-----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, EZ2oKby3ImMUeQc83TGXKUDJiD2cYPtSGY5cQSzIhVZ/8KnvTDwBqtP4MdJ2Q8gF ebPGRggwivtZliM1EDtVlQ== 0001036050-99-000541.txt : 19990322 0001036050-99-000541.hdr.sgml : 19990322 ACCESSION NUMBER: 0001036050-99-000541 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990319 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BOSTON LIFE SCIENCES INC /DE CENTRAL INDEX KEY: 0000094784 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 870277826 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405/A SEC ACT: SEC FILE NUMBER: 000-06533 FILM NUMBER: 99569339 BUSINESS ADDRESS: STREET 1: 31 NEWBURY ST STREET 2: SUITE 300 CITY: BOSTON STATE: MA ZIP: 02116 BUSINESS PHONE: 6174250200 MAIL ADDRESS: STREET 1: 31 NEWBURY STREET STREET 2: SUITE 300 CITY: BOSTON STATE: MA ZIP: 02116 FORMER COMPANY: FORMER CONFORMED NAME: GREENWICH PHARMACEUTICALS INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: STRATEGIC MEDICAL RESEARCH CORP /DE DATE OF NAME CHANGE: 19790521 10-K405/A 1 BOSTON LIFE SCIENCES, INC. FORM 10-K405/A SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------- FORM 10-K/A [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD Commission file number 0-6533 BOSTON LIFE SCIENCES, INC. (Exact name of registrant as specified in its charter) DELAWARE 87-0277826 (State or other jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification no.) 31 NEWBURY STREET, SUITE 300 BOSTON, MASSACHUSETTS 02116 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (617) 425-0200 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE $.01 PER SHARE WARRANTS TO PURCHASE COMMON STOCK, PAR VALUE $.01 PER SHARE SERIES A PREFERRED STOCK PURCHASE RIGHTS (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or 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. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (((S)) 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K/A or any amendment to this Form 10-K/A. [_] Based on the last sales price of the Registrant's Common Stock as reported on the Nasdaq Small Cap Market on March 9, 1999, the aggregate market value of the 13,918,934 outstanding shares of voting stock held by nonaffiliates of the Registrant was $98,267,674. As of March 12, 1999, there were 14,103,005 shares of the Registrant's Common Stock issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the following document are incorporated by reference in this report on Form 10-K/A: The Company's Definitive Proxy Statement for the Company's 1999 Annual Meeting of Stockholders (Part III). PART I Item 1. Business. FORWARD-LOOKING STATEMENTS The description of the business of Boston Life Sciences, Inc. ("BLSI" or the "Company" or "We") that follows contains certain forward-looking statements on the prospects for our pharmaceutical development activities and results of operations based on our current expectations, including, but not limited to statements regarding certain milestones with respect to the Company's technologies and product candidates. Statements that are not historical facts, including statements about the Company's beliefs and expectations, are forward- looking statements. Forward-looking statements can be identified by, among other things, the use of forward-looking language, such as "believe," "expects," "may," "will", "should," "seeks," "plans," "scheduled to," "anticipates" or "intends" or the negative of those terms, or other variations of those terms or comparable language, or by discussions of strategy or intentions. Forward- looking statements speak only as of the date they are made and the Company undertakes no obligation to update them. For a description of meaningful factors which could cause future results to differ significantly from our current expectations, see "Business - Products under FDA Review", "Business - Products in Clinical Trials", "Business - Principal Preclinical Development Programs", "Business - Other Information", "Business-Business Risks", and "Business-Market Risks" in Part I of this Annual Report and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II of this Annual Report on Form 10-K/A for the fiscal year ended December 31, 1998. OVERVIEW We are a development stage biotechnology company engaged in the research and development of novel therapeutic and diagnostic products to treat chronic debilitating diseases such as cancer, central nervous system (CNS) disorders and autoimmune diseases. The Company was incorporated in Delaware in 1972 under the name Greenwich Pharmaceuticals Incorporated ("Greenwich"). Effective June 15, 1995, Greenwich merged with a privately-held company named Boston Life Sciences, Inc. (the "Merger"). Greenwich survived the Merger and changed its name to Boston Life Sciences, Inc. On June 6, 1997 the Company's stockholders approved a one-for-ten reverse split of the common stock effective as of June 9, 1997. Our principal executive offices are located at 31 Newbury Street, Suite 300, Boston, Massachusetts, and the telephone number is (617) 425-0200. In general, our corporate strategy is to seek to (i) fund the early development of our compounds in preclinical development and (ii) enter into corporate partnering arrangements with established pharmaceutical or biotechnology companies to support the continued development of our compounds and the marketing of any products as and to the extent they receive government approval. Additionally, since We do not currently own any laboratory or manufacturing facilities, We contract for such services and intend to continue to do so. The Company currently has eight technologies in its product portfolio. Therafectin, a potential treatment for rheumatoid arthritis, was acquired as a result of the Merger. The balance of our technologies currently under development were invented or discovered by researchers working at Harvard University and its affiliated hospitals ("Harvard and its Affiliates") and have been licensed to us. PRODUCTS UNDER FDA REVIEW 1. Therafectin(R) Therafectin is a synthetic molecule developed for the treatment of Rheumatoid Arthritis which affects approximately 2.5 million individuals in the U.S. It is estimated that the total U.S. market for Rheumatoid Arthritis drug sales is approximately $2.5 billion per year. Therafectin has undergone extensive preclinical and clinical testing in which the molecule has been demonstrated to be safe and well-tolerated. A New Drug Application ("NDA") was initially filed with the Food and Drug Administration ("FDA") in 1993 by Greenwich. The Company's (BLSI) 20 week, double-blind, placebo-controlled Phase III trial included approximately 220 patients, and was conducted at 25 centers across the United States. The trial was designed to closely resemble Greenwich's 200 patient Phase III RA-9 trial which demonstrated that Therafectin was more effective than placebo and reached positive statistical significance. The BLSI trial was completed in August 1997, and on September 30, 1997, the Company announced preliminary results which were based on primary efficacy called "Therapeutic Success." In the preliminary analysis of results, Therafectin fell short of statistical significance although 40% of patients receiving Therafactin and 33% of patients receiving placebo achieved "Therapeutic Success". However, in centers that enrolled at least ten patients (about half of the patient population), 48% of Therafactin patients achieved "Therapeutic Success" as compared to 29% of placebo patients. Further, among the pre-defined secondary efficacy variables, the improvement in the number of swollen joints in patients receiving Therafectin was highly statistically significantly better than in those patients receiving placebo (p is less than 0.007). Further, in a group of patients with higher levels of swollen joints (approximately half of those completing the trial), there was a statistically significant difference between Therafectin and placebo in achieving success as measured by the primary efficiency variable (Therapeutic Success). Additionally, utilizing the most recent MIRA ("Minocycline in Rheumatoid Arthritis") criteria for meaningful improvement", defined as at least a 50% improvement in joint swelling compared to baseline, Therafectin showed a statistically significant improvement compared to placebo. Consistent with the previously established excellent safety profile of Therafectin, there were no significant adverse events attributable to Therafectin during the course of the study. In view of the excellent safety profile of Therafectin, and the previous statistically significant successful trial combined with at least three supportive trials (previously completed by Greenwich), the Company convened an advisory panel of clinical rheumatologists to seek input and advice regarding whether to proceed with the submission of an amendment to the pending NDA seeking approval for the drug. In January 1998, We announced our plans to seek marketing approval for Therafectin based upon the cumulative data obtained from the trial and the input provided by our special outside advisory panel of clinical rheumatologists. The 1 overall opinion of the advisory panel was that the cumulative safety and efficacy data on Therafectin justified its use by clinicians looking for a safe alternative to other more toxic drugs now being used to treat Rheumatoid Arthritis. The Company also reported that analysis of the trial data strongly suggested the therapeutic efficacy of Therafectin. Applying the widely-accepted "Paulus" criteria of therapeutic efficacy (at least a 20% improvement in 4 of 6 measures: joint tenderness scores, joint swelling scores, physician's and patient's global assessment, erythrocyte sedimentation rate (ESR), and morning stiffness), there was a highly statistically significant difference in the percentage of Therafectin patients meeting the Paulus criteria for therapeutic efficacy as compared to the percentage of placebo patients meeting the Paulus criteria (p greater than 0.02). Among the predefined secondary efficacy variables, the reduction in the number of swollen joints, the ESR results, Functional Class scores, and the CLINHAQ (a quality of life measurement) were statistically significant in favor of Therafectin. In addition, after withdrawing non-steroidal medication, clinical secondary variables returned to baseline or better in the Therafectin group, while remaining statistically significantly worse than baseline in the placebo group. Applying the American College of Rheumatology (ACR) "50% improvement" criteria to the number of swollen joints, 36% of Therafectin patients experienced at least a 50% decrease in the number of swollen joints compared to 23% of placebo patients resulting in a statistically significant difference (p greater than 0.04). Finally, in the subgroup of patients (about half the total number) entering the study with greater than the median number of swollen joints (ten), the primary and secondary variables specified in the trial protocol were statistically significant. The Company believes that statistically significant improvement in the important clinical variables related to joint swelling, functional class, and "quality of life" experienced by the Therafectin patients demonstrates the clinical efficacy of Therafectin. Because the beneficial effect is most obvious on joint swelling, the Company believes that the other improvements are secondary to Therafectin's apparent ability to favorably impact the underlying disease. In 1998, the Company concluded agreements for drug substance and tablet manufacturing with FDA compliant Good Manufacturing Practices ("GMP") manufacturers (replacing its previous relationship with Boehringer which was adversely impacted by the closing of the latter's Connecticut facility, which had been expected to produce Therafectin launch supplies). Commercial quantities of drug substance have been manufactured and transferred to the tablet manufacturer, and commercial quantities of finished tablets were manufactured during the first quarter of 1999. Manufacturing data reflecting this production are expected to be submitted to the FDA during the first half of 1999, however there can be no assurance that the Company will meet such expectations. The Company filed an amendment to the NDA for Therafectin in 1998, and intends to make a follow-up request for a meeting with the FDA's Arthritis Advisory Committee along with submission of the manufacturing data. However, there can be no assurance that a decision will be rendered or that Therafectin will ultimately be approved. The Company's strategy is to enter into a marketing agreement with a well established pharmaceutical company, but there can be no assurance that the Company will be able to successfully manufacture, market, and distribute Therafectin, or to enter into a licensing and strategic alliance on acceptable terms. PRODUCTS IN CLINICAL TRIALS 1. Altropane(TM) Parkinson's Disease is a chronic, irreversible, neurodegenerative disease which generally affects people over 50 years old. It is caused by a significant decrease in the number of dopamine terminals in specific areas of the brain. Inadequate production of dopamine causes the classic PD symptoms of resting tremor, muscle retardation, and rigidity. Altropane is an 123I-based nuclear medicine imaging agent that We believe may be useful in the diagnosis of PD in its early stages. Since administration of currently available therapies at an early stage of PD may delay the progression of the disease, early definitive diagnosis may be of substantial benefit. PD afflicts about 250,000-500,000 Americans and about 4 million individuals worldwide (developed nations). The number of individuals having PD is expected to grow substantially as people continue to live longer and the overall population ages. We filed an IND application in November 1996 asking for permission to conduct full scale clinical trials of Altropane. We started our Phase I clinical trial in the second quarter of 1997 and completed the Phase I trial in February 1998. We started our Phase II studies in April 1998 and completed the Phase II trial in February 1999. We believe that results of the Phase II study provide clear evidence that Altropane is useful in telling the difference between normal individuals from those individuals with early PD. The interim results thus far analyzed, based upon half the total number of enrolled patients in the Phase II trial indicate that patients with early or mild PD can be reliably and easily differentiated from normal patients based on the Altropane scan results. Normal patients had a mean striatal binding potential of 1.07 + 0.17 vs 0.44 + 0.19 for - - patients with early/mild PD (p greater than 0.00007). The highest binding potential for a PD patient (0.66) was still well below the lowest binding potential seen in the normal patients (0.9). Qualitative assessment of the scans revealed moderate to marked decrease in at least one quadrant of the striatum in the brain of PD patients compared to the normal patients. The Company plans to initiate its Phase III study in March of 1999, although there can be no assurances that this timetable will be met. Our 1997 Annual Report indicated that we had expected to complete our Phase III trial by the end of 1998 although we noted that there were no assurances that this timing would be met. Due to the functional impairment associated with PD, and the resulting physical inability of many patients to complete their clinical visits when scheduled, the completion of Phase II enrollment took longer than originally expected. We are implementing measures to assist Phase III patients in completing their clinical visits as originally scheduled. While we believe that these and other supportive measures will have a beneficial effect, the completion of Phase III by the end of 1999 should be regarded as a goal rather than as well-assured. 2 In December 1998, the Company announced that it had started preclinical development on a "second generation" technetium-based compound for the diagnosis of PD. This compound differs from Altropane in structure and in the advantageous substitution of technetium for iodine as the radio-ligand. Subsequent research has shown that this agent can differentiate PD from normal, but comprehensive data on its performance as compared to Altropane is not yet available. Human clinical trials with this new agent, which the Company hopes to commence in 2000, although there can be no assurance that the Company will meet such expectations, will establish the ultimate clinical usefulness for this technetium-based compound. The Company believes that the ability to eventually follow Altropane to market with a second-generation technetium product would give BLSI a long-term competitive advantage in this rapidly emerging diagnostic area. PRINCIPAL PRECLINICAL DEVELOPMENT PROGRAMS 1. Troponin It is now generally accepted that angiogenesis (the formation of new blood vessels) plays an important role in the growth and spread of cancer throughout the body. Increasing experimental and clinical evidence strongly suggests that the inhibition of angiogenesis could potentially offer a general therapeutic approach to the prevention or treatment of all solid tumor metastases. This approach is independent of tumor type, since it targets only proliferating blood vessel cells, and if the anti-angiogenic agent is specific to endothelial (blood vessel) cells, it is also theoretically nontoxic since angiogenesis does not take place under normal circumstances. Our anti-angiogenic agent, Troponin I was discovered to be present in cartilage (a tissue devoid of blood vessels) by scientists at Children's Hospital in Boston, and found to have extremely strong anti-angiogenic activity, both in vitro and in vivo. Recombinant Troponin I has been shown to inhibit lung metastases in animals at doses that by extrapolation to the human equivalent appears to yield a convenient clinical dosing regimen. The Company's goal is, therefore, to complete its clinical formulation effort enabling the subcutaneous administration of Troponin in human trials. The scientific basis for the Company's development of Troponin was published in the March 16, 1999 edition of the Proceedings of the National Academy of Sciences, and summarized in a Company Press Release of the same date. The Company's goal is to file an IND and initiate human clinical trials of Troponin in the second half of 1999, but there can be no assurance that the Company will be able to meet such expectations, or that it will be able to successfully manufacture, market and distribute Troponin. In our 1997 Annual Report, we had indicated that our objective was to file an IND for Troponin around the end of 1998. More extensive pre-clinical development work than originally planned was necessary in order to (1) further define desirable parameters for the manufacturing process prior to initiating the required toxicology, teratogenicity, and wound healing studies for regulatory compliance, and (2) generate additional information on dosing for use in establishing clinical protocols. In addition to the treatment of cancer, the anti-angiogenic approach appears to have significant potential for the treatment of eye diseases that are associated with abnormal retinal angiogenesis. Two of these diseases, Macular Degeneration and Diabetic Retinopathy, are the major causes of blindness in developed countries. Preliminary experiments in animal models of these diseases suggest that Troponin can effectively inhibit retinal angiogenesis. The Company is, therefore, developing Troponin for these indications, and hopes to file an IND for ophthalmic indications in the year 2000, although there can be no assurance that the Company will meet such expectations. BLSI owns the exclusive license to the recently issued (November 1998) U.S. patent for the use of Troponin I to treat a broad spectrum of angiogenic diseases including solid tumors, eye diseases, atherosclerosis, hypertrophic scarring (including in the spinal cord), arthritis and psoriasis. 2. Axogenesis Factor 1 (AF-1) Axogenesis Factor 1 (AF-1) is a nerve growth factor which specifically promotes axon outgrowth in central nervous system (CNS) cells. Since axons form the connections between cells of the CNS (brain and spinal cord), We believe that AF-1 could provide a means to regenerate those connections following CNS damage suffered in stroke or spinal cord injury. In addition, chronic degenerative diseases of the CNS such as Parkinson's Disease or Alzheimer's Disease, may be amenable to AF-1 or similar treatment. Results obtained by BLSI scientists in animals appear to demonstrate the feasibility of regenerating the injured optic nerve and spinal cord by treating these tissues with AF-1 or related compounds. Further experiments are presently being conducted to expand upon these results, with the aim of achieving substantial functional recovery after such injuries. If these ongoing studies are successful, the Company will proceed toward human clinical studies. Some of the important new findings concerning the regulation of axon growth in CNS nerve cells that were generated by BLSI researchers were announced in 1998. The discoveries were presented at the annual meeting of the Society for Neuroscience and were published in The Journal of Biological Chemistry. The paper describes the intracellular pathway that may control axon growth in all nerve cells. 3 The annual incidence of stroke in the U.S. is approximately 500,000 with more than 3,000,000 stroke survivors currently alive. The incidence of traumatic brain injury is approximately 50,000 annually. The incidence of spinal cord injury is approximately 10,000 cases annually. Treatment for these conditions is presently limited to hemodynamic support, steroids to reduce inflammation, and, in the case of stroke, the correction of predisposing hematological abnormalities. 3. C-MAF In June 1996, the Company acquired the rights to a transcription factor called C-MAF which has been shown, in preclinical in vitro tests, to regulate the switching of T helper 1 (Th1) cells into T helper 2 (Th2) cells. The Company believes that the ability to switch Th1 cells into Th2 cells (and vice versa) may be significant in the treatment of autoimmune diseases and allergies. The discovery of and potential role for this factor was the subject of a lead article in the June 28, 1996 edition of Cell. When C-MAF was inserted into Th1 cells, they transformed themselves into Th2 cells. The Company's collaborating scientists have since accomplished the stable transfection of a large proportion of T cells in culture, which is the first step in creating a gene therapy product for clinical use. In a "Proof of Principle" experiment, C-MAF was inserted into a fertilized mouse egg. The T cells of the fully developed animal all appeared to be of the Th2 subtype, thereby providing evidence that one can transform an animal's T cells in vivo. Animal experiments are currently underway in an attempt to demonstrate that autoimmune disease might be successfully treated using this approach. In addition, the Company's scientists believe that they have identified the C-MAF promoter, which could represent an ideal target for the development for small molecule inhibition of the allergic/autoimmune response. A product based upon a successful program in this area would potentially address a large cross-section of autoimmune and allergic diseases. In addition to C-MAF, a second factor, called NIP-45, has been discovered which appears to synergize with C-MAF and other factors to significantly boost transcription of the IL4 gene in Th2 cells. Thus, a gene therapy strategy focused on either inserting C-MAF alone, or C-MAF together with NIP-45, could potentially lead to the development of therapeutic product for the treatment of severe autoimmune diseases, although results to date are preliminary. The approach to the treatment for allergies requires the development of an inhibitor to C-MAF, NIP-45, or both, in order to decrease the number of Th2 cells and to restore the proper balance between the numbers of Th1 and Th2 cells at the site of inflammation. In the case of asthma and hay fever, the optimal formulation would be a small molecule that could be delivered via aerosol to the lung where it would be incorporated into the Th2 cells surrounding the bronchi. The Company's strategy for the commercialization of this technology is to collaborate with a corporate partner in the discovery and clinical development of such a small molecule inhibitor utilizing the basic research and screening techniques developed by the BLSI research program. OTHER INFORMATION SCIENTIFIC ADVISORY BOARD We have organized a Scientific Advisory Board, which currently consists of six members (the "Scientific Advisors"). The Scientific Advisors have extensive experience in fields related to our fields of research. The Scientific Advisors may be asked to review and evaluate our research programs, to provide advice on technical matters in fields in which they have experience, and to recommend personnel to us. The Scientific Advisors are employed by or have consulting agreements with other organizations, some of which may or may not conflict or compete with us, and the Scientific Advisors are expected to spend only a minor portion of their time working for us. Except for members of the Scientific Advisory Board who are also consultants to the Company or its subsidiaries, the Scientific Advisors are not expected to participate actively in our activities or in the development of our technologies. Some of the organizations that the Scientific Advisors are affiliated with may have regulations or policies which limit their ability to act as consultants to us. Any new regulations or policies adopted in the future might limit the ability of the Scientific Advisors to consult with the Company. Inventions or processes discovered by the Scientific Advisors do not become our property but remain the property of an Advisors' full-time employer, other than those inventions or processes that may be covered by consulting agreements between us and such advisors. In addition, the institutions with which the Scientific Advisors are affiliated may make available the research services of their scientific and other skilled personnel, including the Scientific Advisors, to organizations other than us under sponsored research agreements with others. Under such agreements, such organizations 4 may be obligated to assign or license patents and other proprietary information which may result from research sponsored by an entity other than us, including research performed by a Scientific Advisor for a competitor of the Company. The members of the Scientific Advisory Board and a composite of their professional background and affiliations is as follows: HENRY BREM, M.D. Dr. Brem is Professor of Neurosurgery, Ophthalmology, and Oncology at Johns Hopkins University, and Director of Neurosurgical Oncology at Johns Hopkins Hospital. JOSEPH P. VACANTI, M.D. Dr. Vacanti is Associate Professor of Surgery, Harvard Medical School, and Director of the Laboratory for Transplantation and Tissue Engineering at the Children's Hospital, Boston. ALEXANDER M. KLIBANOV, PH.D. Dr. Klibanov is Professor of Chemistry at Massachusetts Institute of Technology. MICHAEL A. MOSKOWITZ, M.D. Dr. Moskowitz is Professor of Neurology, Harvard Medical School, and Associate Neurologist at Massachusetts General Hospital. VLADIMIR TORCHILIN, PH.D. Dr. Torchilin is the Head of the Chemistry Program at the Center for Imaging and Pharmaceutical Research, and Associate Professor of Radiology at the Harvard Medical School. LICENSING AGREEMENTS We have entered into a number of exclusive worldwide licenses of patent applications covering our technologies. These licenses are obtained from the collaborating institutions where such technologies were invented or discovered (generally Harvard and its Affiliates), and generally include the right to sublicense, to make, use or sell, products or processes resulting from the development of these technologies. The licensing agreements generally require the payment of an initial licensing fee as well as additional payments upon reaching development milestones, as defined in each respective agreement. The licensing agreements also provide for the payment of a royalty to the collaborating institution based upon the sales of any products developed by us or our sublicensees. We usually have a first option to license additional technologies invented or discovered during the course of related research programs funded by us. There can be no assurance that such research will lead to the discovery of new technologies or that We will be able to obtain a license for any newly discovered technologies on acceptable terms, if at all. BUSINESS RISKS THE COMPANY IS UNCERTAIN REGARDING THE PATENTS AND PROPRIETARY RIGHTS OF ITS PRODUCT CANDIDATES Our patent strategy has been to aggressively pursue patent protection, in the U.S. and in most developed countries, for our compounds and technologies. Our goal is to obtain broad patent protection for our compounds under development and their related medical indications. Although We will seek patent protection for our technologies, the patent application and issuance process generally takes several years and is usually very expensive without any guarantee that a patent will be issued. In many cases, the Company's know-how and technology may not be patentable. If We do not obtain patent protection for our technologies, our ability to compete and business prospects may be significantly and negatively affected. Further, even if patents can be obtained, there can be no guarantee that these patents will provide us with any competitive advantage. Risks associated with protecting our patent and proprietary rights include the following: . Our ability to protect our technologies could be delayed or negatively affected if the United States Patent and Trademark Office (the "USPTO") requires clinical evidence that our technologies work. . Our competitors may develop similar technologies or products, or duplicate any technology developed by us. . If patents are issued to us, our competitors may develop products which are similar to ours but which do not infringe on our patents or products, or a third party may successfully challenge one or more of our patents. . Our patents may infringe on the patents or rights of other parties which may decide not to grant a license to us. . We may have to change our products or processes, pay licensing fees or stop certain activities because of the patent rights of third parties which could cause additional unexpected costs and delays. Patent law in the fields of healthcare and biotechnology is still evolving. As a result, future changes in patent laws might conflict with the existing or future patent rights of others. For the same reasons, the products of others could infringe on our patent rights. The defense and prosecution of patent claims is both expensive and time-consuming, even if We receive a favorable outcome. If any existing or future patent owned by or licensed to us or our collaborators fails to protect us against competitors, it could: . Subject us to significant liabilities to third parties, 5 . Require us to license rights from third parties, . Require us to alter our products or processes or . Require us to cease developing and/or selling certain of our technologies. We also rely on trade secrets and proprietary know-how. We seek to protect this information primarily through confidentiality agreements with our collaborators, employees and consultants. There can be no guarantee that these agreements will not be breached or that We will have adequate remedies for such breach. In addition, our trade secrets may become known or be developed independently by competitors. If consultants, key employees or other third parties apply technological information which they have developed separate from the Company to our technologies, there may be disputes as to the ownership of such information which may not be resolved in our favor. Our scientific advisors and other consultants are employed by and may have consulting agreements with third parties. Therefore, any inventions discovered by such individuals are not likely to become our property. THE COMPANY HAS ALWAYS HAD LOSSES FROM ITS OPERATIONS AND EXPECTS FUTURE LOSSES We are a development stage company. We have never generated revenues from product sales, and We do not currently expect to generate revenues from product sales for at least the next eighteen months. As of December 31, 1998, We have incurred total net losses since inception of approximately $40 million. To date, We have dedicated most of our financial resources to the research and development of our product candidates, preclinical compounds, and other technologies (collectively referred to herein as our "technologies"), general and administrative expenses and costs related to obtaining and protecting patents. We expect to incur significant operating losses for at least the next twenty-four months, and possibly longer, primarily due to the continued progress of our research and development programs, including preclinical studies and clinical trials, and costs associated with making and selling our products. Our ability to earn profits will depend on many things including: . Successfully completing the research and development of our technologies; . The time, cost and effort required to obtain regulatory approvals; . Establishing collaborative arrangements for manufacturing, sales and marketing capabilities; . Protecting our patent and other intellectual rights; . The ability of our licensors or collaborators to protect their patent and other intellectual rights; . Competing technology and market developments; . Manufacturing costs and the costs of commercializing our products; and . Raising enough money to finance our business. There can be no guarantee that the Company will become profitable or that if it becomes profitable, it will remain profitable. THE COMPANY DEPENDS HEAVILY ON HARVARD UNIVERSITY AND ITS AFFILIATES Most of our research and development is completed through Harvard University and its affiliated hospitals ("Harvard and its Affiliates") under sponsored research agreements. Researchers working at Harvard and its Affiliates invented or discovered virtually all of our current technologies. Therefore, most of the Company's business depends upon: . Harvard and its Affiliates continuing to perform research and development work under sponsored research agreements with us; and . Our ability to maintain the licenses that We received from Harvard and its affiliates for our current technologies. THERE CAN BE NO GUARANTEE THAT HARVARD AND ITS AFFILIATES WILL CONTINUE TO WORK WITH US. Each of our collaborative research agreements is managed by a sponsoring scientist and/or researcher who has his or her own independent affiliation with Harvard and its Affiliates. In addition, We may enter into consulting, advisory, and related arrangements with other scientific, research and development professionals whom We believe can assist us in the development of our technologies. A summary of the principal scientific, research and development professionals associated with the Company, and a composite of their professional background and affiliations is as follows: 6 LARRY I. BENOWITZ, PH.D., Director, Laboratories for Neuroscience Research in Neurosurgery, Children's Hospital, Boston; Associate Professor of Neuroscience, Department of Surgery, Harvard Medical School ALAN J. FISCHMAN, M.D., PH.D., Chief, Department of Nuclear Medicine, Massachusetts General Hospital; Professor of Radiology, Harvard Medical School LAURIE H. GLIMCHER, M.D., Irene Heinz Given Professor of Immunology, Harvard School of Public Health; Professor of Medicine, Harvard Medical School ALEXANDER M. KLIBANOV, PH.D., Professor of Chemistry, Massachusetts Institute of Technology ROBERT S. LANGER, SC.D. Germeshausen Professor of Chemical and Biomedical Engineering, Massachusetts Institute of Technology BERTHA K. MADRAS, PH.D., Associate Professor of Psychobiology, Harvard Medical School PETER MELTZER, PH.D., President, Organix, Inc., Woburn, MA VLADIMIR TORCHILIN, PH.D., Head of the Chemistry Program, Center for Imaging and Pharmaceutical Research and Associate Professor of Radiology, Harvard Medical School THE COMPANY WILL NEED TO RELY ON FUTURE AND CERTAIN PRIOR RELATIONSHIPS IN ORDER TO BE SUCCESSFUL We expect that developing, clinical testing, manufacturing and commercializing our technologies will require working with various corporate partners, joint venturers, licensors, sub-licensees and others. There can be no guarantee that: . We will be able to enter into such collaborations on acceptable terms and conditions, . That such collaborations will be successful or, . The parties will not dispute the ownership rights to any technology developed under such collaborations. If any of our collaborators breach or terminate their agreement with us or otherwise fail to conduct their activities on time, it could delay the development or commercialization of the technology for which the parties are collaborating. Further, We may need to undertake additional responsibilities or to devote additional resources. The termination or cancellation of any working arrangements could also negatively affect our patent and intellectual property