<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 21, 1999
REGISTRATION NO. 333-58819.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
INTRACEL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 2834 04-2980325
(STATE OF INCORPORATION) (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER IDENTIFICATION
CLASSIFICATION CODE NUMBER) NUMBER)
</TABLE>
2005 NW SAMMAMISH ROAD, SUITE 107
ISSAQUAH, WASHINGTON 98027
(425) 392-2992
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
SIMON R. MCKENZIE
PRESIDENT AND CHIEF EXECUTIVE OFFICER
INTRACEL CORPORATION
2005 NW SAMMAMISH ROAD, SUITE 107
ISSAQUAH, WASHINGTON 98027
(425) 392-2992
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
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JOSEPH W. BARTLETT, ESQ. ALAN L. JAKIMO, ESQ.
ALLEN L. WEINGARTEN, ESQ. BROWN & WOOD LLP
MORRISON & FOERSTER LLP ONE WORLD TRADE CENTER
1290 AVENUE OF THE AMERICAS NEW YORK, NEW YORK 10048
NEW YORK, NEW YORK 10104 (212) 839-5300
(212) 468-8000
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
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TITLE OF EACH CLASS OF SECURITIES PROPOSED MAXIMUM AGGREGATE
TO BE REGISTERED OFFERING PRICE(1) AMOUNT OF REGISTRATION FEE
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Common Stock, $.0001 par value.............. $59,800,000 $17,602
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</TABLE>
(1) Estimated pursuant to Rule 457(o) under the Securities Act solely for the
purpose of calculating the registration fee.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION, OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JANUARY 21, 1999
PROSPECTUS
, 1999
4,000,000 SHARES
LOGO
COMMON STOCK
All of the shares of common stock offered hereby are being sold by Intracel
Corporation ("Intracel" or the "Company"). Prior to this offering, there has
been no public market for the common stock of the Company. It is currently
estimated that the initial public offering price will be between $12.00 and
$14.00 per share. See "Underwriting" for information relating to the factors
considered in determining the initial public offering price.
The common stock has been approved for quotation on the Nasdaq National
Market under the symbol "ICEL," subject to official notice of issuance.
------------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 8 FOR INFORMATION THAT SHOULD BE CONSIDERED BY
PROSPECTIVE INVESTORS.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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PRICE UNDERWRITING PROCEEDS
TO THE DISCOUNTS AND TO THE
PUBLIC COMMISSIONS(1) COMPANY(2)
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Per Share...................... $ $ $
Total(3)....................... $ $ $
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</TABLE>
(1) See "Underwriting" for indemnification arrangements with the Underwriters.
(2) Before deducting expenses estimated at $ , which will be paid by
the Company.
(3) The Company and Michael G. Hanna, Ph.D., the Chairman of the Board and Chief
Scientific Officer of the Company (the "Selling Stockholder"), have granted
to the Underwriters a 30-day option to purchase up to 300,000 and 300,000
additional shares, respectively, at the Price to the Public less
Underwriting Discounts and Commissions, solely to cover over-allotments, if
any. If such option is exercised in full, the total Price to the Public,
Underwriting Discounts and Commissions, Proceeds to the Company, and
proceeds to the Selling Stockholder will be $ , $ , $ , and
$ , respectively. See "Underwriting."
The shares of common stock are being offered by the several Underwriters,
subject to prior sale, when, as and if delivered to and accepted by the
Underwriters, and subject to various prior conditions, including their right to
reject orders in whole or in part. It is expected that delivery of share
certificates will be made in New York, New York on or about
, 1999.
DONALDSON, LUFKIN & JENRETTE PIPER JAFFRAY INC.
<PAGE> 3
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING STABILIZING, THE PURCHASE OF COMMON STOCK TO COVER SYNDICATE SHORT
POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
------------------------
ZYMMUNE(R) is a registered United States trademark of the Company.
ASI(BCL), HumaRAD(16.88), HumaRAD(88BV59), Apo-Tek Lp(a) and Accu-D(x) are
trademarks of the Company. Other trademarks used herein belong to various other
parties. As used herein, "OncoVAX(CL)" means OncoVAX(CL)(R), "HumaSPECT" means
HumaSPECT(R) and "ZYMMUNE" means ZYMMUNE(R).
------------------------
All references to Stage I, Stage II, Stage III and Stage IV colon cancer
set forth herein refer to different stages of the disease based upon the status
of a patient's tumor nodes and metastases.
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus, including "Risk Factors" and
the consolidated financial statements and notes thereto. Unless otherwise
indicated, all information in this Prospectus assumes (i) no exercise of the
Underwriters' over-allotment option, or currently outstanding stock options,
granted by the Company, (ii) the conversion of all shares of the Company's
Series A, A-1, A-3, B-1 and B-2 preferred stock into shares of common stock
effective upon the closing of this offering (the "Preferred Stock Conversion")
and (iii) a 2-for-3 reverse split of the common stock that will be effected
prior to the closing of this offering. All references to the "Company" or
"Intracel" herein include Intracel Corporation, its predecessor Massachusetts
corporation and their respective subsidiaries. Unless otherwise indicated, all
references to years refer to the fiscal years of the Company ending December 31.
THE COMPANY
Intracel is an integrated biopharmaceutical company focused on the
development and commercialization of cancer vaccines and immunotherapeutic and
diagnostic products for cancers and infectious diseases. Based upon the results
of Phase III clinical trials, the Company is preparing a Biologics License
Application ("BLA") for its OncoVAX(CL) cancer vaccine for the post-surgical
treatment of Stage II colon cancer, the most common form of colon cancer. The
Company is also planning to initiate Phase III clinical trials for OncoVAX(CL)
in combination with chemotherapy for Stage III colon cancer, has initiated Phase
III clinical trials for its proprietary formulation of keyhole limpet hemocyanin
("KLH") for the treatment of refractory bladder cancer, and is planning to
initiate a Phase II/III clinical trial for its ASI(BCL) vaccine for the
treatment of low-grade B-cell lymphoma. In addition, the Company markets a
portfolio of in vitro diagnostic products and is introducing a number of new
diagnostic products for detecting and monitoring various cancers, AIDS and heart
disease.
The Company believes that OncoVAX(CL) is the first vaccine to demonstrate
efficacy for the post-surgical treatment of Stage II colon cancer, and has
recently announced the results of a ten-year Phase III clinical trial for
OncoVAX(CL) conducted at University Hospital, Vrije Universiteit, Amsterdam (the
"Amsterdam" trial). This randomized, multi-centered 254-patient clinical trial
was the third in a series of clinical trials of OncoVAX(CL) conducted in the
United States and Europe. The series included a Phase III clinical trial
conducted by the Eastern Cooperative Oncology Group (the "ECOG" trial) and a
Phase II/III clinical trial conducted by Dr. Herbert C. Hoover, Jr. (the
"Hoover" trial). In the Amsterdam trial, which added a fourth booster
vaccination to the regimen, the Company believes that OncoVAX(CL) demonstrated a
61% reduction in the rate of recurrences and a 50% improvement in the survival
rate for patients with Stage II colon cancer when compared to surgery alone. The
Company believes that the results of the Amsterdam trial are supported by
positive trends shown in the ECOG and Hoover trials. Stage II colon cancer
accounts for approximately 120,000 of the more than 200,000 new cases of colon
cancer diagnosed in the United States and Europe each year. There is currently
no product approved by the United States Food and Drug Administration (the
"FDA") for patients with Stage II colon cancer, and surgery is the principal
means of treatment. The Company plans to file a BLA for OncoVAX(CL) with the FDA
in 1999 and is presently seeking the necessary regulatory and reimbursement
approvals in certain countries in Europe. If the FDA does not consider the
trials discussed above as relevant or supporting to the efficacy of OncoVAX(CL),
the FDA may require additional clinical trials of OncoVAX(CL) prior to or after
the FDA's approval of the product. There can be no assurance that the Company
will obtain FDA approval for OncoVAX(CL) on a timely basis, if at all.
OncoVAX(CL) is a multivalent vaccine produced from a patient's own
surgically removed tumor. The tumor is collected immediately after surgery and
delivered to one of the Company's OncoVAX treatment centers ("OncoVAX Centers")
for manufacture and subsequent administration of the vaccine. Each OncoVAX
Center has been designed to treat up to 2,000 patients per year. The Company
plans to establish OncoVAX Centers at or near hospitals with established surgery
practices, serving areas characterized by high population density and high
incidence of colon cancer. The Company expects that each OncoVAX Center will
require less than 3,000 square feet and will employ a staff of production
technicians and a supervising
3
<PAGE> 5
physician. Facilities for the first OncoVAX Center in the United States have
been established at Lehigh Valley Hospital in Allentown, Pennsylvania, and the
terms of the Company's ownership in, and operation of, the center are being
developed pursuant to a joint venture with Lehigh Valley Hospital. A second
OncoVAX Center in the United States is being established at the Company's
therapeutic manufacturing facility in Rockville, Maryland. Future OncoVAX
Centers may also be structured as joint ventures with established healthcare
providers. The OncoVAX Centers located in the United States will be considered
to be manufacturing facilities by the FDA and will be regulated accordingly. The
first OncoVAX Center in Europe is being established at University Hospital,
Vrije Universiteit, Amsterdam. The Company plans to establish more than 25
OncoVAX Centers in the United States and more than 15 OncoVAX Centers in Europe.
The Company estimates that each OncoVAX Center will cost approximately $1.0 to
$3.0 million dollars to build. The Company expects revenues from operating
OncoVAX Centers to offset the cost of new centers.
The Company plans to leverage its OncoVAX Centers to perform expedited
clinical trials and to launch other products, such as its in vivo imaging agent,
HumaSPECT, and its B-cell lymphoma vaccine ASI(BCL). The Company has filed an
amendment to the Investigational New Drug application ("IND") for OncoVAX(CL)
with the FDA to commence a Phase III clinical trial for the use of OncoVAX(CL)
in combination with chemotherapy for the treatment of Stage III colon cancer.
The Company believes that this combination therapy will be more effective in the
treatment of Stage III colon cancer than either OncoVAX(CL) or chemotherapy
administered alone. The Company is currently in discussions with the FDA
regarding the commencement of the Phase III clinical trial for this combination
therapy. No assurance can be given that the Company will be given clearance to
commence this Phase III clinical trial in a timely manner, if at all.
The Company has initiated a Phase III clinical trial for KLH for the
treatment of refractory bladder cancer. In Phase II clinical trials, the Company
believes that KLH demonstrated significantly less toxicity than the leading
FDA-approved product for the treatment of bladder cancer. The Company has
entered into a strategic partnership with Mentor Corporation ("Mentor"), a
leading urology company, under which Mentor has been funding research and
development, is required to make milestone payments to the Company and will
market KLH worldwide. Mentor also markets Accu-D(x), the Company's rapid bladder
cancer test.
The Company plans to file an amendment to the IND for its ASI(BCL) vaccine
with the FDA to commence a Phase II/III clinical trial for such vaccine in the
first half of 1999. ASI(BCL) is designed to prevent recurrence of low-grade
non-Hodgkin's B-cell lymphoma, the most common type of B-cell lymphoma, in
patients who have achieved remission through chemotherapy and/or immunotherapy.
ASI(BCL), like OncoVAX(CL), is an autologous vaccine and is produced using a
unique antigen derived from a patient's own cancerous cells. The Company
believes that a Phase I clinical trial has demonstrated that ASI(BCL) can
stimulate a specific immune response and is associated with improved clinical
outcomes.
The Company has substantial expertise in the development and manufacturing
of totally human antibodies. In April 1998, the Company commenced enrollment in
its Phase I clinical trial for its totally human antibody HumaRAD(16.88) for the
treatment of head and neck cancer and plans to submit an IND with the FDA to
commence a Phase I clinical trial of a related product, HumaRAD(88BV59) for the
treatment of ovarian cancer, in the first half of 1999. In addition, the Company
is developing several antibody products to treat life-threatening infectious
diseases.
Through its wholly owned subsidiary, Bartels, Inc. ("Bartels"), the Company
also markets a portfolio of innovative in vitro diagnostic products for the
confirmation of viral and bacterial diseases. The Company markets these
diagnostic products domestically to approximately 1,500 hospitals and clinical
laboratories through its internal sales force. Internationally, the Company
relies upon third-party distributors to market its diagnostic products. In 16
foreign countries, the Company is marketing a one-minute test for HIV/AIDS based
on its proprietary INSTI technology. In addition, the Company is introducing a
number of new diagnostic products, including its Apo-Tek Lp(a) test kit to
monitor an important indicator of heart disease, its Accu-D(x) test to monitor
the recurrence of bladder cancer and its ZYMMUNE test to monitor CD4/CD8 levels
in patients with HIV/AIDS. As a complementary product for OncoVAX(CL), the
Company has developed an in vivo diagnostic product, HumaSPECT, to monitor
recurrence and metastic spread of colon cancer. For a Phase III clinical trial,
the Company believes that HumaSPECT demonstrated significant
4
<PAGE> 6
advantages over CT scans, the current standard for detecting recurrence and
metastic spread of colon cancer. The Company has filed a BLA in the United
States and in December 1998 received marketing authorization for HumaSPECT in
Europe. A third party currently holds world-wide distribution rights for the
Company's HumaSPECT product. While the Company is currently in negotiations to
terminate the agreement providing for such rights, there can be no assurances
that the agreement will be terminated on a timely basis, if at all.
The Company's technology foundation in cancer vaccines and human antibodies
is supported by a clinical trial group with expertise in designing and
implementing complex clinical trials and by state-of-the-art manufacturing
facilities capable of producing commercial quantities of its therapeutic,
diagnostic and prognostic products. To conduct research, development,
manufacturing and marketing of its products, the Company employs over 220 people
in multiple facilities, including its corporate headquarters in Issaquah,
Washington, a therapeutic product facility located in Rockville, Maryland and
diagnostic product facilities in Issaquah, Washington and Richmond, British
Columbia, Canada.
5
<PAGE> 7
THE OFFERING
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Common Stock Offered by the Company.......... 4,000,000 shares
Common Stock to be Outstanding After the
Offering................................... 15,440,285 shares(1)
Use of Proceeds.............................. To support the establishment and early
operation of OncoVAX Centers, to repay
existing indebtedness, and the balance for
the Company's other research and development
programs, to conduct clinical trials for the
Company's cancer and infectious disease
products and for working capital and other
general corporate purposes. The Company may
also use a portion of the net proceeds to
acquire technologies or products com-
plementary to its business. See "Use of
Proceeds."
Proposed Nasdaq National Market Symbol....... ICEL
</TABLE>
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(1) The foregoing computations exclude: (i) 1,341,594 shares of common stock
issuable upon exercise of stock options outstanding as of November 30, 1998,
at a weighted-average exercise price of $3.55 per share; and (ii) 1,727,002
shares of common stock issuable upon exercise of warrants expected to remain
outstanding after this offering, of which 643,664 are at a weighted-average
exercise price of $7.96 per share, and 1,083,338 shares which are
exercisable at $15.00 per share.
RISK FACTORS
This offering involves a high degree of risk. See "Risk Factors."
6
<PAGE> 8
SUMMARY FINANCIAL DATA
The following Summary Consolidated Financial and Operating Data of the
Company is qualified by reference to and should be read in connection with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and notes thereto which
are included elsewhere in this Prospectus.
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<CAPTION>
SIX MONTHS YEAR ENDED PRO FORMA
YEAR ENDED JUNE 30, ENDED DECEMBER 31, YEAR ENDED
------------------------- DECEMBER 31, ----------------- DECEMBER 31,
1993 1994 1995 1995 1996 1997 1997(1)
------ ------ ------- ------------ ------- ------- ------------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
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STATEMENT OF OPERATIONS DATA:
Revenue...................... $1,776 $1,618 $ 1,566 $ 2,426 $14,718 $13,452 $ 21,341
Cost of revenue.............. 533 449 824 1,779 8,265 8,661 15,277
Selling, general and
administrative............. 962 801 1,580 2,593 5,740 8,478 12,922
Research and development..... 785 1,078 1,174 1,118 1,043 556 8,633
Acquired research and
development................ 2,100
Amortization of cost in
excess of net assets
acquired................... 151 908 908 993
Reorganization expense....... 917
------ ------ ------- ------- ------- ------- --------
Total operating expense.... 2,280 2,328 3,578 7,741 16,873 18,603 37,825
------ ------ ------- ------- ------- ------- --------
Loss from operations......... (504) (710) (2,012) (5,315) (2,155) (5,151) (16,484)
Interest income (expense),
net........................ 47 22 68 (135) (2,235) (2,913) (3,750)
Gain on pension
curtailment................
Other income.................
Loss on sale-leaseback
transaction................ (335)
------ ------ ------- ------- ------- ------- --------
Loss before extraordinary
item....................... (457) (688) (1,944) (5,450) (4,390) (8,064) (20,569)
Extraordinary gain on early
extinguishment of debt..... 1,367
------ ------ ------- ------- ------- ------- --------
Net loss................... $ (457) $ (688) $(1,944) $(4,083) $(4,390) $(8,064) $(20,569)
====== ====== ======= ======= ======= ======= ========
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NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1997 1998(2)
----------- -----------
(UNAUDITED)
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STATEMENT OF OPERATIONS DATA:
Revenue...................... $10,231 $ 14,244
Cost of revenue.............. 5,909 9,588
Selling, general and
administrative............. 5,912 11,101
Research and development..... 523 8,420
Acquired research and
development................ 37,718
Amortization of cost in
excess of net assets
acquired................... 681 744
Reorganization expense.......
------- --------
Total operating expense.... 13,025 67,571
------- --------
Loss from operations......... (2,794) (53,327)
Interest income (expense),
net........................ (2,100) (3,293)
Gain on pension
curtailment................ 800
Other income................. 1,273
Loss on sale-leaseback
transaction................
------- --------
Loss before extraordinary
item....................... (4,894) (54,547)
Extraordinary gain on early
extinguishment of debt..... 785
------- --------
Net loss................... $(4,894) $(53,762)
======= ========
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<CAPTION>
SEPTEMBER 30, 1998
--------------------------------------------
PRO FORMA
ACTUAL PRO FORMA(4) AS ADJUSTED(5)
----------- ------------- --------------
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BALANCE SHEET DATA:
Cash, cash equivalents, pledged securities and restricted
cash(3)................................................. $ 11,392 $ 17,400 $ 58,760
Working capital........................................... 4,817 9,392 52,752
Total assets.............................................. 51,960 57,968 99,328
Long-term debt, non-convertible, including current
portion................................................. 35,038 37,038 30,038
Long-term debt, convertible, including current portion.... 11,035 10,802 10,802
Redeemable, convertible preferred stock................... 21,159
Accumulated deficit....................................... (74,942) (74,942) (74,942)
Total stockholders' equity (deficit)...................... (27,097) (868) 47,492
</TABLE>
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(1) Gives effect to the acquisition of PerImmune Holdings, Inc. and Subsidiary
("PerImmune Holdings") as if it had occurred on January 1, 1997. See "Pro
Forma Consolidated Financial Information."
(2) Represents the Company as consolidated with PerImmune Holdings.
(3) $6.0 million of the cash, cash equivalents, pledged securities and
restricted cash are maintained in segregated accounts from which the Company
is permitted to obtain funds upon request to the lender. Of the $6.0
million, $4.0 million is invested in pledged securities. $4.92 million of
the cash, cash equivalents, pledged securities and restricted cash is
maintained in a segregated "interest escrow account" which is restricted for
the payment of interest under certain outstanding debt obligations. See Note
14 to the Company's consolidated financial statements contained elsewhere in
this Prospectus.
(4) Gives effect to the automatic mandatory conversion of 1,488,771 shares of
outstanding preferred stock into 3,426,953 shares of common stock, and the
conversion of $232,500 of short-term notes payable which will automatically
convert into 36,433 shares of common stock at the conclusion of this
offering, and the issuance of 493,786 shares of common stock for the
exercise of warrants at a weighted-average price of $8.12 per share which
will automatically expire ten days after the date of this offering. Also
reflects $2.0 million of non-convertible debt securities which the Company
has agreed to issue pursuant to a letter of intent. See "Business -- Recent
Debt Refinancings."
(5) Adjusted to reflect the sale of 4,000,000 shares of common stock offered
hereby assuming a public offering price of $13.00 per share less estimated
underwriting discounts and commissions and other expenses of this offering,
resulting in net proceeds of $48,360,000, and the $7,000,000 repayment of
various indebtedness that must be redeemed upon completion of this offering.
7
<PAGE> 9
RISK FACTORS
This Prospectus contains forward-looking statements that involve risks and
uncertainties. Actual results could differ materially from those discussed in
the forward-looking statements as a result of certain factors, including those
set forth below and elsewhere in this Prospectus. The following risk factors
should be considered carefully in addition to the other information in this
Prospectus before purchasing the shares of common stock offered hereby.
DEPENDENCE ON ONCOVAX(CL)
The Company's future growth and profitability will depend on its ability to
introduce and market OncoVAX(CL) and establish OncoVAX Centers. There can be no
assurance that the Company will be able to obtain necessary regulatory approvals
for OncoVAX(CL) in a timely manner, if at all. The failure of the Company to
introduce and market OncoVAX(CL) and establish OncoVAX Centers in a timely
manner would have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company believes that the results of the Amsterdam, ECOG and Hoover
trials of OncoVAX(CL) will provide sufficient evidence to support the approval
by the FDA of the Company's BLA for OncoVAX(CL) being prepared for submission.
However, based upon a summary data package submitted to the FDA by the Company,
the FDA recently raised the question of whether these trials met the criteria
for Phase III clinical trials or should rather be considered as an ongoing
series of Phase II clinical trials. The Company believes that, if this issue
remains current, the BLA will clearly demonstrate that both the ECOG and
Amsterdam Trials meet all the criteria for Phase III clinical trials. If the FDA
does not consider the ECOG and Hoover trials as relevant or supporting to the
efficacy of OncoVAX(CL), there can be no assurance that the FDA will consider
the Amsterdam trial alone as a sufficient basis for approval. Given the May 1998
FDA Guidance Document entitled "Providing Clinical Evidence of Effectiveness of
Human Drug and Biological Products," which discusses the use and limitations of
a single clinical trial to form the basis for approval of a BLA, and the views
the FDA has expressed on this subject with respect to OncoVAX(CL) combined with
chemotherapy for the treatment of Stage III colon cancer discussed below, there
can be no assurance that the FDA will not require additional clinical trials of
OncoVAX(CL) prior to FDA acceptance of the Company's BLA for filing or,
ultimately, for approval. Any such requirement to conduct additional clinical
trials could result in a substantial delay or failure to achieve regulatory
approval for OncoVAX(CL). The FDA has raised questions regarding the manufacture
of OncoVAX(CL) in accordance with the FDA's requirements for, among other
things, sterility that are relevant for both the Phase III clinical trial on
OncoVAX(CL) combined with chemotherapy and the BLA for OncoVAX(CL) for Stage II
colon cancer. However, there can be no assurance that the Company's submissions
on these issues will be sufficient to convince the FDA to accept the BLA for
filing and approval. There can be no assurance that the Company will obtain FDA
approval for OncoVAX(CL) on a timely basis.
The Company may elect to seek approval of OncoVAX(CL) under the accelerated
approval provisions of the Food and Drug Administration Modernization Act of
1997 (the "FDA Modernization Act"). The accelerated approval regulations apply
to products used in the treatment of serious or life-threatening illnesses that
appear to provide meaningful therapeutic benefits over existing treatments.
These requirements permit approval of such products based on the product's
effect on a clinical endpoint or surrogate endpoint that is likely to predict
clinical benefit. When a product is approved under the accelerated approval
regulations, the sponsor may be required to conduct additional adequate and
well-controlled studies to verify that the effect on the surrogate endpoint
correlates with improved clinical outcome or to otherwise verify the clinical
benefit. In the event such postmarketing studies do not verify the drug's
anticipated clinical benefit, or if there is other evidence that the drug
product is not shown to be safe and effective, expedited withdrawal procedures
permit the FDA, after a hearing, to remove a product from the market.
Significant uncertainty exists as to the extent to which these accelerated
approval regulations will result in accelerated review and approval.
Furthermore, the FDA has considerable discretion to determine eligibility for
accelerated review and approval. Accordingly, the FDA could employ such
discretion to deny eligibility of OncoVAX(CL) as a candidate for accelerated
review or to require additional clinical trials or other information before
approving OncoVAX(CL). A determination that OncoVAX(CL) is not eligible for
accelerated review and delays and additional expenses associated with generating
a response to any such request for additional trials could have a material
adverse effect on the
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Company's business, financial condition and results of operations. See
"-- Government Regulation: No Assurance of Regulatory Approvals" and
"Business -- Government Regulation."
Even if OncoVAX(CL) is approved for marketing by the FDA and other
regulatory authorities, there can be no assurance that it will be commercially
successful or that the Company will be successful in establishing and operating
OncoVAX Centers and manufacturing OncoVAX(CL) on a commercial scale at a cost
that will enable the Company to realize a profit. If OncoVAX(CL) is approved,
its commercialization through the Company's OncoVAX Centers would be
substantially different from the manner in which most anti-cancer treatments,
including chemotherapeutics, are now manufactured and distributed. Furthermore,
the OncoVAX centers located in the United States will be considered to be
manufacturing facilities by the FDA and must comply with all applicable
requirements. See "-- Government Regulation: No Assurance of Regulatory
Approvals." Despite the results of the clinical trials of OncoVAX(CL) and the
absence of any therapeutic products currently approved by the FDA for
post-surgical treatment of Stage II colon cancer, there can be no assurance that
oncologists and other physicians will refer patients for treatment with
OncoVAX(CL). Market acceptance also could be affected by the availability of
third-party reimbursement. Failure of OncoVAX(CL) to achieve significant market
acceptance could have a material adverse effect on the Company's business,
financial condition and results of operations. See "-- Uncertainty Related to
Health Care Reform and Third-Party Reimbursement" and "Business -- Competition."
On May 26, July 24, September 16, and November 27, 1998, the FDA's Center
for Biologics Evaluation and Research ("CBER") advised the Company in writing
that its proposed Phase III clinical trial relating to the use of OncoVAX(CL) in
combination with chemotherapy for the treatment of Stage III colon cancer had
been placed on clinical hold and, therefore, may not begin until certain
manufacturing information is provided to CBER. The Company believes it has fully
responded to CBER's May 26, July 24 and September 16, 1998 letters. As a result
of these letters, a number of concerns have been resolved and the Company is
continuing to negotiate the outstanding issues. The Company believes that upon
evaluation of the information the Company has provided and will provide to the
FDA, CBER will remove the clinical hold and allow the clinical trial to begin.
CBER also asked questions regarding the study to determine whether it would
constitute a "pivotal" Phase III trial sufficient to support approval. In
addition, the FDA questioned whether a single pivotal study would be sufficient
to approve a product for this indication and requested further information on
this issue. The Company intends to provide all requested information. There can
be no assurance at this time that the FDA will allow the study to commence or
will consider this clinical trial to be sufficient to support approval. The
Company met with FDA officials on September 22, 1998, to discuss these issues.
The FDA reiterated that information regarding manufacturing of the product must
be submitted to and found acceptable by the FDA before this Phase III clinical
trial may begin. Without committing to remove the clinical hold, the FDA
officials expressed the view that, with a fully responsive submission, these
issues may be favorably resolved. These issues must also be resolved with
respect to the Stage II product before the FDA will accept the BLA for filing.
On October 17, 1998, the Company responded to FDA concerns regarding the
manufacturing issues. There was an FDA public meeting on December 10, 1998 to
review a variety of issues regarding cancer vaccines, including the development
of potency assays, which the Company's Chairman attended as a panelist in the
Autologous and Allogeneic Tumor Cells as Tumor Vaccines Session. The Company
plans to file additional information to respond to the FDA's concerns. The
Company believes that its submissions on manufacturing and potency assays will
be sufficient to allow the FDA to permit the clinical trial in 1999. However,
there can be no assurance that the Company's submissions on these issues will be
sufficient to convince the FDA to allow the Company's Phase III study of
OncoVAX(CL) to treat Stage III colon cancer to commence or to accept for filing
the Company's BLA for OncoVAX(CL) for treatment of Stage II colon cancer.
HISTORY OF OPERATING LOSSES; ANTICIPATED FUTURE LOSSES
The Company has experienced significant losses since inception. The
Company's net losses were $20.6 million for the year ended December 31, 1997 (on
a pro-forma basis after giving effect to the acquisition of PerImmune Holdings
as if it had occurred on January 1, 1997) and $4.4 million, $8.1 million and
$53.8 million for the years ended December 31, 1996, 1997 and the nine months
ended September 30, 1998,
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respectively. The loss for the nine months ended September 30, 1998 includes a
one-time expense of $37.7 million related to the acquired in-process research
and development in connection with the Company's acquisition of PerImmune
Holdings on January 2, 1998. As of September 30, 1998, the Company's accumulated
deficit was approximately $74.9 million. The Company expects to incur
significant additional operating losses primarily in connection with the
establishment and operation of its OncoVAX Centers, ongoing and expanded
research and development and expanded and later stage clinical trials. The
Company expects that losses will fluctuate from quarter to quarter and that such
fluctuations may be substantial. Most of the Company's product candidates are in
development in preclinical studies and clinical trials and have not generated
product revenues. To achieve and sustain profitable operations, the Company,
alone or with others, must develop successfully, obtain regulatory approval for,
manufacture, introduce, market and sell its products. The time frame necessary
to achieve market success is long and uncertain. There can be no assurance that
the Company will ever generate sufficient product revenues to become profitable
or to sustain profitability. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Pro Forma Consolidated
Financial Information."
SUBSTANTIAL LEVERAGE
Following the consummation of the offering of common stock pursuant to this
Prospectus, the Company will have indebtedness that is substantial in relation
to its stockholders' equity, as well as interest and debt service requirements
that are significant compared to its income and cash flow from operations. Such
indebtedness is secured by substantially all of the Company's assets. At
September 30, 1998, the Company's total indebtedness was approximately $46.1
million.
The degree to which the Company is leveraged could have important
consequences to holders of the common stock, including the following: (i) the
Company's ability to obtain additional financing in the future for working
capital, capital expenditures, acquisitions or general corporate purposes may be
impaired, (ii) a substantial portion of the Company's cash flow from operations
must be dedicated to the payment of interest on its debt and its other
indebtedness, thereby reducing funds available to the Company for other
purposes, (iii) the agreements governing the Company's long-term indebtedness
contain certain restrictive financial and operating covenants, (iv) certain of
the Company's long-term indebtedness is secured by substantially all the assets
of the Company and (v) the Company's substantial degree of leverage may limit
its flexibility to adjust to changing market conditions, reduce its ability to
withstand competitive pressures and make it more vulnerable to a downturn in
general economic conditions or its business. See "Business -- Recent Debt
Refinancings."
The Company's ability to pay interest on its long-term indebtedness and
satisfy its other obligations will depend on its future operating performance,
which will be affected by prevailing economic conditions and financial, business
and other factors, many of which are beyond its control. Although the Company
believes it will be able to pay its obligations as they come due, there can be
no assurance that the Company will generate earnings in any future period
sufficient to cover its fixed charges. In the absence of adequate operating
results and cash flows, the Company may be required to adopt alternative
strategies that include reducing or delaying capital expenditures, disposing of
material assets or operations, refinancing its indebtedness or seeking
additional equity capital to meet its debt service obligations. Certain of the
Company's long-term debt instruments contain covenants that restrict the
Company's ability to take certain of the foregoing actions, including selling
assets and using proceeds therefrom. There can be no assurance as to the timing
of such actions, the ability of the Company to consummate such actions under its
existing financial agreements or the proceeds that the Company could realize
therefrom, and there can be no assurance that any such refinancing would be
feasible at the time or that such proceeds would be adequate to meet the
obligations then due.
DEVELOPMENT, INTRODUCTION AND MARKETING OF NEW PRODUCTS
The Company's future growth and profitability will depend, in part, on its
ability to develop, introduce and market new products based on its proprietary
technologies. Many of the Company's products are currently under development,
either in preclinical testing or clinical trials. Other products are planned for
future development. The time period required for such development is extensive
and highly uncertain and such
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development requires substantial expense. The new products developed by the
Company may prove to be ineffective or unreliable. They may be difficult to
manufacture in a cost-effective manner, may fail to receive necessary regulatory
clearances, may not achieve market acceptance or may encounter other
unanticipated difficulties. The failure of the Company to develop, introduce and
market new products in a timely manner, if at all, could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business."
UNCERTAINTIES ASSOCIATED WITH CLINICAL TRIALS
The Company has conducted and plans to continue to undertake extensive and
costly clinical trials to assess the safety and efficacy of its product
candidates. Such trials are often subject to setbacks and delays. The rate of
completion of the Company's clinical trials is dependent upon, among other
factors, the rate of patient enrollment. Patient enrollment is a function of
many factors, including the nature of the Company's clinical trial protocols,
existence of competing protocols, size of the patient population, proximity of
patients to clinical sites and eligibility criteria for the study. Delays in
patient enrollment will result in increased expenses and delays, which could
have a material adverse effect on the Company's business, results of operations
and financial condition. The Company cannot assure that patients enrolled in the
Company's clinical trials will respond to the Company's product candidates.
Failure to comply with FDA regulations applicable to clinical trials could
result in delay, suspension or cancellation of such trials (e.g., clinical hold)
and/or refusal by the FDA to accept the results of such trials. In addition, the
FDA may suspend clinical trials at any time if it concludes that the
participants in such trials are being exposed to unacceptable risks. Thus, there
can be no assurance that any clinical trials will be completed successfully
within any specific time period, if at all, with respect to any of the Company's
product candidates. Furthermore, there can be no assurance that human clinical
trials will show any current or future product candidate to be safe and
effective or that data derived therefrom will be suitable for submission to the
FDA or will support the Company's submission of a BLA, Product License
Application ("PLA") or New Drug Application ("NDA"). See "-- Dependence on
OncoVAX(CL)" for a description of certain issues relating to the clinical trials
of OncoVAX(CL), "Business -- Diagnostic Products -- In Vivo Diagnostics" for a
description of certain issues relating to the Company's BLA for HumaSPECT and
"Business -- Government Regulation."
GOVERNMENT REGULATION: NO ASSURANCE OF REGULATORY APPROVALS
All new drugs, biologics and diagnostic products, including the Company's
products under development, are subject to extensive and rigorous government
regulation in the United States and elsewhere. The requirements imposed by
regulators of pharmaceuticals and medical devices vary from country to country.
In the United States, regulation is administered by the federal government,
principally the FDA under the Federal Food, Drug and Cosmetic Act (the "FDC
Act") and other laws including, in the case of biologics, the Public Health
Service Act (the "PHS Act"), and by state and local governments. Such
regulations govern, among other things, the development, testing, manufacture,
labeling, storage, premarket approval, advertising, promotion, sales and
distribution of such products and post-approval monitoring of safety and
efficacy.
In the European Union, the European Medicines Evaluation Agency ("EMEA") is
responsible for administering a centralized assessment procedure for European
Union-wide authorizations valid in Britain, France, Germany, Italy, Spain and
Greece ("Member States") for medicinal products of significant therapeutic
interest or comprising a significant innovation.
In addition, regulatory approval of prices is required in most countries
other than the United States. For example, regulators in certain European
countries condition their approval of a pharmaceutical product on the agreement
of the seller not to sell the product for more than a certain price in their
respective countries. In some cases, the price established in any of these
countries may serve as a benchmark in the other countries. As such, the price
approved in connection with the first approval obtained in any of these European
countries may serve as the maximum price that may be approved in the other
European countries. Also, a price approved in one of these European countries
that is lower than the price previously approved in the other European countries
may require a reduction in the prices in those other European countries. In such
an event, there can
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be no assurance that the resulting prices would be sufficient to generate an
acceptable return on the Company's investment in its products.
The regulatory process, which includes preclinical studies and clinical
trials of each potential product, is lengthy, expensive and uncertain. Prior to
commercial sale in the United States, most new drugs, biologics and diagnostic
products, including the Company's products under development, must be approved
by the FDA. Securing FDA marketing approvals often requires the submission of
extensive preclinical and clinical data and supporting information to the FDA.
Product approvals, if granted, can be withdrawn for failure to comply with
regulatory requirements or upon the occurrence of unforeseen problems following
initial marketing. Moreover, regulatory approvals for products such as new
drugs, biologics and diagnostic products, even if granted, may require that the
labeling for such products include significant limitations on the uses for which
such products may be marketed. There can be no assurance that the Company will
be able to obtain necessary regulatory approvals in a timely manner, if at all,
for any of its product candidates, and delays in receipt or failures to receive
such approvals or failures to comply with existing or future regulatory
requirements could have a material adverse effect on the Company's business,
financial condition and results of operations.
Failure to comply with applicable FDA and other regulatory requirements can
result in sanctions being imposed on the Company or the manufacturers of its
products, including warning letters, fines, product recalls or seizures,
injunctions, refusals to permit products to be imported into or exported out of
the United States, refusals of the FDA to grant premarket approval of drugs,
biologics or devices, refusals of the FDA to allow the Company to enter into
government supply contracts, withdrawals of previously approved marketing
applications and criminal prosecutions.
The pharmaceutical legislation of the European Union requires any person
seeking to market a medicinal product for human use to obtain approval of a
Marketing Authorization Application ("MAA"). While procedures for approval of
MAAs have been harmonized within the European Union through directives for
implementation into the domestic law of each Member State and by regulations
having direct effect, the specific approvals and the time required for approval
varies from country to country and may, in some instances, involve additional
testing. Drugs which fall within the definition of "high technology medicines"
under the Annex to Council Regulation 2309/93 undergo the centralized approval
system under which the Committee for Proprietary Medicinal Products ("CPMP") is
obliged to give an opinion as to whether a marketing authorization has been
granted within 210 days (although the "clock" may be stopped if further
information is required).
Manufacturers of drugs, biologics and devices also are required to comply
with the FDA current Good Manufacturing Practice ("cGMP") regulations or similar
foreign regulations, which include requirements relating to quality control and
quality assurance as well as the corresponding maintenance of records and
documentation. The OncoVAX centers located in the United States will be
considered to be manufacturing facilities by the FDA and will be regulated
accordingly. Manufacturing facilities are subject to inspection by the FDA and
other government regulators, including unannounced inspection in their own and
other jurisdictions. Certain material manufacturing changes to approved drugs,
biologics and diagnostic products also are subject to FDA and foreign regulatory
review and approval. There can be no assurance that the Company or its suppliers
will be able to comply with the applicable cGMP regulations and other FDA or
other post-approval regulatory requirements such as adverse event reporting.
Failure to comply with the post-approval regulatory requirements can lead to
product withdrawal and/or other regulatory action by the FDA. Such failure could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business -- Governmental Regulation."
In addition to regulation by the FDA, the Nuclear Regulatory Commission
(the "NRC") and some individual states (referred to as "Agreement States") also
regulate companies that possess radioactive material and those that manufacture,
prepare or transfer radioactive drugs for commercial distribution. Agreement
States typically regulate in a manner similar to the NRC. The Company's
incorporation of radioactive materials in its labeled products, HumaSPECT,
HumaRAD(16.88) and HumaRAD(88BV59), will subject it to these NRC requirements.
To comply, the Company must apply for and maintain appropriate licenses and
comply with reporting, recordkeeping and other regulatory requirements. The
Company's failure to comply
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with the regulatory requirements could subject it to enforcement actions
including civil penalties and orders to modify, suspend, or revoke its licenses.
With a suspended or revoked license, the Company would need to cease and desist
from possessing the radioactive material necessary for producing its products
and from distributing its products.
GOVERNMENT REGULATION; FRAUD AND ABUSE, FACILITY LICENSURE AND CORPORATE
PRACTICE
The Company has established, or may establish in the future, various
financial relationships with potential purchasers of the Company's products and
with sources of referral, including hospitals, clinical laboratories and
physicians. In addition, the Company provides coding advice to customers and,
operating through its OncoVAX Centers, expects to seek reimbursement for its
products and services from patients and/or third-party payers (including
Medicare, Medicaid and private health insurers). Consequently, the Company is
subject to various federal and state laws pertaining to health care fraud and
abuse, including anti-kickback laws, physician self-referral laws and false
claims laws. Anti-kickback laws make it illegal to solicit, offer, receive, or
pay any remuneration in exchange for, or to induce, the referral of business.
Physician self-referral laws restrict the ability of a physician to refer
patients to entities with which the physician has a financial relationship.
False claims laws prohibit anyone from knowingly and willfully presenting, or
causing to be presented, claims for payment that contain false or fraudulent
information. Violations of these laws are punishable by criminal and/or civil
sanctions and may render the Company ineligible for reimbursement for its
products and services. Although the Company intends to operate in compliance
with these laws, because of the broad scope of some of these laws, there can be
no assurance that one or more of the Company's practices will not be challenged
by governmental authorities under certain of these laws, that the Company will
not be required to alter its practices as a result or that the occurrence of one
or more of these events will not have a material adverse effect on the Company's
business. See "Business -- Government Regulation."
The Company's OncoVAX Centers will be subject to state laws regulating the
licensure and operation of healthcare facilities and clinics where patients
receive treatment. The structure and operation of the OncoVAX Centers and each
OncoVAX Center's relationship to supervising physicians and other healthcare
professionals also must comply with laws existing in some states that prohibit
the corporate practice of medicine and other healthcare professions. These laws
vary from state to state and are enforced by the courts and regulatory
authorities with broad discretion. The Company intends to structure and operate
its OncoVAX Centers in compliance with these laws, but a failure to meet these
requirements could have a material adverse effect on the Company's ability to
market OncoVAX(CL) and this, in turn, could have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Business -- Government Regulation."
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING
The Company's operations to date have consumed substantial and increasing
amounts of cash. The Company's negative cash flow from operations is expected to
continue and to accelerate in the foreseeable future. The development of the
Company's technology and potential products, including the establishment of
OncoVAX Centers in the United States and Europe, will continue to require a
commitment of substantial funds. The Company expects that its existing capital
resources, including the net proceeds of the Offering and interest thereon, will
be adequate to satisfy the requirements of its current and planned operations
until the end of 1999. However, the rate at which the Company expends its
resources is variable, may be accelerated and will depend on many factors,
including the scope and results of preclinical studies and clinical trials,
continued progress of the Company's research and development of product
candidates, the cost, timing and outcome of regulatory approvals, the expenses
of establishing a sales and marketing force, the cost of establishing and
operating OncoVAX Centers, the cost of manufacturing, the cost involved in
preparing, filing, prosecuting, maintaining, defending and enforcing patent
claims, the acquisition of technology licenses, the status of competitive
products and the availability of other financing.
The Company may need to raise substantial additional capital to fund its
operations and may seek such additional funding through public or private equity
or debt financings, as well as through collaborative arrangements. There can be
no assurance that such additional funding will be available on acceptable terms,
if
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at all. If additional funds are raised by issuing equity securities, substantial
equity dilution to stockholders may result. If adequate funds are not available,
the Company may be required to delay, reduce the scope of, or eliminate one or
more of its research and development programs, curtail its operations or obtain
funds through arrangements with collaborative partners or others that may
require the Company to relinquish rights to certain of its technologies, product
candidates or products that the Company would otherwise seek to develop or
commercialize on its own. See "Pro Forma Consolidated Financial Information" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
DEPENDENCE UPON PROPRIETARY TECHNOLOGY; UNCERTAINTY OF INTELLECTUAL PROPERTY
RIGHTS
Extensive research has been conducted in the cancer vaccine and monoclonal
antibody fields by pharmaceutical and biotechnology companies and other
organizations and a substantial number of patents in these fields have been
issued to other pharmaceutical and biotechnology companies. In addition,
competitors may have applications for additional patents pending and may obtain
additional patents and proprietary rights related to products or processes
competitive with or similar to those of the Company. Patent applications are
maintained in secrecy for a period after filing and, in the United States,
patent applications are confidential until the patent is issued. Publication of
discoveries in the scientific or patent literature tends to lag behind actual
discoveries and the filing of related patent applications. The Company may not
be aware of all of the patents potentially adverse to the Company's interests
that may have been issued to other companies, research or academic institutions,
or others. No assurance can be given that such patents do not exist, have not
been filed, or could not be filed or issued, which contain claims relating to
the Company's technology, products or processes. To date, no consistent policy
has emerged regarding the breadth of claims allowable in pharmaceutical and
biotechnology patents.
The Company is aware of various patents that have been issued to others
that pertain to a portion of the Company's prospective business. The Company is
aware, in particular, of the existence of at least one United States patent
owned by another party that may interfere with the manufacture and marketing of
HumaSPECT in the United States. There can be no assurance that other patents do
not exist in the United States or in other countries or that patents will not be
issued to third parties that contain preclusive or conflicting claims with
respect to OncoVAX(CL) or any of the Company's other product candidates or
programs. Commercialization of cancer vaccines and monoclonal antibody-based
products may require licensing and/or cross-licensing of one or more patents
with other organizations in the field. There can be no assurance that the
licenses that might be required for the Company's processes or products would be
available on commercially acceptable terms, if at all.
The Company's breach of an existing license or failure to obtain a license
to technology required to commercialize its product candidates may have a
material adverse effect on the Company's business, financial condition and
results of operations. Litigation, which could result in substantial costs to
the Company, may also be necessary to enforce any patents issued to the Company
or to determine the scope and validity of third-party proprietary rights. If
competitors of the Company prepare and file patent applications in the United
States that claim technology also claimed by the Company, the Company may have
to participate in interference proceedings declared by the United States Patent
and Trademark Office to determine priority of invention, which could result in
substantial cost to the Company, even if the eventual outcome is favorable to
the Company. An adverse outcome could subject the Company to significant
liabilities to third parties and require the Company to license disputed rights
from third parties or to cease using such technology.
Patents issued and patent applications filed internationally relating to
biologics are numerous and there can be no assurance that current and potential
competitors and other third parties have not filed or in the future will not
file applications for, or have not received or in the future will not receive,
patents or obtain additional proprietary rights relating to products or
processes used or proposed to be used by the Company. Many non-United States
jurisdictions allow oppositions by third parties to granted patents and/or
issued patents. The Company may have to participate in opposition proceedings in
non-United States jurisdictions to prevent a third party from obtaining a patent
that may be adverse to the Company's interests. Also, the Company may have to
defend against a third party's opposition to a patent granted and/or issued to
the Company. There can be no assurance that the Company will be successful in an
opposition proceeding, and
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participation in such a proceeding could result in substantial cost to the
Company whether or not the eventual outcome is favorable to the Company.
Moreover, there is certain subject matter which is patentable in the United
States and not generally patentable outside of the United States and this may
limit the protection the Company can obtain on some of its inventions outside of
the United States. For example, methods of treating humans are not patentable in
many countries outside of the United States. These and/or other issues may
prevent the Company from obtaining patent protection outside of the United
States, which could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Patents and
Other Intellectual Property."
The Company also relies on trade secrets and trademarks to protect its
technology, especially where patent protection is not believed to be appropriate
or obtainable. The Company protects its proprietary technology and processes, in
part, by confidentiality agreements with its key employees, consultants, medical
advisory board members, collaborators and contractors. There can be no assurance
that these agreements will not be breached, that the Company would have adequate
remedies for any breach, or that the Company's trade secrets and trademarks or
those of its collaborators or contractors will not otherwise become known or be
discovered independently by competitors. All of the Company's material patents,
including those which relate to the Company's OncoVAX(CL), HumaSPECT and the
Company's HumaRAD products, have been pledged to secure certain of the Company's
existing debt obligations. See "Business -- Recent Debt Refinancings."
HIGHLY COMPETITIVE INDUSTRY; RISK OF TECHNOLOGICAL OBSOLESCENCE
The pharmaceutical and biotechnology industries are intensely competitive.
Many of the product candidates being developed by the Company, if approved,
would compete with existing drugs, therapies and diagnostic products and with
new drugs, therapies and diagnostic products under development, including, in
the case of cancer treatments, angiogenesis inhibitors, gene therapy, advanced
hormonal replacement therapy and new chemotherapeutics. There are many
pharmaceutical companies, diagnostic companies, biotechnology companies, public
and private universities and research organizations actively engaged in research
and development of products for the treatment of people with cancer. Many of
these organizations have financial, technical, manufacturing and marketing
resources greater than those of the Company. Several of them may have developed
or are developing therapies or diagnostic products that could be used for
treatment or diagnosis of the same diseases targeted by the Company. If a
competing company were to develop or acquire rights to a safer or more
efficacious treatment of or diagnostic products for the same diseases targeted
by the Company, or one which offers significantly lower costs of treatment or
diagnosis, the Company's business, financial condition and results of operations
could be materially adversely affected.
The Company believes that its product development programs will be subject
to significant competition from companies utilizing alternative technologies as
well as to increasing competition from companies that develop and apply
technologies similar to the Company's technologies. Other companies may succeed
in developing products earlier than the Company, obtaining approvals for such
products from the FDA more rapidly than the Company or developing products that
are safer or more effective than those under development or proposed to be
developed by the Company. There can be no assurance that research and
development by others will not render the Company's technology or product
candidates obsolete or non-competitive or result in treatments superior to any
therapy developed by the Company, or that any therapy developed by the Company
will be preferred to any existing or newly developed technologies. See
"Business -- Competition."
DEPENDENCE ON MANAGEMENT AND OTHER KEY PERSONNEL
The Company is dependent upon a limited number of key management and
technical personnel, including Michael G. Hanna, Ph.D., the Chairman of the
Board and Chief Scientific Officer of the Company, and Simon R. McKenzie, the
President and Chief Executive Officer of the Company. The loss of the services
of one or more of such key employees could have a material adverse effect on the
Company's business, financial condition and results of operations. If Mr.
McKenzie should cease to be the principal executive officer of the Company in
charge of the Company's management and policies for a period of 30 days or more
and the holders of August 1998 Notes constituting 70% of the total amount due
under all such notes have not
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approved a successor to Mr. McKenzie within 180 days after the cessation of his
full time service to the Company, the Company will be required, at the request
of the noteholders, to prepay certain of the Company's material debt obligations
at a price equal to 101% of the principal amount so prepaid, plus accrued
interest to the date of prepayment. See "Business -- Recent Debt Refinancings."
In addition, the Company's success will be dependent upon its ability to attract
and retain additional highly qualified personnel. The Company faces intense
competition in its recruiting activities, and there can be no assurance that the
Company will be able to attract and/or retain qualified personnel. See
"Management."
EXPOSURE TO PRODUCT LIABILITY
The manufacture and sale of human therapeutic and diagnostic products
involve an inherent risk of product liability claims and associated adverse
publicity. The Company has only limited commercial product liability insurance.
There can be no assurance that the Company will be able to maintain existing
insurance or obtain additional product liability insurance on acceptable terms
or with adequate coverage against potential liabilities. Such insurance is
expensive, difficult to obtain and may not be available in the future on
acceptable terms, if at all. An inability to obtain sufficient insurance
coverage on reasonable terms or to otherwise protect against potential product
liability claims brought against the Company in excess of its insurance
coverage, if any, or a product recall could have a material adverse effect upon
the Company's business, financial condition and results of operations.
UNCERTAINTY RELATED TO HEALTH CARE REFORM AND THIRD-PARTY REIMBURSEMENT
Political, economic and regulatory influences are subjecting the health
care industry in the United States to fundamental change. Initiatives to reform
health care financing continue to be dominated by cost-containment efforts. The
Company anticipates that Congress, state legislatures and the private sector
will continue to review and assess controls on health care spending through
limitations on the growth of private health insurance premiums and Medicare and
Medicaid spending, the increased use of capitated managed care contractors by
government payers, price controls on pharmaceuticals and other fundamental
changes to the health care delivery system. Any such proposed or actual changes
could affect the Company's ultimate profitability or could cause the Company to
limit or eliminate spending on development projects. In anticipation of the
impending demographic shifts brought about by the "baby boom" generation,
legislative debate concerning potential reform to Medicare, the government's
health financing program for persons over age 65, is expected to continue, and
market forces are expected to drive reductions in health care costs. The Company
cannot predict what impact the adoption of any federal or state health care
reform measures or future private sector reforms may have on its business.
In the United States and foreign markets, sales of the Company's proposed
products will depend in part upon the availability of reimbursement from
third-party payors, such as government health administration authorities,
managed care providers, private health insurers and other organizations. The
Company has very limited experience obtaining coverage and reimbursement for its
products in the United States. Third-party payors are increasingly challenging
the price and cost effectiveness of medical products and services. Significant
uncertainty exists as to the reimbursement status of newly approved health care
products. OncoVAX(CL), as potentially the first vaccine to treat colon cancer
approved for marketing by government regulators, faces particular uncertainties
due to the absence of a comparable, approved therapy to serve as a model for
pricing and reimbursement decisions.
As an autologous product that will not generally be sold through
traditional commercial channels, OncoVAX(CL) may present unique coverage and
payment issues for Medicare. Because the Company's plans concerning the
production, distribution and administration of OncoVAX(CL) do not precisely fit
the models established for drug coverage and payment by Medicare, the Company
cannot predict whether Medicare will cover and pay for the biologic under its
established rules for drugs and biologics. Failure to obtain coverage and
adequate reimbursement could have a material adverse effect on the Company's
ability to market OncoVAX(CL). With respect to private payors, there can be no
assurance that the Company's product candidates will be considered cost
effective or that adequate third-party reimbursement will be available to enable
the Company to maintain price levels sufficient to realize an appropriate return
on its investment in
16
<PAGE> 18
product development. If adequate coverage and reimbursement rates are not
provided by the government and third-party payors for the Company's products,
the market acceptance of these products could be adversely affected, which could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business -- Reimbursement."
RADIOACTIVE AND OTHER HAZARDOUS MATERIALS
The manufacturing and administration of the Company's HumaRAD products and
HumaSPECT require the handling, use and disposal of (90)Yttrium and Technetium
Tc 99m, respectively, each a radioactive isotope. These activities must comply
with various state and federal regulations. Violations of these regulations
could delay significantly completion of clinical trials and commercialization of
these products.
