9 Item 3. Quantitative and Qualitative Disclosure About Market Risk....................... 19 PART II Item 2. Changes in Securities........................................................... 19 Item 4. Submission of Matters to a Vote of Security Holders ............................ 19 Item 6. Exhibits and Reports on Form 8-K................................................ 20 Signatures............................................................................... 21
2 PART I: FINANCIAL INFORMATION Item 1. Financial Statements SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES (a development stage enterprise) CONSOLIDATED BALANCE SHEETS
Assets June 30, December 31, 2002 2001 ---------------- --------------- (unaudited) Current assets: Cash and cash equivalents ............................................... $ 855,920 $ 859,298 Clinical supplies........................................................ 499,422 427,550 Prepaid expenses and other current assets ............................... 208,173 86,080 ---------------- --------------- Total current assets ................................................. 1,563,515 1,372,928 ---------------- --------------- Property and equipment: Laboratory equipment .................................................... 462,949 431,920 Office equipment ........................................................ 245,019 245,019 Leasehold improvements .................................................. 25,309 25,309 ---------------- --------------- Total at cost ........................................................ 733,277 702,248 Less accumulated depreciation and amortization .......................... (426,714) (355,014) ---------------- --------------- Property and equipment, net .......................................... 306,563 347,234 ---------------- --------------- Patent costs, net of accumulated amortization of $26,977 and $20,216, respectively 392,116 308,203 Other assets................................................................. 27,913 27,913 ---------------- --------------- Total assets ............................................................ $ 2,290,107 $ 2,056,278 ================ =============== Liabilities and Stockholders' Equity (Net Capital Deficiency) Current liabilities: Accounts payable......................................................... $ 2,263,452 $ 856,216 Accrued liabilities...................................................... 376,044 441,778 Sponsored research payable .............................................. 235,757 235,757 Note payable ............................................................ -- 4,000,000 ---------------- --------------- Total current liabilities ............................................ 2,875,253 5,533,751 Convertible promissory note ................................................. 2,000,000 2,000,000 Long-term debt .............................................................. 9,500,000 3,000,000 Other long-term liabilities ................................................. 1,024,341 608,803 Commitments and contingencies ............................................... -- -- ---------------- --------------- Total liabilities ....................................................... 15,399,594 11,142,554 Minority interest in subsidiary.............................................. -- -- Stockholders' equity (net capital deficiency): Preferred stock, $.01 par value, authorized 3,000,0000 shares: Series C cumulative convertible preferred stock, authorized 23,000 shares; issued and outstanding 15,229 and 14,708 shares at June 30, 2002 and December 31, 2001, respectively............................ 152 147 Series D cumulative convertible exchangeable preferred stock, authorized 21,000 shares; issued and outstanding 14,287 and 13,779 shares at June 30, 2002 and December 31, 2001, respectively........................ 143 138 Series E cumulative convertible non-exchangeable preferred stock, authorized 9,000 shares; issued and outstanding 3,231 and 2,124 shares at June 30, 2002 and December 31, 2001, respectively................... 32 21 Series F convertible non-exchangeable preferred stock, 5,000 shares authorized; 5,000 shares issued and outstanding at June 30, 2002 and December 31, 2001................................................. 50 50 Common stock, $.01 par value, authorized 100,000,000 shares; issued and outstanding 29,563,712 and 29,001,602 shares at June 30, 2002 and December 31, 2001, respectively................................ 295,637 290,016 Additional paid-in capital ............................................ 86,519,602 83,120,316 Other comprehensive income ............................................ -- -- Deficit accumulated during development stage .......................... (99,925,103) (92,496,964) ---------------- --------------- Total stockholders' equity (net capital deficiency) ..... (13,109,487) (9,086,276) ---------------- --------------- Total liabilities and stockholders' equity (net capital deficiency).......... $ 2,290,107 $ 2,056,278 ================ ===============
See notes to consolidated financial statements. 3 SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES (a development stage enterprise) CONSOLIDATED STATEMENTS OF Operations For the Three and Six Months Ended June 30, 2002 and 2001 and for the Period from October 17, 1986 (inception) to June 30, 2002 (Unaudited)
Three Months Ended Six Months Ended October 17, 1986 June 30, June 30, (inception) to --------------------------------- -------------------------------- June 30, 2002 2001 2002 2001 2002 -------------- -------------- -------------- ------------- --------------- Revenues: Contract research revenue......... $ 5,000 $ 688,348 $ 5,000 $ 869,095 $ 1,775,045 Sublicense revenue................ 5,000 5,000 5,000 5,000 1,375,000 -------------- -------------- -------------- ------------- --------------- Total revenues................. 10,000 693,348 10,000 874,095 3,150,045 Expenses: Acquisition of research and develop- ment in-process technology....... -- -- -- -- 29,975,000 Research and development.......... 1,622,136 1,934,362 2,775,926 2,980,135 37,548,481 General and administrative........ 1,442,734 1,119,531 3,381,400 1,877,800 32,268,146 -------------- -------------- -------------- ------------- --------------- Total expenses................. 3,064,870 3,053,893 6,157,326 4,857,935 99,791,627 -------------- -------------- -------------- ------------- --------------- Loss from operations................ (3,054,870) (2,360,545) (6,147,326) (3,983,840) (96,641,582) Interest income..................... 4,356 22,382 7,018 50,765 796,405 Interest expense.................... (180,926) (51,398) (330,757) (109,247) (1,404,327) Realized loss on sale of marketable securities....................... -- -- -- -- (5,580) Minority interest in loss of subsidiary 54,544 110,151 160,586 182,502 3,679,279 -------------- -------------- -------------- ------------- --------------- Net loss............................ $ (3,176,896) $ (2,279,410) $ (6,310,479) $ (3,859,820) $ (93,575,805) ============== ============== ============== ============= =============== Preferred stock dividends........... (588,914) (504,953) (1,141,576) (992,728) (6,871,097) Accretion of mandatorily redeemable preferred stock................... -- -- -- -- (103,400) -------------- -------------- -------------- ------------- --------------- Net loss - attributable to common shares $ (3,765,810) $(2,784,363) $ (7,452,055) $ (4,852,548) $ (100,550,302) ============== ============== ============== ============= =============== Weighted average common shares outstanding-basic and diluted..... 29,541,954 28,965,925 29,284,410 28,897,350 11,209,969 ============== ============== ============== ============= =============== Net loss per share of common stock - basic and diluted................. $ (0.13) $ (0.10) $ (0.25) $ (0.17) $ (8.97) ============== ============== ============== ============= ===============
See notes to consolidated financial statements. 4 SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES (a development stage enterprise) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY) For the Period from October 17, 1986 (Inception) to June 30, 2002 (Unaudited)
Notes receivable in connection Additional Preferred Common with sale of paid-in stock Stock stock capital ----- ----- ----- ------- Balance at October 17, 1986....................... $ -- $ -- $ -- $ -- Common stock issued............................ -- 11,484,953 100,000 30,539,185 Reincorporation in Delaware at $.01 par value.. -- (11,220,369) -- 11,220,369 Common stock subscribed........................ -- -- (110,000) -- Common stock issued............................ -- 2,504 10,000 89,059 Common stock options and warrants issued....... -- -- -- 444,320 Issuance of common stock in connection with acquisition of Camelot Pharmacal, L.L.C.... -- 6,000 -- 1,644,000 Common stock options extended.................. -- -- -- 215,188 Accretion of issuance costs for Series A -- -- -- -- preferred stock Series C preferred stock issued................ 115 -- -- 11,499,885 Series C preferred stock dividends............. 13 -- -- 1,279,987 Series D preferred stock issued................ 120 -- -- 12,014,880 Series F preferred stock issued................ 50 -- -- 4,691,255 Comprehensive income (loss): Unrealized gain on marketable securities... -- -- -- -- Net loss................................... -- -- -- -- Comprehensive loss......................... -- -- -- -- ----------- ------------ -------------- ----------- Balance at December 31, 1999...................... 298 273,088 -- 73,638,128 Common stock issued............................ -- 15,738 -- 3,796,072 Repurchase and retirement of common stock...... -- (910) -- (312,279) Series C preferred stock dividends............. 9 -- -- 931,991 Series D preferred stock dividends............. 9 -- -- 854,991 Series E preferred stock issued................ 10 -- -- 999,990 Series E preferred stock dividends............. -- -- 4,000 Common stock warrants issued................... -- -- -- 195,202 Comprehensive income (loss): Unrealized loss on marketable securities... -- -- -- -- Net loss................................... -- -- -- -- Comprehensive loss......................... -- -- -- -- ----------- ------------ -------------- ----------- Balance at December 31, 2000...................... 326 287,916 -- 80,108,095 Common stock issued............................ -- 4,251 -- 481,201 Repurchase and retirement of common stock -- (2,151) -- (640,691) Series C preferred stock dividends............. 10 -- -- 995,990 Series D preferred stock dividends............. 9 -- -- 928,991 Series E preferred stock issued................ 10 -- -- 999,990 Series E preferred stock dividends............. 1 -- -- 119,999 Common stock warrants issued................... -- -- -- 126,741 Comprehensive income (loss): Unrealized loss on marketable securities... -- -- -- -- Net loss................................... -- -- -- -- Comprehensive loss......................... -- -- -- -- ----------- ------------ -------------- ----------- Balance December 31, 2001......................... 356 290,016 $ -- 83,120,316 Common stock issued............................ -- 5,621 -- 1,001,379 Series C preferred stock dividends............. 5 -- -- 520,995 Series D preferred stock dividends............. 5 -- -- 487,995 Series E preferred stock issued................ 10 -- -- 999,990 Series E preferred stock dividends............. 1 -- -- 106,999 Common stock warrants issued................... -- -- -- 281,928 Net loss....................................... -- -- -- -- ----------- ------------ -------------- ----------- Balance June 30, 2002............................. $ 377 $ 295,637 $ -- $86,519,602 =========== ============ ============== ===========
Deficit Total Other accumulated stockholders' comprehen- during equity (net sive income development capital (loss) stage deficiency) ------ ----- ----------- Balance at October 17, 1986....................... $ -- $ -- $ -- Common stock issued............................ -- -- 42,124,138 Reincorporation in Delaware at $.01 par value.. -- -- -- Common stock subscribed........................ -- -- (110,000) Common stock issued............................ -- -- 101,563 Common stock options and warrants issued....... -- -- 444,320 Issuance of common stock in connection with acquisition of Camelot Pharmacal, L.L.C.... -- -- 1,650,000 Common stock options extended.................. -- -- 215,188 Accretion of issuance costs for Series A -- (103,400) (103,400) preferred stock Series C preferred stock issued................ -- -- 11,500,000 Series C preferred stock dividends............. -- (1,283,389) (3,389) Series D preferred stock issued................ -- -- 12,015,000 Series F preferred stock issued................ -- -- 4,691,305 Comprehensive income (loss): Unrealized gain on marketable securities... 169,387 -- -- Net loss................................... -- (72,023,039) -- Comprehensive loss......................... -- -- (71,853,652) ----------- -------------- -------------- Balance at December 31, 1999...................... 169,387 (73,409,828) 671,073 Common stock issued............................ -- -- 3,811,810 Repurchase and retirement of common stock...... -- -- (313,189) Series C preferred stock dividends............. -- (934,045) (2,045) Series D preferred stock dividends............. -- (855,750) (750) Series E preferred stock issued................ -- -- 1,000,000 Series E preferred stock dividends............. -- (4,750) (750) Common stock warrants issued................... -- -- 195,202 Comprehensive income (loss): Unrealized loss on marketable securities... (11,920) -- -- Net loss................................... -- (5,763,151) -- Comprehensive loss......................... -- -- (5,775,071) ----------- -------------- -------------- Balance at December 31, 2000...................... 157,467 (80,967,524) (413,720) Common stock issued............................ -- -- 485,452 Repurchase and retirement of common stock -- -- (642,842) Series C preferred stock dividends............. -- (999,278) (3,278) Series D preferred stock dividends............. -- (929,603) (603) Series E preferred stock issued................ -- -- 1,000,000 Series E preferred stock dividends............. -- (121,422) (1,422) Common stock warrants issued................... -- -- 126,741 Comprehensive income (loss): Unrealized loss on marketable securities... (157,467) -- -- Net loss................................... -- (9,479,137) -- Comprehensive loss......................... -- -- (9,636,604) ----------- -------------- -------------- Balance December 31, 2001......................... (92,496,964) (9,086,276) Common stock issued............................ -- -- 1,007,000 Series C preferred stock dividends............. -- (522,187) (1,187) Series D preferred stock dividends............. -- (488,331) (331) Series E preferred stock issued................ -- -- 1,000,000 Series E preferred stock dividends............. -- (107,142) (142) Common stock warrants issued................... -- -- 281,928 Net loss....................................... -- (6,310,479) (6,310,479) ----------- -------------- -------------- Balance June 30, 2002............................. $ -- $(99,925,103) $ (13,109,487) =========== ============== ==============
See notes to consolidated financial statements. 5 SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES (a development stage enterprise) CONSOLIDATED STATEMENTS OF CASH FLOWS For the Six Months Ended June 30, 2002 and 2001 and for the Period from October 17, 1986 (inception) to June 30, 2002 (Unaudited)
October 17, Six Months Ended 1986 June 30, (inception) to --------------------------------- June 30, 2002 2001 2002 --------------- -------------- ---------------- Cash outflows from operating activities: Net loss........................................ $ (6,310,479) $ (3,859,820) $ (93,575,805) Adjustments to reconcile net loss to net cash used by development stage activities: Issuance of common stock, stock options/warrants for services........................................ 281,928 126,741 3,101,296 Depreciation and amortization................... 78,461 62,506 807,351 Non-cash acquisition of research and development in-process technology........................... -- -- 1,650,000 Loss on sale of marketable securities........... -- -- 5,580 Increase in clinical supplies, prepaid expenses & other current assets............................ (193,965) (545,393) (766,636) Decrease in milestone advance receivable........ -- 1,000,000 -- Increase in other assets........................ (90,674) (57,494) (387,966) Increase in accounts payable and accrued liabilities 1,593,511 542,130 2,747,659 Increase in sponsored research payable.......... -- -- 812,827 Other........................................... 166,003 (78,773) 391,706 --------------- -------------- ---------------- Net cash used by operating activities................ (4,475,215) (2,810,103) (85,213,988) --------------- -------------- ---------------- Cash flows from investing activities: Proceeds from sale of marketable securities..... -- -- 844,420 Acquisition of laboratory and office equipment, and leasehold improvements.......................... (31,029) (107,979) (903,419) Other........................................... -- -- (57,087) --------------- -------------- ---------------- Net cash used by investing activities................ (31,029) (107,979) (116,086) --------------- -------------- ---------------- Cash flows from financing activities: Payments on debt and capital leases............. (4,134) (3,581) (854,170) Net proceeds from issuance of: Debt......................................... 2,500,000 -- 14,550,000 Common stock................................. -- -- 23,433,660 Preferred stock.............................. 1,000,000 1,000,000 35,741,117 Proceeds from exercise of warrants/stock options 1,007,000 343,683 14,770,358 Repurchase and retirement of common stock....... -- -- (956,031) Other........................................... -- -- (500,024) --------------- -------------- ---------------- Net cash provided by financing activities............ 4,502,866 1,340,102 86,184,910 --------------- -------------- ---------------- Net increase (decrease) in cash and cash equivalents. (3,378) (1,577,980) 854,836 Cash and cash equivalents at beginning of period..... 859,298 3,041,948 1,084 --------------- -------------- ---------------- Cash and cash equivalents at end of period........... $ 855,920 $ 1,463,968 $ 855,920 =============== ============== ================ Noncash investing and financing activities: Common stock, stock options/warrants issued for $ 281,928 $ 126,741 $ 3,101,296 services............................................. Common stock redeemed in payment of notes receivable -- -- 10,400 Acquisition of research and development in-process technology.................................. -- -- 1,655,216 Common stock issued for intellectual property rights -- -- 866,250 Common stock issued to retire debt.............. -- -- 600,000 Common stock issued to redeem convertible securities -- -- 5,353,368 Securities acquired under sublicense agreement.. -- -- 850,000 Equipment acquired under capital lease.......... -- -- 121,684 Notes payable converted to common stock......... -- -- 749,976 Stock dividends................................. 1,117,660 985,000 6,609,334 Supplemental disclosure of cash flow information: $ 1,162 $ 1,106 $ 287,482 Interest paid........................................