rights, as well as our financial condition and operations. If We are not able to establish or maintain collaborative arrangements, We will need more money to research and develop technologies on our own and may encounter delays in introducing our products. We may also find that not collaborating with others may negatively affect our development and manufacturing efforts, as well as the sales of any products. We also expect to rely on third parties to manufacture our products. There can be no assurance that We will be able to contract with manufacturers who can fulfill our requirements for quality, quantity and timeliness, or that We would be able to find substitute manufacturers, if necessary. If We are unable to contract with manufacturers on acceptable terms, it could negatively affect our ability to conduct preclinical and clinical testing and may delay our efforts to obtain regulatory approvals. In addition, manufacturing of our products on a commercial scale will require us to incur significant start-up expenses and to expand our facilities and personnel. No guarantee can be given that We can develop such manufacturing capability or hire and train qualified personnel. THE COMPANY DEPENDS HEAVILY ON ITS KEY PERSONNEL AND MAY NEED ADDITIONAL KEY PERSONNEL Our success depends significantly upon our ability to attract and retain highly qualified scientific and management personnel. There is significant competition for such personnel from other companies, research and academic institutions, government entities and other organizations. We can not guarantee that We will be successful in hiring or retaining key personnel. If We decide to undertake internally the research and development of any of our technologies, We may need to hire additional key management and scientific personnel to assist the limited number of employees that We currently employ. If We fail to attract such personnel, it could have a significant negative effect on our ability to develop our technologies. There is significant competition for such personnel from other companies, research and academic institutions, government 7 entities and other organizations. There can be no guarantee that We will be successful in hiring or retaining the personnel required for such activities. THE COMPANY'S INDUSTRY IS VERY COMPETITIVE AND SUBJECT TO CHANGES IN TECHNOLOGY The pharmaceutical industry is highly competitive. Research on the causes of, and possible treatments for diseases for which We are trying to develop products, including rheumatoid arthritis, cancer, Parkinson's Disease, central nervous system disorders and autoimmune diseases are developing rapidly. Competition from larger, more experienced and better capitalized companies will be intense. We are pursuing areas of product development in which there is a potential for extensive technological innovation in relatively short periods of time. There can be no assurance that We will be able to keep pace with any new technological developments. Factors affecting our ability to successfully manage the technological changes occurring in the biotechnology industry as well as our ability to successfully compete include: . We have no sales force or marketing experience; . We compete with a number of pharmaceutical and biotechnology companies which have financial, technical and marketing resources significantly greater than ours; . Companies with established positions in the pharmaceutical industry may be better able to develop and market products for the treatment of those diseases for which We are trying to develop products; . Many of our competitors have significantly greater experience than us in completing preclinical and clinical testing of new pharmaceutical products and obtaining Food and Drug Administration ("FDA") and other regulatory approvals of products; . Our competitors may succeed in developing products that are more effective than ours; . Rapid technological change or developments by others may result in our potential products becoming obsolete or uncompetitive; and . Universities and other not-for-profit research organizations are responsible for a significant amount of research in the field. These institutions are becoming increasingly aware of the commercial value of their findings and are becoming more active in seeking patent protection and licensing arrangements to collect royalties for the use of technology that they have developed. These institutions may also market competitive products on their own or through joint ventures and may compete with us in recruiting qualified personnel. A substantial number of patents have been issued to other pharmaceutical and biotechnology companies, and other companies may have applied for patents, been issued patents or obtained additional patents and proprietary rights relating to products or processes competitive with ours. Patent applications in the United States are kept secret until the patents are issued, and since publication of discoveries in the scientific or patent literature occurs after the actual discoveries, We cannot be certain that We, or our licensors or collaborators, were the first creator of inventions covered by pending patent applications or the first to file patent applications for such inventions. Consequently, there can be no assurance that our existing patents or any patents that may be issued to us or our licensors or collaborators in the future will provide protection against competitive products or otherwise be commercially valuable. IT MAY BE DIFFICULT FOR THE COMPANY TO OBTAIN FDA AND OTHER GOVERNMENTAL APPROVALS Our activities are regulated by a number of government authorities in the United States and other countries, including the FDA pursuant to the Federal Food, Drug and Cosmetic Act. The FDA regulates pharmaceutical products, including their manufacture and labeling. Any product developed by us must undergo an extensive regulatory approval process which includes preclinical and clinical testing of such product to demonstrate its safety and efficacy before it can be marketed. This regulatory process can require many years and substantial cost. Data obtained from testing is subject to varying interpretations, which can delay, limit or prevent FDA approval. None of our technologies have been approved for marketing by the FDA or any of the FDA's international equivalents. We cannot accurately predict all relevant regulatory requirements or issues. Changes in existing regulatory requirements could prevent or affect the timing of our ability to achieve regulatory compliance. Federal and state laws, regulations and policies may be changed with possible retroactive effect, and depend heavily on administrative policies and interpretations. There can be no guarantee that any changes with respect to Federal and state laws, regulations and policies, and, particularly, with respect to FDA and other such regulatory bodies, will not have a significant, negative effect on the Company. Obtaining FDA clearances can be time-consuming and expensive, and there is no guarantee that such clearances will be granted or that the FDA review process will not involve delays that significantly and negatively affect our products. We may encounter similar delays in foreign countries. Also, regulatory clearances may have significant limitations on the uses for which such products may be marketed. In addition, even if regulatory approval is obtained, any marketed product and its manufacturer are subject to 8 periodic review and any discovery of previously unrecognized problems with a product or manufacturer could result in suspension or limitation of approvals. If We obtain any required clearances, there can be no assurance that the regulatory authority will not withdraw such clearance or that We will continue to comply with other regulatory requirements. NONE OF THE COMPANY'S PRODUCT CANDIDATES HAVE BEEN APPROVED AND THE COMPANY HAS NO MARKETING EXPERIENCE Neither the FDA nor any of the FDA's international equivalents has approved any of our technologies for marketing. The research and development of our technologies will require extensive additional laboratory and clinical testing prior to regulatory approval. There can be no guarantee that: . Our product development efforts will be successfully completed . We will obtain required regulatory approvals . Our technologies will be capable of being manufactured in commercial quantities at reasonable cost or; . New products, if introduced, will achieve market acceptance. We do not have any experience in marketing pharmaceutical products. In order to earn a profit on any future product, We will be required to either enter into arrangements with third parties with respect to marketing the products or develop internally such marketing capability. There can be no assurance that We will be able to enter into marketing agreements with others on acceptable terms or that We can successfully develop such capability, on our own. THERE IS UNCERTAINTY IN THE PHARMACEUTICAL INDUSTRY REGARDING PRICING, HEALTH CARE REIMBURSEMENT AND RELATED MATTERS The continuing efforts of government and third party payers to contain or reduce health care costs may negatively affect our business. For example, certain foreign governments control pricing or profitability of prescription pharmaceuticals. In the United States, there have been a number of federal and state proposals to implement similar government control. In recent years, several bills proposing comprehensive health care reform have been introduced in Congress. In general, such proposals are designed to reform the health care system to, among other things; . control or reduce public and private spending on health care; . provide for uniform health insurance benefits packages and administrative efficiency in the health care system; and . provide universal access to health care within the next several years. Some of the proposals introduced in Congress would potentially limit pharmaceutical prices and establish mandatory or voluntary refunds. Such proposals could decrease the price that We receive for any products that We may sell in the future. There can be no guarantee that such proposals will not negatively affect us. In addition, there have been a number of federal and state proposals for the government to control the prices of health care products and services. It is uncertain if any legislative proposals will be adopted and how federal, state or private payers for health care goods and services will respond to any health care reforms. Such reforms may have a significant effect on us. If such proposals have a significant negative effect on the business, financial condition and profitability of other pharmaceutical companies which work with us, our ability to commercialize our technologies may be negatively affected. Our ability to commercialize our products may depend, in part, on the extent to which government health administration authorities, private health insurers and others provide reimbursement for the costs of our products. Significant uncertainty exists as to the reimbursement status of newly approved health care products, and third-party payers are increasingly challenging the prices charged for medical products and services. There can be no guarantee that adequate insurance coverage will be available to allow us to charge prices for products which are adequate for us to realize an appropriate return on our cost for developing these technologies. If adequate coverage and reimbursement are not provided for use of our products, the market acceptance of these products will be negatively affected. In addition, many health maintenance organizations and other managed care companies are seeking to negotiate substantial volume discounts for the sale of pharmaceutical products to their members thereby reducing profit margins for manufacturers. Competitive pressures are causing many manufacturers to accept such discount arrangements. THE COMPANY HAS NO MANUFACTURING EXPERIENCE We currently have no manufacturing facilities for either clinical trial or commercial quantities of any of our technologies. To date, We have obtained the limited amount of quantities required for clinical trials from contract manufacturing companies. We intend to continue using contract manufacturing arrangements with experienced firms for the supply of material for both clinical trials and commercial sale. As a result of these arrangements, We will depend upon 9 third parties to produce and deliver products in accordance with all FDA and other governmental regulations. There can be no guarantee that such parties will constantly perform their obligations in a timely fashion, and, in accordance with the applicable regulations. The failure by any third party to perform their obligations may delay clinical trials, the commercialization of products, and the ability to supply product for sale. THE COMPANY MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS AND INSURANCE TO COVER SUCH CLAIMS MAY BE UNAVAILABLE OR INADEQUATE The use of our product candidates in clinical trials and the future sale of any resulting products may subject us to liability claims. There can be no guarantee that any product liability claims will not significantly and negatively affect our business or financial condition. These claims might be made directly by consumers or by pharmaceutical companies or other sellers of such products. While We currently have product liability insurance, there can be no guarantee that such insurance will be sufficient to meet any liabilities that may arise. In addition, such coverage is expensive and may be difficult to obtain. Our existing coverage may not be adequate as our product development activities progress. There can be no guarantee that adequate insurance coverage will be available in the future at an acceptable cost, if at all. If We are unable to obtain sufficient insurance coverage at an acceptable cost to protect against potential product liability claims, it could prevent or limit our ability to commercialize our products. MARKET RISKS THE COMPANY MAY NEED ADDITIONAL CAPITAL IN THE FUTURE AND IS NOT CERTAIN ADDITIONAL CAPITAL WILL BE AVAILABLE We have experienced negative cash flows from operations since the company began operating. To date, We have funded our business operations primarily from equity financings. We spend a significant amount for research and development, including preclinical studies and clinical trials of our technologies. We expect that our current cash, cash equivalents and investment balances will be sufficient to fund our capital requirements through at least the next twelve months. Thereafter, We may need to raise substantial additional capital to fund our operations. Our capital requirements will depend on many factors, including: . Potential problems, delays, expenses and complications frequently encountered by development stage companies; . The progress of our research and development activities and our clinical trials; . Our ability to meet the terms of any current and future collaborative research, manufacturing, marketing or other agreements; . Our ability to obtain regulatory approvals from the FDA and other government agencies; . The costs and timing of obtaining regulatory approvals of our products; . The costs of protecting our patent claims and other intellectual property rights; and . Changes in economic, regulatory or competitive conditions of the pharmaceutical and biotechnology industry. Estimates about how much funding will be required are based on a number of assumptions, all of which are subject to change based on the results and progress of our research and development activities. To satisfy our capital requirements, We may raise additional funds in the public or private capital markets. If the results of our current or future clinical trials are not favorable, it may negatively affect our ability to raise additional funds. We may also seek additional funding through corporate collaborations and other financing methods. There can be no guarantee that any such funding will be available on favorable terms, if at all. If adequate funds are not available, We may need to significantly reduce one or more of our research or development programs, or We may be required to obtain funds through arrangements with others that may require us to surrender rights to some or all of our technologies. If We are successful in obtaining additional financing, the terms of such financing may have the effect of diluting or adversely affecting the holdings or the rights of our common stockholders. THERE ARE OPTIONS AND WARRANTS OUTSTANDING WHICH MAY CAUSE DILUTION TO THE STOCKHOLDERS OF THE COMPANY As of March 9, 1999, We had granted stock options and warrants to purchase approximately five million shares of our Common Stock at exercise prices ranging from $0.63 - $15.00 per share. Many of these previously granted options and warrants were issued at exercise prices below the market price of the Common Stock. If the holders exercise these stock options and warrants, it will dilute the percentage ownership interest of our current stockholders. In addition, the terms upon which We would be able to obtain additional money through the sale of our stock may be negatively affected because the holders of such outstanding options and warrants would probably exercise them at a time when We would most likely be able to obtain capital on terms more favorable to us than those provided by the exercise of outstanding options and warrants. 10 As of March 9, 1999, We also had 14,296 and 315,416 shares of Series A and Series C Convertible Preferred Stock outstanding, respectively, which are currently convertible into 250,719 and 1,577,080 shares of common stock, respectively. If the holders convert their shares of preferred stock into common stock, it will dilute the percentage ownership interest of our current stockholders. THERE HAS BEEN A LIMITED PUBLIC MARKET FOR THE COMPANY'S COMMON STOCK, THE PRICES HAVE BEEN VOLATILE AND THE COMPANY HAS NEVER PAID DIVIDENDS TO ITS STOCKHOLDERS Historically, the trading volume of our Common Stock has fluctuated significantly. At times our trading volume has been significant while at other times our trading volume has been relatively low. The market price of our Common Stock has been highly volatile and it may continue to be highly volatile similar to the securities of other public biotechnology companies. Factors which may have a significant effect on the market price of our common stock include: . the discovery of new technologies in fields in which We are developing products . the results of clinical trials . FDA approval of new products . Proposed government regulations and . Issues relating to patents or proprietary rights. The securities markets have experienced volatility that affects prices of equity securities of biotechnology companies which is often unrelated to the performance of such companies. Thus, changes in the market price of our common stock may not be consistent with our actual operations or financial results. We do not expect to pay any dividends for the foreseeable future. YEAR 2000 COMPLIANCE The Company has initiated planning for issues related to the upcoming new millenium. These issues derive from the use of software and hardware with embedded chips or processors that use two digits to refer to a year and do not properly recognize a year that begins with "20" instead of the familiar "19." Our plan to address these issues and to enhance our readiness for the Year 2000 is primarily focused on: . Network and facility infrastructure, . Business applications and software, and . External partners Within each area, our efforts will involve: . The identification of systems that may be susceptible to Year 2000 issues, . An assessment of the risks to the Company's business of Year 2000 issues, . Fixing problems that are identified, and . Contingency planning. We expect that the identification and assessment phases will be completed during the second quarter of 1999, at which time remediation and contingency planning will be initiated as appropriate. The Company primarily operates its business applications software using the Microsoft Office suite of products. As a result, We will primarily rely on the software developer's representations regarding Year 2000 compliance of their software. We intend to assess the possible effects on our operations of the Year 2000 compliance of certain relevant third parties, primarily our service providers, by requesting confirmation from the parties regarding their Year 2000 readiness. The Company does not expect to incur costs in its Year 2000 program that will be material to its business, financial condition or results of operations. Although We intend to complete all phases of our Year 2000 program by December 31, 1999, there can be no assurance We will complete our program by then, and even if this program is successfully completed on schedule, that disruptions in our business will be avoided. Possible consequences of Year 2000 issues that We are unable to adequately identify, assess or fix include but are not limited to: . Delays in supplies from vendors, 11 . Errors in processing transactions and . Diversion of management time and effort to addressing difficulties that emerge . Loss of clinical and research data The goal of our Year 2000 program is to plan for and reduce the risk of such difficulties. There can be no assurance that our Year 2000 program will be completed in a timely manner or will be successful. EMPLOYEES As of March 9, 1999, the Company employed 10 individuals full-time, of whom four hold Ph.D. or M.D. degrees. None of the Company's employees is covered by a collective bargaining agreement. ITEM 2. PROPERTIES. The Company's administrative offices are located in Boston, Massachusetts. The lease on this 3,500 square foot facility expires on June 30, 1999 and can be renewed by the Company for additional three year periods. In addition, the Company has 4,000 square feet of warehouse space in Horsham, Pennsylvania. This lease will terminate on March 31, 2000. The Company believes that its existing facilities are adequate for its present and anticipated purposes, except that additional facilities will be needed if the Company builds its own laboratory space or undertakes manufacturing operations. The Company, however, has no present intention to develop such capabilities for its technologies. ITEM 3. LEGAL PROCEEDINGS. The Company is subject to legal proceedings in the normal course of business. Management believes that these proceedings will not have a material adverse effect on the consolidated financial statements. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. EXECUTIVE OFFICERS OF THE REGISTRANT. The following is a list of the executive officers of the Company and their principal positions with the Company. Except for S. David Hillson, Esq. and Marc E. Lanser, M.D., who are employed pursuant to employment agreements, each individual officer serves at the pleasure of the Board of Directors.
Name Age Position ---- --- -------- S. David Hillson, Esq. ................ 58 Chairman of the Board of Directors, President And Chief Executive Officer Marc E. Lanser, M.D. .................. 50 Executive Vice President and Chief Scientific Officer Joseph Hernon, CPA .................... 39 Chief Financial Officer, Secretary
S. DAVID HILLSON, ESQ. Mr. Hillson has been President and Chief Executive Officer and a member of the Board since the Merger with Greenwich in June 1995. He also has served as Chairman of the Board of Directors since September 1996. Prior to the Merger, Mr. Hillson served as President, Chief Executive Officer and a member of the Board of Directors of Old BLSI from November 1994. Prior to his responsibilities at Old BLSI, from January to November 1994, Mr. Hillson was Senior Vice President of Josephthal, Lyon & Ross, Incorporated in the research and investment banking divisions and from November 1992 to January 1994, Mr. Hillson was the Senior Managing Director, investment banking, at The Stamford Company in New York City. From October 1990 until October 1992, Mr. Hillson was an Executive Vice President of the asset management division of Mabon Securities. Earlier in his career as an investment manager, Mr. Hillson was a Senior Vice President with Shearson, Lehman, Hutton from 1983 to 1990, where he managed three mutual funds, primarily in the emerging growth area, for the SLH Asset Management division. Prior to his fund management responsibilities, he was the Chairman of the Equity Committee for Hutton Investment Management (1976- 1982). He started his business career as an attorney in New York City, having received his Juris Doctorate from New York University School of Law. He also attended the Columbia University School of Business Administration and received a Bachelor of Arts degree from Columbia College. MARC E. LANSER, M.D. Dr. Lanser has been Executive Vice President and Chief Scientific Officer and a member of the Board since June 1995. Prior to the Merger, Dr. Lanser held the same position with Old BLSI from November 1994. From October 1992 until November 1994, Dr. Lanser was President and Chief Executive Officer of Old BLSI. Prior to assuming the position of President and Chief Executive Officer of Old BLSI, Dr. Lanser was an Assistant Professor of 12 Surgery at Harvard Medical School and member of the full-time academic faculty, where he directed an NIH funded research project in immunology and received an NIH Research Career Development Award. Dr. Lanser has published more than 30 scientific articles in his field in peer-reviewed journals. Dr. Lanser received his M.D. from Albany Medical College. JOSEPH P. HERNON, CPA. Mr. Hernon has been Chief Financial Officer since August 1996. Prior to joining the Company, Mr. Hernon was a Business Assurance Manager at Coopers & Lybrand where he was employed from January 1987 to August 1996. Mr. Hernon holds a Masters of Science in Accountancy from Bentley College and a Bachelor of Science in Business Administration from the University of Lowell. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. The Company's Common Stock is traded on The Nasdaq SmallCap Market under the symbol BLSI. The following table sets forth the high and low sale prices for the Company's Common Stock by quarter for 1997 and 1998, as reported by Nasdaq. These prices reflect inter-dealer quotation, without retail mark-up, mark-downs or other fees or commissions, and may not necessarily represent actual transactions.
High LOW ----------- ---------- 1998 First Quarter ............................................................... $ 2 7/16 $1 11/16 Second Quarter .............................................................. 8 15/16 1 31/32 Third Quarter ............................................................... 4 5/8 1 3/4 Fourth Quarter .............................................................. 4 1/32 4 25/32 1997 First Quarter ............................................................... $ 10 $ 6 1/4 Second Quarter .............................................................. 7 1/2 4 13/16 Third Quarter ............................................................... 9 4 3/8 Fourth Quarter .............................................................. 4 1/8 1 31/32
On March 9, 1999 the closing sales price for the Common Stock was $7 1/16 per share. The number of stockholders of record of Common Stock on March 9, 1999 was approximately 6,700. The Company has not paid any dividends and does not expect to pay dividends in the foreseeable future. Recent sales of unregistered securities: During the year ended December 31, 1998, the Company issued 48,043 shares of common stock related to sale of common stock and the exercise of warrants outstanding for which the Company received consideration in the amount of $ 136,618. In addition, the Company issued 15,686 shares of common stock related to the exercise of 18,883 warrants, of which 3,197 warrants were surrendered to finance the exercise price of the warrants. In January 1998, the Company issued 225,000 warrants to a financial advisor which represented a substantial portion of the compensation paid by the Company for the advisor's services. The Company recorded a non-cash charge of approximately $290,000 representing the fair value of the warrants at the date of issuance. 13 ITEM 6. SELECTED FINANCIAL DATA. The selected consolidated financial information presented below has been derived from the audited consolidated financial statements of the Company. This data is qualified in its entirety by reference to, and should be read in conjunction with the Company's Consolidated Financial Statements and notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations, included elsewhere herein.
YEAR ENDED ------------------------------------------ December 31, December 31, 1994 1995 ------------------- -------------------- Statement of Operations Data Revenues .......................................... $ 0 $ 416,940 Operating expenses ................................ 2,609,068 13,462,322 Net loss .......................................... (2,596,872) (14,149,151) Basic and diluted Net loss per share .............. $ (0.66) $ (2.23) Weighted average number of shares outstanding ..... 3,933,921 6,347,993
YEAR ENDED ------------------------------------------------------------------ December 31, December 31, December 31, Period from 1996 1997 1998 Inception ------------- ------------- ------------- (October 16, 1992) Through December 31, 1998 -------------------- Statement of Operations Data Revenues .......................................... $ 200,000 $ 83,060 $ $ 700,000 -- Operating expenses ................................ 7,047,399 9,202,664 7,682,406 42,559,538 Net loss .......................................... (5,996,147) (7,974,016) (6,897,024) (40,163,496) Preferred stock preferences......................... (34,387,953) -- -- Net loss available to common shareholders........... (40,384,100) (7,974,016) (6,897,024) Basic and diluted net loss per share .............. $ (0.61) $ (0.64) $ (0.52) Per share effect of preferred stock preferences.... (3.48) -- -- Basic and diluted net loss available to common shareholders............................. $ (4.09) $ (0.64) $ (0.52) Weighted average number of shares outstanding ..... 9,880,222 12,378,219 13,138,862
December 31, ---------------------------------------------------------------------------------------- 1994 1995 1996 1997 1998 ----------------- ---------------- --------------- --------------- ----------------- Balance Sheet Data Total assets .................... $ 806,502 $6,585,101 $26,153,130 $18,578,969 $12,269,048 Working capital ................. (1,518,571) (297,303) 20,383,735 12,718,875 6,744,226 Long-term debt .................. 0 658,735 0 0 0 Stockholders' equity (deficit) .. (906,100) 1,185,802 24,100,406 16,587,165 10,534,849
14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The Management's Discussion and Analysis of Financial Condition and Results of Operations that follows contains forward looking statements based on current management expectations. Meaningful factors which could cause future results to differ materially from such expectations include, without limitation, the following: (i) the results from the Phase III clinical trials for Altropane, (ii) scientific data collected on the Company's technologies currently in preclinical research and development, (iii) decisions made by the Food and Drug Administration ("FDA") or other regulatory bodies with respect to the initiation of human clinical trials, (iv) decisions made by the FDA or other regulatory bodies with respect to approval of the amendment to the NDA for Therafectin, and to the commercial sale of any of the Company's proposed products, including Therafectin, (v) the commercial acceptance of any products approved for sale and the ability of the Company to manufacture, distribute and sell for a profit any products approved for sale, (vi) the Company's ability to obtain the necessary patents and proprietary rights to effectively protect its proposed products and technologies, and (vii) the outcome of any collaborations or alliances currently entered into by the Company or to be entered into by the Company in the future with pharmaceutical or other biotechnology companies. RESULTS OF OPERATIONS OVERVIEW On June 15, 1995, Greenwich Pharmaceuticals Incorporated ("Greenwich") acquired all of the outstanding common stock of Boston Life Sciences, Inc. ("Old BLSI") and merged with and into Old BLSI. Effective June 15, 1995, the merged company was renamed "Boston Life Sciences, Inc." (the "Company") and the management and Board of Directors of Old BLSI assumed management of the Company. The acquisition of Old BLSI by Greenwich has been treated as a recapitalization of Old BLSI with Old BLSI as the acquiror (reverse acquisition). The historical financial statements prior to June 15, 1995 are those of Old BLSI. The Company is a biotechnology company engaged in the research and development of novel therapeutic and diagnostic products to treat chronic debilitating diseases such as rheumatoid arthritis, cancer, central nervous system disorders and autoimmune diseases. The Company anticipates that its (i) research and development and (ii) general and administrative costs will continue to increase as the Company attempts to gain regulatory approval for the commercial introduction of its proposed products. At December 31, 1998, the Company is considered a development stage enterprise as defined in Statement of Financial Accounting Standards No. 7. YEAR ENDED DECEMBER 31, 1998 AND 1997 The Company's net loss was $6,897,024 during the year ended December 31, 1998 as compared with $7,974,016 during the year ended December 31, 1997. Net loss per common share totaled $0.52 per share during 1998 as compared with $0.64 per share during 1997. The lower net loss in 1998 was primarily due to reduced costs associated with Therafectin. The Phase III clinical trial for Therafactin, which began in March 1996, ended in August 1997. The effect of these lower costs were partially offset by (i) higher licensing fees, (ii) an increase in general and administrative expenses and (iii) a decrease in interest income. Revenue was zero during the year ended December 31, 1998 as compared with $83,060 during the year ended December 31, 1997. Revenue during 1997 was attributable to an agreement with Zeneca which provided funds to support the research and development of certain technology. Such funds were recognized ratably over the original term of the Agreement which expired in June 1997. Research and development expenses were $4,881,889 during the year ended December 31, 1998 as compared with $4,874,233 during the year ended December 31, 1997. The majority of the Company's research and development expenses were, and will continue to be in 1999, sponsored research obligations paid to Harvard University and its affiliated hospitals. Licensing fees were $80,000 during the year ended December 31, 1998 as compared with $20,000 during the year ended December 31, 1997. The increase is primarily related to an increase in the number of new technologies licensed to the Company in 1998 as compared to 1997. During 1998, the Company paid $40,000 to license two new technologies as compared to $20,000 paid in 1997 for the right to one new technology. In addition to an initial licensing fee payment, the Company is obligated to pay additional amounts upon the attainment of development milestones, as defined in each respective licensing agreement, as well as royalties upon the sales of any resulting products. During 1998, the Company incurred a milestone obligation of $40,000 related to the development of one of its technologies. The Company expects to pay future licensing fees, the timing and amounts of which will depend upon the progress attained in developing existing 15 technologies and the terms of agreements which may be executed for technologies currently being developed or which may be developed in the future. There can be no assurance regarding the likelihood or materiality of any such future licensing agreements. Therafectin related expenses were $423,228 during the year ended December 31, 1998 as compared with $2,190,040 during the year ended December 31, 1997. The level of expenses in 1997 related to the Company's Phase III clinical trial for Therafactin which was completed in August 1997. Expenses incurred during 1998 were primarily associated with the preparation of the amendment to the previously filed NDA for Therafectin. In January 1998, the Company announced its intention to seek marketing approval for Therafectin based upon the cumulative data obtained from the trial and the input provided by its special panel of clinical rheumatologists. The consensus of this special advisory panel was that the cumulative safety and efficacy data on Therafectin justified its use by clinicians looking for a safe alternative to other more toxic drugs now being used to treat Rheumatoid Arthritis. The Company also reported that further analysis of the trial data strongly suggested the therapeutic efficacy of Therafectin. Applying the widely- accepted "Paulus" criteria of therapeutic efficacy (at least a 20% improvement in 4 of 6 measures: joint tenderness scores, joint swelling scores, physician's and patient's global assessment, erythrocyte sedimentation rate (ESR), and morning stiffness), there was a highly statistically significant difference in the percentage of Therafectin patients meeting the Paulus criteria for therapeutic efficacy as compared to the percentage of placebo patients meeting the Paulus criteria (p greater than 0.02). Among the predefined secondary efficacy variables, the reduction in the number of swollen joints, the ESR results, Functional Class scores, and the CLINHAQ (a quality of life measurement) were statistically significant in favor of Therafectin. In addition, after withdrawing non-steroidal medication, clinical secondary variables returned to baseline or better in the Therafectin group, while remaining statistically significantly worse than baseline in the placebo group. Applying the American College of Rheumatology (ACR) "50% improvement" criteria to the number of swollen joints, 36% of Therafectin patients experienced at least a 50% decrease in the number of swollen joints compared to 23% of placebo patients resulting in a statistically significant difference (p greater than 0.04). Finally, in the subgroup of patients (about half the total number) entering the study with greater than the median number of swollen joints (ten), the primary and secondary variables specified in the trial protocol were statistically significant. The Company believes that statistically significant improvement in the important clinical variables related to joint swelling, functional class, and "quality of life" experienced by the Therafectin patients demonstrates the clinical efficacy of Therafectin. Because the beneficial effect is most obvious on joint swelling, the Company believes that the other improvements are secondary to Therafectin's apparent ability to favorably impact the underlying disease. Before any commercially viable product from Therafectin may be developed, and any revenue generated therefrom, the Company currently expects that between $500,000 and $1,000,000 of additional future expense will be necessary. There can be no assurance, however, that the Company will not need to spend more than the range indicated, or that the expenditure of these additional amounts will result in the regulatory approval of any compounds or that such approval will ever be obtained by the Company. Moreover, if the Company is ultimately unsuccessful in obtaining regulatory approval for Therafectin, the Company would be required to write off the $3.5 million asset value attributable to Therafectin as reflected on the Company's balance sheet. General and administrative expenses were $2,297,289 during the year ended December 31, 1998 as compared with $2,118,391 during the year ended December 31, 1997. This increase was primarily due to non-cash charges related to certain changes in the provisions of the Company's stock option plans and the issuance of warrants to a financial advisor. . Interest income was $785,382 during the year ended December 31, 1998 as compared with interest income of $1,148,025 during the year ended December 31, 1997. Average cash and investment balances during 1998 were lower as compared to 1997. At December 31, 1998, the Company had net deferred tax assets of approximately $22 million for which a full valuation allowance has been established. As a result of its concentrated efforts on research and development and Therafectin related expenses, the Company has a history of incurring net operating losses and expects to incur additional net operating losses for the foreseeable future. Accordingly, management believes that, at the present time, it is appropriate to conclude that it is more likely than not that the future benefits related to the deferred tax assets will not be realized and, therefore, has provided a full valuation allowance for these assets. In the event the Company achieves profitability, these deferred tax assets may be available to offset future income tax liabilities and expense. 