The Company expects to continue using hazardous chemicals and radioactive
compounds in its ongoing research activities. Although the Company believes that
safety procedures for handling and disposing of such materials will comply with
the standards prescribed by state and federal regulations, the risk of
accidental contamination or injury from these materials cannot be completely
eliminated. The Company could be held liable for any damages that result from
such an accident, contamination or injury from the handling and disposal of
these materials, as well as for unexpected remedial costs and penalties that may
result from any violation of applicable regulations, which could result in a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, the Company may incur substantial costs to
comply with environmental regulations. See "Business -- Radioactive and Other
Hazardous Materials."
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS AND FOREIGN CURRENCY FLUCTUATIONS
The Company's international operations are anticipated to comprise a
substantial percentage of the Company's net revenue in the future and,
accordingly, the Company will be subject to risks associated with international
operations. Such risks include managing a multinational organization,
fluctuations in currency exchange rates, the burden of complying with
international laws and other regulatory and product certification requirements
and changes in such laws and requirements, tariffs and other trade barriers,
import and export controls, restrictions on the repatriation of funds,
inflationary conditions, staffing, employment and severance issues, political
and economic instability and longer payment cycles in certain countries. The
inability to effectively manage these and other risks could adversely affect the
Company's business, financial condition and results of operations.
TAX LOSS CARRYFORWARDS
The Company's net operating loss carryforwards ("NOLs") expire through the
year 2012. Under Section 382 of the Internal Revenue Code of 1986, as amended,
utilization of prior NOLs is limited after an ownership change, as defined in
Section 382, to an annual amount equal to the value of the corporation's
outstanding stock immediately before the date of the ownership change multiplied
by the federal long-term exempt tax rate. Each of the Company and PerImmune
Holdings has experienced an ownership change, and is limited in its use of its
prior NOLs. In the event the Company or PerImmune Holdings achieves profitable
operations, these limitations would have the effect of increasing the Company's
consolidated tax liability and reducing net income and available cash reserves.
See Note 8 to the consolidated financial statements of the Company and Note 13
to the consolidated financial statements of PerImmune Holdings.
CONTROL BY OFFICERS, DIRECTORS AND PRINCIPAL STOCKHOLDERS
Following consummation of this offering, directors, executive officers and
principal stockholders of the Company will beneficially own approximately 26.25%
of the outstanding shares of the Company's common stock. Accordingly, these
stockholders, individually and as a group, may be able to control the Company
and direct its affairs and business, including any determination with respect to
a change in control of the Company, future issuances of common stock or other
securities by the Company, declaration of dividends on the common stock and the
election of directors. See "Principal and Selling Stockholders."
17
<PAGE> 19
FUTURE MERGERS AND ACQUISITIONS
The Company may acquire complementary businesses, products or technologies
in the future although the Company has no pending agreements or commitments. No
assurance can be given that the Company will not incur problems in integrating
any future acquisition and there can be no assurance that any future acquisition
will result in the Company's becoming profitable or, if the Company achieves
profitability, that such profitability will be sustainable. Furthermore, there
can be no assurance that the Company will realize value from any such
acquisition which equals or exceeds the consideration paid. Any such problem
could have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, future acquisitions by the
Company may result in dilutive issuances of equity securities, the incurrence of
additional debt, large one-time write-offs and the creation of goodwill or other
intangible assets that could result in amortization expense. These factors could
have a material adverse effect on the Company's business, financial condition
and results of operations.
ABSENCE OF PRIOR TRADING MARKET; POTENTIAL VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the common
stock and there is no assurance that an active market will develop or be
sustained after this offering. The initial public offering price will be
determined through negotiations among the Company and the Underwriters and may
bear no relationship to the price at which the common stock will trade upon
consummation of this offering. The securities markets have from time to time
experienced significant price and volume fluctuations that are unrelated to the
operating performance of particular companies. The market prices of the common
stock of many publicly held biotechnology and pharmaceutical companies have in
the past been, and can in the future be expected to be, especially volatile.
Announcements of technological innovations or new products by the Company or its
competitors, release of reports by securities analysts, developments or disputes
concerning patents or proprietary rights, regulatory developments, changes in
regulatory or medical reimbursement policies, economic and other external
factors, as well as period-to-period fluctuations in the Company's financial
results, may have a significant and adverse impact on the market price of the
common stock. See "Underwriting."
POTENTIAL ADVERSE IMPACT OF SHARES ELIGIBLE FOR FUTURE SALE
All of the shares of common stock to be sold in this offering will be
freely tradable, except for shares purchased by or issued to any "affiliate" of
the Company (within the meaning of the Securities Act). The remaining shares of
common stock, representing approximately 74.09% of the outstanding common stock
upon consummation of this offering, will be deemed "restricted securities" under
the Securities Act, and, as such, will be subject to restrictions on the timing,
manner and volume of sales of such shares. Certain holders of those shares will
have the right to request the registration of their shares under the Securities
Act following the completion of a period of one year, in the case of directors
and executive officers, and a period of 180 days, in the case of certain other
stockholders, after the date of this Prospectus, which, upon the effectiveness
of such registration, would permit the free transferability of such shares. In
addition, the Company intends to file a registration statement on Form S-8 for
the shares held pursuant to its stock option plans, which may make these shares
freely tradeable. See "Shares Eligible for Future Sale."
The Company, its executive officers and directors and certain of its
current stockholders have agreed that, subject to certain limited exceptions,
for a period of one year, in the case of directors and executive officers, and a
period of 180 days, in the case of such other stockholders, after the date of
this Prospectus, without the prior written consent of the Underwriters, they
will not, directly or indirectly, offer to sell, sell or otherwise dispose of
any shares of common stock. See "Underwriting."
No predictions can be made as to the effect, if any, that future sales of
shares or the availability of shares for future sale, will have on the market
price for common stock prevailing from time to time. The sale of a substantial
number of shares held by existing stockholders, whether pursuant to a subsequent
public offering or otherwise, or the perception that such sales could occur,
could adversely affect the market price of the
18
<PAGE> 20
common stock and could materially impair the Company's future ability to raise
capital through an offering of equity securities.
DILUTION
Purchasers of the shares of common stock offered hereby will experience
immediate dilution of $11.78 per share in net tangible book value (deficit) per
share after deducting the underwriting discounts and estimated offering
expenses. Such investors will experience additional dilution upon the exercise
of outstanding options. See "Dilution."
ADVERSE IMPACT OF POSSIBLE ISSUANCES OF PREFERRED STOCK;
ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER AND BYLAW PROVISIONS
The Board of Directors has authority to issue up to 5,000,000 shares of
preferred stock and to fix the price, rights, preferences, privileges and
restrictions, including voting rights, of those shares without any further vote
or action by the stockholders. The rights of the holders of common stock will be
subject to, and may be adversely affected by, the rights of the holders of any
preferred stock that may be issued in the future. The issuance of preferred
stock could affect adversely the voting power of the holders of common stock and
the likelihood that such holders will receive dividend payments and payments
upon liquidation. Additionally, the issuance of preferred stock and certain
provisions in the Company's Amended and Restated Certificate of Incorporation,
as amended (the "Certificate of Incorporation"), and Bylaws may have the effect
of delaying, deferring or preventing a change in control of the Company, may
discourage bids for the common stock at a premium over the market price of the
common stock and may affect adversely the market price of and the voting and
other rights of the holders of the common stock.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, in less
than one year, computer systems and software used by many companies may need to
be upgraded to comply with such "Year 2000" requirements.
Management has initiated a program to prepare the Company's computer
systems and other electronic applications for the year 2000 (the "Year 2000
Program"). Through the Year 2000 Program, management is currently reviewing the
Company's computer systems and other electronic applications in order to
identify potential Year 2000 problems. Based upon preliminary results of the
Year 2000 Program, management anticipates that the Company's Year 2000
compliance expenses will not be material and that the Company's Year 2000
Program will be completed before January 1, 2000. The Company's failure to
successfully complete its Year 2000 Program could have a material adverse effect
on the Company's business, financial condition and results of operations.
FORWARD-LOOKING STATEMENTS
This Prospectus contains forward-looking statements, which may be deemed to
include the Company's plans to commercialize OncoVAX(CL) and other product
candidates, conduct clinical trials with respect to OncoVAX(CL) and other
product candidates, seek regulatory approvals, open OncoVAX Centers, expand its
sales and marketing capability, use OncoVAX Centers to conduct clinical trials,
evaluate additional product candidates for subsequent clinical and commercial
development and apply the proceeds of this offering. In addition, this
Prospectus states the Company's belief that the net proceeds of this offering
and interest thereon will be adequate to satisfy the requirements of its current
and planned operations through the end of 1999. Actual results could differ
materially from those projected in any forward-looking statements for a variety
of reasons, including those detailed above in this "Risk Factors" section or
elsewhere in this Prospectus.
19
<PAGE> 21
THE COMPANY
The Company is an integrated biopharmaceutical company focused on the
development and commercialization of cancer vaccines and of immunotherapeutic
and diagnostic products for cancers and infectious diseases. Since its formation
in 1987, the Company has grown in part as a result of various strategic mergers
and acquisitions.
On January 2, 1998, the Company acquired in a tax-free merger (the
"Merger") all of the capital stock of PerImmune Holdings, which conducts
operations through PerImmune, Inc., its wholly owned subsidiary ("PerImmune").
PerImmune's core research and development expertise in cancer and infectious
diseases complements those previously developed by the Company. The Company's
expanded resources and greater management depth resulting from the Merger have
increased the Company's ability to offer a broader spectrum of diagnostic,
prognostic and immunotherapeutic products targeted at cancer and infectious
diseases. In particular, the addition of PerImmune's large clinical development
group has augmented development of the Company's therapeutic products and the
Company's sales and marketing organization has enabled the direct launch of many
of PerImmune's diagnostic products. PerImmune Holdings was incorporated in 1996
by the management of PerImmune to acquire all of the common stock of PerImmune
from Organon Teknika Corporation, an indirect wholly owned subsidiary of Akzo
Nobel, NV ("Organon Teknika").
In November 1995, the Company entered into a Stock Purchase Agreement with
Dade International, Inc. ("Dade") by which the Company acquired all of the
common stock of Bartels held by Dade. This acquisition provided the Company with
entry into the diagnostic products retail market.
The Company has historically used significant amounts of debt to finance
its operations. In 1998, the Company completed a comprehensive refinancing of
its outstanding debt securities. See "Business -- Recent Debt Refinancings."
The Company was incorporated under the laws of Massachusetts in 1987 and
reincorporated under the laws of Delaware in 1997. The Company's principal
executive offices are located at 2005 NW Sammamish Road, Suite 107, Issaquah,
Washington 98027 and its telephone number is (425) 392-2992.
20
<PAGE> 22
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 4,000,000 shares of
common stock offered hereby, after deducting underwriting discounts and
commissions and estimated offering expenses, are estimated to be approximately
$48,360,000 million ($51,987,000 million if the over-allotment option granted by
the Company to the Underwriters is exercised in full) based upon an assumed
initial public offering price of $13.00 per share.
The Company anticipates that such net proceeds, together with its other
available cash and cash equivalents, will be used as follows: (i) approximately
$25.0 million to support the establishment and early operation of OncoVAX
Centers; (ii) $5.0 million to repay existing indebtedness bearing interest at a
rate of 12% per annum due when the Company receives the proceeds of this
offering; (iii) approximately $5.0 million for the Company's other research and
development programs and to conduct clinical trials for the Company's cancer and
infectious disease products; (iv) approximately $2.0 million to repay
indebtedness bearing interest at a rate of 15% per annum due when the Company
receives the proceeds from this offering and (v) the balance for working capital
and other general corporate purposes. The Company may also use a portion of the
net proceeds to acquire technologies or products complementary to its business,
although no material expenditures in connection with any such acquisitions are
anticipated as of the date of this Prospectus. Pending application as described
above, the Company intends to invest the net proceeds from this offering in
short-term investment-grade, interest-bearing instruments.
The amounts and timing of the Company's actual expenditures for the
purposes described above will depend upon a number of factors, including: the
scope and results of preclinical studies and clinical trials; continued progress
of the Company's research and development of product candidates; the cost,
timing and outcome of regulatory approvals; the adequacy of manufacturing and
other facilities; the expenses of expanding the Company's sales and marketing
force; the cost involved in preparing, filing, prosecuting, maintaining,
defending and enforcing patent claims; the acquisition of technology licenses;
the status of competitive products and the availability of other financing. The
Company will require substantial additional funds to conduct its operations in
the future, and there can be no assurance that such funding will be available on
acceptable terms, if at all. The Company expects that its existing capital
resources, including the net proceeds of this offering and interest thereon,
will be adequate to satisfy the requirements of its current and planned
operations until the end of 1999. The occurrence of certain unforeseen events or
changed business conditions, however, could result in the application of the
proceeds of this offering in a manner other than as described in this
Prospectus.
DIVIDEND POLICY
The Company has never paid a cash dividend on its common stock and does not
anticipate paying any cash dividends in the foreseeable future.
21
<PAGE> 23
CAPITALIZATION
The following table sets forth at September 30, 1998: (a) the actual
capitalization of the Company; (b) the pro forma capitalization of the Company
giving effect to the mandatory conversion of all outstanding preferred stock,
automatic conversion of certain convertible notes payable into common stock
effective on the closing of this offering, and the exercise of certain warrants
and (c) the pro forma as adjusted to give effect to the receipt of the estimated
net proceeds from the sale of the 4,000,000 shares of common stock offered
hereby at an assumed initial public offering price of $13.00, and after
deducting the underwriting discounts and commissions and offering expenses
payable by the Company. This table should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements of the Company and notes
thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
-------------------------------------
PRO PRO FORMA AS
ACTUAL FORMA(1) ADJUSTED(2)
-------- ---------- ------------
(DOLLAR IN THOUSANDS)
<S> <C> <C> <C>
Cash, cash equivalents, pledged securities and restricted
cash(3)................................................... $ 11,392 $ 17,400 $ 58,760
======== ========== ============
Long-term debt, non-convertible, including current
portion................................................... $ 35,038 $ 37,038 $ 30,038
Long-term debt, convertible, including current portion(4)... 11,035 10,802 10,802
Redeemable and convertible preferred stock, $0.0001 par
value; 5,000,000 shares authorized; of which 1,780,220
shares have been authorized for issue in five series
subject to mandatory redemption, of which 1,488,771 shares
are issued and outstanding, actual; none pro forma and pro
forma as adjusted(5)...................................... 21,159
Stockholder's equity (deficit):
Common stock, $0.0001 par value; 25,000,000 shares
authorized; 7,440,365 shares issued and outstanding,
actual; 11,397,533 shares issued and outstanding, pro
forma; and 15,397,533 shares issued and outstanding,
pro forma as adjusted(6)............................... 1 1 2
Additional paid-in capital................................ 48,145 74,373 122,732
Accumulated deficit....................................... (74,942) (74,942) (74,942)
Note receivable due from stockholder...................... (300) (300) (300)
-------- ---------- ------------
Total stockholders' equity (deficit).............. (27,097) (868) 47,492
-------- ---------- ------------
Total capitalization.............................. $ 40,136 $ 46,972 $ 88,332
======== ========== ============
</TABLE>
- ---------------
(1) Gives effect to the automatic mandatory conversion of 1,488,771 shares of
outstanding preferred stock into 3,426,953 shares of common stock, and the
conversion of $232,500 of short-term notes payable which will automatically
convert into 36,433 shares of common stock at the conclusion of this
offering, and the issuance of 493,786 shares of common stock for the
exercise of warrants at a weighted average price of $8.12 per share which
will automatically expire ten days after the date of this offering. Reflects
$2.0 million of non-convertible debt securities which the Company has agreed
to issue pursuant to a letter of intent. See "Business -- Recent Debt
Refinancings."
(2) Adjusted to reflect the sale of 4,000,000 shares of common stock offered
hereby assuming a public offering price of $13.00 per share less estimated
underwriting discounts and commissions and other expenses of this offering,
resulting in net proceeds of $48,360,000, and the repayment of $7,000,000 of
various indebtedness that must be redeemed upon completion of this offering.
(3) $6.0 million of the cash, cash equivalents, pledged securities and
restricted cash is maintained in segregated accounts from which the Company
is permitted to obtain funds upon request to the lender. Of the $6.0
million, $4.0 million is invested in pledged securities. $4.92 million of
the cash, cash equivalents, pledged securities and restricted cash is
maintained in a segregated "interest escrow account" which is restricted for
the payment of interest under certain outstanding debt obligations. See Note
14 to the Company's consolidated financial statements contained elsewhere in
this Prospectus.
(4) Actual includes $232,500 in short-term notes payable which will
automatically be converted into 36,433 shares of common stock upon
consummation of this offering, and pro forma includes approximately
$10,802,000 in notes payable which may be converted at anytime prior to the
maturity date of January 15, 2000, at the payee's option into common stock
calculated by the sum of the then outstanding principal amount and all
accrued interest divided by the price to the public per share set forth on
the cover page of this Prospectus.
(5) On an actual basis, includes Series A, 730,000 shares authorized, 640,639
shares issued and outstanding; Series A-1, 850,000 shares authorized,
690,951 shares issued and outstanding; Series A-3, 200,000 shares
authorized, 156,961 shares issued and outstanding; Series B-1, 100 shares
authorized, issued and outstanding; and Series B-2, 120 shares authorized,
issued and outstanding. None of such shares will be outstanding on a pro
forma and pro forma as adjusted basis.
(6) The foregoing computations exclude (i) 1,351,594 shares of common stock
issuable upon exercise of stock options outstanding as of September 30,
1998, at a weighted-average exercise price of $3.66 per share; (ii)
1,727,004 shares of common stock issuable upon exercise of warrants expected
to remain outstanding after this offering, of which 643,665 are at a
weighted-average price of $7.96 per share and 1,083,339 shares which are
exercisable at $15.00 per share.
22
<PAGE> 24
DILUTION
The pro forma net tangible book value (deficit) of the Company as of
September 30, 1998, was $(29,566,387), or $(2.59) per share of common stock. Pro
forma net tangible book value (deficit) per share represents the Company's total
tangible assets less total liabilities divided by 11,397,533 shares of common
stock outstanding (after reflecting the automatic mandatory conversion of
preferred stock into 3,426,953 shares of common stock, the automatic conversion
of notes into 36,433 shares of common stock, which notes automatically convert
upon consummation of this offering, and the exercise of warrants to purchase
493,786 shares of common stock, which warrants automatically expire ten days
after consummation of this offering). Without taking into account any other
changes in the net tangible book value after September 30, 1998, other than to
give effect to the sale of 4,000,000 shares of common stock by the Company in
this offering (assuming a public offering price of $13.00 per share and after
deducting the underwriting discounts and commissions and estimated offering
expenses) and the application of the estimated proceeds thereof, the pro forma
net tangible book value of the Company as of September 30, 1998, would have been
$18,793,613, or $1.22 per share. This amount represents an immediate improvement
in pro forma net tangible book value of $3.81 per share to existing stockholders
and immediate dilution of $11.78 per share to new investors purchasing common
stock in this offering. Dilution per share to new investors represents the
difference between the pro forma net tangible book value per share of common
stock immediately upon consummation of this offering and the amount per share
paid by purchasers of common stock of the Company in this offering. The
following table illustrates this per share dilution as of September 30, 1998:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $13.00
Pro forma net tangible book value per share at September
30, 1998............................................... $(2.59)
Improvement per share attributable to new investors....... 3.81
------
Pro forma net tangible book value per share after this
offering.................................................. 1.22
------
Dilution per share to new investors......................... $11.78
======
</TABLE>
23
<PAGE> 25
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following unaudited consolidated pro forma statement of operations (the
"Pro Forma Consolidated Financial Information") gives pro forma effect to the
completion of the Merger of PerImmune Holdings on January 2, 1998, after giving
effect to the pro forma adjustments described in the accompanying notes as if
the Merger had occurred on January 1, 1997. The Pro Forma Consolidated Financial
Information has been prepared from, and should be read in conjunction with, the
historical consolidated financial statements and notes thereto of each of the
Company and PerImmune Holdings.
The Pro Forma Consolidated Financial Information is provided for
illustrative purposes only and does not purport to represent what the actual
results of operations of the Company would have been had the Merger occurred on
the date assumed, nor is it necessarily indicative of the Company's future
operating results. The following table enumerates the unaudited pro forma
consolidated statement of operations.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-------------------------------------------------------
ACQUIRED PRO FORMA PRO FORMA
COMPANY BUSINESS ADJUSTMENTS CONSOLIDATED
---------- -------- ----------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenue
Product..................................... $ 13,452 $ 2,111 $ 15,563
Contract.................................... 5,778 5,778
---------- -------- ------- ----------
Total revenue............................. 13,452 7,889 21,341
Cost of revenue
Product..................................... 8,661 1,600 10,261
Contract.................................... 5,016 5,016
---------- -------- ------- ----------
Total cost of revenue..................... 8,661 6,616 15,277
Selling, general and administrative........... 8,478 2,849 $ 1,595(1) 12,922
Research and development...................... 556 8,077 8,633
Amortization of cost in excess of net assets
acquired.................................... 908 85(1) 993
---------- -------- ------- ----------
Total operating expense.................. 18,603 17,542 1,680 37,825
---------- -------- ------- ----------
Loss from operations..................... (5,151) (9,653) (1,680) (16,484)
Interest income (expense), net................ (2,913) (837) (3,750)
Loss on sale-leaseback transaction............ (335) (335)
---------- -------- ------- ----------
Net loss................................. (8,064) (10,825) (1,680) (20,569)
Preferred stock dividends/accretion........... (1,261) (32) 32(2) (1,261)
---------- -------- ------- ----------
Net loss used in calculating loss per
share.................................. $ (9,325) $(10,857) $(1,648) $ (21,830)
========== ======== ======= ==========
Basic and diluted net loss per share.......... $ (3.43)
==========
Pro forma net loss per share.................. $ (3.43)
==========
Shares used in calculating per share data..... 2,715,599 6,368,035
========== ==========
</TABLE>
- ---------------
(1) Represents the pro forma effects of amortization expenses recognized on
intangible assets on which a portion of the purchase price was allocated in
conjunction with the Merger. The allocation of the purchase price, the
amortization periods of the intangible assets and the annual amortization
expense to be recognized on those assets are as follows (dollars in
thousands):
<TABLE>
<CAPTION>
PURCHASE AMORTIZATION ANNUAL
PRICE PERIOD AMORTIZATION
ALLOCATION (YEARS) EXPENSE
---------- ------------ ------------
<S> <C> <C> <C>
Working capital (deficit) acquired.......................... $ (145)
Other long-term assets...................................... 5,436
Workforce in progress....................................... 144 3 $ 48
Product technology.......................................... 6,861 10 686
Patents..................................................... 8,608 10 861
Cost in excess of net assets acquired....................... 849 10 85
Acquired in-process research and development................ 37,718
------- ------
$59,471 $1,680
======= ======
</TABLE>
(2) Represents the pro forma effect of the Merger. The acquired business' Series
A and Series B redeemable and convertible preferred stock was exchanged for
Intracel Series B-1 and Series B-2 preferred stock. Accordingly, the
acquired business' preferred stock dividends/accretion is eliminated.
24
<PAGE> 26
SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA FOR INTRACEL CORPORATION
The selected financial data below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operation," the consolidated financial statements of the Company and the notes
thereto included elsewhere in this Prospectus. The statement of operations data
for the years ended June 30, 1993 and June 30, 1994 and the balance sheet data
at June 30, 1993, June 30, 1994, June 30, 1995 and December 31, 1995 are derived
from the financial statements of the Company not included in this Prospectus.
The statement of operations data for the year ended June 30, 1995, the six
months ended December 31, 1995 and the year ended December 31, 1996 and the
balance sheet data as of December 31, 1996 are derived from the consolidated
financial statements of the Company included elsewhere in this Prospectus and
have been audited by Ernst & Young LLP, independent auditors. The financial
statement data as of and for the year ended December 31, 1997 is derived from
the financial statements of the Company included elsewhere in this Prospectus
and has been audited by PricewaterhouseCoopers LLP, independent accountants. The
pro forma financial data for the year ended December 31, 1997 and the financial
data as of and for the periods ended September 30, 1997 and 1998 are unaudited
but have been prepared on a basis consistent with the audited consolidated
financial statements of the Company and the notes thereto and included all
adjustments (constituting only normal recurring adjustments), which the Company
considered necessary for a fair presentation of the information. The results of
operation for the nine months ended September 30, 1998 are not necessarily
indicative of results to be expected for the year or for any future periods.
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
YEAR ENDED JUNE 30, ENDED DECEMBER 31,
-------------------------- DECEMBER 31, -------------------
1993 1994 1995 1995(2) 1996 1997
------ ------- ------- ------------ -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue
Product....................................... $1,776 $ 1,618 $ 1,566 $ 2,426 $ 14,718 $ 13,452
Contract......................................
------ ------- ------- ------- -------- --------
Total revenue............................... 1,776 1,618 1,566 2,426 14,718 13,452
------ ------- ------- ------- -------- --------
Cost of revenue
Product....................................... 533 449 824 1,779 8,265 8,661
Contract......................................
------ ------- ------- ------- -------- --------
Total cost of revenue....................... 533 449 824 1,779 8,265 8,661
Selling, general and administrative............. 962 801 1,580 2,593 5,740 8,478
Research and development........................ 785 1,078 1,174 1,118 1,043 556
Acquired research and development............... 2,100
Amortization of costs in excess of net assets
acquired...................................... 151 908 908
Reorganization expense.......................... 917
------ ------- ------- ------- -------- --------
Total operating expense..................... 2,280 2,328 3,578 7,741 16,873 18,603
------ ------- ------- ------- -------- --------
Loss from operations.......................... (504) (710) (2,012) (5,315) (2,155) (5,151)
Interest income (expense), net.................. 47 22 68 (135) (2,235) (2,913)
Gain on pension curtailment.....................
Other income....................................
Loss on sale-leaseback transaction..............
------ ------- ------- ------- -------- --------
Loss before extraordinary item................ (457) (688) (1,944) (5,450) (4,390) (8,064)
Extraordinary gain on early extinguishment of
debt.......................................... 1,367
------ ------- ------- ------- -------- --------
Net loss...................................... (457) (688) (1,944) (4,083) (4,390) (8,064)
Preferred stock dividends/accretion............. (211) (266) (790) (1,261)
------ ------- ------- ------- -------- --------
Net loss used in calculating loss per share... $ (457) $ (688) $(2,155) $(4,349) $ (5,180) $ (9,325)
====== ======= ======= ======= ======== ========
Net loss basic and diluted per share(3)....... $(0.18) $ (0.26) $ (0.82) $ (1.68) $ (1.99) $ (3.43)
====== ======= ======= ======= ======== ========
Shares used in computing net loss per share..... 2,610 2,631 2,642 2,591 2,597 2,716
====== ======= ======= ======= ======== ========
BALANCE SHEET DATA:
Cash, cash equivalents, pledged securities and
restricted cash(4)............................ $ 648 $ 421 $ 2,370 $ 4,072 $ 3,145 $ 1,975
Working capital (deficit)....................... 1,072 569 2,273 1,986 1,525 (270)
Total assets.................................... 1,912 1,632 3,728 25,646 26,523 28,042
Long-term debt, including current portion....... 102 281 193 18,047 22,744 20,275
Redeemable, convertible preferred stock......... 3,961 9,578 10,367 11,222
Accumulated deficit............................. (537) (1,226) (3,381) (7,730) (12,909) (21,180)
Total stockholders' equity (deficit)............ 1,422 834 (1,314) (5,624) (10,605) (9,778)
<CAPTION>
PRO FORMA NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, -------------------------
1997(1) 1997 1998(2)
------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue
Product....................................... $ 15,563 $ 10,231 $ 10,862
Contract...................................... 5,778 3,382
-------- -------- --------
Total revenue............................... 21,341 10,231 14,244
-------- -------- --------
Cost of revenue
Product....................................... 10,261 5,909 7,678
Contract...................................... 5,016 1,910
-------- -------- --------
Total cost of revenue....................... 15,277 5,909 9,588
Selling, general and administrative............. 12,922 5,912 11,101
Research and development........................ 8,633 523 8,420
Acquired research and development............... 37,718
Amortization of costs in excess of net assets
acquired...................................... 993 681 744
Reorganization expense..........................
-------- -------- --------
Total operating expense..................... 37,825 13,025 67,571
-------- -------- --------
Loss from operations.......................... (16,484) (2,794) (53,327)
Interest income (expense), net.................. (3,750) (2,100) (3,293)
Gain on pension curtailment..................... 800
Other income.................................... 1,273
Loss on sale-leaseback transaction.............. (335)
-------- -------- --------
Loss before extraordinary item................ (20,569) (4,894) (54,547)
Extraordinary gain on early extinguishment of
debt.......................................... 785
-------- -------- --------
Net loss...................................... (20,569) (4,894) (53,762)
Preferred stock dividends/accretion............. (1,261) (897) (1,958)
-------- -------- --------
Net loss used in calculating loss per share... $(21,830) $ (5,791) $(55,720)
======== ======== ========
Net loss basic and diluted per share(3)....... $ (3.43) $ (2.23) $ (7.64)
======== ======== ========
Shares used in computing net loss per share..... 6,368 2,596 7,291
======== ======== ========
BALANCE SHEET DATA:
Cash, cash equivalents, pledged securities and
restricted cash(4)............................ $ -- $ 11,392
Working capital (deficit)....................... 858 4,817
Total assets.................................... 22,427 51,960
Long-term debt, including current portion....... 20,281 46,073
Redeemable, convertible preferred stock......... 11,002 21,159
Accumulated deficit............................. (18,011) (74,942)
Total stockholders' equity (deficit)............ (12,175) (27,097)
</TABLE>
- ---------------
(1) Gives effect to the acquisition of PerImmune Holdings as if it had occurred
on January 1, 1997. See "Pro Forma Consolidated Financial Information."
(2) The six months ended December 31, 1995 and the subsequent periods include
the operations of Bartels, which was acquired by the Company in November
1995. The 1998 results include the operations of PerImmune Holdings, which
the Company acquired in January 1998. See Note 11 to the Company's
consolidated financial statements.
(3) See Note 2 to the Company's consolidated financial statements contained
elsewhere in this Prospectus for an explanation of earnings per share
calculations.
(4) The 1998 amount includes $6.0 million maintained in segregated accounts from
which the Company is permitted to obtain funds upon requests to the lender,
and $4.92 million maintained in a segregated "interest escrow account" which
is restricted for the payment of interest under certain outstanding debt
obligations. Of the $6.0 million in the segregated accounts, $4.0 million is
invested in pledged securities. See Note 14 to the Company's consolidated
financial statements contained elsewhere in this Prospectus.
25
<PAGE> 27
SELECTED FINANCIAL DATA FOR PERIMMUNE HOLDINGS AND PREDECESSOR COMPANIES
The selected financial data below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the consolidated financial statements of PerImmune Holdings and the
notes thereto included elsewhere in this Prospectus. The balance sheet data as
of December 31, 1993 and the statement of operations data for the year then
ended and for the year ended December 31, 1994 are derived from the financial
statements of OT Biotechnology Research Institute ("BRI"), a predecessor company
to PerImmune which operated as a division of Organon Teknika, an indirect wholly
owned subsidiary of Akzo Nobel, NV. Such financial statements are not included
in this Prospectus but have been audited by KPMG LLP, independent certified
public accountants. The balance sheet data as of December 31, 1994 and 1995 are
derived from the financial statements of PerImmune, which was incorporated as a
wholly owned subsidiary of Organon Teknika in December 1994 (BRI and PerImmune,
collectively, are referred to as the "Predecessor Companies"). Such financial
statements are not included in this Prospectus but have been audited by KPMG
LLP, independent certified public accountants. The statement of operations data
for the year ended December 31, 1995 is derived from the statement of operations
of PerImmune, which is included elsewhere in this Prospectus and which was
audited by KPMG LLP, independent certified public accountants. The balance sheet
data as of August 2, 1996 have been derived from the unaudited financial
statements of PerImmune and have been prepared on a basis consistent with the
audited financial statements of PerImmune and the notes thereto and include all
adjustments (constituting only normal recurring adjustments) necessary for a
fair presentation of the information. The statement of operations data for the
period ended August 2, 1996 is derived from the financial statements of
PerImmune included elsewhere in this Prospectus and has been audited by KPMG
LLP, independent certified public accountants. The balance sheet data as of
December 31, 1996 and the statement of operations data for the period then ended
were derived from the consolidated financial statements of PerImmune Holdings
included elsewhere in this Prospectus and have been audited by KPMG LLP,
independent certified public accountants. The balance sheet data as of December
31, 1997 and the statement of operations data for the year then ended are
derived from the consolidated financial statements of PerImmune Holdings
included elsewhere in this Prospectus, and have been audited by
PricewaterhouseCoopers LLP, independent accountants.
<TABLE>
<CAPTION>
PREDECESSOR COMPANIES (1) PERIMMUNE HOLDINGS
------------------------------------------ ---------------------------
JANUARY 1 AUGUST 3
YEAR ENDED DECEMBER 31, THROUGH THROUGH YEAR ENDED
----------------------------- AUGUST 2, DECEMBER 31, DECEMBER 31,
1993 1994 1995 1996 1996 1997
-------- ------- -------- ---------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Government contracts............................... $ 3,947 $ 6,005 $ 6,578 $ 3,420 $ 2,751 $ 1,869
Commercial and affiliate contracts................. 485 776 2,152 1,106 3,909
Product sales...................................... 821 1,247 1,407 1,632 594 2,111
-------- ------- -------- ------- ------- --------
Total revenue.................................. 4,768 7,737 8,761 7,204 4,451 7,889
-------- ------- -------- ------- ------- --------
Operating expenses:
Cost of contracts and sales:
Government contracts............................... 3,469 5,173 5,779 3,375 1,968 1,585
Commercial and affiliate contracts................. 9,996 9,796 10,189 6,299 886 3,431
Product sales...................................... 609 822 1,124 1,102 325 1,600
-------- ------- -------- ------- ------- --------
Total cost of contracts and sales.............. 14,074 15,791 17,092 10,776 3,179 6,616
Selling, general and administrative.................. 1,034 1,264 1,283 740 708 2,241
Research and development............................. 467 239 360 189 4,683 8,077
Other................................................ 50 29 14 10 608
-------- ------- -------- ------- ------- --------
Total operating expenses....................... 15,575 17,344 18,764 11,719 8,580 17,542
-------- ------- -------- ------- ------- --------
Loss from operations........................... (10,807) (9,607) (10,003) (4,515) (4,129) (9,653)
Interest (expense), net................................ (446) (837)
Loss on sale-leaseback transaction..................... (335)
-------- ------- -------- ------- ------- --------
Loss before income taxes....................... (10,807) (9,607) (10,003) (4,515) (4,575) (10,825)
Provision for income taxes............................. -- -- -- --
-------- ------- -------- ------- ------- --------
Net loss....................................... $(10,807) $(9,607) $(10,003) $(4,515) $(4,575) $(10,825)
======== ======= ======== ======= ======= ========
BALANCE SHEET DATA: (UNAUDITED)
Cash and cash equivalents.............................. $ 2 $ 2 $ 2 $ 193 $ 2,424 $ 2,504
Working capital (deficit).............................. 3,123 3,244 3,014 (18) (3,835) (8,871)
Total assets........................................... 7,506 12,694 12,829 12,650 13,624 8,030
Long-term debt, including current portion.............. 14,835 10,393
Redeemable, convertible preferred stock................ 9,786
Accumulated deficit.................................... (10,003) (14,518) (5,485) (16,310)
Total stockholders' equity (deficit)................... 5,844 10,242 10,521 9,161 (5,485) (16,027)
</TABLE>
- ---------------
(1) Effective August 3, 1996, 100% of PerImmune's common stock was acquired by
PerImmune Holdings from Organon Teknika in exchange for a $9,234,935 note
payable. Prior to the acquisition, the Predecessor Companies performed
certain research and development activities for, and were reimbursed by,
Organon Teknika and other affiliates under contractual agreements. The cost
related to those activities prior to the acquisition were presented as part
of "Cost of contacts and sales -- Commercial and affiliate contracts" in the
above selected financial data. Subsequent to the acquisition by PerImmune
Holdings, costs incurred in research and development activities were
presented as "Research and development" expenses as those activities were
primarily performed for PerImmune's own benefit and were not reimbursed.
26
<PAGE> 28
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations may contain forward-looking statements which involve
risks and uncertainties. The Company's actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including those set forth under "Risk Factors" and elsewhere in
this Prospectus. This discussion and analysis should be read in conjunction with
the financial statements and the notes thereto included elsewhere in this
Prospectus.
OVERVIEW
The Company is an integrated biopharmaceutical company, focused on the
development and commercialization of cancer vaccines and of immunotherapeutic
and diagnostic products for cancers and infectious diseases. The Company is
applying its extensive expertise in immunology and its clinical, regulatory,
manufacturing and marketing experience to develop a portfolio of innovative
therapeutic, prognostic and diagnostic products.
On January 2, 1998, the Company acquired all of the capital stock of
PerImmune Holdings. With the consummation of the Merger, PerImmune Holdings
became a subsidiary of Intracel. Management's Discussion and Analysis of
Financial Condition and Results of Operations for each of Intracel and PerImmune
Holdings for 1997, 1996 and 1995 will be presented, as appropriate, on a
separate basis. The results of operations for the nine-month period ended
September 30, 1998 and forward-looking liquidity and capital resources will be
discussed on a consolidated basis.
INTRACEL -- RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH THE NINE MONTHS ENDED
SEPTEMBER 30, 1997
Revenues increased $4.0 million or 39.2% to $14.2 million as compared to
$10.2 million for the nine months ended September 30, 1998 and 1997,
respectively. Product revenues generated by the Company's portfolio of
diagnostic products, which are used for the confirmation of viral and bacterial
diseases, increased by $0.7 million, or 6.9%, to $10.9 million as compared to
$10.2 million for the nine months ended September 30, 1997. This increase is
primarily the result of $1.5 million of product revenues arising from the
acquisition of PerImmune Holdings offset by a decline of $0.9 million of product
revenues as compared to the nine months ended September 30, 1997. This decline
is due to eroding sales prices of certain of the Company's product lines due to
increased competition, the loss of a distributing right to a high sales volume
product and the Company's decision at the end of 1997 to move its manufacturing
for the INSTI product to Canada, which came on line in March 1998. Contract
revenues for the nine months ended September 30, 1998 were $3.4 million, all
associated with the acquisition of PerImmune Holdings. Approximately $1.0
million is attributable to non-recurring revenue from a commercial contract for
the treatment of refractory bladder cancer, and the remaining $2.4 million is
associated with recurring government and commercial projects.
Cost of revenues increased $3.7 million, or 62.7%, to $9.6 million as
compared to $5.9 million for the nine months ended September 30, 1998 and 1997,
respectively. This increase was primarily comprised of $1.9 million for cost of
contract revenue and $1.1 million of cost of product revenues wholly
attributable to the acquisition of PerImmune Holdings for the nine months ended
September 30, 1998 as compared to the nine months ended September 30, 1997.
Selling, general and administrative expenses increased $5.2 million, or
88.1%, to $11.1 million as compared to $5.9 million for the nine months ended
September 30, 1998 and 1997, respectively. This increase is primarily comprised
of $2.0 million of expenses associated with the hiring of additional personnel,
primarily resulting from the Company's continued expansion of its internal
marketing and sales organization, $1.9 million of related expenses attributable
to the acquisition of PerImmune Holdings and $1.3 million of amortization
expense pertaining to the assets acquired from PerImmune Holdings.
27
<PAGE> 29
Research and development expense increased $7.9 million, or 1,580.0%, to
$8.4 million as compared to $0.5 million for the nine months ended September 30,
1998 and 1997, respectively. $8.2 million of this increase is attributable to
the acquisition of PerImmune Holdings.
Interest expense increased by $1.2 million, or 57.1%, to $3.3 million as
compared to $2.1 million for the nine months ended September 30, 1998 and 1997,
respectively. This increase is primarily attributable to the overall increase in
the Company's debt obligations as a result of the debt refinancings that took
place in 1998. See "Business -- Recent Debt Refinancings."
A gain of $0.8 million was recognized in conjunction with the curtailment
of the PerImmune Holdings pension plan. Other income in the amount of $1.3
million was recognized of which $1.1 million was attributable to the settlement
of a contingency for which the Company had previously recorded a liability, and
$0.2 million was attributable to the recovery of an investment previously
written off.
Extraordinary gain on the extinguishment of debt in the amount of $0.8
million was recognized of which $0.4 million was attributable to the settlement
of a note payable previously in dispute for the purchase of certain assets, and
$0.9 million was in connection with the Company's August 1998 refinancing
whereby a noteholder as a condition of early extinguishment agreed to waive a
"make-whole" guarantee provision of its note, resulting in a reversal by the
Company of all accumulated accrued interest recorded through the date of the
refinancing. Offsetting the gain in connection with the refinancing was
approximately $0.5 million of loss on the extinguishment of debt attributable to
the write-off of the then unamortized balance of debt issue costs associated
with the obligations that were refinanced.
1997 COMPARED TO 1996
Diagnostics revenue decreased $1.2 million, or 8.2%, to $13.5 million in
1997 as compared to $14.7 million for the twelve months ended December 31, 1996.
The Company believed the decline was in part related to the ineffectiveness of a
third-party distributor agreement. In response, the Company decided to establish
its own internal marketing and sales organization and terminated such agreement
during 1997. During 1997, the Company's INSTI product for HIV/AIDS testing was
introduced to international markets at a price designed to facilitate market
penetration. This pricing strategy resulted in an increase of revenues from $0.1
million to $0.5 million.
Cost of product sales increased $0.4 million, or 4.8%, to $8.7 million in
1997. The increase is a combination of several items. During 1996 and 1997 the
Company evaluated its research-related inventory, ("RUO Inventory") to determine
obsolete inventory quantities. As a result the Company recorded adjustments in
1996 and 1997 to Cost of Sales in the amounts of $1.1 million and $0.3 million,
respectively. After adjusting for obsolescence the Company's cost of products
sales increased approximately $1.2 million primarily due to the Company's cost
of products sales for INSTI products exceeding product revenues by $0.8 million.
Selling, general and administrative expenses increased by $2.8 million, or
49.1%, to $8.5 million. The increase was due to several factors. The Company
established its own internal marketing and sales organization in 1997. In
addition, the Company formed a regulatory department to provide quality control
in compliance with regulatory requirements to support Bartel's lines of
production and newly emerging products such as INSTI and ZYMMUNE. The Company
also incurred costs in connection with the Company's merger and acquisition
program, which included the Merger on January 2, 1998. A lease for a fully
developed diagnostic manufacturing facility was acquired in September 1996 with
associated costs included for all in 1997.
Research and development expenses decreased $0.4 million, or 40.0%, to $0.6
million in 1997 as a result of reduced payments under a specific contract.
Reorganization expense of $0.9 million was incurred in 1996, in connection with
the Company's relocation from Cambridge, Massachusetts to Issaquah, Washington.
Interest expense increased $0.7 million, or 31.8%, to $2.9 million in 1997
primarily related to interest rate increases associated with certain debt
instruments and $0.4 million for the Company's make whole provision associated
with a certain debt instrument.
28
<PAGE> 30
SIX MONTHS ENDED DECEMBER 31, 1995
Due to a change in the Company's fiscal year end from June 30 to December
31 during 1995, all information in the following paragraphs under this section
applies to the six months ended December 31, 1995.
Product sales for the six months ended December 31, 1995 were $2.4 million,
primarily comprised of $1.8 million from diagnostic product sales generated by
Bartels from the date of its acquisition.
For the six-month period ended December 31, 1995, cost of product sales was
$1.8 million, primarily comprised of $1.2 million pertaining to Bartels' cost of
product sales. Selling, general and administrative expenses for the six months
ended December 31, 1995 totaled $2.6 million.
Research and development expenses of $1.1 million for the six-month period
ended December 31, 1995 were associated with a specific contract. An additional
$2.1 million was expensed in the six months ended December 31, 1995 for acquired
in-process research and development associated with the acquisition of Bartels.
The Company recognized an extraordinary gain for the six months ended
December 31, 1995 of $1.4 million, pertaining to the Company's early retirement
of debt.
TWELVE MONTHS ENDED JUNE 30, 1995
Net revenues of $1.6 million for the year ended June 30, 1995 were
comprised of sales of proteins and antibodies for use in diagnostic and research
applications.
Cost of sales of $0.8 million consisted of the cost to manufacture the
various proteins and antibodies for the year ended June 30, 1995. Selling,
general and administrative expenses were $1.6 million for the year ended June
30, 1995.
Research and development expenses of $1.2 million for the year ended June
30, 1995 were associated with a specific contract.
INTRACEL -- LIQUIDITY
The Company's operating activities used $2.5 million in 1997 resulting from
the net loss of $2.9 million (adjusted for non-cash items) offset by a $0.4
million reduction in investment in working capital. Investing activities used
$4.2 million of which $2.0 million represented the deposit in escrow of
restricted cash associated with a debt issue. Additionally, $1.4 million was
invested in the purchase of property and equipment and $0.8 million was invested
or advanced to Bartels Prognostics, Inc., an unconsolidated subsidiary in which
the Company has a minority interest ("Bartels Prognostics"). Net cash from
financing activities of $5.5 million was primarily comprised of $1.7 million
from the sale of preferred stock and $6.0 million net from the sale of common
stock and the exercise of warrants and options, offset by $2.3 million of
payments on long-term debt net of proceeds of new issuances and associated
costs.
PERIMMUNE HOLDINGS -- RESULTS OF OPERATIONS
PerImmune Holdings' operations are conducted in one business segment which
applies biotechnology and other life sciences technologies to develop and
provide products and services. PerImmune Holdings groups these activities into
three operating activities: Government Contracts, Commercial Contracts and
Product Sales.
PerImmune Holdings' operations began on August 3, 1996 with its acquisition
of PerImmune from Organon Teknika, an indirect wholly owned subsidiary of Akzo
Nobel, NV, in a leveraged buyout. Therefore, all comparisons are for the full
year of 1997 as compared to approximately five months of 1996.
TWELVE MONTHS ENDED DECEMBER 31, 1997 COMPARED WITH THE FIVE MONTHS ENDED
DECEMBER 31, 1996
Revenues increased $3.4 million, or 75.6%, to $7.9 million in the 1997
period. Government contracts revenues decreased $0.9 million, or 32.1%, to $1.9
million. This decrease was the result of several contracts which ended during
the United States government fiscal year, October 1996 to September 1997, with
only one
29
<PAGE> 31
of those contracts being renewed, at a much lower dollar value than in prior
years. Management decided to de-emphasize the government contract business and
instead focus on future products and services. Commercial contract revenues
increased by $2.8 million, or 254.5%, to $3.9 million in the 1997 period. This
increase was due to the start of a research and development contract with Baxter
Healthcare Corporation ("Baxter") and the difference in the length of the two
reporting periods. Product sales increased by $1.5 million, or 250.0%, to $2.1
million in the 1997 period due entirely to the difference in the length of the
two reporting periods. There was also a decrease of $0.3 million in 1997 sales
due to the completion of research and development for PerImmune's previous
parent in 1996.
Gross profit was approximately the same for both years. Government contract
gross profits declined from 28.5% of sales to 15.2% of sales due to the start-up
of new contracts and additional costs not expected on contracts completed.
Commercial contract gross profits declined from 19.9% of sales in the 1996
period to 12.2% in the 1997 period of sales due to non-billable overruns on
various fixed price research and development contracts. Product sales gross
profits decreased from 45.3% in the 1996 period to 24.2% in 1997 of sales due to
start-up and validation expenses related to products that received marketing
clearance from the FDA in late 1997.
Selling, general administrative expense increased by $1.5 million in the
1997 period, or 214.3%, due to the change in reporting periods and the initial
payment of over $0.3 million in connection with marketing studies prior to the
launch of the HumaSPECT product line. Previously, PerImmune's former parent had
paid marketing costs for this product line.
Research and development costs increased $3.4 million, or 72.3%, in 1997
due to the change in reporting periods, introduction of several clinical trials
and filing of applications for approval with the FDA, offset by lower research
and development activity as PerImmune Holdings placed more emphasis on its
largest projects while eliminating others. Other expense increased by $0.6
million due in part to facility costs that in the past had been allocated to
government contracts that were completed in 1996.
Interest expense increased by $0.6 million, or 150.0%, to $1.0 million in
1997, due to the change in reporting periods. Interest income of $0.2 million in
1997 was due to the earnings on excess cash received from the sale-leaseback of
PerImmune's corporate headquarters building in January 1997, which also resulted
in a $0.3 million loss.
PERIMMUNE HOLDINGS -- LIQUIDITY
PerImmune Holdings' operating activities used $8.5 million in 1997
resulting from the net loss of $9.9 million (adjusted for non-cash items) offset
by a $1.4 million in reduction in investment in working capital. Investing
activities generated $3.6 million of which $5.1 million related to the purchase
and sale-leaseback transaction referred to above and leaseback improvements
offset by capital expenditures of $0.3 million and $1.2 million paid to an
investment bank. Net cash from financing activities of $5.0 million included
$9.8 million from issuance of convertible preferred stock, $0.3 million from
issuance of common stock and $0.9 million from issuance of notes payable offset
by $5.6 million in payment of notes payable and $0.4 million of increase in
restricted cash.
CONSOLIDATED LIQUIDITY AND CAPITAL RESOURCES
As stated earlier, the future liquidity and capital resources of the
Company will be discussed on a post-Merger consolidated basis.
The Company's operating activities used $8.9 million for the nine months
ended September 30, 1998, resulting from the net loss of $12.4 million (adjusted
for non-cash and non-operating items) offset by a $3.6 million reduction in
investment in working capital. Investing activities for the nine months ended
September 30, 1998 used $8.1 million, as a result of $4.0 million invested in
pledged securities, $7.0 million deposited as restricted cash, $1.3 million paid
in conjunction with the merger of PerImmune Holdings and $0.5 million used for
the acquisition of property and equipment, offset by $2.5 million cash acquired
in conjunction with the merger, $2.0 million from the release of restricted cash
in escrow and a $0.2 million recovery of an investment in GAIFAR. Financing
activities for the nine months ended September 30, 1998
30
<PAGE> 32
provided $15.4 million primarily from the issuance of new debt and warrants of
$50.1 million, net of issuance costs, offset by payments of long-term debt
obligations, a line of credit and pension liability, and redemption of Series
A-2 preferred stock in the aggregate amount of $34.3 million and $0.8 million
paid in conjunction with the initial public offering of the Company's common
stock.
During the first quarter of 1998, the Company announced the results of a
ten-year Phase III clinical trial for OncoVAX(CL), which the Company believes is
the first vaccine to demonstrate efficacy for the post-surgical treatment of
Stage II colon cancer. The Company plans to begin treatment of patients using
the OncoVAX(CL) vaccine by establishing OncoVAX Centers in Europe and the United
States. Over 40 OncoVax Centers are expected to be established in the next
several years. The Company expects capital expenditures to increase over the
next several years as the OncoVAX Centers are established. Currently, the
Company is investigating various options for funding the OncoVAX Center capital
expenditures which are estimated to require an investment between $1.0 and $3.0
million per site. This may include, but is not limited to, capital equipment
vendor financing, lease lines, and strategic alliances with the hospitals
associated with the OncoVAX Centers. Currently the Company has no material
commitments for such capital expenditures. In addition to the capital
expenditures required for each OncoVAX Center, working capital requirements of
the Company will increase in association with the build-up of patient
receivables as each OncoVAX Center becomes operational.
As of September 30, 1998, the Company's accumulated deficit was
approximately $74.9 million. Included in the accumulated deficit is a one-time
expense of $37.7 million which was incurred in the first quarter of 1998 related
to acquired in-process research and development consisting of six projects which
were undergoing continuing development and/or clinical trials as they approached
approval by the FDA. As each of these projects was in development at the date of
the Merger with PerImmune, technological feasibility for the projects was not
established. The research projects acquired were all specifically designed to
address specific indications with focused therapies, which may or may not lead
to the development of "platform technologies," having alternative future uses
outside of the contemplated indications. If the Company continues to pursue such
"platform technologies," the aggregate expenditures to facilitate the completion
of these projects for the remainder of 1998, 1999, 2000, 2001 and 2002 are
estimated to be $1.5 million, $3.5 million, $3.6 million, $3.7 million and $2.7
million, respectively.
At September 30, 1998, the Company had working capital of approximately
$4.8 million with approximately $11.4 million in cash, cash equivalents and
pledged securities as its principal source of liquidity. As all of PerImmune's
contracts and commitments survived the Merger, the Company is now responsible
for honoring the terms and conditions of these agreements. The Company considers
all such contracts and agreements to be of a normal, recurring nature and
consistent with the operational functions of the Company. The material contracts
are discussed in further detail in the notes to the financial statements of
PerImmune Holdings, Inc. and Subsidiary and elsewhere in this Prospectus.
During 1997, the Company received certain amendments and waivers to a debt
agreement and its covenants. These amendments and waivers were retroactive to
January 1, 1997 and remained in effect until June 30, 1998. The amendments and
waivers became effective upon the consummation of the Merger. On April 1, 1998,
the Company repaid all amounts outstanding under the debt agreement associated
with the amendments and waivers.
On August 25, 1998, the Company obtained additional financing of
approximately $42.0 million through the issuance of equity securities and
additional debt instruments. Of this amount, approximately $27.3 million was
used for the retirement of existing debt or to redeem outstanding shares of
preferred stock, approximately $4.9 million was deposited into an escrow account
which is equivalent to four scheduled interest payments on the new debt
agreement and $6.0 million was deposited into a segregated bank account from
which the Company is permitted to obtain funds upon request to the lender, with
the balance applied to meeting the working capital needs of the Company. The
Company's current material indebtedness consists of a 12% Guaranteed Senior
Secured Primary Note due August 25, 2003 in the aggregate original principal
amount of $35.0 million and a 12% Guaranteed Senior Secured Escrow Note due
August 25, 2003 in the aggregate original principal amount of $6.0 million. See
further discussion of the outstanding indebtedness of the Company as set forth
under "Business -- Recent Debt Refinancings" and elsewhere in this Prospectus.