See notes to consolidated financial statements. 6 SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES (a development stage enterprise) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2002 (Unaudited) 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q of the Securities and Exchange Commission and should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2001. In the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary to present fairly the financial position, results of operations, stockholders' equity and cash flows at June 30, 2002 and for all periods presented have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The results of operations for the three and six months ended June 30, 2002 and 2001 are not necessarily indicative of the operating results for the full years. The consolidated financial statements include the accounts of Sheffield Pharmaceuticals, Inc. and its wholly owned subsidiaries, Systemic Pulmonary Delivery, Ltd., Ion Pharmaceuticals, Inc., and CP Pharmaceuticals, Inc., and its 80.1% owned subsidiary, Respiratory Steroid Delivery, Ltd., and are herein referred to as "Sheffield" or the "Company." All significant intercompany transactions are eliminated in consolidation. The Company is focused on the development and commercialization of later stage pharmaceutical products that utilize the Company's unique proprietary pulmonary delivery technologies. The Company is in the development stage and to date has been principally engaged in research, development and licensing efforts. The accompanying consolidated financial statements have been prepared on a going concern basis that contemplates the realization of assets and satisfaction of liabilities and commitments in the normal course of business. The Company has generated minimal operating revenue, sustained significant net operating losses, and requires additional capital that the Company intends to obtain through out-licensing of rights to its technology, as well as through equity and debt offerings, to continue to operate its business. Management believes that the Company's ability to meet its obligations as they become due and to continue as a going concern is dependent upon obtaining additional funding immediately. In an effort to meet this capital requirement, the Company is evaluating various financing alternatives including private offerings of its securities, debt financings, and collaboration and licensing arrangements with other companies. However, the accompanying financial statements do not include any adjustments that might result from the failure to obtain additional financing. Additionally, the Company's ability to meet its obligations as they become due and to continue as a going concern must be considered in light of the expenses, difficulties and delays frequently encountered in developing a new business, particularly since the Company will focus on product development that may require a lengthy period of time and substantial expenditures to complete. Even if the Company is able to successfully develop new products, there can be no assurance that the Company will generate sufficient revenues from the sale or licensing of such products to be profitable. 2. BASIC LOSS PER COMMON SHARE Basic net loss per share is calculated in accordance with Statement of Financial Accounting Standards No. 128, Earnings Per Share. Basic net loss per share is based upon the weighted average common stock outstanding during each period. Potentially dilutive securities such as stock options, warrants, convertible debt and preferred stock, have not been included in any periods presented as their effect is antidilutive. 3. LONG-TERM DEBT On August 14, 2001, the Company entered into a Note Purchase Agreement ("Agreement") with Elan Pharma International Ltd. ("Elan Pharma"), pursuant to which Elan Pharma agreed to lend the Company up to $4 million. On April 4, 2002, the Company amended the Agreement. Under the terms of the amended Agreement, Elan Pharma agreed to increase the principal amount of the loan available from $4 million to $5 million and extend the maturity date from November 14, 2002 to April 4, 2004. On April 5, 2002, the Company received proceeds on the loan of $1 million, 7 increasing the total borrowings to $5 million. All borrowings under the Agreement are evidenced by a $5 million unsecured promissory note of the Company that provides for interest on principal and semi-annually compounded interest at a fixed rate of 10% per annum. The outstanding principal balance of the Agreement at June 30, 2002, and December 31, 2001, was $5 million and $4 million, respectively. Due to the modification of the maturity date, the borrowings under the Agreement, totaling $5 million at June 30, 2002, have been classified in the Company's balance sheet as long-term debt. In September 2001, in connection with the amendment of its 1998 agreement with Zambon Group SpA ("Zambon"), the Company entered into a Loan and Security Agreement ("Loan Agreement") with Zambon, pursuant to which Zambon agreed to lend the Company $2.5 million. The Company received $1.0 million upon signing of the Loan Agreement, $1.0 million on January 2, 2002 and $.5 million on April 5, 2002. The Loan Agreement provides for interest on principal and annually compounded interest at a fixed rate of 2% per annum and is secured by certain security interests in respiratory products developed in the Premaire. One third of the principal balance, together with interest, is payable by the Company upon the Company's execution of an agreement with one or more third parties to develop, co-promote and/or sell certain products in North America, with all remaining unpaid principal and interest due on December 31, 2005. The outstanding principal balance of the Loan Agreement at June 30, 2002, and December 31, 2001, was $2.5 million and $1.0 million, respectively. 4. RECLASSIFICATIONS Certain amounts in the prior year financial statements and notes have been reclassified to conform to the current year presentation. 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are intended to be covered by the safe harbors created thereby. All forward-looking statements involve risks and uncertainty. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore, there can be no assurance that the forward-looking statements included in this report will prove to be accurate. The Company's actual results may differ materially from the results anticipated in the forward-looking statements. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Important Factors that May Affect Future Results" included herein for a discussion of factors that could contribute to such material differences. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the objectives and plans of the Company will be achieved. The Company disclaims any obligation to update or revise the information provided in this report to reflect future events. OVERVIEW We provide innovative, cost-effective pharmaceutical therapies by combining state-of-the-art pulmonary drug delivery technologies with existing and emerging therapeutic agents. We are developing a range of products to treat respiratory and systemic diseases in our proprietary Premaire(R) Delivery System ("Premaire") and Tempo(TM) Inhaler ("Tempo"). We are in the development stage and, as such, have been principally engaged in the development of our pulmonary delivery systems. In 1997, we acquired the Premaire, a portable nebulizer-based pulmonary delivery system, through a worldwide exclusive license and supply arrangement with Siemens AG ("Siemens"). During the second half of 1998, we acquired the rights to an additional pulmonary delivery technology, Tempo, from a subsidiary of Aeroquip-Vickers, Inc. ("Aeroquip-Vickers"). The Tempo technology is a new generation propellant-based pulmonary delivery system. Additionally, during 1998, we licensed from Elan Corporation, plc ("Elan") the Ultrasonic Pulmonary Drug Absorption System ("UPDAS"), a novel disposable unit dose nebulizer system, and Elan's Absorption Enhancing Technology ("Enhancing Technology"), a therapeutic agent to increase the systemic absorption of drugs. In October 1999, we licensed Elan's Nanocrystal(TM) technology to be used in developing certain inhaled steroid products. Our lead drug delivery technology, the Premaire, is a patented, multi-dose nebulizer delivery system. The pocket-sized inhaled drug delivery system features an ultrasonic nebulizer that emits high-frequency sound waves that turn liquid medication into a fine cloud or soft mist. The Premaire combines the therapeutic benefits of nebulization with the convenience of pressurized metered dose inhalers, or pMDIs, in one patient-friendly device. The Premaire is comprised of a hand-held ultrasonic nebulizer and drug-filled cartridges that are inserted into the inhaler unit. The cartridges provide patients who must take multiple respiratory medications with a single, easy-to-use system. We believe the soft mist created by the Premaire provides multiple drug administration advantages over the high-velocity pMDIs and dry powder inhalers. Furthermore, the Premaire system is fast and portable as compared to conventional tabletop nebulizers, which are large, cumbersome and more time consuming to use. The Premaire system targets younger and older asthma patients, as well as older chronic obstructive pulmonary disease patients who have difficulty using pMDIs and currently depend on tabletop nebulizers for delivery of their medications. Our Tempo is a patented, new generation pMDI that we believe has significant efficiency and performance advantages over standard pMDIs. The Tempo technology utilizes a standard aerosol pMDI canister, encased in a compact device that provides an aerosol flow-control chamber and a synchronized triggering mechanism. The aerosol flow-control chamber allows the patient to inhale through the device at a normal breathing rate, instead of a forced breath. The inspiratory breath establishes flow fields within the device that mix and uniformly disperse the drug in the breath. At the mouthpiece, nearly all the propellant is evaporated leaving only drug particles to be inspired, allowing a significant increase in the amount of drug delivered to the lungs. The Tempo system, like the Premaire system, is designed to reduce patient coordination problems and enhance compliance with the prescribed treatment. In June 1998, we sublicensed to Zambon Group SpA ("Zambon") worldwide marketing and development rights to respiratory products to be delivered by the Premaire in return for an equity investment in the Company (approximately 10%). From June 1998 to September 2001, Zambon funded the development costs for the respiratory compounds delivered by Premaire. In September 2001, we amended our 1998 agreement with Zambon whereby we regained the rights to the Premaire previously granted to Zambon. As part of the amended agreement, Zambon provided a low-interest, $2.5 million loan to us to progress the development 9 of the Premaire respiratory program. Upon commercialization, Zambon will be entitled to certain royalties on payments received by us for albuterol, ipratropium and cromolyn sales for specified periods. As part of a strategic alliance with Elan, we are developing therapies for non-respiratory diseases to be delivered to the lungs using both Tempo and Premaire. In 1998, the systemic applications of Premaire and Tempo were licensed to Systemic Pulmonary Delivery, Ltd. ("SPD"), one of our wholly owned subsidiaries. In addition, two Elan technologies, UPDAS(TM) and the Enhancing Technology, were also licensed to SPD. We retained exclusive rights outside of the strategic alliance to respiratory disease applications utilizing the Tempo technology and the two Elan technologies. In addition to the above alliance with Elan, in 1999, we and Elan formed a joint venture, Respiratory Steroid Delivery, Ltd. ("RSD"), to develop certain inhaled steroid products to treat respiratory diseases using Elan's NanoCrystal technology. Currently, RSD is developing a solution-based unit-dose-packaged steroid formulation for delivery using a conventional tabletop nebulizer, and a solution-based steroid formulation for delivery using the Premaire. RESULTS OF OPERATIONS Revenue Contract research revenues primarily represent revenues earned from a collaborative research agreement with Zambon relating to the development of respiratory applications of Premaire. Contract research revenues for the second quarter of 2002 and 2001 were $5,000 and $688,348, respectively. For the first six months of 2002 and 2001, contract research revenues were $5,000 and $869,095, respectively. The decrease for both the second quarter and first half of 2002 was due to no longer performing development work for Zambon as a result of our regaining the Premaire respiratory rights in the third quarter of 2001. Costs of contract research revenue approximated such revenues in 2001 and were included in research and development expenses. Future contract research revenues and expenses are anticipated to fluctuate depending, on part, in obtaining additional collaborative agreements and upon the success of current clinical studies. Our ability to generate material revenues is contingent on the successful commercialization of our technologies and other technologies and products that we may acquire, followed by the successful marketing and commercialization of such technologies through licenses, joint ventures and other arrangements. Research and Development Research and development ("R&D") expenses were $1.6 million and $1.9 million for the second quarter of 2002 and 2001, respectively. The decrease of $.3 million for the second quarter of 2002 was primarily due to lower design and development costs associated with finalizing the to-be-marketed Premaire device in December 2001 ($.4 million), higher development expenses in the second quarter of 2001 related to the anticipation of a Phase I trial of RSD's unit dose product ($.3 million), lower Tempo development costs resulting from finalizing the industrialization of the device in the first half of 2002 for Phase I and II trials and reduced formulation work on certain respiratory products ($.3 million), and lower new product development in the area of polypeptides ($.1 million). These decreases were partially offset by higher expenses related to formulation work on the Tempo dyhydroergotamine ("DHE") product ($.8 million). For the six months ended June 30, 2002 and 2001, R&D costs were $2.8 million and $3.0 million, respectively. The decrease of $.2 million was primarily due to lower design and development costs associated with finalizing the to-be-marketed Premaire device in December 2001 ($.4 million), lower expenses related to formulation work on certain Tempo respiratory products ($.3 million), lower Tempo development costs resulting from industrialization of the device in the first half of 2002 for Phase I and II trials ($.1 million), higher development expenses in the second quarter of 2001 related to the anticipation of a Phase I trial of RSD's unit dose product ($.1 million), and lower product development work in the area of polypeptides ($.1 million). These decreases were partially offset by higher expenses related to formulation work on the Tempo DHE product ($.8 million) and Premaire steroid product ($.1 million). The following details the status of each of our development programs as of June 30, 2002: Premaire Respiratory Program: As a result of our regaining from Zambon the rights to the respiratory applications to the Premaire in September 2001, the sponsorship of the Premaire respiratory development programs was transferred to us from Zambon with the Food and Drug Administration ("FDA") being notified accordingly. In the fourth quarter of 2001, we reviewed all of the development work completed-to-date, identifying a number of deficiencies in the Zambon development program. To address these issues, we made a number of internal management changes and moved the program to a group of highly experienced pulmonary clinical and regulatory experts. The Premaire device is currently in a to-be-marketed form and 10 fully industrialized. As of June 30, 2002, we had spent $3.6 million on developing the respiratory products discussed below. Our strategy is to out license the U.S. rights to the Premaire respiratory products to a third party which we anticipate concluding in 2003. As a result, we estimate a U.S. commercial launch of our first products in Premaire to occur in the last half of 2005 or first half of 2006. Subject to obtaining additional financing from debt and/or equity placements, we intend to fund the continued development work for the Premaire respiratory products up through the period of outlicensing, currently estimated at approximately $10 million, after which time it is anticipated that the licensee would assume funding responsibility for further development work. Albuterol Sulfate. Zambon initiated a Phase II clinical trial in December 1999 that compared the Premaire-albuterol sulfate to a conventional albuterol-pMDI. Findings from Phase II studies indicated that Premaire-albuterol and pMDI-albuterol were comparable in improving lung function in the 24 adult patients. An end of Phase II meeting was held in February 2002 with the FDA where the results of the development activities-to-date, specifically the results of the Phase II trial, were reviewed. We are currently reviewing the FDA's comments and recommendations, integrating the information into the plans for the Phase III trial and NDA submission. Subject to obtaining additional funding by the end of 2002, we anticipate to begin pivotal clinical trials for the albuterol sulfate program at the beginning of 2003. Budesonide. Preclinical formulation development work is currently underway. A formulation developed by Nanosystems has proven a feasible candidate for delivery in the Premaire. The formulation is dependent on a proprietary nanocrystaline dispersion of budesonide in an aqueous carrier. Two other alternative formulation approaches are also under evaluation. Upon scale-up and production of clinical batches released under CMC protocol, an Investigational New Drug Application ("IND") will be prepared for filing with the FDA, which is currently planned for the first half of 2003. Ipratropium Bromide. Zambon initiated a Phase I/II clinical trial in Europe in January 2000 assessing the safety and efficacy compared to a commercially available ipratropium bromide product delivered by a pMDI and placebo in patients with chronic obstructive pulmonary disease ("COPD"). The results of the study indicated that both Premaire-ipratropium bromide and pMDI-ipratropium were tolerated and improved lung function in the COPD patients. An IND was filed by Zambon with the FDA in May 2000. During 2001, the IND was transferred to the us. We do not intend to further develop this product on our own as the program has progressed to the point where a potential licensing partner would be in a position to take the product into clinical studies. Sodium Cromoglycate. An IND was filed by Zambon with the FDA in July 2000. No further development work is anticipated to be completed on this product as the projected market opportunity for sodium cromoglycate is currently deemed too small to justify further progression. Premaire Systemic Program: Through our development alliance with Elan and SPD, we evaluated certain drugs for systemic treatment by pulmonary delivery through Premaire. By identifying a market opportunity for a rapid-acting, non-invasive treatment for breakthrough pain, the first drug to be tested for delivery in Premaire was morphine. In July 1999, we completed a gamma scintigraphy/pharmacokinetic trial comparing morphine delivered using the Premaire to subcutaneous injection. The Premaire demonstrated good pulmonary deposition and very rapid absorption, more rapid peak blood levels vs. subcutaneous injection and low oral and throat deposition. As part of the development alliance with Elan, Elan has the first right of refusal on the development of any product developed by the joint venture. Elan has chosen not to license this product from the joint venture. As such, the joint venture continues to seek to attract a partner for the continued development and commercialization of this product. We have spent $.4 million to date to develop this product and do not anticipate incurring any future costs for further development until such time as a licensing partner is secured. Tempo Respiratory Program: In September 2000, we completed a pilot study using the Tempo to deliver an undisclosed, patented respiratory drug used to treat asthma. The study measured the distribution of this respiratory drug delivered by Tempo compared to the distribution of this same drug delivered through a commercially available pMDI in 12 healthy volunteers. Results of this study demonstrated that Tempo significantly increased drug deposition in all regions of the lung. Tempo delivered approximately 200% more drug to the lungs, deposited approximately 75% less drug in the mouth, and increased dosing consistency by approximately 55% compared to the currently marketed form of this same drug. As of June 30, 11 2002, we had incurred approximately $.9 million to-date on this study. We are using the results of this study as a basis for conducting discussions for feasibility work and/or clinical studies with potential collaboration partners. Tempo Systemic Program: The development of systemic drugs using Tempo is being conducted as part of our alliance with Elan. The initial product developed was targeted to address migraine headaches. We utilized ergotamine tartrate as a proof-of-principle product. In December 1999, we completed a gamma scintigraphy/pharmacokinetic trial comparing the Tempo to a conventional pMDI. The trial showed successful delivery of the drug to all regions of lung with significantly reduced mouth and throat deposition, and rapid drug absorption. As part of the development alliance with Elan, Elan has the first right of refusal on the development of any product developed by the joint venture. Elan has chosen not to license this product from the joint venture. As such, the joint venture continues to seek to attract a partner for the continued development and commercialization of this product. As of June 30, 2002, we had spent $1.0 million to date to develop this product and do not anticipate incurring any future costs for further development until such time as a licensing partner is secured. As a result of the work performed on the ergotamine product noted above, in April 2002, we announced the initiation of a pulmonary migraine therapy program with Inhale Therapeutic Systems ("Inhale"), a world-renowned expert in particle design. We will combine Inhale's supercritical fluid technology with our proprietary drug delivery technologies to develop a systemically acting DHE administered through the pulmonary route. We plan to study DHE in sub-categories of migraine where DHE administered by injection is often used to relieve migraine symptoms. These sub-categories are the more serious forms of migraine and often require either hospitalization or treatment in pain or headache clinics. Under the terms of the agreement, Inhale will supply the particle engineering technology and receive R&D funding, milestone payments, and royalties upon commercialization. We are responsible for all other aspects of clinical development and marketing of the product. As part of this agreement, Inhale will produce DHE particles using Good Manufacturing Practices ("GMP") for clinical development and commercial sale. The treatment of migraine represents a worldwide prescription market estimated at approximately $2.4 billion. As of June 30, 2002, we had incurred-to-date approximately $1.0 million related to this project. Future costs related to this project are dependent upon, among other factors, the timing of securing a development partner. Subject to obtaining additional financing from debt and/or equity placements, we estimate incurring approximately $2.0 million in 2002 related to the development of the DHE project. Unit Dose Nebulizer Program: As part of an alliance with Elan, RSD is developing a product for inhalation delivery in a standard commercial tabletop device using the steroid budesonide, formulated using the NanoCrystal technology. A Phase I, double-blind safety and pharmacokinetic study of nebulized nanobudesonide in 16 healthy volunteers was satisfactorily completed at Thomas Jefferson University Hospital in February 2002. This study compared single doses of Pulmicort Respules ("Pulmicort"), our proprietary nanobudesonide in two different single dose strengths and placebo. The study resulted in no significant adverse events with either of our dosage strengths or the Pulmicort reference drug. Data from the study is currently undergoing final data and statistical analysis. After such data has been analyzed, we plan on initiating discussions with potential partners regarding the outlicensing of this opportunity. As of June 30, 2002, we incurred-to-date approximately $2.8 million on this project. We intend to fund the continued development work for this program up through the period of outlicensing, currently estimated at approximately $.7 million, after which time it is anticipated that the licensee would assume funding responsibility for further development work. Our additional funding of this program will be through the sale of our remaining $1.0 million of Series E Preferred Stock committed to be purchased by Elan. General and Administrative General and administrative expenses were $1.4 million for the second quarter of 2002 as compared to $1.1 million for the second quarter of 2001. The increase of $.3 million from 2001 was primarily due to higher severance-related costs and ongoing benefit coverage associated with the resignation of the Chief Executive Officer effective April 30, 2002. For the six months ended June 30, 2002 and 2001, general and administrative expenses were $3.4 million and $1.9 million, respectively. The increase of $1.5 million from 2001 was primarily due to higher consulting costs, legal fees and severance-related costs. The higher consulting costs and legal fees were associated with expanded business development, and merger and acquisition activities in the area of licensing and partnering of our delivery systems, as well as potential acquisitions of complementary pulmonary delivery technologies and companies ($.7 million). The severance costs were associated with the resignation of 12 three executive officers in 2002 and include costs incurred pursuant to their respective separation agreements for severance payments and ongoing benefit coverage ($.6 million) and modification of the terms of certain stock options ($.2 million). Interest Interest income was $4,356 and $22,382 for the second quarter of 2002 and 2001, respectively, and $7,018 and $50,765 for the first six months of 2002 and 2001, respectively. The decrease in interest income for both the second quarter and first six months of 2002 was primarily due to less cash available for investment and lower yields on those investments. Interest expense was $180,926 and $51,398 for the second quarter of 2002 and 2001, respectively, and $330,757 and $109,247 for the first half of 2002 and 2001, respectively. The increase for both the second quarter and first six months of 2002 resulted primarily from interest associated with the borrowings on the August 2001 Note Purchase Agreement with Elan Pharma. The borrowings totaled $4 million as of January 1, 2002 and $5 million as of April 5, 2002; no borrowings were outstanding for the first half of 2001. LIQUIDITY AND CAPITAL RESOURCES At both June 30, 2002 and December 31, 2001, we had $.9 million in cash and cash equivalents. The comparable cash balances between periods reflect the receipt of $1.0 million from the issuance of 1,000 shares of our Series E Cumulative Convertible Preferred Stock, $1.5 million from the proceeds of a secured loan from Zambon, $1.0 million from the proceeds of an unsecured promissory note from Elan Pharma, and $1.0 million in proceeds from the exercise of a portion of a common stock warrant by Elan International Services, Ltd., offset by cash disbursements of $4.5 million used primarily to fund operating activities. Cash available for funding our operations as of June 30, 2002 was $.9 million. As of such date, we had trade payables and accrued liabilities of $2.6 million, and current research obligations of $.2 million. In addition, committed and/or anticipated funding of research and development after June 30, 2002 is estimated at approximately $.3 million, of which $.1 million has been committed to be funded by Elan through the issuance of our Series E cumulative convertible preferred stock, which funds are required to be used by the Company to fund its portion of RSD's operating and development costs. As of August 12, 2002, we had cash and equivalents of approximately $.5 million, of which $.2 million is committed to fund our portion of RSD's expenditures. In addition, through the sale of our Series E Preferred Stock, we have available $1.0 million to fund our portion of future RSD expenditures. As of such date, we had trade payable and accrued liabilities of approximately 2.8 million. In an effort to trim our short-term costs, we recently decreased our total headcount by 27% by reducing our administrative headcount. In addition, we have reduced all R&D expenditures not specifically related to the Tempo DHE, unit dose nebulizer, Premaire and certain Tempo respiratory programs. We may consider future cost reductions by curtailing these development programs, as well as other administrative and R&D headcount reductions. Because we do not expect to generate significant cash flows from operations for at least the next few years, we will require additional funds to meet our current obligations and future costs. In an effort to meet both our short- and long-term capital requirements, we are currently evaluating various financing alternatives including private offerings of our securities, debt financings, and collaboration and licensing arrangements with other companies. There can be no assurance that we will be able to obtain such additional funds or enter into such collaborative and licensing arrangements on terms favorable to us, if at all. Our development programs may be curtailed if future financings are not completed. On April 5, 2002, Elan International Services, Ltd. exercised a portion of a warrant that it had received in June 1998 as part of a strategic alliance with us and purchased 495,000 shares of our common stock at $2.00 per share. We received approximately $1.0 million in proceeds as a result of the exercise of a portion of this warrant. On August 14, 2001, we entered into a Note Purchase Agreement ("Agreement") with Elan Pharma, pursuant to which Elan