16 YEAR ENDED DECEMBER 31, 1997 AND 1996 The Company's net loss, excluding preferred stock preferences, was $7,974,016 during the year ended December 31, 1997 as compared with $5,996,147 during the year ended December 31, 1996. Net loss per common share, excluding the effect of preferred stock preferences, totaled $.64 per share during 1997 as compared with $.61 per share during 1996. The higher loss in 1997 was primarily due to (i) lower revenues, (ii) increased research and development expenses, and (iii) higher costs associated with the completion of the Phase III clinical trial for Therafectin which began in March 1996 and ended in August 1997. The effect of these items were partially offset by (i) lower licensing fees, (ii) decreased general and administrative expenses and (iii) a reduction in interest expense. The net loss available to common shareholders for the 1996 period, including preferred stock preferences of $34,387,953, totaled $40,384,100. Net loss per common share for 1996, including $3.48 attributable to preferred stock preferences, totaled $4.09. In January and February 1996, the Company completed a private placement of Series A Convertible Preferred Stock and warrants. Based on the market price of the Company's stock on the date of issuance, the preferred stock had a beneficial conversion feature of $28,389,846 and the warrants had a fair value of $5,998,107. Revenue was $83,060 during the year ended December 31, 1997 as compared with $200,000 during the year ended December 31, 1996. Revenue for both periods was attributable to a research and development agreement under which a certain pharmaceutical company provided funds to support the research and development of certain technology. The research agreement expired in 1997. Research and development expenses were $4,874,233 during the year ended December 31, 1997 as compared with $2,408,734 during the year ended December 31, 1996. This increase was primarily due to the Company incurring a higher level of research and development expenses for its existing technologies in 1997 as compared to 1996 related to the continued advancement of its clinical efforts, and, to a lesser degree, to an increase in the number of personnel supporting the Company's research and development activities. The majority of the Company's research and development expenses were sponsored research obligations paid to Harvard University and its affiliated hospitals. Licensing fees were $20,000 during the year ended December 31, 1997 as compared with $390,000 during the year ended December 31, 1996. The decrease was primarily related to a decrease in the number of new technologies licensed to the Company in 1997 as compared to 1996, as well as lower costs to obtain such licenses. During 1997, the Company paid $20,000 to license one new technology as compared to $360,000 paid in 1996 for the rights to four new technologies. In addition to an initial licensing fee payment, the Company is obligated to pay additional amounts upon the attainment of development milestones, as defined in each respective licensing agreement, as well as royalties upon the sales of any resulting products. During 1996, the Company made a milestone payment of $30,000 related to the development of one of its technologies. The Company expects to pay future licensing fees, the timing and amounts of which will depend upon the progress attained in developing existing technologies and the terms of agreements which may be executed for technologies currently being developed or which may be developed in the future. There can be no assurance regarding the likelihood or materiality of any such future licensing agreements. Therafectin related expenses were $2,190,040 during the year ended December 31, 1997 as compared with $1,546,791 during the year ended December 31, 1996. The increased level of expenses in 1997 related to the higher average number of patients enrolled in the Company's Phase III clinical trial for Therafectin in 1997 as compared to 1996. The Company commenced its Phase III clinical trial in March 1996 and completed the trial in August 1997. On September 30, 1997, the Company announced the preliminary results of the trial. An analysis of the trial data indicated that a statistically significant difference between Therafectin and placebo in the percentage of patients achieving the overall composite efficacy index had not been realized. However, in an important secondary efficacy variable, there was a highly statistically significant difference between Therafectin and placebo in reducing the number of swollen joints in patients. Further, in a group of patients with higher levels of swollen joints (approximately half of those completing the trial), there was a statistically significant difference between Therafectin and placebo in achieving success as measured by the overall composite efficacy index. Additionally, utilizing the most recent MIRA ("Minocycline in Rheumatoid Arthritis") criteria for "meaningful improvement", defined as at least a 50% improvement in joint swelling compared to baseline, Therafectin showed a statistically significant improvement compared to placebo. Consistent with the previously established excellent safety profile of Therafectin, there were no significant adverse events attributable to Therafectin during the course of the study. In view of the excellent safety profile of Therafectin, and the previous statistically significant successful trial combined with at least three supportive trials (previously completed by Greenwich), the Company initiated plans to convene an advisory panel of rheumatologists in early 1998 to seek input and advice regarding whether to proceed with the submission of an amendment to the pending NDA seeking approval for the drug. 17 General and administrative expenses were $2,118,391 during the year ended December 31, 1997 as compared with $2,701,874 during the year ended December 31, 1996. This decrease was primarily due to lower professional services expenses. Interest income was $1,148,025 during the year ended December 31, 1997 as compared with interest income of $1,151,810 during the year ended December 31, 1996. Average cash and investment balances during 1997 were comparable to 1996. The interest income realized during both periods related to the Company raising net proceeds of approximately $25.6 million from two private placements completed in 1996. Interest expense totaled $2,437 during the year ended December 31, 1997 as compared to $300,558 during the year ended December 31, 1996. Interest expense incurred in 1996 included amounts related to (i) $2.175 million of notes payable, which were fully repaid on April 1, 1996, (ii) $1.0 million of convertible debentures, which were converted to common stock in the first quarter of 1996, and (iii) the amortization of the discount and debt issuance costs on both debt instruments during the period outstanding in 1996. At December 31, 1997, the Company had net deferred tax assets of approximately $19.5 million for which a full valuation allowance has been established. As a result of its concentrated efforts on research and development and Therafectin related expenses, the Company has a history of incurring net operating losses and expects to incur additional net operating losses for the foreseeable future. Accordingly, management believes that, at the present time, it is appropriate to conclude that it is more likely than not that the future benefits related to the deferred tax assets will not be realized and, therefore, has provided a full valuation allowance for these assets. In the event the Company achieves profitability, these deferred tax assets may be available to offset future income tax liabilities and expense. LIQUIDITY AND CAPITAL RESOURCES Since its inception, the Company has primarily satisfied its working capital requirements from the sale of the Company's securities through private placements. In February 1999, the Company raised approximately $8.2 million in net proceeds by completing two private placements. The first transaction, which consisted of shares of common stock and warrants to purchase shares of the Company's common stock, raised approximately $2.5 million in net proceeds. The second transaction, which consisted of shares of its Series C Convertible Preferred Stock and warrants to purchase shares of the Company's common stock, raised approximately $5.7 million in net proceeds. In January and February 1996, the Company raised approximately $20.6 million of net proceeds by completing a private placement of units consisting of (i) shares of its Series A Convertible Preferred Stock and (ii) warrants to purchase shares of the Company's common stock. In June 1996, the Company raised approximately $5.0 million of net proceeds by completing a private placement of common stock. For additional information related to the private placements, see Notes 8 and 9 of the Notes to the Consolidated Financial Statements included in this Form 10-K. In addition, the Company has raised working capital through the issuance of notes payable and convertible debentures. In March 1995, Old BLSI issued $2,175,000 of units consisting of notes payable, common stock and warrants to purchase shares of Old BLSI's Series B Preferred Stock. The $2,175,000 of notes payable became obligations of the Company and the warrants exercisable for shares of Old BLSI Series B Preferred Stock were exchanged for warrants exercisable for shares of the Company's common stock. In the second quarter of 1996, the Company repaid all accrued interest plus the remaining principal of $1,525,000 of the notes payable. In December 1995, the Company also issued $1,000,000 of convertible subordinated debentures. During the first quarter of 1996, the entire $1,000,000 of convertible subordinated debentures were converted into 156,605 shares of common stock. In the future, the Company's working capital and capital requirements will depend on numerous factors, including the progress of the Company's research and development activities, the level of resources that the Company devotes to the developmental, clinical, and regulatory aspects of its products, and the extent to which the Company enters into collaborative relationships with pharmaceutical and biotechnology companies. At December 31, 1998, the Company had available cash, cash equivalents, and investments of approximately $7.9 million and working capital of approximately $6.7 million. In February 1999, the Company completed two separate private placements from which the Company received approximately $8.2 million in net proceeds. The Company believes that the level of financial resources available at December 31, 1998, as well as the additional capital received in 1999, will provide sufficient working capital to meet its anticipated expenditures for more than the next twelve months. The Company may raise additional capital in the future through collaboration agreements with other pharmaceutical or biotechnology companies, debt financing and equity offerings. There can be no assurance, however, that the Company will be successful or that additional funds will be available on acceptable terms, if at all. 18 YEAR 2000 COMPLIANCE The Company has initiated planning for issues related to the upcoming new millenium. These issues derive from the use of software and hardware with embedded chips or processors that use two digits to refer to a year and do not properly recognize a year that begins with "20" instead of the familiar "19." The Company's plan to address these issues and to enhance the Company's readiness for the Year 2000 is primarily focused on (1) network and facility infrastructure, (2) business applications and software, and (3) external partners. Within each area, the Year 2000 program will involve (a) the identification of systems that may be susceptible to Year 2000 issues, (b) the assessment of the degree of readiness of those systems for the Year 2000 and an assessment of the risks to the Company's business, (c) the remediation of problems that are identified, and (d) contingency planning. The Company's network and facility infrastructure, located at its Boston headquarters, includes personal computers and other network equipment, together with general facility systems such as telephone and security systems. The Company expects that the identification and assessment phases will be completed during the second quarter of 1999, at which time remediation and contingency planning will be initiated as appropriate. The Company primarily operates its business applications software using the Microsoft Office suite of products. For many software applications, the Company will, in the assessment phase, rely on the software developer's representations regarding Year 2000 compliance of their software. There can be no assurance, however, that software applications represented by developers as being Year 2000 compliant will be free from Year 2000 errors and defects. The Company intends to assess the possible effects on its operations of the Year 2000 compliance of certain relevant third parties, primarily its service providers by requesting confirmation from such parties regarding their Year 2000 readiness and, if required, site visits and interviews to solicit information from these parties. In the event the Company identifies a problem with respect to a particular vendor, then the Company may be forced to identify alternative sources of supply or services. However, the Company's ability to seek alternative sources of supply is subject to FDA restrictions and may involve extensive validation processes. The failure to timely identify and validate an alternative supplier could have a material adverse effect on the Company's business, financial condition and results of operations. The Company does not expect to incur costs in its Year 2000 program that will be material to its business, financial condition or results of operations. However, until the Company completes the identification and assessment phases of its program, the full extent of the remediation costs will not be known and there can be no assurance that such costs will not be material. The Company will utilize both internal and external resources, such as consultants and professional advisors, in implementing the Year 2000 program and the Company currently estimates that the external resources required during the identification and assessment phases of the Year 2000 program will not cost more than approximately $15,000. Because the Year 2000 program is an ongoing process, all cost estimates are subject to change. Specific contingency plans will be developed upon completion of the assessment phases. Although the Company intends to complete all phases of its Year 2000 program by December 31, 1999, there can be no assurance, even if this program is successfully completed on schedule, that disruptions in the Company's business will be avoided. Year 2000 issues are pervasive in nature and involve highly technical issues, not all of which are under the Company's control. Possible consequences of Year 2000 issues that the Company is unable to adequately identify, assess or remediate include but are not limited to: delays in supplies from vendors, errors in processing transactions and diversion of management time and effort to addressing difficulties that emerge. The goal of the Company's Year 2000 program is to plan for and reduce the risk of such difficulties. There can be no assurance that the Year 2000 program will be completed in a timely manner or will be successful. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The Company, to date, has not engaged in derivative and hedging activities, and accordingly does not believe that the adoption of SFAS No. 133 will have a material impact on the financial reporting and related disclosures of the Company. The Company will adopt SFAS No. 133 as required for its first quarterly filing of 2000. 19 income, as presented on the accompanying consolidated balance sheets, consists of the net unrealized gains on available-for-sale securities. ITEM 7 A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. 20 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Boston Life Sciences, Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, stockholders' equity, cash flows and comprehensive loss present fairly, in all material respects, the financial position of Boston Life Sciences, Inc. (a development stage enterprise) and its subsidiaries (the "Company") at December 31, 1998 and 1997, and the results of their operations and of their cash flows for each of the three years in the period ended December 31, 1998 and for the period from inception (October 16, 1992) through December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Boston, Massachusetts March 11, 1999 21 BOSTON LIFE SCIENCES, INC. (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ------------------------------------- 1998 1997 ----------------- ----------------- ASSETS Current assets: Cash and cash equivalents ..................................................... $ 71,834 $ 1,713,975 Short-term investments ........................................................ 7,837,992 12,338,496 Other current assets .......................................................... 568,599 658,208 ------------ ------------ Total current assets ....................................................... 8,478,425 14,710,679 Fixed assets, net ............................................................... 14,417 95,061 Acquired technology ............................................................. 3,500,000 3,500,000 Other assets .................................................................... 276,206 273,229 ------------ ------------ Total assets ............................................................... $ 12,269,048 $ 18,578,969 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses ......................................... $ 1,734,199 $ 1,991,804 Commitments and contingencies (Note 12) Stockholders' equity: Series A convertible preferred stock, $.01 par value, 1,000,000 shares authorized; 16,996 and 28,372 shares issued and outstanding at December 31, 1998 and 1997, respectively .................................... 170 284 Common stock, $.01 par value; 25,000,000 shares authorized; 13,276,978 and 12,993,838 shares issued and outstanding at December 31, 1998 and 1997, respectively .......................................................... 132,770 129,938 Additional paid-in capital ...................................................... 50,489,202 49,624,386 Accumulated other comprehensive income .......................................... 76,203 99,029 Deficit accumulated during development stage .................................... (40,163,496) (33,266,472) ------------ ------------ Total stockholders' equity ................................................. 10,534,849 16,587,165 ------------ ------------ Total liabilities and stockholders' equity ................................. $ 12,269,048 $ 18,578,969 ============ ============ The accompanying notes are an integral part of the consolidated financial statements.
22 BOSTON LIFE SCIENCES, INC. (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year Ended December 31, --------------------------------------------------------- From inception (October 16, 1992) to 1998 1997 1996 December 31, 1998 ----------------- ----------------- ------------------ -------------------- Revenues .................................. $ -- $ 83,060 $ 200,000 $ 700,000 Operating Expenses: Research and development ................. 4,881,889 4,874,233 2,408,734 16,779,002 Licensing fees ........................... 80,000 20,000 390,000 733,683 Therafectin related ...................... 423,228 2,190,040 1,546,791 4,160,059 General and administrative ............... 2,297,289 2,118,391 2,701,874 10,465,250 Purchased in-process research and development .............................. -- -- -- 10,421,544 ----------- ----------- ------------ ------------ 7,682,406 9,202,664 7,047,399 (42,559,538) ----------- ----------- ------------ ------------ Loss from operations ..................... (7,682,406) (9,119,604) (6,847,399) (41,859,538) Interest expense ........................... -- (2,437) (300,558) (1,461,829) Interest income ............................ 785,382 1,148,025 1,151,810 3,157,871 ----------- ----------- ------------ ------------ Net loss ................................. $(6,897,024) $(7,974,016) $ (5,996,147) $(40,163,496) =========== =========== ============ ============ Calculation of net loss available to common shareholders: Net loss.................................... $(6,897,024) $(7,974,016) $ (5,996,147) Preferred stock preferences (Note 9)........ -- -- (34,387,953) ----------- ----------- ------------ Net loss available to common shareholders................................ $(6,897,024) $(7,974,016) $(40,384,100) =========== =========== ============ Calculation of basic and diluted net loss available to common shareholders: Net loss.................................... $(0.52) $(0.64) $ (0.61) Preferred stock preferences (Note 9) ..... -- -- (3.48) ----------- ----------- ------------ Basic and diluted net loss available to $(0.52) $(0.64) $ (4.09) common shareholders......................... =========== =========== ============ Weighted average shares outstanding ......... 13,138,862 12,378,219 9,880,222 =========== =========== ============ The accompanying notes are an integral part of the consolidated financial statements.
23 BOSTON LIFE SCIENCES, INC. (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) FOR THE PERIOD FROM INCEPTION (OCTOBER 16, 1992) TO DECEMBER 31, 1998
Series A Preferred Stock ----------------------------- Number of Par Shares Value ------------- --------------- Issuance of common stock to founders ....................................................... Net loss .................................................................................. Balance at December 31, 1992 ............................................................... Issuance of option to purchase common stock to a licensor .................................. Issuance of common stock to a consultant ................................................... Issuance of common stock, net issuance costs of $500,988 ................................... Net loss .................................................................................. Balance at December 31, 1993 ............................................................... Issuance of common stock, net issuance costs of $406,916 ................................... Issuance of common stock upon exercise of option ........................................... Net loss .................................................................................. Balance at December 31, 1994 ............................................................... Issuance of common stock and warrants related to bridge financing .......................... Issuance of common stock and warrants upon merger .......................................... Issuance of common stock in exchange for minority interest in certain subsidiaries ......... Issuance of common stock upon exercise of options .......................................... Issuance of common stock subject to redemption ............................................. Expiration of valuation periods for common stock subject to redemption ..................... Issuance of convertible debt ............................................................... Deferred compensation related to stock options and warrants granted ........................ Compensation expense related to stock options and warrants ................................. Net loss .................................................................................. -- -- -------------- ----------- Balance at December 31, 1995 ............................................................... Issuance of preferred stock, net issuance costs of $3,397,158 .............................. 239,911 $ 2,399 Conversion of preferred stock into common stock ............................................ (106,301) (1,063) Issuance of common stock, net issuance costs of $42,537 .................................... Issuance of common stock upon conversion of convertible debentures ......................... Issuance of common stock upon exercise of warrants and options ............................. Expiration of valuation periods for common stock subject to redemption ..................... Deferred compensation related to stock options granted ..................................... Compensation expense related to stock options .............................................. Net loss .................................................................................. -- -- -------------- ----------- Balance at December 31, 1996 ............................................................... 133,610 1,336 Conversion of preferred stock into common stock ............................................ (105,238) (1,052) Issuance of common stock upon exercise of warrants and options ............................. Expirationof valuation periods for common stock subject to redemption....................... Deferred compensation related to stock options granted ..................................... Compensation expense related to stock options .............................................. Unrealized gains on investments ............................................................ Net loss .................................................................................. -- -- -------------- ----------- Balance at December 31, 1997 ............................................................... 28,372 284 Conversion of preferred stock into common stock ............................................ (11,376) (114) Issuance of common stock upon exercise of warrants and options ............................. Compensation expense related to stock options and warrants ................................. Unrealized loss on investments ............................................................. Net loss .................................................................................. -- -- -------------- ----------- Balance at December 31, 1998 ............................................................... 16,996 $ 170 ============== =========== The accompanying notes are an integral part of the consolidated financial statements.
24
Deficit Accumulated Accumulated Total Common Stock Additional Other During Stockholders' Number of Paid-in Deferred Comprehensive Development Equity Shares Par Value Capital Compensation Income Stage (Deficit) - --------------- --------- ------------- ------------- ------------------ ---------------------- -------------- 1,520,044 $ 15,200 $ 33,525 $ -- $ 48,725 -- -- -- -- -- (295,388) (295,388) --------- -------- ----------- ------------ ----------------- ------------ ------------ 1,520,044 15,200 33,525 (295,388) (246,663) -- -- 62,433 -- 62,433 3,913 40 7,460 -- 7,500 1,545,713 15,457 2,458,545 -- 2,474,002 -- -- -- -- -- (2,254,898) (2,254,898) ---------- -------- ----------- ------------ ----------------- ------------ ------------ 3,069,670 30,697 2,561,963 (2,550,286) 42,374 987,355 9,873 1,638,211 -- 1,648,084 95,378 954 (640) -- 314 -- -- -- -- -- (2,596,872) (2,596,872) ---------- -------- ----------- ------------ ----------------- ------------ ------------ 4,152,403 41,524 4,199,534 (5,147,158) (906,100) 198,366 1,984 797,409 799,393 3,519,736 35,197 14,568,751 14,603,948 100,000 1,000 (1,000) -- 37,567 375 184,952 185,327 324,675 3,247 (3,247) -- 180,600 180,600 411,002 411,002 327,146 $(327,146) -- -- 60,783 60,783 -- -- -- -- -- (14,149,151) (14,149,151) ---------- -------- ----------- ------------ ----------------- ------------ ------------ 8,332,747 83,327 20,665,147 (266,363) (19,296,309) 1,185,802 -- -- 20,591,443 -- -- 20,593,842 1,864,276 18,643 (17,580) -- 547,274 5,473 5,001,490 5,006,963 156,605 1,566 576,023 577,589 203,952 2,040 499,765 501,805 1,764,872 1,764,872 439,607 (439,607) -- 465,680 465,680 -- -- -- -- -- (5,996,147) (5,996,147) ---------- -------- ----------- ------------ ----------------- ------------ ------------ 11,104,854 111,049 49,520,767 (240,290) (25,292,456) 24,100,406 1,845,634 18,456 (17,404) -- 43,350 433 54,283 54,716 28,886 28,886 37,854 (37,854) -- 278,144 278,144 $ 99,029 99,029 -- -- -- -- -- (7,974,016) (7,974,016) ---------- -------- ----------- ------------ ----------------- ------------ ------------ 12,993,838 129,938 49,624,386 -- 99,029 (33,266,472) 16,587,165 199,509 1,995 (1,881) -- 83,631 837 147,472 148,309 719,225 719,225 (22,826) (22,826) -- -- -- -- -- (6,897,024) (6,897,024) ---------- -------- ----------- ------------ ----------------- ------------ ------------ 13,276,978 $132,770 $50,489,202 $ -- $ 76,203 $(40,163,496) $ 10,534,849 ========== ======== =========== ============ ================= ============ ============ The accompanying notes are an integral part of the consolidated financial statements.
25 BOSTON LIFE SCIENCES, INC. (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended December 31, ----------------------------------- From Inception (October 16, 1992) to December 31, 1998 1997 1996 1998 ------------ ----------- ------------ ------------- Cash flows from operating activities: Net loss .................................................. $(6,897,024) $(7,974,016) $ (5,996,147) $(40,163,496) Adjustments to reconcile net loss to net cash used for operating activities: Purchased research and development in-process ............ -- -- -- 10,421,544 Compensation charge related to options and warrants ...... 719,225 278,144 465,680 1,593,765 Amortization and depreciation ............................ 80,644 79,946 297,839 1,451,816 Changes in current assets and liabilities: Decrease (increase) in other current assets ............. 89,609 371,408 (590,513) (73,071) (Decrease) increase in accounts payable and accrued expenses ............................................... (257,605) 83,892 396,741 786,534 (Decrease) increase in deferred revenue ................. -- (83,060) -- -- ------------ ----------- ------------ ------------ Net cash used for operating activities .................... (6,265,151) (7,243,686) (5,426,400) (25,982,908) ------------ ----------- ------------ ------------ Cash flows from investing activities: Cash acquired through the merger with Greenwich Pharmaceuticals, Inc. .......................... -- -- -- 1,758,037 Purchase of fixed assets .................................. -- (74,010) (107,384) (256,701) Other....................................................... (2,977) (157,555) (107,674) (266,406) Short term investments: Purchases ................................................ (13,340,276) (8,984,893) (22,324,741) (44,898,230) Sales and maturities ..................................... 17,817,954 9,740,448 9,578,039 37,136,441 ------------ ----------- ------------ ------------ Net cash provided by (used for) investing activities ...... 4,474,701 523,990 (12,961,760) (6,526,859) ------------ ----------- ------------ ------------ Cash flows from financing activities: Proceeds from issuance of common stock .................... 148,309 83,602 5,686,177 13,158,054 Proceeds from issuance of preferred stock ................. -- -- 20,872,170 20,872,170 Proceeds from issuance of notes payable ................... -- -- -- 2,585,000 Proceeds from issuance of convertible debt ................ -- -- -- 1,000,000 Principal payments of notes payable ....................... -- (61,752) (1,628,062) (2,796,467) Payment of note issuance costs ............................ -- -- -- (399,702) Payment of stock issuance and merger transaction costs .... -- -- (256,142) (1,837,454) ------------ ----------- ------------ ------------ Net cash provided by financing activities ................. 148,309 21,850 24,674,143 32,581,601 ------------ ----------- ------------ ------------ Net increase (decrease) in cash and cash equivalents ....... (1,642,141) (6,697,846) 6,285,983 71,834 Cash and cash equivalents, beginning of period ............. 1,713,975 8,411,821 2,125,838 -- ------------ ----------- ------------ ------------ Cash and cash equivalents, end of period ................... $ 71,834 $ 1,713,975 $ 8,411,821 $ 71,834 ============ =========== ============ ============ Supplemental cash flow disclosures: Interest paid ............................................. $ -- $ 2,437 $ 198,739 Non cash transactions (see notes 8, 9 and 10) The accompanying notes are an integral part of the consolidated financial statements.
26 BOSTON LIFE SCIENCES, INC. (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
FOR THE YEAR ENDED DECEMBER 31, ------------------------------------------------ From inception (October 16, 1992) to 1998 1997 1996 December 31, 1998 ------------- ------------ ------------- ------------------ Net loss............................................. $(6,897,024) $(7,974,016) $ (5,996,147) $(40,163,496) Preferred stock preferences (Note 9)............... -- -- (34,387,953) (34,387,953) Unrealized gains on securities..................... Unrealized holding gains arising during the period (25,310) 102,797 -- 76,987 Investment gains (losses) included in Net Loss.... 2,484 (3,768) -- (1,284) ------------ ------------ ------------- -------------- Comprehensive loss ................................. $ (6,919,850) $(7,874,987) $(40,384,100) $(74,475,746) ============ ============ ============= ============== The accompanying notes are an integral part of the consolidated financial statements.