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<PAGE> 33
The Company believes that its sources of liquidity, together with net
proceeds from its private placements and borrowings, as well as the proceeds
from this offering will be sufficient to satisfy its funding needs for
operations through the end of 1999. Since June 30, 1995, the Company has
incurred negative cash flow from operations and does not expect to generate
positive cash flow to fund its operations for the next few years. This estimate
of the period for which the Company expects its available sources of liquidity
to be sufficient to meet its capital requirements is a forward-looking statement
that involves risks and uncertainties. There can be no assurance that the
Company will be able to meet its capital requirements for this period as a
result of certain factors set forth under "Risk Factors -- Future Capital
Requirements: Uncertainty of Additional Funding" and elsewhere in this
Prospectus. In the event the Company's capital requirements are greater than
estimated, the Company may need to raise additional capital to fund its research
and development and to expand its sales and marketing efforts to support the
commercialization of its products under development. The Company's future
liquidity and capital funding requirements will depend on numerous factors,
including the extent to which the Company's products under development are
successfully developed and gain market acceptance, the timing of regulatory
actions regarding the Company's products under development, the costs and timing
of expansion of sales, marketing and manufacturing activities, procurement and
enforcement of patents important to the Company's business and results of
clinical trials, regulatory approvals and competition. There can be no assurance
that additional capital will be available on terms acceptable to the Company, if
at all. Furthermore, any additional equity financing may be dilutive to
stockholders, and debt financing, if available, may include restrictive
covenants. If adequate funds are not available, the Company may be required to
curtail certain Company operations or to obtain funds through entering into
collaborative agreements or other arrangements on unfavorable terms. The failure
by the Company to raise capital on acceptable terms when needed could have a
material adverse effect on the Company's business, financial condition or
results of operations.
The Company may incur additional operating losses over the next few years
in connection with the establishment and operation of its OncoVAX Centers.
Historically, such losses have been principally the result of the various costs
associated with the Company's research and development programs and pre-clinical
and clinical activities. The Company expects that losses will fluctuate from
quarter to quarter and that such fluctuations may be substantial. To date the
Company's revenues have primarily resulted from product sales of diagnostic test
kits. The Company's ability to achieve a consistent, profitable level of
operations is dependent in large part upon continued product research and
development, obtaining regulatory approvals for its existing identified products
and successfully manufacturing and marketing such products.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, in less
than one year, computer systems and software used by many companies may need to
be upgraded to comply with such "Year 2000" requirements.
Management has initiated a program to prepare the Company's computer
systems and other electronic applications for the year 2000 (the "Year 2000
Program"). Through the Year 2000 Program, management is currently reviewing the
Company's computer systems and other electronic applications in order to
identify potential Year 2000 problems. Based upon preliminary results of the
Year 2000 Program, management anticipates that the Company's Year 2000
compliance expenses will not be material and that the Company's Year 2000
Program will be completed before January 1, 2000. The Company's failure to
successfully complete its Year 2000 Program could have a material adverse effect
on the Company's business, financial condition and results of operations.
32
<PAGE> 34
BUSINESS
GENERAL
Intracel is an integrated biopharmaceutical company focused on the
development and commercialization of cancer vaccines and immunotherapeutic and
diagnostic products for cancers and infectious diseases. Based upon the results
of Phase III clinical trials, the Company is preparing a BLA for its OncoVAX(CL)
cancer vaccine for the post-surgical treatment of Stage II colon cancer, the
most common form of colon cancer. The Company is also planning to initiate Phase
III clinical trials for OncoVAX(CL) in combination with chemotherapy for Stage
III colon cancer, has initiated Phase III clinical trials for KLH for the
treatment of refractory bladder cancer, and is planning to initiate a Phase
II/III clinical trial for its ASI(BCL) vaccine for the treatment of low-grade
B-cell lymphoma. In addition, the Company markets a portfolio of in vitro
diagnostic products and is introducing a number of new diagnostic products for
detecting and monitoring various cancers, AIDS and heart disease.
The Company believes that OncoVAX(CL) is the first vaccine to demonstrate
efficacy for the post-surgical treatment of Stage II colon cancer, and has
recently announced the results of the ten-year Phase III Amsterdam trial. This
randomized, multi-centered 254-patient clinical trial was the third in a series
of clinical trials of OncoVAX(CL) conducted in the United States and Europe. The
series included the Phase III ECOG trial and the Phase II/III Hoover trial. In
the Amsterdam trial, which added a fourth booster vaccination to the regimen,
the Company believes that OncoVAX(CL) demonstrated a 61% reduction in the rate
of recurrences and a 50% improvement in the survival rate for patients with
Stage II colon cancer when compared to surgery alone. The Company believes that
the results of the Amsterdam trial are supported by positive trends shown in the
ECOG and Hoover trials. Stage II colon cancer accounts for approximately 120,000
of the more than 200,000 new cases of colon cancer diagnosed in the United
States and Europe each year. There is currently no product approved by the FDA
for patients with Stage II colon cancer, and surgery is the principal means of
treatment. The Company plans to file a BLA for OncoVAX(CL) with the FDA in 1999
and is presently seeking the necessary regulatory and reimbursement approvals in
certain countries in Europe. If the FDA does not consider the trials discussed
above as relevant or supporting to the efficacy of OncoVAX(CL), the FDA may
require additional clinical trials of OncoVAX(CL) prior to or after the FDA's
approval of the product. There can be no assurance that the Company will obtain
FDA approval for OncoVAX(CL) on a timely basis. See "Risk Factors -- Dependence
on OncoVAX(CL)" for a description of certain issues relating to the proposed BLA
filing.
OncoVAX(CL) is a multivalent vaccine produced from a patient's own
surgically removed tumor. The tumor is collected immediately after surgery and
delivered to one of the Company's OncoVAX Centers for manufacture and subsequent
administration of the vaccine. Each OncoVAX Center has been designed to treat up
to 2,000 patients per year. The Company plans to establish OncoVAX Centers at or
near hospitals with established surgery practices, serving areas characterized
by high population density and high incidence of colon cancer. The Company
expects that each OncoVAX Center will require less than 3,000 square feet and
will employ a staff of production technicians and a supervising physician.
Facilities for the first OncoVAX Center in the United States have been
established at Lehigh Valley Hospital in Allentown, Pennsylvania, and the terms
of the Company's ownership in, and operation of, the center are being developed
pursuant to a joint venture with Lehigh Valley Hospital. A second OncoVAX Center
in the United States is being established at the Company's therapeutic
manufacturing facility in Rockville, Maryland. Future OncoVAX Centers may also
be structured as joint ventures with established healthcare providers. The
OncoVAX Centers located in the United States will be considered to be
manufacturing facilities by the FDA and will be regulated accordingly. The first
OncoVAX Center in Europe is being established at University Hospital, Vrije
Universiteit, Amsterdam. The Company plans to establish more than 25 OncoVAX
Centers in the United States and more than 15 OncoVAX Centers in Europe. The
Company estimates that each OncoVAX Center will cost approximately $1.0 to $3.0
million dollars to build. The Company expects revenues from operating OncoVAX
Centers to offset the cost of new centers.
The Company plans to leverage its OncoVAX Centers to perform expedited
clinical trials and to launch other products, such as its in vivo imaging agent,
HumaSPECT, and its B-cell lymphoma vaccine ASI(BCL).
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<PAGE> 35
The Company has filed an amendment to the IND for OncoVAX(CL) with the FDA to
commence a Phase III clinical trial for the use of OncoVAX(CL) in combination
with chemotherapy for the treatment of Stage III colon cancer. The Company
believes that this combination therapy will be more effective in the treatment
of Stage III colon cancer than either OncoVAX(CL) or chemotherapy administered
alone. The Company is currently in discussions with the FDA regarding the
commencement of the Phase III clinical trial for this combination therapy. No
assurance can be given that the Company will be given clearance to commence this
Phase III clinical trial in a timely manner, if at all.
The Company has initiated a Phase III clinical trial for KLH for the
treatment of refractory bladder cancer. In Phase II clinical trials, the Company
believes that KLH demonstrated significantly less toxicity than the leading
FDA-approved product for the treatment of bladder cancer. The Company has
entered into a strategic partnership with Mentor, a leading urology company,
under which Mentor has been funding research and development, is required to
make milestone payments to the Company and will market KLH worldwide. Mentor
also markets Accu-D(x), the Company's rapid bladder cancer test.
The Company plans to file an amendment to the IND for its ASI(BCL)vaccine
with the FDA to commence a Phase II/III clinical trial for such vaccine in the
first half of 1999. ASI(BCL) is designed to prevent recurrence of low-grade
non-Hodgkin's B-cell lymphoma, the most common type of B-cell lymphoma, in
patients who have achieved remission through chemotherapy and/or immunotherapy.
ASI(BCL), like OncoVAX(CL), is an autologous vaccine and is produced using a
unique antigen derived from a patient's own cancerous cells. The Company
believes that a Phase I clinical trial has demonstrated that ASI(BCL) can
stimulate a specific immune response and is associated with improved clinical
outcomes.
The Company has substantial expertise in the development and manufacturing
of totally human antibodies. In April 1998, the Company commenced enrollment in
its Phase I clinical trial for its totally human antibody HumaRAD(16.88) for the
treatment of head and neck cancer and plans to submit an IND with the FDA to
commence a Phase I clinical trial of a related product, HumaRAD(88BV59) for the
treatment of ovarian cancer, in the first half of 1999. In addition, the Company
is developing several antibody products to treat life-threatening infectious
diseases.
Through Bartels, the Company also markets a portfolio of innovative in
vitro diagnostic products for the confirmation of viral and bacterial diseases.
The Company markets these diagnostic products domestically to approximately
1,500 hospitals and clinical laboratories through its internal sales force.
Internationally, the Company relies upon third-party distributors to market its
diagnostic products. In 16 foreign countries, the Company is marketing a
one-minute test for HIV/AIDS based on its proprietary INSTI technology. In
addition, the Company is introducing a number of new diagnostic products,
including its Apo-Tek Lp(a) test kit to monitor an important indicator of heart
disease, its Accu-D(x) test to monitor the recurrence of bladder cancer and its
ZYMMUNE test to monitor CD4/CD8 levels in patients with HIV/AIDS. As a
complementary product for OncoVAX(CL), the Company has developed an in vivo
diagnostic product, HumaSPECT, to monitor recurrence and metastatic spread of
colon cancer. For a Phase III clinical trial, the Company believes that
HumaSPECT demonstrated significant advantages over CT scans, the current
standard for detecting recurrence and metastatic spread of colon cancer. The
Company has filed a BLA in the United States and in December 1998 received
marketing authorization for HumaSPECT in Europe. A third party currently holds
world-wide distribution rights for the Company's HumaSPECT product. While the
Company is currently in negotiations to terminate the agreement providing for
such rights, there can be no assurances that the agreement will be terminated on
a timely basis, if at all.
The Company's technology foundation in cancer vaccines and human antibodies
is supported by a clinical trial group with expertise in designing and
implementing complex clinical trials and by state-of-the-art manufacturing
facilities capable of producing commercial quantities of its therapeutic,
diagnostic and prognostic products. To conduct research, development,
manufacturing and marketing of its products, the Company employs over 220 people
in multiple facilities, including its corporate headquarters in Issaquah,
Washington, a therapeutic product facility located in Rockville, Maryland and
diagnostic product facilities in Issaquah, Washington and Richmond, British
Columbia, Canada.
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<PAGE> 36
BACKGROUND INFORMATION
Overview
Cancer is a family of more than one hundred different diseases which can be
categorized into two broad groups: (i) solid tumors, like colon, breast,
prostate and lung cancer and (ii) hematologic, or blood-borne, cancers like
B-cell lymphoma and leukemia. Both groups are generally characterized by a
breakdown of the cellular mechanisms that ordinarily regulate cell growth and
cell death in healthy tissues.
Cancers develop from normal cells in the body. When a cell ceases to act
according to its pre-programmed function, it may become malignant and grow
uncontrollably. In solid tumors, malignant cells disrupt the normal function of
the tissues in which they are growing and can also spread to other tissues in
the body or "metastasize." This disruption in vital organs, such as the lungs or
the liver, frequently leads to death. Blood-borne cancers primarily affect blood
cells and the immune system. Death from blood-borne cancers is usually caused by
infection and/or vital organ failure.
Despite a substantial investment in cancer research and development during
the past several decades, the overall incidence of cancer is now higher than it
was 30 years ago. According to the World Health Organization, cancer kills six
million people per annum worldwide. The American Cancer Society estimates that,
in the United States, the incidence of new cancer cases in 1998 will be
approximately 1.2 million and that over 560,000 people will die from cancer. In
addition, according to the American Cancer Society, over 35% of all Americans,
or 85 million people, now living will eventually contract some form of cancer.
According to statistics published by the American Cancer Society which are
based on estimates from the National Cancer Institute, approximately 35% of all
new cancer cases and approximately 24% of cancer deaths in the United States in
1998 will be attributable to colorectal, breast, ovarian, bladder and head and
neck cancer. The diagnosis and treatment of these cancers and B-cell lymphoma
are the subject of current development efforts by the Company. The following
table details the new cases, deaths and direct treatment expenditures for
selected cancers in the United States:
NEW CASES, DEATHS AND ANNUAL EXPENDITURES FOR SELECTED CANCERS IN THE UNITED
STATES
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
ANNUAL
EXPENDITURES(2)
TYPE NEW CASES(1) DEATHS(1) (IN MILLIONS)
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Lung 171,500 160,100 $5,060
- ---------------------------------------------------------------------------------
Colorectal 131,600 56,500 6,465
- ---------------------------------------------------------------------------------
Breast 180,300 43,900 6,599
- ---------------------------------------------------------------------------------
Prostate 184,500 39,200 4,610
- ---------------------------------------------------------------------------------
Ovarian 25,400 14,500 906
- ---------------------------------------------------------------------------------
Bladder 54,400 12,500 2,172
- ---------------------------------------------------------------------------------
Head and neck 30,300 8,000 N/A
- ---------------------------------------------------------------------------------
Non-Hodgkin's lymphoma(3) 55,400 24,900 N/A
</TABLE>
- ---------------
(1) Source: American Cancer Society's Cancer Facts and Figures, 1998.
(2) Includes all direct treatment expenses but excludes all indirect and actual
morbidity costs. Source: Brown M.L., Fintor L.; "The Economic Burden of
Cancer," Cancer Prevention and Control, New York, Marcel Dekker, 1995.
(3) Includes B-cell lymphoma, which accounts for a vast majority of new cases
and deaths.
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<PAGE> 37
Current Cancer Treatments
The three most common methods of treating patients with cancer are surgery,
chemotherapy and radiation. Surgery is primarily performed to remove solid
tumors that are accessible to the surgeon and can be effective if the cancer has
not yet metastasized. Frequently, however, the surgeon cannot remove all of the
cancerous cells associated with the solid tumor. This results in the need for
post-surgical "adjuvant" treatment methods, such as chemotherapy or radiation,
to kill or limit growth of remaining cancerous cells and to prevent recurrence
of the cancer.
Chemotherapy, which typically involves the intravenous administration of
cytotoxic drugs designed to destroy cancerous cells, is used for the treatment
of both solid tumors and blood-borne malignancies. Chemotherapeutic drugs
generally interfere with cell division and are therefore more toxic to rapidly
dividing cancer cells. Since cancer cells can often survive the effect of a
single drug, several different drugs are usually given in a combination therapy
designed to target overlapping mechanisms of cellular metabolism and to
overwhelm the ability of cancer cells to develop drug resistance. Nevertheless,
partial and even complete remissions achieved by chemotherapy are often not
permanent, because the treatment does not kill all the cancer cells, and the
cancer resumes its progression within a few months or years of treatment.
Chemotherapy is often re-administered to relapsed patients whose response
typically becomes shorter with each successive treatment as resistance
increases. Eventually, most patients become "refractory" to chemotherapy,
meaning that the length of their response, if any, to treatment is so brief as
to conclude that further chemotherapy regimes would be of little or no benefit.
Chemotherapeutic drugs are not sufficiently specific to cancer cells to
avoid affecting normal cells, especially those that are growing rapidly. As a
result, patients often experience debilitating side effects such as nausea,
vomiting, hair loss, anemia and fatigue, as well as life-threatening side
effects such as immune system suppression. These side effects can limit the
effectiveness of therapy because the clinician must avoid exceeding the maximum
dose of drug that the patient can tolerate. Since dosages must be limited to
avoid unacceptable side effects, it may not be possible to administer
sufficiently high doses of chemotherapeutic drugs to overcome the natural
ability of cancer cells to become resistant.
Radiation is employed to irradiate a solid tumor and surrounding tissues
and is a first-line therapy for inoperable tumors, but side effects are a
limiting factor in treatment. Radiation accomplishes its purpose by killing
cancer cells through a process called ionization. Some cells die immediately
after radiation because of the direct effect, though most die because the
radiation damages the chromosomes and DNA thereby limiting cell division.
Radiation is used frequently in conjunction with surgery either to reduce the
tumor mass prior to surgery or to destroy any tumor cells that may remain at the
tumor site after surgery. However, radiation therapy cannot assure that all
tumor cells will be destroyed and has very limited utility for treating
widespread metastatic disease.
Mechanisms of Immunity
The immune system is composed of specialized cells that recognize, destroy
and eliminate disease-causing foreign substances or cancer cells. There are two
generally recognized components of immunity, cellular immunity and humoral
immunity. Cellular immunity is effected by T lymphocytes ("T-cells"), natural
killer cells, macrophages, and polymorphonuclear leukocytes. T-cells recognize
and can be directly toxic to viruses, bacteria, parasites and cancer cells.
T-cells also secrete cytokines which recruit and activate other immune cells,
such as macrophages, natural killer cells and polymorphonuclear leukocytes, to
the site of infection or tumor, where these cells engulf, or secrete cytotoxic
substances that kill, the foreign substances, infectious agents or cancer cells.
T-cells also direct the development of humoral immunity. Humoral immunity is
effected by antibodies produced by B lymphocytes ("B-cells"). Antibodies are
proteins produced in response to foreign substances called "antigens."
Antibodies have a region that binds specifically to the antigen and a region
that binds other immune cells such as macrophages and natural killer cells. The
region that binds other immune cells is only recognized by these cells when the
antibody is bound to the antigen. Thus, the antibody specifically directs the
elimination of the antigen from the body. In persons with healthy immune
systems, cancerous cells are recognized as antigens and eliminated through a
process called immune
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<PAGE> 38
surveillance. In patients with cancer, the immune surveillance process often
fails, thus allowing cancerous cells to evade elimination by the immune system
and develop into tumors and lymphomas. It is believed, however, that the immune
system's ability to fight cancer can be enhanced through various
immunotherapeutic approaches.
Emerging Immunotherapeutic Cancer Treatments
Scientific progress in defining key aspects of the molecular biology and
immunology of cancer in recent years has yielded a number of promising new
treatment approaches, which potentially overcome some of the major drawbacks of
current treatment modalities. The Company believes that one of the most
promising approaches for the development of cancer treatments is immunotherapy.
The four principal immunotherapeutic or cancer vaccine approaches are described
in the following table and include: (i) Active Specific Immunotherapy, (ii)
Active Non-Specific Immunotherapy, (iii) Antibody-Based Immunotherapy and (iv)
Adoptive Immunotherapy. The Company is developing products which utilize one or
more of the first three of these approaches.
IMMUNOTHERAPEUTIC APPROACHES
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
TYPE OF IMMUNOTHERAPY DESCRIPTION
- -------------------------------------------------------------------------------------
<S> <C>
Active Specific Activation of anti-tumor immunity using antigenic tumor
cells, cell lysates, or extracted/synthetic tumor antigens.
- -------------------------------------------------------------------------------------
Active Non-Specific Activation of anti-tumor immunity and other nonspecific
effector cells using microbial or chemical immunomodulators.
- -------------------------------------------------------------------------------------
Antibody-Based Transfer of antibodies or antisera, providing indirect
enhancement to immunity.
- -------------------------------------------------------------------------------------
Adoptive Transfer of immunological cells from one patient to another.
</TABLE>
Active Specific Immunotherapy involves the stimulation of a patient's
immune system by using a patient's own cancer cells or extracted or synthetic
tumor associated antigens. Cancer vaccines based upon active specific
immunotherapy are typically mixed with a non-specific adjuvant whose role is to
stimulate the immune system's response to the vaccine. By isolating cells or
antigenic components from the tumor, mixing them with an adjuvant, and
reintroducing this mixture back into the individual, the immune system may be
induced to develop a response capable of destroying tumor cells. Active specific
immunotherapy treatments are generally being developed as an adjuvant to
surgery. Adjuvant therapy is necessary because surgery often fails to remove all
primary or metastatic cancer cells. Active specific immunotherapy may offer the
means by which an individual's immune system can be activated throughout the
body to search out and destroy these residual cancer cells. The Company's active
specific immunotherapeutic products include OncoVAX(CL) for the treatment of
colon cancer and ASI(BCL) for the treatment of B-cell lymphoma.
Active Non-Specific Immunotherapy involves the stimulation of a patient's
immune system by using non-specific microbial or chemical immunomodulators, such
as Bacillus Calmette-Guerin ("BCG"), the only FDA-approved immunomodulator for
the treatment of bladder cancer. The mechanisms by which these non-specific
immunomodulators enhance the immune response to antigens are poorly understood
but are thought to involve the inducement of a local inflammatory reaction. This
reaction results in the recruitment and activation of antigen presenting cells,
the production of cytokines and the recruitment of effector T-cells and B-cells
to the site of the antigen. Some of these non-specific agents have also been
shown to be effective as immunogenic carriers and adjuvants. The Company's
active non-specific immunotherapeutic products include KLH for the treatment of
refractory bladder cancer.
Antibody-Based Immunotherapy involves the use of anti-cancer monoclonal
antibodies as stand-alone therapeutics to augment a patient's immune system or
as targeting mechanisms for the administration of radiation or chemotherapy.
While monoclonal antibodies have been shown to be effective in binding to cancer
cells, problems associated with their specificity, immunogenicity and variable
binding properties have to date resulted in a limited number of useful
applications for even the most effective monoclonal antibodies when
37
<PAGE> 39
used alone. Research has increasingly moved towards using monoclonal antibodies
as vehicles for targeting the administration of radiation or chemotherapy to the
immediate vicinity of malignant cells. The Company's antibody-based
immunotherapeutic products include HumaRAD(16.88) and HumaRAD(88BV59), totally
human antibodies labeled with (90)Yttrium for the intratumoral treatment of head
and neck cancer and of ovarian cancer, respectively.
Adoptive Immunotherapy involves the transfer of immunological cells with
anti-cancer properties from one patient into another in the hope that these
cells either directly or indirectly produce anti-cancer effects on growing
tumors. Although significant advances have been made, the available data remains
inconclusive. At present, the Company is not active in this field.
THERAPEUTIC PRODUCTS
The Company has accumulated and developed proprietary technology and
expertise in several different approaches to the development of cancer vaccines
and immunotherapeutics. The diversity of the Company's product and technology
portfolio reflects the Company's belief that different approaches are required
for different cancers. The following table sets forth the Company's leading
therapeutic and in vivo monitoring products, classifies each according to its
immunotherapeutic approach, specifies the cancer indication treated or monitored
by each and summarizes the regulatory status of each:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
THERAPEUTIC PRODUCTS
- ---------------------------------------------------------------------------------------------------------
IMMUNOTHERAPEUTIC/ CLINICAL TRIAL STATUS/
PRODUCT DIAGNOSTIC APPROACH INDICATION EXPECTED MILESTONES(1)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OncoVAX(CL) Active Specific Stage II colon cancer Phase III complete, BLA
Immunotherapy filing expected in 1999.
Launch in Europe expected
in first half of 1999
subject to opinions on
national regulatory
status.(2)
- ---------------------------------------------------------------------------------------------------------
OncoVAX(CL) plus Active Specific Stage III colon cancer Amendment to IND filed for
chemotherapy Immunotherapy plus Phase III.(3)
chemotherapy
- ---------------------------------------------------------------------------------------------------------
KLH Active Non-Specific Refractory bladder cancer Phase III initiated.
Immunotherapy
- ---------------------------------------------------------------------------------------------------------
ASI(BCL) Active Specific B-cell lymphoma Phase II/III amendment to
Immunotherapy IND planned for submission
in 1999.
- ---------------------------------------------------------------------------------------------------------
HumaRAD(16.88) Antibody-Based Diagnosis Head and neck cancer Phase I enrollment
commenced.
- ---------------------------------------------------------------------------------------------------------
HumaRAD(88BV59) Antibody-Based Diagnosis Ovarian cancer Phase I IND planned for
submission in 1999.
- ---------------------------------------------------------------------------------------------------------
MONOGENE(INT) Antibody-Based Gene HIV Phase I IND planned for
Therapy submission in 1999.
- ---------------------------------------------------------------------------------------------------------
</TABLE>
- ---------------
(1) See "Risk Factors -- Government Regulation: No Assurance of Regulatory
Approvals" and "-- Government Regulation."
(2) See "Risk Factors -- Dependence on OncoVAX(CL)" for a description of certain
issues relating to the proposed BLA filing.
(3) See "Risk Factors -- Dependence on OncoVAX(CL)" for a description of certain
issues relating to the status of this IND amendment.
OncoVAX(CL) for the treatment of colon cancer
The American Cancer Society estimates that approximately 95,600 Americans
will be diagnosed with colon cancer in 1998 and approximately 47,700 will die
from colon cancer in 1998, ranking second only to lung cancer as a cause of
death from cancer. According to Facts and Figures in the European Community
(1993), colon cancer afflicts over 120,000 people annually in Europe, with
deaths from colon cancer estimated at over 79,000 per year. Colon cancer is
generally classified into four categories or stages according to the status of
the
38
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tumor nodes and metastasis. In Stage I colon cancer, the tumor has not
penetrated the bowel wall and surgery is curative in more than 90% of the cases.
In Stage II colon cancer, penetration of the bowel wall has occurred but
regional lymph nodes are negative and surgery is curative for approximately 70%
of these patients. Approximately two-thirds of patients with colon cancer
present with Stage II disease. In Stage III colon cancer, the tumor has spread
to the lymph nodes and the cure rate is moderate to poor depending on the extent
of lymph node involvement. In Stage IV colon cancer, the cancer has spread to
other vital organs in the body and is fatal in the vast majority of cases.
Generally, patients that recur present with advanced colon cancer and the
prognosis for these patients is very poor.
Except for surgery, there is no medically accepted treatment for either
Stage I or Stage II colon cancer and trials using adjuvant chemotherapy have not
clearly demonstrated any patient benefit. For Stage III colon cancer, a
combination of the chemotherapeutic drugs 5-fluorouracil ("5-FU") and levamisole
or leucovorin is the treatment of choice in the United States and in Europe. The
Company estimates that between 20% and 30% of patients fail to complete their
course of chemotherapy because of adverse reactions.
OncoVAX(CL) is an active specific immunotherapeutic for the post-surgical
treatment of patients diagnosed with Stage II colon cancer. OncoVAX(CL) is
prepared for each patient using the patient's own surgically removed tumor.
After receipt at an OncoVAX Center, the tumor is enzymatically treated to
separate the tumor cells and these cells are frozen awaiting preparation of the
vaccine. The vaccine consists of a regimen of four inoculations administered
over a period of six months. When a patient presents approximately four to five
weeks after surgery for the first inoculation and one week later for the second
inoculation, a portion of the tumor cells is thawed, irradiated to neutralize
tumorigenic potential and combined with a proprietary formulation of BCG that
serves as an immunogenic enhancer. The third inoculation (given one week after
the second inoculation) and the final booster inoculation (given six months
after the initial inoculation) are prepared the same way but without the
addition of BCG.
In the Amsterdam trial, OncoVAX(CL) was tested in the prospectively
randomized, multi-center Phase III clinical trial. A total of 254 patients were
randomized postoperatively to receive either OncoVAX(CL) or no further treatment
after eligibility was established. Eligible patients included patients with
confirmed Stage II or Stage III disease whose primary tumors had an adequate
number of cells to allow for the production of OncoVAX(CL). Twelve hospitals
within a four-hour radius of University Hospital screened potential candidates
for the protocol. The potential candidate's colon resection was performed at one
of the twelve sites, and the tumor specimen was transported to University
Hospital's vaccine production laboratory for processing.
The Company believes that the Amsterdam trial demonstrated that, at a
median follow-up period of 5.4 years after treatment, OncoVAX(CL) significantly
reduces the rate of tumor recurrences by 44% in patients with Stage II and III
colon cancer. In Stage II patients, OncoVAX(CL) had the greatest impact with a
statistically significant 61% reduction in the rate of recurrences along with
proportional increases in overall survival.
The Company believes that, in addition to its efficacy, OncoVAX(CL) has
demonstrated an extremely favorable safety profile. Over a 15-year period, more
than 700 people have received either a three- or four-shot regimen of
OncoVAX(CL) with no significant side effects reported. The Company believes that
the results of the Amsterdam trial confirmed positive trends seen in the ECOG
and Hoover trials that tested OncoVAX(CL) administered in regimens of three
inoculations without a six-month booster inoculation.
The Company is now preparing a BLA for OncoVAX(CL) for submission to the
FDA in 1999. The Company is also seeking the necessary registrations and
reimbursement approvals in certain countries in Europe.
To commercialize OncoVAX(CL), the Company is planning to establish OncoVAX
Centers at or near hospitals with established surgery practices. OncoVAX Centers
have been designed to treat up to 2,000 patients per year. The Company expects
that each OncoVAX Center will require less than 3,000 square feet and contain
all the equipment, facilities and personnel necessary to manufacture, store and
administer OncoVAX(CL). The first centers in the United States are planned for
areas characterized by high population density and high incidence of colon
cancer. In each OncoVAX Center, the Company will employ or otherwise
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<PAGE> 41
retain a staff of production technicians and a supervising physician. Each
OncoVAX Center will be responsible for collecting tumors from regional
colorectal surgeons. The Company estimates that most OncoVAX Centers can be
established and put into operation for an investment between $1.0 and $3.0
million per site. Facilities for the first OncoVAX Center in the United States
have been established at Lehigh Valley Hospital in Allentown, Pennsylvania, and
the terms of the Company's ownership in, and operation of, the facilities are
being developed pursuant to a joint venture with Lehigh Valley Hospital. A
second OncoVAX Center in the United States is being established at the Company's
therapeutic manufacturing facility in Rockville, Maryland. A Research and Center
Agreement has been entered into between the Company and Duke University for the
establishment of an OncoVAX Center at Duke University Medical Center whereby the
required facilities and personnel will be provided to the Company. In addition,
the Company has signed letters of intent with each of Vanderbilt University
Medical Center, the Robert H. Lurie Comprehensive Cancer Center of Northwestern
University, the University of Rochester Medical Center and Hoag Memorial
Hospital Presbyterian to form joint ventures for the formation of additional
OncoVAX Centers. The OncoVAX centers located in the United States will be
considered to be manufacturing facilities by the FDA and will be regulated
accordingly. The first OncoVAX Center in Europe is being established at
University Hospital, Vrije Universiteit, Amsterdam. The Company plans to
establish more than 25 OncoVAX Centers in the United States and more than 15
OncoVAX Centers in Europe.
The Company and Lehigh Valley Hospital have entered into a joint venture
agreement to own and operate an OncoVAX Center for the manufacture of
OncoVAX(CL) and other oncological products and to provide, or arrange for the
provision of, such products to cancer patients in the mid-Atlantic region of the
United States. Prior to FDA approval for OncoVAX(CL), the Company will lease
facilities and equipment (the "Equipment") from Lehigh Valley Hospital for the
purpose of manufacturing and producing OncoVAX(CL) for use in the conduct of
clinical trials and arranging and/or sponsoring such clinical trials. Upon
receipt of FDA approval for OncoVAX(CL), the parties will form and capitalize a
new entity in which Intracel and Lehigh Valley Hospital will be the sole
shareholders. In connection with the formation of such new entity, the Company
will then purchase the Equipment in exchange for cash in the amount of $36,842
and a promissory note made by the Company and payable to Lehigh Valley Hospital
in the maximum principal amount of approximately $663,518 together with
interest, convertible into shares of the Company's common stock at a minimum
conversion price that is generally based upon the then current public trading
price of the Company's common stock (which shall in no event be less than 75% of
the per share price to the public of common stock in this offering) and which
shall be secured by a pledge of the Equipment. Concurrently with such purchase,
the Company will contribute the Equipment in exchange for ninety-five percent of
the joint venture entity's issued capital stock and Lehigh Valley Hospital will
purchase the remaining five percent for cash. Under the terms of the agreement
it is contemplated that the Company shall be primarily responsible for case
management, reimbursement, quality assurance, sales and marketing and supply of
materials necessary for the manufacture and production of OncoVAX(CL) while
Lehigh Valley Hospital shall be primarily responsible for the provision of
bioengineering and housekeeping support services, specialized laboratory testing
and the development of relationships with managed care entities and physician
groups. In addition, Lehigh Valley Hospital shall provide, on a limited basis,
an employee physician to serve as "medical director" to the Lehigh Valley
Hospital OncoVAX Center in exchange for payment to Lehigh Valley Hospital of an
amount reflecting the fair market value of such services, which the parties
agree will equal $75,000 for the first year of the agreement.
Herbert C. Hoover, Jr., M.D., the Chairman of the Department of Surgery at
Lehigh Valley Hospital, has agreed to spend 25% of his professional time to
continue to assist the Company in setting up OncoVAX Centers. See "-- Medical
Advisory Board." The Company has agreed to pay to Lehigh Valley Hospital the sum
of $125,000 per annum, which amount will be offset by Lehigh Valley Hospital
against the salary that the hospital pays to Dr. Hoover. It is anticipated that
Dr. Hoover's time commitment to the Company will increase with the progressive
implementation of the Company's OncoVAX(CL) program and that the salary offset
will be renegotiated to appropriately reflect his growing time commitment.
Intracel has agreed to grant to Dr. Hoover options to purchase up to 133,333
shares of the Company's common stock with an exercise price equal to the lesser
of $13.00 per share and the price per share being offered to the public in this
offering, with vesting terms of 25% fully vested upon grant and 25% of such
options will vest on each of the first, second
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and third anniversaries of such grant. In addition, the Company has agreed to
grant to Dr. Hoover an additional 66,666 options at such time as the OncoVAX
Center at Lehigh Valley Hospital is open and treating the first patients. It is
anticipated that further stock options will be granted to Dr. Hoover in
connection with the achievement of additional milestones to be determined in the
future. Dr. Hoover currently is the holder of 200,000 shares of the Company's
common stock.
The Company plans to leverage its OncoVAX Centers to perform expedited
clinical trials and to launch other products, such as its in vivo imaging agent
HumaSPECT for monitoring recurrence of colon cancer and ASI(BCL) for prevention
of recurrence of disease in B-cell lymphoma. In the immediate term, the Company
plans to use the OncoVAX Centers to conduct a Phase III clinical trial for
OncoVAX(CL) in combination with chemotherapy to treat Stage III colon cancer
patients. See "Risk Factors -- Dependence on OncoVAX(CL)" for the status of the
Company's clinical trial for such product.
KLH for the treatment of bladder cancer
The American Cancer Society estimates that there will be 54,400 new cases
of bladder cancer in the United States in 1998. Bladder cancer is the fourth
most prevalent malignant disease among male patients and the eighth among female
patients. The Company estimates that approximately 350,000 people in the United
States currently have had or are living with bladder cancer. Patients diagnosed
with bladder cancer present with superficial tumors of which approximately 80%
are papillary and the remaining 20% are carcinoma in situ ("CIS"). Superficial
papillary tumors respond well to endoscopic surgery and post-surgical adjuvant
therapy, but recurrence at the same or another site in the bladder is relatively
common. CIS has particularly invasive and lethal potential and is not amenable
to surgical resection. Intravesicular therapy, using chemotherapy and/or BCG, is
used to treat endoscopically unresectable bladder cancer lesions. It is also
used after surgery as adjuvant therapy designed to prevent recurrences.
The Company is developing an active, non-specific immunotherapeutic
approach for the treatment of bladder cancer using a proprietary formulation of
keyhole limpet hemocyanin. Keyhole limpet hemocyanin is a potent immune
stimulator that induces a non-specific inflammatory response in the bladder.
However, a tumor-specific phenomenon may be involved as it has been recognized
that keyhole limpet hemocyanin shares an antigen in common with bladder cancer
cells. The Company believes that keyhole limpet hemocyanin has a significantly
more favorable toxicity profile than BCG therapy and chemotherapy. Keyhole
limpet hemocyanin is also being used by the Company and others as an immunogenic
enhancer for products based upon active specific immunotherapy.
The Company has completed a Phase I/II dose escalation study on KLH for
superficial bladder cancer and CIS of the bladder. KLH was administered as a
treatment for those bladder cancer patients that did not respond to treatment
with BCG or chemotherapy. Data from the Phase I/II study indicates that, of the
25% of all bladder cancer patients who fail to respond to BCG or other forms of
treatment, KLH has a greater than 50% complete response rate. Based upon these
results, the Company has commenced a Phase III clinical trial to evaluate the
efficacy of KLH for the treatment of refractory bladder cancer.
Agreements with Mentor
On June 16, 1997, the Company entered into an exclusive distribution
agreement with Mentor for the Accu-D(X) bladder cancer diagnostic product, which
the Company refers to as Accu-D(X), with an initial term of five years and is
automatically renewable for a one year term thereafter until either party
terminates the agreement with 180 days written notice. Under this agreement,
Mentor accepts title of the product shipments upon receipt and pays the Company
a specific purchase price defined by the agreement. Additionally, Mentor will
pay the Company a royalty of 50% of its net sales of the Company's product, less
the specific purchase price as defined in the agreement. The Company is
obligated to provide up to 12,000 units of the product per year to be used by
Mentor for promotional purposes, at no cost to Mentor.
On December 22, 1997, the Company entered into a research, collaboration
and distribution agreement with Mentor whereby the Company agreed to provide
certain research, development and pilot programs for Mentor in exchange for
research and development fees in an aggregate amount of $3,000,000 based on a
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milestone payment schedule. As of December 31, 1997, the Company had not earned
any milestone payments. The Company will receive $1,000,000 within five days of
submission of written notice of the completion of each milestone to Mentor. The
Company is required to pay the cost in excess of $3,000,000 for expenditures
within the scope of the project development schedule. The Company is the owner
of all rights to proprietary technical information and the United States Patent
to which Mentor was granted exclusive world-wide rights to market, sell and
distribute the program product. This agreement is effective for a ten year
period following the first approval of commercialized use of products under
development. Mentor has the right to terminate this agreement at the expiration
of five years from the date of the first approval of commercialized use of the
product based upon 180 days written notice to the Company. As of September 30,
1998, the Company has received to date milestone payments from Mentor in the
amount of $1,000,000.
ASI(BCL) for the treatment of B-cell Lymphoma
The American Cancer Society estimates that approximately 55,400 cases of
non-Hodgkin's lymphoma will be diagnosed in the United States in 1998. As with
other cell types in the body, the B-cells and T-cells of the immune system may
become malignant and grow as systemic tumors such as lymphomas. B-cell non-
Hodgkin's lymphomas are one such group of cancers of the immune system and
currently afflict approximately 250,000 people in the United States alone.
B-cell non-Hodgkin's lymphomas are diverse with respect to both diagnosis and
treatment and are generally classified as low-grade, intermediate or high grade.
The Company estimates that approximately half of the 250,000 patients afflicted
with non-Hodgkin's lymphoma in the United States have low-grade or follicular
lymphoma and approximately 18,000 of these have been diagnosed within the
previous 12 months. Treatment alternatives for lymphoma patients include
chemotherapy, radiation and Rituxan(R) and Intron A, which is currently
indicated for use in refractory, low-grade, CD20 positive B-cell non-Hodgkin's
lymphoma.
In conjunction with researchers at Stanford University, the Company has
been developing ASI(BCL), an active specific immunotherapeutic product for the
treatment of B-cell lymphoma, as an adjuvant therapy to chemotherapy and
antibody-based immunotherapy. The approach is based upon the observation that
each clone of B-cells expresses on the cell surface an antibody unique to that
clone. Each patient's B-cell lymphoma may be characterized by the unique portion
of the antibody molecule, the idiotype, expressed on the surface of that
patient's tumor cells and this idiotype constitutes a patient-specific,
tumor-specific antigen. By stimulating an immune response against this idiotype,
the Company believes that ASI(BCL) may be able to prevent the continuous pattern
of tumor relapse in B-cell lymphoma patients completing remission therapy.
Results from a Phase I study indicated that when B-cell lymphoma patients
were immunized during remission, 71% (15 out of 21) developed an immune response
to ASI(BCL). Of these responding patients, 87% (13 out of 15) remained in a
state of remission for a median duration of 7.9 years. An additional Phase I
activity study has been ongoing since 1995 for which the Company has prepared 31
vaccines, of which 27 have now been administered. Based upon results obtained to
date, the Company is preparing to file an amendment to its existing IND to
commence a Phase II/III clinical trial of ASI(BCL) in the United States in the
first half of 1999.
HumaRAD
The Company is developing HumaRAD(16.88) and HumaRAD(88BV59), radiolabeled
human monoclonal antibodies for the treatment of head and neck cancer and of
ovarian cancer, respectively. Focal head and neck cancer grows locally and
usually metastasizes to the regional lymph nodes rather than to distant sites.
This compartmentalization provides an opportunity for intratumoral injection of
a radiolabeled monoclonal antibody. The American Cancer Society estimates that
30,300 people in the United States will develop head and neck cancer in 1998 and
that approximately 8,000 people will die in 1998 from the disease. Surgery and
radiation are the only currently available treatments for head and neck cancer
and are often disfiguring. Like head and neck cancer, ovarian cancer is a
relatively localized disease. The American Cancer Society estimates that, in
1998, there will be 25,400 cases of newly diagnosed ovarian cancer in the United
States and that approximately 14,500 people will die in 1998 from the disease.
Approximately 70% of patients with ovarian cancer are diagnosed with advanced
disease. The introduction of platinum combination chemotherapy and
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taxol has greatly improved medium-term survival, but long-term survival rates
remain low. The prognosis is particularly poor for patients with recurrent or
progressive disease.
The Company's HumaRAD products utilize radioimmunotherapy ("RIT"), a form
of targeted radiation therapy, by having a human monoclonal antibody carry a
therapeutic dose of radiation, in this case (90)Yttrium, to tumor cells. By
targeting "compartmentalized" tumors with intratumoral injections of a human
monoclonal antibody, the Company believes its HumaRAD products may overcome
systemic toxicity and the antigenicity of non-human antibodies, two of the major
problems previously encountered with RIT in the treatment of solid tumors.
The Company has developed extensive expertise in the RIT field. The
Company's HumaRAD human monoclonal antibodies bind with a variety of tumor types
in vivo and have been shown to be specific for tumor localization in patients
with colorectal, breast, ovarian and head and neck cancer. One of the most
important advantages seen with these HumaRAD products is their lack of
immunogenicity in patients. This is in contrast to a single administration of a
mouse monoclonal antibody from which the majority of patients develop a human
anti-mouse response precluding further or frequent treatment with the mouse
antibody. The administration of HumaRAD, even following multiple infusions, does
not elicit a human anti-human response. This is important because multiple
infusions are necessary to deliver a therapeutic dose of radiation.
The Company, by using intratumoral injections of HumaRAD(16.88) in patients
with head and neck cancer, has been able to demonstrate that it can deliver
therapeutic doses of radiation to the primary tumor and metastatic lymph nodes.
In ovarian cancer, where the whole peritoneal cavity is at risk and the majority
of patients present with advanced disease, the Company is evaluating the
intraperitioneal administration of HumaRAD(88BV59) in patients who have minimal
residual disease following surgery and chemotherapy. The Company has commenced
enrollment of its Phase I clinical trial of HumaRAD(16.88) for the treatment of
head and neck cancer and plans to submit an IND with the FDA to commence a Phase
I clinical trial of HumaRAD(88BV59) for the treatment of ovarian cancer in the
first half of 1999.
Other products
The successful development of HumaSPECT and the Company's HumaRAD products
has enabled the Company to extend its human antibody program to the development
of products to treat several serious infectious diseases in North America and
Europe. The principal targets of this program are life-threatening infectious
diseases, including nosocomial, or hospital-borne, infections and HIV/AIDS.
The Company is developing human monoclonal antibodies for three different
types of bacteria: staphylococcus epidermidis, enterococcus faecalis and
enterococcus faecium. Some of this work was initiated pursuant to an agreement
with Baxter which terminated in March 1998. Baxter may have some residual
licensing rights to products developed during the course of this contract.
Staphylococcus epidermis is a major cause of infections of premature infants in
hospitals. Enterococcus faecalis and enterococcus faecium are major causes of
serious infections in immunocompromised patients. The seriousness of
enterococcus infection, particularly faecium, is exacerbated by the increasing
prevalence of resistance to antibiotics, including vancomycin. The Company plans
to file an IND to commence Phase I clinical trials of one or more of these
antibodies in the first half of 1999.
The Company has also been developing its MONOGENE(INT) antibody-based gene
therapy product for the treatment of patients with HIV/AIDS. MONOGENE(INT)
involves the introduction of an antibody gene into key immune cells of the body.
The antibody gene allows the immune cells to produce an antibody fragment which
binds to the critical integrase protein and which, in extensive preclinical
testing, has been shown to strongly inhibit HIV infection. The Company believes
that this gene therapy approach is less toxic and less likely to result in viral
resistance than certain other therapies. The Company is currently focused on
manufacturing clinical grade quantities of MONOGENE(INT) necessary for use in
conducting a Phase I clinical trial.
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DIAGNOSTIC PRODUCTS
In addition to its therapeutic products portfolio, the Company also
develops, manufactures and markets a portfolio of in vitro diagnostic products.
The Company's diagnostic business unit has been expanded through acquisition and
internal development to include the following products:
<TABLE>
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------
DIAGNOSTIC PRODUCTS
- ------------------------------------------------------------------------------------------------------
PRODUCT DIAGNOSTIC USES STATUS(1)
- ------------------------------------------------------------------------------------------------------
Confirmatory diagnostic Viruses and bacteria Being marketed.
products
- ------------------------------------------------------------------------------------------------------
INSTI HIV-1/2 HIV Registered or approved in 16 countries.
- ------------------------------------------------------------------------------------------------------
Chemotrax(BR) Breast cancer Pre-market approval ("PMA") application approved.
- ------------------------------------------------------------------------------------------------------
ZYMMUNE CD4/CD8 HIV 501(k) cleared. Being marketed.
- ------------------------------------------------------------------------------------------------------
Accu-D(x) Bladder cancer 501(k) cleared. Being marketed by Mentor.
- ------------------------------------------------------------------------------------------------------
Apo-Tek Lp(a) Cardiovascular disease 501(k) cleared. Being marketed by Sigma
Diagnostics, Inc. ("Sigma").
- ------------------------------------------------------------------------------------------------------
HumaSPECT Monitoring of colon BLA submitted in the United States.(2) Marketing
cancer authorization granted in Europe.
- ------------------------------------------------------------------------------------------------------
HumaSPECT Ovarian cancer Phase II completed.
- ------------------------------------------------------------------------------------------------------
</TABLE>
(1) See "-- Government Regulation -- Device Regulation."
(2) See "Business -- Diagnostic Products -- In Vivo Diagnostics" for a
description of certain issues relating to the Company's BLA for HumaSPECT.
IN VITRO DIAGNOSTICS
Confirmatory diagnostic products
With the exception of pathogens which have a major effect on the blood
supply, such as HIV and hepatitis, a significant volume of virology and
bacteriology testing in the United States and elsewhere continues to employ
standard cell culture techniques. Depending on the pathogen suspected and the
organs involved, a fecal, sputum or blood sample is taken from the patient and
sent to a hospital or clinical laboratory in a plastic transport containing a
liquid preservative. The laboratory incubates the patient sample with a cell-
line selected for its ability to produce the suspected pathogen. After a
standard incubation period, the cells are then exposed to antibodies that
recognize the virus or bacterium for which the test has been designed. These
antibodies are coupled with dyes or enzymes so laboratory technicians can
observe whether the virus or bacterium is present.
Through Bartels, the Company manufactures and/or markets a comprehensive
family of products required for every step of this process and is widely
regarded as one of the leading suppliers in the field. The product portfolio
includes 31 transports, 50 cell-lines, more than 60 antibodies and 66
enzyme-linked immuno-assay ("ELISA") tests. The Company also supplies
instrumentation required to read the results of its ELISA tests. In accordance
with standard industry practice, these instruments are generally furnished to
customers at a charge that is based, in part, upon customer purchase volume.
INSTI HIV-1/2
After several international clinical trials, the Company is currently
launching a rapid test for detection of HIV-1 and HIV-2. The INSTI HIV-1/2 test
takes approximately one minute to run, is easy to perform and interpret and is
as sensitive and specific as most instrument-based tests which take more than an
hour or more and many steps to perform. The product has been registered/approved
in India, Thailand, Chile, Russia,
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Pakistan, South Africa, Venezuela, Costa Rica, Panama, Colombia, Jordan, Belize,
Haiti, the Dominican Republic, Surinam and Turkey. The Company has not sought
and does not anticipate seeking approval of this product for marketing in the
United States. INSTI HIV-1/2 is the first product utilizing the Company's INSTI
platform technology that provides a fast and accurate antibody detection system
for serum, plasma and whole blood samples. In addition to speed and accuracy,
the INSTI format has been designed for high-volume, low-cost production. The
product is being manufactured at the Company's facility in Richmond, British
Columbia, Canada.
Chemotrax(BR)
Until recently, there has been no FDA-approved test to determine the
sensitivity of solid tumors to the range of chemotherapeutic agents available to
treat these tumors. In 1996, after a four-year PMA application process, Bartels
Prognostics (a company, unrelated to Bartels, in which Intracel has a minority
financial interest) received FDA approval to market Chemotrax(BR), a
chemotherapeutic sensitivity test to be used in conjunction with the treatment
of breast cancer. Clinical trials demonstrated that Chemotrax(BR) accurately
measured breast tumor cell sensitivity to 5-FU, a type of chemotherapy widely
used to treat breast and other cancers, and that assay results correlated
closely to patient clinical responses to 5-FU. Bartels Prognostics has received
FDA approval of an investigational device exemption ("IDE") for the testing of
four other chemotherapeutic agents and intends to supplement the IDE to obtain
FDA approval to those two other chemotherapeutic agents so that a panel of
standard chemotherapies can be evaluated for each breast cancer patient. The
clinical trials have not yet commenced. The Company has exclusive rights to
market Chemotrax(BR).
ZYMMUNE CD4/CD8
The Company is launching ZYMMUNE CD4/CD8, a product to determine the number
of CD4 and CD8 immune cells in the body. CD4/CD8 counts are an important marker
for staging and treating HIV-infected individuals and implementing therapeutic
intervention. The demand for CD4/CD8 testing is expected to grow as patients on
the new triple therapy regimes live longer and require extended monitoring. The
standard methodology used to determine the level of these immune cells has been
a combination of flow cytometry and hematology. ZYMMUNE CD4/CD8 is a simpler,
less costly alternative to the flow cytometer and provides results in less than
35 minutes. The ZYMMUNE CD4/CD8 testing system received final FDA clearance in
November 1995 and is now in expanded field trials.
Accu-D(x)
The Company has developed Accu-D(x), a point-of-care in vitro diagnostic
test for the detection of recurrent bladder cancer. Accu-D(x) is a urine-based
test which can be performed in a physician's office in about seven minutes. The
Company estimates that the market potential for Accu-D(x) in the United States
includes approximately 350,000 persons previously diagnosed with bladder cancer.
Accu-D(x) was cleared for marketing by the FDA in April 1997. The Company has
also entered into an agreement with Mentor for the marketing and distribution of
Accu-D(x), pursuant to which product sales began in early 1998. Under the terms
of the agreement, the Company receives 50% of the net sales of the product.
Apo-Tek Lp(a)
In November 1997, the Company received FDA clearance to market its Apo-Tek
Lp(a) test kit which detects Lipoprotein(a) ("Lp(a)"), a single independent risk
factor for astherosclerotic cardiovascular disease. The Company estimates that
over 57 million Americans have one or more types of cardiovascular disease. The
Company's Apo-Tek Lp(a) test can be used with human serum or plasma to detect
and accurately quantify Lp(a) levels and shows no cross reactivity with
plasminogen or other plasma components. The Company currently has a distribution
agreement with Sigma in connection with Apo-Tek Lp(a), pursuant to which product
sales began in early 1998.
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IN VIVO DIAGNOSTICS
The Company plans to market OncoVAX(CL) in conjunction with HumaSPECT,
which has been designed to detect recurrence of colorectal cancer. HumaSPECT is
a totally human antibody that is labeled with a radioisotope and then injected
into a patient to detect recurrent or metastatic spread of colon cancer. Because
HumaSPECT utilizes a human antibody (rather than a non-human antibody that can
elicit an adverse reaction by the patient's own immune system), it can be
repeatedly infused. A multi-center Phase III clinical trial was completed for
HumaSPECT in 1996. In this trial, the Company believes that HumaSPECT
demonstrated to be as accurate as CT scans in detecting recurrence of colorectal
cancer and significantly superior to CT scans in determining whether a
recurrence is inoperable. The Company has since submitted a BLA to the FDA and
recently received marketing authorization for HumaSPECT in Europe. The Company
believes, with the European Commission's approval, that HumaSPECT is the first
totally human antibody approved for use in humans. HumaSPECT is also being
evaluated in clinical trials for its efficacy in detecting recurrent lung,
ovarian and prostate cancer. The Company plans to recommend HumaSPECT to
patients vaccinated with OncoVAX(CL) to monitor recurrence and metastatic spread
during the three-year period following vaccination. HumaSPECT can be
administered and the results interpreted at an OncoVAX Center, with the results
sent to a patient's oncologist or physician for further action, if required.