Pharma agreed to lend us up to $4 million. On April 4, 2002, we amended the Agreement. Under the terms of the amended Agreement, Elan Pharma agreed to increase the principal amount of the loan available from $4 million to $5 million and extend the maturity date from November 14, 2002 to April 4, 2004. On April 5, 2002, we received proceeds on the loan of $1 million, increasing the total borrowings to $5 million. All borrowings under the Agreement are evidenced by our $5 million unsecured promissory note that provides for interest on principal and semi-annually compounded interest at a fixed rate of 10% per annum. Due to the modification of the maturity date, the borrowings under the Agreement, totaling $5 million at June 30, 2002, have been classified in our balance sheet as long-term debt. In September 2001, in connection with the amendment of our 1998 agreement with Zambon, we entered into a Loan and Security Agreement ("Loan Agreement") with Zambon, pursuant to which Zambon agreed to lend us $2.5 million. We received $1.0 13 million upon signing of the Loan Agreement, $1.0 million on January 2, 2002 and $.5 million on April 5, 2002. The Loan Agreement provides for interest on principal and annually compounded interest at a fixed rate of 2% per annum and is secured by certain security interests in respiratory products developed in the Premaire. One third of the principal balance, together with interest, is payable by us upon our execution of an agreement with one or more third parties to develop, co-promote and/or sell certain products in North America, with all remaining unpaid principal and interest due on December 31, 2005. On October 17, 2001, as part of the amendment of its 1998 agreement with Zambon, we repurchased from Zambon, 214,997 shares of common stock for $3.0233 per share ("Repurchase Price"). In addition, we received an option, expiring December 31, 2002, to repurchase the remaining shares of our common stock held by Zambon at the Repurchase Price. In the event we complete a sublicense for the North American rights or a sublicense for the non-North American rights to certain Premaire respiratory products prior to December 31, 2002, we will repurchase from Zambon 882,051 shares of our common stock on each of the events. In October 1999, as part of a licensing agreement with Elan, we received gross proceeds of $17,015,000 related to the issuance to Elan of 12,015 shares of Series D Cumulative Convertible Exchangeable Preferred Stock and 5,000 shares of Series F Convertible Non-Exchangeable Preferred Stock. In turn, we made an equity investment of $12,015,000 in a joint venture, RSD, representing an initial 80.1% ownership. The remaining proceeds from this preferred stock issuance will be utilized for general operating purposes. As part of the agreement, Elan also committed to purchase, on a drawdown basis, up to an additional $4.0 million of our Series E Preferred Stock, of which $1.0 million of such commitment remains outstanding. The proceeds from the Series E Preferred Stock will be utilized by us to fund our portion of RSD's operating and development costs. In May 1999, in conjunction with the completion of its Phase I/II Premaire-albuterol trial, Zambon provided us with a $1.0 million interest-free advance against future milestone payments. In January 2001, we received an additional $1.0 million interest-free milestone advance resulting from the demonstration of the technical feasibility of delivering an inhaled steroid formulation in Premaire. The proceeds from these advances are not restricted as to their use by us. As part of the amendment of its 1998 agreement with Zambon, the terms of the milestone advances were modified in that we shall repay $1.0 million of the advance milestone payments upon the earlier of December 31, 2003, or upon the first regulatory approval for either albuterol or an inhaled steroid delivered in the Premaire. The remaining $1.0 million advance shall be repaid by us on the earlier of December 31, 2005, or the regulatory approval of the second product (albuterol or an inhaled steroid) delivered in the Premaire. Due to the modification in the repayment terms, the advances have been reclassified in our balance sheet as long-term debt. CERTAIN RISK FACTOR THAT MAY AFFECT FUTURE RESULTS, FINANCIAL CONDITION AND MARKET PRICE OF SECURITIES The following are some of the factors that could affect the Company's future results. They should be considered in connection with evaluating forward-looking statements contained in this report and otherwise made by us or on our behalf, because these factors could cause actual results and conditions to differ materially from those projected in forward-looking statements. We have experienced significant operating losses throughout our history and expect these losses to continue for the foreseeable future. Our operations to date have consumed substantial amounts of cash and we have generated to date only limited revenues from contract research and licensing activities. We have incurred approximately $96.6 million of operating losses since our inception, including $6.1 million during the six months ended June 30, 2002. Our operating losses and negative cash flow from operations are expected to continue in the foreseeable future. The Company expects that it will continue to have a high level of operating expenses, negative cash flow from operations and will be required to make significant up-front expenditures in connection with its product development activities. As a result, we anticipate additional operating losses for the remainder of 2002 and that such losses will continue thereafter until such time, if ever, as we are able to generate sufficient revenues to sustain our operations. The independent auditors' report dated February 12, 2002, on our consolidated financial statements for the year ended December 31, 2001 stated that we have incurred recurring operating losses and have a working capital deficiency and that these conditions raise substantial doubt about our ability to continue as a going concern. We will need additional financing, which if not available, could prevent us from funding or expanding our operations. We need to raise substantial additional capital to fund our operations. The development of our technologies and proposed products will require a commitment of substantial funds to conduct costly and time-consuming research, preclinical and clinical testing, and to bring any such products to market. Our future capital requirements will depend on many factors, including continued progress in developing and out-licensing our pulmonary delivery technologies, our ability to establish and maintain collaborative arrangements with others and to comply with the terms thereof, receipt of payments due from partners under research and development agreements, progress with preclinical and clinical trials, the time and costs involved in obtaining 14 regulatory approvals, the cost involved in preparing, filing, prosecuting, maintaining and enforcing patent claims, the need to acquire licenses to new technology and the status of competitive products. We are currently seeking such additional funding through collaborative or partnering arrangements, the extension of existing arrangements, or through public or private equity or debt financings. Additional financing may not be available on acceptable terms or at all. If we raise additional funds by issuing equity securities, stockholders may be further diluted and such equity securities might have rights, preferences and privileges senior to those of our current stockholders. If adequate funds are not available, we may be required to delay, reduce the scope of, or eliminate one or more of our research or development programs or obtain funds through arrangements with collaborative partners or others that may require us to relinquish rights to certain of our technologies, product candidates or products that we would otherwise seek to develop or commercialize. If adequate funds are not available from operations or additional sources of funding, our business will suffer a material adverse effect. If our common stock is delisted from the American Stock Exchange, the price of our common stock and its liquidity could decline. Our common stock is listed for trading on the American Stock Exchange, or AMEX, under the symbol "SHM". We do not satisfy AMEX standards for continued listing, including a standard that a listed company that has sustained losses from continuing operations and/or net losses in its five most recent fiscal years, have stockholders' equity of at least $6,000,000. We had a net capital deficiency of $13.1 million at June 30, 2002. We have been requested by the AMEX to submit a plan advising the AMEX of the action we will take that will bring us into compliance with continued listing standards. If this plan is accepted by the AMEX, we will be able to continue our listing pursuant to an extension, and subject to periodic reviews to determine whether we are progressing consistent with the plan. There can be no assurance that the plan will be accepted by the AMEX, or that we will be able to meet the objectives outlined in the plan, both of which may result in the AMEX initiating delisting procedures. If our common stock were delisted from AMEX, trading of our common stock, if any, would thereafter likely be conducted in the over-the-counter market, unless we were able to list our common stock on The Nasdaq Stock Market or another national securities exchange, which cannot be assured. If our common stock were to trade in the over-the-counter market it may be more difficult for investors to dispose of, or to obtain accurate quotations as to the market value of our common stock. In addition, it may become more difficult for us to raise funds through the sale of our securities. In the event of the delisting of our common stock from the AMEX and our inability to list our common stock on The Nasdaq Stock Market or another national securities exchange, the regulations of the SEC under the Securities Exchange Act of 1934, as amended, require additional disclosure relating to the market for penny stocks. SEC regulations generally define a penny stock to be an equity security that has a market price of less than $5.00 per share, subject to certain exceptions. A disclosure schedule explaining the penny stock market and the risks associated therewith is required to be delivered to a purchaser and various sales practice requirements are imposed on broker-dealers who sell penny stocks to persons other than established customers and accredited investors (generally institutions). In addition, the broker-dealer must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer's account. If our securities become subject to the regulations applicable to penny stocks, the market liquidity for our securities could be severely affected. In such an event, the regulations on penny stocks could limit the ability of broker-dealers to sell our securities. Our products are still in development and we may be unable to bring our products to market. We have not yet begun to generate revenues from the sale of products. Our products will require significant additional development, clinical testing and investment prior to their commercialization. We do not expect regulatory approval for commercial sales of any of our products in the immediate future. Potential products that appear to be promising at early stages of development may not reach the market for a number of reasons. Such reasons include the possibility that products will not be proven to be safe and efficacious in clinical trials, that they will not be able to meet applicable regulatory standards or obtain required regulatory approvals, that they cannot be produced in commercial quantities at reasonable costs or that they fail to be successfully commercialized or fail to achieve market acceptance. If our products are not accepted by the medical community, our business will suffer. Commercial sales of our products will substantially depend upon the products' efficacy and on their acceptance by the medical community. Widespread acceptance of our products will require educating the medical community as to the benefits and reliability of the products. Our products may not be accepted and, even if accepted, we are unable to estimate the length of time it would take to gain such acceptance. 15 We will be required to make royalty payments on products we may develop, reducing the amount of revenues with which we could fund ongoing operations. The owners and licensors of the technology rights acquired by us are entitled to receive a certain percentage of all revenues received by us from commercialization, if any, of products in respect of which we hold licenses. Accordingly, in addition to our substantial investment in product development, we will be required to make substantial payments to others in connection with revenues derived from commercialization of products, if any, developed under licenses we hold. Consequently, we will not receive the full amount of any revenues that may be derived from commercialization of products to fund ongoing operations. Our dependence on third parties for rights to technology and the development of our products could harm our business. Under the terms of existing license agreements, we are obligated to make certain payments to our licensors. In the event that we default on the payment of an installment under the terms of an existing licensing agreement, our rights there under could be forfeited. As a consequence, we could lose all rights under a license agreement to the related licensed technology, notwithstanding the total investment made through the date of the default. Unforeseen obligations or contingencies may deplete our financial resources and, accordingly, sufficient resources may not be available to fulfill our commitments. If we were to lose our rights to technology, we may be unable to replace the licensed technology or be unable to do so on commercially reasonable terms, which would materially adversely affect our ability to bring products based on that technology to market. In addition, we depend on our licensors for assistance in developing products from licensed technology. If these licensors fail to perform or their performance is not satisfactory, our ability to successfully bring products to market may be delayed or impeded. We face intense competition and rapid technological changes and our failure to successfully compete or adapt to changing technology could make it difficult to successfully bring products to market. The medical field is subject to rapid technological change and innovation. Pharmaceutical and biomedical research and product development are rapidly evolving fields in which developments are expected to continue at a rapid pace. Reports of progress and potential breakthroughs are occurring with increasing frequency. Our success will depend upon our ability to develop and maintain a competitive position in the research, development and commercialization of products and technologies in our areas of focus. Competition from pharmaceutical, chemical, biomedical and medical companies, universities, research and other institutions is intense and is expected to increase. All, or substantially all, of these competitors have substantially greater research and development capabilities, experience, and manufacturing, marketing, financial and managerial resources. Further, acquisitions of competing companies by large pharmaceutical or other companies could enhance such competitors' financial, marketing and other capabilities. Developments by others may render our products or technologies obsolete or not commercially viable and we may not be able to keep pace with technological developments. We are subject to significant government regulation and failure to achieve regulatory approval for our products would severely harm our business. Our ongoing research and development projects are subject to rigorous FDA approval procedures. The preclinical and clinical testing requirements to demonstrate safety and efficacy in each clinical indication (the specific condition intended to be treated) and regulatory approval processes of the FDA can take a number of years and will require us to expend substantial resources. We may be unable to obtain FDA approval for our products, and even if we do obtain approval, delays in such approval would adversely affect the marketing of products to which we have rights and our ability to receive product revenues or royalties. Moreover, even if FDA approval is obtained, a marketed product, its manufacturer and its manufacturing facilities are subject to continual review and periodic inspections by the FDA, and a later discovery of previously unknown problems with a product, manufacturer or facility may result in restrictions on such product or manufacturer. Failure to comply with the applicable regulatory requirements can, among other things, result in fines, suspensions of regulatory approvals, product recalls, operating restrictions and criminal prosecution. Additional government regulation may be established which could prevent or delay regulatory approval of our products. Sales of pharmaceutical products outside the United States are subject to foreign regulatory requirements that vary widely from country to country. Even if FDA approval has been obtained, approval of a product by comparable regulatory authorities of foreign countries must be obtained prior to the commencement of marketing the product in those countries. The time required to obtain such approval may be longer or shorter than that required for FDA approval. We have no experience in manufacturing or marketing in foreign countries nor in matters such as currency regulations, import-export controls or other trade laws. To date, we have not received final regulatory approval from the FDA or any other comparable foreign regulatory authority for any of our products or technologies. Our failure to meet product release schedules would make it difficult to predict our quarterly results and may cause our operating results to vary significantly. 16 Delays in the planned release of our products may adversely affect forecasted revenues and create operational inefficiencies resulting from staffing levels designed to support the forecasted revenues. Our failure to introduce new products on a timely basis could delay or hinder market acceptance and allow competitors to gain greater market share. If our intellectual property and proprietary rights are infringed, or infringe upon the rights of others, our business will suffer. Our success will depend in part on our ability to obtain patent protection for our technologies, products and processes and to maintain trade secret protection and operate without infringing the proprietary rights of others. The degree of patent protection to be afforded to pharmaceutical, biomedical or medical inventions is an uncertain area of the law. In addition, the laws of foreign countries do not protect our proprietary rights to the same extent as do the laws of the United States. We may not develop or receive sublicenses or other rights related to proprietary technology that are patentable, patents that are pending may be not issued, and any issued patents may not provide us with any competitive advantages and may be challenged by third parties. Furthermore, others may independently duplicate or develop similar products or technologies to those developed by or licensed to us. If we are required to defend against charges of patent infringement or to protect our own proprietary rights against third parties, substantial costs will be incurred and we could lose rights to certain products and technologies or be required to enter into costly royalty or licensing agreements. We do not have any marketing or manufacturing capabilities and will likely rely on third parties for these capabilities in order to bring products to market. We do not currently have our own sales force or an agreement with another pharmaceutical company to market all of our products that are in development. When appropriate, we may build or otherwise acquire the necessary marketing capabilities to promote our products. However, we may not have the resources available to build or otherwise acquire our own marketing capabilities, and we may be unable to reach agreements with other pharmaceutical companies to market our products on terms acceptable to us, if at all. In addition, we do not intend to manufacture our own products. While we have already entered into two manufacturing and supply agreements related to the Premaire system and one related to the Tempo, these manufacturing and supply agreements may not be adequate and we may not be able to enter into future manufacturing and supply agreements on acceptable terms, if at all. Our reliance on independent manufacturers involves a number of risks, including the absence of adequate capacity, the unavailability of, or interruptions in, access to necessary manufacturing processes and reduced control over product quality and delivery schedules. If our manufacturers are unable or unwilling to continue manufacturing our products in required volumes, we will have to identify acceptable alternative manufacturers. The use of a new manufacturer may cause significant interruptions in supply if the new manufacturer has difficulty manufacturing products to our specifications. Further, the introduction of a new manufacturer may increase the variation in the quality of our products. Healthcare reimbursement policies are uncertain and may adversely impact the sale of our products. Our ability to commercialize human therapeutic and diagnostic products may depend in part on the extent to which costs for such products and technologies are reimbursed by private health insurance or government health programs. The uncertainty regarding reimbursement may be especially significant in the case of newly approved products. Reimbursement price levels may be insufficient to provide a return to us on our investment in new products and technologies. In the United States, government and other third-party payers have sought to contain healthcare costs by limiting both coverage and the level of reimbursement for new pharmaceutical products approved for marketing by the FDA, including some cases of refusal to cover such approved products. Healthcare reform may increase these cost containment efforts. We believe that managed care organizations may seek to restrict the use of new products, delay authorization to use new products or limit coverage and the level of reimbursement for new products. Internationally, where national healthcare systems are prevalent, little if any funding may be available for new products, and cost containment and cost reduction efforts can be more pronounced than in the United States. We may become subject to product liability claims and our product liability insurance may be inadequate. The use of our proposed products and processes during testing, and after approval, may entail inherent risks of adverse effects that could expose us to product liability claims and associated adverse publicity. Although we currently maintain general liability insurance, the coverage limits of our insurance policies may not be adequate. We currently maintain clinical trial product liability insurance of $2.0 million per event for certain clinical trials and intend to obtain insurance for future clinical trials of products under development. However, we may be unable to obtain or maintain insurance for any future clinical trials. Such insurance is expensive, difficult to obtain and may not be available in the future on acceptable terms, or at all. A 17 successful claim brought against us in excess of our insurance coverage would have a material adverse effect upon us and our financial condition. We intend to require our licensees to obtain adequate product liability insurance. However, licensees may be unable to maintain or obtain adequate product liability insurance on acceptable terms and such insurance may not provide adequate coverage against all potential claims. The price of biotechnology/pharmaceutical company stocks has been volatile which could result in substantial losses to our stockholders. The market price of securities of companies in the biotechnology/pharmaceutical industries has tended to be volatile. Announcements of technological innovations by us or our competitors, developments concerning proprietary rights and concerns about safety and other factors may have a material effect on our business or financial condition. The market price of our common stock may be significantly affected by announcements of developments in the medical field generally or our research areas specifically. The stock market has experienced volatility in market prices of companies similar to us that has been unrelated to the operating results of such companies. This volatility may have a material adverse effect on the market price of our common stock. Our ability to issue "blank check" preferred stock may make it more difficult for a change in our control. Our certificate of incorporation authorizes the issuance of "blank check" preferred stock with such designations, rights and preferences as may be determined from time to time by the Board of Directors, without shareholder approval. In the event of issuance, such preferred stock could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in our control and preventing shareholders from receiving a premium for their shares in connection with a change of control. We issued Series A and Series B cumulative convertible redeemable preferred stock in connection with private placements in February 1997 and April 1998, respectively. All of the Series A preferred stock was converted into common stock during 1998. On July 31, 1998, all of the Series B Preferred stock was redeemed for cash. We also issued shares of our Series C cumulative convertible preferred stock in connection with the consummation of an agreement with Elan International Services, Ltd. ("Elan International") in June 1998. In October 1999, in conjunction with a licensing agreement with Elan International, we issued shares of our Series D cumulative convertible exchangeable preferred stock and Series F cumulative convertible preferred stock. In addition, we also have a commitment from Elan International to purchase shares of Series E cumulative convertible non-exchangeable preferred stock at our option (subject to satisfaction of certain conditions). Except for the previously-mentioned purchase commitment for Series E preferred stock, and additional shares of Series C, D and E preferred stock that may be payable as dividends to Elan International, as holder of the outstanding Series C, D and E preferred stock, we have no present intention to issue any additional shares of our preferred stock. As we are currently investigating raising additional equity financing, we may issue additional shares of our preferred stock in the near future. We have granted anti-dilutions rights to The Tail Wind Fund Ltd. which may require us to issue additional shares to Tail Wind, make cash payments to Tail Wind and may hinder our ability to raise additional funds. Pursuant to our December 2000 private placement with The Tail Wind Fund Ltd., until at least August 29, 2002, if we sell shares of our common stock or securities convertible into or exercisable for common stock for less than $3.5888 per share, we are obligated to issue to Tail Wind additional shares so that the number of shares purchased by Tail Wind in the December 2000 private placement plus the additional shares issued to Tail Wind equals the number of shares that Tail Wind could have purchased for $2,250,000 at the price per share at which the new shares are sold. The presence of these anti-dilution rights may negatively affect our ability to obtain additional financing. In addition, in the event that we are required to issue additional shares to Tail Wind, we may not issue an aggregate of over 5,630,122 shares of our common stock in total to Tail Wind in connection with the December 2000 private placement. If we would otherwise be required to issue more than 5,630,122 shares to Tail Wind, we must instead pay Tail Wind 105% of the cash value of such shares we do not issue. We are obligated to issue additional securities in the future diluting our stockholders. As of June 30, 2002, we had reserved approximately 5,433,206 shares of our common stock for issuance upon exercise of outstanding options and warrants convertible into shares of our common stock, including by our officers and directors. In addition, as of June 30, 2002, we had $2,000,000 principal amount of a convertible promissory note, 15,229 shares of our Series C preferred stock, 14,287 shares of our Series D preferred stock, 3,231 shares of our Series E preferred stock and 5,000 shares of our Series F preferred stock outstanding. Our Series C, D, E and F preferred stock are convertible into 10,800,709 shares, 2,939,712 shares, 830,591 shares and 1,470,588 shares, respectively, of common stock. The convertible promissory note, including accrued interest is convertible into 1,534,052 shares of common stock. The exercise of options and outstanding warrants, the conversion of such other securities and sales of common stock issuable thereunder could have a significant 18 dilutive effect on the market price of our common stock and could materially impair our ability to raise capital through the future sale of our equity securities. Item 3. Quantitative and Qualitative Disclosure About Market Risk The Company has no material market risk exposure. PART II: OTHER INFORMATION Item 2. Changes in Securities The following unregistered securities were issued by the Company during the quarter ended June 30, 2002:
Date of Description Number Aggregate Sale/Issuance of Securities Issued of Shares Offering Price - ------------- -------------------- --------- -------------- March 2002 Series E Preferred Stock 1,000 $1,000,000
Each share of these securities is generally convertible prior to September 30, 2006 and into the number of shares of common stock determined by multiplying the number of shares by $1,000, and dividing by $3.89. The issuance of these securities is claimed to be exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended, as transactions by an issuer not involving a public offering. There were no underwriting discounts or commissions paid in connection with the issuance of any of these securities. Item 4. Submission of Matters to a Vote of Security Holders An annual Meeting of Stockholders was held on June 12, 2002. All management's nominees for director, as listed in the Proxy Statement for the Annual Meeting, were elected. Listed below are the matters voted on by Stockholders and the number of votes cast at the Annual Meeting. (a) Election of members of the Board of Directors.