27 BOSTON LIFE SCIENCES, INC. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES Boston Life Sciences, Inc. (the "Company"), founded in October 1992, is a biotechnology company engaged in the research and development of novel therapeutic and diagnostic products to treat chronic debilitating diseases such as cancer, central nervous system disorders and autoimmune diseases. On June 15, 1995, Greenwich Pharmaceutical Incorporated ("Greenwich") acquired (the "Merger") all of the outstanding capital stock of Boston Life Sciences, Inc. ("Old BLSI"). Effective June 15, 1995, the merged company was renamed "Boston Life Sciences, Inc." (the "Company") and the management and Board of Directors of Old BLSI assumed management of the Company. During the period from inception through December 31, 1998, the Company has devoted substantially all of its efforts to business planning, raising financing, consummating the merger with Greenwich, furthering the research and development of its technologies, Therafectin related activities and corporate partnering efforts. Accordingly, the Company is considered to be in the development stage as defined in Statement of Financial Accounting Standards No. 7. A summary of the Company's significant accounting policies is as follows: Basis of Consolidation The Company's consolidated financial statements include the accounts of its six subsidiaries where a majority of the operations are conducted. Five of these subsidiaries, Ara Pharmaceutical, Inc., Acumed Pharmaceutical, Inc., Boston Life Sciences International, Inc., Coda Pharmaceutical, Inc. and NeuroBiologics, Inc., are wholly-owned. A minority shareholder owns 10% of the sixth subsidiary, Procell Pharmaceutical, Inc. For the period from inception (October 16, 1992) through December 31, 1998, each subsidiary has incurred losses, all of which are included in the Company's consolidated statement of operations. All significant intercompany transactions and balances have been eliminated. Cash, Cash Equivalents and Investments The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. The Company invests its cash equivalents primarily in overnight repurchase agreements, money market funds, and United States treasury and agency obligations. At December 31, 1998 and periodically throughout the year, the Company had cash balances at certain financial institutions in excess of federally insured limits. However, the Company does not believe that it is subject to any unusual credit risk beyond the normal credit risk associated with commercial banking relationships. Investments, which are classified as available-for-sale, are recorded at fair value. Unrealized gains or losses are not immediately recognized in the statement of operations but are reflected in the statement of comprehensive loss and as a component of stockholders' equity until realized. Investments consist of United States treasury and agency bonds, and domestic and foreign corporate bonds (Note 2). These investments are classified as a current asset because they are highly liquid and are available, as required, to meet working capital and other operating requirements. Other assets include approximately $160,000 invested in a certificate of deposit. In April 1997, the Company's primary banking institution loaned $150,000 to an officer of the Company (the "Loan"). As a condition to and as security for the Loan, the Bank requested that the Company pledge an amount equal to the Loan to the Bank. Such funds, including the accumulated interest thereon, will be held by the Bank in a restricted escrow account until the Loan is repaid. 28 BOSTON LIFE SCIENCES, INC. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Financial Instruments Financial instruments which potentially subject the Company to concentrations of credit risk consist of cash equivalents and short term investments. The Company places its excess cash in marketable investment grade securities. There are no significant concentrations in any one issuer of debt securities. The Company places its cash, cash equivalents, and investments with financial institutions with high credit standing. Revenue Recognition and Concentration of Customers In June 1995, the Company entered into a research and development collaboration agreement for a certain specified technology with a pharmaceutical company. Under the terms of the agreement, which expired in June 1997, the pharmaceutical company provided funds to support the research and development of the specified technology. Payments received were recognized as revenue ratably over the original term of the agreement which the Company believes corresponded with the manner in which the work was performed. Fixed Assets Furniture and equipment are stated at cost. Depreciation is provided using the straight-line method based on the estimated useful lives of the assets, and further adjusted, as required, to their estimated net realizable value. Licensing Fees, Research and Development Expenses, Concentration of Outside Researchers, and Therafectin-related expenses The Company has entered into licensing agreements with certain institutions that provide the Company with the rights to certain patents and technologies, and the right to market and distribute any products developed. Obligations initially incurred to acquire these rights are recognized and expensed on the date that the Company acquires the rights. The Company has entered into sponsored research agreements with certain institutions for the research and development of its licensed technologies. Payments made under these sponsored research agreements are expensed ratably over the term of the agreement which the Company believes corresponds with the manner in which the work is performed. The Company currently conducts a substantial portion of its research and development through a certain University and its affiliates pursuant to sponsored research agreements. The majority of the Company's technologies currently under development were invented or discovered by researchers working for this University and its affiliates. A substantial portion of the Company's research is thus dependent upon a continuing business relationship with this University. Research and development activities cease when developmental work is substantially complete and when the Company believes appropriate efficacy has been demonstrated. In connection with its merger with Greenwich, the Company acquired technology related to Therafectin, a treatment for rheumatoid arthritis. Greenwich had previously conducted clinical trials which management believes demonstrated the efficacy of the technology. Accordingly, costs related to Therafectin have been separately stated in the consolidated statement of operations. Acquired Technology In connection with the Merger, $3,500,000 of the purchase price was ascribed to acquired technology. The Company assesses whether there has been impairment whenever events or changes in circumstances indicate that any portion of the carrying amount of the technology may not be recoverable. The Company evaluates potential impairment by comparing anticipated undiscounted future net cash flows from expected product sales of the technology with its carrying value. The factors considered by management in performing this assessment include the expected cost to obtain product approval as well as the effects on expected product sales of competition, demand, and other economic factors. At December 31, 1998, management believes that there has been no impairment in the value of the technology. 29 BOSTON LIFE SCIENCES, INC. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Income Taxes The Company uses the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recorded for the expected future tax consequences of temporary differences between the financial statement and tax bases of assets and liabilities. A valuation allowance is established to reduce net deferred tax assets to the amount expected to be realized. Reverse Stock Split On June 6, 1997, the Company's stockholders approved a one-for-ten reverse split of the common stock effective as of June 9, 1997. All share and per share amounts were retroactively restated to reflect the terms of the split. Net Loss Per Share Basic and diluted net loss per share available to common shareholders has been calculated by dividing net loss, adjusted for preferred stock preferences, by the weighted average number of common shares outstanding during the period. All potential common shares have been excluded from the calculation of weighted average common shares outstanding since their inclusion would be antidilutive. Stock options, preferred stock, and warrants to purchase 3,499,119, 3,304,489, and 4,842,524 shares of common stock at prices ranging from $0.63 to $15.00 per share were outstanding at December 31, 1998, 1997, and 1996, respectively, but were not included in the computation of diluted net loss per common share because they were antidilutive. The aforementioned stock options, preferred stock and warrants could potentially dilute earnings per share in the future. Accounting for Stock-Based Compensation The Company has elected to adopt the disclosure-only alternative permitted under Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation" (Note 10). The Company applies APB Opinion No. 25 "Accounting for Stock Issued to Employees" and related interpretations in accounting for its stock-based compensation plans and related equity issuances. Options and warrants issued to non-employees are subject to a fair value based method of accounting under which compensation cost is generally recognized over the vesting period based on the value of the award. The value is determined using the Black-Scholes pricing model and the resulting expense is recognized over the vesting period. Preferred Stock The Company has, at certain times, issued preferred stock which was convertible into common stock at a discount from the common stock market price at the date of issuance. The discounted amount associated with such conversion rights represents an incremental yield, i.e. a "beneficial conversion feature," which is recognized as a return to the preferred shareholders. Such amounts are reported as preferred stock preferences in the statement of operations, and represent a non-cash charge in the determination of net loss available to common shareholders. 30 BOSTON LIFE SCIENCES, INC. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses for the periods presented. Actual results could differ from those estimates. Risks and Uncertainties The Company is subject to risks and uncertainties common to the biotechnology industry. Such risks and uncertainties include, but are not limited to: (i) results from current and planned clinical trials, (ii) scientific data collected on technologies currently in preclinical research and development, (iii) decisions made by the Food and Drug Administration ("FDA") or other regulatory bodies with respect to the initiation of human clinical trials and the commercial sale of any proposed products, (iv) the Company's ability to obtain the necessary patents and proprietary rights to effectively protect its technologies, (v) the outcome of any current or future collaborations or alliances with pharmaceutical or other biotechnology companies and universities, and (vi) dependence on key personnel. Reclassifications Certain reclassifications have been made to the 1997 and 1996 financial statements to conform to the 1998 presentation. Recent Accounting Pronoucements In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The Company, to date, has not engaged in derivative and hedging activities, and accordingly does not believe that the adoption of SFAS No. 133 will have a material impact on the financial reporting and related disclosures of the Company. The Company will adopt SFAS No. 133 as required for its first quarterly filing of 2000. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income," which was adopted by the Company in the first quarter of fiscal 1998. SFAS 130 establishes standards for reporting comprehensive income and its components in a financial statement. Comprehensive income as defined includes all changes in equity (net assets) during a period from non-owner sources. Examples of items to be included in comprehensive income, which are excluded from net income, include unrealized gains and losses on available-for-sale securities. Accumulated other comprehensive income, as presented on the accompanying consolidated balance sheets, consists of the net unrealized gains on available- for-sale securities. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("Statement No. 131"), effective for fiscal years beginning after December 15, 1997. Statement No. 131 establishes standards for reporting information about operating segments in annual financial statements and selected information about operating segments in interim financial reports issued to stockholders. The Company currently operates in only one business segment. 31 BOSTON LIFE SCIENCES, INC. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 2. INVESTMENTS CONSIST OF THE FOLLOWING AT DECEMBER 31:
1998 1997 --------------- --------------- U.S. Treasury obligations........................................... $ 3,515,469 U.S. Agency obligations............................................. $7,084,374 6,002,267 Corporate debt obligations.......................................... 753,618 2,820,760 ---------- ----------- $7,837,992 $12,338,496 ========== ===========
The contractual maturities of the Company's investments at December 31, 1998 are as follows: less than one year--$1,433,242; one to five years--$1,683,599; six to ten years--$4,013,120; ten to fifteen years--$708,031. Actual maturities may differ from contractual maturities because the issuers of these securities may have the right to prepay obligations without penalty. Gross unrealized gains and (losses) at December 31, 1998 totaled $113,097 and ($36,894), respectively. Net realized gains (losses), based on the specific identification method, totaled $2,484 and ($3,768) in 1998 and 1997, respectively, and are included in interest income in the statement of operations. 3. FIXED ASSETS CONSIST OF THE FOLLOWING AT DECEMBER 31:
ESTIMATED USEFUL LIFE (YEARS) 1998 1997 ------------- ------------ ------------ Office furniture and equipment.......................... 3-5 $112,006 $112,006 Leasehold improvements.................................. 3 59,424 59,424 Computer equipment...................................... 3-5 58,510 58,510 Laboratory equipment.................................... 3-5 33,018 33,018 -------- -------- 262,958 262,958 Less accumulated depreciation and amortization.......... 248,541 167,897 -------- -------- $ 14,417 $ 95,061 ======== ========
Depreciation expense on fixed assets for the years ended December 31, 1998, 1997 and 1996 was approximately $81,000 , $80,000, and $58,000, respectively, and $249,000 for the period from inception (October 16, 1992) through December 31, 1998. 4. ACQUIRED TECHNOLOGY In connection with the Merger, a $3.5 million asset was established representing the appraised value assigned to Therafectin technology acquired from Greenwich Pharmaceuticals. The Company completed a Phase III clinical trial for Therafectin in August 1997. Based upon evaluation of all of the trial data on Therafectin, including data from previous Greenwich trials, and the advice obtained from a special panel of clinical rheumatologists, the Company filed an amendment, on June 30, 1998, to the previously filed New Drug Application ("NDA") with the FDA seeking marketing approval for Therafectin. If the Company is ultimately unsuccessful in obtaining regulatory approval for Therafectin, the Company will be required to write off the $3.5 million asset value attributable to Therafectin as reflected on the Company's balance sheet. 5. RESEARCH AND DEVELOPMENT AGREEMENT In June 1995, the Company entered into a research and development agreement with a pharmaceutical company. Under the terms of the agreement, which expired in June 1997, the pharmaceutical company provided funds to support the research and development of one of the Company's technologies. These funds were recognized as revenue ratably over the term of the Agreement and totaled $83,060 and $200,000 during 1997 and 1996, respectively. 32 BOSTON LIFE SCIENCES, INC. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES CONSIST OF THE FOLLOWING AT DECEMBER 31:
1998 1997 ------------- ------------ Accrued research and development............................. $ 600,000 $ 449,000 Accounts payable and other operating expenses................ 448,558 613,897 Accrued professional fees.................................... 442,961 668,620 Accrued Therafectin related.................................. 210,000 203,293 Accrued payroll related...................................... 32,680 56,994 ---------- ---------- 1,734,199 $1,991,804 ========== ==========
7. NOTES PAYABLE AND DEBT 7% Convertible Subordinated Debentures In December 1995, the Company issued, pursuant to an investment agreement (the "Subscription Agreement") under Regulation S of the Securities Act of 1933, an aggregate of $1 million of 7% convertible subordinated debentures maturing in December 1997. The debentures were convertible, at the option of the holder, into shares of common stock at sixty-five percent of the market price of the common stock at the time of conversion. In addition, the Subscription Agreement contained certain restrictions on the sale of common stock issued upon conversion of the debentures. Because of the significant discount associated with the conversion feature, an estimated value of approximately $411,000 was ascribed to such feature and was recorded as a debt discount and additional paid-in capital. The debt discount was initially being amortized over the period the debentures were expected to be outstanding. In February 1996, the holder elected to convert all of the 7% convertible debentures into 156,605 shares of common stock. Approximately $70,000 of the debt discount was amortized and recognized as interest expense in 1996 prior to the conversion. The remaining unamortized discount and related deferred financing fees were included in the carrying amount of the debt which upon conversion was credited to additional paid-in capital. 8. COMMON STOCK Common Stock Subject to Redemption In September and November 1995, the Company sold, pursuant to investment agreements (each, individually, the "September Investment Agreements" and the "November Investment Agreements") under Regulation S of the Securities Act of 1933, an aggregate of approximately 320,000 shares of common stock resulting in net proceeds of approximately $1.8 million. Both agreements provided that, based upon the average price of the Company's common stock through June 1996 and July 1996 for the September Investment Agreements and the November Investment Agreements, respectively, (i) the Company was contingently obligated to issue additional shares of common stock to the investors, (ii) such investors were contingently obligated to make additional payments to the Company for shares purchased, and (iii) the Company was contingently obligated to make repayment to such investors for certain amounts of the investment. Until the circumstances providing for the possible repayment by the Company of certain amounts of the equity investment no longer existed, the portion of the net proceeds which the Company was contingently obligated to repay was classified as common stock subject to redemption on the Company's balance sheet. The portion of the equity investment that was no longer subject to possible repayment was reclassified to stockholders' equity upon the expiration of the valuation periods as defined in the investment agreements. 33 BOSTON LIFE SCIENCES, INC. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) In December 1995, $175,000 of the net proceeds subject to redemption was reclassified to equity concurrent with the expiration of the first valuation period. During 1997 and 1996, the Company received approximately $29,000 and $135,000, respectively, in additional payments from the investors based upon the average price of the Company's common stock for certain periods specified in the agreements. Also in 1996, the amount of $1,630,000 previously classified as common stock subject to redemption was reclassified to stockholders' equity. Common Stock Issuances In June 1996, the Company completed a private placement of 500,000 shares of common stock which raised approximately $5 million in net proceeds. In connection with this financing, the Company issued to the placement agent, as payment for its services, 47,274 shares of common stock and warrants to purchase 54,727 shares at a price of $11.00 per share (Note 10). In February 1999, the Company completed a private placement of 647,668 shares of common stock which raised approximately $2.5 million in gross proceeds. The investor also received warrants to purchase 97,150 shares of common stock at a price of $4.81 per share. The Company is obligated to issue additional shares to the investor if the Company issues common stock in a capital raising transaction at a price per share less than that paid by the investor. Certain issuances, including those related to the exercise of outstanding warrants and options, are not subject to this provision which expires in October 2002. 9. PREFERRED STOCK The Company has authorized 1,000,000 shares of preferred stock of which 264,000 shares have been designated as Series A Convertible Preferred Stock. In February 1999, the Company designated 475,000 shares as Series B Convertible Preferred Stock, which it subsequently decreased to 227,719 shares. In February 1999, the Company designated 475,000 shares as Series C Convertible Preferred Stock. The remaining authorized shares have not been designated. 1996 Issuance In January and February 1996, the Company raised, through a private placement of its securities, net proceeds of approximately $20.6 million, net of approximately $3.4 million of issuance costs. In connection with the private placement, the Company issued (i) 239,910 shares of Series A Convertible Preferred Stock and (ii) granted warrants to purchase 599,775 shares of common stock at $6.71 per share (Note 10). The warrants may be redeemed at the election of the Company, in whole but not in part, under certain conditions as defined in the warrant agreements. In connection with this financing, the Company granted to the placement agent, a related party (Note 13), options to acquire 23.991 units with each unit consisting of 1,000 shares of Series A Convertible Preferred stock and warrants to purchase 2,500 shares of common stock at a unit exercise price of $110,000. Each share of the Series A Convertible Preferred Stock is convertible at any time at the option of the holder into shares of common stock pursuant to a ratio of 17.53771 shares of common stock for each share of Series A Convertible Preferred Stock. The Company may, under certain conditions defined in the preferred stock agreement, cause the conversion of the preferred stock, in whole or in part, into common stock. The Company issued 199,509, 1,845,634 and 1,864,276 shares of common stock during 1998, 1997 and 1996, respectively, related to the conversion of 11,376, 105,238 and 106,301 shares of preferred stock, respectively. The preferred stock had a beneficial conversion feature which allowed the holders to convert their shares into common stock at a discount to the market price. The intrinsic value of the beneficial conversion feature totaled $34,387,953 which was included in calculating the net loss available to common shareholders for the year ended December 31, 1996. 34 BOSTON LIFE SCIENCES, INC. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 1999 Issuance In February 1999, the Company completed a private placement of Series C Convertible Preferred Stock ("Series C Stock") which raised proceeds of approximately $5.7 million, net of approximately $0.5 million of issuance costs. In connection with the financing, the Company issued (i) 315,416 shares of Series C Stock and (ii) 569,248 warrants to purchase common stock at $5.06 per share and 219,234 warrants to purchase common stock at $6.09 per share. In connection with this financing, the Company paid $372,725 to the placement agent and issued 166,948 warrants to purchase common stock at $5.06 per share and 54,808 warrants to purchase common stock at $6.09 per share to the placement agent. Subsequent to an initial closing of the private placement, which consisted of Series B Convertible Preferred Stock, ("Series B Stock"), it was determined that a certain agreed upon provision had not been included in the Certificate of Designation defining the rights, preferences and other provisions of the Series B Stock. As a result, the investors participating in the initial closing exchanged their shares of Series B Stock for an equal number of shares of Series C Stock whose Certificate of Designation includes the previously omitted provision. Investors participating in the second and final closing were directly issued Series C Stock. Each share of the Series C Stock is convertible at any time at the option of the holder into shares of common stock pursuant to a ratio of five shares of common stock for each share of Series C Stock. The Company may be required to issue up to one additional share of common stock for each share of common stock underlying Series C Stock still held by an investor on the date that is 270 days after the closing, if the market price of the common stock is below a specified level on such date. However, the investor's right to receive additional shares terminates if the market price of the common stock is above a specified level for a certain period, as defined. The initial conversion price of the Series C Stock was at a discount to the market price on the date of issuance and the terms provide for a minimum return of 25%. The intrinsic value of this beneficial conversion of approximately $1.9 million will be recognized as a preferred stock preference in the statement of operations in 1999, and will represent a non-cash charge in the determination of net loss available to common shareholders. The net proceeds of $5.7 million will be allocated between the warrants and the Series C Stock based on their relative fair values. Because the redemption of the Series C Stock is not within the control of the Company, the amount allocated to the Series C Stock will be reflected outside of stockholders' equity as "mezzanine" financing. The amount allocated to the warrants will be credited to additional paid-in capital. 10. STOCK OPTIONS AND WARRANTS Omnibus Plans The Amended and Restated Omnibus Stock Option Plan allows for the issuance of options to purchase up to 1,200,000 shares of the Company's common stock through April 2005. The 1998 Omnibus Plan, which was approved at the 1998 Annual Meeting, provides for the issuance of options to purchase up to 500,000 shares of the Company's common stock through April 2008. Both plans provide for the issuance of both nonqualified stock options and incentive stock options to employees, officers, consultants and scientific advisors of the Company. The Company's Board of Directors determines the term of each option, vesting provisions, option price, number of shares for which each option is granted and the rate at which each option is exercisable. The term of each option cannot exceed ten years. The exercise price of incentive stock options shall not be less than the fair market value of the Company's common stock on the date of grant. Nonqualified stock options may be issued under the Omnibus Plan at an option price determined by the Board of Directors which shall not be less than 50% of the fair market value of the Company's common stock on the date of grant. In 1996, the Company granted, in recognition of services to be performed by certain employees, consultants and scientific advisors, non-qualified stock options under the Omnibus Plan. The total fair value of approximately $274,000 and $236,000 ascribed to the options granted in 1996 and 1995, respectively, was recorded as deferred compensation and was charged to operations over the vesting period of the options which management believed fairly approximates the service period. The charge to operations for the years ended December 31, 1997 and 1996 totaled approximately $182,000 and $292,000, respectively. 35 Directors' Plan The Directors' Plan allows for the issuance of up to 450,000 shares of the Company's common stock through April 2005. The Director's Plan provides for an automatic yearly grant of options to all non-employee directors of up to 2,500 options. Non-qualified stock options granted under the Directors' Plan generally vest 75% six months from the grant date and the remaining 25% on the later of six months from the date of grant or December 31st of the year of grant, and have an exercise price equivalent to 20% of the quoted market price of the Company's common stock on the date of grant. For new non-employee Directors, the Directors' Plan also provides for the one-time issuance of options to purchase 7,500 shares of the Company's common stock at fair market value at the time of grant with such options vesting over a period of four years. During 1996, the Directors' Plan was amended to provide for the granting of additional options at the discretion of the Board of Directors. During 1998, the Directors' Plan was amended to provide for the granting of options to employees of the Company. All options granted under the Directors' Plan have a term of ten years. Compensation expense related to the intrinsic value of options issued in 1998, 1997 and 1996 totaled approximately $19,000, $18,000 and $98,000, respectively. Stock-Based Compensation If the Company had valued awards to qualified employees using the fair value methodology prescribed by SFAS 123, the Company's net loss and basic and diluted net loss per share would have equaled the pro forma amounts indicated below. Net loss and net loss per share for 1996 (as reported and pro forma) include preferred stock preferences.
1998 1997 1996 ----------------- ----------------- ------------------- Net loss available to common shareholders.................... As reported................................................. $(6,897,024) $(7,974,016) $(40,384,100) Pro forma................................................... $(7,900,270) $(8,711,431) $(40,895,329) Basic and diluted loss per share available to common shareholders................................................ As reported................................................. $ (0.52) $ (0.64) $ (4.09) Pro forma................................................... $ (0.60) $ (0.70) $ (4.14)
The fair value of each option grant was estimated on the date of the grant using the Black-Scholes option-pricing model with the following assumptions: dividend yield of zero percent; expected volatility of 80 percent; risk-free interest rates, based on the date of grant, ranging from 4.61% to 6.46%; and expected lives of 5 years. A summary of the status of the Company's stock option plans as of December 31, 1998, 1997, and 1996 and changes during the years ending on those dates is presented below. In January 1998, the Company issued 372,000 options to employees and directors at a price that was $0.13 less than the market price of the Company's stock on the date of grant, for which the Company recorded a non-cash charge of approximately $48,000. During 1998, the Company amended its Stock Option Plans to provide employees and directors with extended exercise rights upon termination subject to the option holder meeting certain requirements, including minimum terms of employment. In connection with these changes, the Company recorded a non-cash charge of approximately $410,000.
1998 1997 1996 ------------------------ ------------------------ ------------------------ Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ---------- ---------- ---------- ----------- --------- ---------- Outstanding at beginning of year............. 1,039,668 $4.33 716,008 $4.30 661,260 $ 2.30 Granted...................................... 503,204 2.13 409,640 4.43 174,368 6.70 Exercised.................................... (10,770) 1.10 (28,280) 0.82 (92,830) 2.10 Forfeited and expired........................ (163,574) 2.69 (57,700) 7.03 (26,790) 19.10 --------- --------- ------- Outstanding at end of year................... 1,368,528 3.74 1,039,668 4.33 716,008 4.30 ========= ========= ======= Options exercisable at year-end.............. 1,077,212 3.72 690,720 4.12 475,577 3.70 ========= ========= ======= Weighted-average fair value of options granted during the year............................ $1.46 $3.07 $ 5.70
The following table summarizes information about stock options outstanding at December 31, 1998:
Options Outstanding Options Exercisable ------------------------------------------- -------------------------------- Weighted- Average Weighted- Weighted- Remaining Average Number Average Range of Number Contractual Exercise Exercisable Exercise Exercise Prices Outstanding Life Price at 12/31/98 Price - --------------------------------------------- ----------- --------------- ------------- ----------------- ------------- $.63--$2.20.................................. 672,053 7.8 years $1.60 574,428 $1.50 $4.47........................................ 380,400 8.6 years 4.47 201,934 4.47 $6.30--$9.40................................. 316,075 7.3 years 7.41 300,850 7.44 --------- --------- 1,368,528 7.9 years 3.74 1,077,212 3.72 ========= =========
At December 31, 1998, 612,025 shares are available for grant under the Company's Option Plans. 36 BOSTON LIFE SCIENCES, INC. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Warrants In January and February 1996, the Company granted 659,955 warrants in connection with a private placement of its Series A Preferred Stock (Notes 9 and 13). In June 1996, the Company granted 54,727 warrants in connection with a private placement of its common stock (Note 8). In September 1996, the Company issued 5,000 warrants to its public relations advisor as partial compensation for its services. In January 1997, the Company issued 20,000 warrants pursuant to a letter agreement between the Company and a shareholder. In January 1998, the Company issued 225,000 warrants to a financial advisor which represented a substantial portion of the compensation paid by the Company for the advisor's services. The Company recorded a non-cash charge of approximately $290,000 representing the fair value of the warrants at the date of issuance. At December 31, 1998, warrants outstanding were as follows:
Exercise Warrants Date Price Outstanding Expiration of Issue per Share at 12/31/98 Date - -------- --------- ----------- ---- January 1998.......................... $2.13 - $4.00 225,000 January 2003 January 1997.......................... 15.00 20,000 January 2007 September 1996........................ 6.30 5,000 September 2006 June 1996............................. 11.00 54,727 June 2006 February 1996......................... 6.70 639,603 February 2006 December 1995......................... 3.50 23,175 December 2000 August 1995........................... 6.81 25,226 July 2005 June 1995............................. .13 - 9.41 94,590 March 2000 June 1995............................. 2.29 47,674 July 1999 June 1995............................. 1.50 - 8.78 697,535 March 2000 --------- 1,832,530 =========
Each warrant is exercisable into one share of common stock. The Company has reserved sufficient shares of common stock to meet its stock option and warrant obligations. A total of 54,917 warrants were exercised in 1998. 37 BOSTON LIFE SCIENCES, INC. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Stockholder Rights Plan On September 29, 1991, the Board of Directors of Greenwich adopted a Stockholder Rights Plan (the "Rights Plan"), which was amended during 1994 and 1993 and adopted by the Company in connection with the Merger. Under the Rights Plan, stockholders received as a dividend, for each share of common stock owned by them, one right (the "Right") to purchase a fractional share of a new class of preferred stock. With certain exceptions, if a person or group (the "Acquirer") acquires 15 percent (the "trigger point") or more of the outstanding shares of the Company's common stock, the Rights will separate from the shares of common stock and become exercisable. Once the Rights are exercised, and in certain circumstances if additional conditions are met, the Rights Plan allows holders of the Rights (other than the Acquirer) to buy common stock of the Company or the Acquirer at a substantial discount. The Rights dividend was issued to stockholders of record on October 7, 1991. The Rights will expire in ten years unless exercised by the holders or redeemed or exchanged by the Company. 11. INCOME TAXES Income tax benefit consists of the following for the years ended December 31:
1998 1997 1996 ------------------- ------------------- ------------------ Federal................................................... $ 2,326,000 $ 2,543,000 $ 2,139,000 State..................................................... 794,000 1,346,000 680,000 ----------- ----------- ----------- 3,120,000 3,889,000 2,819,000 Valuation allowance....................................... (3,120,000) (3,889,000) (2,819,000) ----------- $ -- $ -- $ -- =========== =========== ===========
Deferred tax assets (liabilities) consist of the following at December 31:
1998 1997 ------------------- ------------------- Net operating loss carryforwards.............................. $ 19,676,000 $ 15,817,000 Capitalized research and development expenses................. 2,812,000 3,637,000 Research and development credit carryforwards................. 961,000 717,000 Other......................................................... 616,000 774,000 ------------ ------------ Gross deferred tax assets..................................... 24,065,000 20,945,000 Acquired technology........................................... (1,435,000) (1,435,000) ------------ ------------ Net deferred tax assets....................................... 22,630,000 19,510,000 Valuation allowance........................................... (22,630,000) (19,510,000) ------------ ------------ $ -- $ -- ============ ============
The Company has provided a full valuation allowance for its deferred tax assets since it is more likely than not that the future benefits related to these assets will not be realized. In the event the Company achieves profitability, these deferred tax assets will be available to offset future income tax liabilities and expense. Approximately $7 million of the valuation allowance at December 31, 1998 relates to deferred tax assets acquired in the merger with Greenwich. If the valuation allowance related to these assets is released, the credits will first be recorded to reduce the carrying value, if any, of acquired technology purchased in the Merger. 38 BOSTON LIFE SCIENCES, INC. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) A reconciliation between the amount of reported tax benefit and the amount computed using the U.S. Federal statutory rate of 35% for the year ended December 31 is as follows:
1998 1997 1996 ---------------- ---------------- ---------------- Benefit at statutory rate.................................... $(2,417,000) $(2,825,000) $(2,099,000) State taxes, net of federal benefit.......................... (504,000) (587,000) (420,000) Research and development credit.............................. (180,000) (206,000) (72,000) Other........................................................ (19,000) (271,000) (228,000) ----------- ----------- ----------- (3,120,000) (3,889,000) (2,819,000) Benefit of loss not recognized, increase in valuation allowance.................................................. 3,120,000 3,889,000 2,819,000 ----------- ----------- ----------- $ -- $ -- $ -- =========== =========== ===========
As of December 31, 1998, the Company has federal net operating loss carryforwards of $47,907,000 which expire beginning in 2007 and ending in 2019. In addition, the Company has federal and state research and development credits of $656,000 and $445,000, respectively, which expire beginning in 2007 and 1999, respectively, and ending in 2019 and 2004, respectively. These net operating loss carryforwards and research and development credits may be used to offset future federal and state taxable income and tax liabilities. A portion of the net operating loss carryforwards totaling approximately $864,000 relates to deductions for the exercise of non-qualified options and will be credited to additional paid-in capital upon realization. In connection with the Merger, the Company acquired approximately $90 million of net operating loss carryforwards of which approximately $11.6 million can be utilized by the Company under the ownership change provisions of the Internal Revenue Code. These net operating losses, which expire in 2009 and 2010, cannot offset the taxable income of any of the subsidiaries of the Company. In addition, ownership changes resulting from the Company's issuance of common stock may limit the amount of net operating loss and tax credit carryforwards that can be utilized annually to offset future taxable income. The amount of the annual limitation is determined based upon the Company's value immediately prior to the ownership change. Subsequent significant changes in ownership could further affect the limitation in future years. 12. COMMITMENTS AND CONTINGENCIES Operating Leases The Company leases certain office equipment and its office space and warehouse facilities under noncancelable operating leases. Terms of the lease for office space include a renewal option of three years. Approximate future minimum lease commitments at December 31, 1998 are as follows: 1999--$62,000 and 2000--$5,000. Total rent expense under noncancelable operating leases was approximately $124,000, $131,000, and $100,000 during the years ended December 31, 1998, 1997, and 1996, respectively, and approximately $481,000 for the period from inception (October 16, 1992) through December 31, 1998. Sponsored Research and Development, and Consulting Agreements Pursuant to noncancellable sponsored research and development agreements and consulting agreements, the Company is committed to make payments totaling approximately $1.2 million in 1999. Litigation The Company is subject to legal proceedings in the normal course of business. Management believes that these proceedings will not have a material adverse effect on the consolidated financial statements. 39 BOSTON LIFE SCIENCES, INC. (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 13. RELATED PARTY TRANSACTIONS Placement Agent Fees and Service Agreements The Chief Executive Officer and sole stockholder of the placement agent ("Principal Agent") involved with a significant portion of the Company's equity and debt financings through December 31, 1998 was previously a significant common stockholder of the Company. In connection with the Company's 1996 private placement of Series A Convertible Preferred Stock (Note 9), the Principal Agent received options to acquire 23.991 units. Each unit consists of 1,000 shares of Series A Convertible Preferred Stock and warrants to purchase 2,500 shares of common stock at a unit exercise price of $110,000. In August 1995, the Company entered into a two-year financial advisory services agreement with the Principal Agent. In connection with the agreement, the Company issued warrants to the Principal Agent for the purchase of 25,000 shares of the Company's common stock (Note 10). This agreement expired in 1997. In February 1996, the Company entered into a two-year agreement under which the Principal Agent received a monthly retainer fee of $2,500 per month. This agreement expired in January 1998. Loan to Officer In April 1997, the Bank loaned $150,000 to Dr. Lanser, the Company's Executive Vice President and Chief Scientific Officer (the "Loan"). The Loan bears interest at prime and matures in its entirety in September 1999. As a condition to and as security for the Loan, the Bank requested that the Company pledge to the Bank a certificate of deposit in the amount of $155,000 (the "Company Pledge"). In recognition of Dr. Lanser's past and expected future contributions to the Company and as an additional motivation and incentive to Dr. Lanser, which the Company's Board of Directors determined would reasonably benefit the Company, the Company agreed to provide the Company Pledge. As security for the Company, however, in the event Dr. Lanser defaults on the Loan and the Bank forecloses on the Company Pledge, Dr. Lanser has executed and delivered to the Company his contingent note in the amount of $150,000, bearing interest identical to the Loan (the "Contingent Note") and a perfected pledge of 50,000 shares of Common Stock of the Company which he beneficially owns. The Company will demand payment of the Contingent Note only in the event that the Bank forecloses on the Company Pledge as a result of Dr. Lanser's defaulting on his payment of the Loan. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. 40 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information required by this Item 10, with respect to executive officers, is hereby incorporated by reference to the text appearing under Part 1, Item 4A under the caption "Executive Officers of the Registrant" in this Report, and, with respect to directors, by reference to the information included under the headings "Information Regarding Directors", "Executive Officers", and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's definitive Proxy Statement for the 1999 Annual Meeting of Stockholders to be filed by the Company with the Securities and Exchange Commission within 120 days after the close of the Company's fiscal year. ITEM 11. EXECUTIVE COMPENSATION. The information required by this Item 11 is hereby incorporated by reference to the information under the heading "Executive Compensation" and "Report of Compensation Committee on Executive Compensation" in the Company's definitive Proxy Statement for the 1999 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days after the close of its fiscal year. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by this Item 12 is hereby incorporated by reference to the information under the heading "Security Ownership of Principal Stockholders and Management" in the Company's definitive Proxy Statement for the 1999 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days after the close of its fiscal year. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by this Item 13 is hereby incorporated by reference to the information under the heading "Certain Relationships and Related Transactions" in the Company's definitive Proxy Statement for the 1999 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days after the close of its fiscal year. 41 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a)(1) Consolidated Financial Statements of the Company Financial Statements of the Registrant and Report of Independent Accountants thereon Consolidated Balance Sheets at December 31, 1998 and 1997 Consolidated Statements of Operations for the fiscal years ended December 31, 1998, 1997 and 1996 and for the period from inception (October 16, 1992) through December 31, 1998 Consolidated Statements of Stockholders' Equity (Deficit) for the fiscal years ended December 31, 1998, 1997 and 1996 and for the period from inception (October 16, 1992) through December 31, 1998 Consolidated Statements of Cash Flows for the fiscal years ended December 31, 1998, 1997 and 1996, and for the period from inception (October 16, 1992) through December 31, 1998 Consolidated Statements of Comprehensive Loss for the fiscal years ended December 31, 1998, 1997 and 1996, and for the period from inception (October 16, 1992) through December 31, 1998 Notes to Consolidated Financial Statements (a)(2) Financial Statement Schedules Schedules are omitted since the required information is not applicable or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the Consolidated Financial Statements or Notes thereto. (a)(3) Exhibits. The following exhibits are incorporated in this report by reference or included and submitted with this report, as indicated.