On November 5, 1997, the FDA advised the Company in writing that its BLA
for HumaSPECT was not approvable at that time. The letter raised questions
regarding clinical and manufacturing process issues and questions related to the
FDA's inspection of the manufacturing facility itself. The Company submitted
responses to the issues raised in the FDA letter via letters dated April 10, May
19 and 29, and July 15 and 24, 1998. The Company believes it has responded to
the issues raised by the FDA. However, discussions with the FDA on these matters
are ongoing. Once a company fully responds to the FDA, the agency has six months
to either approve the BLA or issue a "complete action" letter setting forth
specific deficiencies, if any, and the actions necessary to receive approval.
There can be no assurance, however, that upon review of these submissions that
the FDA ultimately will approve the BLA for HumaSPECT.
A third party currently holds world-wide distribution rights for the
Company's HumaSPECT product. While the Company is currently in negotiations to
terminate the agreement providing for such rights, there can be no assurances
that the agreement will be terminated on a timely basis, if at all.
MANUFACTURING
The Company manufactures its therapeutic products in Rockville, Maryland in
a facility of approximately 120,000 square feet. The Rockville, Maryland
facility contains facilities for production of human monoclonal antibodies, gene
therapy and production of vaccines from antisera as well as extensive research
and development facilities. The Company manufactures all of its FDA-cleared
diagnostic products in two registered facilities totaling approximately 54,000
square feet in Issaquah, Washington. The Company's INSTI HIV-1/2 product is
manufactured in a facility of approximately 7,000 square feet in Richmond,
British Columbia, Canada. Facilities for the first OncoVAX Center in the United
States have been established at Lehigh Valley Hospital in Allentown,
Pennsylvania, and the terms of the Company's ownership in, and operation of, the
center are being developed pursuant to a letter of intent with Lehigh Valley
Hospital. A second OncoVAX Center in the United States is being established at
the Company's therapeutic manufacturing facility in Rockville, Maryland. The
first OncoVAX Center in Europe is being established at University Hospital,
Vrije Universiteit, Amsterdam, The Netherlands. The Company is planning to
establish more than 40 OncoVAX Centers in the United States and Europe to
manufacture and administer OncoVAX(CL). All of the Company's facilities are
leased. Upon establishment of the OncoVAX Centers, the Company believes that its
facilities will be adequate for the foreseeable future.
MARKETING AND SALES
The Company markets and sells its diagnostic products in the United States
through its own direct sales force, which consists of 17 employees. Outside the
United States, the Company utilizes local distributors for the sale of its
diagnostic products. The Company has appointed Sigma and Mentor as exclusive
world-wide distributors for Apo-Tek Lp(a) and of Accu-D(x), respectively.
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The Company plans to market and sell OncoVAX(CL) and HumaSPECT through
OncoVAX Centers to be established in the United States and Europe. The Company
anticipates that OncoVAX Centers will be supported by account representatives
with both sales and service responsibilities with centralized marketing support
located in Rockville, Maryland. The Company has appointed Mentor as exclusive
world-wide distributor for KLH, but has not appointed distributors for any of
its other therapeutic products.
RESEARCH AND DEVELOPMENT
The Company employs approximately 25 people in research and development, 16
of whom hold advanced degrees in chemistry and molecular biology. Their research
and development efforts range from generic cancer vaccines to gene therapy for
HIV/AIDS. For the six months ended December 31, 1995, the year ended December
31, 1996 and the year ended December 31, 1997, the Company (on a pro-forma basis
after giving effect to the Merger as if it had occurred on January 1, 1997)
spent $1.1 million, $1.0 million and $8.6 million, respectively, on research and
development.
REIMBURSEMENT
The ability of the Company to successfully commercialize its products
depends, in part, on coverage and reimbursement of such products by third-party
payers, such as government health care programs (including Medicare and
Medicaid), indemnity insurers, and managed care organizations. In the past
several years there have been numerous initiatives on the federal and state
government levels for comprehensive or incremental reforms affecting the payment
for health care services and products, including a number of proposals that
would significantly limit reimbursement under the Medicare and Medicaid
programs. The Company anticipates that federal and state governments will
continue to review and assess health care delivery systems and payment
methodologies. There can be no assurance that adequate third-party coverage and
reimbursement will be available for the Company's products. If adequate coverage
and reimbursement are not provided by government and other third-party payers
for uses of the Company's products, the market acceptance of these products
could be adversely affected.
In the United States, almost all people over age 65 have primary health
care coverage through the federal Medicare program administered by the Health
Care Financing Administration ("HCFA"). The strong correlation between the
incidence of cancer and age means that HCFA's decisions concerning coverage and
payment for OncoVAX(CL) by Medicare will be financially significant to the
Company. As an autologous product that will not generally be sold through
traditional commercial channels, OncoVAX(CL) may present unique coverage and
payment issues for Medicare. Currently, once approved by the FDA, Medicare
covers medically necessary biologics administered as part of or incident to a
physician's service when furnished to beneficiaries in settings such as
physicians' offices or clinics. Under federal law, HCFA pays physicians the
lesser of their actual charge for the drug or 95% of the commercially published
price of the drug. The Company plans to work to ensure that HCFA addresses and
resolves any unique OncoVAX(CL) issues under its existing policies that
generally provide Medicare coverage and payment for FDA-approved drugs.
Medicare's decision concerning coverage and reimbursement of OncoVAX(CL)
also may be useful in assuring private coverage and payment. Adults under age 65
who have insurance coverage are likely to have employer sponsored or
work-related health plans, which are increasingly likely to involve some element
of managed care with policies similar to those of Medicare. Because coverage and
payment issues for private insurance coverage are heavily dependent on the
provisions in the insurance contract, the Company is planning to work closely
with payors and patients to obtain coverage and payment for OncoVAX(CL).
GOVERNMENT REGULATION
The testing, manufacturing, labeling, advertising, promotion, export and
marketing, among other things, of the Company's therapeutic and diagnostic
products are subject to extensive regulation by governmental authorities in the
United States and other countries. Therapeutic and diagnostic products that are
administered to patients are regulated as drugs or biologic drugs, while
diagnostic products that are used on blood and tissue samples taken from
patients are regulated as devices. In Europe, in vitro diagnostic devices will
be subject to a Directive, to be adopted in 1999, which will create a harmonized
regime for such products. For the
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purposes of European Community law, OncoVAX(CL) is neither a medical device or
medicinal product and therefore is unharmonized. Regulatory requirements are
accordingly to be determined on a national basis. In certain Member States,
OncoVAX(CL) would be unregulated.
Drug Regulation
Non-biological drugs and biological drugs are generally subject to some of
the same laws and regulations. Ultimately, however, they are approved under
different regulatory frameworks, with non-biological drugs being approved under
the FDC Act through an NDA and biological drugs being approved under the PHS Act
by a BLA. Among other things, the FDA Modernization Act clarifies that
biological products are subject to the same requirements as non-biological
products under the FDC Act, except that a biological product licensed under the
PHS Act is not required to have an NDA. Thus, as a biologic, OncoVAX(CL) is
subject to IND regulations prior to approval and will be regulated as both a
biologic and a drug once it has an approved BLA. Traditionally, a company
seeking FDA approval to market a biological drug (in contrast to a non-
biological drug) was required to file and obtain approval of a PLA and an
Establishment License Application ("ELA") with the FDA pursuant to the PHS Act
before commercial marketing of the product could begin. The FDA Modernization
Act repealed the statutory requirement for an ELA for a biological product.
Instead, a single BLA covering both the product and the facility in which the
product is manufactured is now required. As of February 19, 1998, the effective
date of the FDA Modernization Act, approval of applications filed under the old
system will result in the issuance of a BLA for the product. No refiling or
other action on the part of the applicant will be required to implement this
conversion to a single license. At the present time, the Company believes that
OncoVAX(CL) and other immunotherapeutics that it may develop will be regulated
by the FDA as biologics.
The steps required before a drug or biologic may be approved for marketing
in the United States generally include (i) preclinical laboratory tests and
animal tests, (ii) the submission to the FDA of an IND application for human
clinical testing, which must become effective before human clinical trials may
commence, (iii) adequate and well-controlled human clinical trials to establish
the safety and efficacy of the product, (iv) in the case of a biologic, the
submission to the FDA of a BLA, or in the case of a drug, an NDA, (v) FDA review
of the BLA or NDA and (vi) satisfactory completion of an FDA inspection of the
manufacturing facilities at which the product is made to assess compliance with
cGMPs. The testing and approval process requires substantial time, effort and
financial resources, and there can be no assurance that any approval will be
granted on a timely basis, if at all.
Preclinical studies include laboratory evaluation of the product, as well
as animal studies to assess the safety and potential efficacy of the product.
The results of the preclinical studies, together with manufacturing information
and analytical data, are submitted to the FDA as part of the IND. The IND
automatically will become effective thirty days after receipt by the FDA unless
the FDA, before that time, raises concerns or questions about the conduct of the
trials as outlined in the IND and places the trial on clinical hold. In such
case, the IND sponsor and the FDA must resolve any outstanding concerns before
clinical trials can proceed. There can be no assurance that submission of an IND
will result in FDA authorization to commence clinical trials. Moreover, once
trials have commenced, the FDA may stop the trials, or particular types of
trials, by placing a "clinical hold" on such trials because of concerns about,
for example, the safety of the product being tested or the adequacy of the trial
design. Such holds can cause substantial delay and in some cases may require
abandonment of a product or a particular trial.
Clinical trials involve the administration of the investigational products
to healthy volunteers or patients under the supervision of a qualified principal
investigator consistent with an informed consent. Further, each clinical trial
must be reviewed and approved by an independent Institutional Review Board
("IRB") at each institution at which the study will be conducted. The IRB will
consider, among other things, ethical factors, the safety of human subjects and
the possible liability of the institution.
Clinical trials typically are conducted in three sequential phases, but the
phases may overlap. In Phase I, the initial introduction of the drug into human
subjects, the drug is usually tested for safety (adverse effects), dosage
tolerance, absorption, metabolism, distribution, excretion and pharmacodynamics.
Phase II clinical trials usually involve studies in a limited patient population
to (i) evaluate the efficacy of the drug for specific,
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targeted indications, (ii) determine dosage tolerance and optimal dosage and
(iii) identify possible adverse effects and safety risks. Phase III clinical
trials generally further evaluate clinical efficacy and test further for safety
within an expanded patient population and at multiple clinical sites. Phase IV
clinical trials are conducted after approval to gain additional experience from
the treatment of patients in the intended therapeutic indication and to document
a clinical benefit in the case of drugs approved under accelerated approval
regulations. If the FDA approves a product while a company has ongoing clinical
trials that were not necessary for approval, a company may be able to use the
data from these clinical trials to meet all or part of any Phase IV clinical
trial requirement. These clinical trials are often referred to as "Phase III/IV
post-approval clinical trials." Failure to promptly conduct Phase IV clinical
trials could result in withdrawal of approval for products approved under
accelerated approval regulations.
In the case of products for severe or life-threatening diseases, the
initial clinical trials are sometimes done in patients rather than in healthy
volunteers. Since these patients are afflicted already with the target disease,
it is possible that such clinical trials may provide evidence of efficacy
traditionally obtained in Phase II clinical trials. These trials are referred to
frequently as Phase I/II trials. There can be no assurance that Phase I, Phase
II or Phase III testing will be completed successfully within any specific time
period, if at all, with respect to any of the Company's product candidates.
Furthermore, the FDA may suspend clinical trials at any time on various grounds,
including a finding that the subjects or patients are being exposed to an
unacceptable health risk.
The results of the preclinical studies and clinical trials, together with
detailed information on the manufacture and composition of the product, are
submitted to the FDA in the form of a BLA or NDA requesting approval to market
the product. Before approving a BLA or NDA, the FDA will inspect the facilities
at which the product is manufactured and will not approve the product unless the
manufacturing facility is in cGMP compliance. The FDA may delay approval of a
BLA or NDA if applicable regulatory criteria are not satisfied, require
additional testing or information, and/or require postmarketing testing and
surveillance to monitor safety or efficacy of a product. There can be no
assurance that FDA approval of any BLA or NDA submitted by the Company will be
granted on a timely basis, if at all. Also, if regulatory approval of a product
is granted, such approval may entail limitations on the indicated uses for which
such product may be marketed. Any FDA approvals that may be granted will be
subject to continual review, and newly discovered or developed safety or
efficacy data may result in withdrawal of products from marketing. Moreover, if
and when such approval is obtained, the marketing and manufacture of the
Company's products would remain subject to extensive regulatory requirements
administered by the FDA and other regulatory bodies, including compliance with
cGMPs and adverse event reporting requirements. Failure to comply with these
regulatory requirements could, among other things, result in product seizures,
recalls, fines, injunctions, suspensions, or withdrawals of regulatory
approvals, operating restrictions and criminal prosecutions.
The FDA Modernization Act establishes a new statutory program for the
approval of fast track drugs, including biological products. The fast track
program is designed to facilitate the development and expedite the approval of
therapies that are intended to treat serious or life-threatening conditions,
such as cancer and AIDS, and that demonstrate the potential to address unmet
medical needs for such conditions. Under the new fast track program, a request
for designation may be submitted concurrently with, or any time after, the
submission of an application for an IND. If a product meets the statutory
criteria, the Secretary is required to designate it as a fast track drug within
60 days of the request for designation. An application for a fast track drug may
be approved upon determination that the drug has an effect on a clinical
endpoint or a surrogate endpoint that is reasonably likely to predict clinical
benefit. While precise time frames for approval of fast track products have not
been established, the Prescription Drug User Fee Act established performance
goals in correspondence between the FDA Commissioner and Congress committing the
agency to a six-month review period for priority drugs.
The Company may elect to seek approval of OncoVAX(CL) under this fast track
process. If a product is approved under the fast track program, the sponsor may
be required to conduct additional adequate and well-controlled studies to verify
that the effect on the surrogate marker represents improved clinical outcome or
otherwise confirm the effect on a clinical endpoint. In the event such
postmarketing studies do not verify the drug's anticipated clinical benefit, or
if there is other evidence that the drug product is not shown to be safe
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and effective, expedited withdrawal procedures permit the FDA, after a hearing,
to remove a product from the market. For products approved under the fast track
provisions, promotional materials must be submitted to the FDA for review 30
days prior to dissemination. Significant uncertainty exists as to the extent to
which such initiative will result in accelerated review and approval. Further,
the FDA has considerable discretion in determining eligibility for accelerated
review and approval and is not bound by discussions that an applicant may have
with FDA staff. Accordingly, the FDA could employ such discretion to deny
eligibility of OncoVAX(CL) as a candidate for accelerated review or require
additional clinical trials or other information before approving OncoVAX(CL).
The Company cannot predict the ultimate impact, if any, of the new approval
process on the timing or likelihood of FDA approval of OncoVAX(CL) or any of its
other potential products.
Treatment of patients with an experimental therapy may be allowed under a
treatment IND before general marketing begins and pending FDA approval. Charging
for an investigation product also may be allowed under a treatment IND to
recover certain costs of development, if various requirements are met. The
Company may elect to file a treatment IND pending approval of its BLA for
OncoVAX(CL). The FDA has full discretion with regard to whether to allow a
treatment IND to go into effect and there can be no assurance that the FDA will
allow a treatment IND in this instance.
The Company also will be subject to a variety of regulations governing
clinical trials and sales of its products outside the United States. Whether or
not FDA approval has been obtained, approval of a product by the comparable
non-U.S. regulatory authorities must be obtained prior to the commencement of
marketing of the product in their respective countries. The approval process
varies from country to country and the time needed to secure approval may be
longer or shorter than that required for FDA approval.
The pharmaceutical legislation of the European Union requires any person
seeking to market a medicinal product for human use to obtain approval of an
MAA. Procedures for granting such authorizations have been harmonized within the
European Union through the issue of directives for implementation into the
domestic law of each Member State and by Regulations having direct effect. There
are two authorization procedures by which approvals can be sought to market
pharmaceutical products in more than one Member State. The first is a
centralized assessment procedure administered by the EMEA. The second is a
decentralized, or "mutual recognition," procedure available only to
non-biologics. Pursuant to this procedure, an applicant may apply for a national
authorization in one Member State. Upon obtaining that authorization, an
applicant may make further national applications in such other Member States as
are relevant to the applicant, requesting the relevant national authorities in
those Member States to recognize, by reference to the assessment report of the
relevant national authority in the first Member State, the marketing
authorization already granted. In the event of objection, European Union
authorities require that binding arbitration determine whether authorizations
should be granted and, if so, on what terms. The Company's policy is to design
its clinical trials in order to meet the eligibility requirements for
centralized EMEA approval. Drugs which fall within the definition of "high
technology medicines" under the Annex to Council Regulation 2309/93 undergo the
centralized approval system under which the CPMP is obliged to give an opinion
as to whether a marketing authorization has been granted within 210 days
(although the "clock" may be stopped if further information is required).
In addition, prices are regulated in most countries other than the United
States. For example, regulators in certain European countries condition their
approval of a pharmaceutical product on the agreement of the seller not to sell
the product for more than a certain price in their respective countries. In some
cases, the price established in any of these countries may serve as a benchmark
in the other countries. As such, the price approved in connection with the first
approval obtained in any of these European countries may serve as the maximum
price that may be approved in the other European countries. Also, a price
approved in one of these European countries that is lower than the price
previously approved in the other European countries may require a reduction in
the prices in such other European countries. In such event, there can be no
assurance that the resulting prices would be sufficient to generate an
acceptable return on the Company's investment in its products.
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Device Regulation
Pursuant to the FDC Act and the regulations promulgated thereunder, the FDA
regulates the preclinical and clinical testing, manufacturing, labeling,
distribution and promotion of medical devices. In the United States, medical
devices are classified into one of three classes (i.e., Class I, II, or III) on
the basis of the controls deemed necessary by the FDA to reasonably ensure their
safety and effectiveness. Class I devices are subject to general controls (e.g.,
labeling, premarket notification and adherence to cGMPs) and Class II devices
are subject to general and special controls (such as performance standards,
postmarket surveillance, patient registries, and FDA guidelines). Generally,
Class III devices are those which must receive premarket approval by the FDA to
ensure their safety and effectiveness (life-sustaining, life-supporting and
implantable devices, or new devices which have been found not to be
substantially equivalent to legally marketed devices). Before a new device can
be introduced in the market, the manufacturer must generally obtain FDA
clearance or approval through either clearance of a 510(k) notification or
approval of a PMA application. However, most Class I devices are now exempt from
the FDA's market clearance requirements.
A PMA application must be filed if a proposed device is not substantially
equivalent to a legally marketed Class I or Class II device, or if it is a
preamendment Class III device for which the FDA has called for PMA applications.
A PMA application must be supported by valid scientific evidence to demonstrate
the safety and effectiveness of the device, typically including the results of
clinical trials, bench tests and laboratory and animal studies. The PMA
application must also contain a complete description of the device and its
components, and a detailed description of the methods, facilities and controls
used to manufacture the device. In addition, the submission must include the
proposed labeling, advertising literature and any training materials.
Once the FDA determines that the PMA application is sufficiently complete
to permit a substantive review, the FDA will accept the application for filing
and begin its review. Although the FDA has 180 days to review a PMA application,
such reviews generally take one to three years, and may take significantly
longer, from the date the PMA application is accepted for filing.
During the review of a PMA application, an advisory committee likely will
be convened to review and evaluate the application and provide recommendations
to the FDA as to whether the device should be approved. The FDA is not bound by
the recommendation of the advisory panel. In addition, prior to approval, the
FDA generally will inspect the manufacturing facility to ensure compliance with
applicable cGMP requirements. If granted approval, the PMA application may
include significant limitations on the indicated uses for which the product may
be marketed, and the agency may require post-marketing studies of the device.
If the FDA's evaluation of the PMA application or manufacturing facilities
is not favorable, the FDA will deny approval of the PMA application or issue a
"non-approval" letter. The FDA may determine that additional clinical trials are
necessary, in which case approval may be delayed for one or more years while
additional clinical trials are conducted and submitted. The PMA application
process can be expensive, uncertain and lengthy, and a number of devices for
which FDA clearance has been sought by other companies have never been approved
for marketing. Modifications to a device that is the subject of an approved PMA
application, its labeling or its manufacturing process may require approval by
the FDA of PMA application supplements or new PMA applications. Supplements to a
PMA application often require the submission of the same type of information
required for an initial PMA application, except they are generally limited to
that information needed to support the proposed change.
A 510(k) clearance will be granted if the submitted information establishes
that the proposed device is "substantially equivalent" to a legally marketed
Class I or Class II medical device or a preamendment Class III medical device
for which the FDA has not called for PMA applications. In some cases, 510(k)
submissions require clinical data. It generally takes from four to 12 months
from submission to obtain 510(k) premarket clearance, but it may take longer.
The FDA may determine that a proposed device is not substantially equivalent to
a legally marketed device, or that additional information is needed before a
substantial equivalence determination can be made. A "not substantially
equivalent" determination, or a request for additional information could prevent
or delay the market introduction of new products that fall into this category.
For any devices that are cleared through the 510(k) process, modifications or
enhancements
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that could significantly affect safety or effectiveness, or constitute a major
change in the intended use of the device, will require new 510(k) submissions.
If human clinical trials of a device are required, whether for a 510(k) or
a PMA application, and the device presents a "significant risk," the sponsor of
the trial (usually the manufacturer or the distributor of the device) will have
to file an IDE application prior to commencing human clinical trials. The IDE
application must be supported by data, typically including the results of animal
and laboratory testing. If the IDE application is approved by the FDA and one or
more appropriate IRBs, human clinical trials may begin at a specific number of
investigational sites with a specific number of patients, as approved by the
FDA. If the device presents a "nonsignificant risk" to the patient, a sponsor
may begin the clinical trial after obtaining approval for the study by one or
more appropriate IRBs without the need for FDA approval. Submission of an IDE
does not give assurance that the FDA will approve the IDE and, if it is
approved, there can be no assurance that the FDA will determine that the data
derived from these studies supports the safety and efficacy of the device or
warrants the continuation of clinical studies. Sponsors of clinical trials are
permitted to sell investigational devices distributed in the course of the study
provided such compensation does not exceed recovery of the costs of manufacture,
research, development and handling. An IDE supplement must be submitted to and
approved by the FDA before a sponsor or investigator may make a change to the
investigational plan that may affect its scientific soundness or the rights,
safety or welfare of human subjects.
Although clinical investigations of most devices are subject to the IDE
requirements, clinical investigations of in vitro diagnostic ("IVDs") tests are
exempt from the IDE requirements, including FDA approval of investigations,
provided the testing meets certain exemption criteria. IVD manufacturers must
also establish distribution controls to assure that IVDs distributed for the
purpose of conducting clinical investigations are used only for that purpose.
Pursuant to current FDA policy, manufacturers of IVDs labeled for
investigational use only ("IUO") or research use only ("RUO") are encouraged by
the FDA to establish a certification program under which investigational IVDs
are distributed to or utilized only by individuals, laboratories or health care
facilities that have provided the manufacturer with a written certification of
compliance indicating that the IUO or RUO product will be restricted in use and
will, among other things, meet institutional review board and informed consent
requirements.
Any devices manufactured or distributed by the Company pursuant to FDA
clearance or approvals are subject to pervasive and continuing regulation,
including routine inspections of facilities by the FDA and certain state
agencies. Manufacturers of medical devices for marketing in the United States
are required to adhere to applicable regulations setting forth detailed cGMP
requirements, which include testing, control and documentation requirements.
Manufacturers must also comply with Medical Device Reporting ("MDR")
requirements that a firm report to the FDA any incident in which its product may
have caused or contributed to a death or serious injury, or in which its product
malfunctioned and, if the malfunction were to recur, it would be likely to cause
or contribute to a death or serious injury. Labeling and promotional activities
are subject to scrutiny by the FDA and, in certain circumstances, by the Federal
Trade Commission. Current FDA enforcement policy prohibits the marketing of
approved medical devices for unapproved uses.
The Company is subject to routine inspection by the FDA and certain state
agencies for compliance with cGMP requirements, MDR requirements, and other
applicable regulations. With respect to devices, the FDA Modernization Act will
affect the IDE, 510(k) and PMA application processes, and also will affect
device standards and data requirements, procedures relating to humanitarian and
breakthrough devices, tracking and postmarket surveillance, accredited
third-party review, and the dissemination of off-label information. The Company
cannot predict how or when these changes will be implemented or what effect the
changes will have on the regulation of the Company's products. Changes in
existing requirements or adoption of new requirements could have a material
adverse effect on the Company's business, financial condition, and results of
operations. There can be no assurance that the Company will not incur
significant costs to comply with laws and regulations in the future or that laws
and regulations will not have a material adverse effect on the Company's
business, financial condition or results of operations.
Within the European Community, there exists a harmonized European
regulatory regime for medical devices (Directive 93/42/EEC) and, from 1999, a
separate Directive for in vitro diagnostics will be adopted.
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These Directives require that relevant products satisfy certain Essential
Requirements and bear a marking to demonstrate compliance.
The Company is also subject to numerous federal, state and local laws
relating to such matters as safe working conditions, manufacturing practices,
environmental protection, fire hazard control and disposal of hazardous or
potentially hazardous substances. There can be no assurance that the Company
will not be required to incur significant costs to comply with such laws and
regulations in the future or that such laws or regulations will not have a
material adverse effect upon the Company's ability to do business.
Noncompliance with applicable requirements can result in, among other
things, fines, injunctions, civil penalties, recall or seizure of products,
total or partial suspension of production, failure of the government to grant
premarket clearance or premarket approval for devices, withdrawal of marketing
clearances or approvals, and criminal prosecution. The FDA also has authority to
request recall, repair, replacement or refund of the cost of any device
manufactured or distributed by the Company.
Health Care Fraud and Abuse
The Company is subject to various federal and state laws pertaining to
health care fraud and abuse, including anti-kickback laws, physician
self-referral laws, and false claim laws. Violations of these laws are
punishable by criminal and/or civil sanctions. The Company has never been
challenged by a government authority under these laws, and intends to seek legal
counsel and structure its operations in order to comply with such laws. However,
because of the breadth of some of these laws, the Company cannot provide
assurances that one or more of its current or future practices would not be
challenged by governmental authorities under these laws or that such challenge
could not be successful.
Anti-Kickback Laws. The Company's operations are subject to federal and
state anti-kickback laws. The Federal Health Care Programs Anti-Kickback Statute
(section 1128B(b) of the Social Security Act) prohibits persons or entities
from, among other things, knowingly and willfully offering, paying, soliciting
or receiving any remuneration, directly or indirectly, overtly or covertly, in
cash or in kind, in return for or to induce (i) the referral of an individual
for the furnishing of any item or service for which payment may be made in whole
or in part under a Federal Health Care Program, including Medicare and Medicaid,
or (ii) the purchasing, ordering, or recommending of any product or service for
which payment may be made in whole or in part under a Federal Health Care
Program. The statute is broad in scope and has been interpreted by federal
courts and administrative tribunals to apply if even "one purpose" (as opposed
to the primary or sole purpose) of an arrangement is to induce the referral of
business. The statute contains certain exceptions, and regulations have created
certain "safe harbors," which identify specific practices that might otherwise
fall within the broad language of the statutory prohibition, but that are not
considered unlawful under the statute. Safe harbors exist for, among other
things, certain investment interests held in an entity by a referral source, as
well as employment and personal service arrangements. Each safe harbor contains
a number of requirements that must be met. Practices that do not satisfy all of
the requirements of an applicable safe harbor do not necessarily violate the
statute, although such practices may be subject to scrutiny by federal
enforcement officials. Several states also have anti-kickback laws that vary in
scope and may apply regardless of whether a Federal Health Care Program is
involved.
The Company has established, or may establish in the future, various
financial relationships with potential purchasers of the Company's products or
sources of referral, including hospitals, clinical laboratories and physicians.
For example, the Company may lease space from hospitals and may contract with
clinical laboratories for testing to be performed in connection with patient
treatment. In addition, the Company may acquire, equipment, products, services
and/or capital improvements from hospitals where OncoVAX Centers may be located,
through payments of cash, notes and/or stock, and/or may enter into joint
ventures for the operation of such centers, as the Company has done with Lehigh
Valley Hospital. As long as such relationships involve the lease or purchase by
the Company of space, product services or capital improvements needed for the
Company's operations, and the amounts paid represent fair market value, the
Company believes that such relationships should not be found to violate the
anti-kickback laws. In addition, certain supervising physicians at the Company's
OncoVAX Centers, as well as physician-members of the Company's
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Medical Advisory Board, may recommend, order or purchase the Company's products,
or refer patients to the Company's OncoVAX Centers. Arrangements with these
physicians or their employers will be structured to either meet the requirements
of the applicable safe harbors for employment and personal service arrangements
or, as with the other relationships described above, compensate the individuals
or their employers a fair market value amount for the physician's services.
Potential purchasers of the Company's products or sources of referral may
acquire investment interests in the Company or in the OncoVAX Centers. The
Company believes that such interests could qualify for the investment interests
safe harbor or, absent safe harbor compliance, should not be found to violate
the anti-kickback laws as long as such interests are offered and purchased for a
fair market value amount and any return on investment is proportional to the
amount of the investment. The Company may provide certain customers with
volume-based discounts on the sale of laboratory reagents and instrumentation
necessary to read ELISA tests. The Company believes that its policies for
providing discounts and instrumentation are consistent with standard industry
practices and should not be found to violate the anti-kickback laws. Moreover,
the Company's CEO has made a donation to Lehigh Valley Hospital in the amount of
5,000 shares of Company common stock. Because the contributed shares were owned
by the CEO, and provided that if subjected to regulatory scrutiny, the donation
was found to be motivated solely by the CEO's charitable purpose, the Company
believes that the CEO's donation should not be found to violate the
anti-kickback laws.
Physician Self-Referral Laws. To the extent it has financial relationships
with physicians, the Company is subject to federal and state physician
self-referral laws. The federal Medicare/Medicaid physician self-referral law
(the "Stark law," section 1877 of the Social Security Act) prohibits a physician
from referring Medicare and Medicaid beneficiaries to an entity for specified
"designated health services," including outpatient prescription drugs, if the
physician has either an investment interest in the entity or a compensation
arrangement with the entity. There are several exceptions to the Stark law
prohibition, including exceptions for employment and personal service
arrangements, as well as investment interests in publicly traded companies with
stockholder equity exceeding $75 million. Several states also have physician
self-referral laws that vary in scope and may apply regardless of whether a
Federal Health Care Program is involved.
As described above, the Company has established, or may establish in the
future, various financial relationships with physicians who may refer patients
to the Company's OncoVAX Centers. Since the centers will furnish designated
health services, such as the OncoVAX vaccine, which likely would be deemed an
outpatient prescription drug, the Company intends to structure arrangements with
referring physicians to be in compliance with the Stark law. For example,
arrangements with supervising physicians at the Company's OncoVAX Centers, as
well as physician-members of the Company's Medical Advisory Board, will be
structured to meet the requirements of applicable Stark law exceptions,
including exceptions for employment and personal service arrangements. Certain
physician-members of the Company's Medical Advisory Board may hold investment
interests in the Company. Since such investment interests would not currently
qualify for a Stark law exception, the Company intends to enter into agreements
with these physicians that prohibit the physicians from referring patients to
the Company's OncoVAX Centers until the Company has sufficient stockholder
equity to qualify for the Stark law exception for ownership in a publicly traded
company. Moreover, once the Company's stock becomes publicly traded, it will not
be in a position to know or control whether some physicians who refer patients
to OncoVAX Centers may be investors in the Company. Absent the Company having
sufficient stockholder equity to qualify for the Stark law exception for
ownership in a publicly traded company, any such referrals that do occur could
be found to be in violation of the Stark law.
False Claims Laws. The Company is subject to federal and state laws
prohibiting individuals or entities from knowingly and willfully presenting, or
causing to be presented, false reimbursement claims to third-party payers,
including the Medicare and Medicaid programs. Although the Company does not
currently submit reimbursement claims to third-party payers for any of its
products, the Company may provide customers with CPT coding recommendations for
its products. Moreover, once operational, the Company's OncoVAX Centers may
submit claims to third-party payers. The Company intends that claims submitted
to third-party payers by OncoVAX Centers will comply with requirements imposed
by such payers, including Medicare program requirements for the coverage of
biologics administered incident to a physician's service.
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Facility Licensure, Corporate Practice of Medicine and other Health Care
Professions
States generally require that certain types of health care facilities have
regulatory licenses in order to operate and treat patients. Facilities must
satisfy specified regulatory requirements, and undergo periodic surveys or
inspections by state licensing bodies, in order to obtain and maintain such
licenses. Some states may require licensure of the Company's OncoVAX Centers.
The Company intends to obtain and maintain all required regulatory licenses for
the OncoVAX Centers.
Many states also have laws restricting the corporate practice of medicine.
These laws generally prohibit non-physician entities from practicing medicine or
otherwise exercising control over a physician's practice of medicine. In some
states, these laws prohibit business corporations from employing physicians to
render medical services on behalf of the corporation, although the retention of
physicians on an independent contractor basis is generally permissible. Some
states also have laws restricting the corporate practice of other health care
professions such as nurse practitioners. The Company intends to retain
supervising physicians and other health care professionals for its OncoVAX
Centers in compliance with these laws.
Other Regulation
The Company is subject to laws of more general applicability dealing with
issues such as occupational safety, employment, medical leave, and civil rights
and discrimination. Federal, state and local governments in many instances are
expanding the regulatory requirements on businesses, and the imposition of these
requirements may have the effect of increasing operating costs and reducing the
profitability of the Company's operations.
RADIOACTIVE AND OTHER HAZARDOUS MATERIALS
The NRC and the Agreement States regulate companies that possess
radioactive material and those that manufacture, prepare, or transfer
radioactive drugs for commercial distribution to assure the public's safety
through proper use of radioactive materials. Agreement States typically regulate
in a manner similar to the NRC. The Company's incorporation of radioactive
materials into its HumaRAD products and HumaSPECT subjects it to these NRC
requirements. To comply, the Company must apply for and maintain appropriate
licenses and comply with reporting, recordkeeping, and other regulatory
requirements. Obtaining and maintaining a license includes demonstrating that:
the Company's equipment and facilities are adequate to protect health and
minimize danger to life and property; the personnel are adequately qualified to
operate the equipment; and environmental concerns are adequately addressed.
Other regulatory requirements include specific packaging and labeling
compliance, measuring radiation emitted from products before distribution,
conducting daily inspections and maintaining instruments used to measure the
product's radiation. The regulatory authorities periodically conduct routine
inspections, the frequency of which varies depending on the Company's history
and changes in volume or character of manufacturing operations.
The NRC takes enforcement actions against those companies failing to
achieve compliance with NRC regulations. The Company's failure to comply with
the regulatory requirements could subject it to enforcement actions including
civil penalties up to $5,500 per violation per day and orders to modify, suspend
or revoke its licenses. With a suspended or revoked license, the Company would
be required to cease possessing the radioactive material necessary for producing
its products and distributing its products. The nature of a particular penalty
will depend on who discovered the violation and upon its severity, its
repetitiveness and the willfulness involved. The manufacturing and
administration of the Company's HumaRAD products and HumaSPECT require the
handling, use and disposal of (90)Yttrium and Technetium Tc 99m, respectively,
each a radioactive isotope. These activities must comply with various state and
NRC regulations regarding the handling and use of radioactive materials.
Violations of these regulations could significantly delay completion of clinical
trials and commercialization of the Company's HumaRAD products and HumaSPECT.
The administration of the Company's HumaRAD products and HumaSPECT entails
the introduction of radioactive materials into patients. These patients emit
radioactivity at levels that pose a safety concern to others around them,
especially healthcare workers for whom the cumulative effect of repeated
exposure to radioactivity is of particular concern. These concerns are addressed
in regulations promulgated by the NRC,
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as well as by various state and local governments and individual hospitals.
Generally, patients who emit radioactivity above specified levels are required
to be hospitalized, where they can be isolated from others until radiation falls
to acceptable levels. The NRC recently enacted regulations that have made it
easier for hospitals to treat patients with radioactive materials on an
outpatient basis. Under these regulations, the Company's HumaRAD products and
HumaSPECT may be administered on an outpatient basis in most cases. Although
state and local governments often follow the lead of the NRC, many currently do
not, and there can be no assurance that they will do so or that patients
receiving the Company's HumaRAD products and HumaSPECT will not have to remain
hospitalized for one to three days following administration, adding to the
overall cost.
The Company expects to continue using hazardous chemicals and radioactive
compounds in its ongoing research activities. Although the Company believes that
safety procedures for handling and disposing of such materials will comply with
the standards prescribed by state and federal regulations, the risk of
accidental contamination or injury from these materials cannot be completely
eliminated. The Company could be held liable for any damages that result from
such an accident, contamination or injury from the handling and disposal of
these materials as well as for unexpected remedial costs and penalties that may
result from any violation of applicable regulations, which could result in a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, the Company may incur substantial costs to
comply with environmental regulations.
PATENTS AND OTHER INTELLECTUAL PROPERTY
The Company believes that patent and trade secret protection is important
to its business and that its future will depend in part on its ability to
maintain its technology licenses, protect its trade secrets, secure additional
patents and operate without infringing the proprietary rights of others.
Currently, the Company has an extensive portfolio of patents and additional
pending patent applications in connection with most of the Company's therapeutic
products. This includes United States Patent No. 5,484,596, which covers the
OncoVAX(CL) method of treatment and will expire in January 2013.
Extensive research has been conducted in the cancer vaccine and monoclonal
antibody fields by pharmaceutical and biotechnology companies and other
organizations and a substantial number of patents in these fields have been
issued to other pharmaceutical and biotechnology companies. In addition,
competitors may have applications for additional patents pending and may obtain
additional patents and proprietary rights related to products or processes
competitive with or similar to those of the Company. Patent applications are
maintained in secrecy for a period after filing and, in the United States,
patent applications are confidential until the patent is issued. Publication of
discoveries in the scientific or patent literature tends to lag behind actual
discoveries and the filing of related patent applications. The Company may not
be aware of all of the patents potentially adverse to the Company's interests
that may have been issued to other companies, research or academic institutions,
or others. No assurance can be given that such patents do not exist, have not
been filed, or could not be filed or issued, which contain claims relating to
the Company's technology, products or processes. To date, no consistent policy
has emerged regarding the breadth of claims allowable in pharmaceutical and
biotechnology patents.
The Company is aware of various patents that have been issued to others
that pertain to a portion of the Company's prospective business. There can be no
assurance that other patents do not exist in the United States or in other
countries or that patents will not be issued to third parties that contain
preclusive or conflicting claims with respect to OncoVAX(CL) or any of the
Company's other product candidates or programs. Commercialization of cancer
vaccines and monoclonal antibody-based products may require licensing and/or
cross-licensing of one or more patents with other organizations in the field.
There can be no assurance that the licenses that might be required for the
Company's processes or products would be available on commercially acceptable
terms, if at all.
The Company's breach of an existing license or failure to obtain a license
to technology required to commercialize its product candidates may have a
material adverse effect on the Company's business, financial condition and
results of operations. Litigation, which could result in substantial costs to
the Company, may
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also be necessary to enforce any patents issued to the Company or to determine
the scope and validity of third-party proprietary rights. If competitors of the
Company prepare and file patent applications in the United States that claim
technology also claimed by the Company, the Company may have to participate in
interference proceedings declared by the United States Patent and Trademark
Office to determine priority of invention, which could result in substantial
cost to the Company, even if the eventual outcome is favorable to the Company.
An adverse outcome could subject the Company to significant liabilities to third
parties and require the Company to license disputed rights from third parties or
to cease using such technology.
Patents issued and patent applications filed internationally relating to
biologics are numerous and there can be no assurance that current and potential
competitors and other third parties have not filed or in the future will not
file applications for, or have not received or in the future will not receive,
patents or obtain additional proprietary rights relating to products or
processes used or proposed to be used by the Company. Many non-United States
jurisdictions allow oppositions by third parties to granted patents and/or
issued patents. The Company may have to participate in opposition proceedings in
non-United States jurisdictions to prevent a third party from obtaining a patent
that may be adverse to the Company's interests. Also, the Company may have to
defend against a third party's opposition to a patent granted and/or issued to
the Company. There can be no assurance that the Company will be successful in an
opposition proceeding, and participation in such a proceeding could result in
substantial cost to the Company whether or not the eventual outcome is favorable
to the Company. Moreover, there is certain subject matter which is patentable in
the United States and not generally patentable outside of the United States and
may limit the protection the Company can obtain on some of its inventions
outside of the United States. For example, methods of treating humans are not
patentable in many countries outside of the United States. These and/or other
issues may prevent the Company from obtaining patent protection outside of the
United States, which could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company also relies on trade secrets and trademarks to protect its
technology, especially where patent protection is not believed to be appropriate
or obtainable. The Company protects its proprietary technology and processes, in
part, by confidentiality agreements with its key employees, consultants, medical
advisory board members, collaborators and contractors. There can be no assurance
that these agreements will not be breached, that the Company would have adequate
remedies for any breach, or that the Company's trade secrets and trademarks or
those of its collaborators or contractors will not otherwise become known or be
discovered independently by competitors. All of the Company's material patents,
including those which relate to the Company's OncoVAX(CL), HumaSPECT and the
Company's HumaRAD products, have been pledged to secure certain of the Company's
existing debt obligations. See "-- Recent Debt Refinancings."
RECENT DEBT REFINANCINGS
On April 1, 1998, the Company issued to each of Northstar High Yield Fund
and Northstar High Total Return Fund II a 12.5% promissory note (each such note,
an "April 1998 Note") in the principal amount of $4.0 million and a warrant to
purchase 32,711 shares of common stock (collectively, the "April 1998
Securities"). The Company applied approximately $6.7 million of the $8.0 million
proceeds from the sale of the April 1998 Securities to retire the Company's
existing credit facility with Creditanstalt AB. The maturity of the April 1998
Notes was subsequently extended from April 17, 1998 to August 21, 1998 and the
principal amount of the April 1998 Note issued to Northstar High Total Return
Fund II was increased to $6.0 million, bringing the total principal amount
outstanding under the April 1998 Notes to $10.0 million.
On July 31, 1998, the Company's subsidiary, PerImmune Holdings, entered
into an agreement with Organon Teknika (the "Organon Amendment") whereby Organon
Teknika agreed to extend the maturity of a promissory note issued by PerImmune
Holdings in the original principal amount of approximately $9.2 million, plus
all unpaid accrued interest as calculated on the date of this offering (the
"Organon Note"), from August 1, 1998 to January 15, 2000. The Organon Amendment
provides that, from and after the date of the consummation of this offering
until paid in full, interest will accrue on the Organon Note at the rate of 10%
per annum, and shall be due and payable on a quarterly basis, commencing on each
November 1 thereafter. The Organon Amendment also provides that the Organon Note
shall mature on January 15, 2000 and shall be payable in quarterly installments
over the nine or twelve month period thereafter, depending on the
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Company's cash and cash equivalent balances as of December 31, 1999. The Organon
Note is convertible, at the option of Organon Teknika, into common stock any
time from and after the date of the consummation of this offering at a
conversion price equal to the price to the public set forth on the cover page of
this Prospectus, subject to certain anti-dilution adjustments. The Organon Note
is secured by a first priority perfected security interest in all of the patents
owned by PerImmune Holdings including those related to OncoVAXCL, HumaSPECT and
the Company's HumaRAD products (the "PerImmune Patents"). The Organon Amendment
also extended the date of certain milestone payments due under the Intellectual
Property Agreement, dated August 2, 1996, by and among PerImmune Holdings and
Akzo Nobel Pharma International, B.V. ("Akzo") (the "Intellectual Property
Agreement"). Under the Organon Amendment, the Company agreed to guarantee
payment of the Organon Note and payment of milestone payments due under the
Intellectual Property Agreement.
On August 25, 1998, the Company completed a comprehensive refinancing of
its outstanding indebtedness (the "August 1998 Refinancing"). In the August 1998
Refinancing, the Company issued to Northstar High Yield Fund, Northstar High
Total Return Fund, Northstar High Total Return Fund II and Northstar Strategic
Income Fund (collectively, the "Northstar Funds") (i) the Company's 12%
guaranteed senior secured primary notes due August 25, 2003 in the aggregate
original principal amount of $35.0 million (the "August 1998 Primary Notes"),
(ii) the Company's 12% guaranteed senior secured escrow notes due August 25,
2003 in the aggregate original principal amount of $6.0 million (the "August
1998 Escrow Notes" and, together with the August 1998 Primary Notes, the "August
1998 Notes") and (iii) common stock warrants to purchase up to 1,083,338 shares
of common stock (the "August 1998 Warrants" and, together with the August 1998
Notes, the "August 1998 Securities"). In addition, the Company amended and
restated (i) certain provisions of warrants previously granted to certain of the
Northstar Funds and (ii) certain provisions of that portion of a warrant
previously granted to CoreStates Enterprise Fund ("CoreStates"), which was
assigned and transferred to the Northstar Funds (the "CoreStates Warrant"). The
description of the agreements that effected the August 1998 Refinancing
contained herein does not purport to be complete and is qualified in its
entirety by reference to such agreements, which have been filed as Exhibits to
the Registration Statement of which this Prospectus is a part.
As consideration for their purchase of the August 1998 Securities, the
Northstar Funds (i) contributed to the Company (A) each of the 12.5% April 1998
Notes, (B) a senior secured promissory note in the original principal amount of
$4.7 million issued by the Company to Northstar High Total Return Fund on
December 27, 1995, due and payable on December 21, 2000 (the "1995 Note") and
(C) an aggregate of 47,030 shares of the Company's Series A-2 preferred stock
("Series A-2 Preferred Stock") and (ii) paid the remaining proceeds from the
purchase of the August 1998 Securities to the Company.
The net cash proceeds from the sale of the August 1998 Securities were
applied (i) to discharge the Company's indebtedness to (A) CoreStates in the
aggregate amount of $5,097,568.91 for repayment of a Secured Promissory Note, in
the original principal amount of $4.0 million, bearing an interest rate of 13%
per annum, (B) Northstar High Total Return Fund in the amount of $7,171,131
including interest for repayment of the 1995 Note, (C) Northstar High Yield Fund
and Northstar High Total Return Fund II in the amount of $10,113,014 for
repayment of the April 1998 Notes and (D) Northstar High Total Return Fund in
the amount of $4,876,423 for redemption of certain shares of the Series A-2
Preferred Stock, (ii) to make a $500,000 milestone payment owed by PerImmune
Holdings to Akzo pursuant to the Intellectual Property Agreement, (iii) to
advance to subsidiaries of the Company capital required by such subsidiaries in
the amount of $2,165,365.09, (iv) to fund a (A) $6.0 million escrow account
("Segregated Account") (which sum represents all of the cash proceeds from the
sale of the August 1998 Escrow Notes) and (B) a $4.92 million escrow (the
"Escrow Account"), which amount was sufficient to pay, together with the
proceeds from the investment thereof, the first four quarterly interest payments
on the August 1998 Notes. In addition, in conjunction with the sale of the
August 1998 Securities, CoreStates transferred the CoreStates Warrant,
representing the right to purchase up to 159,073 shares of the Company's Common
Stock, to the Northstar Funds.
The August 1998 Notes are secured by (i) a first priority security interest
in all the existing and future assets of the Company, other than the PerImmune
Patents and certain equipment financed pursuant to the
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Loan and Security Agreement, dated September 30, 1997, between the Company and
the Washington Economic Development Finance Authority, and a second security
interest in certain of the PerImmune Patents and (ii) a pledge of all the issued
and outstanding capital stock of the existing and future subsidiaries of the
Company.
Pursuant to the Interest Escrow Security Agreement, the Company is
permitted to obtain funds upon request from such Segregated Account, provided
that no event of default (as defined) occurs. The Company may draw out of the
Escrow Account to make scheduled interest payments on the August 1998 Notes,
provided that, after giving effect to any such withdrawal, the Company, subject
to certain conditions, is required to maintain the balance in the Escrow Account
at an amount sufficient to pay the next four scheduled interest payments, and,
after the first two successive full payments of interest hereafter, at a level
sufficient to pay the next two successive full payments of interest on the
outstanding August 1998 Notes. The Northstar Funds will have a first priority
security interest in the Escrow Account. The Escrow Account will be terminated
after payment in full of all interest accrued through and including the twelfth
successive interest payment due on the August 1998 Notes, with any balance
remaining in the Escrow Account to be retained by the Company. The August 1998
Notes are guaranteed by all the existing subsidiaries of the Company and will be
guaranteed by all future subsidiaries of the Company.
The August 1998 Notes, among other things, require that the Company comply
with certain financial covenants beginning in the year 2000 including, without
limitation, maintaining an adjusted debt to EBITDA (as defined) ratio, minimum
levels of tangible net worth and interest coverage, and maximum levels of
leverage for certain periods. In addition, the August 1998 Notes impose certain
limitations on the ability of the Company to, among other things, (i) incur
additional indebtedness, (ii) pay dividends or make certain other restricted
payments, (iii) consummate certain asset sales, (iv) enter into certain
transactions with affiliates, (v) incur liens, (vi) merge or consolidate with
any other person or sell, assign, transfer, lease, convey or otherwise dispose
of all or substantially all of its assets, (vii) enter into certain restrictive
arrangements relating to the Company's subsidiaries, (viii) extend credit and
(ix) make investments.
Pursuant to the terms of the August 1998 Primary Notes, up to $5.0 million
aggregate principal amount of the August 1998 Primary Notes must be redeemed (at
a price equal to 100% of their principal amount plus accrued and unpaid
interest, if any, to the date of redemption), when and as the Company receives
the net proceeds from the sale of common stock offered hereby. See "Use of
Proceeds." Pursuant to the terms of the August 1998 Escrow Notes, the Company
must notify the noteholders if the Company or any of its subsidiaries receives
cash proceeds from the sale of debt or equity securities or from certain asset
sales, and, if requested, up to $6.0 million aggregate principal amount of the
August 1998 Escrow Notes must be redeemed, in whole or in part (at a price equal
to 100% of their principal amount plus accrued and unpaid interest, if any, to
the date of redemption). In January 1999, the August 1998 Escrow Notes were
amended to eliminate the Company's obligation to redeem the August 1998 Escrow
Notes with proceeds received from this offering or any other debt or equity
offering prior to the consummation of this offering.
The Northstar Funds may require the Company to repurchase an aggregate of
up to $7.5 million aggregate principal of the August 1998 Notes at a price equal
to 100% of their principal amount plus accrued and unpaid interest, upon the
failure of Intracel to satisfy certain ratios of EBITDA to interest expense as
measured at the end of each of three successive fiscal quarters of the Company
commencing March 31, 2000.
The Northstar Funds may require the Company to prepay the August 1998
Notes, in whole or in part, at a price equal to 101% of the principal amount so
prepaid, plus accrued interest to the date of prepayment, if there is a Change
of Control (as defined) of the Company, or if Simon R. McKenzie shall cease to
be the principal executive officer of the Company in charge of the Company's
management and policies for a period of 30 days or more.
The August 1998 Primary Notes may be prepaid, in whole or in part, at the
option of the Company initially at a redemption price of 112% of the principal
amount thereof, and declining to 100% of the principal amount thereof after July
31, 2002, plus accrued and unpaid interest, if any, to the date of redemption.
The August 1998 Escrow Notes may be prepaid, in whole or in part, at the option
of the Company, provided that certain notice requirements are met.
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Events of default under the August 1998 Notes include, among other things,
(i) failure to pay principal or interest on the August 1998 Notes when due, (ii)
breaches of representations, warranties and covenants, (iii) defaults under
other indebtedness of the Company or its subsidiaries, (iv) failure to
consummate an equity offering on or prior to December 31, 1999, with an
aggregate offering price of not less than $40.0 million and aggregate proceeds
to the Company (net of selling expenses and underwriters' discounts or selling
agent's commission) of not less than $35.0 million, (v) the occurrence of
certain events of bankruptcy, (vi) certain adverse judgments against the Company
or its subsidiaries, (vii) certain ERISA events and (viii) other customary
defaults, in certain cases after the expiration of a grace period.
The August 1998 Warrants are exercisable until August 25, 2003 at an
exercise price of $15.00 per share. As part of the August 1998 Refinancing, the
Company agreed to grant certain demand and "piggyback" registration rights to
the Northstar Funds and their affiliates with respect to the shares of common
stock held by them, including those issuable upon exercise of warrants, and has
agreed to file a registration statement covering such shares 181 days after the
date of this Prospectus. See "Shares Eligible for Future Sale."
In January 1999, the Company and the Northstar Funds entered into a First
Amendment and Waiver Agreement which, among other things, (i) amended the terms
of the August 1998 Escrow Notes to eliminate the Company's obligation to redeem
the August 1998 Escrow Notes with proceeds received from this offering or any
other debt or equity offering prior to the consummation of this offering, (ii)
amended the Interest Escrow Security Agreement to eliminate the balance required
to be maintained in the escrow account created thereunder and to permit the next
three scheduled interest payments to be paid out of amounts currently held in
such escrow account, and (iii) waived certain non-payment events of default and
compliance by the Company with certain covenants set forth in the documentation
non-payment executed in connection with the August 1998 Refinancing.
The Company has entered into a letter of intent with two accredited
investors who currently hold various securities issued by the Company, pursuant
to which the Company has agreed to sell to such investors $2 million aggregate
principal amount of the Company's non-convertible debt securities bearing
interest at the rate of 15% per annum. The proceeds from the issuance and sale
of these non-convertible debt securities will be used for working capital and
other general corporate purposes. In addition, Messrs. Hanna, McKenzie, Bloom
and Schuyler, all being current stockholders, officers and/or directors of the
Company, have committed to invest, at the Company's request, up to $5 million in
the Company within the next six to twelve months.