Broker Non-Votes Name Voted for Voted Against Votes Withheld and Abstentions ---- --------- ------------- -------------- --------------- John M. Bailey 27,513,177 -- 1,161,922 -- Thomas M. Fitzgerald 27,292,966 -- 1,382,103 -- Digby W. Barrios 27,512,677 -- 1,162,422 -- Todd C. Davis 27,513,677 -- 1,161,422 -- Andrew J. Ferrara 27,510,677 -- 1,164,422 -- Allan M. Fox 27,511,677 -- 1,163,422 --
In accordance with Section 121 of the Amex Company Guide (the "Guide"), the Amex requires that the Audit Committee (the "Committee") be comprised solely of independent directors. Todd C. Davis, an affiliate of the Company as defined by the Guide, serves as a member of the Committee under an exception as provided by the Guide. The Board of Directors has determined that it is in the best interest of the Company and its shareholders for Mr. Davis to serve on the Committee for the following reasons: (1) the remaining four Committee members are independent as defined by the Amex, (2) Mr. Davis's financial experience and expertise are important to matters brought forth to the Audit Committee, (3) Mr. Davis does not control a majority of the votes on the Audit Committee and (4) the Board has required, and Mr. Davis has agreed, to abstain from voting on any issues that may be considered in conflict with his current or past affiliations. (b) Amendment to the Company's 1993 Stock Option Plan to increase the aggregate number of shares of Common Stock reserved for issuance pursuant to the exercise of options granted thereunder from 4,000,000 shares to 5,000,000 shares. Voted For: 23,691,837 Voted Against: 4,919,402 Votes Abstained: 63,860 Broker Non-Votes: --
19 Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits 10.40 Separation Agreement dated as of April 26, 2002 between the Company and Loren G. Peterson. (b) Reports on Form 8-K A current Report on Form 8-K filed with the Securities and Exchange Commission on May 13, 2002 to announce the filing of a press release under Item 5. 20 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SHEFFIELD PHARMACEUTICALS, INC. Dated: August 14, 2002 /s/ Thomas M. Fitzgerald ------------------------ Thomas M. Fitzgerald President & Chief Executive Officer Dated: August 14, 2002 /s/ Scott A. Hoffmann --------------------- Scott A. Hoffmann Vice President & Chief Financial Officer (Principal Financial and Accounting Officer) 21 EX-10.40 3 c71273exv10w40.txt SEPARATION AGREEMENT DATED AS OF APRIL 26, 2002 EXHIBIT 10.40 SHEFFIELD PHARMACEUTICALS, INC. 14528 SOUTH OUTER FORTY ROAD SUITE 205 ST. LOUIS, MISSOURI 83017 April 26, 2002 Mr. Loren G. Peterson 1776 Stifel Lane Drive Town & Country, Missouri 63017 Dear Loren: This letter follows up on the discussions we have had recently concerning the mutually agreeable separation of your employment for reasons other than cause with Sheffield Pharmaceuticals, Inc. (the "Company"). To assist you in your transition, the Company is offering to you certain severance and other benefits in exchange for the general release of claims and other terms set forth below. The specific terms of the Company's proposed agreement (the "Agreement") are as follows: 1. TERMINATION OF EMPLOYMENT. The effective date of your termination shall be April 30, 2002 (the "Termination Date"). The Company will pay you all wages earned and any accrued and unused vacation time in accordance with Company policy through your Termination Date. For the period from the date of this letter through your Termination Date, you will continue to perform your duties and responsibilities in your current position; provided however that the Company may at any time and in its sole discretion request that you vacate the Company's premises and cease performing any duties for the Company. In such event, the Company shall remain obligated to pay to you all wages due to you through your Termination Date. 2. SEVERANCE PAY. The Company will continue to pay your base salary, as in effect on your Termination Date, for a period of eighteen (18) months following your Termination Date (the "Severance Period"), subject to appropriate tax withholdings and authorized deductions, in accordance with the Company's regular payroll practices and regular pay schedule. In the event that there is a change in control of the Company, as such term is defined in Exhibit A-1 to your Employment Agreement, at any time during the Severance Period, you will be paid the remainder of the severance pay in a lump sum at the time of any such change in control. 3. BENEFIT CONTINUATION. (a) Death and Disability Insurance. The Company will continue to pay the full premium cost of Company-sponsored death and/or disability insurance coverage for you in effect as of your Termination Date, if any, for a period of eighteen (18) months following your Termination Date. Your rights and obligations under such insurance plans shall be governed by the specific terms of the plans. In the event you obtain comparable death and/or disability insurance coverage through other employment prior to the expiration of the eighteen (18) month period of continuation coverage described herein, the Company's obligation to continue to provide such coverage shall cease as of the effective date of such comparable coverage. For purposes of this agreement, comparable coverage shall be deemed to include, at a minimum, coverage at the same benefit level at no cost to you. Should you obtain such comparable coverage, you agree to promptly notify the Company's Chief Financial Officer in writing at the Company's headquarters. (b) Health and Dental Insurance. Upon the termination of your employment, you and your dependents may be eligible to continue your health and/or dental insurance coverage under Company-sponsored plans, if any, pursuant to the federal law known as COBRA. In the event you elect COBRA continuation coverage, the Company will pay the full premium cost and any administrative fee for such continuation coverage for a period of eighteen (18) months following your Termination Date. After that time, you will become responsible for the full 1 premium cost and any administrative fee for such continuation coverage. You understand and acknowledge that it is solely your responsibility to elect COBRA continuation coverage if you desire such coverage. Your rights and obligations under such insurance plans shall be governed by the specific terms of the plans and COBRA. Information concerning COBRA rights, coverage and election will be sent to you under separate cover. In the event you and/or your dependent(s) become ineligible for COBRA continuation coverage during the eighteen (18) month period of premium payments described herein, the Company shall reimburse you for the premium cost of health and/or dental insurance coverage at the same monthly rate the Company would have paid for COBRA continuation coverage had you and/or your dependents remained eligible for such coverage. In the event you obtain comparable health and/or dental insurance coverage through other employment prior to the expiration of the eighteen (18) month period of premium payments described herein, the Company's obligation to continue to provide such premium payments shall cease as of the effective date of such comparable coverage. For purposes of this agreement, comparable coverage shall be deemed to include, at a minimum, coverage at the same benefit level at no cost to you. Should you obtain such comparable coverage, you agree to promptly notify the Company's Chief Financial Officer in writing at the Company's headquarters. (c) Other Benefits. Except as specifically set forth in this Agreement, your right to, and participation in, all employee benefit plans of the Company shall terminate as of your Termination Date in accordance with the specific terms of each plan; provided however, and notwithstanding anything to the contrary herein, in no event shall you have any right to any benefits upon a change in control, except with respect to the specific benefits set forth in this Agreement. 4. STOCK OPTIONS; TAX DIFFERENCE PAYMENT. (a) Except as provided in this paragraph 4, your interest in and rights in your Vested Stock Options (as defined and set forth in the summary of your current option holdings, attached hereto as Exhibit A) shall be governed by and be subject to all conditions, terms and restrictions contained in the Company's 1993 Stock Option Plan, as amended from time to time (the "Plan"), and the option letter agreements dated April 25, 1997 (denoted as Exhibits A-1, A-2 and B to your Employment Agreement dated April 25, 1997, a copy of which is attached hereto as Exhibit B (the "Employment Agreement")), the option letter agreement dated August 28, 1998 (a copy of which is attached hereto as Exhibit C) and the option letter agreement dated March 1, 2000 (a copy of which is attached hereto as Exhibit D). Your rights with respect to your Stock Options shall be fixed as of your Termination Date and pursuant to this Agreement. With respect to the option letter agreements dated April 25, 1997 and denoted as Exhibits A-1, A-2 and B to your Employment Agreement, all 400,000 of the options issued thereunder will be vested as of your Termination Date and you shall be entitled to exercise those options on or before April 25, 2007. With respect to the option letter agreement dated August 28, 1998, you shall be entitled to exercise, at your election, some or all of the 155,000 options that are vested as of your Termination Date on or before August 28, 2008. With respect to the option letter agreement dated March 1, 2000, you shall be entitled to exercise the 100,000 options that are vested as of your Termination Date on or before March 1, 2010. You acknowledge and agree that you shall forfeit any right to those 50,000 unvested stock options under the option letter agreement dated March 1, 2000, as shown in Exhibit A hereto. You acknowledge and agree that there has been no change of control at any time up to and including your Termination Date and that you shall have no rights to accelerated vesting or otherwise upon any change of control occurring after your Termination Date except as provided in paragraph 2 above. The Company agrees to take any action necessary to effectuate the terms of this paragraph 4. (b) In the event that you are required to pay any U.S. federal or state income and withholding tax (collectively, "Income Taxes") on any income recognized by you arising upon any exercise of the stock options set forth on Exhibit A, the Company hereby agrees to reimburse you the difference between (A) the amount of Income Taxes you would have been required to pay had the income recognized on such exercise been treated as a long term capital gain and (B) the amount of Income Taxes payable by you in respect of such exercise (the amount of such difference being referred to as the "Tax Difference" in respect of such exercise). In computing the Tax Difference, the amount of taxes payable by you shall be determined by assuming that the income recognized as a result of such exercise is taxed at the highest marginal federal and state income tax rates applicable to ordinary income. In addition, the Company shall pay you an amount equal to the Tax Difference arising in respect of such exercise multiplied by a fraction, the numerator of which is 1 and the denominator of which is equal to 1 minus (i) the highest marginal federal income tax rate and (ii) the highest marginal state income tax rate applicable to you, in each case in respect of ordinary income, in effect at the time of such exercise. Such amount shall be paid by the Company within 2 ninety (90) days after any such exercise. Notwithstanding anything to the contrary in this Agreement or the Plan Option Letters, the Company shall have no obligation to pay you any amount in excess of $175,000 in the aggregate in respect of its obligations under this subparagraph. 5. STOCK PROXY. You agree that at the time you execute this Agreement, you will execute a proxy for all of your shares of Company common stock and any other shares of Company Common Stock over which you have voting control, in favor of the Chairman of the Company, Thomas M. Fitzgerald, or his designee, which proxy shall be in the form attached hereto as Exhibit E. The proxy shall be granted for a term of one year and shall not be limited in scope of authority. 6. RETURN OF COMPANY PROPERTY. You agree to return to the Company: (a) all originals and copies of all proprietary and/or confidential information and trade secrets of the Company; (b) all originals and copies of customer files; (c) all identification cards, keys, or other means of access to the Company; and (d) any other property of the Company in your possession, custody or control except your office computer and two (2) office chairs, which you will be allowed to retain and remove from the Company's premises. All Company property must be returned no later than your Termination Date. 7. NONDISPARAGEMENT. You agree that you will not make disparaging or adverse remarks about, or refer negatively to your association with the Company, its parents, subsidiaries, affiliates, officers, directors, trustees, employees or any other Released Party defined in paragraph 10. The Company agrees that its Board of Directors and executive officers shall not make disparaging or adverse remarks about you, or refer negatively to your association with the Company. 8. NON-FILING OF COMPLAINT OR CHARGES. You represent that you have not filed or asserted any cause of action, claim, charge or other action or proceeding against the Company. 9. COOPERATION. You agree that you will cooperate and assist the Company in the future in the event that the Company is presented with legal issues as to which you have relevant information and knowledge. To the extent such cooperation is required, the Company agrees: (a) to reimburse you for reasonable out-of-pocket expenses actually incurred in connection with providing such cooperation so long as such expenses are approved in advance; and (b) to compensate you for your time at a reasonable rate. 10. MUTUAL GENERAL RELEASES. (a) As a material inducement to the Company to enter into this Agreement, and in consideration of the good and valuable consideration contained herein, the receipt and sufficiency of which is hereby acknowledged, you, on behalf of yourself, your heirs, administrators, representatives, executors, successors, and assigns, hereby irrevocably and unconditionally release, acquit, and forever discharge Sheffield Pharmaceuticals, Inc. and its predecessors (including without limitation Sheffield Medical Technologies Inc.), parents, subsidiaries, affiliates, divisions, successors and assigns, and all of their current and former agents, officers, directors, employees, members, trustees, fiduciaries, representatives and attorneys (the "Released Parties") from any and all charges, complaints, claims, liabilities, obligations, promises, agreements, damages, causes of action, suits, demands, losses, debts, and expenses of any nature whatsoever, known or unknown ("Claims") which you have, had or claim to have against any Released Party up to and including the date you sign this Agreement. This General Release of Claims shall include, without limitation, Claims relating to your employment and separation from employment with the Company, Claims of discrimination under the common law or any federal or state statute (including, without limitation, the Civil Rights Act of 1964, the Americans with Disabilities Act and the Age Discrimination in Employment Act, all as amended), Claims for wrongful discharge, Claims for the payment of any salary, wages, vacation time, bonuses or commissions, Claims for severance or other benefits (other than as specifically set forth in paragraphs 2, 3 and 4 herein), Claims of detrimental reliance, and all other statutory, common law or other Claims of any nature whatsoever. This General Release of Claims does not apply to any Claims concerning a breach of this Agreement, including the option letter agreements referred to in Paragraph 4 as amended by this Agreement, or any claims arising after the date you sign this Agreement. With respect to the Claims you are waiving herein, you acknowledge that you are waiving your right to receive money or any other relief in any action instituted by you or on your behalf by any other person, entity or government agency. 3 (b) Sheffield Pharmaceuticals, Inc. and its predecessors, parents, subsidiaries, affiliates, divisions, successors and assigns, and all of their current and former agents, officers, directors, employees, members, trustees, fiduciaries, representatives and attorneys (the "Company Parties") hereby irrevocably and unconditionally release, acquit, and forever discharge you, your heirs, administrators, representatives, executors, successors and assigns from any and all charges, complaints, claims, liabilities, obligations, promises, agreements, damages, causes of action, suits, demands, losses, debts, and expenses of any nature whatsoever, known or unknown ("Claims") which the Company Parties have, had or claim to have against you up to and including the date you sign this Agreement. This General Release of Claims does not apply to any Claims concerning a breach of this Agreement, criminal fraudulent acts or other criminal conduct negatively affecting the Company, or any claims arising after the date you sign this Agreement. This General Release of Claims is attached hereto as Exhibit G. 11. NOTICE AND RIGHT TO CONSIDER. You are advised to consult with an attorney before executing this Agreement. You acknowledge that you have consulted with an attorney of your choosing in connection with your review of this Agreement. In any event, you should thoroughly review and understand the effect of this Agreement and its General Release before taking action upon them. You may have up to twenty-one (21) days from April 26, 2002 (the date of this letter) to complete your review and sign the Agreement. You acknowledge that if you sign this Agreement prior to the expiration of the twenty-one (21) day period that you did so voluntarily. You will also have seven (7) days following your execution of this Agreement to revoke it (the "Revocation Period"). If you wish to revoke the Agreement, you must do so in writing, addressed to the Company's Chairman at the Company's headquarters, and such revocation must be received by the Company prior to the expiration of the Revocation Period. If you sign this Agreement prior to your Termination Date, then you agree to execute the General Release attached hereto as Exhibit F on your Termination Date. Should you fail to do so, then this Agreement shall immediately become null and void. 12. RESTRICTIVE COVENANT. (a) In consideration of the Company entering into this Agreement, you agree that for a period of twelve (12) months following the Termination Date you will not (i) directly or indirectly own, manage, operate, join, control, participate in, invest in, whether as an officer, director, employee, partner, investor, consultant or otherwise, any business entity that is engaged in any business related to pulmonary delivery systems or respiratory therapeutics, in each case, which may be in any competitive business (as hereinafter defined) to that of the Company or any of its subsidiaries, (ii) for yourself or on behalf of any person, partnership, corporation or entity, call on any customer or partner of the Company or any of its subsidiaries for purposes of soliciting away, diverting or taking away any customer from the Customer or its subsidiaries, or (iii) solicit any person then engaged as an employee, representative, agent, independent contractor or otherwise by the Company or any of its subsidiaries, to terminate his or her relationship with the Company or any of its subsidiaries. Nothing contained in this paragraph shall be deemed to prohibit you from investing your funds in securities of an issuer if the securities of such issuer are listed for trading on a national securities exchange or are traded in the over-the-counter market and your holdings therein represent less than 5% of the total number of shares or principal amount of the securities of such issuer then outstanding. For purposes of this Agreement, the term competitive business shall mean any business that is then involved in the research, development, manufacturing or commercialization in any way of any product, compound, device or method which delivers therapeutics to human beings via the respiratory tract for the treatment of any disease. Should you wish to pursue an opportunity in the respiratory therapeutics area during the 12-month period covered herein, the Company agrees to consider reasonably a written request from you that the applicability of this Section 12(a) be waived as to any such opportunity. It is assumed that in making any such request, you, in good faith and based on your still current knowledge of the Company and its operations and plans, will have concluded and be able to support a case that such an opportunity is distinguishable enough from the current business and objectives of the Company that such a waiver would be appropriate and should not have any material negative impact on the Company and its business. (b) From the Termination Date for a period of eighteen (18) months, you shall hold in a fiduciary capacity for the benefit of the Company and its subsidiaries all confidential information, knowledge and data relating to or concerned with the Company, its operations, sales, business and affairs and you shall not, at any time during such eighteen (18) month period, use, disclose or divulge any such information, knowledge or data to any 4 person, firm or corporation other than to the Company or its subsidiaries or as may otherwise be reasonably required in connection with the business and affairs of the Company. Notwithstanding anything to the contrary contained herein, your obligations under this paragraph 12(b) shall not apply to any information which (i) becomes rightfully known to you subsequent to your employment by the Company or was known to you prior to your employment with the Company; (ii) is or becomes available to the public other than as a result of any wrongful disclosure by you; or (iii) becomes available to you subsequent to your employment by the Company on a non-confidential basis from a source other than the Company or its agents which source has a right to disclose such information. Notwithstanding anything to the contrary contained herein, in the event that you become legally compelled to disclose any confidential information, you will provide the Company with prompt notice so that the Company may seek a protective order or other appropriate remedy. In the event that such protective order or other remedy is not obtained, you shall furnish only such confidential information that is legally required to be disclosed. (c) You acknowledge that the provisions of this paragraph 12 are reasonable and necessary for the protection of the Company and that each provision, and the period of time, geographic area and scope of restrictions on your activities set forth herein are and are intended to be divisible. In the event that any provision of this paragraph 12 shall be deemed contrary to law or invalid or unenforceable in any respect by a court of competent jurisdiction, the remaining provisions shall not be affected but shall, subject to the discretion of such court, remain in full force and effect. 13. MISCELLANEOUS. This Agreement constitutes the full understanding and entire Agreement between you and the Company and supersedes and terminates any other agreements, communications and understandings of any kind, whether oral or written, formal or informal, including, without limitation, any agreement concerning benefits upon a change in control. Except for paragraphs 9, 10 and 11 (excluding any reference in paragraph 11 to paragraph 8) and the Exhibits to the Employment Agreement which have been referenced in this Agreement, the Employment Agreement by and between the parties is hereby superseded by this Agreement and shall be deemed null and void and of no further force or effect. You represent and acknowledge that in signing this Agreement, you have not relied upon any promise, inducement, representation or statement, whether oral or written, not set forth in this Agreement. This Agreement may be amended or modified only by a written instrument signed by the parties. The Company acknowledges that you are entitled to, and will continue to be entitled to, the same rights of indemnification as current officers and directors of the Company, to the fullest extent provided for under Delaware law and as more particularly set forth in the Company's By-Laws and the Indemnification Agreement dated January 23, 2002. You and the Company shall reasonably agree upon any language, relating to your departure from the Company and the circumstances of such departure, contained in any press releases or other announcements prior to or after the execution of this Agreement. The parties agree that the failure of a party at any time to require performance of any provision of this Agreement shall not affect, diminish, obviate or void in any way the Party's full right or ability to require performance of the same or any other provisions of this Agreement at any time thereafter. This Agreement shall inure to the benefit of and shall be binding upon you, your heirs, administrators, representatives, executors, successors and assigns and upon the successors and assigns of the Company. This Agreement shall be construed in accordance with and governed by the laws of the State of Missouri, without respect to its conflict of laws provisions. Should any portion, term or provision of this Agreement be declared or determined by any court to be illegal, invalid or unenforceable, the validity or the remaining portions, terms and provisions shall not be affected thereby, and the illegal, invalid or unenforceable portion, term or provision shall be deemed not to be part of this Agreement. The headings of the paragraphs of this Agreement are for convenience only and are not binding on any interpretation of this Agreement. 5 In the event of any conflict between this Agreement and the stock option letter agreements referred to in paragraph 4, the provisions of this Agreement shall control. If you wish to accept this Agreement, please sign and date the Agreement below and return it to me within the time period specified in paragraph 11. We wish you every success for the future. Sincerely, /s/ Thomas M. Fitzgerald ------------------------------------ Thomas M. Fitzgerald Chairman BY SIGNING THIS AGREEMENT, I STATE THAT I HAVE READ IT, I UNDERSTAND IT, I AGREE WITH EVERYTHING IN IT AND I HAVE SIGNED IT KNOWINGLY AND VOLUNTARILY. /s/ Loren G. Peterson - ----------------------------- Loren G. Peterson Date: April 26, 2002 6 LOREN G. PETERSON EXHIBIT A STOCK OPTIONS AS OF TERMINATION DATE (APRIL 30, 2002)