EXHIBIT # DESCRIPTION AND METHOD OF FILING - ---------------- ----------------------------------------------------------------------------------------------------- 2.1 Amended and Restated Agreement of Merger, dated as of December 29, 1994, by and between the Company and Greenwich Pharmaceuticals Incorporated (1) 2.2 Amendment No. 1 to Amended and Restated Agreement of Merger, dated as of April 6, 1995, by and between the Company and Greenwich Pharmaceuticals Incorporated (4) 3.1 Amended and Restated Certificate of Incorporation, dated March 29, 1996, as amended on June 9, 1997, and by the Certificate of Designations, Rights and Preferences of Series B Convertible Preferred Stock filed on February 5, 1999, the Certificate of Decrease of Series B Convertible Preferred Stock filed on February 18, 1999, and the Certificate of Designations, Rights and Preferences of Series C Convertible Preferred Stock filed on February 18, 1999. (8) 3.2 Amended and Restated By Laws, effective as of June 26, 1995 (5) 4.1 Rights Agreement between the Company and Chemical Trust Group (formerly Manufacturers Hanover Trust Company) as Rights Agent dated September 26, 1991 (2) 10.1 Form of Indemnity Agreement to be entered into by the Company and its directors and officers (3) 10.2 Boston Life Sciences, Inc. Amended and Restated Omnibus Stock Option Plan (6) 10.3 Boston Life Sciences, Inc. Amended and Restated 1990 Non-Employee Directors' Non Qualified Stock Option Plan (6) 10.4 Boston Life Science Inc. 1998 Omnibus Stock Option Plan (6) 10.5 Purchase Agreement dated February 5, 1999 between the Tail Wind Fund, Ltd. ("Tail Wind") and the Company. (7) 10.6 The Registration Rights Agreement dated February 5, 1999 between Tail Wind and the Company. (7) 10.7 Form of Subscription Agreement for Series B Preferred Stock. (7) 10.8 Form of Exchange Agreement between the Company and Holders of Series B Preferred Stock (7) 10.9 Supplement to Subscription Agreement for Series B Preferred Stock. (7) 21.1 Subsidiaries of the Registrant (7) 23.1 Consent of Independent Accountants (8) 27.1 Financial Data Schedule (8)
42 (1) Incorporated by reference to Greenwich's Annual Report on Form 10-K for the year ended December 31, 1994 (2) Incorporated by reference to Greenwich's Current Report on Form 8-K dated September 26, 1991 (3) Incorporated by reference to Greenwich's proxy statement in connection with its 1987 Annual Meeting of Stockholders (4) Incorporated by reference to the Registration Statement of Greenwich Pharmaceuticals Incorporated on Form S-4, Registration No. 33-91106 (5) Incorporated by reference to BLSI's Annual Report on Form 10-K for the year ended December 31, 1995 (6) Incorporated by reference to BLSI's proxy statement in connection with its 1998 Annual Meeting of Stockholders (7) Incorporated by reference to BLSI's Annual Report on Form 10-K for the year ended December 31, 1998. (8) Filed herewith (b) REPORTS ON FORM 8-K: The Registrant filed the following Reports on Form 8-K during the fourth quarter of 1998 and through March 11, 1999:
Item Date of Report Reported - ----------------------------------------------------------------------------------------- ------------ November 3, 1998 5,7 December 14, 1998 5,7 January 26, 1999 5,7 February 5, 1999 5,7 February 16, 1999 5,7
43 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Boston Life Sciences, Inc. (Registrant) March 19, 1999 By /s/ s. David Hillson --------------------------------------- S. DAVID HILLSON Chairman, President & Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - ----------------------------------------------------------- ------------------------------------ --------------------- /s/ S. David Hillson Chairman, President & Chief March 19, 1999 - --------------------------------------- Executive Officer S. DAVID HILLSON (Principal Executive Officer) /s/ Marc E. Lanser, M.D. Executive Vice President & March 19, 1999 - --------------------------------------- Chief Scientific Officer MARC E. LANSER, M.D. /s/ Joseph P. Hernon Chief Financial Officer March 19, 1999 - --------------------------------------- (Principal Financial and JOSEPH P. HERNON Accounting Officer) /s/ Colin B. Bier, M.D. Director March 19, 1999 - --------------------------------------- COLIN B. BIER, M.D. /s/ Edson D. de Castro Director March 19, 1999 - --------------------------------------- EDSON D. DE CASTRO /s/ Ira W. Lieberman, Ph.D. Director March 19, 1999 - --------------------------------------- IRA W. LIEBERMAN, PH.D. /s/ E. Christopher Palmer Director March 19, 1999 - --------------------------------------- E. CHRISTOPHER PALMER /s/ Adrian M. Gerber Director March 19, 1999 - --------------------------------------- ADRIAN GERBER
44 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION AND METHOD OF FILING PAGE NUMBER - -------------------- ------------------------------------------------------------------------------------------------ ------------ 2.1 Amended and Restated Agreement of Merger, dated as of December 29, 1994, by and between the Company and Greenwich Pharmaceuticals Incorporated (1) 2.2 Amendment No. 1 to Amended and Restated Agreement of Merger, dated as of April 6, 1995, by and between the Company and Greenwich Pharmaceuticals Incorporated (4) 3.1 Amended and Restated Certificate of Incorporation, dated March 29, 1996, as amended on June 9, 1997, and by the Certificate of Designations, Rights and Preferences of Series B Convertible Preferred Stock filed on February 5, 1999, the Certificate of Decrease of Series B Convertible Preferred Stock filed on February 18, 1999, and the Certificate of Designations, Rights and Preferences of Series C Convertible Preferred Stock filed on February 18, 1999. (8) 3.2 Amended and Restated By Laws, effective as of June 26, 1995 (5) 4.1 Rights Agreement between the Company and Chemical Trust Group (formerly Manufacturers Hanover Trust Company) as Rights Agent dated September 26, 1991 (2) 10.1 Form of Indemnity Agreement to be entered into by the Company and its directors and officers (3) 10.2 Boston Life Sciences, Inc. Amended and Restated Omnibus Stock Option Plan (6) 10.3 Boston Life Sciences, Inc. Amended and Restated 1990 Non-Employee Directors' Non Qualified Stock Option Plan (6) 10.4 Boston Life Sciences, Inc. 1998 Omnibus Stock Option Plan (6) 10.5 Purchase Agreement dated February 5, 1999 between the Tail Wind Fund, Ltd. ("Tail Wind") and the Company. (7) 10.6 The Registration Rights Agreement dated February 5, 1999 between Tail Wind and the Company. (7) 10.7 Form of Subscription Agreement for Series B Preferred Stock. (7) 10.8 Form of Exchange Agreement between the Company and Holders of Series B Preferred Stock (7) 10.9 Supplement to Subscription Agreement for Series B Preferred Stock. (7) 21.1 Subsidiaries of the Registrant (7) 23.1 Consent of Independent Accountants (8) 27.1 Financial Data Schedule (8) - ---------------
(1) Incorporated by reference to Greenwich's Annual Report on Form 10-K for the year ended December 31, 1994 (2) Incorporated by reference to Greenwich's Current Report on Form 8-K dated September 26, 1991 (3) Incorporated by reference to Greenwich's proxy statement in connection with its 1987 Annual Meeting of Stockholders (4) Incorporated by reference to the Registration Statement of Greenwich Pharmaceuticals Incorporated on Form S-4, Registration No. 33-91106 (5) Incorporated by reference to BLSI's Annual Report on Form 10-K for the year ended December 31, 1995 (6) Incorporated by reference to BLSI's proxy statement in connection with its 1998 Annual Meeting of Stockholders (7) Incorporated by reference to BLSI's Annual Report on Form 10-K for the year ended December 31, 1998. (8) Filed herewith 45 EX-3.1 2 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION EXHIBIT 3.1 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF BOSTON LIFE SCIENCES, INC. Boston Life Sciences, Inc. (the "Corporation), a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY: 1. The name of the Corporation is Boston Life Sciences, Inc. (the "Corporation"). The Corporation is the entity resulting from the merger of Boston Life Sciences, Inc., a Massachusetts corporation, with and into Greenwich Pharmaceuticals Incorporation, a Delaware corporation, on June 15, 1995. A Certificate of Merger was filed with the Secretary of State of Delaware on that date. The Corporation was originally incorporated on May 18, 1972 under the name "Strategic Medical Research Corp." 2. This Amended and Restated Certificate of Incorporation amends and restates the Restated Certificate of Incorporation to restate the certificate of incorporation of the Corporation in its entirety in a single document. 3. The text of the Restated Certificate of Incorporation is further amended and restated hereby to read as herein set forth in full: "FIRST: The name of the corporation is Boston Life Sciences, Inc. (the "Corporation"); SECOND: Its registered office in the State of Delaware is to be located at 1209 Orange Street, Wilmington, Delaware 19801, County of New Castle. The registered agent at such address is The Corporation Trust Company. THIRD: The nature of the business and objects and purposes for which the Corporation is organized are: (a) To engage in research, exploration, laboratory, and development work relating to any material, substance, compound, or mixture now known or which may hereafter be known, discovered, or developed, and to perfect, develop, manufacture, use, apply, and generally to deal in and with any such material, substance, compound, or mixture, and to undertake, conduct, manage, assist, promote, and engage or participate in every kind of research or scientific experimental, design, or development work, including pure or basic research. (b) To engage in the general business of purchasing, selling, licensing, distributing, developing, manufacturing or marketing of medical and pharmaceutical products of any kind whatsoever. (c) To purchase, acquire, own, hold, lease, mortgage, encumber, sell and dispose of any and all kinds and character of property, real, personal and mixed (the foregoing particular enumeration in no sense being used by way of exclusion or limitation) and while the owner thereof, to exercise all the rights, powers and privileges of ownership, including in the case of stocks and shares, the rights to vote thereon. (d) To borrow and lend money, with or without security, and to endorse or otherwise guarantee the obligations of others. (e) To act as principal or agent for others and receive compensation for all services which it may render in the performance of its duties of an agency character. (f) To engage in any and all business activities and pursuits as may be reasonably related to the foregoing. (g) As provided in Section 102(a)(3) of the General Corporation Law of Delaware, to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. FOURTH: The aggregate number of shares which the Corporation shall have authority to issue is 176,000,000 to be divided into (a) 175,000,000 shares of Common Stock, par value $.01 per share, (b) 1,000,000 shares of Preferred Stock, par value $.01 per share, of which 264,000 shares are designated as Series A Convertible Preferred Stock, par value $.01 per share, with the powers, preferences and other rights as described on Exhibit A attached hereto and made a part hereof. 2 The Board of Directors is hereby empowered to cause the Preferred Stock to be issued from time to time for such consideration as it may from time to time fix, and to cause such Preferred Stock to be issued in series with such voting powers, designations, preferences and relative, participating, optional or other special rights, if any, or the qualifications, limitations or restrictions thereof, as designated by the Board of Directors in the resolution providing for the issue of such series. Shares of Preferred Stock of any one series shall be identical in all respects. FIFTH: In furtherance and not in limitation of the power conferred by statute, the Board of Directors is expressly authorized to make, repeal, alter, amend and rescind the By-laws of the Corporation. 3 SIXTH: No director of the Corporation shall be personally liable to the Corporation or any of its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, as the same exists or hereafter may be amended, or (iv) for any transaction from which the director derived an improper personal benefit. If the Delaware General Corporation Law hereafter is amended to authorize the further elimination or limitation of the liability of directors, then the liability of a director of the Corporation, in addition to the limitation on personal liability provided herein, shall be limited to the fullest extent permitted by the amended Delaware General Corporation Law. Any repeal or modification of this paragraph by the stockholders of the Corporation shall be prospective only, and shall not adversely affect any limitation on the personal liability of a director of the Corporation existing at the time of such repeal or modification. SEVENTH: Any action required or permitted to be taken at any annual or special meeting of stockholders may be taken only upon the vote of the stockholders at an annual or special meeting duly called and may not be taken by written consent of the stockholders. Special meetings of the stockholders of the Corporation for any purpose or purposes may be called at any time by the Board of Directors, the Chairman of the Board of Directors or the President of the Corporation. Special meetings of the stockholders of the Corporation may not be called by any other person or persons. EIGHTH: This Amended and Restated Certificate of Incorporation may be amended by the affirmative vote of the majority of the shares entitled to vote on each such amendment." 4. This Amended and Restated Certificate of Incorporation was duly adopted by the board of directors and by the stockholders in accordance with the provisions of Sections 242 and 245 of the Delaware General Corporation Law. IN WITNESS WHEREOF, Boston Life Sciences, Inc. has caused this Amended and Restated Certificate of Incorporation to be signed by the authorized officer this 28th of March 1996. ATTEST: BOSTON LIFE SCIENCES, INC. 4 By: /s/ Philip M. Shapiro By: /s/ George Eldridge ---------------------- -------------------- Vice-President, Corporate Development and Finance 5 EXHIBIT A --------- Series A Convertible Preferred Stock ------------------------------------ 1. Designation and Amount. There shall be a series of Preferred Stock ---------------------- designated as "Series A Convertible Preferred Stock" and the number of shares constituting such series shall be 264,000. Such series is referred to herein as the "Series A Convertible Preferred Stock". Such number of shares may be increased or decreased by resolution of the Board of Directors of the Corporation; provided, however, that no decrease shall reduce the number of shares of Series A Convertible Preferred Stock to less than the number of shares then issued and outstanding. 2. Dividends. Subject to the prior and superior rights of the holders --------- of any shares of any series of Preferred Stock ranking and superior to the shares of Series A Convertible Preferred Stock with respect to dividends and distributions, the holders of shares of Series A Convertible Preferred Stock, shall be entitled to receive dividends and distributions, when, as and if declared by the Board of Directors out of funds legally available for such purpose. If the Corporation declares a dividend [CONTINUED ON NEXT PAGE] * Copy of Exhibit A to the certificate of amendment 6 or distribution on the common stock, par value $.01 per share (the "Common Stock"), of the Corporation, the holders of shares of Series A Convertible Preferred Stock shall be entitled to receive for each share of Series A Convertible Preferred Stock a dividend or distribution in the amount of the dividend or distribution that would be received by a holder of the Common Stock into which such share of Series A Convertible Preferred Stock is convertible on the record date for such dividend or distribution. If the Corporation declares a dividend or distribution on any other class or series of preferred stock, the holders of shares of Series A Convertible Preferred Stock shall be entitled to receive a dividend or distribution in an amount per share in proportion to the dividend or distribution declared on a share of such other class or series based upon the liquidation preference of a share of the Series A Convertible Preferred Stock relative to that of a share of such other class or series, unless the holders of at least 66-2/3% of the outstanding shares of Series A Convertible Preferred Stock consent otherwise. In any such case, the Corporation shall declare a dividend or distribution on the Series A Convertible Preferred Stock at the same time that it declares a dividend or distribution on the Common Stock or such other class or series of preferred stock and shall establish the same record date for the dividend or distribution on the Series A Convertible Preferred Stock as is established for such dividend or distribution on the Common Stock or such other class or series of preferred stock. Each such dividend or distribution will be payable to holders of record of the Series A Convertible Preferred Stock as they appeared on the records of the Corporation at the close of business on the record date declared for such dividend or distribution, as shall be fixed by the Board of Directors. If the corporation declares or pays a dividend or distribution on the Series A Convertible Preferred Stock as a result of the declaration or payment of a dividend or distribution on the Common Stock or any other class or series of preferred stock as described above, the holders of the Series A Convertible Preferred Stock shall not be entitled to any additional dividend or distribution solely because such first dividend or distribution also required the declaration or payment of a dividend or distribution on any other class or series of preferred stock. Any reference to "distribution" contained in this Section 2 shall not be deemed to include any distribution made in connection with any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary. 3. Liquidation Preference. (a) In the event of a (i) liquidation, ---------------------- dissolution or winding up of the Corporation, whether voluntary or involuntary or (ii) a sale or other disposition of all or substantially all of the assets of the Corporation (a "Liquidation Event"), after payment or provision for payment of debts and other liabilities of the Corporation, the holders of the Series A Convertible Preferred Stock then outstanding shall be entitled to be paid out of the assets of the Corporation available for distribution to its shareholders, whether such assets are capital, surplus, or earnings, before any payment or declaration and setting apart for payment of any amount shall be made in respect of the stock junior to the Series A Convertible Preferred Stock, an amount equal to $130.00 per share plus an amount equal to all declared and unpaid dividends thereon. If upon any Liquidation Event, whether voluntary or involuntary, the assets to be distributed to holders of the Series A Convertible Preferred Stock shall be insufficient to permit the payment to such shareholders of the full preferential amounts aforesaid, then all of the assets of the Corporation to be distributed shall be so distributed ratably to the holders of the Series A Convertible Preferred Stock on the basis of the number of shares of Series A Convertible Preferred Stock held. A consolidation or merger of the Corporation with or into another corporation shall not be considered a liquidation, dissolution or winding up of the Corporation or a sale or other disposition of all or substantially all of the assets of the Corporation. All shares of Series A Convertible Preferred Stock shall rank as to payment upon the occurrence of any of the events described in clauses (i) and (ii) above senior to the Common Stock as provided herein and, unless the terms of such series shall provide otherwise, senior to all other series of the Corporation's preferred stock. 7 (b) After the payment or distribution to the holders of the Series A Preferred Stock of the full preferential amounts aforesaid, the holders of shares of the Common Stock and any other shares of participating preferred stock then outstanding will be entitled to receive, pro rata an amount per share equal --- ---- to $13 plus accrued but unpaid dividends, if any, paid to the holders of the Series A Convertible Preferred Stock. After the payment or distribution pursuant to the immediately preceding sentence, the holders of shares of the Series A Convertible Preferred Stock, the Common Stock and any other shares of participating preferred stock then outstanding will share any remaining assets of the Corporation on a pari passu, as converted basis. ---- ----- 4. Conversion. ---------- (a) Right of Conversion. The shares of Series A Convertible Preferred ------------------- Stock shall be convertible, in whole or in part, at the option of the holder thereof and upon notice to the Corporation as set forth in paragraph (b) below, into fully paid and nonassessable shares of Common Stock and such other securities and property as hereinafter provided. The shares of Series A Convertible Preferred Stock shall be convertible initially at the rate of 175.3771 shares of Common Stock for each full share of Series A Convertible Preferred Stock and shall be subject to adjustment as provided herein. The initial conversion price per share of Common Stock is $.5702 and shall be subject to adjustment as provided herein. For purposes of this resolution, the "conversion rate" applicable to a share of Series A Convertible Preferred Stock shall be the number of shares of Common Stock and number or amount of any other securities and property as hereinafter provided into which a share of Series A Convertible Preferred Stock is then convertible and shall be determined by dividing the then existing conversion price into $100.00. Subject to adjustment pursuant to the provisions of paragraph (c) below, in the event that the conversion price in effect at the time of each Interim Closing Date (as defined below) and the Final Closing Date (as defined below) is greater than 85% of the average closing bid price of the Common Stock for the thirty consecutive trading days immediately preceding (x) any interim closing date of the issuance and sale of the Series A Convertible Preferred Stock (each an "Interim Closing Date") or (y) the final closing date of the issuance and sale of the Series A Convertible Preferred Stock (the "Final Closing Date"), then the conversion price shall be adjusted to equal the lesser of any such average closing bid price. If there is any change in the conversion price as a result of the preceding sentence, then the conversion rate shall be changed accordingly, and shall be determined by dividing the new conversion price into $100.00. The Corporation shall prepare a certificate signed by the principal financial officer of the Corporation setting forth the conversion rate as of the Final Closing Date, showing in reasonable detail the facts upon which such conversion rate is based, and such certificate shall forthwith be filed with the transfer agent of the Series A Convertible Preferred Stock. Notwithstanding the provisions of subparagraph (vi) of paragraph (c) below, a notice stating that the conversion rate has been adjusted pursuant to this paragraph, or that no adjustment is necessary, and setting forth the conversion rate in effect as of the Final Closing Date shall be mailed as promptly as practicable after the Final Closing Date by the Corporation to all record holders of Series A Convertible Preferred Stock at their last addresses as they shall appear in the stock transfer books of the Corporation. Subject to adjustment pursuant to the provisions of paragraph (c) below, the conversion price in effect immediately prior to the date that is 12 months after the Final Closing Date of the issuance and sale of the Series A Convertible Preferred Stock (the "Reset Date") shall be adjusted and reset effective as of the Reset Date if the average closing bid price of the Common Stock for the 30 8 consecutive trading days immediately preceding the Reset Date (the "12-Month Trading Price") is less than 130% of the then applicable conversion price (a "Reset Event"). Upon the occurrence of a Reset Event, the conversion price shall be reduced to be equal to the greater of (A) the 12-Month Trading Price divided by 1.3, (B) 50% of the then applicable conversion price and (C) $.375 (subject to a proportional adjustment in the event of an adjustment to the conversion price pursuant to paragraph 4(c) below). If there is any change in the conversion price as a result of the preceding sentence, then the conversion rate shall be changed accordingly, and shall be determined by dividing the new conversion price into $100.00. The Corporation shall prepare a certificate signed by the principal financial officer of the Corporation setting forth the conversion rate as of the Reset Date, showing in reasonable detail the facts upon which such conversion rate is based, and such certificate shall forthwith be filed with the transfer agent of the Series A Convertible Preferred Stock. Notwithstanding the provisions of subparagraph (vi) of paragraph (c) below, a notice stating that the conversion rate has been adjusted pursuant to this paragraph, or that no adjustment is necessary, and setting forth the conversion rate in effect as of the Reset Date shall be mailed as promptly as practicable after the Reset Date by the Corporation to all record holders of the Series A Convertible Preferred Stock at their last addresses as they shall appear in the stock transfer books of the Corporation. The "closing bid price" for each trading day shall be the reported closing bid price on the NASDAQ Small-Cap Market or the NASDAQ National Market System (collectively referred to as, "NASDAQ") or, if the Common Stock is not quoted on NASDAQ, on the principal national securities exchange on which the Common Stock is listed or admitted to trading (based on the aggregate dollar value of all securities listed or admitted to trading) or, if not listed or admitted to trading on any national securities exchange or quoted on NASDAQ, the closing bid price in the over-the-counter market as furnished by any NASD member firm selected from time to time by the Corporation for that purpose, or, if such prices are not available, the fair market value set by, or in a manner established by, the Board of Directors of the Corporation in good faith. "Trading day" shall mean a day on which the national securities exchange or NASDAQ used to determine the closing bid price is open for the transaction of business or the reporting of trades or, if the closing bid price is not so determined, a day on which NASDAQ is open for the transaction of business. (b) Conversion Procedures. Any holder of shares of Series A --------------------- Convertible Preferred Stock desiring to convert such shares into Common Stock shall surrender the certificate or certificates evidencing such shares of Series A Convertible Preferred Stock at the office of the transfer agent for the Series A Convertible Preferred Stock, which certificate or certificates, if the Corporation shall so require, shall be duly endorsed to the Corporation or in blank, or accompanied by proper instruments of transfer to the Corporation or in blank, accompanied by irrevocable written notice to the Corporation that the holder elects so to convert such shares of Series A Convertible Preferred Stock and specifying the name or names (with address) in which a certificate or certificates evidencing shares of Common Stock are to be issued. The Corporation need not deem a notice of conversion to be received unless the holder complies with all the provisions hereof. The Corporation will instruct the transfer agent (which may be the Corporation) to make a notation of the date that a notice of conversion is received, which date shall be deemed to be the date of receipt for purposes hereof. The Corporation shall, as soon as practicable after such deposit of certificates evidencing shares of Series A Convertible Preferred Stock accompanied by the written notice and compliance with any other conditions herein contained, deliver at such office of such transfer agent to the person for whose account such share of Series A Convertible Preferred Stock were so surrendered, or to the nominee or nominees of such person, certificates evidencing the number of full shares of Common Stock to which such person shall be entitled as aforesaid, together with a cash adjustment of any fraction of a 9 share as hereinafter provided. Subject to the following provisions of this paragraph, such conversion shall be deemed to have been made as of the date of such surrender of the shares of Series A Convertible Preferred Stock to be converted, and the person or persons entitled to receive the Common Stock deliverable upon conversion of such Series A Convertible Preferred Stock shall be treated for all purposes as the record holder or holders of such Common Stock on such date; provided, however, that the Corporation shall not be required to convert any shares of Series A Convertible Preferred Stock while the stock transfer books of the Corporation are closed for any purpose, but the surrender of Series A Convertible Preferred Stock for conversion during any period while such books are so closed shall become effective for conversion immediately upon the reopening of such books as if the surrender had been made on the date of such reopening, and the conversion shall be at the conversion rate in effect on such date. No adjustments in respect of any dividends on shares surrendered for conversion or any dividend on the Common Stock issued upon conversion shall be made upon the conversion of any shares of Series A Convertible Preferred Stock. All notices of conversion shall be irrevocable; provided, however, that if the Corporation has sent notice of an event pursuant to Section 4(g) hereof, a holder of Series A Convertible Preferred Stock may, at its election, provide in its notice of conversion that the conversion of its shares of Series A Convertible Preferred Stock shall be contingent upon the occurrence of the record date or effectiveness of such event (as specified by such holder), provided that such notice of conversion is received by the Corporation prior to such record date or effective date, as the case may be. (c) Certain Adjustments of Conversion Rate. In addition to adjustment -------------------------------------- pursuant to paragraph (a) above, the conversion rate (and the corresponding conversion price) shall be subject to adjustment from time to time as follows: (i) In case the Corporation shall (A) pay a dividend in Common Stock or make a distribution in Common Stock, (B) subdivide its outstanding Common Stock, (C) combine its outstanding Common Stock into a smaller number of shares of Common Stock or (D) issue by reclassification of its Common Stock other securities of the Corporation, then in each such case the conversion rate in effect immediately prior thereto shall be adjusted so that the holder of any shares of Series A Convertible Preferred Stock thereafter surrendered for conversion shall be entitled to receive the kind and number of shares of Common Stock or other securities of the Corporation which such holder would have owned or would have been entitled to receive immediately after the happening of any of the events described above had such shares of Series A Convertible Preferred Stock been converted immediately prior to the happening of such event or any record date with respect thereto. Any adjustment made pursuant to this subparagraph (i) shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event. (ii) In case the Corporation shall issue or sell Common Stock or rights, options, warrants or other securities convertible into Common Stock, excluding those rights, options, warrants or other securities convertible into Common Stock already outstanding and disclosed in the Offering Memorandum, at a price per share which is lower than both (A) the then effective conversion price and (B) the closing bid price (as defined in Section 4) for the trading day immediately prior to such record date (the "Current Market Price"), then the conversion rate shall be determined by multiplying the conversion rate theretofore in effect by a fraction, of which the numerator shall be the number of shares of Common Stock outstanding immediately prior to the issuance of such shares, rights, options, warrants or convertible securities plus the number of additional shares of Common Stock offered for subscription or purchase, and of which the 10 denominator shall be the number of shares of Common Stock outstanding immediately prior to the issuance of such rights, options, warrants or convertible securities plus the number of shares which the aggregate offering price of the total number of shares offered would purchase at the then effective conversion price. Such adjustment shall be made whenever such rights, options, warrants or convertible securities are issued, and shall become effective immediately and retroactive to the record date for the determination of stockholders entitled to receive such rights, options, warrants or convertible securities. (iii) In case the Corporation shall distribute to all or substantially all holders of its Common Stock evidences of its indebtedness or assets (excluding cash dividends or distributions out of earnings) or rights, options, warrants or convertible securities containing the right to subscribe for or purchase Common Stock (excluding those referred to in subparagraph (ii) above), then in each case the conversion rate shall be determined by multiplying the conversion rate theretofore in effect by a fraction, of which the numerator shall be the then fair value as determined in good faith by the Corporation's Board of Directors on the date of such distribution, and of which the denominator shall be such fair value on such date minus the then fair value (as so determined) of the portion of the assets or evidences of indebtedness so distributed or of such subscription rights, options, warrants or convertible securities applicable to one share. Such adjustment shall be made whenever any such distribution is made and shall become effective on the date of distribution retroactive to the record date for the determination of stockholders entitled to receive such distribution. (iv) Upon the expiration of any rights, options, warrants or conversion privileges, if such shall not have been exercised, the conversion rate shall, upon such expiration, be readjusted and shall thereafter be such as it would have been had it been originally adjusted (or had the original adjustment not been required, as the case may be) on the basis of (A) the fact that Common Stock, if any, actually issued or sold upon the exercise of such rights, options, warrants or conversion privileges, and (B) the fact that such shares of Common Stock, if any, were issued or sold for the consideration actually received by the Corporation upon such exercise plus the consideration, if any, actually received by the Corporation for the issuance, sale or grant of all such rights, options, warrants or conversion privileges whether or not exercised. (v) No adjustment in the conversion rate shall be required unless such adjustment would require an increase or decrease of at least 1% in such rate; provided, however, that the Corporation may make any such adjustment at its election; and provided, further, that any adjustments which by reason of this subparagraph (v) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 4 shall be made to the nearest cent or to the nearest one-hundredth of a share, as the case may be. (vi) Whenever the conversion rate is adjusted as provided in any provision of this Section 4; (A) the Corporation shall compute (or may retain a firm of independent public accountants of recognized national standing (which may be any such firm regularly employed by the Corporation) to compute) the adjusted conversion rate in accordance with this Section 4 and shall prepare a certificate signed by the principal financial officer of the Corporation (or cause any such independent public accountants to execute a certificate) setting forth the adjusted conversion rate and showing in reasonable detail the 11 facts upon which each adjustment is based, and such certificate shall forthwith be filed with the transfer agent of the Series A Convertible Preferred Stock; and (B) a notice stating that the conversion rate has been adjusted and setting forth the adjusted conversion rate shall forthwith be required, and as soon as practicable after it is required, such notice shall be mailed by the Corporation to all record holders of Series A Convertible Preferred Stock at their last addresses as they shall appear in the stock transfer books of the Corporation. (vii) In the event that at any time, as a result of any adjustment made pursuant to this Section 4, the holder of any shares of Series A Convertible Preferred Stock thereafter surrendered for conversion shall become entitled to receive any shares of the Corporation other than shares of Common stock or to receive any other securities, the number of such other shares or securities so receivable upon conversion of any share of Series A Convertible Preferred Stock shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions contained in this Section 4 with respect to the Common Stock. (d) No fractional Shares. No fractional shares or scrip -------------------- representing fractional shares of Common stock shall be issued upon conversion of Series A Convertible Preferred Stock. If more than one certificate evidencing shares of Series A Convertible Preferred Stock shall be surrendered for conversion at one time by the same holder, the number of full shares issuable upon conversion thereof shall be computed on the basis of the aggregate number of shares of Series A Convertible Preferred Stock so surrendered. Instead of any fractional share of Common stock which would otherwise be issuable upon conversion of any shares of Series A Convertible Preferred Stock, the Corporation shall pay a cash adjustment in respect of such fractional interest in an amount equal to the same fraction of the market price per share of Common Stock (which shall be the closing price as defined in Section 5) at the close of business on the day of conversion. (e) Consolidation; Merger; Etc. If the Corporation shall enter -------------------------- into any consolidation, merger, combination or other transaction in which shares of Common Stock constituting in excess of 50% of the voting power of the Corporation are exchanged for or changed into other stock or securities, cash and/or any other property (a "Merger Transaction"), then in any such case the shares of Series A Convertible Preferred Stock shall at the same time be similarly exchanged or changed in an amount per share equal to (i) the conversion rate in effect at such time multiplied by (ii) the aggregate fair market value, as determined in good faith by the Board of Directors of the Corporation, of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common stock is changed or exchanged (the "Per Share Merger Consideration"); provided, however, -------- ------- that if any stock of securities received in the Merger Transaction are traded on a securities exchange or quotation system, the fair market value of such stock or securities shall be the closing sales price of such stock or securities as reported by the principal exchange or quotation system for such stock or securities the business day immediately preceding the execution of the merger agreement or other transaction agreement for such Merger Transaction, and if no such trading market exists for such stock or securities, the aggregate fair market value shall be as determined in good faith by the Board of Directors of the Corporation; provided, further, however, that if any such Merger Transaction -------- ------- ------- is effected on or before the Reset Date, and if the Per Share Merger Consideration (assuming conversion of all outstanding convertible stock, including the Series A Convertible Preferred Stock, at the conversion rate for such stock in effect at the time of the execution and delivery of the merger agreement relating to such Merger Transaction) is less than 130% of the then applicable conversion price relating to the Series A Convertible Preferred Stock, then the conversion price will be reduced to equal the greater of (x) the Per Share 12 Merger Consideration divided by 1.3, (y) 50% of the then applicable conversion price and (z) $.375 (subject to a proportional adjustment in the event of an adjustment to the conversion price pursuant to paragraph 4(c) above). (f) Reservation of Shares; Transfer Taxes; Etc. The ------------------------------------------ Corporation shall at all times reserve and keep available, out of its authorized unissued stock, solely for the purpose of effecting the conversion of the Series A Convertible Preferred Stock, such number of shares of its Common Stock free of preemptive rights as shall from time to time be sufficient to effect the conversion of all shares of Series A Convertible Preferred Stock from time to time outstanding. The Corporation shall use its best efforts from time to time, in accordance with the laws of the State of Delaware, to increase the authorized number of shares of Common Stock if at any time the number of shares of Common Stock not outstanding shall not be sufficient to permit the conversion of all the then-outstanding shares of Series A Convertible Preferred Stock. The Corporation shall pay any and all issue or other taxes that may be payable in respect of any issue or delivery of shares of Common Stock on conversion of the Series A Convertible Preferred Stock. The Corporation shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issue or delivery of Common Stock (or other securities or assets) in a name other than that in which the shares of Series A Convertible Preferred Stock so converted were registered, and no such issue or delivery shall be made unless and until the person requesting such issue has paid to the Corporation the amount of such tax or has established, to the satisfaction of the Corporation, that such tax has been paid. Notwithstanding anything to the contrary herein, before taking any action that would cause an adjustment reducing the conversion rate or before any such adjustment is made as a result of a Reset Event, in either event, such that the effective conversion price (for all purposes an amount equal to $100.00 divided by the conversion rate as in effect at such time) would be below the then par value of the Common Stock, the Corporation shall take any corporate action which may, in the opinion of its counsel, be necessary in order that the Corporation may validly and legally issue fully paid and nonassessable shares of Common Stock at the conversion rate as so adjusted. (g) Prior Notice of Certain Events. In case: ------------------------------ (i) the Corporation shall declare any dividend (or any other distribution) on its Common Stock; or (ii) the Corporation shall authorize the granting to the holders of Common Stock of rights or warrants to subscribe for or purchase any shares of stock of any class or of any other rights or warrants; or (iii) of any reclassification of Common Stock (other than a subdivision or combination of the outstanding Common Stock, or a change in par value, or from par value to no par value, or from no par value to par value), or of any consolidation or merger to which the Corporation is a party and for which approval of any stockholders of the Corporation shall be required, or of the sale or transfer of all or substantially all of the assets of the Corporation or of any compulsory share exchange whereby the Common Stock is converted into other securities, cash or other property; or 13 (iv) of the voluntary or involuntary dissolution, liquidation or winding up of the Corporation; then the Corporation shall cause to be filed with the transfer agent for the Series A Convertible Preferred Stock, and shall cause to be mailed to the holders of record of the Series A Convertible Preferred Stock, at their last addresses as they shall appear upon the stock transfer books of the Corporation, at least 10 days prior to the applicable record date hereinafter specified, a notice stating (x) the date on which a record (if any) is to be taken for the purpose of such dividend, distribution or granting of rights or warrants or, if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distribution, rights or warrants are to be determined and a description of the cash, securities or other property to be received by such holders upon such dividend, distribution or granting of rights or warrants or (y) the date on which such reclassification, consolidation, merger, sale, transfer, share exchange, dissolution, liquidation or winding up is expected to become effective, the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities or other property deliverable upon such exchange, dissolution, liquidation or winding up and the consideration, including securities or other property, to be received by such holders upon such exchange; provided, however, that no failure to mail such notice or any defect therein or in the mailing thereof shall affect the validity of the corporate action required to be specified in such notice. (h) Other Changes in Conversion Rate. The Corporation from time to -------------------------------- time may increase the conversion rate by any amount for any period of time if the period is at least 20 days and if the increase is irrevocable during the period. Whenever the conversion rate is so increased, the Corporation shall mail to holders of record of the Series A Convertible Preferred Stock a notice of the increase at least 10 days before the date the increased conversion rate takes effect, and such notice shall state the increased conversion rate and the period it will be in effect. The Corporation may make such increases in the conversion rate, in addition to those required or allowed by this Section 4, as shall be determined by it, as evidence by a resolution of the Board of Directors, to be advisable in order to avoid or diminish any income tax to holders of Common Stock resulting from any dividend or distribution of stock or issuance or rights or warrants to purchase or subscribe for stock or from any event treated as such for income tax purposes. (i) Ambiguities/Errors. The Board of Directors of the Corporation ------------------ shall have the power to resolve any ambiguity or correct any error in the provisions relating to the convertibility of the Series A Convertible Preferred Stock, and its actions in so doing shall be final and conclusive. 