COMPETITION
The pharmaceutical and biotechnology industries are intensely competitive.
Many of the product candidates being developed by the Company, if approved,
would compete with existing drugs, therapies and diagnostic products. There are
many pharmaceutical companies, biotechnology companies, public and private
universities and research organizations actively engaged in research and
development of products for the treatment of people with cancer. Many of these
organizations have financial, technical, manufacturing and marketing resources
greater than those of the Company. Several of them may have developed or are
developing therapies or diagnostic products that could be used for treatment or
diagnosis of the same diseases targeted by the Company. If a competing company
were to develop or acquire rights to a more efficacious therapeutic or
diagnostic product for the same diseases targeted by the Company, or one which
offers significantly lower costs of treatment or diagnosis, the Company's
business, financial condition and results of operations could be materially
adversely affected.
The Company believes that competition in the development and marketing of
new cancer therapies will be based primarily on product efficacy and safety,
time to market and price. To the extent the Company's product programs are
successful, it also intends to rely to some degree on patents and other
intellectual property and orphan drug designations to protect its products from
competition.
The Company believes that its product development programs will be subject
to significant competition from companies utilizing alternative technologies as
well as to increasing competition from companies that develop and apply
technologies similar to the Company's technologies. Other companies may succeed
in developing products earlier than the Company, obtaining approvals for such
products from the FDA more
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rapidly than the Company or developing products that are more effective than
those under development or proposed to be developed by the Company. There can be
no assurance that research and development by others will not render the
Company's technology or product candidates obsolete or non-competitive or result
in treatments superior to any therapy developed by the Company, or that any
therapy developed by the Company will be preferred to any existing or newly
developed technologies.
PRODUCT LIABILITY AND INSURANCE
The manufacture and sale of human therapeutic and diagnostic products
involve an inherent risk of product liability claims and associated adverse
publicity. The Company has only limited commercial product liability insurance.
There can be no assurance that the Company will be able to maintain existing
insurance or obtain additional product liability insurance on acceptable terms
or with adequate coverage against potential liabilities. Such insurance is
expensive, difficult to obtain and may not be available in the future on
acceptable terms, if at all. An inability to obtain sufficient insurance
coverage on reasonable terms or to otherwise protect against potential product
liability claims brought against the Company in excess of its insurance
coverage, if any, or a product recall could have a material adverse effect upon
the Company's business, financial condition and results of operations.
HUMAN RESOURCES
As of September 30, 1998, the Company had over 220 employees. The Company's
employees are not represented by a collective bargaining agreement. The Company
believes its relations with its employees are good.
MEDICAL ADVISORY BOARD
The Company's Medical Advisory Board is comprised of internationally
recognized clinical researchers in the fields of oncology and cancer surgery.
The Medical Advisory Board advises the Company's management on strategic issues
related to the Company's clinical development programs and consists of the
following individuals:
Herbert C. Hoover, Jr., M.D., co-chairman of the Medical Advisory Board and
Medical Director of the Company, is the Chairman of the Department of Surgery at
Lehigh Valley Hospital in Allentown, Pennsylvania and the Vice Chairman of the
Department of Surgery and Professor of Surgery at Pennsylvania State
University/Milton S. Hershey Medical Center, Hershey, Pennsylvania. Dr. Hoover
is the holder of the Anne C. and Carl R. Anderson Chair of Surgery at Lehigh
Valley Hospital. Dr. Hoover obtained a B.A. from the Kansas State College of
Pittsburgh in 1966 and his M.D. in 1970 from the University of Kansas School of
Medicine. Dr. Hoover is a member of numerous professional societies and
national, regional, medical school and hospital committees and boards, as well
as being on the editorial board of various medical and scientific journals.
Herbert Michael Pinedo, M.D., Ph.D., co-chairman of the Medical Advisory
Board, is Professor of Medical Oncology and Chief of the Department of Medical
Oncology at the Vrije Universiteit in Amsterdam, the Netherlands. Dr. Pinedo
obtained his M.S. and his M.D. degree in 1967 and his Ph.D. in Medical Science
in 1972, from the Medical School of the University of Leiden in Amsterdam, the
Netherlands. Dr. Pinedo belongs to numerous professional societies, university
and hospital committees and boards, and is on the editorial board of numerous
medical journals.
Michael Andrew Choti, M.D. is Director, Johns Hopkins Colon Cancer Center,
and Medical Director, Outpatient Center at The Johns Hopkins Hospital and has
been Assistant Professor in the Department of Surgery at The Johns Hopkins
School of Medicine since 1992, Assistant Professor in the Department of Oncology
at The Johns Hopkins School of Medicine since 1995, and a full-time staff member
in the Department of Surgery at The Johns Hopkins Hospital. Dr. Choti obtained
his B.S. in 1979 from the University of California at Irvine and his M.D. in
1983 from Yale University School of Medicine. Dr. Choti is a member of various
professional societies as well as being involved in various professional
activities.
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<PAGE> 63
Ronald Levy, M.D. has been Chief of the Division of Oncology at Stanford
University School of Medicine since 1993. From 1987, Dr. Levy has been Professor
of Medicine, Division of Oncology, at Stanford University School of Medicine,
holder of the Summy Chair at Stanford University School of Medicine, and an
American Cancer Society Clinical Research Professor. Dr. Levy obtained his A.B.
from Harvard University in 1963 and obtained his M.D. from Stanford University
in 1968. Dr. Levy is a member of numerous medical societies and an active member
of various professional review organizations, including the Margaret Early Trust
Research Grant Committee and the Scientific Advisory Board of CellPro, Bothell,
Washington.
H. Kim Lyerly, M.D., Ph.D. is Professor of Surgery, Immunology, and
Pathology and Clinical Director of the Duke Center for Genetic and Cellular
Therapies at Duke University Medical Center. Dr. Lyerly obtained his B.S. in
1980 from the University of California at Riverside and his M.D. from the
University of California at Los Angeles in 1983. Dr. Lyerly is on the Editorial
Board of Annals of Surgery and International Journal of Surgical Science. Dr.
Lyerly has been awarded numerous honors and belongs to numerous professional
societies. Since 1990, Dr. Lyerly has been a research sponsor working with
various M.D.s and Ph.D.s, as well as an investigator since 1988 working on
protocols for the treatment of diseases such as AIDS and leukemia, and on
molecular therapeutics programs.
Bruce G. Wolff, M.D. is Professor of Surgery at the Mayo Medical School and
a consultant in colon, rectal, and general surgery, at the Mayo Clinic. Dr.
Wolff obtained a B.S. from Davidson College and his M.D. from Duke University
School of Medicine. Dr. Wolff belongs to numerous in-house Mayo Clinic
organizations as well as national and regional organizations including being
vice-chairman of the American Cancer Society Executive Committee on Allied
Health Personnel.
LEGAL PROCEEDINGS
On November 30, 1998, a complaint was filed against the Company in the
Circuit Court of Cook County, Illinois, Law Division, by Vector Securities
International Inc. ("Vector"). In the complaint, Vector alleges a breach of
contract by the Company in connection with the Company's retention of Vector as
a financial advisor, and seeks damages of approximately $1.6 million plus
attorneys' fees. The Company believes it has defenses to the claims alleged in
the complaint as well as counterclaims against Vector, and is currently in the
process of preparing its answer to the complaint and its counterclaims. In
addition, the Company is aware that there has been a trademark opposition
proceeding filed with the Trademark Trial and Appeal Board, Jenner Technologies,
Inc. v. Theriak S.A. (Case No. 106,938), in which Jenner Technologies, Inc. is
challenging Theriak S.A.'s registration of the OncoVAX(CL) trademark. The
Company's rights to use the OncoVAX(CL) mark in countries other than the United
States derive from Theriak's rights in that mark. The outcome of the
above-mentioned proceeding may effect whether or not the Company is or will be
entitled to use the OncoVAX(CL) mark. The Company also recently received a
request for payment of approximately $990,000 due under a license agreement
assumed by the Company in connection with its purchase of certain assets from
Zynaxis Inc. The Company is currently in the process of reviewing the underlying
contracts and correspondence regarding this claim to determine its validity.
In addition, the Company is party to claims and litigation that arise in
the normal course of business. Management believes that the ultimate outcome of
these claims and litigation will not have a material impact on the financial
position or results of operations of the Company.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning the Company's
current directors and executive officers.
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------- --- ----------------------------------------------------------
<S> <C> <C>
Michael G. Hanna, 62 Chairman of the Board and Chief Scientific Officer
Ph.D. ..................
Simon R. McKenzie......... 41 President, Chief Executive Officer and Director
Lawrence A. Bloom......... 42 Senior Vice President and Chief Financial Officer
Daniel S. Reale........... 44 Senior Vice President and President, OncoVAX(CL) Division
Persis M. Strong.......... 44 Senior Vice President and President, Bartels Diagnostics
Division
Diana Goroff, Ph.D........ 46 Senior Vice President, Operations
Carl T. Foster............ 33 Senior Vice President European Operations, Business
Development
Patricia A. Barnett....... 48 Vice President, Reimbursement
Raymond J. Schuyler....... 62 Director
Joseph Caligiuri.......... 70 Director
Steven Gerber, M.D. ...... 44 Director
Alexander Klibanov, 49 Director
Ph.D. ..................
</TABLE>
- ---------------
Michael G. Hanna, Ph.D. is currently Chairman of the Board and Chief
Scientific Officer of the Company. Dr. Hanna had been Chairman of the Board,
Chief Executive Officer and President of PerImmune since 1994. Dr. Hanna founded
the Litton Institute of Applied Biotechnology ("LIAB") in 1982. In 1985, Organon
Teknika assumed operations of LIAB and Dr. Hanna served as Senior Vice President
of Organon Teknika. Prior to his position at LIAB in 1982, Dr. Hanna served as
the Director of the National Cancer Institute, Frederick Cancer Research Center.
Simon R. McKenzie founded Intracel in 1987 and serves as President, Chief
Executive Officer and a director of the Company. From 1987 to the present, Mr.
McKenzie has served as President of Intracel and, from 1995 to 1997, Mr.
McKenzie was also Chairman of the Board. Prior to forming Intracel, Mr. McKenzie
co-founded and managed Baltech, Inc., an early stage pharmaceutical company
developing a new class of antiviral drugs including candidates for treating
Herpes Simplex. Since 1997, Mr. McKenzie has served on the Board of Directors of
New Century Pharmaceuticals, an early stage company working in x-ray
crystallography.
Lawrence A. Bloom is currently Senior Vice President and Chief Financial
Officer for the Company. Mr. Bloom joined the Company in January 1998 as Senior
Vice President, Corporate Development and was promoted to his current position
in August 1998. From 1996 to 1997, Mr. Bloom was a consultant to emerging
biotechnology companies. From 1991 to 1995, Mr. Bloom served as Senior Vice
President for Dillon Read Inc., an investment banking firm. From 1985 to 1990,
Mr. Bloom served as Vice President and Associate Portfolio Manager for Lehman
Management Co., a $15 billion money management division of Shearson/ Lehman
American Express.
Daniel S. Reale is currently Senior Vice President of the Company and
President of the Company's OncoVAX(CL) Division. From 1994 to 1997, Mr. Reale
served as President and Chief Operating Officer of Coral Therapeutics, a
provider of in-hospital apheresis-based technologies, where he was responsible
for the establishment of 10 hospital-based state-of-the-art blood service units
in cGMP environments. From 1989 to 1994, Mr. Reale served as Senior Vice
President, Operations for Chartwell Home Therapies, L.P., where Mr. Reale
oversaw 14 infusion pharmacies with hospital based supporting clinics.
Persis M. Strong presently serves as Senior Vice President of the Company
and President of the Company's Bartels Diagnostics Division. She joined the
Company in 1995 as Vice President of Marketing. Ms. Strong has over 17 years of
management and business development experience in the medical diagnostics
industry. Prior to joining the Company, Ms. Strong spent seven years with Binax,
Inc., a point-of-care diagnostics company, where she served as Vice President of
Marketing. From 1981 to 1988, Ms. Strong was
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<PAGE> 65
employed by Ventrex Laboratories, Inc., a biotechnology company, in various
marketing and management positions. Ms. Strong has extensive international
business experience and has successfully organized and negotiated manufacturing
and distribution arrangements in over 35 international markets.
Diana Goroff, Ph.D. is Senior Vice President of Operations. From 1991 to
1998, Dr. Goroff served as Director of Parenteral Drug Manufacturing for
PerImmune. Dr. Goroff has extensive experience with production of monoclonal
antibodies and has recently managed the clinical production of the Company's
first totally human antibody.
Carl T. Foster is Senior Vice President European Operations, Business
Development. He joined the Company as Vice President of Business Development in
June 1998. From 1997 to June 1998, Mr. Foster served as Managing Director of
Ferghana Partners, Inc., an investment banking firm. From 1989 to 1997, Mr.
Foster was employed by Merck and Co., Inc. and Astra Merck, Inc., which are
affiliated pharmaceutical companies, most recently as Director of Licensing and
Business Development of Astra Merck, Inc..
Patricia A. Barnett joined the Company in August 1998 as Vice President of
Reimbursement in August 1998. From 1997 to August 1998, Ms. Barnett was employed
by Bristol-Myers Squibb Company, a pharmaceutical company, most recently as
Associate Director of Reimbursement. In addition, from 1993 to 1997, Ms. Barnett
was also employed by Genentech, Inc., a biotechnology company, as a Senior
Manager of Health Economics and Policy and Health Care Affairs.
Raymond J. Schuyler has been a director of Intracel since August 1995. From
February 1974 through 1998, Mr. Schuyler was employed by Orion Capital and
Security Insurance Co. of Hartford, one of Intracel's principal institutional
stockholders, most recently as a Senior Vice President and Chief Investment
Officer. Mr. Schuyler has been involved in investment banking and portfolio
management for more than 38 years.
Joseph Caligiuri became a director of Intracel immediately following the
Merger. Mr. Caligiuri retired as a Corporate Executive Vice President of Litton
Industries, Inc. in April 1993, where he had worked since 1969. Mr. Caligiuri
also serves as a member of the Board of Directors of Titan Corporation, a
commercial and military electronic and information systems company and Avnet,
Inc., an electronics components and distribution company.
Steven Gerber, M.D. became a director of Intracel immediately following the
Merger. Dr. Gerber is a senior pharmaceutical industry analyst and Head of
Healthcare Research for CIBC Oppenheimer, an investment banking firm. Dr. Gerber
holds a medical staff appointment at Cedars-Sinai Medical Center in Los Angeles.
He is also a member of the Board of Overseers of Tufts University School of
Medicine, and a member of the Board of Directors of Syncor International
Corporation.
Alexander Klibanov, Ph.D. has been a director of Intracel since July 1992.
For more than five years, Dr. Klibanov has been a Professor of Chemistry in the
Department of Chemistry at the Massachusetts Institute of Technology. He serves
on the editorial and review board of numerous scientific publications in the
fields of chemistry and biochemistry. He is a leader in the fields of
enzymology, having published numerous related articles in leading publications.
There are no family relationships among any of the persons who are
directors or executive officers of Intracel.
Directors of the Company are elected by holders of common stock for a
three-year term, and are divided into three classes with staggered terms that
currently have expiration dates as follows: (a) Class I Directors -- 1999, (b)
Class II Directors -- 2000 and (c) Class III Directors -- 2001. As of the date
hereof, Messrs. Gerber and Caligiuri serve as Class I Directors, Messrs.
Klibanov and Schuyler serve as Class II Directors and Dr. Hanna and Mr. McKenzie
serve as Class III Directors.
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<PAGE> 66
SUMMARY OF EXECUTIVE COMPENSATION
The table below sets forth certain information concerning the compensation
earned by the Company's Chief Executive Officer and each of the other most
highly compensated executive officers of the Company (collectively, the "Named
Executive Officers") whose aggregate cash compensation exceeded $100,000 for
services rendered in all capacities to the Company during the year ended
December 31, 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
--------------------- ----------------------------
SHARES OF
COMMON STOCK
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUSES OPTIONS COMPENSATION
- ------------------------------------------ -------- ------- ------------ ------------
<S> <C> <C> <C> <C>
Simon R. McKenzie
President and Chief Executive Officer... $186,434
Persis M. Strong
Senior Vice President, Marketing........ 118,550 13,333
Matthew L. Root
Chief Financial Officer(1).............. 94,003 $20,000
Cheryl Cataldo
Corporate Secretary(1).................. 111,374
</TABLE>
- ---------------
(1) Mr. Root served as chief financial officer for a portion of 1997, and Ms.
Cataldo served as an executive officer for a portion of 1997. They were not
officers of the Company as of the last day of fiscal year 1997.
The following table sets forth information regarding stock options granted
pursuant to the Company Stock Option Plan (as defined) during the fiscal year
ended December 31, 1997 to each of the Named Executive Officers. The Company has
never granted any stock appreciation rights.
OPTION GRANTS IN FISCAL YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED
TOTAL OPTIONS ANNUAL RATES OF
GRANTED TO STOCK PRICE
NUMBER OF EMPLOYEES APPRECIATION FOR
SECURITIES IN FISCAL YEAR OPTION TERM
UNDERLYING OPTIONS ENDED EXERCISE PRICE EXPIRATION ---------------------
NAME GRANTED DECEMBER 31, 1997 PER SHARE(1) DATE 5% 10%
- ---------------------- ------------------ ----------------- -------------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Simon R.
McKenzie(2).........
Persis M. Strong(3)... 13,333 15.4% $6.75 12/31/02 $24,865 $54,946
Matthew L. Root.......
Cheryl Cataldo........
</TABLE>
- ---------------
(1) All share numbers and prices adjusted to reflect a two-for-one stock split
on December 31, 1997 and a two-for-three reverse stock split on December 28,
1998. The Company granted options totaling 86,666 shares (as adjusted)
during the year ended December 31, 1997.
(2) Under the terms of a January 2, 1998 employment agreement, the Company had
granted Mr. McKenzie warrants to purchase 452,896 shares of common stock at
an exercise price of $6.75.
(3) On December 31, 1997, the Company issued a five-year option for 13,333
shares at an exercise price of $6.75 per share of which 33% was immediately
vested and exercisable. An additional 33% of the options vest and are
exercisable on or after the first anniversary date, and the remainder vest
and are exercisable on the second anniversary date.
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<PAGE> 67
No options were exercised by the Named Executive Officers in 1997. The
following table sets forth the specified information concerning unexercised
options held by the Named Executive Officers as of December 31, 1997.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES SUBJECT VALUE OF UNEXERCISED
TO UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT FISCAL YEAR END AT FISCAL YEAR END(1)
-------------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Simon R. McKenzie...................... 133,332(2) $475,480
Persis M. Strong....................... 34,444(2) 18,889 90,000 $ 30,000
Matthew L. Root........................
Cheryl Cataldo......................... 4,978 8,889 4,933 6,667
</TABLE>
- ---------------
(1) Calculated based upon the difference between the exercise price and the
$6.75 estimated fair market value of the underlying securities as of
December 31, 1997.
(2) As of August 31, 1998, the Company had granted Mr. McKenzie warrants to
purchase 452,896 shares of common stock at an exercise price of $6.75 per
share and options to Ms. Strong to purchase 10,000 shares of common stock at
an exercise price of $11.25 per share.
On July 5, 1998, Mr. McKenzie exercised options to acquire 80,000 shares of
the Company's common stock at an exercise price of $3.75 per share. Mr. McKenzie
received a loan from the Company in the amount of $300,000 to facilitate his
exercising such options. The full recourse note, which matures on July 5, 2001,
bears interest at a rate of 10% per annum (payable at maturity).
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with certain of its key
employees. The following is a summary of the material terms and conditions of
such agreements and is subject to the detailed provisions of the respective
agreements attached as exhibits to the Registration Statement.
Dr. Hanna entered into an employment agreement with the Company as of
January 2, 1998, providing for his employment as Chairman of the Board and Chief
Scientific Officer of the Company with a base salary of $200,000, which may be
increased by discretionary bonus payments. In addition, the agreement provides
for a $50,000 bonus if the Company's initial OncoVAX Center commences treatment
of its first cancer patient prior to December 31, 1998 and a bonus of $50,000 if
HumaSPECT receives FDA or MAA final approval prior to September 30, 1998. The
Company may terminate employment for cause (as defined) or either party may
terminate upon 30 days prior notice. Pursuant to the employment agreement, the
Company has provided to Dr. Hanna a $2,000,000 life insurance policy which will
be fully funded within five years. Dr. Hanna's compensation also includes
customary perquisites and other personal benefits. If Dr. Hanna's employment is
terminated without cause, or Dr. Hanna terminates the agreement by reason of
constructive discharge (as defined), the Company is obligated to pay him a lump
sum amount equal to the monthly portion of his base salary multiplied by 36,
certain benefits for a three-year period following termination and, to the
extent he is not fully vested with the Company retirement plans, the difference
between any amounts payable to him under such plans and amounts which would have
been payable had he been vested. If employment is terminated on account of
medical disability (as defined), the Company is obligated to pay Dr. Hanna an
amount equal to two-thirds of his base salary (less any amounts paid as workers
compensation, social security disability or other federal, state or local
disability benefits) for the period ending the earlier of (i) the date that Dr.
Hanna becomes employed in a full-time manner or substantially full-time basis,
in which case he shall receive his base salary without adjustment or (ii) the
date that Dr. Hanna attains normal retirement age. The agreement has an initial
three-year term and shall be negotiated on an annual basis upon expiration of
the initial term. The agreement also provides that Dr. Hanna may not engage in
certain competitive activities with the Company for a period of one year
following termination of the agreement.
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<PAGE> 68
Mr. McKenzie entered into an employment agreement with the Company as of
January 2, 1998, providing for his employment as President and Chief Executive
Officer of the Company with a base salary of $200,000, which may be increased by
discretionary bonus payments. In addition, pursuant to the agreement the Company
granted to Mr. McKenzie warrants, exercisable at $6.75 per share, to acquire
452,896 shares of common stock. Mr. McKenzie's compensation also includes
customary perquisites and other personal benefits. The Company may terminate
employment for cause (as defined) or either party may terminate the agreement
upon 30 days prior notice. If such agreement is terminated without cause, or Mr.
McKenzie terminates the agreement by reason of constructive discharge (as
defined), the Company is obligated to pay him a lump sum amount equal to the
monthly portion of his base salary multiplied by 36, certain benefits for a
three-year period following termination and, to the extent he is not fully
vested with the Company retirement plans, the difference between any amounts
payable to him under such plans and amounts which would have been payable had he
been vested. If employment is terminated on account of medical disability (as
defined), the Company is obligated to pay Mr. McKenzie an amount equal to
two-thirds of his base salary (less any amounts paid as workers compensation,
social security disability or other federal, state or local disability benefits)
for the period ending the earlier of (i) the date that Mr. McKenzie becomes
employed in a full-time manner or substantially full-time basis, in which case
he shall receive his base salary without adjustment or (ii) the date that Mr.
McKenzie attains normal retirement age. The agreement has an initial four-year
term and shall be negotiated on an annual basis upon expiration of the initial
term. Mr. McKenzie has agreed not to compete with the Company for a period of
one year following termination of the agreement.
Mr. Reale entered into an employment agreement with the Company effective
March 8, 1998, providing for his employment as President of the OncoVAX(CL)
Division with a base salary of $200,000, which may be increased by discretionary
bonus payments. Pursuant to the agreement, the Company has granted Mr. Reale
options to purchase 66,667 shares of its common stock at an exercise price of
$11.25 per share vesting at a rate of 25% on the commencement of his employment
and 25% on each of the first, second and third anniversaries thereof. If Mr.
Reale achieves the first and second year performance objectives set forth
therein, his options will vest at an accelerated rate. Additionally, Mr. Reale
may receive additional performance bonuses totaling up to 100% of his salary.
Mr. Reale's compensation includes customary perquisites and other personal
benefits.
Ms. Strong entered into an employment agreement with the Company effective
June 1, 1998, providing for her employment as Senior Vice President and
President of the Bartels Diagnostic Division with a base salary of $160,000,
which may be increased by discretionary bonus payments. During her employment
with the Company, Ms. Strong has purchased 6,666 shares of common stock and been
granted options to purchase 63,333 shares of common stock with exercise prices
ranging from $3.75 per share to $11.25 per share. Ms. Strong's compensation
includes customary perquisites and customary benefits.
Mr. Bloom entered into an employment agreement with the Company effective
February 1, 1998, providing for his employment as Senior Vice President of
Corporate Development with a base salary of $180,000, which may be increased by
discretionary bonus payments and option grants. Prior to his entering this
employment agreement, Mr. Bloom had a consulting agreement with the Company from
August 1997 to February 1998, pursuant to which he was paid $51,000. Mr. Bloom
has purchased 13,333 shares of common stock in the Company and has been granted
options to purchase 23,333 shares of common stock with the exercise prices
ranging from $6.75 per share to $11.25 per share. Mr. Bloom's compensation
includes customary perquisites and customary benefits. Subsequent to entering
into the employment agreement, Mr. Bloom was promoted to Chief Financial
Officer.
Mr. Foster entered into an employment agreement with the Company effective
May 19, 1998, providing for his employment as Vice President of Business
Development with a base salary of $200,000, which may be increased by
discretionary bonus payments and is guaranteed to be at least $300,000 during
his first year of employment. Pursuant to the agreement, the Company has granted
Mr. Foster options to purchase 66,667 shares of its common stock at an exercise
price of $15.00 per share vesting at a rate of 25% on the commencement of his
employment and 25% on each of the first, second and third anniversaries thereof.
If Mr. Foster achieves the first and second year performance objectives set
forth therein, his options will vest at an accelerated rate. Additionally, Mr.
Foster may receive additional performance bonuses totaling up to 100% of his
salary. Mr. Foster's compensation includes customary perquisites and customary
benefits.
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<PAGE> 69
STOCK OPTION PLANS
Intracel Stock Option Plans
The Company has reserved 1,110,172 shares of common stock for issuance
under its 1989 Stock Option Plan and 1990-91 Stock Option Plan (the "Company
Stock Option Plan") which provides for the granting of options to key employees
and consultants of the Company and its subsidiaries. The option price per share,
the amount of shares underlying each option, the vesting period and the
expiration date are determined by the Board of Directors at the date of the
grant, except that the option price may not be less than the fair market value
(as defined) of stock on the date of the grant and the option period may not
exceed ten years. For stockholders possessing more than a 10% ownership
interest, the option price shall not be less than 110% of the fair market value
at the date of grant. The vesting period for options issued in 1997 ranged from
24 months to 48 months and all had expiration dates five years from the date of
issue. At September 30, 1998, options to purchase 588,014 shares of common stock
at $1.50 to $15.00 per share were outstanding, of which 329,745 were vested and
exercisable. See Note 10 to the Company's consolidated financial statements
contained elsewhere in this Prospectus.
The Company's 1999 Stock Incentive Plan (the "1999 Plan") was adopted and
approved by the Board of Directors and by the Company's stockholders in January
1999. Options under this plan will not be issued until after the closing of the
Company's anticipated public offering in 1999. The 1999 Plan allows granting of
options intended to qualify as "incentive stock options" under Section 422 of
the Internal Revenue Code of 1986, nonqualified stock options and stock
appreciation rights. The 1999 Plan also allows the transfer or sale of common
stock to selected individuals in connection with the performances of services to
the Company or its affiliates. A total of 3,000,000 shares of common stock have
been reserved for issuance under the 1999 Plan, plus an annual increase to be
added on the first day of the Company's fiscal year beginning in 2000 equal to
two percent (2%) of the number of shares outstanding as of such date not to
exceed 500,000 in any plan year. The Board of Directors or a committee
designated by the Board is authorized to administer the 1999 Plan, including the
selection of individuals eligible for grants of options, issuances of common
stock, the terms of such grants or issuances, possible amendments to the terms
of such grants or issuances and the interpretation of the terms of, and adoption
of rules for, the 1999 Plan. The maximum term of any stock option to be granted
under the 1999 Plan is ten years, except that with respect to incentive stock
options granted to a person possessing more than 10% of the combined voting
power of the Company (a "10% Stockholder"), the term of such stock options shall
be for no more than five years.
The exercise price of nonqualified stock options and incentive stock
options granted under the 1999 Plan must be at least 85% and 100%, respectively,
of the fair market value of the common stock on the grant date except that the
exercise price of incentive stock options granted to a 10% Stockholder must be
at least 110% of such fair market value on the grant date. The aggregate fair
market value on the date of grant of the common stock for which incentive stock
options are exercisable for the first time by an employee during any calendar
year may not exceed $100,000. The purchase price of shares of common stock
granted under the 1999 Plan must be at least 85% of the fair market value of the
common stock on the grant date except that the purchase price of shares of
common stock granted to a 10% Stockholder must be at least 100% of such fair
market value on the grant date. The individual agreements under the 1999 Plan
may provide for repurchase rights for the Company under the terms and conditions
set forth in the 1999 Plan. The 1999 Plan will terminate in 2009, unless earlier
terminated by the Board.
PerImmune Holdings, Inc. Stock Option Plan
Pursuant to the Amended and Restated 1996 Stock Option Plan of PerImmune
Holdings (the "PerImmune Stock Option Plan") for independent directors,
executive officers and key employees and consultants (all as defined) of
PerImmune Holdings, PerImmune and the Company, PerImmune Holdings reserved 500
shares of its common stock, par value $.01 per share, for issuance. At the time
of the Merger, options to purchase 257 shares of PerImmune Holdings were
outstanding, of which options to purchase 86 shares of PerImmune Holdings were
vested and exercisable. In connection with the Merger, the Company assumed
PerImmune Holdings' obligations under the PerImmune Stock Option Plan.
Consequently, each option outstanding under the PerImmune Stock Option Plan
converted into an option to purchase
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<PAGE> 70
6,072.21 shares of common stock upon exercise. Of the options to purchase 257
shares of PerImmune Holdings, options to purchase 255 shares of PerImmune
Holdings were granted to employees of PerImmune Holdings at an exercise price of
$2,725 per share and options to purchase two shares of PerImmune Holdings were
granted to directors of PerImmune Holdings at an exercise price of $45,000 per
share. In conjunction with the execution of one year employment agreements with
the Company effective August 3, 1998, seven employees holding PerImmune
Holdings, Inc. stock options agreed to surrender a total of 79 unvested options.
RETIREMENT SAVINGS PLANS
The Company has a 401(k) savings plan covering substantially all of its
employees. Eligible employees may contribute amounts through payroll deductions.
The Company matches employees' contributions at the discretion of the Company's
Board of Directors. The Company did not match employee contributions to the
401(k) savings plan in the 1997, 1996 and 1995 periods. The Company does not
provide other post-retirement benefits.
In connection with the Merger, the Company assumed PerImmune Holdings'
employee pension plan, a noncontributory defined benefit pension plan (the
"PerImmune Holdings Plan") retroactive to August 2, 1996. The Company froze the
benefits under the PerImmune Holdings Plan in February 1998, and determined that
the remaining PerImmune Holdings Plan assets and recorded pension liability
exceeded the obligation relating to the participants. As a result of the
curtailment of the plan benefits, the Company recorded income of $800,000 and
reduced the related pension liability in accordance with Statement of Financial
Accounting Standards No. 88, "Employers Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans."
In addition, PerImmune Holdings maintains a defined-contribution savings
plan under Section 401(k) of the Internal Revenue Code. This plan covers
substantially all full-time employees. Participating employees may defer a
portion of their pretax earnings up to the Internal Revenue Service annual
contribution limit. PerImmune Holdings matches employee contributions according
to a specified formula. PerImmune Holdings' matching contributions totalled
$176,098 and $72,779 for the year ended December 31, 1997, and period from
August 3, 1996 through December 31, 1996, respectively.
COMMITTEES OF THE BOARD OF DIRECTORS
In March 1998, the Board of Directors designated a Compensation Committee,
which consists of Joseph Caligiuri, Steven Gerber and Alexander Klibanov. The
Compensation Committee reviews executive salaries and administers any bonuses,
incentive compensation and stock options of the Company issuable to management
employees and directors of the Company. In addition, the Compensation Committee
consults with management of the Company regarding compensation policies and
practices of the Company. Also in March 1998, the Board of Directors established
an Audit Committee consisting of Joseph Caligiuri, Simon R. McKenzie and Raymond
J. Schuyler, an Executive Committee consisting of Michael J. Hanna, Simon R.
McKenzie and Raymond J. Schuyler and a Finance Committee consisting of Steven
Gerber, Simon R. McKenzie and Raymond J. Schuyler. The Audit Committee will
review the professional services provided by the Company's independent auditors,
the annual financial statements of the Company and the Company's internal
financial controls.
DIRECTOR COMPENSATION
Fees. None of the Company's directors who are also employees of the Company
receive cash compensation for attendance at meetings of the Board of Directors
or at meetings of committees of the Board of Directors of which they are
members. Independent, non-employee directors shall be entitled to cash
compensation of $1,500 for attendance at meetings of the Board of Directors or
at meetings of committees of the Board of Directors of which they are members.
All directors receive reimbursement for reasonable travel expenses incurred in
connection with attendance at each Board of Directors and committee meeting.
Stock Options. To attract and retain independent, non-employee directors
for the Company, the Company has issued, and intends to continue to issue, to
its independent directors, a one-time grant of 10,000 options to purchase the
Company's common stock pursuant to the Company Stock Option Plan, in amounts
determined at the discretion of the Board of Directors or the Compensation
Committee and exercisable at a
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price equal to the fair market value of the common stock on the date of grant.
These options vest over a three-year period. Independent directors will
generally be granted stock options upon their initial appointment, and
independent directors and stockholder representative directors may be granted
stock options during their term of service as an incentive for continued
service. Employee directors are not granted stock options for their services as
directors.
CONFIDENTIALITY AND NON-COMPETE AGREEMENTS
The Company has entered into employment agreements containing
confidentiality and non-compete provisions with each of its key employees. The
agreements provide that, among other things, all inventions, discoveries and
ideas which are, directly or indirectly, related to or suggested by the
employee's employment or is pertinent to any field of business or research in
which the Company is engaged or is considering engaging during the employee's
employment shall be the sole and exclusive property of the Company. The
agreements also provide that, for a specified period from the date of
termination of employment with the Company for any reason, the employee will
not, directly or indirectly, engage, participate or invest in any business
activity anywhere in the world that is competitive with or similar to the
products and services of the Company or make use of any of the Company's
confidential information.
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's common stock as of November 30, 1998, and as adjusted
to reflect the sale of the shares of common stock offered hereby (assuming no
exercise of the Underwriters' over-allotment option), by: (i) each person (or
group of affiliated persons) known by the Company to own beneficially more than
five percent of the Company's outstanding common stock; (ii) each of the
Company's directors; (iii) each Named Executive Officer of the Company; and (iv)
all directors and executive officers of the Company as a group. Dr. Michael G.
Hanna, Jr. (the "Selling Stockholder") has granted the Underwriters a 30-day
option to purchase up to an aggregate of 300,000 shares of common stock on the
same terms and conditions as the offering to cover over-allotments, if any, in
connection with this offering. See "Underwriting."
<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES
OUTSTANDING(3)
NAME, TITLE AND --------------------
ADDRESS OF OFFICERS, NUMBER OF SHARES PRIOR TO AFTER
DIRECTORS AND BENEFICIAL OWNERS(1) BENEFICIALLY OWNED(2) OFFERING OFFERING
---------------------------------- --------------------- -------- --------
<S> <C> <C> <C>
Michael G. Hanna, Ph.D.(4) 3,640,308 31.82% 19.66%
Chairman of the Board and Chief Scientific Officer
Northstar Funds, TD Partners and 1,069,020 9.34 6.92
Thomas O. Dial(5)
2 Pickwick Plaza
Greenwich, CT 06830
Security Insurance Co. of Hartford(6) 884,452 7.73 5.73
600 Fifth Avenue
New York, NY 10020
Simon R. McKenzie(7) 798,962 6.69 5.01
President, Chief Executive Officer and Director
Mentor Corporation(8) 781,227 6.83 5.06
5425 Hollister Avenue
Santa Barbara, CA 93111
Syncor International Corporation(9) 677,217 5.92 4.39
6464 Canoga Avenue
Woodland Hills, CA 91367
Dianne Goroff, Ph.D.(10) 182,167 1.58 1.17
Vice President of Operations
Raymond Schuyler(11) 119,042 1.04 *
Director
Persis M. Strong(12) 58,055 * *
Senior Vice President and President Bartels Diagnostics
Division
Alexander Klibanov, Ph.D.(13) 53,333 * *
Director
Lawrence Bloom(14) 19,166 * *
Chief Financial Officer
Joseph Caligiuri(15) 18,216 * *
Director
Daniel S. Reale(16) 16,667 * *
Senior Vice President and President, OncoVAX(CL) Division
Carl Foster(16) 16,667 * *
Vice President, Business Development
Steven Gerber, M.D.(17) 6,072 * *
Director
Patricia Barnett(18) 5,833 * *
Vice President, Reimbursement
All directors and executive officers as a group (12 persons) 4,861,622 39.80% 26.25%
</TABLE>
- ---------------
* Less than 1% of the outstanding shares of common stock.
(1) Unless otherwise indicated, the address for each person is c/o Intracel
Corporation, 2005 NW Sammamish Road, Suite 107, Issaquah, Washington 98027.
(2) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission (the "Commission"). In computing the
number of shares beneficially owned by a person and the percentage
ownership of that person, shares of common stock and preferred stock
subject to options and warrants held by that person that are exercisable
within 60 days are deemed outstanding. Such shares, however, are not deemed
outstanding for purposes of computing percentage ownership of any other
person. Options vest over a period of three to five years from the date of
grant. Options granted under the PerImmune Holdings,
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<PAGE> 73
Inc. 1996 Stock Option Plan have been adjusted and reflected in the
equivalent number of shares of the Company under the merger and
consolidation terms of the options agreement. Unless otherwise indicated in
the footnotes to this table, the persons and entities named in the table
have sole voting and sole investment power with respect to all shares
beneficially owned, subject to community property laws where applicable.
(3) Based on 11,440,285 shares outstanding prior to this offering (including
7,440,365 shares of common stock, 3,469,705 shares of common stock which
will be issued pursuant to the Preferred Stock Conversion, 36,433 shares of
common stock which will be issued under automatic conversion features of
certain outstanding debt, and 493,786 shares of common stock issuable under
warrants immediately exercisable after this offering), and 15,440,285
shares of common stock outstanding after this offering.
(4) Includes 3,036,121 shares of common stock held for Dr. Hanna's personal
account and 604,187 shares of common stock (over which Dr. Hanna has sole
voting power under the terms of a voting trust entered into among certain
other founding employees of PerImmune Holdings). Dr. Michael G. Hanna, Jr.
(the "Selling Stockholder") has granted the Underwriters a 30-day option to
purchase up to an aggregate of 300,000 shares of common stock on the same
terms and conditions as the offering to cover over-allotments, if any, in
connection with this offering.
(5) Includes 15,884 shares of Series A-1 preferred stock (which will be
automatically converted to 21,461 shares of common stock at the conclusion
of this offering) and warrants to purchase 31,814 shares of common stock at
a price of $10.50 per share, held by Northstar High Yield Fund; 254,147
shares of Series A-1 preferred stock (which will be automatically converted
to 343,394 shares of common stock at the conclusion of this offering), and
106,049 shares of common stock, and warrants to purchase 127,259 shares of
common stock at a price of $10.50 per share held by Northstar Advantage
High Total Return Fund; and 148,148 shares of common stock held by
Northstar Balance Sheet Opportunities; but does not include warrants to
purchase 812,343 shares of common stock held by Northstar Advantage High
Total Return Fund, warrants to purchase 270,517 shares of common stock held
by Northstar High Total Return Fund II, warrants to purchase 39,634 shares
of common stock held by Northstar Strategic Income Fund, and warrants to
purchase 151,614 shares of common held by Northstar High Yield Fund, all of
which are expected to remain outstanding after this offering. Also includes
68,335 shares of Series A preferred stock and 79,421 shares of Series A-1
preferred stock (which will be automatically converted to 92,332 and
107,311 shares of common stock upon consummation of this offering), and
warrants to purchase 3,697 shares of common stock at a price of $6.00 per
share) held by TD Partners; and 87,555 shares of common stock beneficially
owned by Mr. Thomas O. Dial. Northstar High Yield Fund, High Total Return
Fund, High Total Return Fund II, Strategic Income Fund and Balance Sheet
Opportunities Fund are registered mutual funds of Northstar Financial
Management Services, Inc., a registered financial management firm. Mr. Dial
is an employee of Northstar Financial Management Services, Inc. and
Portfolio Manager of the Northstar High Total Return Fund, High Total
Return Fund II, and Balance Sheet Opportunities Fund, and Managing Partner
of TD Partners. Mr. Dial disclaims beneficial ownership of any of
Northstar's holdings of the Company's stock. As Managing Partner of TD
Partners, Mr. Dial has voting and investment power with respect to that
partnership.
(6) Includes 384,388 shares of Series A preferred stock and 158,842 shares of
Series A-1 preferred stock which will be automatically converted to 519,371
and 214,622 shares of common stock, respectively, upon consummation of this
offering, and 150,459 shares of common stock. Security Insurance Co. of
Hartford is a subsidiary of Orion Capital Corporation, a New York Stock
Exchange-listed insurance holding company.
(7) Includes 292,732 shares of common stock beneficially owned, 53,334 shares
issuable upon exercise of options that are currently fully vested and
exercisable and 452,896 shares issuable upon exercise of warrants to be
granted in accordance with an employment agreement dated January 2, 1998.
(8) Includes 120 shares of Series B-2 preferred stock which will be
automatically converted to 781,227 shares of common stock upon consummation
of this offering. Mentor Corporation is a medical technology developer,
manufacturer, and distributor. Mentor and the Company are parties in a
joint development agreement. Voting control of Mentor's holdings of the
Company's securities rests with a Mentor executive committee.
(9) Includes 100 shares of Series B-1 preferred stock which will be
automatically converted to 677,217 shares of common stock upon consummation
of this offering. Syncor International Corp. is a pharmacy services company
engaged in compounding and distributing radiopharmaceutical products and
services. Syncor and the Company are parties to a joint development
agreement. Voting control of Syncor's holdings of the Company's securities
rests with a Syncor executive committee.
(10) Includes 121,445 shares issuable upon exercise of options that are
currently fully vested and exercisable and 60,722 shares which will be
distributed from the voting trust upon consummation of this offering.
(11) Includes 15,884 shares of Series A-1 preferred stock which will be
automatically converted to 21,461 shares of common stock upon consummation
of this offering, 84,248 shares of common stock, and 13,333 shares of
common stock issuable upon exercise of options which are fully vested and
exercisable.
(12) Includes 6,666 shares of common stock and 51,389 shares of common stock
issuable upon exercise of options which are fully vested and exercisable.
(13) Includes 26,667 shares of common stock issuable upon exercise of options
which are fully vested and exercisable and 26,666 shares of common stock.
(14) Includes 13,333 shares of common stock and 5,833 shares of common stock
issuable upon exercise of options which are fully vested and exercisable.
(15) Includes 6,072 shares of common stock issuable upon exercise of options
which are fully vested and exercisable and 12,144 shares which will be
distributed from the voting trust upon consummation of this offering.
(16) Includes 16,667 shares of common stock issuable upon exercise of options
which are fully vested and exercisable.
(17) Includes 6,072 shares of common stock issuable upon exercise of options
which are fully vested and exercisable.
(18) Includes 5,833 shares of common stock issuable upon exercise of options
which are fully vested and exercisable.
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DESCRIPTION OF CAPITAL STOCK
The following description of the Company's capital stock does not purport
to be complete and is subject in all respects to applicable Delaware law and to
the provisions of the Company's Certificate of Incorporation, and Bylaws, copies
of which have been filed as exhibits to the Registration Statement of which this
Prospectus is a part.
As of November 30, 1998, the authorized capital stock of the Company
currently consists of (i) 25,000,000 shares of common stock, and (ii) 5,000,000
shares of preferred stock. Immediately prior to the date hereof, there were
11,440,285 shares of common stock outstanding (including 3,469,705 shares of
common stock issuable upon the automatic conversion of the 1,488,771 shares of
preferred stock issued and outstanding, or accrued, on the date hereof; 493,786
shares of common stock issuable in connection with "in-the-money" warrants
issued and outstanding on the date hereof, which warrants automatically expire
upon the closing of this offering; and 36,433 shares of common stock issuable in
connection with three convertible Promissory Notes issued and outstanding on the
date hereof, which Notes automatically convert into common stock upon the
consummation of this offering) held by approximately 148 holders of record.
COMMON STOCK
Holders of common stock are entitled to one vote for each share held of
record on all matters on which stockholders are entitled to vote. Holders of
common stock do not have cumulative voting rights and, therefore, holders of a
majority of the shares of common stock voting for the election of directors can
elect all of the directors. In such event, the holders of the remaining shares
of common stock will not be able to elect any directors.
Holders of common stock are entitled to receive such dividends as may be
declared from time to time by the Board of Directors out of funds legally
available therefor. The Company has not paid any cash dividends since inception
and does not anticipate paying cash dividends in the foreseeable future. In the
event of liquidation, dissolution or winding up of the Company, the holders of
common stock are entitled to share ratably in any corporate assets remaining
after payment of all debts, subject to any preferential rights of any
outstanding preferred stock. See "Dividend Policy."
Holders of common stock have no preemptive, conversion or redemption rights
and are not subject to further calls or assessments by the Company. All of the
outstanding shares of common stock are, and the shares offered by the Company
hereby will be, if issued, validly issued, fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors have authority to issue up to 5,000,000 shares of
preferred stock and to fix the price, rights, preferences, privileges and
restrictions, including voting rights, of those shares without any further vote
or action by the stockholders. The rights of the holders of common stock will be
subject to, and may be adversely affected by, the rights of the holders of any
preferred stock that may be issued in the future. Upon consummation of this
offering, all 1,488,771 shares of convertible preferred stock issued and
outstanding, or accrued, will automatically convert into 3,469,705 shares of the
Company's common stock.
WARRANTS
In connection with several transactions, the Company issued warrants
("Warrants") to buy a total of 2,351,338 shares of common stock, of which
Warrants to purchase 2,220,785 shares of common stock are still outstanding. The
Warrants may be exercised in whole or in part at any time after the date of
issue until the expiration date by delivering the warrant agreement with the
duly executed form of subscription to the Company. Warrants generally expire
five years from the date of issue and are subject to antidilution protection.
Outstanding Warrants to purchase 493,783 shares of common stock are subject
to accelerated expiration upon the earlier of: (i) this offering; or (ii) the
date immediately prior to the effective date of any
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consolidation of the Company with or merger of the Company into any other
corporation or entity or the sale or transfer of all or substantially all of the
assets of the Company to another person or entity.
On July 22, 1994, the Company issued Warrants to purchase 51,999 shares of
common stock to several Series A stockholders in connection with the Preferred
Stock Purchase Agreement between the Company and the Series A preferred
stockholders. After giving effect to a two-for-one split of the common stock
effective as of December 31, 1997 and the 2-for-3 reverse stock split of the
common stock authorized by the Company's Board of Directors on December 28, 1998
(the "Stock Splits"), the remaining outstanding Warrants are currently
exercisable for a total of 44,834 shares of the common stock at an exercise
price of $6.00 per share, and which will expire upon conclusion of this offering
unless exercised.
In connection with an additional Preferred Stock Purchase Agreement entered
into by the Company and several Series A-1 preferred stockholders on September
22, 1995, the Company issued Warrants to purchase 86,462 shares of common stock.
After giving effect to the Stock Splits, such Warrants are currently exercisable
into 115,283 shares of common stock at an exercise price of $6.00 per share, and
which will expire upon conclusion of this offering unless exercised. On November
21, 1995, the Company issued Warrants to purchase 91,177 shares of common stock
in connection with a second closing under the Preferred Stock Purchase Agreement
dated September 27, 1995. After giving effect to the Stock Splits, such Warrants
are currently exercisable into 121,569 shares of common stock at an exercise
price of $6.75 per share, and which will expire upon conclusion of this offering
unless exercised.
On December 28, 1995, the Company issued Warrants to purchase 94,010 shares
of common stock in connection with a Warrant and Note Agreement with Northstar
Advantage High Total Return Fund. After giving effect to the Stock Splits, such
Warrants are currently exercisable into 125,347 shares of common stock at an
exercise price of $10.50 per share.
On June 11, 1996, the Company issued Warrants to purchase 159,073 shares of
common stock in connection with a Note and Warrant Purchase Agreement with
CoreStates Enterprise Fund. After giving effect to the Stock Splits, such
Warrants are currently exercisable into 212,097 shares of common stock at an
exercise price of $10.50 per share and which will expire upon conclusion of this
offering unless exercised.
On June 21, 1996, the Company issued Warrants to purchase 79,537 shares of
common stock in connection with a Note and Warrant Purchase Agreement with
Northstar Advantage High Total Return Fund. These warrants were exercised on
November 18, 1997 at a price of $7.00 per share.
On January 2, 1998, the Company issued Warrants to purchase 452,896 shares
of common stock in connection with an employment agreement between Simon R.
McKenzie, the Company's Chief Executive Officer, and the Company. The Warrants
currently carry an exercise price of $6.75 per share, and expire five years from
the date of issue.
On April 1, 1998, the Company issued Warrants to purchase 65,421 shares of
common stock in connection with a Note and Warrant Purchase Agreement at a
current exercise price of $11.46 per share.
On August 25, 1998, the Company issued Warrants to purchase up to 1,083,338
shares of common stock in connection with the August 1998 Refinancing as
discussed elsewhere in this Prospectus. See "Business -- Recent Debt
Refinancings."
CONVERTIBLE NOTES
In January 1997, the Company's subsidiary, PerImmune Holdings, issued three
promissory notes each in the amount of $77,500 that will each be automatically
converted into 12,144 shares of the Company's common stock at the conclusion of
this offering. Upon conversion, the rights of each investor under the promissory
notes cease and each investor will be entitled to rights as holders of common
stock.
REGISTRATION RIGHTS
Upon consummation of the offering, certain stockholders who will hold an
aggregate of 7,813,154 shares of common stock (the "Holders"), including
3,849,666 outstanding shares of common stock, 3,469,705 shares
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of common stock issuable upon the Preferred Stock Conversion at the consummation
of this offering, and 493,783 shares of common stock issuable upon exercise of
"in-the-money" Warrants (with exercise prices ranging from $6.00 to $10.50 per
share) that will otherwise expire upon conclusion of this offering, are entitled
to certain registration rights with respect to the common stock under the
Securities Act. Pursuant to the terms of these registration rights, the Company
is required to notify each Holder of each decision of the Company to file a
registration statement. Upon receipt of such notice, a Holder may request to
include certain of the Holder's shares of common stock in the Company's
registration, subject to the determination of the managing underwriters that
inclusion will not interfere with the offering. These rights have been waived by
the Holders, other than the Selling Stockholder, to the extent that such Holders
had rights to register common stock in this offering.
In addition, certain Holders can require the Company to use its best
efforts to prepare and file a registration statement on Form S-3 (or any
successor form) with respect to such Holders' shares of common stock. The right
of the Holders to request the Company to file a registration statement on Form
S-3 is available to the Holders no more than twice during any twelve-month
period.
The Company generally is required to bear the expenses relating to the sale
of shares under registrations contemplated by the registration rights, except
for underwriting fees and discounts. The Company also is obligated to indemnify
the stockholders whose shares are included in any of the Company's registrations
against certain losses and limitations, including certain liabilities under the
Securities Act and state securities laws generally.
Following this offering, the rights of any Holder to cause the Company to
register shares terminates when all of such Holder's securities subject to the
registration rights can be transferred or sold under the provisions of Rule 144.
CERTAIN PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION, BYLAWS AND
DELAWARE LAW
Classified Board of Directors. The Certificate of Incorporation of the
Company provides for the Board of Directors to be divided into three classes of
directors, as nearly equal in number as is reasonably possible, serving
staggered terms so that the directors' initial terms will expire either at the
1999, 2000 or 2001 annual meeting of the stockholders. Starting with the 1999
annual meeting of the stockholders, one class of directors will be elected each
year for a three-year term.
The Company believes that a classified Board of Directors will help to
assure the continuity and stability of the Board of Directors and the Company's
business strategies and policies as determined by the Board of Directors, since
a majority of the directors at any given time will have had prior experience as
directors of the Company. The Company believes that this, in turn, will permit
the Board of Directors to more effectively represent the interest of
stockholders. With a classified Board of Directors, at least two annual meetings
of stockholders, instead of one, will generally be required to effect a change
in the majority of the Board of Directors. As a result, a provision relating to
a classified Board of Directors may discourage proxy contests for the election
of directors or purchases of a substantial block of the common stock because its
provisions could operate to prevent obtaining control of the Board of Directors
in a relatively short period of time. The classification provision could also
have the effect of discouraging a third party from making a tender offer or
otherwise attempting to obtain control of the Company. Under the Delaware
General Corporation Law (the "DGCL"), a director on a classified board may be
removed by the stockholders of the corporation only for cause.
Advance Notice Provisions for Stockholder Nominations of Directors and
Stockholder Proposals. The Bylaws of the Company establish an advance notice
procedure with regard to the nomination, other than by or at the direction of
the Board of Directors or a committee thereof, of candidates for election as
directors (the "Nomination Procedure") and with regard to other matters to be
brought by stockholders before an annual meeting of stockholders of the Company
(the "Business Procedure").
The Nomination Procedure requires that a stockholder give prior written
notice, in proper form, of a planned nomination for the Board of Directors to
the Secretary of the Company. The requirements as to the
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form and timing of that notice are specified in the Bylaws of the Company. If
the Chairman of the Board of Directors determines that the other business was
not properly brought before such meeting in accordance with the Business
Procedure, such business will not be conducted at such meeting.