- ------------------------------------------------------------------------------------------------------------------- Grant Date Total Vested Stock Options Unvested Exercise Price Exercise Period - ---------- ------ -------------------- --------- -------------- --------------- Shares Shares for Vested Stock ------ ------ ---------------- Options ------- - ------------------------------------------------------------------------------------------------------------------- 4/25/97 100,000 100,000 0 $2.75 To and including (A-1 grant) 4/25/07 - ------------------------------------------------------------------------------------------------------------------- 4/25/97 150,000 150,000 0 $2.75 To and including (A-2 grant) 4/25/07 - ------------------------------------------------------------------------------------------------------------------- 4/25/97 150,000 150,000 0 $2.75 To and including (B grant) 4/25/07 - ------------------------------------------------------------------------------------------------------------------- 8/28/98 155,000 55,000 at $1.2375 0 55,000 at $1.2375 To and including 50,000 at $2.125 50,000 at $2.125 8/28/08 50,000 at $3.125 50,000 at $3.125 - ------------------------------------------------------------------------------------------------------------------- 3/01/00 150,000 50,000 at $4.75 50,000 at 50,000 at $4.75 To and including 50,000 at $5.3125 $6.3125 50,000 at $5.3125 3/1/10 50,000 at $6.3125 - -------------------------------------------------------------------------------------------------------------------
7 EXHIBIT B EMPLOYMENT AGREEMENT (INCLUDING EXHIBITS A-1, A-2 AND B) EMPLOYMENT AGREEMENT AGREEMENT made as of the 25th day of April, 1997, by and between Sheffield Medical Technologies Inc., a Delaware corporation with its principal offices at 30 Rockefeller Plaza, Suite 4515, New York, New York 10112 (the "Corporation"), and Loren G. Peterson residing at 1776 Stifel Lane Drive, Town & Country, Missiouri 63017 ("Executive"). W I T N E S S E T H WHEREAS, the Corporation desires to employ and retain Executive as its Chief Executive Officer, upon the terms and subject to the conditions of this Agreement; and NOW, THEREFORE, in consideration of the premises and the mutual covenants hereinafter set forth, the parties hereto agree as follows: 1. Employment of Executive. The Corporation hereby employs Executive as its Chief Executive Officer, to perform the duties and responsibilities traditionally incident to such office, subject at all times to the control and direction of the Board of Directors of the Corporation. 2. Acceptance of Employment; Offices; Time and Attention, Etc. (a) Executive hereby accepts such employment and agrees that throughout the period of his employment hereunder, except as hereinafter provided, he will devote his full business and professional time in utilizing his business and professional expertise, with proper attention, knowledge and skills faithfully, diligently and to the best of his ability in furtherance of the business of the Corporation and its subsidiaries and will perform the duties assigned to him pursuant to Paragraph 1 hereof. As Chief Executive Officer, Executive shall also perform such specific duties and shall exercise such specific authority related to the management of the day-to-day operations of the Corporation and its subsidiaries as may be reasonably assigned to Executive from time to time by the Board of Directors of the Corporation. (b) Executive shall at all times be subject to, observe and carry out such rules, regulations, policies, directions and restrictions as the Board of Directors of the Corporation shall from time to time establish. During the period of his employment hereunder, Executive shall not, directly or indirectly, accept employment or compensation from, or perform services of any nature for, any business enterprise other than the Corporation and its subsidiaries. Notwithstanding the foregoing in this Paragraph 2, Executive shall not be precluded from engaging in recreational, eleemosynary, educational and other activities which do not materially interfere with his duties hereunder during vacations, holidays and other periods outside of business hours. (c) It is anticipated that the Corporation's principal executive office (now located in New York City) shall be relocated to St. Louis, Missouri but that Executive may be required to spend substantial amounts of time at locations in and outside of St. Louis, Missouri relating to the business of the Corporation and its subsidiaries. It is understood that Executive shall continue to reside in the vicinity of St. Louis, Missouri and that the Corporation shall maintain an office in St. Louis, Missouri, which is where Executive shall maintain his principal office until the Corporation relocates from New York City to St. Louis, Missouri. The Corporation agrees to reimburse Executive for his reasonable expenses, including hotel and travel costs, associated with the Corporation's business. In addition, until completion of such relocation, it is understood that Executive shall visit the Corporation's executive office in New York City on a regular basis for meetings and to conduct Corporation business that is more appropriately conducted from such executive office. 3. Term. Except as otherwise provided herein, the term of Executive's employment hereunder shall commence on the date of the consummation of the merger of Camelot Pharmacal, L.L.C., a Missouri limited liability company, with and into a subsidiary of the Company (the "Merger") and shall continue to and including April 25, 2002. Notwithstanding anything to the contrary contained in the Agreement, this Agreement shall 8 terminate and have no force and effect in the event that the Merger is not consummated on or before June 6, 1997. Unless terminated earlier in accordance with the terms hereof, this Agreement shall automatically be extended for one or more additional consecutive one year terms unless either party notifies the other party in writing at least six months before the end of the then current term (including the initial term) of its or his desire to terminate this Agreement. The last day of the term of this Agreement pursuant to this Paragraph 3 (including any early termination pursuant to the terms hereof) is referred to herein as the "Termination Date". 4. Compensation. (a) As compensation for his services hereunder, the Corporation shall pay to Executive (i) a base annual salary at the rate of $175,000, payable in equal installments in accordance with the normal payroll practices of the Corporation but in no event less frequently than semi-monthly, and (ii) such incentive compensation and bonuses, if any, as the Board of Directors of the Corporation in its absolute discretion may determine to award Executive (it being understood that this Agreement shall in no event be construed to require the payment to Executive of any incentive compensation or bonuses), it being understood that Executive shall be entitled to receive such incentive compensation and bonuses determined on a basis comparable to the incentive compensation and/or bonuses awarded to other executive officers of the Corporation. All compensation paid to Executive shall be subject to withholding and other employment taxes imposed by applicable law. (b) During the period of Executive's employment hereunder, Executive shall not be entitled to any additional compensation for rendering employment services to subsidiaries of the Corporation or for serving in any office of the Corporation or any of its subsidiaries to which he is elected or appointed. (c) In the event that Executive is elected to the Corporation's Board of Directors, Executive will receive compensation and benefits as a director of the Corporation consistent with the compensation and benefits received by the Corporation's other directors who are also employees of the Corporation. 5. Stock Options. (a) As additional compensation for his services hereunder, the Corporation shall grant to Executive an option under the Corporation's 1993 Stock Option Plan (the "Plan") to acquire a total of 400,000 shares of the Corporation's common stock at an exercise price per share equal to the closing sale price of the Corporation's common stock as reported by the American Stock Exchange on the date hereof, with the terms of such option to be evidenced by (i) one option letter agreement in the form annexed as Exhibit "A" hereto ("Option Letter A-1") being exercisable for 100,000 shares of Common Stock, (ii) one option letter agreement in the form annexed as Exhibit "A-2" hereto ("Option Letter A-2") being exercisable for 150,000 shares of Common Stock and (iii) one option letter agreement in the form annexed as Exhibit "B" hereto ("Option Letter B") being exercisable for 150,000 shares of Common Stock (such option letters being referred to collectively herein as the "Plan Option Letters"). (b) The Company represents and warrants that there are sufficient shares of Common Stock currently available under the Company's 1993 Stock Option Plan (the "1993 Plan") to cover the shares of Common Stock issuable to Executive upon exercise of Option Letter A-1. (c) In the event that the Company's stockholders fail at the next annual meeting of stockholders of the Corporation to approve both (i) an amendment increasing the number of shares available for the issuance of options under the Plan to an amount at least sufficient to cover all the shares of Common Stock issuable upon exercise of Option Letter A-2 and Option Letter B and (ii) appropriate amendments to the Plan specifically confirming the right of the Corporation's Board of Directors, in the issuance of stock options under the Plan, to determine provisions regarding terms of the exercise of such stock options (including without limitation, the period of exercisability of stock options under the Plan upon termination of employment for cause or without cause) and provisions regarding forfeiture of stock options under the Plan upon termination of employment, the Company agrees, upon receipt of a written demand from Executive, to promptly amend the Plan Option Letters to provide for three non-qualified options outside the Plan having substantially the same terms and provisions of the Plan Stock Options. (d) In the event that (i) the Corporation is required to amend the Plan Option Letters pursuant to Paragraph 5(c) or (ii) Executive's employment by the Corporation is terminated (x) by the Corporation for any reason other than for Cause, (y) by Executive as a result of an Employer Breach or (z) by the Corporation by reason of the Executive's disability or death prior to the expiration of the options evidenced by the Plan Option Letters and Executive is required after such event to pay any U.S. federal or state income and withholding tax (collectively, "Income Taxes") on any income recognized by Executive arising upon any exercise of options evidenced by the Plan Option Letters, the Corporation agrees to reimburse Executive the difference between (A) the amount of Income Taxes Executive would have been required to pay had the income recognized on such exercise been treated 9 as a long term capital gain and (B) the amount of Income Taxes payable by Executive in respect of such exercise (the amount of such difference being referred to as the "Tax Difference" in respect of such exercise). In computing the Tax Difference, the amount of taxes payable by Executive shall be determined by assuming that the income recognized as a result of such exercise is taxed at the highest marginal federal and state income tax rates applicable to ordinary income. In addition, the Corporation shall pay Executive an amount equal to the Tax Difference arising in respect of such exercise multiplied by a fraction, the numerator of which is 1 and the denominator of which is equal to 1 minus (i) the highest marginal federal income tax rate (currently 39.6%) and (ii) the highest marginal state income tax rate applicable to Executive, in each case in respect of ordinary income, in effect at the time of such exercise. Such amount shall be paid by the Corporation within ninety (90) days after any such exercise. Notwithstanding anything to the contrary in this Agreement or the Plan Option Letters, the Corporation shall have no obligation to pay Executive any amount in excess of $250,000 in the aggregate in respect of its obligations under this subparagraph. 6. Additional Benefits; Vacation. (a) In addition to such base salary, Executive shall receive and be entitled to participate, to the extent he is eligible under the terms and conditions thereof, in any profit sharing, pension, retirement, hospitalization, disability, medical service, insurance or other employee benefit plan generally available to the executive officers of the Corporation that may be in effect from time to time during the period of Executive's employment hereunder. The Corporation agrees to cover Executive under any directors' and officers' liability policy maintained by the Corporation. (b) Executive shall be entitled to four (4) weeks' paid vacation in respect of each 12-month period during the term of his employment hereunder, such vacation to be taken at times mutually agreeable to Executive and the Board of Directors of the Corporation. (c) Executive shall be entitled to recognize as holidays all days recognized as such by the Corporation. 7. Reimbursement of Expenses. The Corporation shall reimburse Executive in accordance with applicable policies of the Corporation for all expenses reasonably incurred by him in connection with the performance of his duties hereunder and the business of the Corporation, upon the submission to the Corporation of appropriate receipts or vouchers. 8. Restrictive Covenant. (a) In consideration of the Corporation's entering into this Agreement, Executive agrees that during the period of his employment hereunder and, in the event of termination of this Agreement (i) by the Corporation upon Executive becoming Disabled (as that term is defined in Paragraph 13 hereof), (ii) by the Corporation for Cause (as that term, is defined in Paragraph 14 hereof) or (iii) by Executive otherwise than for Employer Breach (as that term is defined in Paragraph 15 hereof), for a further period of six months thereafter, he will not (x) directly or indirectly own, manage, operate, join, control, participate in, invest in, whether as an officer, director, employee, partner, investor or otherwise, any business entity that is engaged in a directly competitive business (as hereinafter defined) to that of the Corporation or any of its subsidiaries within the United States of America, (y) for himself or on behalf of any other person, partnership, corporation or entity, call on any customer of the Corporation or any of its subsidiaries for the purpose of soliciting away, diverting or taking away any customer from the Corporation or its subsidiaries, or (z) solicit any person then engaged as an employee, representative, agent, independent contractor or otherwise by the Corporation or any of its subsidiaries, to terminate his or her relationship with the Corporation or any of its subsidiaries. For purposes of this Agreement, the term "directly competitive business" shall mean any business that is then involved in the research, development, manufacturing or commercialization in any way of any product, compound, device or method that acts or functions by, through or on the same active, binding or receptor site, mechanism of action, signaling pathway or channel as any product, compound, device or method that is or becomes a part of the Corporation's business or the business of any of its subsidiaries during Executive's employment by the Corporation or any of its subsidiaries. Nothing contained in this Agreement shall be deemed to prohibit Executive from investing his funds in securities of an issuer if the securities of such issuer are listed for trading on a national securities exchange or are traded in the over-the-counter market and Executive's holdings therein represent less than 10% of the total number of shares or principal amount of the securities of such issuer outstanding. (b) Executive acknowledges that the provisions of this Paragraph 8 are reasonable and necessary for the protection of the Corporation, and that each provision, and the period or periods of time, geographic areas and types and scope of restrictions on the activities specified herein are, and are intended to be, divisible. In the event that any provision of this Paragraph 8, including any sentence, clause or part hereof, shall be deemed contrary to law or 10 invalid or unenforceable in any respect by a court of competent jurisdiction, the remaining provisions shall not be affected, but shall, subject to the discretion of such court, remain in full force and effect. 9. Confidential Information. (a) Executive shall hold in a fiduciary capacity for the benefit of the Corporation and its subsidiaries all confidential information, knowledge and data relating to or concerned with its operations, sales, business and affairs, and he shall not, at any time during his employment hereunder and for two years thereafter, use, disclose or divulge any such information, knowledge or data to any person, firm or corporation other than to the Corporation and its subsidiaries or their respective designees or except as may otherwise be reasonably required or desirable in connection with the business and affairs of the Corporation and its subsidiaries. (b) Notwithstanding anything to the contrary contained herein, Executive's obligations under Paragraph 9(a) hereof shall not apply to any information which: (i) becomes rightfully known to Executive subsequent or prior to his employment by the Corporation; (ii) is or becomes available to the public other than as a result of wrongful disclosure by Executive; (iii) becomes available to Executive subsequent to his employment by the Corporation on a nonconfidential basis from a source other than the Corporation or its agents which source has a right to disclose such information; or (iv) results from research and development and/or commercial operations at any time by or on behalf of any person, company or other entity with which or with whom Executive shall become associated (in a manner consistent with the terms of this Agreement) subsequent to his employment by the Corporation or its agents totally independent from any disclosure from the Corporation or its agents. (c) Notwithstanding anything to the contrary contained herein, in the event that Executive becomes legally compelled to disclose any confidential information, Executive will provide the Corporation with prompt notice so that the Corporation may seek a protective order or other appropriate remedy. In the event that such protective order or other remedy is not obtained, Executive shall furnish only such confidential information which is legally required to be disclosed. 10. Intellectual Property. Any idea, invention, design, written material, manual, system, procedure, improvement, development or discovery conceived, developed, created or made by Executive alone or with others, during the period of his employment hereunder and applicable to the business of the Corporation or any of its subsidiaries, whether or not patentable or registrable, shall become the sole and exclusive property of the Corporation or such subsidiary. Executive shall disclose the same promptly and completely to the Corporation and shall, during the period of his employment hereunder and at any time and from time to time hereafter at no cost to Executive (i) execute all documents reasonably requested by the Corporation for vesting in the Corporation or any of its subsidiaries the entire right, title and interest in and to the same, (ii) execute all documents reasonably requested by the Corporation for filing and prosecuting such applications for patents, trademarks, service marks and/or copyrights as the Corporation, in its sole discretion, may desire to prosecute, and (iii) give the Corporation all assistance it reasonably requires, including the giving of testimony in any suit, action or proceeding, in order to obtain, maintain and protect the Corporation's right therein and thereto. 11. Equitable Relief. The parties hereto acknowledge that Executive's services are unique and that, in the event of a breach or a threatened breach by Executive of any of his obligations under Paragraphs 8, 9 or 10 this Agreement, the Corporation shall not have an adequate remedy at law. Accordingly, in the event of any such breach or threatened breach by Executive, the Corporation shall be entitled to such equitable and injunctive relief as may be available to restrain Executive and any business, firm, partnership, individual, corporation or entity participating in such breach or threatened breach from the violation of the provisions of Paragraph 8, 9 or 10 hereof. Nothing herein shall be construed as prohibiting the Corporation from pursuing any other remedies available at law or in equity for such breach or threatened breach, including the recovery of damages and the immediate termination of the employment of Executive hereunder, if and to the extent permitted hereunder. 11 12. Termination of Agreement; Termination of Employment; Severance; Survival. (a) This Agreement and Executive's employment hereunder shall terminate upon the first to occur of the following: (i) Executive becoming Disabled (as that term is defined in Paragraph 13 hereof); (ii) Executive's death; (iii) termination of Executive's employment by the Corporation for Cause or pursuant to subparagraph (b) of this Paragraph 12; (iv) termination of Executive's employment for Employer Breach and (v) the termination of this Agreement at the end of the term of this Agreement on the Termination Date pursuant to Paragraph 3. (b) Notwithstanding anything to the contrary contained in this Agreement, in the event of the termination of the Executive's employment by the Corporation for any reason (other than for Cause), Executive shall be paid a severance payment equal to 75% of Executive's then current annual base salary payable in nine equal monthly installments, with the first installment being payable on the date falling two weeks after the date of such termination and each additional installment being paid every month after such date until such severance is paid in full. In the event of such termination of the Executive's employment by the Corporation (other than for Cause), the Corporation shall have no further obligation to the Executive under this Agreement other than the Corporation's obligation (i) to make such severance payment to the Executive (ii) to pay Executive's COBRA premium payments for hospitalization and medical insurance coverage provided by the Corporation and to pay Executive's premiums on any death and/or disability insurance being maintained by the Corporation for Executive at the time of such termination, in each case until the payment in full of such severance payments (c) Paragraph 5(c) of this Agreement shall survive the termination of Executive's employment hereunder until the earlier to occur of Executive's exercise of all of the stock options granted pursuant to paragraph 5 and the expiration of all such stock options pursuant to the Stock Option Letters. Paragraphs 7, 8, 9, 10, 11 and 26 of this Agreement shall survive the termination of Executive's employment hereunder, except in the case of termination pursuant to Paragraph 15. 