5. Mandatory Conversion at Option of Corporation. At any time on or --------------------------------------------- after the Reset Date, the Corporation, as its option, may cause the Series A Convertible Preferred Stock to be converted in whole, or in part, on a pro rata --- ---- basis, into fully paid and nonassessable shares of Common Stock and such other securities and property as herein provided if the closing price of the Common Stock shall have exceeded 150% of the then applicable conversion price for at least 20 trading days in any 30 consecutive trading day period. Any shares of Series A Convertible Preferred Stock so converted shall be treated as having been surrendered by the holder thereof for conversion pursuant to Section 4 on the date of such mandatory conversion (unless previously converted at the option of the holder). No more than 60 nor less than 10 days prior to the date of any such mandatory conversion, notice by first class mail, postage prepaid, shall be given to the holders of record of the Series A Convertible Preferred Stock to be converted, addressed to such holders at their last addresses 14 as shown on the stock transfer books of the Corporation. Each such notice shall specify the date fixed for conversion, the place or places for surrender of shares of Series A Convertible Preferred Stock, and the then effective conversion rate pursuant to Section 4. The "closing price" for each trading day shall be the reported last sales price regular way or, in case no such reported sale takes place on such day, the average of the reported closing bid and asked prices regular way, in either case on the NASDAQ Small-Cap Market or the NASDAQ National Market System (collectively referred to as, "NASDAQ") or, if the Common Stock is not quoted on NASDAQ, on the principal national securities exchange on which the Common Stock is listed or admitted to trading (based on the aggregate dollar value of all securities listed or admitted to trading) or, if not listed or admitted to trading on any national securities exchange or quoted on NASDAQ, the average of the closing bid and asked prices in the over-the-counter market as furnished by any NASD member firm selected from time to time by the Corporation for that purpose, or, if such prices are not available, the fair market value set by, or in a manner established by, the Board of Directors of the Corporation in good faith. "Trading day" shall have the meaning given in Section 4 hereof. Any notice which is mailed as herein provided shall be conclusively presumed to have been duly given by the Corporation on the date deposited in the mail, whether or not the holder of the Series A Convertible Preferred Stock receives such notice; and failure properly to give such notice by mail, or any defect in such notice, to the holders of the shares to be converted shall not affect the validity of the proceedings for the conversion of any other shares of Series A Convertible Preferred Stock. On or after the date fixed for conversion as stated in such notice, each holder of shares called to be converted shall surrender the certificate evidencing such shares to the Corporation at the place designated in such notice for conversion. Notwithstanding that the certificates evidencing any shares properly called for conversion shall not have been surrendered, the shares shall no longer be deemed outstanding and all rights whatsoever with respect to the shares so called for conversion (except the right of the holders to convert such shares upon surrender of their certificates therefor) shall terminate. 6. Voting Rights. ------------- (a) General. Except as otherwise provided herein, in the ------- Amended and Restated Certificate of Incorporation or by law, the holders of shares of Series A Convertible Preferred Stock, the holders of shares of Common Stock and the holders of any other class or series of shares entitled to vote with the Common Stock shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation. In any such vote, each share of Series A Convertible Preferred Stock shall entitle the holder thereof to cast the number of votes equal to the number of votes which could be cast in such vote by a holder of the Common Stock into which such share of Series A Convertible Preferred Stock is convertible on the record date for such vote, or if no record date has been established, on the date such vote is taken. Any shares of Series A Convertible Preferred Stock held by the Corporation or any entity controlled by the Corporation shall not have voting rights hereunder and shall not be counted in determining the presence of a quorum. (b) Class Voting Rights. In addition to any vote specified in ------------------- paragraph (a) of this Section 6, so long as 50% of the shares of Series A Convertible Preferred Stock (including those shares of Series A Convertible Preferred Stock issued or issuable upon the exercise of the placement agent warrants issued in connection with the offer and sale of the Series A Convertible Preferred Stock) shall be outstanding, the Corporation shall not, without the affirmative vote or consent of the holders of at least 66-2/3% of all outstanding Series A Convertible Preferred Stock voting separately as a class, (i) amend, alter or repeal any provision of the Amended and Restated Certificate of Incorporation, as amended, or 15 the Bylaws of the Corporation so as adversely to affect the relative rights, preferences, qualifications, limitations or restrictions of the Series A Convertible Preferred Stock, (ii) declare any dividend or distribution on the Common Stock or any other class or series of preferred stock or authorize the repurchase of any securities of the Corporation or (iii) authorize or issue, or increase the authorized amount of, any additional class or series of stock, or any security convertible into stock of such class or series, (A) ranking prior to, or on a parity with, the Series A Convertible Preferred Stock upon liquidation, dissolution or winding up of the Corporation or a sale of all or substantially all of the assets of the Corporation or (B) providing for the payment of any dividends or distributions. A class vote on the part of the Series A Convertible Preferred Stock shall, without limitation, specifically not be deemed to be required (except as otherwise required by law or resolution of the Corporation's Board of Directors) in connection with: (a) the authorization, issuance or increase in the authorized amount of Common Stock or of any shares of any other class or series of stock ranking junior to the Series A Convertible Preferred Stock in respect of distributions upon liquidation, dissolution or winding up of the Corporation; (b) the authorization, issuance or increase in the amount of the Series A Convertible Preferred Stock or any bonds, mortgages, debentures or other obligations of the Corporation (other than bonds, mortgages, debentures or other obligations convertible into or exchangeable for or having option rights to purchase any shares of stock of the Corporation the authorization issuance or increase in amount of which would require the consent of the holders of the Series A Preferred Stock); or (c) any consolidation or merger of the Corporation with or into another corporation, a sale or transfer of all or part of the Corporation's assets for cash, securities or other property, or a compulsory share exchange. 7. Outstanding Shares. For purposes of this Certificate of ------------------ Designations, all shares of Series A Convertible Preferred Stock shall be deemed outstanding except (i) from the date, or the deemed date, of surrender of certificates evidencing shares of Series A Convertible Preferred Stock, all shares of Series A Convertible Preferred Stock converted into Common Stock, (ii) from the date of registration of transfer, all shares of Series A Convertible Preferred Stock held of record by the Corporation or any subsidiary of the Corporation and (iii) any and all shares of Series A Convertible Preferred Stock held in escrow prior to delivery of such stock by the Corporation to the initial beneficial owners thereof. 8. Status of Acquired Shares. Shares of Series A Convertible ------------------------- Preferred Stock received upon conversion pursuant to Section 4 or Section 5 or otherwise acquired by the Corporation will be restored to the status of authorized but unissued shares of Preferred Stock, without designation as to class, and may thereafter be issued, but not as shares of Series A Convertible Preferred Stock. 9. Preemptive Rights. The Series A Convertible Preferred Stock is ----------------- not entitled to any preemptive or subscription rights in respect of any securities of the Corporation. 10. Severability of Provisions. Whenever possible, each provision -------------------------- hereof shall be interpreted in a manner as to be effective and valid under applicable law, but if any provision hereof is held to be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating or otherwise adversely affecting the remaining provisions hereof. If a court of competent jurisdiction should determine that a provision hereof would be valid or enforceable if a period of time were extended or shortened or a particular percentage were increased or decreased, then such court may make such change as shall be necessary to render the provision in question effective and valid under applicable law. 16 CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF BOSTON LIFE SCIENCES, INC Pursuant to Section 242 of the Delaware General Corporation Law BOSTON LIFE SCIENCES, INC. (the "Corporation"), a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY: FIRST: That at a meeting of the Board of Directors of the Corporation, resolutions were duly adopted proposing and declaring advisable the following amendment to the Certificate of Incorporation of the Company: RESOLVED, that the Board of Directors hereby approves and recommends to the Company's stockholders that Article FOURTH of the Articles of Incorporation of the Company be, and it hereby is, subject to stockholder approval at the Meeting, amended and restated in its entirety to read as follows: "FOURTH: The aggregate number of shares which the Corporation shall have authority to issue is 26,000,000 to be divided into (a) 25,000,000 shares of Common Stock, par value $.01 per share, (b) 1,000,000 shares of Preferred Stock, par value $.01 per share, of which 264,000 shares are designated as Series A Convertible Preferred Stock, par value $.01 per share, with the powers, preferences and other rights as described on Exhibit A attached hereto and made a part hereof. The Board of Directors is hereby empowered to cause the Preferred Stock to be issued from time to time for such consideration as it may from time to time fix, and to cause such Preferred Stock to be issued in series with such voting powers, designations, preferences and relative, participating, optional or other special rights, if any, or the qualifications, limitations or restrictions thereof, as designated by 17 the Board of Directors in the resolution providing for the issue of such series. Shares of Preferred Stock of any one series shall be identical in all respects. Effective as of 5:00 p.m., Eastern time, on June 9, 1997, all outstanding shares of Common Stock held by each holder of record on such date shall be automatically combined at the rate of one-for-ten without any further action on the part of the holders thereof or this Corporation. No fractional shares shall be issued. All fractional shares for one-half share or more shall be increased to the next higher whole number of shares and all fractional shares less than one- half share shall be decreased to the next lower whole number of shares, respectively." SECOND: That thereafter a majority of the holders of the stock of the Corporation entitled to vote thereon voted in favor of the amendment at a meeting of the stockholders duly held on June 6, 1997. THIRD: That the foregoing amendment to the Certificate of Incorporation was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law. IN WITNESS WHEREOF, said Boston Life Sciences, Inc. has caused this Certificate to be executed by its duly authorized officers this 6th day of June, 1997. BOSTON LIFE SCIENCES, INC. By: /s/ S. David Hillson -------------------- Name: S. David Hillson Title: Chief Executive Officer 18 EXHIBIT A --------- Series A Convertible Preferred Stock ------------------------------------ 1. Designation and Amount. There shall be a series of Preferred Stock ---------------------- designated as "Series A Convertible Preferred Stock" and the number of shares constituting such series shall be 264,000. Such series is referred to herein as the "Series A Convertible Preferred Stock". Such number of shares may be increased or decreased by resolution of the Board of Directors of the Corporation; provided, however, that no decrease shall reduce the number of shares of Series A Convertible Preferred Stock to less than the number of shares then issued and outstanding. 2. Dividends. Subject to the prior and superior rights of the holders --------- of any shares of any series of Preferred Stock ranking and superior to the shares of Series A Convertible Preferred Stock with respect to dividends and distributions, the holders of shares of Series A Convertible Preferred Stock, shall be entitled to receive dividends and distributions, when, as and if declared by the Board of Directors out of funds legally available for such purpose. If the Corporation declares a dividend [CONTINUED ON NEXT PAGE] * Copy of Exhibit A to the certificate of amendment 19 or distribution on the common stock, par value $.01 per share (the "Common Stock"), of the Corporation, the holders of shares of Series A Convertible Preferred Stock shall be entitled to receive for each share of Series A Convertible Preferred Stock a dividend or distribution in the amount of the dividend or distribution that would be received by a holder of the Common Stock into which such share of Series A Convertible Preferred Stock is convertible on the record date for such dividend or distribution. If the Corporation declares a dividend or distribution on any other class or series of preferred stock, the holders of shares of Series A Convertible Preferred Stock shall be entitled to receive a dividend or distribution in an amount per share in proportion to the dividend or distribution declared on a share of such other class or series based upon the liquidation preference of a share of the Series A Convertible Preferred Stock relative to that of a share of such other class or series, unless the holders of at least 66-2/3% of the outstanding shares of Series A Convertible Preferred Stock consent otherwise. In any such case, the Corporation shall declare a dividend or distribution on the Series A Convertible Preferred Stock at the same time that it declares a dividend or distribution on the Common Stock or such other class or series of preferred stock and shall establish the same record date for the dividend or distribution on the Series A Convertible Preferred Stock as is established for such dividend or distribution on the Common Stock or such other class or series of preferred stock. Each such dividend or distribution will be payable to holders of record of the Series A Convertible Preferred Stock as they appeared on the records of the Corporation at the close of business on the record date declared for such dividend or distribution, as shall be fixed by the Board of Directors. If the corporation declares or pays a dividend or distribution on the Series A Convertible Preferred Stock as a result of the declaration or payment of a dividend or distribution on the Common Stock or any other class or series of preferred stock as described above, the holders of the Series A Convertible Preferred Stock shall not be entitled to any additional dividend or distribution solely because such first dividend or distribution also required the declaration or payment of a dividend or distribution on any other class or series of preferred stock. Any reference to "distribution" contained in this Section 2 shall not be deemed to include any distribution made in connection with any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary. 3. Liquidation Preference. (a) In the event of a (i) liquidation, ---------------------- dissolution or winding up of the Corporation, whether voluntary or involuntary or (ii) a sale or other disposition of all or substantially all of the assets of the Corporation (a "Liquidation Event"), after payment or provision for payment of debts and other liabilities of the Corporation, the holders of the Series A Convertible Preferred Stock then outstanding shall be entitled to be paid out of the assets of the Corporation available for distribution to its shareholders, whether such assets are capital, surplus, or earnings, before any payment or declaration and setting apart for payment of any amount shall be made in respect of the stock junior to the Series A Convertible Preferred Stock, an amount equal to $130.00 per share plus an amount equal to all declared and unpaid dividends thereon. If upon any Liquidation Event, whether voluntary or involuntary, the assets to be distributed to holders of the Series A Convertible Preferred Stock shall be insufficient to permit the payment to such shareholders of the full preferential amounts aforesaid, then all of the assets of the Corporation to be distributed shall be so distributed ratably to the holders of the Series A Convertible Preferred Stock on the basis of the number of shares of Series A Convertible Preferred Stock held. A consolidation or merger of the Corporation with or into another corporation shall not be considered a liquidation, dissolution or winding up of the Corporation or a sale or other disposition of all or substantially all of the assets of the Corporation. All shares of Series A Convertible Preferred Stock shall rank as to payment upon the occurrence of any of the events described in clauses (i) and (ii) above senior to the Common Stock as provided herein and, unless the terms of such series shall provide otherwise, senior to all other series of the Corporation's preferred stock. 20 (b) After the payment or distribution to the holders of the Series A Preferred Stock of the full preferential amounts aforesaid, the holders of shares of the Common Stock and any other shares of participating preferred stock then outstanding will be entitled to receive, pro rata an amount per share equal --- ---- to $13 plus accrued but unpaid dividends, if any, paid to the holders of the Series A Convertible Preferred Stock. After the payment or distribution pursuant to the immediately preceding sentence, the holders of shares of the Series A Convertible Preferred Stock, the Common Stock and any other shares of participating preferred stock then outstanding will share any remaining assets of the Corporation on a pari passu, as converted basis. ---- ----- 4. Conversion. ---------- (a) Right of Conversion. The shares of Series A Convertible Preferred ------------------- Stock shall be convertible, in whole or in part, at the option of the holder thereof and upon notice to the Corporation as set forth in paragraph (b) below, into fully paid and nonassessable shares of Common Stock and such other securities and property as hereinafter provided. The shares of Series A Convertible Preferred Stock shall be convertible initially at the rate of 175.3771 shares of Common Stock for each full share of Series A Convertible Preferred Stock and shall be subject to adjustment as provided herein. The initial conversion price per share of Common Stock is $.5702 and shall be subject to adjustment as provided herein. For purposes of this resolution, the "conversion rate" applicable to a share of Series A Convertible Preferred Stock shall be the number of shares of Common Stock and number or amount of any other securities and property as hereinafter provided into which a share of Series A Convertible Preferred Stock is then convertible and shall be determined by dividing the then existing conversion price into $100.00. Subject to adjustment pursuant to the provisions of paragraph (c) below, in the event that the conversion price in effect at the time of each Interim Closing Date (as defined below) and the Final Closing Date (as defined below) is greater than 85% of the average closing bid price of the Common Stock for the thirty consecutive trading days immediately preceding (x) any interim closing date of the issuance and sale of the Series A Convertible Preferred Stock (each an "Interim Closing Date") or (y) the final closing date of the issuance and sale of the Series A Convertible Preferred Stock (the "Final Closing Date"), then the conversion price shall be adjusted to equal the lesser of any such average closing bid price. If there is any change in the conversion price as a result of the preceding sentence, then the conversion rate shall be changed accordingly, and shall be determined by dividing the new conversion price into $100.00. The Corporation shall prepare a certificate signed by the principal financial officer of the Corporation setting forth the conversion rate as of the Final Closing Date, showing in reasonable detail the facts upon which such conversion rate is based, and such certificate shall forthwith be filed with the transfer agent of the Series A Convertible Preferred Stock. Notwithstanding the provisions of subparagraph (vi) of paragraph (c) below, a notice stating that the conversion rate has been adjusted pursuant to this paragraph, or that no adjustment is necessary, and setting forth the conversion rate in effect as of the Final Closing Date shall be mailed as promptly as practicable after the Final Closing Date by the Corporation to all record holders of Series A Convertible Preferred Stock at their last addresses as they shall appear in the stock transfer books of the Corporation. Subject to adjustment pursuant to the provisions of paragraph (c) below, the conversion price in effect immediately prior to the date that is 12 months after the Final Closing Date of the issuance and sale of the Series A Convertible Preferred Stock (the "Reset Date") shall be adjusted and reset effective as of the Reset Date if the average closing bid price of the Common Stock for the 30 21 consecutive trading days immediately preceding the Reset Date (the "12-Month Trading Price") is less than 130% of the then applicable conversion price (a "Reset Event"). Upon the occurrence of a Reset Event, the conversion price shall be reduced to be equal to the greater of (A) the 12-Month Trading Price divided by 1.3, (B) 50% of the then applicable conversion price and (C) $.375 (subject to a proportional adjustment in the event of an adjustment to the conversion price pursuant to paragraph 4(c) below). If there is any change in the conversion price as a result of the preceding sentence, then the conversion rate shall be changed accordingly, and shall be determined by dividing the new conversion price into $100.00. The Corporation shall prepare a certificate signed by the principal financial officer of the Corporation setting forth the conversion rate as of the Reset Date, showing in reasonable detail the facts upon which such conversion rate is based, and such certificate shall forthwith be filed with the transfer agent of the Series A Convertible Preferred Stock. Notwithstanding the provisions of subparagraph (vi) of paragraph (c) below, a notice stating that the conversion rate has been adjusted pursuant to this paragraph, or that no adjustment is necessary, and setting forth the conversion rate in effect as of the Reset Date shall be mailed as promptly as practicable after the Reset Date by the Corporation to all record holders of the Series A Convertible Preferred Stock at their last addresses as they shall appear in the stock transfer books of the Corporation. The "closing bid price" for each trading day shall be the reported closing bid price on the NASDAQ Small-Cap Market or the NASDAQ National Market System (collectively referred to as, "NASDAQ") or, if the Common Stock is not quoted on NASDAQ, on the principal national securities exchange on which the Common Stock is listed or admitted to trading (based on the aggregate dollar value of all securities listed or admitted to trading) or, if not listed or admitted to trading on any national securities exchange or quoted on NASDAQ, the closing bid price in the over-the-counter market as furnished by any NASD member firm selected from time to time by the Corporation for that purpose, or, if such prices are not available, the fair market value set by, or in a manner established by, the Board of Directors of the Corporation in good faith. "Trading day" shall mean a day on which the national securities exchange or NASDAQ used to determine the closing bid price is open for the transaction of business or the reporting of trades or, if the closing bid price is not so determined, a day on which NASDAQ is open for the transaction of business. (b) Conversion Procedures. Any holder of shares of Series A --------------------- Convertible Preferred Stock desiring to convert such shares into Common Stock shall surrender the certificate or certificates evidencing such shares of Series A Convertible Preferred Stock at the office of the transfer agent for the Series A Convertible Preferred Stock, which certificate or certificates, if the Corporation shall so require, shall be duly endorsed to the Corporation or in blank, or accompanied by proper instruments of transfer to the Corporation or in blank, accompanied by irrevocable written notice to the Corporation that the holder elects so to convert such shares of Series A Convertible Preferred Stock and specifying the name or names (with address) in which a certificate or certificates evidencing shares of Common Stock are to be issued. The Corporation need not deem a notice of conversion to be received unless the holder complies with all the provisions hereof. The Corporation will instruct the transfer agent (which may be the Corporation) to make a notation of the date that a notice of conversion is received, which date shall be deemed to be the date of receipt for purposes hereof. The Corporation shall, as soon as practicable after such deposit of certificates evidencing shares of Series A Convertible Preferred Stock accompanied by the written notice and compliance with any other conditions herein contained, deliver at such office of such transfer agent to the person for whose account such share of Series A Convertible Preferred Stock were so surrendered, or to the nominee or nominees of such person, certificates evidencing the number of full shares of Common Stock to which such person shall be entitled as aforesaid, together with a cash adjustment of any fraction of a 22 share as hereinafter provided. Subject to the following provisions of this paragraph, such conversion shall be deemed to have been made as of the date of such surrender of the shares of Series A Convertible Preferred Stock to be converted, and the person or persons entitled to receive the Common Stock deliverable upon conversion of such Series A Convertible Preferred Stock shall be treated for all purposes as the record holder or holders of such Common Stock on such date; provided, however, that the Corporation shall not be required to convert any shares of Series A Convertible Preferred Stock while the stock transfer books of the Corporation are closed for any purpose, but the surrender of Series A Convertible Preferred Stock for conversion during any period while such books are so closed shall become effective for conversion immediately upon the reopening of such books as if the surrender had been made on the date of such reopening, and the conversion shall be at the conversion rate in effect on such date. No adjustments in respect of any dividends on shares surrendered for conversion or any dividend on the Common Stock issued upon conversion shall be made upon the conversion of any shares of Series A Convertible Preferred Stock. All notices of conversion shall be irrevocable; provided, however, that if the Corporation has sent notice of an event pursuant to Section 4(g) hereof, a holder of Series A Convertible Preferred Stock may, at its election, provide in its notice of conversion that the conversion of its shares of Series A Convertible Preferred Stock shall be contingent upon the occurrence of the record date or effectiveness of such event (as specified by such holder), provided that such notice of conversion is received by the Corporation prior to such record date or effective date, as the case may be. (c) Certain Adjustments of Conversion Rate. In addition to adjustment -------------------------------------- pursuant to paragraph (a) above, the conversion rate (and the corresponding conversion price) shall be subject to adjustment from time to time as follows: (i) In case the Corporation shall (A) pay a dividend in Common Stock or make a distribution in Common Stock, (B) subdivide its outstanding Common Stock, (C) combine its outstanding Common Stock into a smaller number of shares of Common Stock or (D) issue by reclassification of its Common Stock other securities of the Corporation, then in each such case the conversion rate in effect immediately prior thereto shall be adjusted so that the holder of any shares of Series A Convertible Preferred Stock thereafter surrendered for conversion shall be entitled to receive the kind and number of shares of Common Stock or other securities of the Corporation which such holder would have owned or would have been entitled to receive immediately after the happening of any of the events described above had such shares of Series A Convertible Preferred Stock been converted immediately prior to the happening of such event or any record date with respect thereto. Any adjustment made pursuant to this subparagraph (i) shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event. (ii) In case the Corporation shall issue or sell Common Stock or rights, options, warrants or other securities convertible into Common Stock, excluding those rights, options, warrants or other securities convertible into Common Stock already outstanding and disclosed in the Offering Memorandum, at a price per share which is lower than both (A) the then effective conversion price and (B) the closing bid price (as defined in Section 4) for the trading day immediately prior to such record date (the "Current Market Price"), then the conversion rate shall be determined by multiplying the conversion rate theretofore in effect by a fraction, of which the numerator shall be the number of shares of Common Stock outstanding immediately prior to the issuance of such shares, rights, options, warrants or convertible securities plus the number of additional shares of Common Stock offered for subscription or purchase, and of which the 23 denominator shall be the number of shares of Common Stock outstanding immediately prior to the issuance of such rights, options, warrants or convertible securities plus the number of shares which the aggregate offering price of the total number of shares offered would purchase at the then effective conversion price. Such adjustment shall be made whenever such rights, options, warrants or convertible securities are issued, and shall become effective immediately and retroactive to the record date for the determination of stockholders entitled to receive such rights, options, warrants or convertible securities. (iii) In case the Corporation shall distribute to all or substantially all holders of its Common Stock evidences of its indebtedness or assets (excluding cash dividends or distributions out of earnings) or rights, options, warrants or convertible securities containing the right to subscribe for or purchase Common Stock (excluding those referred to in subparagraph (ii) above), then in each case the conversion rate shall be determined by multiplying the conversion rate theretofore in effect by a fraction, of which the numerator shall be the then fair value as determined in good faith by the Corporation's Board of Directors on the date of such distribution, and of which the denominator shall be such fair value on such date minus the then fair value (as so determined) of the portion of the assets or evidences of indebtedness so distributed or of such subscription rights, options, warrants or convertible securities applicable to one share. Such adjustment shall be made whenever any such distribution is made and shall become effective on the date of distribution retroactive to the record date for the determination of stockholders entitled to receive such distribution. (iv) Upon the expiration of any rights, options, warrants or conversion privileges, if such shall not have been exercised, the conversion rate shall, upon such expiration, be readjusted and shall thereafter be such as it would have been had it been originally adjusted (or had the original adjustment not been required, as the case may be) on the basis of (A) the fact that Common Stock, if any, actually issued or sold upon the exercise of such rights, options, warrants or conversion privileges, and (B) the fact that such shares of Common Stock, if any, were issued or sold for the consideration actually received by the Corporation upon such exercise plus the consideration, if any, actually received by the Corporation for the issuance, sale or grant of all such rights, options, warrants or conversion privileges whether or not exercised. (v) No adjustment in the conversion rate shall be required unless such adjustment would require an increase or decrease of at least 1% in such rate; provided, however, that the Corporation may make any such adjustment at its election; and provided, further, that any adjustments which by reason of this subparagraph (v) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 4 shall be made to the nearest cent or to the nearest one-hundredth of a share, as the case may be. (vi) Whenever the conversion rate is adjusted as provided in any provision of this Section 4; (A) the Corporation shall compute (or may retain a firm of independent public accountants of recognized national standing (which may be any such firm regularly employed by the Corporation) to compute) the adjusted conversion rate in accordance with this Section 4 and shall prepare a certificate signed by the principal financial officer of the Corporation (or cause any such independent public accountants to execute a certificate) setting forth the adjusted conversion rate and showing in reasonable detail the 24 facts upon which each adjustment is based, and such certificate shall forthwith be filed with the transfer agent of the Series A Convertible Preferred Stock; and (B) a notice stating that the conversion rate has been adjusted and setting forth the adjusted conversion rate shall forthwith be required, and as soon as practicable after it is required, such notice shall be mailed by the Corporation to all record holders of Series A Convertible Preferred Stock at their last addresses as they shall appear in the stock transfer books of the Corporation. (vii) In the event that at any time, as a result of any adjustment made pursuant to this Section 4, the holder of any shares of Series A Convertible Preferred Stock thereafter surrendered for conversion shall become entitled to receive any shares of the Corporation other than shares of Common stock or to receive any other securities, the number of such other shares or securities so receivable upon conversion of any share of Series A Convertible Preferred Stock shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions contained in this Section 4 with respect to the Common Stock. (d) No fractional Shares. No fractional shares or scrip -------------------- representing fractional shares of Common stock shall be issued upon conversion of Series A Convertible Preferred Stock. If more than one certificate evidencing shares of Series A Convertible Preferred Stock shall be surrendered for conversion at one time by the same holder, the number of full shares issuable upon conversion thereof shall be computed on the basis of the aggregate number of shares of Series A Convertible Preferred Stock so surrendered. Instead of any fractional share of Common stock which would otherwise be issuable upon conversion of any shares of Series A Convertible Preferred Stock, the Corporation shall pay a cash adjustment in respect of such fractional interest in an amount equal to the same fraction of the market price per share of Common Stock (which shall be the closing price as defined in Section 5) at the close of business on the day of conversion. (e) Consolidation; Merger; Etc. If the Corporation shall enter -------------------------- into any consolidation, merger, combination or other transaction in which shares of Common Stock constituting in excess of 50% of the voting power of the Corporation are exchanged for or changed into other stock or securities, cash and/or any other property (a "Merger Transaction"), then in any such