Although the Bylaws of the Company do not give the Board of Directors any
power to approve or disapprove stockholder nominations for the election of
directors or of any business desired by stockholders to be conducted at an
annual meeting, the Bylaws of the Company (i) may have the effect of precluding
a nomination for the election of directors or precluding the conduct of business
at a particular annual meeting if the proper procedures are not followed or (ii)
may discourage or deter a third party from conducting a solicitation of proxies
to elect its own slate of directors or otherwise attempting to obtain control of
the Company, even if the conduct of such solicitation or such attempt might be
beneficial to the Company and its stockholders.
Business Combinations. The Company is subject to the provisions of Section
203 of the DGCL, an anti-takeover law. In general, the statute prohibits a
publicly held Delaware corporation from engaging in certain transactions and
"business combinations" with an "Interested Stockholder" (as defined in Section
203) for a period of three years after the date of the transaction in which the
person became an interested stockholder, unless either (i) prior to the date
such person becomes an interested stockholder, the Board approves either the
business combination or the transaction which resulted in the stockholder
becoming an interested stockholder, (ii) upon the consummation of the
transaction which resulted in the stockholder becoming an interested
stockholder, the interested stockholder owned at least 85% of the voting stock
of the corporation outstanding at the time of the consummation of such
transaction, excluding for purposes of determining the number of shares
outstanding those shares owned (a) by persons who are directors and also
officers and (b) by employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer or (iii) on or subsequent to
the date such person becomes an interested stockholder, the business combination
is approved by the Board and authorized at an annual or special meeting of
stockholders, not by written consent, by the affirmative vote of at least
two-thirds of the outstanding voting stock which is not owned by the interested
stockholder. A "business combination" includes a merger, asset sale, or other
transaction resulting in a financial benefit to the stockholder. For purposes of
section 203, an "interested stockholder" is a person who, together with
affiliates and associates, owns (or within three years prior, did own) 15% or
more of the corporation's voting stock.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Company's Certificate of Incorporation contains certain provisions
permitted under DGCL relating to the liability of directors. These provisions
eliminate a director's personal liability for monetary damages resulting from a
breach of fiduciary duty. This provision in the Certificate of Incorporation
does not eliminate the duty of care, and in appropriate circumstances equitable
remedies such as an injunction or other forms of non-monetary relief would
remain available under the DGCL. Each director will continue to be subject to
liability for breach of the director's duty of loyalty to the Company, for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of the law, or for any transaction from which the director
derived an improper personal benefit. These provisions will not alter a
director's liability under federal securities laws. The Bylaws of the Company
provide for full indemnification of officers and directors to the full extent
permitted under the DGCL, as it now exists or may in the future by amendment
(but, in the case of such amendment, only to the extent that such amendment
permits the Company to provide broader indemnification rights than permitted
prior thereto), or by other applicable law as then in effect, against all
expenses, liabilities and losses actually and reasonably incurred or suffered in
connection with service for or on behalf of the Company, including payment of
expenses in defending an action or proceeding upon receipt of any undertaking by
the person indemnified to repay such payment if it is ultimately determined that
such person is not entitled to indemnification. Such indemnification will
continue to an indemnified person who has ceased to be a director, officer,
employee or agent and will inure to the benefit of the indemnified person's
heirs, executors and administrators.
The Company's Bylaws provide that the Company may maintain insurance, at
its expense, to protect itself and any indemnified party against any expense,
liability or loss, whether or not the Company would have
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the power to indemnify such person against such expense, liability or loss under
the DGCL. The Company, without further stockholder approval, may enter into
contracts with any indemnified person in furtherance of the indemnification
provisions contained in the Bylaws and may create a trust fund, grant a security
interest or use other means (including without limitation, a letter of credit)
to ensure the payment of such amounts as may be necessary to effect
indemnification as provided in the Bylaws.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock of the Company is
American Stock Transfer & Trust Company.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for the common
stock of the Company. Future sales of substantial amounts of shares of common
stock in the public market following this offering could adversely affect the
market price of the common stock. Such sales also might make it more difficult
for the Company to sell equity securities or equity-related securities in the
future at a time and price that the Company deems appropriate or at all.
Upon consummation of this offering, the Company will have 15,440,285 shares
of common stock outstanding, assuming no exercise of the Underwriters'
over-allotment option granted by the Company and no exercise of outstanding
options. Of these shares, all of the 4,000,000 shares sold in this offering will
be freely tradable without restriction or further registration under the
Securities Act, unless such shares are purchased by affiliates of the Company.
The remaining 11,440,285 shares of common stock will be restricted securities
("Restricted Shares") within the meaning of the Securities Act. Restricted
Shares may be sold in the public market only if registered or if they qualify
for an exemption from registration under Rules 144, 144(k) or 701 promulgated
under the Securities Act, which rules are summarized below. Holders of
substantially all of those shares will have the right to request the
registration of their shares under the Securities Act following completion of a
period of one year, in the case of directors and executive officers, and 180
days, in the case of such other stockholders, after the date of this Prospectus,
which, upon the effectiveness of such registration, would permit the free
transferability of such shares.
In general, under Rule 144, beginning 90 days after the date of this
Prospectus, an affiliate of the Company, or person (or persons whose shares are
aggregated) who has beneficially owned Restricted Shares for at least one year,
will be entitled to sell in any three-month period a number of shares that does
not exceed the greater of (i) one percent of the then outstanding shares of the
Company's common stock or (ii) the average weekly trading volume of the
Company's common stock on the Nasdaq Stock Market during the four calendar weeks
immediately preceding the date on which notice of the sale is filed with the
Commission. Sales pursuant to Rule 144 are subject to certain requirements
relating to manner of sale, notice and availability of current public
information about the Company. A person (or person whose shares are aggregated)
who is not deemed to have been an affiliate of the Company at any time during
the 90 days immediately preceding the sale and who has beneficially owned
Restricted Shares for at least two years is entitled to sell such shares
pursuant to Rule 144(k) without regard to the limitations described above.
The Company's directors, executive officers and certain stockholders, who
in the aggregate hold 4,861,622 shares of common stock of the Company
outstanding immediately prior to the consummation of this offering have entered
into or are subject to lock-up agreements under which they have agreed not to
sell, directly or indirectly, any shares owned by them for a period of one year,
in the case of directors and executive officers, and 180 days, in the case of
such other stockholders, after the date of this Prospectus without the prior
written consent of the Underwriters. See "Underwriting." Upon expiration of the
lock-up agreements, approximately 4,861,622 shares of common stock (including
approximately 323,312 shares subject to outstanding vested options and, 452,896
shares issuable upon exercise of warrants which do not expire at the conclusion
of this offering) will become eligible for immediate public resale, subject in
some cases to vesting provisions and volume limitations pursuant to Rule 144.
The remaining approximately 7,354,871 shares held by existing stockholders will
become eligible for public resale at various times over a period of less than
two years following the consummation of this offering, subject in some cases to
vesting provisions and volume limitations. 7,813,154 of the shares outstanding
immediately following the consummation of this offering will be entitled to
registration rights with respect to such shares upon termination of lock-up
agreements. The number of shares sold in the public market could increase if
registration rights are exercised. Dr. Hanna has agreed with the Company not to
sell, other than pursuant to the over-allot option granted to the Underwriters
in this offering, more than 10% of the shares of common stock held by him during
each of the twelve-month periods commencing on the date of this Prospectus and
the first anniversary thereof. In addition, the Company intends to file a
registration statement on Form S-8 for the shares held pursuant to its stock
option plans, which may make these shares freely tradeable. Such registration
statement will become effective immediately upon filing and shares covered by
that registration statement will thereupon be eligible for sale in the public
markets, subject to the applicable lock-up agreements and Rule 144 limitations
applicable to affiliates. See "Description of Capital Stock -- Registration
Rights."
78
<PAGE> 80
UNDERWRITING
Subject to certain terms and conditions contained in an underwriting
agreement (the "Underwriting Agreement"), the Underwriters named below
(collectively, the "Underwriters"), for whom Donaldson, Lufkin & Jenrette
Securities Corporation ("DLJ") and Piper Jaffray Inc. are acting as
representatives (the "Representatives"), have severally agreed to purchase the
number of shares of common stock from the Company set forth opposite their names
below:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
------------ ---------
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation.........
Piper Jaffray Inc...........................................
---------
Total............................................. 4,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase shares of common stock are subject to the approval of
certain legal matters by counsel and to certain other conditions. If any of the
shares of common stock are purchased by the Underwriters pursuant to the
Underwriting Agreement, all such shares of common stock (other than the shares
of common stock covered by the over-allotment option described below) must be so
purchased.
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of common stock to the public initially at the price
to the public set forth on the cover page of this Prospectus and to certain
dealers (who may include the Underwriters) at such price less a concession not
to exceed $ per share. The Underwriters may allow, and such dealers may
reallow, discounts not in excess of $ per share to any other Underwriter and
certain other dealers.
The Company and the Selling Stockholder have granted to the Underwriters an
option to purchase up to 600,000 additional shares of common stock at the
initial public offering price less underwriting discounts and commissions solely
to cover over-allotments. Such option may be exercised in whole or in part from
time to time during the 30-day period after the date of this Prospectus. To the
extent that the Underwriters exercise such option, each of the Underwriters will
be committed, subject to certain conditions, to purchase a number of option
shares proportionate to such Underwriter's initial commitment as indicated in
the preceding table.
The Company, certain stockholders of the Company and the executive officers
and directors of the Company have agreed not to directly or indirectly offer,
pledge, sell, contract to sell, sell any option or contract to purchase or grant
any option, right or warrant to purchase or otherwise transfer or dispose of any
shares of common stock or any securities convertible into or exercisable or
exchangeable for common stock, or enter into any swap or other arrangement that
transfers all or a portion of the economic consequences associated with the
ownership of such common stock, or to cause a registration statement covering
any shares of common stock to be filed, for a period of one year, in the case of
directors and executive officers, and for a period of 180 days, in the case of
such other stockholders, after the closing of this offering without the prior
written consent of the Underwriters, subject to certain limited exceptions, and
provided that the Company may issue shares of common stock upon vesting of
rights under the Company Stock Option Plan and the PerImmune Stock Option Plan.
See "Shares Eligible for Future Sale."
Prior to this offering, there has been no established trading market for
the common stock. The initial price to the public for the common stock offered
hereby has been determined by negotiation among the Company and the
Representatives. The factors considered in determining the initial price to the
public include the history of and the prospects for the industry in which the
Company competes, the ability of the Company's management, the past and present
operations of the Company, the prospects for future earnings of the Company, the
general condition of the securities markets at the time of this offering and the
recent market prices of securities of generally comparable companies. The
Company has been approved for listing of the common stock on the Nasdaq National
Market.
79
<PAGE> 81
The Underwriters do not intend to make sales to accounts over which they
exercise discretionary authority in excess of 5% of the number of shares of
common stock offered hereby.
In connection with this offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
common stock. Specifically, the Underwriters may over-allot this offering,
creating a syndicate short position. Underwriters may bid for and purchase
shares of common stock in the open market to cover syndicate short positions. In
addition, the Underwriters may bid for and purchase shares of common stock in
the open market to stabilize the price of the common stock. These activities may
stabilize or maintain the market price of the common stock above independent
market levels. The Underwriters are not required to engage in these activities
and may end these activities at any time.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
The validity of the shares offered hereby is being passed upon for the
Company by Morrison & Foerster LLP, New York, New York. Certain legal matters
will be passed upon for the Underwriters by Brown & Wood LLP, New York, New
York. Joseph W. Bartlett, a partner of Morrison & Foerster LLP, holds options to
purchase 16,666 shares of the Company's common stock.
EXPERTS
The consolidated financial statements of the Company at September 30, 1998
and December 31, 1997, and for the nine-month period and the year then ended,
included in this Prospectus have been included herein in reliance on the report,
after the restatement described in Note 15, of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
The consolidated financial statements of the Company at December 31, 1996
and for the year ended December 31, 1996, the six months ended December 31,
1995, and for the year ended June 30, 1995, appearing in this Prospectus have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon appearing elsewhere herein, and are included in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.
The consolidated financial statements of PerImmune Holdings, Inc. and
Subsidiary at December 31, 1997 and for the year then ended, included in this
Prospectus have been included herein in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
that firm as experts in accounting and auditing.
The consolidated financial statements of PerImmune Holdings, Inc. and
Subsidiary as of December 31, 1996 and the related consolidated statements of
operations, stockholders' deficit and cash flows for the period from August 3,
1996 through December 31, 1996 and the statements of operations, stockholders'
equity and cash flows of the Predecessor Company for the period from January 1,
1996 through August 2, 1996 and for the year ended December 31, 1995 appearing
in this Prospectus have been audited by KPMG LLP, independent certified public
accountants, as set forth in their report thereon appearing elsewhere herein,
and are included in reliance upon such report given upon the authority of such
firm as experts in accounting and auditing.
In February 1998, the Company's Board of Directors dismissed Ernst & Young
LLP and appointed PricewaterhouseCoopers LLP as the Company's independent
accountants to report on the Company's consolidated balance sheet as of December
31, 1997, and the related consolidated statements of operations, stockholders'
deficit, and cash flows for the year then ended. The report of Ernst & Young LLP
for the year ended December 31, 1996 and June 30, 1995 and for the six months
ended December 31, 1995 did not contain any adverse opinion or disclaimer of
opinion and was not qualified or modified as to uncertainty, audit scope or
accounting principles.
In February 1998, in conjunction with the acquisition of PerImmune
Holdings, the Company's Board of Directors dismissed KPMG LLP and appointed
PricewaterhouseCoopers LLP as PerImmune Holdings independent accountants to
report on its consolidated balance sheet as of December 31, 1997, and the
related
80
<PAGE> 82
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for the year then ended. The report of KPMG Peat Marwick at December 31,
1996 and the period from August 3, 1996 through December 31, 1996 did not
contain any adverse opinion or disclaimer of opinion and was not qualified or
modified as to uncertainty, audit scope or accounting principles.
In connection with the audits for the periods presented within this
Prospectus and Registration Statement, there were no disagreements with Ernst &
Young LLP or KPMG LLP on any matter of accounting principles or practices,
financial disclosure or auditor scope of procedure, which disagreements if not
resolved to the satisfaction of Ernst & Young LLP or KPMG LLP would have caused
them to make reference thereto in their report on the financial statements for
such years. Prior to retaining PricewaterhouseCoopers LLP, the Company had not
consulted with PricewaterhouseCoopers LLP regarding the application of
accounting principles or the type of audit opinion that might be rendered on the
Company's financial statements.
During the course of Ernst & Young LLP's audit of the consolidated
financial statements of the Company for the year ended December 31, 1996, Ernst
& Young LLP notified the Company that it had identified two material weaknesses
considered reportable conditions as defined under standards of the American
Institute of Certified Public Accountants. The first of these was failure to
maintain accurate information to monitor financial position, results of
operations and liquidity. The second of these related to the method of
accounting, monitoring and valuation of the Company's "Research Use Only"
inventory. Ernst & Young LLP attributed the cause for these two material
weaknesses to inadequate accounting resources, lack of technical accounting
expertise at the Company and the lack of adequate systems to maintain and
account for "Research Use Only" inventory. In order to remedy these weaknesses,
the Company hired several accounting personnel with technical experience and
expertise in financial management and reporting and has performed an extensive
analysis of the "Research Use Only" inventory as of December 31, 1997 to assure
a consistent and accurate valuation. In connection with the audit of the
consolidated financial statements of the Company for the year ended December 31,
1997, the Company's current auditors did not identify any material weaknesses
considered reportable conditions.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (the "Registration Statement") under the Securities Act of 1933, as amended
(the "Securities Act"), with respect to the common stock offered hereby. This
Prospectus, which constitutes a part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement, certain
items of which are contained in the schedules and exhibits to the Registration
Statement as permitted by the rules and regulations of the Commission.
Statements contained in this Prospectus as to the contents of any contract,
agreement or other document referred to are not necessarily complete. With
respect to each such contract, agreement or other document filed as an exhibit
to the Registration Statement, reference is made to the exhibit for a more
complete description of the matter involved, and each such statement shall be
deemed qualified in its entirety by such reference.
As a result of this offering, the Company will become subject to the
informational requirements of the Securities Exchange Act of 1934, as amended,
and, in accordance therewith, will file reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and its regional offices located at Seven World
Trade Center, 13th Floor, New York, New York 10048 and Northwestern Atrium
Center, 500 West Madison Avenue, Suite 1400, Chicago, Illinois 60661-2511.
Copies of such material may be obtained by mail from the Public Reference
Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The Commission also maintains a
World Wide Web site on the Internet at http://www.sec.gov that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission. Upon approval of the common stock
for quotation on the Nasdaq National Market, such reports, proxy and information
statements and other information can be inspected at the office of Nasdaq
Operations, 1735 K Street, N.W., Washington, D.C. 20006.
81
<PAGE> 83
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
INTRACEL CORPORATION
Report of PricewaterhouseCoopers LLP, independent
accountants............................................ F-2
Report of Ernst & Young LLP, independent auditors......... F-3
Consolidated Balance Sheets as of December 31, 1996 and
1997 and September 30, 1998 ........................... F-4
Consolidated Statements of Operations for the year ended
June 30, 1995, the six months ended December 31, 1995,
the years ended December 31, 1996 and 1997 and the nine
months ended September 30, 1997 (unaudited) and 1998
....................................................... F-5
Consolidated Statements of Stockholders' Deficit for the
year ended June 30, 1995, the six months ended December
31, 1995, the years ended December 31, 1996 and 1997
and the nine months ended September 1998 .............. F-6
Consolidated Statements of Cash Flows for the year ended
June 30, 1995, the six months ended December 31, 1995,
the years ended December 31, 1996 and 1997 and the nine
months ended September 30, 1997 (unaudited) and 1998
....................................................... F-7
Notes to Consolidated Financial Statements................ F-8
PERIMMUNE HOLDINGS, INC. AND SUBSIDIARY
Report of PricewaterhouseCoopers LLP, independent
accountants............................................ F-38
Consolidated Balance Sheets as of December 31, 1997 and
1996................................................... F-39
Consolidated Statements of Operations for the year ended
December 31, 1997 and the period from August 3, 1996
through December 31, 1996.............................. F-40
Consolidated Statements of Stockholders' Equity (Deficit)
for the year ended December 31, 1997 and the period
from August 3, 1996 through December 31, 1996.......... F-41
Consolidated Statements of Cash Flows for the year ended
December 31, 1997 and the period from August 3, 1996
through December 31, 1996.............................. F-42
Notes to Consolidated Financial Statements................ F-43
PERIMMUNE HOLDINGS, INC. AND SUBSIDIARY; AND PREDECESSOR
COMPANY
Report of KPMG LLP, independent certified public
accountants............................................ F-56
Consolidated Balance Sheet as of December 31, 1996........ F-57
Statements of Operations for the period from August 3,
1996 through December 31, 1996, the period from January
1, 1996 through August 2, 1996 and the year ended
December 31, 1995...................................... F-58
Statements of Stockholders' Equity (Deficit) for the
period from August 3, 1996 through December 31, 1996,
the period from January 1, 1996 through August 2, 1996
and the year ended December 31, 1995................... F-59
Statements of Cash Flows for the period from August 3,
1996 through December 31, 1996, the period from January
1, 1996 through August 2, 1996 and the year ended
December 31, 1995...................................... F-60
Notes to Financial Statements............................. F-61
</TABLE>
F-1
<PAGE> 84
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Intracel Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' deficit and of cash flows,
after the restatement described in Note 15, present fairly, in all material
respects, the consolidated financial position of Intracel Corporation (the
"Company") at September 30, 1998 and December 31, 1997, and the consolidated
results of its operations and its cash flows for the nine month period and year
then ended, 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 financial 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.
Seattle, Washington
January 19, 1999
- --------------------------------------------------------------------------------
The foregoing report is in the form that will be signed upon completion of
the reverse stock split described in paragraph 13 of Note 10 to the financial
statements.
PricewaterhouseCoopers LLP
F-2
<PAGE> 85
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
Intracel Corporation and Subsidiary
We have audited the accompanying consolidated balance sheet of Intracel
Corporation and subsidiary as of December 31, 1996, and the related consolidated
statements of operations, stockholders' deficit, and cash flows for the year
ended June 30, 1995, the six months ended December 31, 1995, and the year ended
December 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Intracel
Corporation and subsidiary at December 31, 1996, and the consolidated results of
their operations and their cash flows for the year ended June 30, 1995, the six
months ended December 31, 1995, and the year ended December 31, 1996, in
conformity with generally accepted accounting principles.
Seattle, Washington
December 3, 1997, except for
paragraph 3 of Note 6 and
paragraph 10 of Note 10, as to
which the date is January 2,
1998, Note 15, as to which the
date is December 10, 1998, and
paragraph 13 of Note 10 as to
which the date is ,
1999.
- --------------------------------------------------------------------------------
The foregoing report is in the form that will be signed upon completion of
the reverse stock split described in paragraph 13 of Note 10 to the financial
statements.
ERNST & YOUNG LLP
Seattle, Washington
January 21, 1999
F-3
<PAGE> 86
INTRACEL CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- SEPTEMBER 30,
1996 1997 1998
ASSETS ------------ ------------ -------------
<S> <C> <C> <C>
Cash and cash equivalents................................... $ 3,145,231 $ 1,974,629 $ 412,526
Pledged securities.......................................... 3,951,400
Restricted cash............................................. 2,000,000 7,027,993
Accounts receivable, net.................................... 2,383,828 2,003,249 2,512,933
Inventories, net............................................ 3,113,187 1,821,013 2,068,451
Other assets................................................ 404,679 398,494 769,876
------------ ------------ ------------
Total current assets............................... 9,046,925 8,197,385 16,743,179
Property and equipment, net................................. 3,247,333 3,178,959 4,538,909
Restricted cash............................................. 133,236
Cost in excess of net assets acquired, net.................. 12,563,052 11,654,880 12,997,821
Deferred acquisition costs.................................. 2,862,513
Other assets................................................ 1,665,417 2,147,858 17,546,749
------------ ------------ ------------
Total assets....................................... $ 26,522,727 $ 28,041,595 $ 51,959,894
============ ============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current portion of long-term debt........................... $ 3,505,122 $ 2,144,729 $ 176,411
Accounts payable............................................ 2,075,033 1,965,995 8,138,480
Accrued liabilities......................................... 1,941,669 4,356,999 3,611,786
------------ ------------ ------------
Total current liabilities.......................... 7,521,824 8,467,723 11,926,677
Line of credit.............................................. 500,000 500,000
Long-term debt, less current portion........................ 18,738,945 17,630,494 45,896,436
Pension liability........................................... 74,152
------------ ------------ ------------
Total liabilities.................................. 26,760,769 26,598,217 57,897,265
------------ ------------ ------------
Commitments and contingencies
Redeemable and convertible preferred stock, $0.0001 par
value; 5,000,000 shares authorized:
Series A preferred stock, 730,000 shares authorized,
557,656, 603,622, and 640,639 shares issued and
outstanding at December 31, 1996 and 1997, and September
30, 1998, respectively.................................. 4,461,248 4,828,976 5,121,896
Series A-1 preferred stock, 850,000 shares authorized,
738,235, 651,168 and 690,951 shares issued and
outstanding at December 31, 1996 and 1997, and September
30, 1998, respectively.................................. 5,905,880 5,209,340 5,527,580
Series A-3 preferred stock, 200,000 shares authorized,
147,923 and 156,961 shares issued and outstanding at
December 31, 1997, and September 30, 1998,
respectively............................................ 1,183,384 1,255,696
Series B-1 preferred stock, 100 shares authorized, shares
issued and outstanding at September 30, 1998............ 4,166,858
Series B-2 preferred stock, 120 shares authorized, shares
issued and outstanding at September 30, 1998............ 5,087,331
------------ ------------ ------------
10,367,128 11,221,700 21,159,361
------------ ------------ ------------
Stockholders' deficit:
Series A-2 preferred stock; $0.0001 par value; 155,000
shares authorized; 44,063 and no shares issued and
outstanding, $4,406,300 and $0 aggregate preference in
liquidation at December 31, 1997 and September 30, 1998,
respectively............................................ 4
Common stock, $0.0001 par value; 25,000,000 shares
authorized; 2,645,191, 3,579,052 and 7,440,365 shares
issued and outstanding at December 31, 1996 and 1997 and
September 30, 1998, respectively........................ 265 358 744
Additional paid-in capital................................ 2,404,038 11,401,762 48,145,012
Accumulated deficit....................................... (12,909,473) (21,180,446) (74,942,488)
Note receivable due from stockholder...................... (100,000) (300,000)
------------ ------------ ------------
Total stockholders' deficit........................ (10,605,170) (9,778,322) (27,096,732)
------------ ------------ ------------
Total liabilities and stockholders' deficit........ $ 26,522,727 $ 28,041,595 $ 51,959,894
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 87
INTRACEL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30,
YEAR ENDED DECEMBER 31, ------------------------- -------------------------
JUNE 30, 1995 1995 1996 1997 1997 1998
------------- ---------------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
REVENUE
Product.......................... $1,565,795 $ 2,426,158 $14,718,421 $13,452,204 $10,231,319 $10,862,482
Contract......................... 3,381,836
---------- ----------- ----------- ----------- ----------- -----------
Total revenue............. 1,565,795 2,426,158 14,718,421 13,452,204 10,231,319 14,244,318
COST OF REVENUE
Product.......................... 823,988 1,779,172 8,264,679 8,661,058 5,908,592 7,678,160
Contract......................... 1,909,755
---------- ----------- ----------- ----------- ----------- -----------
Total cost of revenue..... 823,988 1,779,172 8,264,679 8,661,058 5,908,592 9,587,915
Selling, general and
administrative................... 1,580,336 2,592,940 5,739,937 8,478,175 5,912,557 11,100,805
Research and development........... 1,173,754 1,118,020 1,042,668 555,840 522,775 8,419,774
Acquired research and
development...................... 2,100,000 37,718,000
Amortization of cost in excess of
net assets acquired.............. 151,362 908,172 908,172 681,129 744,804
Reorganization expense............. 917,442
---------- ----------- ----------- ----------- ----------- -----------
Total operating expense........ 3,578,078 7,741,494 16,872,898 18,603,245 13,025,053 67,571,298
---------- ----------- ----------- ----------- ----------- -----------
Loss from operations........... 2,012,283 5,315,336 2,154,477 5,151,041 2,793,734 53,326,980
Interest expense (income), net..... (68,329) 134,400 2,235,496 2,912,592 2,100,560 3,293,131
Gain on pension curtailment........ (800,000)
Other income....................... (1,272,720)
---------- ----------- ----------- ----------- ----------- -----------
Loss before extraordinary
item......................... 1,943,954 5,449,736 4,389,973 8,063,633 4,894,294 54,547,391
Extraordinary gain on early
extinguishment of debt........... (1,367,000) (785,349)
---------- ----------- ----------- ----------- ----------- -----------
Net loss.................. $1,943,954 $ 4,082,736 $ 4,389,973 $ 8,063,633 $ 4,894,294 $53,762,042
Preferred stock
dividends/accretion.............. 211,448 266,136 789,552 1,260,928 896,980 1,957,739
---------- ----------- ----------- ----------- ----------- -----------
Net loss applicable to common
stockholders..................... $2,155,402 $ 4,348,872 $ 5,179,525 $ 9,324,561 $ 5,791,274 $55,719,781
========== =========== =========== =========== =========== ===========
Basic and diluted net loss per
share before extraordinary
item............................. $ 0.82 $ 2.21 $ 1.99 $ 3.43 $ 2.23 $ 7.75
Extraordinary item................. (0.53) (0.11)
---------- ----------- ----------- ----------- ----------- -----------
Basic and diluted net loss per
share............................ $ 0.82 $ 1.68 $ 1.99 $ 3.43 $ 2.23 $ 7.64
========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 88
INTRACEL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
SERIES A-2
PREFERRED STOCK COMMON STOCK NOTE
---------------- ------------------- ADDITIONAL RECEIVABLE
PAR PAR PAID-IN ACCUMULATED DUE FROM
SHARES VALUE SHARES VALUE CAPITAL DEFICIT STOCKHOLDERS TOTAL
-------- ------ ---------- ------ ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JULY 1, 1994....... 2,641,118 $ 264 $ 2,198,030 $ (1,225,674) $(100,000) $ 872,620
Sale of common stock, net..... 1,333 8,000 8,000
Preferred stock dividends..... (211,448) (211,448)
Net loss...................... (1,943,954) (1,943,954)
------- --- ---------- ------ ----------- ------------ --------- ------------
BALANCE AT JUNE 30, 1995...... 2,642,451 264 2,206,030 (3,381,076) (100,000) (1,274,782)
Preferred stock dividends..... (266,136) (266,136)
Net loss...................... (4,082,736) (4,082,736)
------- --- ---------- ------ ----------- ------------ --------- ------------
BALANCE AT DECEMBER 31,
1995........................ 2,642,451 264 2,206,030 (7,729,948) (100,000) (5,623,654)
Repurchase of common stock.... (116,742) (11) (326,801) (326,812)
Sale of common stock, net..... 117,333 12 339,718 339,730
Exercise of common stock
options..................... 2,149 8,061 8,061
Other......................... 177,030 177,030
Preferred stock dividends..... (789,552) (789,552)
Net loss...................... (4,389,973) (4,389,973)
------- --- ---------- ------ ----------- ------------ --------- ------------
BALANCE AT DECEMBER 31,
1996........................ 2,645,191 265 2,404,038 (12,909,473) (100,000) (10,605,170)
Sale of Series A-2 preferred
stock....................... 40,000 $ 4 3,999,996 4,000,000
Preferred stock dividends..... 4,063 (647,288) (207,340) (854,628)
Repurchase of common stock.... (68,731) (7) (208,743) (208,750)
Sale of common stock, net..... 978,095 98 5,760,826 5,760,924
Exercise of common stock
warrants.................... 24,497 2 146,982 146,984
Other......................... (54,049) (54,049)
Repayment of stockholder note
receivable.................. 100,000 100,000
Net loss...................... (8,063,633) (8,063,633)
------- --- ---------- ------ ----------- ------------ --------- ------------
BALANCE AT DECEMBER 31,
1997........................ 44,063 4 3,579,052 358 11,401,762 (21,180,446) (9,778,322)
Common stock issued and stock
options granted in
conjunction with the
acquisition of PerImmune
Holdings Inc................ 3,652,436 365 35,421,649 35,422,014
Common stock issued in
exchange for 1997 placement
costs....................... 46,669 5 315,104 315,109
Preferred stock
dividends/accretions........ 2,967 1 (920,425) (920,424)
Cash dividends accrued for
Series B-1 and B-2 preferred
stock....................... (567,192) (567,192)
Stock options exercised....... 162,208 16 457,977 (300,000) 157,993
Redemption of Series A-2
preferred stock............. (47,030) (5) (4,876,418) (4,876,423)
Warrants issued in conjunction
with the issuance of August
1998 Note................... 6,751,050 6,751,050
Re-evaluation of existing
stock warrants.............. 190,000 190,000
Other......................... (28,495) (28,495)
Net loss...................... (53,762,042) (53,762,042)
------- --- ---------- ------ ----------- ------------ --------- ------------
BALANCE AT SEPTEMBER 30,
1998........................ $ 7,440,365 $ 744 $48,145,012 $(74,942,488) $(300,000) $(27,096,732)
======= === ========== ====== =========== ============ ========= ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 89
INTRACEL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
YEAR ENDED SIX MONTHS ENDED ------------------------- --------------------------
JUNE 30, 1995 DECEMBER 31, 1995 1996 1997 1997 1998
------------- ----------------- ----------- ----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Operating activities:
Net loss........................... $(1,943,954) $ (4,082,736) $(4,389,973) $(8,063,633) $(4,894,294) $(53,762,042)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Extraordinary gain on early
extinguishment of debt......... (1,367,000) (785,349)
Amortization and depreciation.... 124,363 414,933 2,190,808 2,262,103 1,710,529 3,574,597
Gain on pension curtailment...... (800,000)
Gain on settlement of a
contingent liability........... (1,050,000)
Gain on recovery of investment in
GAIFAR......................... (222,720)
Acquired research and development
charge......................... 2,100,000 37,718,000
Noncash investment charge........ 339,408
Noncash interest expense......... 1,198,392 1,993,515 1,462,701 2,798,247
Noncash inventory charge......... 1,119,000 315,831
Noncash charge on fixed assets... 600,618 532,921
Other............................ 58,030 (23,658) 83,009
Changes in operating assets and
liabilities:
Accounts receivable, net....... 19,027 29,390 (1,156,412) 380,579 299,676 296,401
Inventories, net............... (21,640) 18,357 (2,113,698) 821,568 6,213 115,402
Other assets................... 4,954 (301,901) (323,181) 67,080 17,879
Accounts payable............... 103,232 886,963 339,522 (109,038) (316,033) 3,683,051
Accrued liabilities............ 267,278 666,231 (342,932) (387,292) (575,659) (532,140)
----------- ------------ ----------- ----------- ----------- ------------
Net cash used in operating
activities......................... (1,451,694) (1,328,908) (3,059,756) (2,508,930) (1,730,524) (8,865,665)
----------- ------------ ----------- ----------- ----------- ------------
Investing activities:
Purchase of pledged securities..... (3,951,400)
Deposits of restricted cash........ (2,000,000) (7,027,993)
Release of restricted cash......... 2,000,000
Investment in other assets......... (82,129) (330,225) (3,486)
Purchase of Bartels, Inc........... (13,000,000)
Purchase of assets from Zynaxis,
Inc.............................. (519,000)
Purchase of property and
equipment........................ (106,560) (288,391) (1,587,193) (1,360,209) (912,044) (462,369)
Capitalized patent costs........... (183,995) (25,000) (118,754)
Investment in GAIFAR............... (283,220)
Recovery of investment in GAIFAR... 222,720
Investment in and advances to
Bartels Prognostics.............. (348,198) (795,299) (475,000)
Cash acquired in conjunction with
purchase of PerImmune Holdings,
Inc. (Holdings).................. 2,504,064
Cash paid in conjunction with the
purchase of Holdings............. (1,307,632)
----------- ------------ ----------- ----------- ----------- ------------
Net cash provided by (used in)
investing activities............... (188,689) (13,807,391) (2,402,606) (4,180,508) (1,717,269) (8,144,850)
----------- ------------ ----------- ----------- ----------- ------------
Financing activities:
Proceeds from sale of preferred
stock............................ 3,750,000 5,350,000 1,732,740 1,773,733
Repurchase of common stock......... (326,812) (208,750)
Proceeds from sale of common stock
and exercise of common stock
options.......................... 8,000 347,791 6,248,201 44,000 157,993
Deferred stock issue costs......... (245,968) (140,933) (848,721)
Issuance of common stock
warrants......................... 6,751,050
Exercise of common stock
warrants......................... 146,984
Repayment of stockholder note
receivable....................... 100,000 100,000
Proceeds from the issuance of
long-term obligations............ 54,226 14,845,744 5,960,000 713,339 44,054,506
Debt issue costs................... (668,351) (78,967) (658,087)
Redemption of Series A-2 preferred
stock............................ (4,876,423)
Payments of long-term
obligations...................... (223,413) (3,356,853) (896,345) (2,908,494) (1,625,006) (28,623,343)
Payment of line of credit.......... (500,000)
Payment of pension liability....... (300,000)
Use of restricted cash............. 326,431
Book overdraft..................... 194,807
Other.............................. 119,000 19,751 (44,039) (34,994)
----------- ------------ ----------- ----------- ----------- ------------
Net cash provided by financing
activities......................... 3,588,813 16,838,891 4,535,283 5,518,836 302,562 15,448,412
----------- ------------ ----------- ----------- ----------- ------------
Net increase (decrease) in cash and
cash equivalents................... 1,948,430 1,702,592 (927,079) (1,170,602) (3,145,231) (1,562,103)
Cash and cash equivalents at
beginning of period................ 421,288 2,369,718 4,072,310 3,145,231 3,145,231 1,974,629
----------- ------------ ----------- ----------- ----------- ------------
Cash and cash equivalents at end of
period............................. $ 2,369,718 $ 4,072,310 $ 3,145,231 $ 1,974,629 $ -- $ 412,526
=========== ============ =========== =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE> 90
INTRACEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY:
Intracel Corporation (the "Company") develops and manufactures therapeutic
prognostic and diagnostic products for the treatment of cancers and serious
viral diseases. The Company's current and future products are based on several
proprietary platform technologies, including the development of totally human
antibodies, INSTI (a rapid diagnostic format), and ZYMMUNE (a cell counting
technology). These technologies allow the Company to leverage its core
competencies into large, global clinical markets. In 1995, the Company changed
its fiscal year end from June 30 to December 31.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries after elimination of all significant
intercompany accounts and transactions. Corporate joint ventures are accounted
for under the equity method.
Cash and cash equivalents
Cash and cash equivalents consist of cash on hand, deposits in banks and
money market funds carried at cost, which approximates market.
Restricted Cash
Restricted cash consist of the proceeds of the Company's Guaranteed Senior
Secured Escrow Note deposited in a segregated bank account from which the
Company is permitted to obtain funds upon request to the lender.
Pledged Securities
Pledged securities consist of United States-backed treasury bills with
terms up to 6 months. Securities held in escrow will be used to fund one full
year of interest payments relating to the Company's Guaranteed Senior Secured
Primary Note.
Trade accounts receivable
Accounts receivable are presented net of allowances for doubtful accounts
of $60,000, $50,000 and $121,194 at December 31, 1997, 1996 and September 30,
1998, respectively. The Company recorded provisions for doubtful accounts of
approximately $99,000, $11,000 and $80,649 for the periods ended December 31,
1997, 1996 and September 30, 1998, respectively.
Inventories
Inventories consist of raw materials used in the production process and
diagnostic products, research reagents and antibodies held for sale. Inventories
are valued at the lower of first-in, first-out cost or market.
Property and equipment and depreciation
Property and equipment are stated at cost less accumulated depreciation.
Maintenance and repairs are charged to expense as incurred. Significant
betterments are capitalized. Upon retirement or sale the cost of assets disposed
of and the related accumulated depreciation and amortization are removed from
the accounts and any resulting gain or loss is reflected in the consolidated
statements of operations. Depreciation of property and equipment is provided
using primarily the straight-line method over the estimated useful lives of
three to
F-8
<PAGE> 91
INTRACEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
seven years. Leasehold improvements are amortized on a straight-line method over
the shorter of the useful life or the lease term.
Construction in progress includes the costs of constructed machinery.
Construction in progress costs are transferred to other property and equipment
categories when the construction/installation is completed and the asset is
ready for its intended use.
Cost in excess of net assets acquired
Cost in excess of net assets acquired represents the excess of the cost of
purchased subsidiaries over the estimated fair value of the net assets acquired
as of the date of acquisition and is being amortized by the straight-line
method. The weighted average amortization period for cost in excess of net
assets acquired is 14 years.
Other assets
Other assets consist primarily of patent and technology costs and an
investment (see Note 11). Patent and technology costs are amortized on a
straight-line basis over the estimated useful lives. The weighted average
amortization period for patent and technology cost is 10 years. The investment
is accounted for using the equity method.
Valuation of long lived assets
The Company periodically evaluates the carrying value of long-lived assets
to be held and used, including, but not limited to, property and equipment, cost
in excess of net assets acquired, and other assets, when events and
circumstances warrant such a review. The carrying value of a long-lived asset is
considered impaired when the anticipated undiscounted cash flow from such asset
is separately identifiable and is less than its carrying value. In that event, a
loss is recognized based on the amount by which the carrying value exceeds the
fair market value of the long-lived asset. Fair market value is determined
primarily using the anticipated cash flows discounted at a rate commensurate
with the risk involved. Losses on long-lived assets to be disposed of are
determined in a similar manner, except that fair market values are reduced for
the cost to dispose.
Income taxes
The Company follows the liability method of accounting for income taxes
pursuant to Statement of Financial Accounting Standards No. 109 (SFAS No. 109),
"Accounting for Income Taxes." Under SFAS No. 109, deferred tax assets and
liabilities are determined based on differences between financial reporting and
tax bases of assets and liabilities and are measured using the enacted tax rates
and laws that will be in effect when the differences are expected to reverse.
The Company provides a valuation allowance, if necessary, to reduce deferred tax
assets to their estimated realizable value.
Stock issuance costs
Proceeds from issuances of capital stock are presented net of specific
incremental costs directly attributable to the related offering.
Revenue recognition
Revenue from sales of products is recognized on the date of delivery to
customers or upon shipment, based on the contractual terms of applicable
agreements.
The Company has entered into various research and development and licensing
agreements. Research and development revenue from cost reimbursement agreements
is recorded as the related expenses are incurred, up to contractual limits and
when the Company meets its performance obligations under the
F-9
<PAGE> 92
INTRACEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
respective agreements. Contract revenue is recognized under other agreements
when milestones are met and the Company's performance obligations have been
satisfied in accordance with the terms of the respective agreements. Cash
received that is related to future performance under such contracts is deferred
and recognized as revenue when earned. After performance obligations have been
satisfied, the related amounts received are not reimbursable in the event the
research is unsuccessful.
The Company also engages in contracts with commercial entities and agencies
of the U.S. government (Department of Defense and the National Institute of
Health) on either a cost-plus-fixed-fee, fixed price or a
cost-plus-percentage-fee basis. Revenue on cost-plus-fixed-fee, fixed price and
cost-plus-percentage-fee contract is recognized based on the ratio of total
direct and indirect costs incurred during the period to total estimated costs
using the percentage-of-completion method. Estimates to complete are reviewed
periodically and revised as required in the period the revision is determined.
Provisions are made for the full amount of anticipated losses, if any, on
all contracts in the period in which they are first known and estimable.
Contracts with the U.S. government are subject to government audit upon contract
completion and therefore, all contract costs are potentially subject to
adjustment, even after reimbursement. Management believes adequate provisions
for such adjustments, if any, have been made in the consolidated financial
statements. Expense recovery rates have been audited through 1996.
Research and development
The Company makes significant investments in research for the development
of new products. Research and development costs are charged to expense as
incurred.
Reorganization expense
The Company recognized reorganization expense of $917,442 in 1996 in
connection with the Company's relocation from Cambridge, Massachusetts to
Issaquah, Washington.
Net loss per share
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128 (SFAS No. 128), "Earnings Per Share." SFAS No. 128
requires the presentation of basic and diluted earnings (loss) per share for all
periods presented.
In accordance with SFAS No. 128, basic net loss per share has been computed
using the weighted-average number of shares of common stock outstanding during
the period, except that pursuant to Securities and Exchange Commission Staff
Accounting Bulletin No. 98, if applicable, common shares issued in each of the
periods presented for nominal consideration have been included in the
calculation as if they were outstanding for all periods presented.
Pro forma basic and diluted net loss per share has been computed as
described above and also gives effect to the conversion of the convertible
instruments that will occur upon completion of the Company's initial public
offering. The Company has included the equivalent number of common shares from
the conversion of certain convertible notes, preferred stock and the exercise of
certain warrants in the calculation of pro forma EPS. The notes and preferred
stock are assumed converted because their terms require conversion upon an
initial public offering. The warrants are assumed to have been converted as
certain warrants have terms that accelerate the warrants expiration date to the
date of an IPO or within 10 days of the IPO, at which time the holder must
either exercise the warrants or forfeit such warrants. The warrants have
exercise prices of between $6.00 and $10.50 per share and, for purposes of
determining the Company's fully diluted share values, assume its IPO price to be
in excess of the warrants' exercise price. Consequently, the Company anticipates
3,957,172 shares of common stock will be issued upon conversion or exercise of
such preferred stock, convertible notes and warrants.
F-10
<PAGE> 93
INTRACEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
A reconciliation of shares used in the calculation of basic and diluted and
pro forma basic and diluted net loss per share follows:
<TABLE>
<CAPTION>
SIX MONTHS NINE MONTHS ENDED
ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30,
YEAR ENDED DECEMBER 31, ------------------------ -------------------------------
JUNE 30, 1995 1995 1996 1997 1997 1998
------------- ------------ ---------- ----------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net loss......................... $1,943,954 $4,082,736 $4,389,973 $ 8,063,633 4,894,294 $53,762,042
Preferred stock
dividends/accretion............ 211,448 266,136 789,552 1,260,928 896,980 1,957,739
---------- ---------- ---------- ----------- ---------- -----------
Net loss for common stock........ $2,155,402 $4,348,872 $5,179,525 $ 9,324,561 $5,791,274 $55,719,781
========== ========== ========== =========== ========== ===========
Weighted average shares of common
stock outstanding (shares used
in computing basic and diluted
net loss per share)............ 2,641,784 2,590,828 2,596,883 2,715,599 2,595,535 7,291,018
========== ========== ========== =========== ========== ===========
Basic and diluted net loss per
share before extraordinary
item........................... $ 0.82 $ 2.21 $ 1.99 $ 3.43 $ 2.23 $ 7.75
Extraordinary item............... (0.53) (0.11)
---------- ---------- ---------- ----------- ---------- -----------
Basic and diluted net loss per
share.......................... $ 0.82 $ 1.68 $ 1.99 $ 3.43 $ 2.23 $ 7.64
========== ========== ========== =========== ========== ===========
Shares used in computing basic
and diluted net loss per
share.......................... 2,715,599 7,291,018
----------- -----------
Adjustment to reflect the effect
of the assumed conversion of
convertible instruments:
Preferred stock - series A 804,829 854,185
Preferred stock - series A-1 868,224 921,267
Preferred stock - series A-3 197,231 209,282
Preferred stock - series B-1 669,615
Preferred stock - series B-2 772,604
Convertible notes 36,433
Common stock warrants 619,131 493,786
----------- -----------
2,489,415 3,957,172
----------- -----------
Shares used in computing pro
forma basic and diluted net
loss per share................. 5,205,014 11,248,190
=========== ===========
Pro forma basic and diluted net
loss per share................. $ 1.55 $ 4.78
=========== ===========
</TABLE>
Had the Company been in a net income position, diluted earnings per share
would have included the shares used in the computation of basic net loss per
share as well as additional potential common shares related to outstanding
options and warrants which were excluded because they are anti-dilutive.
F-11
<PAGE> 94
INTRACEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Supplemental disclosure of cash flow information
Noncash investing and financing activities consisted of:
<TABLE>
<CAPTION>
SIX MONTHS NINE MONTHS
YEAR ENDED ENDED YEAR ENDED DECEMBER 31, ENDED
JUNE 30, DECEMBER 31, ----------------------- SEPTEMBER 30,
1995 1995 1996 1997 1998
---------- ----------------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Preferred stock dividends paid with
stock................................ $211,448 $ 266,136 $ 789,552 $1,260,928 $ 1,153,595
Acquisition of Zymmune................. 1,500,000
Property and equipment acquired under
capital lease........................ 96,705
Accrued stock issuance costs........... 315,109
Deferred acquisition costs............. 2,862,513
Conversion of note payable into Series
A-2 preferred stock.................. 2,000,000
Conversion of accrued interest into
Series A-2 preferred stock........... 267,260
Conversion of Series A-1 preferred
stock into Series A-3 preferred
stock................................ 1,115,128
Common stock issued in exchange for
1997 stock issuance costs............ 315,109
Re-evaluation of existing stock
warrants............................. 190,000
Dividends accrued on Series B-1 and B-2
preferred stock...................... 567,192
Accretion on Series B-1 and B-2
preferred stock...................... 236,952
Accrued interest added to note
principal............................ 814,165
Common stock issued for a note......... 300,000
Acquisition of Perimmune Holdings, Inc.
("Holdings" -- See note 11)
Fair value of assets acquired........ 19,249,000
Acquired research and development.... 37,718,000
Issuance of Intracel Corporation
common stock....................... 24,654,000
Assumption of long term debt......... 11,532,000
Grant of options to purchase Intracel
Corporation common stock........... 10,768,000
Issuance of Series B-1 preferred
stock.............................. 4,098,744
Issuance of Series B-2 preferred
stock.............................. 4,918,493
Assumption of acquisition costs...... 3,500,000
Other.................................. 73,800
</TABLE>
Net cash paid for interest during 1997, 1996, the six months ended December
31, 1995, the year ended June 30, 1995 and the nine months ended September 30,
1998 totalled $1,506,390, $1,094,350, $59,071, $22,154 and $507,928,
respectively.
Concentrations of credit risk
The Company's customers are predominantly comprised of government research
organizations and companies in the biomedical research, pharmaceutical and
diagnostic industries throughout the world. No single customer accounted for a
significant amount of the Company's revenues and there were no significant
accounts receivable from a single customer. The Company reviews the credit
histories of potential customers
F-12
<PAGE> 95
INTRACEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
prior to extending credit and maintains allowances for potential credit losses.
The Company maintains cash and cash equivalents in high credit quality financial
institutions. The Company believes that its risk from concentration of credit is
limited.
Use of estimates and assumptions
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair value of financial instruments
For certain financial instruments, including cash and cash equivalents,
accounts receivable, accounts payable and accrued liabilities, recorded amounts
approximate market value.
The Company believes it is not practicable to estimate a fair market value
different from the preferred stock's carrying value as these securities have
numerous unique features (as described in Note 10) and there is no quoted market
price at September 30, 1998.
The carrying amount of the senior note payable and the line of credit
approximate market value because they have interest rates that vary with market
interest rates. The Company believes it is not practicable to estimate the fair
value for the residual of the long term debt as these securities have numerous
unique features such as detachable warrants and contingent interest rates, as
described in Note 6, and there is no quoted market price at September 30, 1998.
Reclassifications
Certain reclassifications have been made to the 1996 and 1995 financial
statements to conform with the 1997 presentation. The reclassifications had no
effect on previously reported net loss, stockholders' deficit or cash flows.
Unaudited interim financial statements
In the opinion of the Company's management, the September 30, 1997
unaudited interim financial statements include all adjustments, consisting of
normal recurring adjustments, necessary for a fair presentation of the financial
statements except for those pertaining to the acquisition of Holdings as
discussed further in Note 11. All references hereinafter to September 30, 1997
amounts are based on unaudited information.
New accounting pronouncements
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income." This statement requires that changes in comprehensive income be shown
in a financial statement that is displayed with the same prominence as other
financial statements. The statement is effective for fiscal years beginning
after December 15, 1997. Reclassification for earlier periods is required for
comparative purposes. The Company does not have any material items of
comprehensive income, other than net loss, and accordingly, the statement does
not have any material impact on reported financial position or results of
operations.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures About Segments of an Enterprise and Related Information."
This statement supersedes Statement of
F-13
<PAGE> 96
INTRACEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Financial Accounting Standards No. 14, "Financial Reporting for Segments of a
Business Enterprise." This statement includes requirements to report selected
segment information quarterly and entity-wide disclosures about products and
services, major customers, and the material countries in which the entity holds
assets and reports revenues. The statement will be effective for fiscal years
beginning after December 15, 1997. Reclassification for earlier periods is
required, unless impracticable, for comparative purposes. The Company is
currently evaluating the impact this statement will have on its financial
statements; however, because the statement requires only additional disclosure,
the Company does not expect the statement to have a material impact on its
reported financial position or results of operations.
In February 1998, the FASB Issued Statement of Financial Accounting
Standards No. 132 "Employers' Disclosures about Pensions and Other
Postretirement Benefits." This Statement revises employers' disclosures about
pension and other postretirement benefit plans. It does not change the
measurement or recognition of those plans. It standardizes the disclosure
requirements for pensions and other postretirement benefits to the extent
practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures that are no longer as useful as
they were when FASB Statements No. 87, Employers' Accounting for Pensions, No.
88, Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pensions Plans and for Termination Benefits, and No. 106, Employers' Accounting
for Postretirement Benefits Other Than Pensions, were issued. The Statement
suggests combined formats for presentation of pension and other postretirement
benefit disclosures. The Statement also permits reduced disclosures for
nonpublic entities. This Statement is effective for fiscal years beginning after
December 15, 1997. Earlier application is encouraged. Restatement of disclosures
for earlier periods provided for comparative purposes is required unless the
information is not readily available, in which case the notes to the financial
statements should include all available information and a description of the
information not available. The Company is currently evaluating the impact this
statement will have on its financial statements; however, because the statement
requires only additional disclosure, the Company does not expect the statement
to have a material impact on its reported financial position or results of
operations.
3. INVENTORIES:
Inventories consisted of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ SEPTEMBER 30,
1996 1997 1998
---------- ---------- -------------
<S> <C> <C> <C>
Raw materials......................... $ 909,198 $1,100,325 $ 826,885
Work in process....................... 265,712 160,886 197,957
Finished goods........................ 1,938,277 559,802 1,043,609
---------- ---------- ----------
$3,113,187 $1,821,013 $2,068,451
========== ========== ==========
</TABLE>
F-14
<PAGE> 97
INTRACEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- SEPTEMBER 30,
1996 1997 1998
----------- ----------- -------------
<S> <C> <C> <C>
Laboratory equipment................ $ 4,173,856 $ 4,183,788 $ 8,331,843
Computer equipment.................. 473,483 550,260 1,283,142
Leasehold improvements.............. 392,786 477,177 506,997
Furniture........................... 337,830 365,532 394,109
Construction in progress............ 1,005,519
----------- ----------- -----------
5,377,955 5,576,757 11,521,610
Accumulated depreciation............ (2,130,622) (2,397,798) (6,982,701)
----------- ----------- -----------
$ 3,247,333 $ 3,178,959 $ 4,538,909
=========== =========== ===========
</TABLE>
Depreciation expense for the years ended December 31, 1997, 1996, the six
months ended December 31, 1995, the year ended June 30, 1995 and the nine months
ended September 30, 1998 was $982,740, $861,546, $414,933, $124,363 and
$1,143,117, respectively.