13. Disability. In the event that during the term of his employment by the Corporation Executive shall become Disabled (as that term is hereinafter defined) he shall continue to receive the full amount of the base salary to which he was theretofore entitled for a period of six months after he shall be deemed to have become Disabled (the "First Disability Payment Period"). If the First Disability Payment Period shall end prior to the Termination Date, Executive thereafter shall be entitled to receive salary at an annual rate equal to 80% of his then current base salary for a further period ending on the earlier of (i) six months thereafter or (ii) the Termination Date (the "Second Disability Payment Period"). Upon the expiration of the Second Disability Payment Period, Executive shall not be entitled to receive any further payments on account of his base salary until he shall cease to be Disabled and shall have resumed his duties hereunder and provided that the Corporation shall not have theretofore terminated this Agreement as hereinafter provided. The Corporation may terminate Executive's employment hereunder at any time after Executive is Disabled, upon at least 10 days' prior written notice; provided, however, that such termination shall not relieve the Corporation from its obligation to make the payments to Executive described above in this Paragraph 13. For the purposes of this Agreement, Executive shall be deemed to have become Disabled when (x) by reason of physical or mental incapacity, Executive is not able to perform his duties hereunder for a period of 90 consecutive days or for 120 days in any consecutive 180-day period or (y) when Executive's physician or a physician designated by the Corporation shall have determined that Executive shall not be able, by reason of physical or mental incapacity, to perform a substantial portion of his duties hereunder. In the event that Executive shall dispute any determination of his disability pursuant to clauses (x) or (y) above, the matter shall be resolved by the determination of three physicians qualified to practice medicine in the United States of America, one to be selected by each of the Corporation and Executive and the third to be selected by the designated physicians. If Executive shall receive benefits under any disability policy maintained by the Corporation, the Corporation shall be entitled to deduct the amount equal to the benefits so received from base salary that it otherwise would have been required to pay to Executive as provided above. 14. Termination for Cause. The Corporation may at any time upon written notice to Executive terminate Executive's employment for Cause. For purposes of this Agreement, the following shall constitute Cause: (i) the willful and repeated failure of Executive to perform any material duties hereunder or gross negligence of Executive in the performance of such duties, and if such failure or gross negligence is susceptible to cure by Executive, the failure to effect such cure within twenty (20) days after written notice of such failure or gross negligence is given to Executive; (ii) except as permitted hereunder, unexplained, willful and regular absences of Executive from the Corporation; (iii) excessive use of alcohol or illegal drugs, interfering with the performance of Executives duties hereunder; (iv) indictment for a crime of theft, embezzlement, fraud, misappropriation of funds, other acts of dishonesty or the violation of any law or ethical rule relating to Executive's employment; (v) indicted for any other 12 felony or other crime involving moral turpitude by Executive; or (vi) the breach by Executive of any of the provisions of paragraphs 8, 9 or 10 and if such breach is susceptible of cure by Executive, the failure to effect such cure within twenty (20) days after written notice of such breach is given to Executive. For purposes of this Agreement, an action shall be considered "willful" if it is done intentionally, purposely or knowingly, distinguished from an act done carelessly, thoughtlessly or inadvertently. In any such event, Executive shall be entitled to receive his base salary to and including the date of termination. 15. Termination for Employer Breach. Executive may upon written notice to the Corporation terminate this Agreement (including paragraphs 8, 9, 10 and 11) in the event of the breach by the Corporation of any material provision of this Agreement, and if such breach is susceptible of cure, the failure to effect such cure within 20 days after written notice of such breach is given to the Corporation (an "Employer Breach"). Executive's right to terminate this Agreement under this Paragraph 15 shall be in addition to any other remedies Executive may have under law or equity. Paragraphs 2(d), 7 and 12(b) of this Agreement shall survive the termination of this Agreement by Executive pursuant to this Paragraph 15. 16. Insurance Policies. The Corporation shall have the right from time to time to purchase, increase, modify or terminate insurance policies on the life of Executive for the benefit of the Corporation, in such amounts as the Corporation shall determine in its sole discretion. In connection therewith, Executive shall, at such time or times and at such place or places as the Corporation may reasonably direct, submit himself to such physical examinations and execute and deliver such documents as the Corporation may reasonably deem necessary or desirable. 17. Entire Agreement; Amendment. This Agreement constitutes the entire agreement of the parties hereto, and any prior agreement between the Corporation and Executive is hereby superseded and terminated effective immediately and shall be without further force or effect. No amendment or modification himself shall be valid or binding unless made in writing and signed by the party against whom enforcement thereof is sought. 18. Notices. Any notice required, permitted or desired to be given pursuant to any of the provisions of this Agreement shall be delivered in person or sent by responsible overnight delivery service or sent by certified mail, return receipt requested, postage and fees prepaid, if to the Corporation, at its address set forth above to the attention of the Corporation's Chief Financial Officer and, if to Executive, at his address set forth above. Either of the parties hereto may at any time and from time to time change the address to which notice shall be sent hereunder by notice to the other party given under this Paragraph 18. Notices shall be deemed effective upon receipt. 19. No Assignment; Binding Effect. Neither this Agreement, nor the right to receive any payments hereunder, may be assigned by either party without the other party's prior written consent. This Agreement shall be binding upon Executive, his heirs, executors and administrators and upon the Corporation, its successors and assigns. 20. Waivers. No course of dealing nor any delay on the part of either party in exercising any rights hereunder shall operate as a waiver of any such rights. No waiver of any default or breach of this Agreement shall be deemed a continuing waiver or a waiver of any other breach or default. 21. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, except that body of law relating to choice of laws. 22. Invalidity. If any clause, paragraph, section or part of this Agreement shall be held or declared to be void, invalid or illegal, for any reason, by any court of competent jurisdiction, such provision shall be ineffective but shall not in any way invalidate or affect any other clause, paragraph, section or part of this Agreement. 23. Further Assurances. Each of the parties shall execute such documents and take such other actions as may be reasonably requested by the other party to carry out the provisions and purposes of this Agreement in accordance with its terms. 24. Headings. The headings contained in this Agreement have been inserted for convenience only and shall not affect in any way the meaning or interpretation of this Agreement. 25. Publicity. The Corporation and Executive agree that they will not make any press releases or other announcements prior to or at the time of execution of this Agreement with respect to the terms contemplated hereby, 13 except as required by applicable law, without the prior approval of the other party, which approval will not be unreasonably withheld. 26. Arbitration. Any disputes arising under this Agreement shall be submitted to and determined by arbitration in New York City, New York; provided, however, that such arbitration shall be held in St. Louis, Missouri in the event that the Company's principal executive offices is located at the time of such dispute in St. Louis, Missouri. Such arbitration shall be conducted in accordance with the rules of the American Arbitration Association. Any award or decision of the arbitration shall be conclusive in the absence of fraud and judgment thereon may be entered in any court having jurisdiction thereof. The costs of such arbitration shall be paid by the non-prevailing party to the extent directed by the arbitrator(s). THIS AGREEMENT CONTAINS BINDING ARBITRATION PROVISIONS WHICH MAY BE ENFORCED BY THE PARTIES. 14 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written. SHEFFIELD MEDICAL TECHNOLOGIES INC. By: /s/ George Lombardi ------------------------------- George Lombardi Vice President and Chief Financial Officer /s/ Loren G. Peterson ----------------------------------- Loren G. Peterson 15 EXHIBIT A-1 TO EMPLOYMENT AGREEMENT SHEFFIELD MEDICAL TECHNOLOGIES INC. 30 ROCKEFELLER PLAZA, SUITE 4515 NEW YORK, NEW YORK 10112 April 25, 1997 Loren G. Peterson 1776 Stifel Lane Drive Town & Country, Missouri 63017 At a meeting of the Board of Directors of Sheffield Medical Technologies Inc. (the "Company") held on April 22, 1997, the Board authorized the grant to you of an option (the "Option") to purchase one hundred thousand (100,000) shares (the "Shares") of Common Stock, par value $.01 per share, of the Company. The Option is being granted in connection with the Employment Agreement dated as of April 25, 1997 between the Company and you (the "Employment Agreement"). The terms of the Option are set forth below. 1. No part of the Option is currently exercisable. Subject to any adjustment pursuant to paragraph 5 below, the Option is exercisable at an exercise price of $2.75 per Share. Subject to the paragraph 2 below, the Option may first be exercised on April 25, 1998 for 10,000 Shares and shall become exercisable for an additional 10,000 Shares on each April 25 thereafter to and including April 25, 2007. Subject to paragraph 2 below, the Option must be exercised as to any and all Shares on or prior to April 25, 2007 (on which date the Option will, to the extent not previously exercised, expire). 2. Notwithstanding anything to the contrary contained herein or in the Plan (as defined below): (a) In the event your employment by the Company is terminated for Cause (as such term is defined in the Employment Agreement) prior to the expiration of the Option, the Option will be exercisable for 90 days from the date of such termination, but only as to such Shares that had become exercisable pursuant to paragraph 1 above (and not previously purchased) prior to such date. The Option shall then expire to the extent not exercised within such 90 day period. (b) In the event that your employment by the Company is terminated by the Company for any reason other than for Cause, by you as a result of an Employer Breach (as such term is defined in the Employment Agreement) or by the Company by reason of your disability or death prior to the expiration of the Option, the Option shall become immediately exercisable for one year as to all Shares not previously purchased. The Option shall then expire to the extent not exercised within such one year period. (c) In the event that your employment by the Company is terminated by you for any reason other than an Employer Breach prior to the expiration of the Option, the Option will be exercisable for 90 days from the date of such termination, but only as to such Shares that had become exercisable pursuant to paragraph 1 above (and not previously purchased) prior to such date; provided, however, that if such termination occurs after the second anniversary of the date of this letter, the Option shall become immediately exercisable for such 90 day period as to all Shares not previously purchased. The Option shall then expire to the extent not exercised within such 90 day period. (d) In the event that your employment by the Company is terminated by the Company by reason of your death or disability, the Option shall become immediately exercisable for one year as to all Shares not previously purchased. The Option shall then expire to the extent not exercised within such one year period. (e) In the event of a Change of Control, the Option shall, at your option exercised by written notice delivered to the Company, become immediately exercisable for one year as to all Shares not previously purchased. The Option shall then expire to the extent not exercised within such one year period. As used in this paragraph, "Change of Control" shall mean (i) the merger, consolidation or other business combination of the Company with or into another corporation with the effect that the shareholders of the Company immediately following the merger, consolidation or other business combination, hold 50% or less 16 of the combined voting power of the then outstanding equity interests of the surviving corporation of such merger, consolidation or other business combination ordinarily (and apart from rights accruing under special circumstances) having the right to vote in the election of directors or (ii) the replacement of a majority of the Board of Directors of the Company in any given year as compared to the directors who constituted the Board at the beginning of such year, and such replacement shall not have been approved by the Board of Directors of the Company as constituted at the beginning of such year. If any of the options granted hereunder are treated as nonqualified stock options ("NQO") as the result of exceeding the $100,000 exercise limit contained in Section 422(d) of the Internal Revenue Code of 1986, as amended, the Company shall issue separate certificates representing those shares constituting incentive stock options ("ISO") and those shares constituting NQO's and shall identify the ISO shares as such on its stock transfer records. 3. Unless at the time of the exercise of the Option a registration statement under the Securities Act of 1933, as amended (the "Act"), is in effect as to such Shares, any Shares purchased by you upon the exercise of the Option shall be acquired for investment and not for sale or distribution, and if the Company so requests, upon any exercise of the Option, in whole or in part, you will execute and deliver to the Company a certificate to such effect. The Company shall not be obligated to issue any Shares pursuant to the Option if, in the opinion of counsel to the Company, the Shares to be so issued are required to be registered or otherwise qualified under the Act or under any other applicable statute, regulation or ordinance affecting the sale of securities, unless and until such Shares have been so registered or otherwise qualified. 4. You understand and acknowledge that, under existing law, unless at the time of the exercise of the Option a registration statement under the Act is in effect as to such Shares (i) any Shares purchased by you upon exercise of this option may be required to be held indefinitely unless such Shares are subsequently registered under the Act or an exemption from such registration is available; (ii) any sales of such Shares made in reliance upon Rule 144 promulgated under the Act may be made only in accordance with the terms and conditions of that Rule (which, under certain circumstances, restrict the number of shares which may be sold and the manner in which shares may be sold); (iii) in the case of securities to which Rule 144 is not applicable, compliance with Regulation A promulgated under the Act or some other disclosure exemption will be required; (iv) certificates for Shares to be issued to you hereunder shall bear a legend to the effect that the Shares have not been registered under the Act and that the Shares may not be sold, hypothecated or otherwise transferred in the absence of an effective registration statement under the Act relating thereto or an opinion of counsel satisfactory to the Company that such registration is not required; and (v) the Company will place an appropriate "stop transfer" order with its transfer agent with respect to such Shares. In addition, you understand and acknowledge that the Company has no obligation to you to furnish information necessary to enable you to make sales under Rule 144. 5. In the event that the Company shall at any time prior to the expiration of the Option and prior to the exercise thereof: (i) declare or pay to the holders of the Common Stock a dividend payable in any kind of shares of stock of the Company; or (ii) change or divide or otherwise reclassify its Common Stock into the same or a different number of shares with or without par value, or into shares of any class or classes; or (iii) consolidate or merge with, or transfer its property as an entirety or substantially all of its assets to any other corporation; or (iv) make any distribution of its assets to holders of its Common Stock as a liquidation, or partial liquidation dividend or by way of return of capital; then, upon the subsequent exercise of the Option, the exercise price of the Shares issuable upon the exercise hereof shall be appropriately adjusted by the Board of Directors of the Company so that you shall receive for the exercise price, in addition to or in substitution for the Shares to which you would be entitled upon such exercise, such additional shares of stock of the Company, or such reclassified shares of stock of the Company, or such securities or property of the Company resulting from such consolidation or merger or transfer, of such assets of the Company, which you would have been entitled to receive had you exercised the Option prior to the happening of any of the foregoing events. 6. The Option (or installment thereof) is to be exercised by delivering to the Company a written notice of exercise in the form attached hereto as Annex A, specifying the number of Shares to be purchased, together with payment of the purchase price of the Shares to be purchased. The purchase price is to be paid in cash. 7. The Option does not confer upon you any right whatsoever as a stockholder of the Company. The Option is granted to you under the Company's 1993 Stock Option Plan, as amended, (the "Plan") and is intended to be an incentive stock option. The terms of the Plan are incorporated by reference into the Option, except as modified in 17 accordance with the Plan by the terms set forth herein. A copy of the Plan has been delivered to you with this letter. The Option shall be binding upon any successors or assigns of the Company. If the foregoing correctly sets forth our understanding of the option, please indicate your acceptance by signing this letter in the space provided below. Very truly yours, SHEFFIELD MEDICAL TECHNOLOGIES INC. By: /s/ George Lombardi ------------------------------- George Lombardi Chief Financial Officer AGREED TO AND ACCEPTED: /s/ Loren G. Peterson - ------------------------------ Loren G. Peterson 18 Annex A STOCK SUBSCRIPTION FORM To: Sheffield Medical Technologies Inc. Gentlemen: I hereby exercise my option to purchase from Sheffield Medical Technologies Inc. (the "Company"), pursuant to the Stock Option Letter Agreement between us dated as of April 25, 1997, ________ shares of the Company's Common Stock, $.01 par value, and herewith tender payment therefor at the rate of $____ per share. The option was originally granted pursuant to the terms of the Company's 1993 Stock Option Plan. I represent and warrant that I am acquiring the said shares for my own account for investment purposes only; that I have no present intention of selling or otherwise disposing of such shares or any part thereof; that I will not transfer said shares in violation of the securities laws of the United States; that I am familiar with the business operations, management and financial condition and affairs of the Company; that I have not relied upon any representation of the Company with respect thereto; and that I have the personal financial means to comply with all of said representations. I further confirm that I have been advised that said shares will not be registered under the Securities Act of 1933, as amended, and that I have consulted with and been advised by counsel as to the restrictions on resale to which said shares will thereby be subject. The form in which I wish my name and address to appear on the Company's stock records is as follows: Name: ______________________ Address: ______________________ ______________________ ______________________ Very truly yours, ________________________ Loren G. Peterson 19 EXHIBIT A-2 TO EMPLOYMENT AGREEMENT SHEFFIELD MEDICAL TECHNOLOGIES INC. 30 ROCKEFELLER PLAZA, SUITE 4515 NEW YORK, NEW YORK 10112 April 25, 1997 Loren G. Peterson 1776 Stifel Lane Drive Town & Country, Missouri 63017 At a meeting of the Board of Directors of Sheffield Medical Technologies Inc. (the "Company") held on April 22, 1997, the Board authorized the grant to you of an option (the "Option") to purchase one hundred thousand (150,000) shares (the "Shares") of Common Stock, par value $.01 per share, of the Company. The Option is being granted in connection with the Employment Agreement dated as of April 25, 1997 between the Company and you (the "Employment Agreement"). The terms of the Option are set forth below. 1. No part of the Option is currently exercisable. Subject to any adjustment pursuant to paragraph 5 below, the Option is exercisable at an exercise price of $2.75 per Share. Subject to the paragraph 2 below, the Option may first be exercised on April 25, 1998 for 15,000 Shares and shall become exercisable for an additional 15,000 Shares on each April 25 thereafter to and including April 25, 2007. Subject to paragraph 2 below, the Option must be exercised as to any and all Shares on or prior to April 25, 2007 (on which date the Option will, to the extent not previously exercised, expire). 