case the shares of Series A Convertible Preferred Stock shall at the same time be similarly exchanged or changed in an amount per share equal to (i) the conversion rate in effect at such time multiplied by (ii) the aggregate fair market value, as determined in good faith by the Board of Directors of the Corporation, of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common stock is changed or exchanged (the "Per Share Merger Consideration"); provided, however, -------- ------- that if any stock of securities received in the Merger Transaction are traded on a securities exchange or quotation system, the fair market value of such stock or securities shall be the closing sales price of such stock or securities as reported by the principal exchange or quotation system for such stock or securities the business day immediately preceding the execution of the merger agreement or other transaction agreement for such Merger Transaction, and if no such trading market exists for such stock or securities, the aggregate fair market value shall be as determined in good faith by the Board of Directors of the Corporation; provided, further, however, that if any such Merger Transaction -------- ------- ------- is effected on or before the Reset Date, and if the Per Share Merger Consideration (assuming conversion of all outstanding convertible stock, including the Series A Convertible Preferred Stock, at the conversion rate for such stock in effect at the time of the execution and delivery of the merger agreement relating to such Merger Transaction) is less than 130% of the then applicable conversion price relating to the Series A Convertible Preferred Stock, then the conversion price will be reduced to equal the greater of (x) the Per Share 25 Merger Consideration divided by 1.3, (y) 50% of the then applicable conversion price and (z) $.375 (subject to a proportional adjustment in the event of an adjustment to the conversion price pursuant to paragraph 4(c) above). (f) Reservation of Shares; Transfer Taxes; Etc. The ------------------------------------------ Corporation shall at all times reserve and keep available, out of its authorized unissued stock, solely for the purpose of effecting the conversion of the Series A Convertible Preferred Stock, such number of shares of its Common Stock free of preemptive rights as shall from time to time be sufficient to effect the conversion of all shares of Series A Convertible Preferred Stock from time to time outstanding. The Corporation shall use its best efforts from time to time, in accordance with the laws of the State of Delaware, to increase the authorized number of shares of Common Stock if at any time the number of shares of Common Stock not outstanding shall not be sufficient to permit the conversion of all the then-outstanding shares of Series A Convertible Preferred Stock. The Corporation shall pay any and all issue or other taxes that may be payable in respect of any issue or delivery of shares of Common Stock on conversion of the Series A Convertible Preferred Stock. The Corporation shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issue or delivery of Common Stock (or other securities or assets) in a name other than that in which the shares of Series A Convertible Preferred Stock so converted were registered, and no such issue or delivery shall be made unless and until the person requesting such issue has paid to the Corporation the amount of such tax or has established, to the satisfaction of the Corporation, that such tax has been paid. Notwithstanding anything to the contrary herein, before taking any action that would cause an adjustment reducing the conversion rate or before any such adjustment is made as a result of a Reset Event, in either event, such that the effective conversion price (for all purposes an amount equal to $100.00 divided by the conversion rate as in effect at such time) would be below the then par value of the Common Stock, the Corporation shall take any corporate action which may, in the opinion of its counsel, be necessary in order that the Corporation may validly and legally issue fully paid and nonassessable shares of Common Stock at the conversion rate as so adjusted. (g) Prior Notice of Certain Events. In case: ------------------------------ (i) the Corporation shall declare any dividend (or any other distribution) on its Common Stock; or (ii) the Corporation shall authorize the granting to the holders of Common Stock of rights or warrants to subscribe for or purchase any shares of stock of any class or of any other rights or warrants; or (iii) of any reclassification of Common Stock (other than a subdivision or combination of the outstanding Common Stock, or a change in par value, or from par value to no par value, or from no par value to par value), or of any consolidation or merger to which the Corporation is a party and for which approval of any stockholders of the Corporation shall be required, or of the sale or transfer of all or substantially all of the assets of the Corporation or of any compulsory share exchange whereby the Common Stock is converted into other securities, cash or other property; or 26 (iv) of the voluntary or involuntary dissolution, liquidation or winding up of the Corporation; then the Corporation shall cause to be filed with the transfer agent for the Series A Convertible Preferred Stock, and shall cause to be mailed to the holders of record of the Series A Convertible Preferred Stock, at their last addresses as they shall appear upon the stock transfer books of the Corporation, at least 10 days prior to the applicable record date hereinafter specified, a notice stating (x) the date on which a record (if any) is to be taken for the purpose of such dividend, distribution or granting of rights or warrants or, if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distribution, rights or warrants are to be determined and a description of the cash, securities or other property to be received by such holders upon such dividend, distribution or granting of rights or warrants or (y) the date on which such reclassification, consolidation, merger, sale, transfer, share exchange, dissolution, liquidation or winding up is expected to become effective, the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their shares of Common Stock for securities or other property deliverable upon such exchange, dissolution, liquidation or winding up and the consideration, including securities or other property, to be received by such holders upon such exchange; provided, however, that no failure to mail such notice or any defect therein or in the mailing thereof shall affect the validity of the corporate action required to be specified in such notice. (h) Other Changes in Conversion Rate. The Corporation from time to -------------------------------- time may increase the conversion rate by any amount for any period of time if the period is at least 20 days and if the increase is irrevocable during the period. Whenever the conversion rate is so increased, the Corporation shall mail to holders of record of the Series A Convertible Preferred Stock a notice of the increase at least 10 days before the date the increased conversion rate takes effect, and such notice shall state the increased conversion rate and the period it will be in effect. The Corporation may make such increases in the conversion rate, in addition to those required or allowed by this Section 4, as shall be determined by it, as evidence by a resolution of the Board of Directors, to be advisable in order to avoid or diminish any income tax to holders of Common Stock resulting from any dividend or distribution of stock or issuance or rights or warrants to purchase or subscribe for stock or from any event treated as such for income tax purposes. (i) Ambiguities/Errors. The Board of Directors of the Corporation ------------------ shall have the power to resolve any ambiguity or correct any error in the provisions relating to the convertibility of the Series A Convertible Preferred Stock, and its actions in so doing shall be final and conclusive. 5. Mandatory Conversion at Option of Corporation. At any time on or --------------------------------------------- after the Reset Date, the Corporation, as its option, may cause the Series A Convertible Preferred Stock to be converted in whole, or in part, on a pro rata --- ---- basis, into fully paid and nonassessable shares of Common Stock and such other securities and property as herein provided if the closing price of the Common Stock shall have exceeded 150% of the then applicable conversion price for at least 20 trading days in any 30 consecutive trading day period. Any shares of Series A Convertible Preferred Stock so converted shall be treated as having been surrendered by the holder thereof for conversion pursuant to Section 4 on the date of such mandatory conversion (unless previously converted at the option of the holder). No more than 60 nor less than 10 days prior to the date of any such mandatory conversion, notice by first class mail, postage prepaid, shall be given to the holders of record of the Series A Convertible Preferred Stock to be converted, addressed to such holders at their last addresses 27 as shown on the stock transfer books of the Corporation. Each such notice shall specify the date fixed for conversion, the place or places for surrender of shares of Series A Convertible Preferred Stock, and the then effective conversion rate pursuant to Section 4. The "closing price" for each trading day shall be the reported last sales price regular way or, in case no such reported sale takes place on such day, the average of the reported closing bid and asked prices regular way, in either case on the NASDAQ Small-Cap Market or the NASDAQ National Market System (collectively referred to as, "NASDAQ") or, if the Common Stock is not quoted on NASDAQ, on the principal national securities exchange on which the Common Stock is listed or admitted to trading (based on the aggregate dollar value of all securities listed or admitted to trading) or, if not listed or admitted to trading on any national securities exchange or quoted on NASDAQ, the average of the closing bid and asked prices in the over-the-counter market as furnished by any NASD member firm selected from time to time by the Corporation for that purpose, or, if such prices are not available, the fair market value set by, or in a manner established by, the Board of Directors of the Corporation in good faith. "Trading day" shall have the meaning given in Section 4 hereof. Any notice which is mailed as herein provided shall be conclusively presumed to have been duly given by the Corporation on the date deposited in the mail, whether or not the holder of the Series A Convertible Preferred Stock receives such notice; and failure properly to give such notice by mail, or any defect in such notice, to the holders of the shares to be converted shall not affect the validity of the proceedings for the conversion of any other shares of Series A Convertible Preferred Stock. On or after the date fixed for conversion as stated in such notice, each holder of shares called to be converted shall surrender the certificate evidencing such shares to the Corporation at the place designated in such notice for conversion. Notwithstanding that the certificates evidencing any shares properly called for conversion shall not have been surrendered, the shares shall no longer be deemed outstanding and all rights whatsoever with respect to the shares so called for conversion (except the right of the holders to convert such shares upon surrender of their certificates therefor) shall terminate. 6. Voting Rights. ------------- (a) General. Except as otherwise provided herein, in the ------- Amended and Restated Certificate of Incorporation or by law, the holders of shares of Series A Convertible Preferred Stock, the holders of shares of Common Stock and the holders of any other class or series of shares entitled to vote with the Common Stock shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation. In any such vote, each share of Series A Convertible Preferred Stock shall entitle the holder thereof to cast the number of votes equal to the number of votes which could be cast in such vote by a holder of the Common Stock into which such share of Series A Convertible Preferred Stock is convertible on the record date for such vote, or if no record date has been established, on the date such vote is taken. Any shares of Series A Convertible Preferred Stock held by the Corporation or any entity controlled by the Corporation shall not have voting rights hereunder and shall not be counted in determining the presence of a quorum. (b) Class Voting Rights. In addition to any vote specified in ------------------- paragraph (a) of this Section 6, so long as 50% of the shares of Series A Convertible Preferred Stock (including those shares of Series A Convertible Preferred Stock issued or issuable upon the exercise of the placement agent warrants issued in connection with the offer and sale of the Series A Convertible Preferred Stock) shall be outstanding, the Corporation shall not, without the affirmative vote or consent of the holders of at least 66-2/3% of all outstanding Series A Convertible Preferred Stock voting separately as a class, (i) amend, alter or repeal any provision of the Amended and Restated Certificate of Incorporation, as amended, or 28 the Bylaws of the Corporation so as adversely to affect the relative rights, preferences, qualifications, limitations or restrictions of the Series A Convertible Preferred Stock, (ii) declare any dividend or distribution on the Common Stock or any other class or series of preferred stock or authorize the repurchase of any securities of the Corporation or (iii) authorize or issue, or increase the authorized amount of, any additional class or series of stock, or any security convertible into stock of such class or series, (A) ranking prior to, or on a parity with, the Series A Convertible Preferred Stock upon liquidation, dissolution or winding up of the Corporation or a sale of all or substantially all of the assets of the Corporation or (B) providing for the payment of any dividends or distributions. A class vote on the part of the Series A Convertible Preferred Stock shall, without limitation, specifically not be deemed to be required (except as otherwise required by law or resolution of the Corporation's Board of Directors) in connection with: (a) the authorization, issuance or increase in the authorized amount of Common Stock or of any shares of any other class or series of stock ranking junior to the Series A Convertible Preferred Stock in respect of distributions upon liquidation, dissolution or winding up of the Corporation; (b) the authorization, issuance or increase in the amount of the Series A Convertible Preferred Stock or any bonds, mortgages, debentures or other obligations of the Corporation (other than bonds, mortgages, debentures or other obligations convertible into or exchangeable for or having option rights to purchase any shares of stock of the Corporation the authorization issuance or increase in amount of which would require the consent of the holders of the Series A Preferred Stock); or (c) any consolidation or merger of the Corporation with or into another corporation, a sale or transfer of all or part of the Corporation's assets for cash, securities or other property, or a compulsory share exchange. 7. Outstanding Shares. For purposes of this Certificate of ------------------ Designations, all shares of Series A Convertible Preferred Stock shall be deemed outstanding except (i) from the date, or the deemed date, of surrender of certificates evidencing shares of Series A Convertible Preferred Stock, all shares of Series A Convertible Preferred Stock converted into Common Stock, (ii) from the date of registration of transfer, all shares of Series A Convertible Preferred Stock held of record by the Corporation or any subsidiary of the Corporation and (iii) any and all shares of Series A Convertible Preferred Stock held in escrow prior to delivery of such stock by the Corporation to the initial beneficial owners thereof. 8. Status of Acquired Shares. Shares of Series A Convertible ------------------------- Preferred Stock received upon conversion pursuant to Section 4 or Section 5 or otherwise acquired by the Corporation will be restored to the status of authorized but unissued shares of Preferred Stock, without designation as to class, and may thereafter be issued, but not as shares of Series A Convertible Preferred Stock. 9. Preemptive Rights. The Series A Convertible Preferred Stock is ----------------- not entitled to any preemptive or subscription rights in respect of any securities of the Corporation. 10. Severability of Provisions. Whenever possible, each provision -------------------------- hereof shall be interpreted in a manner as to be effective and valid under applicable law, but if any provision hereof is held to be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating or otherwise adversely affecting the remaining provisions hereof. If a court of competent jurisdiction should determine that a provision hereof would be valid or enforceable if a period of time were extended or shortened or a particular percentage were increased or decreased, then such court may make such change as shall be necessary to render the provision in question effective and valid under applicable law. 29 CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS OF SERIES B CONVERTIBLE PREFERRED STOCK OF BOSTON LIFE SCIENCES, INC. (Pursuant to Section 151 of the Delaware General Corporation Law) _________________________________________ BOSTON LIFE SCIENCES, INC., a corporation organized and existing under the laws of the State of Delaware (the "Corporation"), hereby certifies that, pursuant to authority vested in the Board of Directors of the Corporation by Article Fourth of the Amended and Restated Certificate of Incorporation of the Corporation, the following resolution was adopted as of January 25, 1999 by the Board of Directors of the Corporation pursuant to Section 141 of the Delaware General Corporation Law: "RESOLVED that, pursuant to authority vested in the Board of Directors of the Corporation by Article Fourth of the Corporation's Amended and Restated Certificate of Incorporation, of the total authorized number of 1,000,000 shares of Preferred Stock, par value $0.01 per share, of the Corporation, there shall be designated a series of 475,000 shares that shall be issued in and constitute a single series to be known as "Series B Convertible Preferred Stock" (hereinafter called the "Series B Convertible Preferred Stock"). The shares of Series B Convertible Preferred Stock shares have the voting powers, designations, preferences and other special rights, and qualifications, limitations and restrictions thereof set forth below: 1. Dividends. The holder of each share of Series B Convertible Preferred --------- Stock shall not be entitled to receive dividends in any fixed amount; provided, however, the holder of each share of Series B Convertible ----------------- Preferred Stock shall be entitled to receive such dividends thereon as the Board of Directors may declare, if, as and when so declared. Such dividends on the Series B Convertible Preferred Stock shall not be cumulative and no right to such dividends shall accrue to holders of the Series B Convertible Preferred Stock unless and until declared by the Board of Directors. The holders of shares of the Series B Convertible Preferred Stock are entitled to share equally in any dividend, when, as and if declared by the Board on the Common Stock. 2. Liquidation. In the event of any liquidation, dissolution or winding ----------- up of the Corporation, whether voluntary or involuntary, after payment or provision for payment of debts and other liabilities of the Corporation, the holders of the shares of Series B Convertible Preferred Stock and the holders of shares of Series A Convertible Preferred Stock, before any distribution or payment is made upon any Common Stock, shall be entitled to receive on a pari-passu basis in accordance with their respective ---------- Preference Amounts (as hereinafter defined), (i) with respect to each share of Series A Convertible 30 Preferred Stock an amount ("Series A Preference Amount") equal to the sum of (A) $130.00 (subject to equitable adjustment to reflect stock splits, stock combinations, stock dividends, recapitalizations, and like occurrences) and (B) all declared but unpaid dividends (if any) payable with respect to such shares, and (ii) with respect to each share of Series B Convertible Preferred ("Series B Preference Amount", and collectively the Series A Preference Amount and the Series B Preference Amount are sometimes hereinafter collectively referred to as the "Preference Amount") equal to the sum of (A) the "Original Issuance Price" per share, which shall mean $19.50 (subject to equitable adjustment to reflect stock splits, stock dividends, stock combinations, recapitalizations, and like occurrences) and (B) all declared but unpaid dividends (if any) payable with respect to such shares. If upon such liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the assets to be distributed among the holders of the Series A Convertible Preferred Stock and the Series B Convertible Preferred Stock of the Corporation shall be insufficient to permit payment to the holders of the full respective Preference Amount to which they shall be entitled, then the entire assets of the Corporation to be so distributed shall be distributed ratably among the holders of the Series A Convertible Preferred Stock and the Series B Convertible Preferred Stock based on the respective amounts that would be payable to them on or with respect to the shares of Series A Convertible Preferred Convertible Stock and Series B Preferred Convertible Stock held by them upon such distribution pursuant to this Section. Upon any such liquidation, dissolution or winding up of the Corporation after the holders of the Series B Convertible Preferred Stock and Series A Convertible Preferred Stock shall have been paid in full in accordance with the rights and preferences to which they are entitled, the remaining net assets of the Corporation shall be distributed ratably and exclusively to the holders of the Common Stock. Written notice of such liquidation, dissolution or winding up, stating a payment date, the amount of the Preference Amounts and the place where said sums shall be payable shall be given by mail, postage prepaid, not less than 30 or more than 60 days prior to the payment date stated therein, to the holders of record of the Series A Convertible Preferred Stock, Series B Convertible Preferred Stock and the Common Stock, such notice to be addressed to each stockholder at his post office address as shown by the records of the Corporation. Notwithstanding Section 3 below, holders of record of the Series B Convertible Preferred Stock shall have the right to convert their shares of Series B Convertible Preferred Stock into Common Stock at the then applicable Conversion Price prior to liquidation pursuant to the formula set forth in the first paragraph of Section 3A; holders shall comply with the procedures set forth in the third paragraph of Section 3A. For purposes of this Section with respect to the Series B Convertible Preferred Stock, a liquidation, dissolution or winding up of the Corporation shall be deemed to be occasioned by, or to include, (A) the acquisition of the Corporation by another entity by means of any transaction or series of related transactions (including, without limitation, any reorganization, merger or consolidation, but excluding any merger effected exclusively for the purpose of changing the domicile of the Corporation) in which outstanding shares of the Corporation are exchanged for securities or other consideration issued, or caused to be issued by the acquiring corporation or its subsidiary, or (B) a sale, 31 lease, exchange or other transfer (in one transaction or a series of transactions) of all or substantially all of the assets of the Corporation, unless in each case the Corporation's stockholders of record as constituted ------ immediately prior to such acquisition or sale will, immediately after such acquisition or sale (by virtue of securities issued as consideration for the Corporation's acquisition or sale or otherwise) hold at least 50% of the voting power of the surviving or acquiring entity. Whenever the distribution provided for in this Section shall be payable in property other than cash, the value of such property shall be the fair market value thereof as determined in good faith by not less than a majority of the Directors then serving on the Board of Directors of the Corporation. 3. Conversion. ---------- 3A. Right to Convert. Subject to the terms and conditions of this ---------------- Section 3, the holder of any share or shares of Series B Convertible Preferred Stock shall have the right, at its option, to convert any such shares of Series B Convertible Preferred Stock into fully paid and nonassessable whole shares of Common Stock in accordance with this Section 3. The holder may convert each share of Series B Convertible Preferred Stock into such number of shares of Common Stock as is obtained by dividing the Original Issuance Price by the Conversion Price (as hereinafter defined). The initial Conversion Price shall be eighty percent (80%) of the average Closing Bid Price of the Common Stock for the five Trading Days (as defined below) ending on the Trading Day that is one Trading Day prior to February 5, 1999; provided, however, that the initial Conversion Price -------- ------- may not be less than $3.50 nor greater than $4.00 (such price defined as the "Initial Conversion Price"). The Initial Conversion Price shall be subject to adjustment pursuant to Sections 3D and 3E below, with such price as last adjusted referred to herein as the "Conversion Price." In addition to the conversion rights of the holder outlined above, at any time commencing 270 days after the issuance of the Series B Convertible Preferred Stock, the holder has the option to convert Series B Convertible Preferred Stock at a conversion rate that produces a minimum rate of return to the holder of twenty-five percent (25%) in accordance with the formula ("Guaranteed Return Formula") set forth below. Under the Guaranteed Return Formula, each share of Series B Convertible Preferred Stock may be converted into such number of shares of Common Stock that produces a total value of Common Stock equal to one hundred and twenty five percent (125%) of the Original Issuance Price; provided, however, that no share of Series B Convertible Preferred Stock -------- ------- shall be convertible into less than five (5) or more than ten (10) shares of Common Stock. The price per share to be used in determining such additional issuances of Common Stock (if any) will be the average Closing Bid Price for the five Trading Days ending on the Trading Day that is one Trading Day prior to the date of conversion. If the Corporation determines that the issuance of shares pursuant to this paragraph or pursuant to the first paragraph of this Section 3A, under applicable NASDAQ Stock Market requirements with respect to certain issues of Corporation securities convertible into 20% or more of the Corporation's Common Stock, requires shareholder approval, then, prior to any such issuance, the Corporation at its option may either (a) redeem the Series B Convertible Preferred Stock in accordance with the 32 redemption procedures contained in Section 4 herein within fifteen (15) days after receipt of the conversion notice relating to the Series B Convertible Preferred Stock; or (b) may solicit and obtain within ninety (90) days after receipt of the conversion notice relating to the Series B Convertible Preferred Stock the necessary shareholder consent before any such shares are required to be issued. In the event that the Corporation is unable to obtain the necessary shareholder consent pursuant to (b) above within the time period allotted, after recommending and seeking such approval in good faith, then the corporation shall redeem the Series B Convertible Preferred Stock in accordance with the preceding sentence. In the event the Closing Bid Price for the Corporation's Common Stock is at any time from the date of issuance at or above $7.00 per share (subject to equitable adjustment to reflect stock splits, stock dividends, stock combinations, recapitalizations, and like occurrences) for five consecutive Trading Days (as defined below), the holder's right to the receive additional shares of Common Stock upon conversion pursuant to this paragraph shall terminate thereafter. The rights of conversion in this Section 3 shall be exercised by the holder thereof by giving written notice that the holder elects to convert a stated number of shares of Series B Convertible Preferred Stock into Common Stock and by surrender of a certificate or certificates for the shares so to be converted to the Corporation at its principal office (or such other office or agency of the Corporation as the Corporation may designate by notice in writing to the holder or holders of the Series B Convertible Preferred Stock) at any time during its usual business hours on the date set forth in such notice, together with a statement of the name or names (with address), subject to compliance with applicable laws to the extent such designation shall involve a transfer, in which the certificate or certificates for shares of Common Stock shall be issued. The "Closing Bid Price" for each trading day shall be the reported closing bid price on the NASDAQ Small-Cap Market or the NASDAQ National Market System (collectively referred to as, "NASDAQ") or, if the Common Stock is not quoted on NASDAQ, on the principal national securities exchange on which the Common Stock is listed or admitted to trading (based on the aggregate dollar value of all securities listed or admitted to trading) or, if not listed or admitted to trading on any national securities exchange or quoted on NASDAQ, the closing bid price in the over- the counter market as furnished by any NASD member firm selected from time to time by the Corporation for that purpose, or, if such prices are not available, the fair market value set by, or in a manner established by, the Board of Directors of the Corporation in good faith. "Trading day" shall mean a day on which the national securities exchange or NASDAQ used to determine the Closing Bid Price is open for the transaction of business or the reporting of trades or, if the Closing Bid Price is not so determined, a day on which NASDAQ is open for the transaction of business. 3B. Issuance of Certificates; Time Conversion Effected. Subject to -------------------------------------------------- the limitation on conversion set forth in second sentence of the third paragraph of Section 3A, promptly after the receipt by the Corporation of the written notice referred to in Subsection 3A and surrender of the certificate or certificates for the share or shares of the Series B Convertible Preferred Stock to be converted, the Corporation shall issue and deliver, or cause to be issued and delivered, to the holder, within three (3) business days, registered in such name or names as such holder may direct, subject to compliance with applicable laws to the extent such designation shall involve a transfer, a certificate or 33 certificates for the number of whole shares of Common Stock issuable upon the conversion of such share or shares of Series B Convertible Preferred Stock. To the extent permitted by law, such conversion shall be deemed to have been effected and the Conversion Price shall be determined as of the close of business on the date on which such written notice shall have been received by the Corporation and the certificate or certificates for such share or shares shall have been surrendered as aforesaid, and at such time the rights of the holder of such share or shares of Series B Convertible Preferred Stock shall cease, and the person or persons in whose name or names any certificate or certificates for shares of Common Stock shall be issuable upon such conversion shall be deemed to have become the holder or holders of record of the shares represented thereby. 3C. Fractional Shares; Dividends; Partial Conversion. No fractional ------------------------------------------------ shares shall be issued upon conversion of the Series B Convertible Preferred Stock into Common Stock and the number of shares of Common Stock to be issued shall be rounded to the nearest whole share. In case the number of shares of Series B Convertible Preferred Stock represented by the certificate or certificates surrendered pursuant to Subsection 3A exceeds the number of shares converted, the Corporation shall upon such conversion, execute and deliver to the holder thereof, at the expense of the Corporation, a new certificate or certificates for the number of shares of Series B Convertible Preferred Stock represented by the certificate or certificates surrendered which are not to be converted. 3D. Adjustments to Conversion Price for Stock Dividends and ------------------------------------------------------- Combinations or Subdivisions of Common Stock. If the Company at any time -------------------------------------------- or from time to time while shares of Series B Convertible Preferred Stock are issued and outstanding shall declare or pay, without consideration, any dividend on Common Stock payable in Common Stock, or shall effect a subdivision of the outstanding shares of Common Stock into a greater number of shares of Common Stock (by stock split, reclassification or otherwise than by payment of a dividend in Common Stock or in any right to acquire Common Stock), or if the outstanding shares of Common Stock shall be combined or consolidated, by reclassification or otherwise, into a lesser number of shares of Common Stock, then the Conversion Price for the Series B Convertible Preferred Stock in effect immediately before such event shall, concurrently with the effectiveness of such event, be proportionately decreased or increased, as appropriate. If the Company shall declare or pay, without consideration, any dividend on Common Stock payable in any right to acquire Common Stock for no consideration, then the Company shall be deemed to have made a dividend payable in Common Stock in an amount of shares equal to the maximum number of shares issuable upon exercise of such rights to acquire Common Stock. 3E. Adjustments for Reclassification and Reorganization. If Common --------------------------------------------------- Stock issuable upon conversion of the Series B Convertible Preferred Stock shall be changed into the same or a different number of shares of any other class or classes of stock, whether by capital reorganization, reclassification or otherwise (other than a subdivision or combination of shares provided for in the preceding paragraph), the Conversion Price then in effect shall, concurrently with the effectiveness of such reorganization or reclassification, be proportionately adjusted so that the Series B Convertible Preferred Stock shall be convertible into, in lieu of the number of shares of Common Stock which the holders would otherwise have been entitled to receive, a number of shares of such other class or classes of stock equivalent to the number of shares of Common Stock that would have been subject to 34 receipt by the holders upon conversion of the Series B Convertible Preferred Stock immediately before that change. 3F. Record Date. In the event of any taking by the Corporation of a ----------- record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend) or other distribution, any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, the Corporation shall send by mail or courier against receipt to each holder of Series B Convertible Preferred Stock, at least ten (10) days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and the amount and character of such dividend, distribution or right. 3G. Notice of Adjustment. Upon any adjustment of the Conversion -------------------- Price, then and in each such case the Corporation shall give written notice thereof by first class mail, postage prepaid, addressed to each holder of shares of Series B Convertible Preferred Stock at the address of such holder as shown on the books of the Corporation, which notice shall be signed by the principal financial officer (or independent public accountant(s) of national standing) and shall state the Conversion Price resulting from such adjustment, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. 3H. Other Notices. In case at any time: ------------- (1) the Corporation shall declare any dividend upon its Common Stock payable in cash or stock or make any other distribution to the holders of its Common Stock; (2) the Corporation shall offer for subscription pro rata to the --- ---- holders of its Common Stock any additional shares of stock of any class or other rights; (3) there shall be any capital reorganization or reclassification of the capital stock of the Corporation, or a consolidation or merger of the Corporation with, or a sale of all or substantially all its assets to, another corporation; or (4) there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Corporation; then, in any one or more of said cases, the Corporation shall give, by first class mail, postage prepaid, addressed to each holder of any shares of Series B Convertible Preferred Stock at the address of such holder as shown on the books of the Corporation, (a) at least 15 days prior written notice of the date on which the books of the Corporation shall close or a record shall be taken for such dividend, distribution or subscription rights or for determining rights to vote in respect of any such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up, and (b) in the case of any such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up, at least 15 days prior written notice of the date when the same shall take place. Such notice in accordance with the foregoing clause (a) shall also 35 specify, in the case of any such dividend, distribution or subscription rights, the date on which the holders of Common Stock shall be entitled thereto, and such notice in accordance with the foregoing clause (b) shall also specify the date on which the holders of Common Stock shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reorganization, reclassification consolidation, merger, sale, dissolution, liquidation or winding up, as the case may be. 3I. Stock to be Reserved. The Corporation will at all times reserve -------------------- and keep available out of its authorized but unissued Common Stock solely for the purpose of issuance upon the conversion of the Series B Convertible Preferred Stock as herein provided, such number of shares of Common Stock as shall then be issuable upon the conversion of all outstanding shares of Series B Convertible Preferred Stock, including shares issuable pursuant to Section 3A above. If at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Series B Convertible Preferred Stock, the Corporation will take such corporate action as may, in the opinion of counsel, be necessary to increase its authorized but unissued shares of the Common Stock to such number of shares as shall be sufficient for such purposes, including, without limitation, engaging in best efforts to obtain the requisite stockholder approval of any necessary amendment to these provisions. All shares of Common Stock which shall be so issued shall be duly and validly issued and fully paid and nonassessable and free from all taxes, liens and charges arising out of or by reason of the issue thereof and, without limiting the generality of the foregoing, the Corporation covenants that it will from time to time take all such action as may be requisite to assure that the par value per share of the Common Stock is at all times equal to or less than the effective Conversion Price. The Corporation will take all such action within its control as may be necessary on its part to assure that all such shares of Common Stock may be so issued without violation of any applicable law or regulation, or of any requirements of any national securities exchange upon which the Common Stock of the Corporation may be listed. The Corporation will not take any action which results in any adjustment of the Conversion Price if after such action the total number of shares of Common Stock issued and outstanding and thereafter issuable upon exercise of all options and conversion of Convertible Securities, including upon conversion of the Series B Convertible Preferred Stock, would exceed the total number of shares of Common Stock then authorized by the Corporation's Amended and Restated Certificate of Incorporation. 3J. No Reissuance of Series B Convertible Preferred Stock. Shares of ----------------------------------------------------- Series B Preferred Stock that are converted into shares of Common Stock as provided herein shall be permanently retired and shall not under any circumstances be reissued; and the Corporation may from time to time take such appropriate corporate action as may be necessary to reduce the number of authorized shares of Series B Convertible Preferred Stock accordingly. 3K. Issue Tax. The issuance of certificates for shares of Common --------- Stock upon conversion of the Series B Convertible Preferred Stock shall be made without charge to the holders thereof for any issuance tax in respect thereof, provided that the Corporation shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any certificate in a name other than that of the holder of the Series B Convertible Preferred Stock which is being converted. 