5. ACCRUED LIABILITIES:
Accrued liabilities consisted of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ SEPTEMBER 30,
1996 1997 1998
---------- ---------- -------------
<S> <C> <C> <C>
Acquisition costs..................... $ 375,000 $2,862,513 $ 284,618
Taxes payable......................... 291,055 828,594 1,120,882
Interest payable...................... 492,752 596,028
Accrued stock issuance costs.......... 315,109
Accrued payroll....................... 420,544 304,690 659,743
Building maintenance.................. 66,569
Accrued dividends..................... 567,192
Other................................. 362,318 46,093 316,754
---------- ---------- ----------
$1,941,669 $4,356,999 $3,611,786
========== ========== ==========
</TABLE>
F-15
<PAGE> 98
INTRACEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT:
Long-term debt consisted of:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
-------------------------- -------------
1996 1997 1998
----------- ----------- -------------
<S> <C> <C> <C>
Senior note payable to bank, collateralized
by substantially all of the assets of the
Company, interest at the higher of prime
plus 1.5% or the federal funds rate plus
0.5% (10% and 9.75% at December 31, 1997 and
1996, respectively). If the interest
payments are not made on a timely basis, the
stated interest rate will be increased by a
penalty amount. Quarterly principal payments
of $250,000 plus interest payable through
December 31, 1996 at which time the payments
increase to $500,000 plus interest through
November 16, 2000. The senior note payable
to bank must be repaid to the extent of any
net proceeds from the issuance and sale of
equity securities by the Company. The note
was issued with 121,570 detachable warrants
to purchase common stock at $6.75 per share
expiring November 16, 2002. The warrants
were estimated to have an immaterial fair
value for financial reporting purposes.
During April 1998, the Company repaid all of
the senior note payable with the proceeds
from the issuance of $8,000,000 of notes
payable to an existing note holder (the
"April 1998 Notes"). The April 1998 Notes
were issued with 65,422 detachable warrants
at an exercise price of $11.46 per share
expiring April 17, 2003. The warrants were
estimated to have an immaterial fair value
for financial reporting purposes. During
August 1998, the Company repaid all of the
April 1998 Notes with proceeds from the
issuance of $41,000,000 of notes payable to
an existing note holder (the "August 1998
Notes")..................................... $ 8,250,000 $ 6,000,000
</TABLE>
F-16
<PAGE> 99
INTRACEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT: (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
-------------------------- -------------
1996 1997 1998
----------- ----------- -------------
<S> <C> <C> <C>
Subordinated note payable, collateralized by
substantially all of the assets of the
Company, interest at 8% per year through
November 30, 1997, increasing to 11%
thereafter. Principal is due December 31,
2000. The maturity date may accelerate under
certain circumstances, as disclosed and
defined in the terms of the agreement,
including a "change in control." The note
was issued with 125,347 detachable warrants
to purchase common stock at $10.50 per share
expiring December 28, 2000. The warrants
were estimated to have an immaterial fair
value for financial reporting purposes. The
note was issued at an original discount of
$1,565,000 which is being amortized over the
term of the note. The unamortized discount
equaled $819,000 and $1,252,000 at December
31, 1997 and 1996, respectively. The
proceeds were used to retire a note payable,
resulting in an extraordinary gain of
$1,367,000 during the period ended December
31, 1995. The Company is required to make
quarterly interest payments and has the
option under certain conditions to add
required interest payments to principal in
lieu of paying in cash. Interest payments of
$507,106 and $395,061 were made "in kind" by
issuing additional promissory notes during
1997 and 1996, respectively. During August
1998, the Company repaid all of the
subordinated note payable with proceeds from
the issuance of the August 1998 notes....... 5,402,060 6,342,166
Subordinated note payable, collateralized by
substantially all of the assets of the
Company, interest at 12% per year through
June 21, 1998, increasing to 13% thereafter.
Principal is due June 30, 2001. The note was
issued with 106,049 detachable warrants to
purchase common stock at $10.50 per share
expiring on April 1, 2003. The warrants were
estimated to have an immaterial fair value
for financial reporting purposes. In
November 1997, the note and warrant holder
purchased 106,049 shares of the Company's
common stock for $6.75 per share, and
simultaneously relinquished to the Company
the warrants to purchase 106,049 shares of
common stock at $10.50 per share. The note
was converted to Series A-2 preferred stock
during 1997 (see Note 10)................... 2,000,000
</TABLE>
F-17
<PAGE> 100
INTRACEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT: (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
-------------------------- -------------
1996 1997 1998
----------- ----------- -------------
<S> <C> <C> <C>
Subordinated note payable to bank,
collateralized by substantially all of the
assets of the Company, interest at 12%
through June 11, 1998, increasing to 13%
thereafter. Principal is due June 30, 2001.
The maturity date may accelerate under
certain circumstances, as disclosed and
defined in the terms of the agreement,
including a "change in control." The note
was issued with 212,098 detachable warrants
to purchase common stock at $10.50 per share
expiring on April 1, 2003. Warrants were
estimated to have an immaterial fair value
for financial reporting purposes. The note
includes a provision guaranteeing the issuer
a 20% compounded annual return through any
combination of warrant appreciation or
interest payments. The Company is required
to make quarterly interest payments and has
the option under certain conditions to add
required interest payments to principal in
lieu of paying in cash. Interest payments of
$366,666 and $269,333 were made "in kind" by
issuing additional promissory notes during
1997 and 1996, respectively. During August
1998, the Company repaid all of the
subordinated note payable with proceeds from
the issuance of the August 1998 notes....... 4,269,333 4,635,999
Subordinated note payable to the
Massachusetts Business Development
Corporation in conjunction with a loan
agreement issued by the United States Small
Business Administration, collateralized by
equipment purchased with the proceeds,
interest at prime plus 2.75% (11% at
December 31, 1996). Principal of $8,334 plus
interest payable monthly through April 1,
2002. This note was paid in full by the
Company during 1997......................... 566,656
Note payable, in the amount of $450,000,
issued in conjunction with the purchase of
certain assets of Zymmune Diagnostic Systems
and collateralized by the related equipment,
inventory, and intellectual property
purchased with the proceeds. Principal plus
accrued interest at 6% due on October 24,
1999. The note requires contingent payments
of up to $1,050,000 based on attaining
certain FDA clinical trial milestones.
Zymmune Diagnostic Systems believes the
milestones are probable of achievement and,
accordingly, the Company had accrued the
additional amount at December 31, 1997. The
Company, however, disputed these amounts
(see Note 11). During August 1998 the
Company settled such dispute................ 1,500,000 1,500,000
</TABLE>
F-18
<PAGE> 101
INTRACEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT: (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
-------------------------- -------------
1996 1997 1998
----------- ----------- -------------
<S> <C> <C> <C>
12% Guaranteed Senior Secured Primary Note
due August 1, 2003 in the amount of $35
million and a 12% Guaranteed Senior Secured
Escrow Note due August 1, 2003 in the amount
of $6 million and common stock warrants to
purchase up to 1,083,339 shares of the
Company's common stock. The warrants were
estimated to have a fair value of $6,751,050
for financial reporting purposes. The notes
are collateralized by (i) a first priority
security interest in all the existing and
future assets of the Company, other than the
Perlmmune Patents and certain equipment
financed pursuant to the Loan and Security
Agreement, dated September 30, 1997, between
the Company and the Washington Economic
Development Finance Authority, and a second
security interest in certain of the
Perlmmune Patents and (ii) a pledge of all
the issued and outstanding capital stock of
the existing and future subsidiaries of the
Company. Pursuant to the terms of the
Primary Notes, up to $5.0 million aggregate
principal amount of the Primary Notes must
be redeemed upon the closing of an initial
public offering. Pursuant to the terms of
the Escrow Notes, the Company must notify
the noteholders of its sale of common stock
upon the closing of an initial public
offering and, if requested, up to $6.0
million aggregate principal amount of the
August 1998 Escrow Notes must be redeemed,
in whole or in part......................... $34,322,680
Note payable, in the amount of $9,234,935
assumed in connection with the merger of
Perimmune Holdings, Inc. (see Note 11 for
additional discussion of the merger) The 8%
note, increased to 10% after certain dates.
Accrued interest is added to the principal
balance on February 1 and August 1 of which
the maturity date is January 15, 2000. The
terms of scheduled repayment are variable
depending on the company's cash position as
of December 31, 1999. The note is
convertible at the option of the lender into
common stock at any time prior to the
repayment of the note in full at a
conversion price equal to the price to the
public if and when the company was to
complete an initial public offering. Certain
patents, patent applications, trademarks and
plant and equipment collateralize the
note........................................ 10,802,170
</TABLE>
F-19
<PAGE> 102
INTRACEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT: (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
-------------------------- -------------
1996 1997 1998
----------- ----------- -------------
<S> <C> <C> <C>
Note payable collateralized by the equipment
purchased with the proceeds, payments of
principal plus interest at 11% totaling
$15,208 due monthly through August 1, 2002.
Note allows for additional borrowings of up
to $1,500,000 for the purchase of
manufacturing equipment. Guaranteed by a
bond posted by the State of Washington
Economic Development Council................ 664,588 569,273
Three notes payable each in the amount of
$77,500 uncollateralized, non-interest
bearing assumed in connection with the
merger of PerImmune Holdings. Inc. Each note
is convertible into the Company's common
stock if the company consummates an initial
public offering............................. 232,500
Other of which includes $603,000 and
$187,000 of interest as of December 31, 1997
and 1996, respectively, in connection with a
subordinated note payable that included a
provision guaranteeing the issuer a 20%
compounded annual return through any
combination of warrant appreciation or
interest payments. The Company has
calculated additional interest expense as
the difference between the stated rate of
12%, increased to 13% June 1998, and the
guaranteed rate of 20% for the periods
effective. On August 25, 1998 the note was
extinguished and as a condition of
extinguishment the noteholder agreed to
waive the "make-whole" guarantee provision.
The Company has reversed all accumulated
accrued interest associated with the
"make-whole" guarantee provision and has
reported an "Extraordinary Gain on
Extinguishment of Debt" in the amount of
$925,000 in its September 30, 1998 financial
statements.................................. 256,018 632,470 146,224
----------- ----------- -----------
22,244,067 19,775,223 46,072,847
Less current portion........................ (3,505,122) (2,144,729) (176,411)
----------- ----------- -----------
$18,738,945 $17,630,494 $45,896,436
=========== =========== ===========
</TABLE>
The various debt agreements contain restrictive covenants relating to
quarterly profitability, minimum levels of net worth and liquidity, limitations
on additional debt and dividends, and other nonfinancial covenants including
certain subjective clauses.
The Company received certain amendments and waivers to its debt agreement
and covenants contained therein.
F-20
<PAGE> 103
INTRACEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT: (CONTINUED)
Future minimum debt payments at September 30, 1998 are as follows:
<TABLE>
<S> <C>
1999............................................ 176,411
2000............................................ 6,267,373
2001............................................ 6,232,903
2002............................................ 144,740
2003............................................ 41,000,000
-----------
$53,821,427
===========
</TABLE>
On April 1, 1998, the Company issued 12.5% notes ("April 1998 Notes") in
the original principal amount of $8.0 million including warrants to purchase
65,422 shares of the Company's common stock. The Company applied the proceeds
from the April 1998 Notes to retire the Company's senior note payable to bank
issued November of 1995 in the principal amount of $6.1 million, including
accrued interest, and the line of credit in the amount of $0.5 million (See Note
7). The remaining $1.4 million was used primarily for working capital purposes.
In June of 1998 the Company amended its April 1998 Notes whereby the lender
agreed to advance an additional $2.0 million to the Company for working capital
purposes. The first advance of $1.0 million occurred in June 1998 while the
second advance of $1.0 million occurred in July 1998. Both April 1998 Notes as
amended, were repaid with proceeds from the "August 1998 Notes" discussed below.
On August 25, 1998 the Company completed a comprehensive refinancing of its
outstanding debt. The August 1998 Notes are (i) a 12% Guaranteed Senior Secured
Primary Note due August 1, 2003 in the amount of $35 million and (ii) a 12%
Guaranteed Senior Secured Escrow Note due August 1, 2003 in the amount of $6
million and (iii) common stock warrants to purchase up to 1,083,339 shares of
the Company's common stock. The net proceeds from the August 1998 Notes were
used to (i) discharge the Company's subordinated note payable to bank issued
June of 1996 in the amount of $5.1 million, including accrued interest, (ii)
discharge the Company's subordinated note payable issued in December of 1995 in
the principal amount of $7.2 million including accrued interest, (iii) discharge
the Company's Amended April 1998 notes in the principal amount of $10.1 million
including accrued interest, and (iv) redeem an aggregate of 47,030 shares of the
Company's Series A-2 Preferred Stock, $.0001 par value per share in the amount
of $4.9 million.
Of the remaining $13.7 million $6.0 million from the Guaranteed Senior
Secured Escrow Note was deposited into a segregated bank account from which the
Company is permitted to obtain funds upon request to the lender, $4.9 million
was deposited into an escrow account, reflected as restricted cash on the
balance sheet, which is equivalent to four scheduled interest payments on the
August 1998 notes, $0.5 million was used to comply with a Company milestone
obligation, and the remaining $2.3 million will be used for working capital
purposes.
The August 1998 Notes are collateralized by (i) a first priority security
interest in all the existing and future assets of the Company, other than the
PerImmune Patents and certain equipment financed pursuant to the Loan and
Security Agreement, dated September 30, 1997, between the Company and the
Washington Economic Development Finance Authority, and a second security
interest in certain of the PerImmune Patents and (ii) a pledge of all the issued
and outstanding capital stock of the existing and future subsidiaries of the
Company.
The Company is permitted to obtain funds upon request from such Segregated
Account, provided that no event of default (as defined) occurs. The Company may
draw out of the escrow account to make scheduled interest payments on the August
1998 Notes, provided that, after giving effect to any such withdrawal, the
F-21
<PAGE> 104
INTRACEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT: (CONTINUED)
Company, subject to certain conditions, is required to maintain the balance in
the escrow account at an amount sufficient to pay the next four scheduled
interest payments, and after the first two successive full payments of interest
hereafter, at a level sufficient to pay the next two successive full payments of
interest on the outstanding August 1998 Notes. The noteholders have a
collateralized interest in the escrow account. The escrow account will be
terminated after payment in full of all interest accrued through and including
the twelfth successive interest payment due on the August 1998 Notes, with any
balance remaining in the escrow account to be retained by the Company. The
August 1998 Notes are guaranteed by all the existing subsidiaries of the Company
and will be guaranteed by all future subsidiaries of the Company.
The August 1998 Notes, among other things, require that the Company comply
with certain financial covenants beginning in the year 2000 including, without
limitation, maintaining an adjusted debt to EBITDA (as defined) ratio, minimum
levels of tangible net worth and interest coverage, and maximum levels of
leverage for certain periods. In addition, the August 1998 Notes impose certain
limitations on the ability of the Company to, among other things, (i) incur
additional indebtedness, (ii) pay dividends or make certain other restricted
payments, (iii) consummate certain asset sales, (iv) enter into certain
transactions with affiliates, (v) incur liens, (vi) merge or consolidate with
any other person or sell, assign, transfer, lease, convey or otherwise dispose
of all or substantially all of its assets, (vii) enter into certain restrictive
arrangements relating to the Company's subsidiaries, (viii) extend credit and
(ix) make investments.
Pursuant to the terms of the August 1998 Primary Notes, up to $5.0 million
aggregate principal amount of the August 1998 Primary Notes must be redeemed
upon the closing of an initial public offering. Pursuant to the terms of the
August 1998 Escrow Notes, the Company must notify the noteholders of its sale of
common stock upon the closing of an initial public offering and, if requested,
up to $6.0 million aggregate principal amount of the August 1998 Escrow Notes
must be redeemed, in whole or in part.
The noteholders may require the Company to repurchase an aggregate of up to
$7.5 million aggregate principal of the August 1998 Notes at a price equal to
100% of their principal amount plus accrued and unpaid interest, upon the
failure of Intracel to satisfy certain ratios of EBITDA to interest expense as
measured at the end of each of three successive fiscal quarters of the Company
commencing March 31, 2000.
The noteholders may require the Company to prepay the August 1998 Notes, in
whole or in part, at a price equal to 101% of the principal amount so prepaid,
plus accrued interest to the date of prepayment, if there is a Change of Control
(as defined) of the Company, or if Simon R. McKenzie shall cease to be the
principal executive officer of the Company in charge of the Company's management
and policies for a period of 30 days or more.
The August 1998 Primary Notes may be prepaid, in whole or in part, at the
option of the Company initially at a redemption price of 112% of the principal
amount thereof, and declining to 100% of the principal amount thereof after July
31, 2002, plus accrued and unpaid interest, if any, to the date of redemption.
The August 1998 Escrow Notes may be prepaid, in whole or in part, at the option
of the Company, provided that certain notice requirements are met.
Events of default under the August 1998 Notes include, among other things,
(i) failure to pay principal or interest on the August 1998 Notes when due, (ii)
breaches of representations, warranties and covenants, (iii) defaults under
other indebtedness of the Company or its subsidiaries, (iv) failure to
consummate an equity offering on or prior to December 31, 1999, with an
aggregate offering price of not less than $40.0 million and aggregate proceeds
to the Company (net of selling expenses and underwriters' discounts or selling
agent's commission) of not less than $35.0 million, (v) the occurrence of
certain events of bankruptcy, (vi) certain adverse judgments against the Company
or its subsidiaries, (vii) certain ERISA events and (viii) other customary
defaults, in certain cases after the expiration of a grace period.
F-22
<PAGE> 105
INTRACEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT: (CONTINUED)
The 1,083,339 warrants issued in connection with the August 1998 Notes are
exercisable until August 25, 2003 at an exercise price per share equal to the
price to the public per share upon the consummation of an initial public
offering. In the event the Company does not consummate an initial public
offering on or prior to December 31, 1998 all 1,083,339 warrants are exercisable
at $15.00 per share. The Company has determined the warrants to have a fair
value of $4.6 million which will be accounted for as a note issuance discount
and amortized using the effective interest method over the life of the note.
In January 1999, the Company and the Northstar Funds entered into a First
Amendment and Waiver Agreement which, among other things, (i) amended the terms
of the August 1998 Escrow Notes to eliminate the Company's obligation to redeem
the August 1998 Escrow Notes with proceeds received from this offering or any
other debt or equity offering prior to the consummation of this offering, (ii)
amended the Interest Escrow Security Agreement to reduce the balance required to
be maintained in the escrow account created thereunder to an amount sufficient
to pay the next two scheduled interest payments on the Notes, and (iii) waived
certain non-payment events of default and compliance by the Company with certain
covenants set forth in the documentation executed in connection with the August
1998 Refinancing.
During August 1998 the Company entered into a settlement agreement with
Vaxcel, Inc., an assignee of an agreement for the purchases of certain assets of
Zymmune Diagnostic Systems from Zynaxis, Inc. (See Note 11). Pursuant to the
terms of the settlement agreement the Company paid $100,000 for a complete and
unconditional release of all obligations owed to Vaxcel, Inc. In return the
Company agreed to certain obligations in the event Company sales of
Zymunne-related products equal or exceed $3,000,000. As of September 30, 1998
the Company had not obtained such sales nor does it anticipate reaching such
sales in the near future. The Company had $1,500,000 recorded for obligations to
Vaxcel, Inc. The Company reported the extinguishment of its long-term debt
obligation associated with this agreement as a "Extraordinary Gain on Early
Extinguishment of Debt" in the amount of $350,000 and "Other Income" in the
amount of $1,050,000.
7. LINE OF CREDIT:
Under the terms of the senior note payable to bank (Note 6), the Company
has a line of credit with an aggregate borrowing capacity of $1.0 million at
prime plus 1.5%. The agreement includes various restrictive covenants which,
among other things, require the Company to maintain certain minimum working
capital and net worth amounts. The line of credit facility has a maturity date
of November 16, 2000.
At December 31, 1997 and 1996, there were $500,000 of borrowings on the
line of credit facility. During April 1998, the Company repaid the line of
credit with the proceeds from the issuance of the April 1998 notes.
8. INCOME TAXES:
The Company did not provide an income tax benefit for any of the periods
presented because it has experienced operating losses since inception.
At September 30, 1998 the Company had net operating loss carryforwards for
federal income tax purposes of approximately $49 million which expire through
2018. Utilization of net operating loss carryforwards will be subject to certain
limitations under Section 382 of the Internal Revenue Code.
F-23
<PAGE> 106
INTRACEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES: (CONTINUED)
The following is a reconciliation of the income tax benefit to the amount
based on the statutory Federal rate:
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED NINE MONTHS
YEAR ENDED ENDED DECEMBER 31, ENDED
JUNE 30, DECEMBER 31, --------------- SEPTEMBER 30,
1995 1995 1996 1997 1998
---------- ------------ ----- ----- -------------
<S> <C> <C> <C> <C> <C>
Federal income tax benefit at
statutory rate............... (34)% (34)% (34)% (34)% (35)%
Change in valuation
allowance.................... 34 % 34 % 34 % 34 % 35 %
----- ----- ----- ----- -----
===== ===== ===== ===== =====
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are approximately as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ SEPTEMBER 30,
1996 1997 1998
---------- ---------- -------------
<S> <C> <C> <C>
Deferred income tax assets:
Tax loss carryforwards............. $3,392,000 $5,930,000 $ 17,132,000
Tax credit carryforwards........... 96,000 96,000 96,000
Property, plant and equipment...... 171,000
Inventories........................ 548,000 140,000
Other.............................. 333,000 438,000 863,000
---------- ---------- -------------
3,992,000 7,012,000 18,231,000
Deferred income tax liabilities:
Other.............................. (65,000) (61,000) (75,000)
---------- ---------- -------------
3,927,000 6,951,000 18,156,000
Valuation allowance.................. (3,927,000) (6,951,000) (18,156,000)
---------- ---------- -------------
Net deferred taxes assets............ $ $ $
========== ========== =============
</TABLE>
A full valuation allowance has been recorded at December 31, 1997, 1996,
and September 30, 1998 based on management's determination that the recognition
criteria for realization has not been met.
9. COMMITMENTS AND CONTINGENCIES:
On November 30, 1998, a complaint was filed against the Company in the
Circuit Court of Cook County, Illinois, Law Division, by Vector Securities
International Inc. ("Vector"). In the complaint, Vector alleges a breach of
contract by the Company in connection with the Company's retention of Vector as
a financial advisor, and seeks damages of approximately $1.6 million plus
attorneys' fees. The Company believes it has defenses to the claims alleged in
the complaint as well as counterclaims against Vector, and is currently in the
process of preparing its answer to the complaint and its counterclaims.
The Company recently received a request for payment of approximately
$990,000 due under a license agreement assumed by the Company in connection with
its purchase of certain assets from Zynaxis Inc. The Company is currently in the
process of reviewing the underlying contracts and correspondence regarding this
claim to determine its validity.
F-24
<PAGE> 107
INTRACEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
In addition, the Company is party to claims and litigation that arise in
the normal course of business. Management believes that the ultimate outcome of
these claims and litigation will not have a material impact on the financial
position or results of operations of the Company.
In the ordinary course of business, the Company is subject to extensive and
changing federal regulations within the United States and by other foreign
countries with regard to the manufacturing and marketing of products. To date
the Company has not identified any potential liabilities arising from the
manufacturing and marketing of its products.
The Company has operating leases for its facilities with remaining fixed
terms ranging up to six years. Rental expense was approximately $2,024,000,
$783,000, $1,466,000, $200,000, and $192,000 for the nine months ended September
30, 1998 and the years ended December 31, 1997 and 1996, the six months ended
December 31, 1995 and the twelve months ended June 30, 1995, respectively.
Future approximate minimum operating lease payments are as follows:
<TABLE>
<S> <C>
Year ending September 30:
1999................................................... $2,018,395
2000................................................... 1,880,257
2001................................................... 1,840,377
2002................................................... 1,890,459
2003................................................... 1,945,870
----------
Total minimum lease payments............................. $9,575,358
==========
</TABLE>
10. CAPITAL STOCK AND STOCKHOLDERS' DEFICIT:
Preferred stock
The Company is authorized to issue 5 million shares of $0.0001 par value
serial preferred stock. Each series of the preferred stock is a separate class
and, as a class, has a liquidation preference equal to the aggregate purchase
price paid for such class.
F-25
<PAGE> 108
INTRACEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. CAPITAL STOCK AND STOCKHOLDERS' DEFICIT: (CONTINUED)
The historical share information regarding the Company's preferred stock
activity follows:
<TABLE>
<CAPTION>
SERIES SERIES SERIES SERIES SERIES SERIES
A A-1 A-2 A-3 B-1 B-2
------- -------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
BALANCES AT JULY 1, 1994
Issuance of preferred stock...................... 468,755
Dividend payments in kind........................ 26,431
------- -------- ------- ------- --- ---
BALANCES AT JUNE 30, 1995........................ 495,186
Issuance of preferred stock...................... 668,750
Dividend payments in kind........................ 20,000 13,261
------- -------- ------- ------- --- ---
BALANCES AT DECEMBER 31, 1995.................... 515,186 682,011
Dividend payments in kind........................ 42,470 56,224
------- -------- ------- ------- --- ---
BALANCES AT DECEMBER 31, 1996.................... 557,656 738,235
Issuance of preferred stock...................... 40,000
Conversion of Series A-1 into Series A-3......... (139,390) 139,390
Dividend payments in kind........................ 45,966 52,323 4,063 8,533
------- -------- ------- ------- --- ---
BALANCES AT DECEMBER 31, 1997.................... 603,622 651,168 44,063 147,923
Issuance of preferred stock...................... 100 120
Dividend payments in kind........................ 37,017 39,783 2,967 9,038
Redemption of preferred stock.................... (47,030)
------- -------- ------- ------- --- ---
BALANCES AT SEPTEMBER 30, 1998................... 640,639 690,951 -- 156,961 100 120
======= ======== ======= ======= === ===
</TABLE>
Series A, Series A-1, and Series A-3 redeemable and convertible preferred
stock
The Series A, Series A-1, and Series A-3 redeemable and convertible
preferred stocks were issued for net proceeds of $8.00 per share and are
convertible into common stock of the Company at a conversion ratio of 1.33
shares of common stock per one share of preferred stock, which is equivalent to
a conversion price of $6.00 per share. Holders of these preferred shares are
entitled to receive a cumulative 8% annual dividend. Dividends may be paid in
cash or in additional shares ("in kind") at the option of the Company until
January 1, 1999 after which time dividends are payable only in cash. The Company
is required to redeem all outstanding shares at $8.00 per share, plus accrued
dividends, on July 1, 2001 (Series A) and September 22, 2002 (Series A-1 and
Series A-3). Each preferred share has voting rights equivalent to two shares of
common stock except for the Series A-3 which does not have voting rights unless
converted to common stock. The stockholders have a liquidation preference of
$8.00 per share upon the dissolution of the Company. The Company covenants that
it will not amend the articles of incorporation, recapitalize, pay or declare
dividends on junior stock, merge or consolidate, liquidate, dissolve or change
the principal business of the Company as long as 25% of the authorized shares
are outstanding of each series of preferred stock, unless 51% or more of the
preferred stockholders approve the change.
The Series A, Series A-1 and Series A-3 preferred stock is mandatorily
convertible into common stock at a ratio of two shares of common stock per one
share of preferred stock upon the closing of an underwritten public offering
pursuant to an effective registration statement on Form S-1 for the sale of
common stock at a per share price of at least $6.00 per share with aggregate
proceeds of at least $10,000,000, so long as the offering occurs no later than
September 19, 1998. The Company is currently in the process of amending the
Series A, Series A-1, and Series A-3 stockholder agreements to extend the
aforementioned date to June 30, 1999. The Company expects the preferred
stockholders to approve the change.
F-26
<PAGE> 109
INTRACEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. CAPITAL STOCK AND STOCKHOLDERS' DEFICIT: (CONTINUED)
Series A-2 preferred stock
The Series A-2 preferred stock was non-convertible, non-voting and were
issued in conjunction with the exchange of $2,267,260 of subordinated debt and
accrued interest in addition to the receipt of $1,732,740 in cash, resulting in
net proceeds of $100 per share. Holders of these preferred shares were entitled
to receive a cumulative 13.5% dividend in cash or in kind, at the option of the
Company, until February 28, 2007 at which time the dividend rate would have
increased to 19% and payable only in cash. The Company had the option to redeem
these shares at any time prior to February 28, 2000 for $100 per share. The
stockholders also had the right to elect directors and exchange their shares for
notes if dividend payments were in arrears for a specified period of time. The
stockholders had a liquidation preference of $100 per share upon the dissolution
of the Company.
On August 25, 1998 all outstanding shares of Series A-2 Preferred Stock
were redeemed in conjunction with the refinancing of the Company's long-term
debt.
Series B-1 and B-2 preferred stock
The Series B-1 and B-2 redeemable and convertible preferred stock were
issued in conjunction with the merger with Holdings to replace that company's
outstanding shares of Holdings Series A and Series B preferred stock with rights
and preferences identical to the original issues. The stockholders have a
liquidation preference of $45,000 and $50,000 per share, respectively, upon
dissolution of the Company. Holders of these preferred shares are entitled to
receive a cumulative 7% per annum dividend based on the liquidation preference
amount per share. Holders of these preferred shares are entitled to receive
annual dividends in cash, commencing on April 24, 1998 and June 16, 1998,
respectively, and continuing, thereafter, on each subsequent anniversary date.
Each preferred share has voting rights equivalent to 6,072.21 shares of common
stock. The Company covenants that it will not amend certain portions of it's
articles of incorporation, dissolve, merge or consolidate the Company, unless
51% or more of the Series B-1 preferred stockholders and 51% of the Series B-2
preferred stockholders approve the change.
On the fifth anniversary of the Series B-1 and B-2 assumed initial issue
date, the Company shall redeem all of the then outstanding shares at the Series
B-1 and B-2 liquidation preference amount. Each share of Series B-1 and B-2
preferred stock may be converted into common stock, at any time prior to the
respective redemption dates, at the option of the stockholder or will
automatically convert to common stock immediately prior to the first registered,
underwritten public offering of shares of common stock by the Company. Theses
preferred shares are convertible into 6,072.21 shares of common stock per one
share of Series B-1 preferred stock or Series B-2 preferred stock.
Common stock
The Company is authorized to issue 25,000,000 shares of $0.0001 par value
voting common stock. Upon liquidation or dissolution, holders of common stock
will be paid only after preferred stock preferences have been satisfied.
On December 31, 1997, all outstanding shares of common stock were split two
for one.
In November 1997, the Company issued 805,979 shares of common stock for
proceeds of $5,687,124, net of issuance costs of approximately $561,077 and
other noncash transactions of $73,800. In conjunction with this transaction,
24,497 warrants to purchase common shares for $6.00 per share were exercised for
proceeds of $146,980.
In January 1998, the Company issued 3,652,436 shares of common stock in
connection with the acquisition of Holdings. The Company also assumed the
outstanding stock options granted to Holdings employees equivalent to 1,560,554
shares of Intracel common stock (Note 11).
F-27
<PAGE> 110
INTRACEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. CAPITAL STOCK AND STOCKHOLDERS' DEFICIT: (CONTINUED)
Common Stock
On December 28, 1998, the Company's Board of Directors approved a
two-for-three reverse stock split of the Company's common stock. The reverse
stock split will become effective at the time an Amended and Restated
Certificate of Incorporation is filed with the Secretary of State of Delaware.
All references in the consolidated financial statements and related notes
thereto referring to shares, share prices, per share amounts and other share
information have been retroactively adjusted for the reverse stock split.
Initial Public Offering
In March 1998, the Company's Board of Directors authorized the Company to
file a Registration Statement with the Securities and Exchange Commission to
permit the Company to proceed with an initial public offering of its common
stock.
Stock options
The Company's 1989 Amended Stock Option Plan (the "Plan") which covers the
Intracel/Bartels employees, provides for the issuance of incentive and
nonqualified stock options to employees, directors, and consultants. There are
1,110,172 shares of common stock reserved under the Plan. The Company's Board of
Directors establishes the option price per share, vesting period, and option
term at the date of grant. Generally, options are granted by the Company's Board
of Directors at an exercise price of not less than the fair market value of the
Company's common stock at the date of grant. For stockholders possessing at
least a 10% ownership interest, the option price shall not be less than 110% of
the fair market value at the date of grant. The vesting period of options
generally ranges from immediately to ratably over four years. Option terms
generally are five or ten years.
The Company also has a 1996 Stock Option Plan, which covers the PerImmune
employees, provides for the issuance of incentive and nonqualified stock options
to employees, directors, and consultants. The Company's Board of Directors
establishes the option price per share, vesting period, and option term at the
date of grant. The vesting period of options generally ranges from one to three
years. Option terms generally are 10 years.
The Company has chosen to continue to account for stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25 (APB No. 25), "Accounting for Stock Issued to Employees," and
related interpretations. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the fair value of the Company's stock at the
date of the grant over the amount an employee must pay to acquire the stock.
Under APB No. 25, because the exercise price of the Company's stock options
generally equals the fair value, as determined by the Board of Directors, of the
underlying stock on the date of grant, no compensation expense is recognized in
the Company's consolidated financial statements.
F-28
<PAGE> 111
INTRACEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. CAPITAL STOCK AND STOCKHOLDERS' DEFICIT: (CONTINUED)
Information regarding activities in the option plan is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
---------- --------
<S> <C> <C>
Options outstanding, July 1, 1994........................... 335,356 $3.00
----------
Options outstanding, June 30, 1995.......................... 335,356 3.00
----------
Options outstanding, December 31, 1995...................... 335,356 3.00
Options granted........................................... 218,667 4.04
Options canceled.......................................... (6,667) 3.75
----------
Options outstanding, December 31, 1996...................... 547,356 3.41
Options granted........................................... 86,667 6.75
Options expired........................................... (54,667) 3.75
----------
Options outstanding, December 31, 1997...................... 579,356 3.87
Options assumed in merger with Holdings, Inc.............. 1,560,554 0.50
Options granted........................................... 316,664 12.27
Options canceled.......................................... (926,102) 1.75
Options exercised......................................... (162,205) 2.82
----------
Options outstanding, September 30, 1998..................... 1,368,267 $3.66
==========
</TABLE>
At December 31, 1996, 1997 and September 30, 1998 the Company granted stock
options in excess of the authorized Plan amount by 82,838, 114,838 and 240,163
shares, respectively. The Company intends to submit for shareholder approval an
amendment to its stock option plan to increase the number of options authorized
for issuance.
The following table summarizes information about options outstanding at
September 30, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------- -----------------------
WEIGHTED
WEIGHTED AVERAGE WEIGHTED
AVERAGE REMAINING AVERAGE
RANGE OF NUMBER EXERCISE CONTRACTUAL NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING PRICE LIFE EXERCISABLE PRICE
- ---------------------------- ----------- -------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ .45...................... 751,434 .45 4 years 531,319 .45
$ 1.50 - $ 2.25............. 72,555 1.56 0 72,555 1.56
$ 2.26 - $ 3.39............. 78,933 2.54 0 78,934 2.54
$ 3.40 - $ 5.10............. 96,534 3.75 2.83 years 88,533 3.75
$ 5.11 - $ 7.65............. 115,477 6.65 4.29 years 42,700 6.63
$11.25 - $15................ 253,334 12.75 5.57 years 75,834 12.51
--------- ----- ---------- -------- -----
1,368,267 3.66 3.79 years 889,875 2.38
</TABLE>
Pro forma information regarding net income (loss) is required by SFAS No.
123, and has been determined as if the Company had accounted for its employee
stock options granted after January 1, 1996 under the fair value method of that
statement. The fair values of options granted in 1998, 1997 and 1996 (no options
were granted during the six months ended December 31, 1995 or the year ended
June 30, 1995) were
F-29
<PAGE> 112
INTRACEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. CAPITAL STOCK AND STOCKHOLDERS' DEFICIT: (CONTINUED)
estimated at the date of grant using the minimum value method and the following
weighted-average assumptions:
<TABLE>
<CAPTION>
1996 1997 1998
------- ------- ------------
<S> <C> <C> <C>
Risk free interest rate.................... 6.41% 6.28% 6.5%
Expected holding period.................... 4 years 6 years 6 years
Dividend yield............................. 0.0% 0.0% 0.0%
</TABLE>
The minimum value method was developed for use in estimating the fair value
of options granted by nonpublic entities and, accordingly, excludes
consideration of volatility. In addition, option valuation models require the
input of highly subjective assumptions. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion, the minimum value
method does not necessarily provide a reliable single measure of the fair value
of its stock options.
The weighted average fair values per share at the date of grant for options
granted were as follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER
-------------- 30,
1996 1997 1998
----- ----- ------------
<S> <C> <C> <C>
Options granted whose exercise price was equal
to the fair value of the stock on the date of
grant........................................ $1.13 $2.09 $2.46
===== ===== =====
</TABLE>
The following table presents net loss and per share amounts as if the
Company accounted for compensation expense related to stock options under the
fair value method prescribed by SFAS No. 123:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
NINE MONTHS ENDED
1996 1997 SEPTEMBER 30, 1998
PRO FORMA PRO FORMA PRO FORMA
----------- ----------- ------------------
<S> <C> <C> <C>
Net loss -- as reported......... $(4,389,973) $(8,063,633) $(53,762,042)
Net loss -- pro forma........... (4,420,723) (8,105,094) (53,933,264
Loss per share -- as reported... (1.99) (3.43) (7.64)
Loss per share -- pro forma..... (2.00) (3.45) (7.67)
</TABLE>
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the option's vesting period.
At September 30, 1998, the following warrants to purchase common stock were
outstanding:
<TABLE>
<CAPTION>
PRICE PER
SHARE,
NUMBER OF SUBJECT TO
SHARES ADJUSTMENT EXPIRATION DATE
- --------- ---------- ------------------
<C> <C> <S>
44,835 $ 6.00 July 22, 1999
115,283 6.00 September 22, 2000
121,570 6.75 November 16, 2002
125,347 10.50 December 28, 2000
212,098 10.50 April 1, 2003
- ---------
452,896 6.75 January 2, 2003
65,422 11.46 August 25, 2003
1,083,339 15.00 August 25, 2003
- ---------
2,220,790
=========
</TABLE>
F-30
<PAGE> 113
INTRACEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. CAPITAL STOCK AND STOCKHOLDERS' DEFICIT: (CONTINUED)
The outstanding warrants carry registration rights, certain anti-dilutive
rights, and certain adjustments to the number of shares obtainable under the
warrants, as provided in the warrant agreements. The expiration dates of the
warrants may accelerate under certain circumstances, including the closing of an
initial public offering of common stock at a minimum purchase price per share of
$8 to $9 and minimum aggregate proceeds of $10,000,000.
On January 2, 1998, the Company issued Warrants to purchase 452,896 shares
of common stock in connection with an employment agreement between Simon R.
McKenzie, the Company's Chief Executive Officer, and the Company. The Warrants
carry an exercise price of $6.75 per share and expire 5 years from the date of
issue. On April 1, 1998, the Company issued Warrants to purchase 65,422 shares
of common stock in connection with a Note and Warrant Purchase Agreement at an
exercise price of $11.46 per share.
On August 25, 1998, the Company issued Warrants to purchase 1,083,339
shares of Common Stock in connection with a note and Warrant Purchase Agreement
at an exercise price per share of $15.00.
11. ACQUISITIONS:
In April 1996, the Company entered into an agreement with Bartels
Prognostics acquiring certain manufacturing equipment for $360,000. The
agreement also granted the Company exclusive manufacturing and marketing rights
subject to the full payment of $1,000,000 for 644,696 shares, or 23.443%, of
common stock of Bartels Prognostics. The Company accrued $375,000 and paid
$250,000 in 1996 and made the residual payments of $750,000 in 1997, comprising
the total consideration of $1,000,000. Additionally, the Company made advances
to Bartels Prognostics of $45,299 and $98,198 during 1997 and 1996,
respectively. At December 31, 1997 and 1996, advances to Bartels Prognostics are
included in other current assets and the investment in Bartels Prognostics is
included in other assets. The agreement allows for further discussion regarding
the potential future merger of the two entities.
In November 1995, the Company purchased certain assets and assumed certain
liabilities of Bartels, a biotechnology company in the business of developing,
manufacturing, selling, and distributing reagents and cell culture media from
Dade International for an aggregate purchase price of approximately $17,667,000.
The acquisition was financed primarily via a $9,000,000 term loan and a
$1,000,000 revolving credit note from a commercial bank, and a $4,667,000 note
payable to the seller (the note payable to the seller was paid in December 1995
primarily from the proceeds of the December 1995 Subordinated Secured Promissory
Note). The purchase price was allocated to the assets acquired based upon fair
market values. The excess of the purchase price over the fair market value of
the assets acquired in the amount of $13,622,586, has been allocated to cost in
excess of net assets acquired and is being amortized over 15 years. Acquired
in-process research and development approximating $1,300,000 was expensed in
1995 as the technological feasibility of the acquired technology had not been
established and the technology had no future alternative use as of the date of
acquisition. This acquisition was accounted for as a purchase and, accordingly,
the results of operations of the acquired business is included in the
accompanying consolidated statement of operations from the date of acquisition.
In September 1995, the Company purchased certain assets of Zymmune
Diagnostic Systems from Zynaxis, Inc., a developer of drug delivery systems, for
an aggregate purchase price of approximately $2,019,000. The financing consisted
of a note payable to Zynaxis and a series of contingent payments. The contingent
payment liability of $1,050,000 was recorded as a long-term liability due to the
Company's view that the milestones underlying the payments are probable of being
achieved. The note payable and the contingent payments to Zynaxis resulted in a
noncash transaction for the purchase of the assets in the amount of
approximately $1,500,000. Assets purchased included technology, patents,
equipment, and inventory. The purchase price was allocated to the assets
acquired based upon their fair market values. Acquired in-process research and
development approximating $800,000 was expensed in 1995 as the technological
feasibility of the acquired technology had not been established and the
technology had no future alternative use as of the date
F-31
<PAGE> 114
INTRACEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. ACQUISITIONS: (CONTINUED)
of the acquisition. Although the manufacturing milestone was achieved during
fiscal year 1996, the Company has alleged a number of breaches of the agreement
by Zynaxis and has accordingly withheld all payments pending resolution of the
dispute. In August 1998 the Company settled with the assignee of this agreement
(Vaxcel, Inc.) for an amount substantially less than the value of the note and
contingent payments.
On January 2, 1998, the Company acquired in a tax-free merger all the
capital stock of PerImmune Holdings ("Holdings") which conducts operations
through PerImmune, Inc., its wholly owned subsidiary ("PerImmune"). As a result
of this transaction, Holdings and PerImmune have become subsidiaries of the
Company. In anticipation of this acquisition, the Company placed $2,000,000 of
cash in a restricted escrow account on December 31, 1997 to satisfy requirements
of the holder of the senior note payable. At December 31, 1997, the Company has
deferred certain acquisition costs related to this transaction, including legal,
accounting and other fees. PerImmune is a research oriented healthcare company
that applies biotechnology and other life sciences technologies to develop and
provide products and services. PerImmune's focus is on the development of human
monoclonal antibodies for cancer and infectious disease applications, as well as
cancer vaccines, specific and nonspecific immunotherapy and cardiovascular
disease test products. The aggregate purchase price was approximately
$59,471,000, payable in 3,652,436 shares of Intracel common stock, 1,560,554
options to purchase Intracel common stock, 220 shares of Intracel Series B-1 and
B-2 preferred stock, the assumption of obligations of approximately $11,532,000
and the assumption of other certain liabilities. The acquisition has been
accounted for using the purchase method of accounting and the September 30, 1998
financial statements reflect valuation of all assets, including identifiable
intangibles, at their estimated fair market values. Perimmune's operating
results are included in Intracel's consolidated operating results from the date
of acquisition. The Company recognized a one time expense of $37,718,000 in the
first quarter of 1998 related to acquired in process research and development as
the technological feasibility of the acquired technology had not been
established and the technology had no future alternative use as of the date of
acquisition. The remaining $21,742,000 of the total purchase price was allocated
among the acquired assets including patents, current product technology and long
term assets including $849,000 recorded as cost in excess of net assets
acquired, which is being amortized over 10 years.
In connection with the acquisition of Holdings, the Company assumed the
ownership rights of certain patents and other technology rights developed under
the research and development contracts with OTC. Under the terms of the
ownership rights, the Company is required to make certain milestone payments of
up to $10 million if specific future conditions are met, and will make payments
of between 5.0% and 7.5% of net product sales and 50% of license revenue. The
milestone and royalty payments will continue until the expiration or termination
of the related patents covering the products defined in the agreement. As of the
date of acquisition $500,000 of milestone payments were included in accrued
liabilities for amounts payable to OTC. On August 25, 1998 the liability was
satisfied in its entirety through cash payment to OTC. No royalty payments have
been accrued or are due to OTC.
Also in conjunction with the acquisition, the Company assumed the following
contractual rights and obligations from Holdings:
Agreement with Baxter
On January 1, 1996, PerImmune entered into a research collaboration and
license agreement with Baxter Healthcare Corporation (Baxter) whereby PerImmune
agreed to provide certain research, development and pilot manufacturing services
for Baxter in exchange for reimbursement of research and development costs,
milestone payments and certain royalty payments. PerImmune received a
non-refundable milestone payment of $1,500,000 in January 1996 and is reimbursed
for actual costs incurred plus a fee of 16% during the term of the agreement.
Baxter is also obligated to make up to $3,000,000 in additional milestone
payments, if PerImmune achieves certain stages of U.S. and European regulatory
approvals for the serotherapy products
F-32
<PAGE> 115
INTRACEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. ACQUISITIONS: (CONTINUED)
for infectious and autoimmune diseases under development. In addition, PerImmune
earns a royalty ranging between 4% and 8% of gross profit with a minimum royalty
ranging between 2% and 4% of net sales, as defined in the agreement on sales of
products depending on whether the product is a result of previously existing
technology of PerImmune or new technology resulting from this development
agreement. As of September 30, 1998, no royalty or additional milestone payments
have been earned. The agreement has a term of three years with an option for a
fourth year. Either party may terminate this agreement at any time without
cause. All patents and technology developed under this agreement are the
property of Baxter.
Agreement with Arch Development Corporation
PerImmune has a license agreement with the Arch Development Corporation
(Arch) to make and sell products under the patent rights for Apotek Lp(a)
developed at the University of Chicago. The agreement requires PerImmune to pay
Arch a royalty of 4% of related product sales. As of September 30, 1998,
PerImmune paid $22,400 of royalty expense under this agreement.
Distribution Agreement with Syncor International Corporation
On April 1, 1997, PerImmune entered into an exclusive distribution
agreement with Syncor International Corporation (Syncor) for the HumaSPECT and
antibody conjugated radiotherapeutic products. Under this agreement, Sycor
accepts title of the product upon receipt and pays PerImmune a specific purchase
price defined by the agreement. Additionally, Syncor will pay PerImmune a
royalty of 50% of its net sales of PerImmune's products less the specific
purchased price, as defined, and right of return exists if the product received
by Syncor has less than one year until its expiration. To date, PerImmune has
not earned any royalties under this agreement. PerImmune is obligated to spend
15% of annual sales of products covered by this agreement on research and
development to improve upon existing products or develop new products. PerImmune
is required to reimburse Syncor for all expenses related to marketing these
products up to $1,500,000, plus 50% of amounts over $1,500,000, provided the
expenditures are in accordance with the annual market plan as prepared and
agreed by the two companies. For the nine month period ended September 30, 1998,
PerImmune has reimbursed Syncor for marketing expenses of $138,000. This
agreement has a term of five years and is renewable for two additional two-year
terms.
Agreements with Mentor Corporation
On June 16, 1997, the PerImmune entered into an exclusive distribution
agreement with Mentor Corporation (Mentor) for the AuraTek -- FDP bladder cancer
diagnostic product, which PerImmune refers to as Accu-D(X), with an initial term
of five years and is automatically renewable for one year terms thereafter until
either party terminates the agreement with 180 days written notice. Under this
agreement, Mentor accepts title of the product shipments upon receipt and pays
PerImmune a specific purchase price defined by the agreement. Additionally,
Mentor will pay PerImmune a royalty of 50% of its net sales of PerImmune's
product, less the specific purchase price as defined in the agreement. PerImmune
is obligated to provide up to 12,000 units of the product per year to be used by
Mentor for promotional purposes, at no cost to Mentor.
On December 22, 1997, PerImmune entered into a research, collaboration and
distribution agreement with Mentor whereby PerImmune agreed to provide certain
research, development and pilot programs for Mentor in exchange for research and
development fees in an aggregate amount of $3,000,000 based on a milestone
payment schedule. As of December 31, 1997, PerImmune had not earned any
milestone payments. PerImmune will receive $1,000,000 within five days of
submission of written notice of the completion of each milestone to Mentor.
PerImmune is required to pay the cost in excess of $3,000,000 for expenditures
within the scope of the project development schedule. PerImmune is the owner of
all rights to proprietary technical information and the U.S. Patent to which
Mentor was granted exclusive world-wide rights to market, sell and
F-33
<PAGE> 116
INTRACEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. ACQUISITIONS: (CONTINUED)
distribute the program product. This agreement is effective for a ten-year
period following the first approval of commercialized use of products under
development. Mentor has the right to terminate this agreement at the expiration
of five years from the date of the first approval of commercialized use of the
product based upon 180 days written notice to PerImmune. As of September 30,
1998, the Company has received to date milestone payments from Mentor in the
amount of $1,000,000.
Sigma Agreement
On June 30, 1997, PerImmune entered into a product development and license
agreement with Sigma Diagnostics, Inc. (Sigma) for a diagnostic product, whereby
PerImmune agreed to provide product development and licensing services for Sigma
in exchange for a product development fee and royalty payment. PerImmune is
entitled to receive an aggregate amount of $348,000 based on a milestone payment
schedule that requires a payment of $87,000 upon completion of each respective
milestone of which $87,000 was earned in 1997. During 1998, the Company received
an additional $87,000. In addition, PerImmune will receive an annual royalty
payment ranging between 3.5% and 7% of the net selling price of the licensed
product depending on whether there are any additional competitors for this
product in the marketplace. PerImmune has sole and exclusive ownership of the
licensed patents, while Sigma has the exclusive world-wide right to use and
sublicense the project program information. This agreement has a term of five
years and is automatically renewable for a one-year term thereafter until Sigma
terminates the agreement.
Manufacturing/Distribution Agreement with OTC
On August 1, 1997, PerImmune entered into an exclusive
manufacturing/distribution agreement with OTC for the FDP Dipstick product,
which PerImmune refers to as Accu-Dx. Under the agreement, PerImmune paid OTC
$250,000 in exchange for the exclusive right to purchase, at a defined price,
such OTC product for package and resale under trademarks or tradenames
designated by PerImmune. PerImmune is obligated to purchase at least 100,000
units of the product annually at $4.00 per unit, starting on August 1, 1998.
This agreement has an initial term of three years and is automatically renewed
in two-year terms until written notice of termination from either PerImmune or
OTC.
Other Contracts and Agreements
PerImmune has entered into various other licensing and research and
development agreements whereby it is committed to participate in research and
development projects, either on a best efforts basis or upon attainment of
certain performance milestones, as defined, or both, for various periods unless
canceled by the respective parties. Such future amounts to be paid to PerImmune
will primarily be determined on a cost-plus basis, and are subject to specific
performance criteria.
The following unaudited pro forma information has been prepared assuming
Holdings had been acquired as of the beginning of the periods presented. The pro
forma information is presented for information purposes only and is not
necessarily indicative of what would have occurred if the acquisition had been
made as of those dates. In addition, the pro forma information is not intended
to be a projection of future results.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED SEPTEMBER 30,
PRO FORMA INFORMATION DECEMBER 31, -------------------
(IN THOUSANDS, EXCEPT PER SHARE) 1997 1997 1998
-------------------------------- ------------ ------- --------
(ACTUAL)
<S> <C> <C> <C>
Revenue.................................... $21,341 $16,521 $14,244
Net loss................................... 58,287 50,480 53,762
Loss per common share basic and diluted.... 9.35 8.22 7.64
</TABLE>
F-34
<PAGE> 117
INTRACEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. JOINT VENTURE:
During 1995, the Company made a 45% investment in the German American
Institute for AIDS Research (GAIFAR), a German limited liability Company. The
purpose of the entity was to develop and distribute the Company's products
within the Eastern European market. The investment is accounted for under the
equity method. Also during 1995, GAIFAR obtained a 1,000,000 Deustche mark (DM)
unsecured loan through the German government. During 1996, the Company made an
additional contribution of capital approximating $283,000 in accordance with the
loan agreement with the German government. No further capital contributions were
required based on the terms of the financing. As of December 31, 1996, the
Company had written off the entire investment in the joint venture because the
amount was deemed not to be recoverable, which resulted in a charge to
operations of $339,408.
In July of 1997, the Company entered into a termination and sale agreement
which resulted in the transfer of all joint venture shares back to GAIFAR on May
14, 1998, releasing the Company from its guarantee of the 1,000,000 DM loan. In
September and October, 1998 the Company received approximately $225,000 and
$90,500, respectively, which the Company considers a recovery of an investment
that was previously written off. These amounts are considered as settlement in
full for the transfer of all joint venture shares.
13. EMPLOYEE RETIREMENT BENEFIT PLANS:
Retirement Savings Plan
The Company maintains two separate retirement savings plans. The first is a
401(k) savings plan covering the Intracel and Bartels employees. Eligible
employees may contribute amounts through payroll deductions. The Company matches
employees' contributions at the discretion of the Company's Board of Directors.
The Company did not match employee contributions to the 401(k) savings plan in
the 1997, 1996 and 1995 periods. The Company does not provide other
post-retirement benefits.
The second is a defined-contribution savings plan under Section 401(k) of
the Internal Revenue Code covering substantially all former PerImmune full-time
employees. Participating employees may defer a portion of their pretax earnings
up to the Internal Revenue Service annual contribution limit. The Company
matches employee contributions according to a specified formula. The Company's
matching contributions totalled $134,455, $176,098 and $72,779 for the periods
ended September 30, 1998, December 31, 1997 and period from August 3, 1996
through December 31, 1996, respectively.