2. Notwithstanding anything to the contrary contained herein or in the Plan (as defined below): (a) In the event your employment by the Company is terminated for Cause (as such term is defined in the Employment Agreement) prior to the expiration of the Option, the Option will be exercisable for 90 days from the date of such termination, but only as to such Shares that had become exercisable pursuant to paragraph 1 above (and not previously purchased) prior to such date. The Option shall then expire to the extent not exercised within such 90 day period. (b) In the event that your employment by the Company is terminated by the Company for any reason other than for Cause, by you as a result of an Employer Breach (as such term is defined in the Employment Agreement) or by the Company by reason of your disability or death prior to the expiration of the Option, the Option shall become immediately exercisable for one year as to all Shares not previously purchased. The Option shall then expire to the extent not exercised within such one year period. (c) In the event that your employment by the Company is terminated by you for any reason other than an Employer Breach prior to the expiration of the Option, the Option will be exercisable for 90 days from the date of such termination, but only as to such Shares that had become exercisable pursuant to paragraph 1 above (and not previously purchased) prior to such date; provided, however, that if such termination occurs after the second anniversary of the date of this letter, the Option shall become immediately exercisable for such 90 day period as to all Shares not previously purchased. The Option shall then expire to the extent not exercised within such 90 day period. (d) In the event that your employment by the Company is terminated by the Company by reason of your death or disability, the Option shall become immediately exercisable for one year as to all Shares not previously purchased. The Option shall then expire to the extent not exercised within such one year period. (e) In the event of a Change of Control, the Option shall, at your option exercised by written notice delivered to the Company, become immediately exercisable for one year as to all Shares not previously purchased. The Option shall then expire to the extent not exercised within such one year period. As used in this paragraph, "Change of Control" shall mean (i) the merger, consolidation or other business combination of the Company with or into another corporation with the effect that the shareholders of the 20 Company immediately following the merger, consolidation or other business combination, hold 50% or less of the combined voting power of the then outstanding equity interests of the surviving corporation of such merger, consolidation or other business combination ordinarily (and apart from rights accruing under special circumstances) having the right to vote in the election of directors or (ii) the replacement of a majority of the Board of Directors of the Company in any given year as compared to the directors who constituted the Board at the beginning of such year, and such replacement shall not have been approved by the Board of Directors of the Company as constituted at the beginning of such year. If any of the options granted hereunder are treated as nonqualified stock options ("NQO") as the result of exceeding the $100,000 exercise limit contained in Section 422(d) of the Internal Revenue Code of 1986, as amended, the Company shall issue separate certificates representing those shares constituting incentive stock options ("ISO") and those shares constituting NQO's and shall identify the ISO shares as such on its stock transfer records. 3. Unless at the time of the exercise of the Option a registration statement under the Securities Act of 1933, as amended (the "Act"), is in effect as to such Shares, any Shares purchased by you upon the exercise of the Option shall be acquired for investment and not for sale or distribution, and if the Company so requests, upon any exercise of the Option, in whole or in part, you will execute and deliver to the Company a certificate to such effect. The Company shall not be obligated to issue any Shares pursuant to the Option if, in the opinion of counsel to the Company, the Shares to be so issued are required to be registered or otherwise qualified under the Act or under any other applicable statute, regulation or ordinance affecting the sale of securities, unless and until such Shares have been so registered or otherwise qualified. 4. You understand and acknowledge that, under existing law, unless at the time of the exercise of the Option a registration statement under the Act is in effect as to such Shares (i) any Shares purchased by you upon exercise of this option may be required to be held indefinitely unless such Shares are subsequently registered under the Act or an exemption from such registration is available; (ii) any sales of such Shares made in reliance upon Rule 144 promulgated under the Act may be made only in accordance with the terms and conditions of that Rule (which, under certain circumstances, restrict the number of shares which may be sold and the manner in which shares may be sold); (iii) in the case of securities to which Rule 144 is not applicable, compliance with Regulation A promulgated under the Act or some other disclosure exemption will be required; (iv) certificates for Shares to be issued to you hereunder shall bear a legend to the effect that the Shares have not been registered under the Act and that the Shares may not be sold, hypothecated or otherwise transferred in the absence of an effective registration statement under the Act relating thereto or an opinion of counsel satisfactory to the Company that such registration is not required; and (v) the Company will place an appropriate "stop transfer" order with its transfer agent with respect to such Shares. In addition, you understand and acknowledge that the Company has no obligation to you to furnish information necessary to enable you to make sales under Rule 144. 5. In the event that the Company shall at any time prior to the expiration of the Option and prior to the exercise thereof: (i) declare or pay to the holders of the Common Stock a dividend payable in any kind of shares of stock of the Company; or (ii) change or divide or otherwise reclassify its Common Stock into the same or a different number of shares with or without par value, or into shares of any class or classes; or (iii) consolidate or merge with, or transfer its property as an entirety or substantially all of its assets to any other corporation; or (iv) make any distribution of its assets to holders of its Common Stock as a liquidation, or partial liquidation dividend or by way of return of capital; then, upon the subsequent exercise of the Option, the exercise price of the Shares issuable upon the exercise hereof shall be appropriately adjusted by the Board of Directors of the Company so that you shall receive for the exercise price, in addition to or in substitution for the Shares to which you would be entitled upon such exercise, such additional shares of stock of the Company, or such reclassified shares of stock of the Company, or such securities or property of the Company resulting from such consolidation or merger or transfer, of such assets of the Company, which you would have been entitled to receive had you exercised the Option prior to the happening of any of the foregoing events. 6. The Option (or installment thereof) is to be exercised by delivering to the Company a written notice of exercise in the form attached hereto as Annex A, specifying the number of Shares to be purchased, together with payment of the purchase price of the Shares to be purchased. The purchase price is to be paid in cash. 7. The Option does not confer upon you any right whatsoever as a stockholder of the Company. The Option is granted to you under the Company's 1993 Stock Option Plan, as amended, (the "Plan") and is intended to be an incentive stock option. The terms of the Plan are incorporated by reference into the Option, except as modified in 21 accordance with the Plan by the terms set forth herein. A copy of the Plan has been delivered to you with this letter. The Option shall be binding upon any successors or assigns of the Company. If the foregoing correctly sets forth our understanding of the option, please indicate your acceptance by signing this letter in the space provided below. Very truly yours, SHEFFIELD MEDICAL TECHNOLOGIES INC. By: /s/ George Lombardi ------------------------------- George Lombardi Chief Financial Officer AGREED TO AND ACCEPTED: /s/ Loren G. Peterson - ------------------------------ Loren G. Peterson 22 Annex A STOCK SUBSCRIPTION FORM To: Sheffield Medical Technologies Inc. Gentlemen: I hereby exercise my option to purchase from Sheffield Medical Technologies Inc. (the "Company"), pursuant to the Stock Option Letter Agreement between us dated as of April 25, 1997, ________ shares of the Company's Common Stock, $.01 par value, and herewith tender payment therefor at the rate of $____ per share. The option was originally granted pursuant to the terms of the Company's 1993 Stock Option Plan. I represent and warrant that I am acquiring the said shares for my own account for investment purposes only; that I have no present intention of selling or otherwise disposing of such shares or any part thereof; that I will not transfer said shares in violation of the securities laws of the United States; that I am familiar with the business operations, management and financial condition and affairs of the Company; that I have not relied upon any representation of the Company with respect thereto; and that I have the personal financial means to comply with all of said representations. I further confirm that I have been advised that said shares will not be registered under the Securities Act of 1933, as amended, and that I have consulted with and been advised by counsel as to the restrictions on resale to which said shares will thereby be subject. The form in which I wish my name and address to appear on the Company's stock records is as follows: Name: ______________________ Address: ______________________ ______________________ ______________________ Very truly yours, ________________________ Loren G. Peterson 23 EXHIBIT B TO EMPLOYMENT AGREEMENT SHEFFIELD MEDICAL TECHNOLOGIES INC. 30 ROCKEFELLER PLAZA, SUITE 4515 NEW YORK, NEW YORK 10112 April 25, 1997 Loren G. Peterson 1776 Stifel Lane Drive Town & Country, Missouri 63017 At a meeting of the Board of Directors of Sheffield Medical Technologies Inc. (the "Company") held on April 22, 1997, the Board authorized the grant to you of an option (the "Option") to purchase one hundred and fifty (150,000) shares (the "Shares") of Common Stock, par value $.01 per share, of the Company. The Option is being granted in connection with the Employment Agreement dated as of April 25, 1997 between the Company and you (the "Employment Agreement"). The terms of the Option are set forth below. 1. No part of the option is currently exercisable. Subject to any adjustment pursuant to paragraph 5 below, the Option is exercisable at an exercise price of $2.75 per Share. Subject to the paragraph 2 below, the Option may first be exercised on April 25, 1998 for 15,000 Shares and shall become exercisable for an additional 15,000 Shares on each April 25 thereafter to and including April 25, 2007. Subject to paragraph 2 below, the Option must be exercised as to any and all Shares on or prior to April 25, 2007 (on which date the Option will, to the extent not previously exercised, expire). 2. Notwithstanding anything to the contrary contained herein or in the Plan (as defined below): (a) In the event your employment by the Company is terminated for Cause (as such term is defined in the Employment Agreement) prior to the expiration of the Option, the Option will be exercisable for 90 days from the date of such termination, but only as to such Shares that had become exercisable pursuant to paragraph 1 above (and not previously purchased) prior to such date. The Option shall then expire to the extent not exercised within such 90 day period. (b) In the event that your employment by the Company is terminated by the Company for any reason other than for Cause, by you as a result of an Employer Breach (as such term is defined in the Employment Agreement) or by the Company by reason of your disability or death prior to the expiration of the Option, the Option shall be exercisable for one year from the date of such termination, but only as to such Shares that had become exercisable pursuant to paragraph 1 above (and not previously purchased) prior to such date; provided, however, that if such termination occurs after the fifth anniversary of the date of this letter, the Option shall become immediately exercisable for such one year period as to all Shares not previously purchased. The Option shall then expire to the extent not exercised within such one year period. (c) In the event that your employment by the Company is terminated by you for any reason other than an Employer Breach other than an Employer Breach prior to the expiration of the Option, the Option will be exercisable for 90 days from the date of such termination, but only as to such Shares that had become exercisable pursuant to paragraph 1 above (and not previously purchased) prior to such date; provided, however, that if such termination occurs after the fifth anniversary of the date of this letter, the Option shall become immediately exercisable for such 90 day period as to all Shares not previously purchased. The Option shall then expire to the extent not exercised within such 90 day period. (d) In the event that your employment by the Company is terminated by the Company by reason of your death or disability, the Option shall be exercisable for one year from the date of such termination, but only as to such Shares that had become exercisable pursuant to paragraph 1 above (and not previously purchased) prior to such date; provided, however, that if such termination occurs after the fifth anniversary of the date of this letter, the Option shall become immediately exercisable for such one year period as to all Shares not previously purchased. The Option shall then expire to the extent not exercised within such one year period. 24 (e) in the event of a Change of Control, the Option shall, at your option exercised by written notice delivered to the Company, be exercisable for one year from the date of such termination, but only as to such Shares that had become exercisable pursuant to paragraph 1 above (and not previously purchased) prior to such date; provided, however, that if such termination occurs after the fifth anniversary of the date of this letter, the Option shall become immediately exercisable for such one year period as to all Shares not previously purchased. The Option shall then expire to the extent not exercised within such one year period. As used in this paragraph, "Change of Control" shall mean (i) the merger, consolidation or other business combination of the Company with or into another corporation with the effect that the shareholders of the Company immediately following the merger, consolidation or other business combination, hold 50% or less of the combined voting power of the then outstanding equity interests of the surviving corporation of such merger, consolidation or other business combination ordinarily (and apart from rights accruing under special circumstances) having the right to vote in the election of directors or (ii) the replacement of a majority of the Board of Directors of the Company in any given year as compared to the directors who constituted the Board at the beginning of such year, and such replacement shall not have been approved by the Board of Directors of the Company as constituted at the beginning of such year. If any of the options granted hereunder are treated as nonqualified stock options ("NQO") as the result of exceeding the $100,000 exercise limit contained in Section 422(d) of the Internal Revenue Code of 1986, as amended, the Company shall issue separate certificates representing those shares constituting incentive stock options ("ISO") and those shares constituting NQO's and shall identify the ISO shares as such on its stock transfer records. 3. Unless at the time of the exercise of the Option a registration statement under the Securities Act of 1933, as amended (the "Act"), is in effect as to such Shares, any Shares purchased by you upon the exercise of the Option shall be acquired for investment and not for sale or distribution, and if the Company so requests, upon any exercise of the Option, in whole or in part, you will execute and deliver to the Company a certificate to such effect. The Company shall not be obligated to issue any Shares pursuant to the Option if, in the opinion of counsel to the Company, the Shares to be so issued are required to be registered or otherwise qualified under the Act or under any other applicable statute, regulation or ordinance affecting the sale of securities, unless and until such Shares have been so registered or otherwise qualified. 4. You understand and acknowledge that, under existing law, unless at the time of the exercise of the Option a registration statement Under the Act is in effect as to such Shares (i) any Shares purchased by you upon exercise of this option may be required to be held indefinitely unless such Shares are subsequently registered under the Act or an exemption from such registration is available; (ii) any sales of such Shares made in reliance upon Rule 144 promulgated under the Act may be made only in accordance with the terms and conditions of that Rule (which, under certain circumstances, restrict the number of shares which may be sold and the manner in which shares may be sold) ; (iii) in the case of securities to which Rule 144 is not applicable, compliance with Regulation A promulgated under the Act or some other disclosure exemption will be required; (iv) certificates for Shares to be issued to you hereunder shall bear a legend to the effect that the Shares have not been registered under the Act and that the Shares may not be sold, hypothecated or otherwise transferred in the absence of an effective registration statement under the Act relating thereto or an opinion of counsel satisfactory to the Company that such registration is not required; and (v) the Company will place an appropriate "stop transfer" order with its transfer agent with respect to such Shares. In addition, you understand and acknowledge that the Company has no obligation to you to furnish information necessary to enable you to make sales under Rule 144. 5. In the event that the Company shall at any time prior to the expiration of the Option and prior to the exercise thereof: (i) declare or pay to the holders of the Common Stock a dividend payable in any kind of shares of stock of the Company; or (ii) change or divide or otherwise reclassify its Common Stock into the same or a different number of shares with or without par value, or into shares of any class or classes; or (iii) consolidate or merge with, or transfer its property as an entirety or substantially all of its assets to any other corporation; or (iv) make any distribution of its assets to holders of its Common Stock as a liquidation, or partial liquidation dividend or by way of return of capital; then, upon the subsequent exercise of the Option, the exercise price of the Shares issuable upon the exercise hereof shall be appropriately adjusted by the Board of Directors of the Company so that you shall receive for the exercise price, in addition to or in substitution for the Shares to which you would be entitled upon such exercise, such additional shares of stock of the Company, or such reclassified shares of stock of the Company, or such securities or property of the Company resulting from such consolidation or merger or transfer, of such assets 25 of the Company, which you would have been entitled to receive had you exercised the option prior to the happening of any of the foregoing events. 6. The Option (or installment thereof) is to be exercised by delivering to the Company a written notice of exercise in the form attached hereto as Annex A, specifying the number of Shares to be purchased, together with payment of the purchase price of the Shares to be purchased. The purchase price is to be paid in cash. 7. The Option does not confer upon you any right whatsoever as a stockholder of the Company. The Option is granted to you under the Company's 1993 Stock Option Plan, as amended, (the "Plan") and is intended to be an incentive stock option. The terms of the Plan are incorporated by reference into the option, except as modified in accordance with the Plan by the terms set forth herein. A copy of the Plan has been delivered to you with this letter. The option shall be binding upon any successors or assigns of the Company. If the foregoing correctly sets forth our understanding of the Option, please indicate your acceptance by signing this letter in the space provided below. Very truly yours, SHEFFIELD MEDICAL TECHNOLOGIES INC. By: /s/ George Lombardi ------------------------------- George Lombardi Chief Financial Officer AGREED TO AND ACCEPTED: /s/ Loren G. Peterson - ------------------------------ Loren G. Peterson 26 Annex A STOCK SUBSCRIPTION FORM To: Sheffield Medical Technologies Inc. Gentlemen: I hereby exercise my option to purchase from Sheffield Medical Technologies Inc. (the "Company"), pursuant to the Stock Option Letter Agreement between us dated as of April 25, 1997, _________ shares of the Company's Common Stock, $.01 par value, and herewith tender payment therefor at the rate of $______ per share. The option was originally granted pursuant to the terms of the Company's 1993 Stock Option Plan. I represent and warrant that I am acquiring the said shares for my own account for investment purposes only; that I have no present intention of selling or otherwise disposing of such shares or any part thereof; that I will not transfer said shares in violation of the securities laws of the United States; that I am familiar with the business operations, management and financial condition and affairs of the Company; that I have not relied upon any representation of the Company with respect thereto; and that I have the personal financial means to comply with all of said representations. I further confirm that I have been advised that said shares will not be registered under the Securities Act of 1933, as amended, and that I have consulted with and been advised by counsel as to the restrictions on resale to which said shares will thereby be subject. The form in which I wish my name and address to appear on the Company's stock records is as follows: Name: ______________________ Address: ______________________ ______________________ ______________________ Very truly yours, ________________________ Loren G. Peterson 27 EXHIBIT C OPTION LETTER AGREEMENT DATED AUGUST 28, 1998 SHEFFIELD PHARMACEUTICALS, INC. 425 SOUTH WOODSMILL ROAD ST. LOUIS, MISSOURI 63017 August 28, 1998 To: Loren G. Peterson 1776 Stifel Lane Drive Town & Country, Missouri 63017 At a meeting of the Stock Option Committee of the Board of Directors of Sheffield Pharmaceuticals, Inc. (the "Company") held on August 25, 1998, the Company authorized the grant to you as of the date hereof of an option (the "Option") to purchase one Hundred Fifty Five Thousand (155,000) shares (the "Shares") of Common Stock, par value $.01 per share, of the Company (the "Common Stock"). No part of the option is currently exercisable. On or after August 28, 1999 and prior to August 28, 2008 (on which date the Option, to the extent it has not previously been exercised or has not previously expired, will expire), the Option may be exercised as follows: (i) as to 55,000 Shares, subsequent to the time that the Fair Market Value (as hereinafter defined) of the Common Stock equals or exceeds $1.2375 for 10 consecutive trading days (such Shares constituting the "First Tranche" of the Option); (ii) as to 50,000 Shares, subsequent to the time that the Fair Market Value of the Common Stock equals or exceeds $2.125 for 10 consecutive trading days (such shares constituting the "Second Tranche" of the Option) and (iii) as to the remaining 50,000 Shares, subsequent to the time that the Fair Market Value of the Common Stock exceeds $3.125 for 10 consecutive trading days (such Shares constituting the "Third Tranche" of the Option). As used herein, "Fair Market Value" means the closing price of the Common Stock on the principal U.S. national securities exchange on which the Common Stock is listed for trading (if the shares are so listed) or on the Nasdaq National Market or Small Cap Market (if the Common Shares are regularly quoted on the Nasdaq National Market or Small Cap Market), or, if not so listed or regularly quoted or if there is no such closing price, the mean between the closing bid and asked prices of the Common Stock on such exchange or on Nasdaq or in the over-the-counter market or, if such bid and asked prices shall not be available, as reported by any nationally recognized quotation service selected by the Company. Shares may be purchased by you upon exercise of the Option at the following respective purchase prices: (i) Shares constituting the First Tranche $1.2375 per Share; (ii) Shares constituting the Second Tranche $2.125 per Share; and (iii) Shares constituting the Third Tranche - $3.125 per Share. This Option must be exercised as to any and all Shares on or prior to August 28, 2008 (on which date the Option, to the extent it has not previously been exercised or has not previously expired, will expire). Notwithstanding anything to the