36 3L. Definition of Common Stock. As used in this Section 3, the term -------------------------- "Common Stock" shall mean and include the Corporation's authorized Common Stock as constituted on the date of filing of this Certificate of Designations; provided, however, that such term, when used to describe the -------- ------- securities receivable upon conversion of shares of the Series B Convertible Preferred Stock of the Corporation, shall include only shares designated as Common Stock of the Corporation on the date of filing of this Certificate of Designations, any shares resulting from any combination or subdivision thereof referred to in this Section 3, or in case of any reorganization or reclassification of the outstanding shares thereof, the stock, securities or assets provided for in this Section 3. 4. Redemption. The Series B Convertible Preferred Stock may be ---------- redeemed by the Corporation at any time in exchange for a cash payment for each share of Series B Convertible Preferred Stock equal to the Original Issuance Price multiplied by one hundred and ten percent (110%). In addition to the foregoing cash payment, the Corporation will issue a number of warrants to purchase Common Stock (each, a "Redemption Warrant") equal to 2.5 multiplied by the number of shares of Series B Convertible Preferred Stock then held by the holder. Each Redemption Warrant will be substantially in the form of Exhibit A attached hereto. The cash payment --------- and additional warrant to be issued upon redemption are collectively referred to as the "Redemption Price." Redemption Warrants issued shall be exercisable at a price equal to the sum of (a) the Closing Bid Price (subject to adjustment under the same circumstances as which the Conversion Price would be adjusted) of the Common Stock for the Trading Day prior to the date on which the Corporation redeems shares of Series B Convertible Preferred Stock (the "Redemption Date), (b) plus $.25. Such Redemption Warrants shall be exercisable for a period of thirty six (36) months subsequent to their issuance and will contain all customary provisions. The Company will file a registration statement within sixty (60) days of the issuance of the Redemption Warrants so as to permit a resale of the shares of Common Stock underlying the Redemption Warrants. Not fewer than fifteen (15) days before the Redemption Date, written notice shall be given by registered or certified first class mail, return receipt requested, by a nationally recognized courier service, postage prepaid, or by personal delivery, addressed to the holders of record of the Series B Convertible Preferred Stock, such notice to be addressed to each such stockholder at his post office address as shown by the records of the Corporation, specifying the number of shares to be redeemed, the Redemption Price and the place and date of such redemption, which date shall not be a day on which banks in New York City are required or authorized to close. If such notice of redemption shall have been duly given and if on or before such Redemption Date the funds and securities necessary for redemption shall have been set aside so as to be and continue to be available therefor, then, notwithstanding that any certificate for shares of Series B Convertible Preferred Stock to be redeemed shall not have been surrendered for cancellation, after the close of business on such Redemption Date, the shares so called for redemption shall no longer be deemed outstanding, the dividends thereon shall cease to accrue, and all rights with respect to such shares shall forthwith after the close of business on the Redemption Date, cease, except only the right of the holders thereof to receive, upon presentation of the certificate representing shares so called for redemption, the Redemption Price therefor. 37 Any shares of the Series B Convertible Preferred Stock redeemed pursuant to this Section 4 or otherwise acquired by the Corporation in any manner whatsoever shall be permanently retired and shall not under any circumstances be reissued; and the Corporation may from time to time take such appropriate corporate action as may be necessary to reduce the number of authorized shares of Series B Convertible Preferred Stock accordingly. 5. Voting - Series B Convertible Preferred Stock. Except as required by --------------------------------------------- law or in Section 6 herein, all shares of Series B Convertible Preferred Stock shall be non-voting, and the holders thereof shall not be entitled to vote on any matters until such shares of Series B Convertible Stock are converted into shares of Common Stock. In addition, any shares of Series A Convertible Preferred Stock or Series B Convertible Preferred Stock held by the Corporation or any entity controlled by the Corporation shall not have voting rights hereunder and shall not be counted in determining the presence of quorum. 6. Restrictions. At any time when shares of Series B Convertible ------------ Preferred Stock are outstanding, and in addition to any other vote of stockholders required by law or by the Amended and Restated Certificate of Incorporation, without the prior consent of the holders of a majority of the outstanding Series B Convertible Preferred Stock, given in person or by proxy, either in writing or at a special meeting called for that purpose, at which meeting the holders of the shares of such Series B Convertible Preferred Stock shall vote together as a class, the Corporation will not: (i) issue any class or series of equity security ranking senior to the Series B Convertible Preferred Stock as to payments on liquidation or dividends of the Company; or (ii) amend the Amended and Restated Certificate of Incorporation or Bylaws in any manner that would impair or reduce the rights of the holders of the Series B Convertible Preferred Stock. 7. No Waiver. Except as otherwise modified or provided for herein, the --------- holders of Series B Convertible Preferred Stock shall also be entitled to, and shall not be deemed to have waived, any other applicable rights granted to such holders under the Delaware General Corporation Law. 8. No Impairment. The Corporation will not, by amendment of its Amended ------------- and Restated Certificate of Incorporation or this Certificate of Designations through any reorganization, transfer of assets, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation but will at all time in good faith assist in the carrying out of all the provisions of this Certificate of Designations and in the taking of all such action as may be necessary or appropriate in order to protect the conversion rights and liquidation preferences granted hereunder of the holders of the Series B Convertible Preferred Stock against impairment. 9. Automatic Conversion. Subject to the limitations on conversion set --------------------- forth herein, each share of Series B Convertible Preferred Stock issued and outstanding on February 5 , 2002 automatically shall be converted into shares of Common Stock at the then effective Conversion Price in accordance with, and subject to, the provisions of Section 3A hereof. 38 IN WITNESS WHERFOF, this Certificate of Designations has been executed by the Corporation by its President as of this 5th day of February, 1999. BOSTON LIFE SCIENCES, INC. By: /s/ S. David Hillson ------------------------------------- S. David Hillson President and Chief Executive Officer 39 CERTIFICATE OF DECREASE OF SERIES B CONVERTIBLE PREFERRED STOCK OF BOSTON LIFE SCIENCES, INC. (PURSUANT TO SECTION 151 OF THE DELAWARE GENERAL CORPORATION LAW) __________________________________________________________ BOSTON LIFE SCIENCES, INC., a corporation organized and existing under the laws of the State of Delaware (the "Corporation"), hereby certifies that, pursuant to Sections 141 and 151 of the Delaware General Corporation Law and the authority vested in the Board of Directors of the Corporation by Article Fourth of the Amended and Restated Certificate of Incorporation, the Board of Directors of the Corporation, by resolution dated February 17, 1999, at a telephonic meeting, did authorize and direct that the number of authorized shares of Preferred Stock designated as Series B Convertible Preferred Stock be reduced from 475,000 to 227,719, pursuant to the authority granted to them under Section 151(g) of the Delaware General Corporation Law. IN WITNESS WHEREOF, this Certificate of Designations has been executed and filed as of this 18/th/ day of February, 1999. BOSTON LIFE SCIENCES, INC. By: /s/ Joseph P. Hernon ----------------------------- Joseph P. Hernon Secretary, Vice President and Chief Financial Officer 40 CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS OF SERIES C CONVERTIBLE PREFERRED STOCK OF BOSTON LIFE SCIENCES, INC. (Pursuant to Section 151 of the Delaware General Corporation Law) _________________________________________ BOSTON LIFE SCIENCES, INC., a corporation organized and existing under the laws of the State of Delaware (the "Corporation"), hereby certifies that, pursuant to authority vested in the Board of Directors of the Corporation by Article Fourth of the Amended and Restated Certificate of Incorporation of the Corporation, the following resolution was adopted as of February 17, 1999 by the Board of Directors of the Corporation pursuant to Section 141 of the Delaware General Corporation Law: "RESOLVED that, pursuant to authority vested in the Board of Directors of the Corporation by Article Fourth of the Corporation's Amended and Restated Certificate of Incorporation, of the total authorized number of 1,000,000 shares of Preferred Stock, par value $0.01 per share, of the Corporation, there shall be designated a series of 475,000 shares that shall be issued in and constitute a single series to be known as "Series C Convertible Preferred Stock" (hereinafter called the "Series C Convertible Preferred Stock"). The shares of Series C Convertible Preferred Stock shares have the voting powers, designations, preferences and other special rights, and qualifications, limitations and restrictions thereof set forth below: 1. Dividends. The holder of each share of Series C Convertible Preferred --------- Stock shall not be entitled to receive dividends in any fixed amount; provided, however, the holder of each share of Series C Convertible ----------------- Preferred Stock shall be entitled to receive such dividends thereon as the Board of Directors may declare, if, as and when so declared. Such dividends on the Series C Convertible Preferred Stock shall not be cumulative and no right to such dividends shall accrue to holders of the Series C Convertible Preferred Stock unless and until declared by the Board of Directors. The holders of shares of the Series C Convertible Preferred Stock are entitled to share equally in any dividend, when, as and if declared by the Board on the Common Stock. 2. Liquidation. In the event of any liquidation, dissolution or winding ----------- up of the Corporation, whether voluntary or involuntary, after payment or provision for payment of debts and other liabilities of the Corporation, the holders of the shares of Series A Convertible Preferred Stock , the holders of shares of Series B Convertible Preferred Stock, and the holders of shares of Series C Convertible Preferred Stock, before any distribution or payment is made upon any Common Stock, shall be entitled to receive on a pari-passu basis in accordance with their respective Preference Amounts (as ---------- hereinafter 41 defined), (i) with respect to each share of Series A Convertible Preferred Stock an amount ("Series A Preference Amount") equal to the sum of (A) $130.00 (subject to equitable adjustment to reflect stock splits, stock combinations, stock dividends, recapitalizations, and like occurrences) and (B) all declared but unpaid dividends (if any) payable with respect to such shares, and (ii) with respect to each share of Series B Convertible Preferred Stock ("Series B Preference Amount") equal to the sum of (A) $19.50 (subject to equitable adjustment to reflect stock splits, stock dividends, stock combinations, recapitalizations, and like occurrences) and (B) all declared but unpaid dividends (if any) payable with respect to such shares, and (iii) with respect to each share of Series C Convertible Preferred ("Series C Preference Amount", and collectively the Series A Preference Amount, the Series B Preference Amount, and the Series C Preference Amount are sometimes hereinafter collectively referred to as the "Preference Amount") equal to the sum of (A) the "Original Issuance Price" per share, which shall mean $19.50 (subject to equitable adjustment to reflect stock splits, stock dividends, stock combinations, recapitalizations, and like occurrences) and (B) all declared but unpaid dividends (if any) payable with respect to such shares. If upon such liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the assets to be distributed among the holders of the Series A Convertible Preferred Stock, the Series B Convertible Preferred Stock and the Series C Convertible Preferred Stock of the Corporation shall be insufficient to permit payment to the holders of the full respective Preference Amount to which they shall be entitled, then the entire assets of the Corporation to be so distributed shall be distributed ratably among the holders of the Series A Convertible Preferred Stock, the Series B Convertible Preferred Stock and the Series C Convertible Preferred Stock based on the respective amounts that would be payable to them on or with respect to the shares of Series A Convertible Preferred Stock, Series B Convertible Preferred Stock and Series C Preferred Convertible Stock held by them upon such distribution pursuant to this Section. Upon any such liquidation, dissolution or winding up of the Corporation after the holders of the Series A Convertible Preferred Stock, Series B Convertible Preferred Stock, and Series C Convertible Preferred Stock shall have been paid in full in accordance with the rights and preferences to which they are entitled, the remaining net assets of the Corporation shall be distributed ratably and exclusively to the holders of the Common Stock. Written notice of such liquidation, dissolution or winding up, stating a payment date, the amount of the Preference Amounts and the place where said sums shall be payable shall be given by mail, postage prepaid, not less than 30 or more than 60 days prior to the payment date stated therein, to the holders of record of the Series A Convertible Preferred Stock, Series B Convertible Preferred Stock and Series C Convertible Preferred Stock and the Common Stock, such notice to be addressed to each stockholder at his post office address as shown by the records of the Corporation. Notwithstanding Section 3 below, holders of record of the Series C Convertible Preferred Stock shall have the right to convert their shares of Series C Convertible Preferred Stock into Common Stock at the then applicable Conversion Price prior to liquidation pursuant to the formula set forth in the first paragraph of Section 3A; holders shall comply with the procedures set forth in the fourth paragraph of Section 3A. For purposes of this Section with respect to the Series C Convertible Preferred Stock, a liquidation, dissolution or winding up of the Corporation shall be deemed to be 42 occasioned by, or to include, (A) the acquisition of the Corporation by another entity by means of any transaction or series of related transactions (including, without limitation, any reorganization, merger or consolidation, but excluding any merger effected exclusively for the purpose of changing the domicile of the Corporation) in which outstanding shares of the Corporation are exchanged for securities or other consideration issued, or caused to be issued by the acquiring corporation or its subsidiary, or (B) a sale, lease, exchange or other transfer (in one transaction or a series of transactions) of all or substantially all of the assets of the Corporation, unless in each case the Corporation's ------ stockholders of record as constituted immediately prior to such acquisition or sale will, immediately after such acquisition or sale (by virtue of securities issued as consideration for the Corporation's acquisition or sale or otherwise) hold at least 50% of the voting power of the surviving or acquiring entity. Whenever the distribution provided for in this Section shall be payable in property other than cash, the value of such property shall be the fair market value thereof as determined in good faith by not less than a majority of the Directors then serving on the Board of Directors of the Corporation. 3. Conversion. ---------- 3A. Right to Convert. Subject to the terms and conditions of this ---------------- Section 3, the holder of any share or shares of Series C Convertible Preferred Stock shall have the right, at its option, to convert any such shares of Series C Convertible Preferred Stock into fully paid and nonassessable whole shares of Common Stock in accordance with this Section 3. The holder may convert each share of Series C Convertible Preferred Stock into such number of shares of Common Stock as is obtained by dividing the Original Issuance Price by the Conversion Price (as hereinafter defined). The initial Conversion Price shall be $3.90 (such price defined as the "Initial Conversion Price"). The Initial Conversion Price shall be subject to adjustment pursuant to Sections 3D and 3E below, with such price as last adjusted referred to herein as the "Conversion Price." In addition to the conversion rights of the holder outlined above, at any time commencing 270 days after the issuance of the Series C Convertible Preferred Stock, the holder has the option to convert Series C Convertible Preferred Stock at a conversion rate that produces a minimum rate of return to the holder of twenty-five percent (25%) in accordance with the formula ("Guaranteed Return Formula") set forth below. Under the Guaranteed Return Formula, each share of Series C Convertible Preferred Stock may be converted into such number of shares of Common Stock that produces a total value of Common Stock equal to one hundred and twenty five percent (125%) of the Original Issuance Price; provided, however, that no share of Series C Convertible Preferred Stock -------- ------- shall be convertible into less than five (5) or more than ten (10) shares of Common Stock. The price per share to be used in determining such additional issuances of Common Stock (if any) will be the average Closing Bid Price for the five Trading Days (as defined below) ending on the Trading Day that is one Trading Day prior to the date of conversion. If the Corporation determines that the issuance of shares pursuant to this paragraph or pursuant to the first paragraph of this Section 3A, or pursuant to the first or third paragraph of Section 3A in the Certificate of Designations, Rights and Preferences for the Series B Convertible Preferred Stock of the Company, 43 under applicable NASDAQ Stock Market requirements with respect to certain issues of Corporation securities convertible into 20% or more of the Corporation's Common Stock, requires stockholder approval, then, prior to any such issuance, the Corporation at its option may either (a) redeem the Series C Convertible Preferred Stock in accordance with the redemption procedures contained in Section 4 herein within fifteen (15) days after receipt of the conversion notice relating to the Series C Convertible Preferred Stock; or (b) may solicit and obtain within ninety (90) days after receipt of the conversion notice relating to the Series C Convertible Preferred Stock the necessary stockholder consent before any such shares are required to be issued. In the event that the Corporation is unable to obtain the necessary stockholder consent pursuant to (b) above within the time period allotted, after recommending and seeking such approval in good faith, then the corporation shall redeem the Series C Convertible Preferred Stock in accordance with the preceding sentence. Following the date on which the Securities and Exchange Commission declares effective a registration statement that permits the resale of the shares of Common Stock underlying the Series C Convertible Preferred Stock and while such registration statement remains in effect, in the event the Closing Bid Price for the Corporation's Common Stock is at or above $7.00 per share (subject to equitable adjustment to reflect stock splits, stock dividends, stock combinations, recapitalizations, and like occurrences) for five consecutive Trading Days (as defined below), the holder's right to receive additional shares of Common Stock upon conversion pursuant to this paragraph shall terminate thereafter. The rights of conversion in this Section 3 shall be exercised by the holder thereof by giving written notice that the holder elects to convert a stated number of shares of Series C Convertible Preferred Stock into Common Stock and by surrender of a certificate or certificates for the shares so to be converted to the Corporation at its principal office (or such other office or agency of the Corporation as the Corporation may designate by notice in writing to the holder or holders of the Series C Convertible Preferred Stock) at any time during its usual business hours on the date set forth in such notice, together with a statement of the name or names (with address), subject to compliance with applicable laws to the extent such designation shall involve a transfer, in which the certificate or certificates for shares of Common Stock shall be issued. The "Closing Bid Price" for each trading day shall be the reported closing bid price on the NASDAQ Small-Cap Market or the NASDAQ National Market System (collectively referred to as, "NASDAQ") or, if the Common Stock is not quoted on NASDAQ, on the principal national securities exchange on which the Common Stock is listed or admitted to trading (based on the aggregate dollar value of all securities listed or admitted to trading) or, if not listed or admitted to trading on any national securities exchange or quoted on NASDAQ, the closing bid price in the over- the counter market as furnished by any NASD member firm selected from time to time by the Corporation for that purpose, or, if such prices are not available, the fair market value set by, or in a manner established by, the Board of Directors of the Corporation in good faith. "Trading day" shall mean a day on which the national securities exchange or NASDAQ used to determine the Closing Bid Price is open for the transaction of business or the reporting of trades or, if the Closing Bid Price is not so determined, a day on which NASDAQ is open for the transaction of business. 44 3B. Issuance of Certificates; Time Conversion Effected. Subject to -------------------------------------------------- the limitation on conversion set forth in first sentence of the third paragraph of Section 3A, promptly after the receipt by the Corporation of the written notice referred to in Subsection 3A and surrender of the certificate or certificates for the share or shares of the Series C Convertible Preferred Stock to be converted, the Corporation shall issue and deliver, or cause to be issued and delivered, to the holder, within three (3) business days, registered in such name or names as such holder may direct, subject to compliance with applicable laws to the extent such designation shall involve a transfer, a certificate or certificates for the number of whole shares of Common Stock issuable upon the conversion of such share or shares of Series C Convertible Preferred Stock. To the extent permitted by law, such conversion shall be deemed to have been effected and the Conversion Price shall be determined as of the close of business on the date on which such written notice shall have been received by the Corporation and the certificate or certificates for such share or shares shall have been surrendered as aforesaid, and at such time the rights of the holder of such share or shares of Series C Convertible Preferred Stock shall cease, and the person or persons in whose name or names any certificate or certificates for shares of Common Stock shall be issuable upon such conversion shall be deemed to have become the holder or holders of record of the shares represented thereby. 3C. Fractional Shares; Dividends; Partial Conversion. No fractional ------------------------------------------------ shares shall be issued upon conversion of the Series C Convertible Preferred Stock into Common Stock and the number of shares of Common Stock to be issued shall be rounded to the nearest whole share. In case the number of shares of Series C Convertible Preferred Stock represented by the certificate or certificates surrendered pursuant to Subsection 3A exceeds the number of shares converted, the Corporation shall upon such conversion, execute and deliver to the holder thereof, at the expense of the Corporation, a new certificate or certificates for the number of shares of Series C Convertible Preferred Stock represented by the certificate or certificates surrendered which are not to be converted. 3D. Adjustments to Conversion Price for Stock Dividends and ------------------------------------------------------- Combinations or Subdivisions of Common Stock. If the Company at any time -------------------------------------------- or from time to time while shares of Series C Convertible Preferred Stock are issued and outstanding shall declare or pay, without consideration, any dividend on Common Stock payable in Common Stock, or shall effect a subdivision of the outstanding shares of Common Stock into a greater number of shares of Common Stock (by stock split, reclassification or otherwise than by payment of a dividend in Common Stock or in any right to acquire Common Stock), or if the outstanding shares of Common Stock shall be combined or consolidated, by reclassification or otherwise, into a lesser number of shares of Common Stock, then the Conversion Price for the Series C Convertible Preferred Stock in effect immediately before such event shall, concurrently with the effectiveness of such event, be proportionately decreased or increased, as appropriate. If the Company shall declare or pay, without consideration, any dividend on Common Stock payable in any right to acquire Common Stock for no consideration, then the Company shall be deemed to have made a dividend payable in Common Stock in an amount of shares equal to the maximum number of shares issuable upon exercise of such rights to acquire Common Stock. 3E. Adjustments for Reclassification and Reorganization. If Common --------------------------------------------------- Stock issuable upon conversion of the Series C Convertible Preferred Stock shall be changed into 45 the same or a different number of shares of any other class or classes of stock, whether by capital reorganization, reclassification or otherwise (other than a subdivision or combination of shares provided for in the preceding paragraph), the Conversion Price then in effect shall, concurrently with the effectiveness of such reorganization or reclassification, be proportionately adjusted so that the Series C Convertible Preferred Stock shall be convertible into, in lieu of the number of shares of Common Stock which the holders would otherwise have been entitled to receive, a number of shares of such other class or classes of stock equivalent to the number of shares of Common Stock that would have been subject to receipt by the holders upon conversion of the Series C Convertible Preferred Stock immediately before that change. 3F. Record Date. In the event of any taking by the Corporation of a ----------- record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend) or other distribution, any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, the Corporation shall send by mail or courier against receipt to each holder of Series C Convertible Preferred Stock, at least ten (10) days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and the amount and character of such dividend, distribution or right. 3G. Notice of Adjustment. Upon any adjustment of the Conversion -------------------- Price, then and in each such case the Corporation shall give written notice thereof by first class mail, postage prepaid, addressed to each holder of shares of Series C Convertible Preferred Stock at the address of such holder as shown on the books of the Corporation, which notice shall be signed by the principal financial officer (or independent public accountant(s) of national standing) and shall state the Conversion Price resulting from such adjustment, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. 3H. Other Notices. In case at any time: ------------- (1) the Corporation shall declare any dividend upon its Common Stock payable in cash or stock or make any other distribution to the holders of its Common Stock; (2) the Corporation shall offer for subscription pro rata to the --- ---- holders of its Common Stock any additional shares of stock of any class or other rights; (3) there shall be any capital reorganization or reclassification of the capital stock of the Corporation, or a consolidation or merger of the Corporation with, or a sale of all or substantially all its assets to, another corporation; or (4) there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Corporation; then, in any one or more of said cases, the Corporation shall give, by first class mail, postage prepaid, addressed to each holder of any shares of Series C Convertible Preferred 46 Stock at the address of such holder as shown on the books of the Corporation, (a) at least 15 days prior written notice of the date on which the books of the Corporation shall close or a record shall be taken for such dividend, distribution or subscription rights or for determining rights to vote in respect of any such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up, and (b) in the case of any such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up, at least 15 days prior written notice of the date when the same shall take place. Such notice in accordance with the foregoing clause (a) shall also specify, in the case of any such dividend, distribution or subscription rights, the date on which the holders of Common Stock shall be entitled thereto, and such notice in accordance with the foregoing clause (b) shall also specify the date on which the holders of Common Stock shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reorganization, reclassification consolidation, merger, sale, dissolution, liquidation or winding up, as the case may be. 3I. Stock to be Reserved. The Corporation will at all times reserve -------------------- and keep available out of its authorized but unissued Common Stock solely for the purpose of issuance upon the conversion of the Series C Convertible Preferred Stock as herein provided, such number of shares of Common Stock as shall then be issuable upon the conversion of all outstanding shares of Series C Convertible Preferred Stock, including shares issuable pursuant to Section 3A above. If at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Series C Convertible Preferred Stock, the Corporation will take such corporate action as may, in the opinion of counsel, be necessary to increase its authorized but unissued shares of the Common Stock to such number of shares as shall be sufficient for such purposes, including, without limitation, engaging in best efforts to obtain the requisite stockholder approval of any necessary amendment to these provisions. All shares of Common Stock which shall be so issued shall be duly and validly issued and fully paid and nonassessable and free from all taxes, liens and charges arising out of or by reason of the issue thereof and, without limiting the generality of the foregoing, the Corporation covenants that it will from time to time take all such action as may be requisite to assure that the par value per share of the Common Stock is at all times equal to or less than the effective Conversion Price. The Corporation will take all such action within its control as may be necessary on its part to assure that all such shares of Common Stock may be so issued without violation of any applicable law or regulation, or of any requirements of any national securities exchange upon which the Common Stock of the Corporation may be listed. The Corporation will not take any action which results in any adjustment of the Conversion Price if after such action the total number of shares of Common Stock issued and outstanding and thereafter issuable upon exercise of all options and conversion of Convertible Securities, including upon conversion of the Series C Convertible Preferred Stock, would exceed the total number of shares of Common Stock then authorized by the Corporation's Amended and Restated Certificate of Incorporation. 3J. No Reissuance of Series C Convertible Preferred Stock. Shares of ----------------------------------------------------- Series C Preferred Stock that are converted into shares of Common Stock as provided herein shall be permanently retired and shall not under any circumstances be reissued; and the Corporation may from time to time take such appropriate corporate action as may be 47 necessary to reduce the number of authorized shares of Series C Convertible Preferred Stock accordingly. 3K. Issue Tax. The issuance of certificates for shares of Common --------- Stock upon conversion of the Series C Convertible Preferred Stock shall be made without charge to the holders thereof for any issuance tax in respect thereof, provided that the Corporation shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any certificate in a name other than that of the holder of the Series C Convertible Preferred Stock which is being converted. 3L. Definition of Common Stock. As used in this Section 3, the term -------------------------- "Common Stock" shall mean and include the Corporation's authorized Common Stock as constituted on the date of filing of this Certificate of Designations; provided, however, that such term, when used to describe the -------- ------- securities receivable upon conversion of shares of the Series C Convertible Preferred Stock of the Corporation, shall include only shares designated as Common Stock of the Corporation on the date of filing of this Certificate of Designations, any shares resulting from any combination or subdivision thereof referred to in this Section 3, or in case of any reorganization or reclassification of the outstanding shares thereof, the stock, securities or assets provided for in this Section 3. 4. Redemption. The Series C Convertible Preferred Stock may be redeemed ---------- by the Corporation at any time in exchange for a cash payment for each share of Series C Convertible Preferred Stock equal to the Original Issuance Price multiplied by one hundred and ten percent (110%). In addition to the foregoing cash payment, the Corporation will issue a number of warrants to purchase Common Stock (each, a "Redemption Warrant") equal to 2.5 multiplied by the number of shares of Series C Convertible Preferred Stock then held by the holder. Each Redemption Warrant will be substantially in the form of Exhibit A attached hereto. The cash payment --------- and additional warrant to be issued upon redemption are collectively referred to as the "Redemption Price." Redemption Warrants issued shall be exercisable at a price equal to the sum of (a) the Closing Bid Price (subject to adjustment under the same circumstances as which the Conversion Price would be adjusted) of the Common Stock for the Trading Day prior to the date on which the Corporation redeems shares of Series C Convertible Preferred Stock (the "Redemption Date), (b) plus $.25. Such Redemption Warrants shall be exercisable for a period of thirty six (36) months subsequent to their issuance and will contain all customary provisions. The Corporation will file a registration statement with the Securities and Exchange Commission within sixty (60) days of the issuance of the Redemption Warrants so as to permit a resale of the shares of Common Stock underlying the Redemption Warrants. Not fewer than fifteen (15) days before the Redemption Date, written notice shall be given by registered or certified first class mail, return receipt requested, by a nationally recognized courier service, postage prepaid, or by personal delivery, addressed to the holders of record of the Series C Convertible Preferred Stock, such notice to be addressed to each such stockholder at his post office address as shown by the records of the Corporation, specifying the number of shares to be redeemed, the Redemption Price and the place and date of such redemption, which date shall not be a day on which banks in New York City are required or authorized to close. If such notice of redemption shall have been duly given and if on or before such Redemption Date the funds and securities 48 necessary for redemption shall have been set aside so as to be and continue to be available therefor, then, notwithstanding that any certificate for shares of Series C Convertible Preferred Stock to be redeemed shall not have been surrendered for cancellation, after the close of business on such Redemption Date, the shares so called for redemption shall no longer be deemed outstanding, the dividends thereon shall cease to accrue, and all rights with respect to such shares shall forthwith after the close of business on the Redemption Date, cease, except only the right of the holders thereof to receive, upon presentation of the certificate representing shares so called for redemption, the Redemption Price therefor. Any shares of the Series C Convertible Preferred Stock redeemed pursuant to this Section 4 or otherwise acquired by the Corporation in any manner whatsoever shall be permanently retired and shall not under any circumstances be reissued; and the Corporation may from time to time take such appropriate corporate action as may be necessary to reduce the number of authorized shares of Series C Convertible Preferred Stock accordingly. 5. Voting - Series C Convertible Preferred Stock. Except as required by --------------------------------------------- law or in Section 6 herein, all shares of Series C Convertible Preferred Stock shall be non-voting, and the holders thereof shall not be entitled to vote on any matters until such shares of Series C Convertible Stock are converted into shares of Common Stock. In addition, any shares of Series A Convertible Preferred Stock, Series B Convertible Preferred Stock or Series C Convertible Preferred Stock held by the Corporation or any entity controlled by the Corporation shall not have voting rights hereunder and shall not be counted in determining the presence of quorum. 6. Restrictions. At any time when shares of Series C Convertible ------------ Preferred Stock are outstanding, and in addition to any other vote of stockholders required by law or by the Amended and Restated Certificate of Incorporation, without the prior consent of the holders of a majority of the outstanding Series C Convertible Preferred Stock, given in person or by proxy, either in writing or at a special meeting called for that purpose, at which meeting the holders of the shares of such Series C Convertible Preferred Stock shall vote together as a class, the Corporation will not: (i) issue any class or series of equity security ranking senior to the Series C Convertible Preferred Stock as to payments on liquidation or dividends of the Company; or (ii) amend the Amended and Restated Certificate of Incorporation or Bylaws in any manner that would impair or reduce the rights of the holders of the Series C Convertible Preferred Stock. 7. No Waiver. Except as otherwise modified or provided for herein, the --------- holders of Series C Convertible Preferred Stock shall also be entitled to, and shall not be deemed to have waived, any other applicable rights granted to such holders under the Delaware General Corporation Law. 8. No Impairment. The Corporation will not, by amendment of its Amended ------------- and Restated Certificate of Incorporation or this Certificate of Designations through any reorganization, transfer of assets, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation but will at all times in good faith assist in the carrying out of all the provisions of this Certificate of 49 Designations and in the taking of all such action as may be necessary or appropriate in order to protect the conversion rights and liquidation preferences granted hereunder of the holders of the Series C Convertible Preferred Stock against impairment. 9. Automatic Conversion. Subject to the limitations on conversion set --------------------- forth herein, each share of Series C Convertible Preferred Stock issued and outstanding on February 18, 2002 automatically shall be converted into shares of Common Stock at the then effective Conversion Price in accordance with, and subject to, the provisions of Section 3A hereof. 50 IN WITNESS WHEREOF, this Certificate of Designations has been executed by the Corporation by its President as of this 18th day of February, 1999. BOSTON LIFE SCIENCES, INC. By: /s/ Joseph P. Hernon --------------------------------- Joseph P. Hernon Secretary, Vice President and Chief Financial Officer 51 EX-23.1 3 CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Forms S-8 (File Nos. 33-98104 and 33-98138) and in the Prospectus constituting part of the Registration Statements on Forms S-3 (SEC File Nos. 333-02730 and 333-08993) of Boston Life Sciences, Inc. and its subsidiaries (the "Company") of our report dated March 11, 1999 appearing on page 21 of the Company's Annual Report on Form 10-K for the year ended December 31, 1998. PricewaterhouseCoopers LLP Boston, Massachusetts March 15, 1999 EX-27.1 4 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from financial statements as reported on Form 10-K and is qualified in its entirety by reference to such financial statements. 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 71,834 7,837,992 0 0 0 8,478,425 262,958 248,541 12,269,048 1,734,199 0 0 170 132,770 10,401,909 12,269,048 0 0 0 7,682,406 (785,382) 0 0 (6,897,024) 0 (6,897,024) 0 0 0 (6,897,024) (0.52) (0.52)
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