contrary contained in this letter agreement, the following provisions shall apply: (a) In the event that Fair Market Value does not equal or exceed $1.2375 for 10 consecutive trading days prior to August 28, 2001 (the "Target Date"), the First Tranche of the Option may be exercised on the Target Date and for 60 days thereafter (after which 60th day the Option in respect of the First Tranche will, to the extent not previously exercised, expire); (b) In the event that Fair Market Value does not equal or exceed $2.125 for 10 consecutive trading days prior to the Target Date, the Second Tranche of the Option may be exercised on the Target Date and for 60 days thereafter (after which 60th day the Option in respect of the Second Tranche will, to the extent not previously exercised, expire); and 28 (c) In the event that Fair Market Value does not equal or exceed $3.125 for 10 consecutive trading days prior to the Target Date, the Third Tranche of the Option may be exercised on the Target Date and for 60 days thereafter (after which 60th day the Option in respect of the Third Tranche will, to the extent not previously exercised, expire). Unless at the time of the exercise of the Option a registration statement under the Securities Act of 1933, as amended (the "Act"), is in effect as to such Shares, any Shares purchased by you upon the exercise of the Option shall be acquired for investment and not for sale or distribution, and if the Company so requests, upon any exercise of the Option, in whole or in part, you will execute and deliver to the Company a certificate to such effect. The Company shall not be obligated to issue any Shares pursuant to the Option if, in the opinion of counsel to the Company, the Shares to be so issued are required to be registered or otherwise qualified under the Act or under any other applicable statute, regulation or ordinance affecting the sale of securities, unless and until such Shares have been so registered or otherwise qualified. You understand and acknowledge that, under existing law, unless at the time of the exercise of the Option a registration statement under the Act is in effect as to such Shares (i) any Shares purchased by you upon exercise of this Option may be required to be held indefinitely unless such Shares are subsequently registered under the Act or an exemption from such registration is available; (ii) any sales of such Shares made in reliance upon Rule 144 promulgated under the Act may be made only in accordance with the terms and conditions of that Rule (which, under certain circumstances, restrict the number of shares which may be sold and the manner in which shares may be sold); (iii) in the case of securities to which Rule 144 is not applicable, compliance with Regulation A promulgated under the Act or some other disclosure exemption will be required; (iv) certificates for Shares to be issued to you hereunder shall bear a legend to the effect that the Shares have not been registered under the Act and that the Shares may not be sold, hypothecated or otherwise transferred in the absence of an effective registration statement under the Act relating thereto or an opinion of counsel satisfactory to the Company that such registration is not required; and (v) the Company will place an appropriate "stop transfer" order with its transfer agent with respect to such Shares. In addition, you understand and acknowledge that the Company has no obligation to you to furnish information necessary to enable you to make sales under Rule 144. In the event that the Company shall at any time prior to the expiration of the Option and prior to the exercise thereof: (i) declare or pay to the holders of the Common Stock a dividend payable in any kind of shares of stock of the Company; or (ii) change or divide or otherwise reclassify its Common Stock into the same or a different number of shares with or without par value, or into shares of any class or classes; or (iii) consolidate or merge with, or transfer its property as an entirety or substantially all of its assets to any other corporation; or (iv) make any distribution of its assets to holders of its Common Stock as a liquidation, or partial liquidation dividend or by way of return of capital; then, upon the subsequent exercise of the Option, the purchase price of the Shares issuable upon the exercise hereof shall be appropriately adjusted by the Board of Directors of the Company so that you shall receive for the exercise price, in addition to or in substitution for the Shares to which you would be entitled upon such exercise, such additional shares of stock of the Company, or such reclassified shares of stock of the Company, or such securities or property of the Company resulting from such consolidation or merger or transfer, of such assets of the Company, which you would have been entitled to receive had you exercised the Option prior to the happening of any of the foregoing events. The Option (or installment thereof) is to be exercised by delivering to the Company a written notice of exercise in the form attached hereto as Annex A, specifying the number of Shares to be purchased, together with payment of the purchase price of the Shares to be purchased. The purchase price is to be paid in cash. The Option does not confer upon you any right whatsoever as a stockholder of the Company. By accepting the Option, you acknowledge your agreement to advise the Company in writing at least five trading days prior to selling, assigning or otherwise transferring any of the Shares. The Option is granted to you under the Company's 1993 Stock Option Plan, as amended, (the "Plan") and is not intended to be an incentive stock option. The terms of the Plan are incorporated by reference into the Option, except as modified by the terms set forth herein. A copy of the Plan has been delivered to you with this letter. 29 The Option shall be binding upon any successors or assigns of the Company. If the foregoing correctly sets forth our understanding, please indicate your acceptance by signing this letter in the space provided below. Very truly yours, Sheffield Pharmaceuticals, Inc. By: /s/ Thomas M. Fitzgerald ------------------------------- Thomas M. Fitzgerald Chairman AGREED TO AND ACCEPTED: /s/ Loren G. Peterson - ------------------------------ Loren G. Peterson 30 Annex A STOCK SUBSCRIPTION FORM To: Sheffield Pharmaceuticals, Inc. Gentlemen: I hereby exercise my option to purchase from Sheffield Pharmaceuticals, Inc. (the "Company"), pursuant to the Stock Option Letter Agreement between us dated August 28, 1998, ______ shares of the Company's Common Stock, $.01 par value, and herewith tender payment therefore at the rate of $____ per share. The option was originally granted pursuant to the terms of the Company's 1993 Stock Option Plan, as amended. I represent and warrant that I am acquiring the said shares for my own account for investment purposes only; that I have no present intention of selling or otherwise disposing of such shares or any part thereof; that I will not transfer said shares in violation of the securities laws of the United States; that I am familiar with the business operations, management and financial condition and affairs of the Company; that I have not relied upon any representation of the Company with respect thereto; and that I have the personal financial means to comply with all of said representations. I further confirm that I have been advised that said shares will not be registered under the Securities Act of 1933, as amended, and that I have consulted with and been advised by counsel as to the restrictions on resale to which said shares will thereby be subject. The form in which I wish my name and address to appear on the Company's stock records is as follows: Name: ______________________ Address: ______________________ ______________________ ______________________ Very truly yours, ________________________ Loren G. Peterson 31 EXHIBIT D OPTION LETTER AGREEMENT DATED MARCH 1, 2000 SHEFFIELD PHARMACEUTICALS, INC. 425 SOUTH WOODSMILL ROAD ST. LOUIS, MISSOURI 63017 March 1, 2000 To: Loren G. Peterson 1776 Stifel Lane Drive Town & Country, MO 63017 At a meeting of the Stock Option Committee of the Board of Directors of Sheffield Pharmaceuticals, Inc. (the "Company") held on February 29, 2000, the Company authorized the grant to you as of the date hereof of an option (the "Option") to purchase One Hundred Fifty Thousand (150,000) shares (the "Shares") of Common Stock, par value $.01 per share, of the Company (the "Common Stock"). No part of the Option is currently exercisable. On or after March 1, 2001 and prior to March 1, 2010 (on which date the Option, to the extent it has not previously been exercised or has not previously expired, will expire), the Option may be exercised as follows: (i) as to 50,000 Shares, subsequent to the time that the Fair Market Value (as hereinafter defined) of the Common Stock equals or exceeds $4.75 for 10 consecutive trading days (such Shares constituting the "First Tranche" of the Option); (ii) as to 50,000 Shares, subsequent to the time that the Fair Market Value of the Common Stock equals or exceeds $5.3125 for 10 consecutive trading days (such shares constituting the "Second Tranche" of the Option) and (iii) as to the remaining 50,000 Shares, subsequent to the time that the Fair Market Value of the Common Stock exceeds $6.3125 for 10 consecutive trading days (such Shares constituting the "Third Tranche" of the Option). As used herein, "Fair Market Value" means the closing price of the Common Stock on the principal U.S. national securities exchange on which the Common Stock is listed for trading (if the shares are so listed) or on the Nasdaq National Market or Small Cap Market (if the Common Shares are regularly quoted on the Nasdaq National Market or Small Cap Market), or, if not so listed or regularly quoted or if there is no such closing price, the mean between the closing bid and asked prices of the Common Stock on such exchange or on Nasdaq or in the over-the-counter market or, if such bid and asked prices shall not be available, as reported by any nationally recognized quotation service selected by the Company. Shares may be purchased by you upon exercise of the Option at the following respective purchase prices: (i) Shares constituting the First Tranche - - $4.75 per Share; (ii) Shares constituting the Second Tranche - $5.3125 per Share; and (iii) Shares constituting the Third Tranche - $6.3125 per Share. This Option must be exercised as to any and all Shares on or prior to March 1, 2010 (on which date the Option, to the extent it has not previously been exercised or has not previously expired, will expire). Notwithstanding anything to the contrary contained in this letter agreement, the following provisions shall apply: (a) In the event that Fair Market Value does not equal or exceed $4.75 for 10 consecutive trading days prior to March 1, 2003 (the "Target Date"), the First Tranche of the Option may be exercised on the Target Date and for 60 days thereafter (after which 60th day the Option in respect of the First Tranche will, to the extent not previously exercised, expire); (b) In the event that Fair Market Value does not equal or exceed $5.3125 for 10 consecutive trading days prior to the Target Date, the Second Tranche of the Option may be exercised on the Target 32 Date and for 60 days thereafter (after which 60th day the Option in respect of the Second Tranche will, to the extent not previously exercised, expire); and (c) In the event that Fair Market Value does not equal or exceed $6.3125 for 10 consecutive trading days prior to the Target Date, the Third Tranche of the Option may be exercised on the Target Date and for 60 days thereafter (after which 60th day the Option in respect of the Third Tranche will, to the extent not previously exercised, expire). Unless at the time of the exercise of the Option a registration statement under the Securities Act of 1933, as amended (the "Act"), is in effect as to such Shares, any Shares purchased by you upon the exercise of the Option shall be acquired for investment and not for sale or distribution, and if the Company so requests, upon any exercise of the Option, in whole or in part, you will execute and deliver to the Company a certificate to such effect. The Company shall not be obligated to issue any Shares pursuant to the Option if, in the opinion of counsel to the Company, the Shares to be so issued are required to be registered or otherwise qualified under the Act or under any other applicable statute, regulation or ordinance affecting the sale of securities, unless and until such Shares have been so registered or otherwise qualified. You understand and acknowledge that, under existing law, unless at the time of the exercise of the Option a registration statement under the Act is in effect as to such Shares (i) any Shares purchased by you upon exercise of this Option may be required to be held indefinitely unless such Shares are subsequently registered under the Act or an exemption from such registration is available; (ii) any sales of such Shares made in reliance upon Rule 144 promulgated under the Act may be made only in accordance with the terms and conditions of that Rule (which, under certain circumstances, restrict the number of shares which may be sold and the manner in which shares may be sold); (iii) in the case of securities to which Rule 144 is not applicable, compliance with Regulation A promulgated under the Act or some other disclosure exemption will be required; (iv) certificates for Shares to be issued to you hereunder shall bear a legend to the effect that the Shares have not been registered under the Act and that the Shares may not be sold, hypothecated or otherwise transferred in the absence of an effective registration statement under the Act relating thereto or an opinion of counsel satisfactory to the Company that such registration is not required; and (v) the Company will place an appropriate "stop transfer" order with its transfer agent with respect to such Shares. In addition, you understand and acknowledge that the Company has no obligation to you to furnish information necessary to enable you to make sales under Rule 144. In the event that the Company shall at any time prior to the expiration of the Option and prior to the exercise thereof: (i) declare or pay to the holders of the Common Stock a dividend payable in any kind of shares of stock of the Company; or (ii) change or divide or otherwise reclassify its Common Stock into the same or a different number of shares with or without par value, or into shares of any class or classes; or (iii) consolidate or merge with, or transfer its property as an entirety or substantially all of its assets to any other corporation; or (iv) make any distribution of its assets to holders of its Common Stock as a liquidation, or partial liquidation dividend or by way of return of capital; then, upon the subsequent exercise of the Option, the purchase price of the Shares issuable upon the exercise hereof shall be appropriately adjusted by the Board of Directors of the Company so that you shall receive for the exercise price, in addition to or in substitution for the Shares to which you would be entitled upon such exercise, such additional shares of stock of the Company, or such reclassified shares of stock of the Company, or such securities or property of the Company resulting from such consolidation or merger or transfer, of such assets of the Company, which you would have been entitled to receive had you exercised the Option prior to the happening of any of the foregoing events. The Option (or installment thereof) is to be exercised by delivering to the Company a written notice of exercise in the form attached hereto as Annex A, specifying the number of Shares to be purchased, together with payment of the purchase price of the Shares to be purchased. The purchase price is to be paid in cash. The Option does not confer upon you any right whatsoever as a stockholder of the Company. By accepting the Option, you acknowledge your agreement to advise the Company in writing at least five trading days prior to selling, assigning or otherwise transferring any of the Shares. 33 The Option is granted to you under the Company's 1993 Stock Option Plan, as amended, (the "Plan") and is not intended to be an incentive stock option. The terms of the Plan are incorporated by reference into the Option, except as modified by the terms set forth herein. A copy of the Plan has been delivered to you with this letter. The Option shall be binding upon any successors or assigns of the Company. If the foregoing correctly sets forth our understanding, please indicate your acceptance by signing this letter in the space provided below. Very truly yours, Sheffield Pharmaceuticals, Inc. By: /s/ Thomas M. Fitzgerald ------------------------------- Thomas M. Fitzgerald Chairman AGREED TO AND ACCEPTED: /s/ Loren G. Peterson - ------------------------------ Loren G. Peterson 34 Annex A STOCK SUBSCRIPTION FORM To: Sheffield Pharmaceuticals, Inc. Gentlemen: I hereby exercise my option to purchase from Sheffield Pharmaceuticals, Inc. (the "Company"), pursuant to the Stock Option Letter Agreement between us dated March 1, 2000, _______ shares of the Company's Common Stock, $.01 par value, and herewith tender payment therefor at the rate of $____ per share. The option was originally granted pursuant to the terms of the Company's 1993 Stock Option Plan, as amended. I represent and warrant that I am acquiring the said shares for my own account for investment purposes only; that I have no present intention of selling or otherwise disposing of such shares or any part thereof; that I will not transfer said shares in violation of the securities laws of the United States; that I am familiar with the business operations, management and financial condition and affairs of the Company; that I have not relied upon any representation of the Company with respect thereto; and that I have the personal financial means to comply with all of said representations. I further confirm that I have been advised that said shares will not be registered under the Securities Act of 1933, as amended, and that I have consulted with and been advised by counsel as to the restrictions on resale to which said shares will thereby be subject. The form in which I wish my name and address to appear on the Company's stock records is as follows: Name: ______________________ Address: ______________________ ______________________ ______________________ Very truly yours, ________________________ Loren G. Peterson 35 EXHIBIT E IRREVOCABLE PROXY The undersigned, Loren G. Peterson ("Holder"), an individual with a residential address of 1776 Stifel Lane Drive, Town and Country, Missouri, 63017, hereby revokes any and all proxies heretofore granted with respect to any shares of common stock, $.01 par value (the "Stock"), of Sheffield Pharmaceuticals, Inc. ("Sheffield") held by Holder and, hereby irrevocably appoints the Chairman of Sheffield, Thomas M. Fitzgerald, or his designee, and each of them, as attorney-in-fact and proxy of Holder to attend any and all meetings of the stockholders of Sheffield and to vote such Holder's Stock, to represent and otherwise to act for Holder in the same manner and with the same effect as if such Holder were personally present and to act by consent in the same manner and with the same effect as if Holder were executing such consent, with respect to any matter. Holder agrees that, so long as this Irrevocable Proxy remains in effect, Holder will not execute or deliver to any persons, any proxy forms relating to any meeting, or written consent in lieu of a meeting, of stockholders of Sheffield, will promptly provide Sheffield with copies of any communications related to Sheffield received by Holder and will not take any action inconsistent with this Irrevocable Proxy. The foregoing appointment shall be (a) absolute and irrevocable and (b) deemed coupled with an interest. This Irrevocable Proxy shall be effective for a period of one (1) year in accordance with Delaware law and may be relied upon by any third party. IN WITNESS WHEREOF, the undersigned Holder has executed this Irrevocable Proxy as of April 26, 2002. Witness: LOREN G. PETERSON /s/ Sally Reiter /s/ Loren G. Peterson - ------------------------- ---------------------------- Witness print name: Sally Reiter 36 EXHIBIT F GENERAL RELEASE Loren G. Peterson, in consideration of the good and valuable consideration contained in the attached Agreement (the "Agreement"), the receipt and sufficiency of which is hereby acknowledged, on behalf of himself, his heirs, administrators, representatives, executors, successors, and assigns, hereby irrevocably and unconditionally releases, acquits, and forever discharges Sheffield Pharmaceuticals, Inc. and its predecessors (including without limitation Sheffield Medical Technologies Inc.), parents, subsidiaries, affiliates, divisions, successors and assigns, and all of their current and former agents, officers, directors, employees, members, trustees, fiduciaries, representatives and attorneys (the "Released Parties") from any and all charges, complaints, claims, liabilities, obligations, promises, agreements, damages, causes of action, suits, demands, losses, debts, and expenses of any nature whatsoever, known or unknown ("Claims") which he has, had or claims to have against any Released Party up to and including the date he signs this General Release. This General Release of Claims shall include, without limitation, Claims relating to his employment and separation from employment with the Company, Claims of discrimination under the common law or any federal or state statute (including, without limitation, the Civil Rights Act of 1964, the Americans with Disabilities Act and the Age Discrimination in Employment Act, all as amended), Claims for wrongful discharge, Claims for the payment of any salary, wages, vacation time, bonuses or commissions, Claims for severance or other benefits (other than as specifically set forth in paragraphs 2, 3 and 4 of the Agreement), Claims of detrimental reliance, and all other statutory, common law or other Claims of any nature whatsoever. This General Release of Claims does not apply to any Claims concerning a breach of the Agreement, including the option letter agreements referred to in Paragraph 4 of the Agreement as amended by the Agreement, or any claims arising after the date you sign this General Release. With respect to the Claims being waived herein, Peterson acknowledges that he is waiving his right to receive money or any other relief in any action instituted by him or on his behalf by any other person, entity or government agency. IN WITNESS WHEREOF, the undersigned Loren G. Peterson has executed this General Release as of April 26, 2002. Witness: LOREN G. PETERSON /s/ Sally Reiter /s/ Loren G. Peterson - ------------------------- ---------------------------- Witness print name: Sally Reiter 37 EXHIBIT G GENERAL RELEASE Sheffield Pharmaceuticals, Inc. and its predecessors (including without limitation Sheffield Medical Technologies, Inc.), parents, subsidiaries, affiliates, divisions, successors and assigns, and all of their current and former agents, officers, directors, employees, members, trustees, fiduciaries, representatives and attorneys (the "Company Parties"), in consideration of the good and valuable consideration contained in the attached Agreement (the "Agreement"), the receipt and sufficiency of which is hereby acknowledged, hereby irrevocably and unconditionally release, acquit, and forever discharge Loren G. Peterson, his heirs, administrators, representatives, executors, successors and assigns from any and all charges, complaints, claims, liabilities, obligations, promises, agreements, damages, causes of action, suits, demands, losses, debts, and expenses of any nature whatsoever, known or unknown ("Claims") which the Company Parties have, had or claim to have against Peterson up to and including the date Peterson signs this Agreement. This General Release of Claims does not apply to any Claims concerning a breach of this Agreement, criminal fraudulent acts or other criminal conduct negatively affecting the Company, or any claims arising after the date Peterson signs this Agreement. IN WITNESS WHEREOF, the undersigned Thomas M. Fitzgerald, on behalf of the Company Parties, has executed this General Release as of ______________, 2002. Witness: THOMAS M. FITZGERALD /s/ Deborah H. Wood /s/ Thomas M. Fitzgerald - ------------------------------ -------------------------------- Witness print name: Deborah H. Wood 38 -----END PRIVACY-ENHANCED MESSAGE-----