Pension Plan
In connection with the Company's merger with Holdings, the Company assumed
Holdings' employee pension plan. The Company froze the benefits under the Plan
in February 1998, and determined that the remaining Plan assets and recorded
pension liability exceeded the obligation relating to the participants. As a
result of the curtailment of the plan benefits, the Company recorded a gain in
the quarter ended March 31, 1998 of $800,000 and reduced the related pension
liability in accordance with Statement of Financial Accounting Standards No. 88,
"Employers Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans."
F-35
<PAGE> 118
INTRACEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. EMPLOYEE RETIREMENT BENEFIT PLANS: (CONTINUED)
The following table sets forth the funded status of the plan at September
30, 1998 and December 31, 1997, and the composition of net periodic pension cost
and significant assumptions for the periods ended September 30, 1998 and
December 31, 1997:
<TABLE>
<CAPTION>
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested
benefits of approximately $1,133,561 in 1996,
$1,251,865 in 1997 and $1,488,170 in 1998.... $ 1,362,971 $ 1,565,486 $ 1,759,951
Effect of anticipated increase in compensation
levels....................................... 718,744 770,256 --
------------ ------------ ------------
Projected benefit obligation...................... 2,081,715 2,335,742 1,759,951
Plan assets at fair value......................... 1,238,260 1,360,127 1,605,615
------------ ------------ ------------
Excess of projected benefit obligation over plan
assets.......................................... (843,455) (975,615) (154,336)
Unrecognized net investment (gain) loss........... (92,424) (208,287) 97,601
------------ ------------ ------------
Total pension liability accrued......... $ (935,879) $ (1,183,902) $ (56,735)
============ ============ ============
Net periodic pension cost includes the following
components:
Service cost -- benefits earned during the
period....................................... $ 93,606 $ 213,981 $ 54,464
Interest cost on projected benefit obligation... 61,916 151,631 118,929
Actual return on assets......................... (135,097) (173,965) (136,472)
Net amortization and deferred investment gain... 92,424 56,376 --
------------ ------------ ------------
Net periodic pension cost............... $ 112,849 $ 248,023 $ 36,921
============ ============ ============
Significant assumptions used were as follows:
Discount rate................................... 7.5% 7.5% 6.75%
Rate of increase in compensation levels (graded
by age of participant)....................... 4.0 to 10.5% 4.0 to 10.5% 4.0 to 10.5%
Expected rate of return of assets............... 9.5% 9.5% 9.5%
============ ============ ============
</TABLE>
14. SUBSEQUENT EVENTS:
The Company has entered into a letter of intent with two accredited
investors who currently hold various securities issued by the Company, pursuant
to which the Company has agreed to sell $2 million aggregate principal amount of
the Company's non-convertible debt securities. The proceeds from the issuance
and sale of this non-convertible debt will be used for working capital and other
general corporate purposes.
15. RESTATEMENT:
The Company's financial statements as of and for the years ended December
31, 1996 and 1997, have been restated for the following:
Long-term debt
Certain of the Company's debt with a bank, with a stated interest rate of
12%, increased to 13% in June 1998, contained a "make-whole" provision which
guaranteed the note holder a 20% return through any combination of interest
payments or payments-in-kind or stock warrant appreciation (See Note 6).
Previously the Company had not recognized any interest in addition to the stated
interest for 1997 and excluded an immaterial portion of the interest in 1996.
Accordingly, the 1997 and 1996 financial statements have been restated to
recognize additional interest expense of $417,000 and $56,000, respectively,
which results in a total
F-36
<PAGE> 119
INTRACEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. RESTATEMENT: (CONTINUED)
interest rate of 20% for each year. Such restatements increased previously
reported loss before extraordinary item and net loss by like amounts, and
increased basic and diluted loss before extraordinary item and net loss per
share amounts by $.15 and $.02 in 1997 and 1996, respectively.
Inventory
At December 31, 1997 the Company directly charged $1.1 million to cost of
revenue-product for the estimated amount of obsolete inventory. Subsequently,
the Company has become aware of a December 31, 1996 inventory adjustment in the
amount of $832,000 to reduce inventory that was inadvertently not reflected in
the Company's December 31, 1996 audited financial statements. Accordingly, the
1996 financial statements have been restated to reduce inventory in 1996 with a
charge to cost of revenue-product. As a result of this restatement, the 1997
financial statements were also restated to reduce by $832,000 the $1.1 million
charge to cost of revenue-product. Such restatements increased loss before
extraordinary item and net loss in 1996 by $832,000 and decreased the 1997
amounts by a like amount. Basic and diluted loss before extraordinary item and
net loss per share amounts for 1996 and 1997 were increased and decreased by
$.32 and $.31, respectively.
F-37
<PAGE> 120
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Perimmune Holdings, Inc. and Subsidiary
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, stockholders' equity (deficit) and of
cash flows present fairly, in all material respects, the financial position of
Perimmune Holdings, Inc. and Subsidiary (the "Company") at December 31, 1997,
and the results of their operations and their cash flows for the year then
ended, 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 audit. We conducted our audit of the 1997 financial 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 audit provides a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
McLean, Virginia
April 2, 1998, except for the
second paragraph of Note 14
as to which the date is June 8, 1998.
F-38
<PAGE> 121
PERIMMUNE HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 2,504,064 $ 2,423,910
Accounts receivable, net.................................. 646,524 1,260,719
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................. 159,561 749,039
Inventories............................................... 362,840 375,488
Prepaid expenses.......................................... 415,928 293,699
------------ -----------
Total current assets.............................. 4,088,917 5,102,855
Property and equipment, net................................. 2,040,698 7,283,715
Restricted cash............................................. 433,000
Cost in excess of assets acquired, including acquisition
costs, net of accumulated amortization of $383,000 in 1997
and $113,000 in 1996...................................... 1,467,500 1,237,500
------------ -----------
Total assets...................................... $ 8,030,115 $13,624,070
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Current portion of notes payable.......................... $ 10,220,505 $ 5,600,000
Current portion of capitalized lease obligations.......... 44,896
Accounts payable.......................................... 616,140 1,950,427
Accrued liabilities....................................... 2,078,283 1,387,334
------------ -----------
Total current liabilities......................... 12,959,824 8,937,761
Capitalized lease obligations, less current portion......... 127,342
Pension liability........................................... 1,183,902 935,879
Notes payable, less current portion......................... 9,234,935
------------ -----------
Total liabilities................................. 14,271,068 19,108,575
------------ -----------
Commitments and contingencies
Series A redeemable and convertible preferred stock -- $0.01
par value; 1,000 shares authorized; 100 shares issued and
outstanding at December 31, 1997 (aggregate liquidation
preference of $4,500,000)................................. 4,280,165
Series B redeemable and convertible preferred stock -- $0.01
par value; 1,000 shares authorized; 120 shares issued and
outstanding at December 31, 1997 (aggregate liquidation
preference of $6,000,000)................................. 5,505,952
------------ -----------
9,786,117
------------ -----------
Stockholders' equity (deficit):
Common stock -- $0.01 par value; 3,000 and 1,000 shares
authorized, respectively; 601.5 and 593.5 shares issued
and outstanding at December 31, 1997 and 1996,
respectively........................................... 6 6
Additional paid-in capital............................. 282,668
Accumulated deficit.................................... (16,309,744) (5,484,511)
------------ -----------
Total stockholders' equity (deficit).............. (16,027,070) (5,484,505)
------------ -----------
Total liabilities and stockholders' equity
(deficit)....................................... $ 8,030,115 $13,624,070
============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-39
<PAGE> 122
PERIMMUNE HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 AND PERIOD FROM
AUGUST 3, 1996 THROUGH DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 3, 1996
YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------------
<S> <C> <C>
REVENUE:
Contract research and development revenue:
Government............................................. $ 1,869,301 $ 2,750,942
Commercial............................................. 3,909,239 1,105,515
Product sales............................................. 2,110,695 594,157
------------ -----------
Total revenue..................................... 7,889,235 4,450,614
------------ -----------
COST OF CONTRACTS AND SALES:
Contract research and development costs:
Government............................................. 1,584,922 1,968,098
Commercial............................................. 3,431,181 885,942
Cost of products sold..................................... 1,600,054 324,886
------------ -----------
Total costs of contracts and sales................ 6,616,157 3,178,926
------------ -----------
GROSS PROFIT................................................ 1,273,078 1,271,688
------------ -----------
OPERATING EXPENSES:
Research and development.................................. 8,077,491 4,683,020
General and administrative................................ 1,685,880 708,247
Marketing................................................. 554,720
Other..................................................... 607,521 10,151
------------ -----------
Total operating expenses.......................... 10,925,612 5,401,418
------------ -----------
LOSS FROM OPERATIONS........................................ (9,652,534) (4,129,730)
Other income (expense):
Interest income........................................... 200,958
Interest expense.......................................... (1,038,467) (445,590)
Loss on sale-leaseback transaction........................ (335,190)
------------ -----------
LOSS BEFORE INCOME TAXES.................................... (10,825,233) (4,575,320)
Income taxes................................................
------------ -----------
NET LOSS.................................................... (10,825,233) (4,575,320)
Preferred stock accretion................................... 32,332
------------ -----------
Net loss applicable to common stockholders.................. $(10,857,565) $(4,575,320)
============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-40
<PAGE> 123
PERIMMUNE HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEAR ENDED DECEMBER 31, 1997 AND PERIOD FROM
AUGUST 3, 1996 THROUGH DECEMBER 31, 1996
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------ ------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Issuance of common stock................. 585 $6 $ 5,844 $ 5,850
Acquisition costs paid through issuance
of common stock........................ 9 100,000 100,000
Consideration paid in excess of net
assets acquired........................ (105,844) $ (909,191) (1,015,035)
Net loss for the period from August 3,
1996 through December 31, 1996......... (4,575,320) (4,575,320)
--- -- --------- ------------ ------------
Balance at December 31, 1996............. 594 6 (5,484,511) (5,484,505)
Issuance of common stock on December 12,
1997................................... 7 315,000 315,000
Issuance of additional common stock to
investment advisor (note 2)............ 1
Preferred stock accretion................ (32,332) (32,332)
Net loss for the year.................... (10,825,233) (10,825,233)
--- -- --------- ------------ ------------
Balance at December 31, 1997............. 602 $6 $ 282,668 $(16,309,744) $(16,027,070)
=== == ========= ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-41
<PAGE> 124
PERIMMUNE HOLDINGS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997 AND PERIOD FROM
AUGUST 3, 1996 THROUGH DECEMBER 31, 1996
<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 3,
YEAR ENDED 1996 THROUGH
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(10,825,233) $(4,575,320)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation........................................... 268,688 185,834
Amortization........................................... 270,000 113,000
Loss on sale-leaseback and disposal of equipment....... 365,985 1,330
Changes in assets and liabilities:
Decrease in accounts receivable...................... 614,195 230,393
Decrease in costs and estimated earnings in excess of
billings.......................................... 589,478 237,825
Decrease (increase) in inventories................... 12,648 (4,840)
Increase in prepaid expenses......................... (122,229) (162,592)
Increase in accounts payable and accrued
liabilities....................................... 329,685 2,170,210
------------ -----------
Net cash used in operating activities............. (8,496,783) (1,804,160)
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (314,601) (129,280)
Acquisition costs......................................... (1,250,000)
Proceeds from sale-leaseback and disposal of equipment.... 5,135,564
Payment to investment advisor............................. (1,225,000)
------------ -----------
Net cash provided by (used in) investing
activities...................................... 3,595,963 (1,379,280)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock.................... 315,000 5,850
Proceeds from issuance of convertible preferred stock (net
of transaction costs of $746,215)...................... 9,753,785
Repayment of capital lease obligations.................... (40,381)
Proceeds from issuance of notes payable................... 985,570 5,600,000
Payments of notes payable................................. (5,600,000)
Increase in restricted cash............................... (433,000)
------------ -----------
Net cash provided by financing activities......... 4,980,974 5,605,850
------------ -----------
Net increase in cash and cash equivalents................... 80,154 2,422,410
Cash and cash equivalents at beginning of period............ 2,423,910 1,500
------------ -----------
Cash and cash equivalents at end of period.................. $ 2,504,064 $ 2,423,910
============ ===========
Supplemental cash flow information:
Cash paid for:
Interest............................................... $ 1,013,347 $ 138,600
Supplemental disclosure of non-cash financing activities:
Purchase of common stock of PerImmune, Inc. with a note
payable................................................ $ 9,234,935
Acquisition costs paid through issuance of common stock... 100,000
Consideration paid in excess of net assets acquired....... 1,015,035
Preferred stock accretion................................. $ 32,332
Cost in excess of assets acquired included in accrued
liabilities............................................ 500,000
Equipment acquired under capital lease obligations........ 212,619
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-42
<PAGE> 125
PERIMMUNE HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
PerImmune Holdings, Inc. (Holdings) was incorporated on June 28, 1996 for
the purpose of acquiring PerImmune, Inc. (PerImmune) in a leveraged buyout
transaction.
Between 1985 and 1996, PerImmune was owned by Organon Teknika Corporation
(OTC), a subsidiary of Akzo Nobel, Inc., which is wholly owned by Akzo Nobel, NV
(Netherlands). Prior to December 20, 1994, PerImmune operated as a division of
OTC, and was known as Biotechnology Research Institute (BRI). On December 20,
1994, PerImmune, Inc., was formed as a wholly owned subsidiary of OTC with the
issuance of 1,000 shares of common stock in exchange for all the assets and
liabilities related to PerImmune. Effective August 3, 1996, PerImmune was
acquired by Holdings through a leveraged buyout (see note 2). Holdings has no
substantive operations.
The Company is a research oriented healthcare company that applies
biotechnology and other life sciences technologies to develop and provide
products and services. The Company's focus is on the development of human
monoclonal antibodies for cancer and infectious disease applications, as well
as, cancer vaccines, specific and nonspecific immunotherapy and cardiovascular
disease test products. Most of PerImmune's products are intended for human use
and are, therefore, regulated by the United States Food and Drug Administration.
Historically, the Company's primary sources of revenue have been research and
development contracts with affiliated companies, revenues generated from
government contracts and sales of products and services. PerImmune markets its
products in the United States, Europe and other geographic regions.
Basis of Presentation
The consolidated financial statements include the accounts of Holdings and
PerImmune. All significant intercompany accounts and transactions have been
eliminated in consolidation.
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 and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ materially from those estimates.
Cash Equivalents
Cash equivalents consist of highly liquid investments with original
maturities of three months or less at the date of investment.
Inventories
Inventories are stated at the lower of cost (as determined by the first-in,
first-out method) or market.
Property and Equipment
Property and equipment are stated at cost. Depreciation on property and
equipment is computed using the straight-line method over the estimated useful
lives of the assets of 3 to 7 years. Expenditures for maintenance, repairs and
renewals of relatively minor items are generally charged to expense as incurred.
F-43
<PAGE> 126
PERIMMUNE HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Construction in progress includes the costs of constructed machinery.
Construction in progress costs are transferred to other property and equipment
categories when the construction/installation is completed and the asset is
ready for its intended use.
Cost in Excess of Assets Acquired
Cost in excess of assets acquired represents the excess of cost of an
acquired business over the fair value of the identifiable net tangible and
intangible assets acquired. Cost in excess of assets acquired is amortized using
the straight-line method over 15 years. The Company periodically evaluates the
life and the recoverability of cost in excess of assets acquired by comparing
the estimated future undiscounted operational cash flows to the carrying value
of cost in excess of assets acquired.
Acquisition Costs
Acquisition costs represent costs incurred related to the leveraged buyout
transaction (see note 2). Amortization of acquisition costs is computed using
the straight-line method over five years.
Income Taxes
Income taxes are accounted for using the asset and liability method
pursuant to Statement of Financial Accounting Standard No. 109 (SFAS No. 109),
Accounting for Income Taxes. Deferred taxes are recognized for the tax
consequences of "temporary differences" by applying enacted statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities. The
effect on deferred taxes for a change in tax rates is recognized in income in
the period that includes the enactment date. The Company establishes valuation
allowances in accordance with the provisions of SFAS No. 109. The Company
continually reviews the adequacy of the valuation allowances and will recognize
deferred tax benefits only when it is more likely than not that the benefits
will be realized. Holdings and its subsidiary file a consolidated U.S. federal
income tax return.
Fair Value of Financial Instruments
The Company has notes payable related to the leveraged buy-out and other
notes payable obligations for which it is not practicable to estimate the fair
value since they are not traded, and no quoted values are readily available for
similar financial instruments.
Stock-based Compensation
The Company accounts for stock option issuances in accordance with the
provisions of APB No. 25, Accounting for Stock Issued to Employees, and related
interpretations. As such, deferred compensation is recorded to the extent that
the fair value of the underlying stock exceeds the exercise price on the date of
grant. Such deferred compensation is amortized over the respective vesting
periods of related option grants. Transactions with non-employees, in which
goods or services are the consideration received for the issuance of equity
instruments, are accounted for under the fair-value based method defined in
Statement of Financial Accounting Standard No. 123 (SFAS No. 123) Accounting for
Stock-Based Compensation (see note 11).
Revenue Recognition
Revenue from sales of products is recognized on the date of delivery to
customers or upon shipment, based upon the contractual terms of applicable
agreements.
The Company has entered into various research and development and licensing
agreements (see note 3). Research and development revenue from cost
reimbursement agreements is recorded as the related expenses are incurred, up to
contractual limits and when the Company meets its performance obligations under
the respective agreements. Contract revenue is recognized under other agreements
when milestones are met and the Company's performance obligations have been
satisfied in accordance with the terms of the respective
F-44
<PAGE> 127
PERIMMUNE HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
agreements. Cash received that is related to future performance under such
contracts is deferred and recognized as revenue when earned.
The Company also engages in contracts with commercial entities and agencies
of the U.S. government (Department of Defense and the National Institute of
Health) on either a cost-plus-fixed-fee, fixed price or a
cost-plus-percentage-fee basis. Revenue on cost-plus-fixed-fee, fixed price and
cost-plus-percentage-fee contracts is recognized based on the ratio of total
direct and indirect costs incurred during the period to total estimated costs
using the percentage-of-completion method. Estimates to complete are reviewed
periodically and revised as required in the period the revision is determined.
Provisions are made for the full amount of anticipated losses, if any, on all
contracts in the period in which they are first known and estimable. Contracts
with the U.S. government are subject to government audit upon contract
completion and therefore, all contract costs are potentially subject to
adjustment, even after reimbursement. Management believes adequate provisions
for such adjustments, if any, have been made in the financial statements.
Expense recovery rates have been audited through 1996.
Research and Development Costs
Research and development costs are expensed as incurred.
Concentration of Credit Risk
The Company performs research and development services for nonaffiliated
entities. The Company generally does not require collateral or other security in
extending credit to its customers. Additionally, the U.S. federal government and
Baxter Healthcare Corporation contributed 24% and 34% of total revenue for the
year ended December 31, 1997, respectively and 62% and 14% for the period from
August 3, 1996 through December 31, 1996, respectively.
Reclassifications
Certain reclassifications have been made to the 1996 financial statements
to conform with the 1997 presentation. The reclassifications had no effect on
previously reported net loss, stockholders' equity (deficit) or cash flows.
(2) LEVERAGED BUYOUT
In 1996, Holdings engaged an investment advisor with regards to the
purchase of PerImmune from Akzo Nobel, Inc. for which the investment advisor's
fee totalled $1,250,000. As of December 31, 1996, $1,225,000 of the advisor's
fee was included in accounts payable and the entire amount was paid in full
during 1997. During 1996, the investment advisor also received 8.5 shares of the
Company's common stock in exchange for funding certain related legal expenses on
behalf of the Company totaling $100,000. The shares are protected from dilution
through certain third-party financings. During the year ended December 31, 1997,
the investment advisor was issued one additional share of the Company's common
stock.
Effective August 3, 1996, 100% of PerImmune's common stock was acquired by
Holdings from OTC in exchange for a $9,234,935 note payable (see note 8). The
transaction was accounted for in accordance with Emerging Issues Task Force
Abstracts No. 88-16 (EITF No. 88-16), Basis in Leveraged Buyout Transactions.
Because the transaction was wholly financed by OTC, all such consideration was
determined to be nonmonetary and, under the provisions of EITF 88-16, the assets
and liabilities of PerImmune were carried over at historical cost.
Concurrent with the leveraged buyout, the ownership rights of certain
patents and other technology rights developed under the research and development
contracts with affiliates, which pertain to the business of PerImmune, were
transferred to Holdings. Under the terms of the transfer, Holdings is required
to make
F-45
<PAGE> 128
PERIMMUNE HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(2) LEVERAGED BUYOUT (CONTINUED)
certain milestone payments of up to $10 million if specific future conditions
are met, and will make payments of between 5% and 7.5% of net product sales and
50% of license revenue. The milestone and royalty payments will continue until
the expiration or termination of the related patents covering the products
defined in the agreement. As of December 31, 1997, $500,000 of milestone
payments were included in accrued liabilities for amounts payable to OTC. No
royalty payments have been accrued or are due to OTC.
(3) CONTRACTS AND AGREEMENTS
Agreement with Baxter
On January 1, 1996, PerImmune entered into a research collaboration and
license agreement with Baxter Healthcare Corporation (Baxter) whereby the
Company agreed to provide certain research, development and pilot manufacturing
services for Baxter in exchange for reimbursement of research and development
costs, milestone payments and certain royalty payments. The Company received a
non-refundable milestone payment of $1,500,000 in January 1996 and is reimbursed
for actual costs incurred plus a fee of 16% during the term of the agreement.
Baxter is also obligated to make up to $3,000,000 in additional milestone
payments, if the Company achieves certain stages of U.S. and European regulatory
approvals for the serotherapy products for infectious and autoimmune diseases
under development. In addition, the Company earns a royalty ranging between 4%
and 8% of gross profit with a minimum royalty ranging between 2% and 4% of net
sales, as defined in the agreement, on sales of products depending on whether
the product is a result of previously existing technology of the Company or new
technology resulting from this development agreement. As of December 31, 1997,
no royalty or additional milestone payments has been earned. The agreement has a
term of three years with an option for a fourth year. Either party may terminate
this agreement at any time without cause. All patents and technology developed
under this agreement are the property of Baxter.
Agreement with Arch Development Corporation
PerImmune has a license agreement with the Arch Development Corporation
(Arch) to make and sell products under the patent rights for Apotek Lp(a)
developed at the University of Chicago. The agreement requires the Company to
pay Arch a royalty of 4 percent of related product sales. As of December 31,
1997, the Company has not incurred any royalty expense under this agreement.
Distribution Agreement with Syncor International Corporation
On April 1, 1997, the Company entered into an exclusive distribution
agreement with Syncor International Corporation (Syncor) for the HumaSPECT and
antibody conjugated radiotherapeutic products. Under this agreement, Syncor
accepts title of the product upon receipt and pays the Company a specific
purchase price defined by the agreement. Additionally, Syncor will pay the
Company a royalty of 50% of its net sales of the Company's products less the
specific purchased price, as defined, and right of return exists if the product
received by Syncor has less than one year until its expiration. To date, the
Company has not earned any royalties under this agreement. The Company is
obligated to spend 15% of annual sales of products covered by this agreement on
research and development to improve upon existing products or develop new
products. The Company is required to reimburse Syncor for all expenses related
to marketing these products up to $1,500,000, plus 50% of amounts over
$1,500,000, provided the expenditures are in accordance with the annual market
plan as prepared and agreed by the two companies. For the year ended December
31, 1997, the Company has reimbursed Syncor for marketing expenses of $330,000.
This agreement has a term of five years and is renewable for two additional
two-year terms.
F-46
<PAGE> 129
PERIMMUNE HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(3) CONTRACTS AND AGREEMENTS (CONTINUED)
Agreements with Mentor Corporation
On June 16, 1997, the Company entered into an exclusive distribution
agreement with Mentor Corporation (Mentor) for the AuraTek -- FDP bladder cancer
diagnostic product, which the Company refers to as Accu-D(x), with an initial
term of five years and is automatically renewable for a one year term thereafter
until either party terminates the agreement with 180 days written notice. Under
this agreement, Mentor accepts title of the product shipments upon receipt and
pays the Company a specific purchase price defined by the agreement.
Additionally, Mentor will pay the Company a royalty of 50% of its net sales of
the Company's product, less the specific purchase price as defined in the
agreement. The Company is obligated to provide up to 12,000 units of the product
per year to be used by Mentor for promotional purposes, at no cost to Mentor.
On December 22, 1997, the Company entered into a research, collaboration
and distribution agreement with Mentor whereby the Company agreed to provide
certain research, development and pilot programs for Mentor in exchange for
research and development fees in an aggregate amount of $3,000,000 based on a
milestone payment schedule. As of December 31, 1997, the Company had not earned
any milestone payments. The Company will receive $1,000,000 within five days of
submission of written notice of the completion of each milestone to Mentor. The
Company is required to pay the cost in excess of $3,000,000 for expenditures
within the scope of the project development schedule. The Company is the owner
of all rights to proprietary technical information and the U.S. Patent to which
Mentor was granted exclusive world-wide rights to market, sell and distribute
the program product. This agreement is effective for a ten year period following
the first approval of commercialized use of products under development. Mentor
has the right to terminate this agreement at the expiration of five years from
the date of the first approval of commercialized use of the product based upon
180 days written notice to the Company.
Sigma Agreement
On June 30, 1997, the Company entered into a product development and
license agreement with Sigma Diagnostics, Inc. (SIGMA) for a diagnostic product,
whereby the Company agreed to provide product development and licensing services
for SIGMA in exchange for a product development fee and royalty payment. The
Company is entitled to receive an aggregate amount of $348,000 based on a
milestone payment schedule that requires a payment of $87,000 upon completion of
each respective milestone of which $87,000 was earned in 1997. In addition, the
Company will receive an annual royalty payment ranging between 3.5% and 7% of
the net selling price of the licensed product depending on whether there are any
additional competitors for this product in the marketplace. The Company has sole
and exclusive ownership of the licensed patents, while SIGMA has the exclusive
world-wide right to use and sublicense the project program information. This
agreement has a term of five years and is automatically renewable for a one year
term thereafter until SIGMA terminates the agreement.
Manufacturing/Distribution Agreement with OTC
On August 1, 1997, the Company entered into an exclusive
manufacturing/distribution agreement with OTC for the FDP Dipstick product,
which the Company refers to as Accu-D(x). Under the agreement, the Company paid
OTC $250,000 in exchange for the exclusive right to purchase, at a defined
price, such OTC product for package and resale under trademarks or tradenames
designated by the Company. The Company is obligated to purchase at least 100,000
units of the product annually at $4.00 per unit, starting on August 1, 1998.
This agreement has an initial term of three years and is automatically renewed
in two-year terms until written notice of termination from either the Company or
OTC.
F-47
<PAGE> 130
PERIMMUNE HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(3) CONTRACTS AND AGREEMENTS (CONTINUED)
Other Contracts and Agreements
The Company has entered into various other licensing and research and
development agreements whereby it is committed to participate in research and
development projects, either on a best efforts basis or upon attainment of
certain performance milestones, as defined, or both, for various periods unless
canceled by the respective parties. Such future amounts to be paid to the
Company will primarily be determined on a cost-plus basis, and are subject to
specific performance criteria.
(4) ACCOUNTS RECEIVABLE
Accounts receivable at December 31, 1997 and 1996, were as follows:
<TABLE>
<CAPTION>
1997 1996
-------- ----------
<S> <C> <C>
Government contracts................................. $123,964 $ 395,952
Product sales and corporate contracts................ 535,560 879,767
-------- ----------
659,524 1,275,719
Allowance for doubtful accounts...................... 13,000 15,000
-------- ----------
$646,524 $1,260,719
======== ==========
</TABLE>
(5) INVENTORIES
Inventories at December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Finished goods......................................... $ 92,888 $186,837
Work-in-process........................................ 1,337
Raw materials.......................................... 269,952 187,314
-------- --------
$362,840 $375,488
======== ========
</TABLE>
(6) PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
---------- -----------
<S> <C> <C>
Leasehold improvements............................. $ 990,573
Leased property.................................... $ 212,619
Computers.......................................... 667,557 453,946
Machinery and equipment............................ 3,549,485 3,735,691
Construction in progress........................... 1,005,316 5,935,047
---------- -----------
5,434,977 11,115,257
Accumulated depreciation and amortization.......... 3,394,279 3,831,542
---------- -----------
$2,040,698 $ 7,283,715
========== ===========
</TABLE>
Sale-Leaseback of Facility
On January 15, 1997, PerImmune exercised its option to purchase the land
and building it occupies in Rockville, Maryland, for a pre-established price of
$7,900,000. Concurrent with the purchase, PerImmune sold the property to a
third-party buyer. The sale included the building and improvements, and certain
equipment. The sales price, excluding settlement and transfer costs, was
$14,150,000, and the loss resulting from this transaction was approximately
$335,000, after consideration of estimated costs for repairs described below.
The Company received approximately $5,136,000 in cash at the closing of the
transaction. This
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<PAGE> 131
PERIMMUNE HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(6) PROPERTY AND EQUIPMENT (CONTINUED)
transaction has been treated as a sale-leaseback. As such, the plant and
equipment previously owned by the Company were removed from the balance sheet
and the loss was recognized.
In conjunction with the sale, PerImmune agreed to make certain repairs at
its own expense and to obtain the release of certain liens against the property.
To ensure compliance with these provisions of the agreement, PerImmune deposited
$500,000 (maintenance escrow) and $100,000 (lien escrow) into escrow accounts.
In addition, PerImmune has agreed to deposit, on a monthly basis from February
1997 through January 2002, $3,333 for costs to be used for elevator repairs and
refurbishment (elevator escrow). The Company is entitled to any amounts not
spent for the described purpose. As of December 31, 1997, the balances in the
maintenance escrow and elevator escrow were $393,000 and $40,000, respectively.
Liens against the property have been released and the $100,000 lien escrow was
refunded to the Company in full during 1997.
In connection with the sale leaseback transaction, PerImmune issued the
buyer a warrant for the purchase of 25,000 shares of PerImmune common stock if
PerImmune consummates an initial public offering (IPO) or if certain other
events occur, such as a capital reorganization, recapitalization, dissolution or
liquidation. The warrants are exercisable for three years following the date of
one of the previously described events. The warrants expire in July 1999 if one
of the above events has not occurred. The warrant purchase price in an IPO would
be the offering price and for the other events described above, the price would
be determined by a formula described in the warrant agreement.
(7) COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON UNCOMPLETED CONTRACTS
The following is a summary of costs and estimated earnings in excess of
billings on uncompleted contracts as of December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Costs incurred on uncompleted contracts........... $30,077,868 $28,548,030
Estimated earnings................................ 2,298,118 2,154,438
----------- -----------
Total costs and estimated earnings................ 32,375,986 30,702,468
Less:
Billings to date................................ 32,148,654 29,836,800
Allowance for losses............................ 67,771 116,629
----------- -----------
$ 159,561 $ 749,039
=========== ===========
</TABLE>
(8) NOTES PAYABLE
Notes payable at December 31, 1997 and 1996, were as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
8% promissory notes to OTC........................ $ 9,988,005 $14,834,935
Other notes....................................... 232,500
----------- -----------
10,220,505 14,834,935
Less current portion.............................. 10,220,505 5,600,000
----------- -----------
$ $ 9,234,935
=========== ===========
</TABLE>
In August 1996, in connection with the leveraged buyout, Holdings issued an
8% promissory note to OTC for $9,234,935 to purchase the outstanding common
stock of PerImmune, Inc. Interest accrued on the note is added to the principal
balance on February 1 and August 1 each year. The note matures in August 1998
and is collateralized by the patents, patent applications, trademarks and plant
and equipment acquired in the
F-49
<PAGE> 132
PERIMMUNE HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(8) NOTES PAYABLE (CONTINUED)
leveraged buyout. As of December 31, 1997 and 1996, the principal and accrued
interest amount outstanding was $9,988,005 and $9,234,935, respectively.
Holdings also issued an 8% note for a credit facility permitting draws of
$720,000 per month up to $3,600,000 and a $2,871,532 working capital facility to
provide capital for operations, both with OTC. The Company borrowed $3,600,000
and $2,000,000, respectively, under the facilities as of December 31, 1996.
These notes were collateralized by the patents, patent applications, trademarks
and plant and equipment acquired in the leveraged buyout. These notes matured in
January and August 1997, respectively, and principal and accrued interest were
paid in full.
In January 1997, Holdings issued three uncollateralized, non-interest
bearing promissory notes, for a total face amount of $232,500, to its advisors
on the sale leaseback transaction (see note 6). Each promissory note is
convertible into two shares of Holdings $0.01 par value common stock and have no
specified maturity date. As of December 31, 1997, no conversion had taken place.
(9) ACCRUED LIABILITIES
Accrued liabilities at December 31, 1997 and 1996, were as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Accrued payroll..................................... $ 157,856 $ 166,853
Accrued bonuses..................................... 327,648 313,004
Accrued interest -- OTC promissory note............. 332,110 306,990
Accrued repair costs (see note 6)................... 393,000
Due to OTC.......................................... 500,000
Other............................................... 367,669 600,487
---------- ----------
$2,078,283 $1,387,334
========== ==========
</TABLE>
(10) EMPLOYEE RETIREMENT BENEFIT PLANS
Pension Plan
In December 1996, the Company decided to establish a noncontributory
defined benefit pension plan (the Plan) retroactive to the date of the leveraged
buyout. This plan has terms similar to those of the Akzo Nobel Retirement Plan
(ANRP) and covers substantially all of the Company's employees. Under the terms
of this plan employees are given credit for prior service. Pursuant to the terms
of the purchase agreement, the fair value of plan assets equal to the present
value of the accumulated pension benefit obligation (as determined by an
actuarial valuation as of the date of the leveraged buyout) were transferred
from ANRP to PerImmune's new pension trust in April 1997. In February 1998, the
Company froze the benefit accruals under the plan.
F-50
<PAGE> 133
PERIMMUNE HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(10) EMPLOYEE RETIREMENT BENEFIT PLANS (CONTINUED)
The following table sets forth the funded status of the plan at December
31, 1997 and 1996, and the composition of net periodic pension cost and
significant assumptions for the year ended December 31, 1997 and period from
August 3, 1996 through December 31, 1996:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits
of approximately $1,251,865 in 1997 and $1,133,561 in
1996................................................... $ 1,565,486 $ 1,362,971
Effect of anticipated increase in compensation levels..... 770,256 718,744
------------ ------------
Projected benefit obligation................................ 2,335,742 2,081,715
Plan assets at fair value................................... 1,360,127 1,238,260
------------ ------------
Excess of projected benefit obligation over plan assets..... (975,615) (843,455)
Unrecognized net investment gain............................ (208,287) (92,424)
------------ ------------
Total pension liability accrued................... $ (1,183,902) $ (935,879)
============ ============
Net periodic pension cost includes the following components:
Service cost -- benefits earned during the period......... $ 213,981 $ 93,606
Interest cost on projected benefit obligation............. 151,631 61,916
Actual return on assets................................... (173,965) (135,097)
Net amortization and deferred investment gain............. 56,376 92,424
------------ ------------
Net periodic pension cost......................... $ 248,023 $ 112,849
============ ============
Significant assumptions used were as follows:
Discount rate............................................. 7.5% 7.5%
Rate of increase in compensation levels (graded by age of
participant)........................................... 4.0 to 10.5% 4.0 to 10.5%
Expected rate of return of assets......................... 9.5% 9.5%
============ ============
</TABLE>
Retirement Savings Plan
The Company maintains a defined-contribution savings plan under Section
401(k) of the Internal Revenue Code. The plan covers substantially all full-time
employees. Participating employees may defer a portion of their pretax earnings
up to the Internal Revenue Service annual contribution limit. The Company
matches employee contributions according to a specified formula. The Company's
matching contributions totalled $176,098 and $72,779 for the year ended December
31, 1997 and period from August 3, 1996 through December 31, 1996, respectively.
(11) STOCKHOLDERS' EQUITY
Syncor Agreement
On April 23, 1997, Holdings issued 100 shares of its Series A Mandatorily
Redeemable Convertible Preferred Stock (par value .01/share) (Series A) to
Syncor International Corporation (Syncor) for $4,500,000 less transaction costs
of $246,215. Dividends are payable if and when declared by the Board of
Directors at the rate of 7% of the liquidation preference per annum, where the
liquidation preference is initially defined as $45,000 per share, subject to
certain adjustments. Each share of Series A may be converted into one share of
common stock before the redemption date (as defined below) at the option of the
holder, or is automatically converted on the date of a qualifying initial public
offering, as defined in the agreement. The Company shall redeem the Series A
seven years after the issuance date (the redemption date) in the event that all
shares have not been converted by this date. If such redemption occurs, the
redemption price shall
F-51
<PAGE> 134
PERIMMUNE HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(11) STOCKHOLDERS' EQUITY (CONTINUED)
equal the amount of the liquidation preference plus any declared but unpaid
dividends. No dividends on the Company's common stock may be made while any
shares of preferred stock remain outstanding. In the event of liquidation or
dissolution, Syncor shall be entitled to be paid from the assets of Holdings, in
preference to the common stockholders, but on an equal basis with Preferred
Series B stockholders, the liquidation preference plus all declared but unpaid
dividends. Holdings shall also have the right of first refusal to repurchase
these shares should Syncor wish to sell them. In connection with this issuance,
Syncor and the holders of Holding's stock were also granted certain registration
rights as contained in the registration agreement.
Mentor Agreements
On June 16, 1997, the Company issued 20 shares of Series B Mandatorily
Redeemable Convertible Preferred Stock (par value .01/share) (Series B) to
Mentor Corporation (Mentor) for $1,000,000. On December 22, 1997, the Company
issued an additional 100 shares of Series B to Mentor for $5,000,000 less
transaction costs of $500,000. Dividends are payable if and when declared by the
Board of Directors at the rate of 7% of the liquidation preference per annum,
where liquidation preferences is defined as $50,000 per share, subject to
certain adjustments. Each share of Series B preferred stock shall have the same
rights, preferences and terms as Series A preferred stock.
Options
On September 27, 1996, Holdings granted 255 stock options to members of
management at an exercise price of $2,725 per option. The options vest over
three years and expire ten years from the date of grant. On May 16, 1997,
Holdings granted an additional 2 stock options to its directors at an exercise
price of $45,000 per option. The options vest over one year and expire ten years
from the date of grant. Stock option activity is summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
OPTIONS EXERCISE PRICE
------- --------------
<S> <C> <C>
Outstanding at August 3, 1996............................
Granted.................................................. 255 $ 2,725
Exercised................................................
Canceled.................................................
--- -------
Outstanding at December 31, 1996......................... 255 2,725
Granted.................................................. 2 45,000
Exercised................................................
Canceled.................................................
--- -------
Outstanding at December 31, 1997......................... 257 $ 3,054
=== =======
Options exercisable at December 31, 1997................. 85 $ 2,725
=== =======
</TABLE>
The weighted-average remaining contractual life of outstanding options, as
of December 31, 1997 and 1996, was 8.75 and 9.75 years, respectively.
Under APB No. 25, because the exercise price of the Company's stock options
generally equals the fair value, as determined by the Company's management, of
the underlying stock on the date of grant, no compensation expense is recognized
in the Company's consolidated financial statements.
F-52
<PAGE> 135
PERIMMUNE HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(11) STOCKHOLDERS' EQUITY (CONTINUED)
Pro forma information regarding net loss is required by SFAS No. 123, and
has been determined as if the Company had accounted for its stock options under
the fair value method of that statement. The fair value of each option is
estimated at the date of grant using the Black-Scholes option pricing model with
the following weighted-average assumptions used for grants issued during the
year ended December 31, 1997, and period from August 3, 1996 through December
31, 1996:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Risk-free interest rate................................... 6.76% 6.28%
Dividend yield............................................ 0.00% 0.00%
Volatility factor......................................... 70.00% 70.00%
Expected term of option................................... 2 years 3 years
</TABLE>
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
net loss would have been as indicated in the pro forma table below:
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED AUGUST 3, 1996
DECEMBER 31, THROUGH
1997 DECEMBER 31, 1996
------------ -----------------
<S> <C> <C>
Net loss -- as reported........................ $10,825,233 $4,575,320
Net loss -- pro forma.......................... 10,963,095 4,604,552
Weighted average fair value of options
granted...................................... 16,654 1,377
</TABLE>
(12) COMMITMENTS
The Company leases certain equipment under agreements which are classified
as capital leases. Assets under capital leases at December 31, 1997 are included
in the consolidated balance sheet as follows:
<TABLE>
<S> <C>
Telephone system and equipment.............................. $180,619
Computer equipment.......................................... 32,000
--------
212,619
Less: accumulated depreciation.............................. 23,652
--------
$188,967
========
</TABLE>
The Company also leases laboratory, office and manufacturing facilities and
equipment under noncancelable operating leases which expire at various times
through January 31, 2007 (including the lease transaction described in note 6
which is also reflected in the amounts below).
F-53
<PAGE> 136
PERIMMUNE HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(12) COMMITMENTS (CONTINUED)
Future minimum lease payments, by year end and in the aggregate, under the
aforementioned capital and operating leases, are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
----------- --------
<S> <C> <C>
1998................................................ $ 1,912,291 $ 66,813
1999................................................ 1,766,447 73,976
2000................................................ 1,801,118 69,980
2001................................................ 1,847,568 5,166
2002................................................ 1,902,379
Thereafter.......................................... 8,396,465
----------- --------
$17,626,268 215,935
===========
Less: imputed interest.............................. 43,697
--------
Present value of net minimum obligations............ 172,238
Current portion..................................... 44,896
--------
Long-term obligation................................ $127,342
========
</TABLE>
Rent expense was $1,753,790 and $588,311 for the year ended December 31,
1997, and the period from August 3, 1996 through December 31, 1996,
respectively. Rent expense is included in both selling, general and
administrative expenses and costs of contracts in the consolidated statements of
operations.
In July 1997, the Company entered into a licensing agreement with a
computer system company for the non-exclusive rights to its system software and
maintenance services. The total licensing fee for the eighteen month period
ending December 31, 1998 is $210,095 and the total maintenance fee is $48,120.
As of December 31, 1997, the Company had paid $132,215 of the licensing and
maintenance fees and the remaining commitment is included in the above future
minimum lease payments.
On January 2, 1998, the Company entered into a three year employment
agreement with a key member of management. The agreement establishes a minimum
compensation level and certain other terms.
(13) INCOME TAXES
The amount computed by applying the Federal corporate income tax rate of
34% to loss before income taxes is reconciled to the provision for income taxes
as follows:
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED AUGUST 3, 1996
DECEMBER 31, THROUGH
1997 DECEMBER 31, 1996
------------ -----------------
<S> <C> <C>
Income tax benefit at statutory rates.......... $(3,680,579) $(1,555,609)
State income taxes, net of federal tax
benefit...................................... (486,573) (205,675)
Valuation allowance adjustment................. 4,167,152 1,759,661
Other.......................................... 1,623
----------- -----------
$ $
=========== ===========
</TABLE>
F-54
<PAGE> 137
PERIMMUNE HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1996
(13) INCOME TAXES (CONTINUED)
Deferred income tax (assets) and liabilities as of December 31, 1997 and
1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
------------ -----------------
<S> <C> <C>
Net operating loss carryforwards............... $(5,997,028) $(1,802,118)
Excess of tax over book basis of assets........ (95,820) (193,520)
Allowance for doubtful accounts and other
reserves..................................... (32,000) (11,539)
Accrued expenses............................... (604,924) (520,259)
Other.......................................... 23,610 (11,567)
----------- -----------
Deferred tax assets............................ (6,706,162) (2,539,003)
Valuation allowance............................ 6,706,162 2,539,003
----------- -----------
Net deferred tax asset......................... $ -- $ --
=========== ===========
</TABLE>
At December 31, 1997 the Company has a net operating loss carryforward for
both federal and state purposes of approximately $14,992,000 which expire
through the year 2012. This net operating loss carryforward relates to the
period August 3, 1996 through December 31, 1996 and for the year ended December
31, 1997 (periods subsequent to the leverage buyout) and as such, is not limited
under existing tax laws. However, this carryforward will be limited under the
Internal Revenue Code as a result of the changes in ownership of the Company as
discussed in note 14. A valuation allowance has been established to reflect the
uncertainty of future taxable income to utilize available tax loss
carryforwards.
(14) SUBSEQUENT EVENTS
Merger
On January 2, 1998, the stockholders of Holdings sold all outstanding
shares of Holding's capital stock to Intracel Corporation ("Intracel") through a
tax-free merger. With the consummation of the transaction, Holdings and
Perimmune became subsidiaries of Intracel. Intracel is a privately owned
biotechnology company developing products that improve the treatment options for
patients suffering from serious viral diseases and cancers. The aggregate
purchase price was approximately $59,471,000, payable in 5,478,654 shares of
Intracel common stock, 2,340,838 options to purchase Intracel common stock, 220
shares of Intracel Series B-1 and B-2 preferred stock, Intracel's assumption of
Perimmune's debt of approximately $11,532,000 and Intracel's assumption of other
liabilities. The acquisition will be accounted for using the purchase method of
accounting and accordingly, Intracel's financial statements will reflect
valuation of all of Perimmune's assets, including identifiable intangibles, at
their estimated fair market values. Perimmune's operating results will be
included in Intracel's consolidated operating results from the date of
acquisition.
Refinancing
On June 8, 1998 OTC negotiated with Intracel to delay the maturity of the
8% note payable until January 2000.
F-55
<PAGE> 138
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS' REPORT
The Board of Directors and Stockholders
PerImmune Holdings, Inc.:
We have audited the consolidated balance sheet of PerImmune Holdings, Inc. and
subsidiary (the Company) as of December 31, 1996, and the related consolidated
statements of operations, stockholders' deficit and cash flows for the period
from August 3, 1996 through December 31, 1996. We have also audited the
statements of operations, stockholders' equity and cash flows of the Predecessor
Company for the period from January 1, 1996 through August 2, 1996 and for the
year ended December 31, 1995. These financial statements are the responsibility
of the Companies' management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of PerImmune
Holdings, Inc. and subsidiary as of December 31, 1996, and the consolidated
results of their operations and their cash flows for the period from August 3,
1996 through December 31, 1996, and the results of operations and cash flows for
the Predecessor Company for the period from January 1, 1996 through August 2,
1996 and for the year ended December 31, 1995, in conformity with generally
accepted accounting principles.
KPMG LLP
Baltimore, Maryland
February 28, 1997, except as to
note 14 which is as of April 23, 1997
and June 16, 1997
F-56
<PAGE> 139
PERIMMUNE HOLDINGS, INC. AND SUBSIDIARY,
AND PREDECESSOR COMPANY
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
ASSETS
<TABLE>
<S> <C>
Current assets:
Cash and cash equivalents................................. $ 2,423,910
Accounts receivable:
Affiliates (Note 3).................................... 218,494
Government............................................. 395,952
Other.................................................. 646,273
Inventories (Note 5)...................................... 375,488
Costs and estimated earnings in excess of billings on
uncompleted contracts (Note 7)......................... 749,039
Other current assets...................................... 293,699
-----------
Total current assets........................................ 5,102,855
Plant and equipment, net (Note 6 and 14).................... 7,283,715
Acquisition costs, net (Note 2)............................. 1,237,500
-----------
$13,624,070
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Notes payable (Note 8).................................... $ 5,600,000
Accounts payable (Note 2)................................. 1,950,427
Accrued liabilities (Note 9).............................. 1,387,334
-----------
Total current liabilities................................... 8,937,761
Accrued pension liability (Note 10)......................... 935,879
Note payable (Note 8)....................................... 9,234,935
-----------
Total liabilities........................................... 19,108,575
Stockholders' deficit (Notes 2 and 11):
Common stock: $.01 par value; 1,000 shares authorized;
593.5 shares issued and outstanding at December 31,
1996................................................... 6
Accumulated deficit....................................... (5,484,511)
-----------
Total stockholders' deficit................................. (5,484,505)
Commitments and contingencies (Notes 3, 4 and 12)
Subsequent events (Note 14)
-----------
$13,624,070
===========
</TABLE>
See Accompanying Notes to Financial Statements.
F-57
<PAGE> 140
PERIMMUNE HOLDINGS INC. AND SUBSIDIARY,
AND PREDECESSOR COMPANY
STATEMENTS OF OPERATIONS
PERIOD FROM AUGUST 3, 1996 THROUGH DECEMBER 31, 1996, PERIOD FROM JANUARY 1,
1996 THROUGH
AUGUST 2, 1996 AND YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
PERIMMUNE
HOLDINGS PREDECESSOR COMPANY
CONSOLIDATED -----------------------------------
----------------- PERIOD FROM
PERIOD FROM JANUARY 1,
AUGUST 3, 1996 1996
THROUGH THROUGH YEAR ENDED
DECEMBER 31, 1996 AUGUST 2, 1996 DECEMBER 31, 1995
----------------- -------------- -----------------
<S> <C> <C> <C>
Revenues:
Contract research and development revenue:
Affiliates (Note 3)..................... $ 322,652 $ -- $ --
Government.............................. 2,750,942 3,420,549 6,578,019
Commercial.............................. 782,863 2,151,763 775,700
Product sales.............................. 594,157 1,631,918 1,407,274
----------- ----------- ------------
4,450,614 7,204,230 8,760,993
----------- ----------- ------------
Costs of contracts and sales:
Contract research and development costs:
Affiliates (Note 3)..................... 300,066 4,312,638 9,545,830
Government.............................. 1,968,098 3,375,008 5,778,534
Commercial.............................. 585,876 1,985,682 643,224
Costs of products sold..................... 324,886 1,102,374 1,124,239
----------- ----------- ------------
3,178,926 10,775,702 17,091,827
----------- ----------- ------------
Gross profit (loss).......................... 1,271,688 (3,571,472) (8,330,834)
Operating expenses:
Research and development (Note 1).......... 4,683,020 189,261 359,998
Selling, general and administrative........ 708,247 740,174 1,283,234
Other...................................... 10,151 14,211 28,862
----------- ----------- ------------
Total operating expenses..................... 5,401,418 943,646 1,672,094
----------- ----------- ------------
Loss from operations......................... (4,129,730) (4,515,118) (10,002,928)
Interest expense............................. (445,590) -- --
----------- ----------- ------------
Loss before income taxes..................... (4,575,320) (4,515,118) (10,002,928)
Provision for income taxes (Note 13)......... -- -- --
----------- ----------- ------------
Net loss..................................... $(4,575,320) $(4,515,118) $(10,002,928)
=========== =========== ============
</TABLE>
See Accompanying Notes to Financial Statements.
F-58
<PAGE> 141
PERIMMUNE HOLDINGS, INC. AND SUBSIDIARY,
AND PREDECESSOR COMPANY
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
PERIOD FROM AUGUST 3, 1996 THROUGH DECEMBER 31, 1996, PERIOD FROM JANUARY 1,
1996 THROUGH
AUGUST 2, 1996 AND YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK ADDITIONAL EARNINGS
------------ PAID-IN (ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT) TOTAL
------ ------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
PREDECESSOR COMPANY:
Balance at January 1, 1995............ 1,000 $ 10 $10,242,309 $ -- $ 10,242,319
Net contribution from parent.......... -- -- 10,282,014 -- 10,282,014
Net loss.............................. -- -- -- (10,002,928) (10,002,928)
----- ---- ----------- ------------ ------------
Balance at December 31, 1995.......... 1,000 10 20,524,323 (10,002,928) 10,521,405
Net contribution from parent.......... -- -- 3,154,644 -- 3,154,644
Net loss for the period from January
1, 1996 through August 2, 1996..... -- -- -- (4,515,118) (4,515,118)
----- ---- ----------- ------------ ------------
Balance at August 2, 1996............... 1,000 10 23,678,967 (14,518,046) 9,160,931
===== ==== =========== ============ ============
- -----------------------------------------------------------------------------------------------------
PERIMMUNE HOLDINGS, INC.:
Issuance of common stock of PerImmune
Holdings, Inc. on June 28, 1996.... 585 6 5,844 -- 5,850
Acquisition costs paid through
issuance of common stock (Note
2)................................. 8.5 -- 100,000 -- 100,000
Consideration paid in excess of net
assets acquired (Note 2)........... -- -- (105,844) (909,191) (1,015,035)
Net loss for the period from August 3,
1996 through December 31, 1996..... -- -- -- (4,575,320) (4,575,320)
----- ---- ----------- ------------ ------------
Balance at December 31, 1996............ 593.5 $ 6 $ -- $ (5,484,511) $ (5,484,505)
===== ==== =========== ============ ============
</TABLE>
See Accompanying Notes to Financial Statements.
F-59
<PAGE> 142
PERIMMUNE HOLDINGS, INC. AND SUBSIDIARY,
AND PREDECESSOR COMPANY
STATEMENTS OF CASH FLOWS
PERIOD FROM AUGUST 3, 1996 THROUGH DECEMBER 31, 1996, PERIOD FROM JANUARY 1,
1996 THROUGH
AUGUST 2, 1996 AND YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
PERIMMUNE HOLDINGS PREDECESSOR COMPANY
CONSOLIDATED ------------------------------------
--------------------- PERIOD FROM
PERIOD FROM AUGUST 3, JANUARY 1, 1996
1996 THROUGH THROUGH YEAR ENDED
DECEMBER 31, 1996 AUGUST 2, 1996 DECEMBER 31, 1995
--------------------- --------------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.......................................... $(4,575,320) $(4,515,118) $(10,002,928)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization.................. 298,834 270,148 476,186
Loss on disposal of equipment.................. 1,330 -- 44,342
Decrease (increase) in accounts receivable:
Affiliates................................... (156,721) 2,720,401 991,941
Government................................... 317,372 140,254 (375,722)
Other........................................ 69,742 (439,377) (115,311)
Decrease (increase) in costs and estimated
earnings in excess of billings............... 237,825 (125,687) (158,452)
Increase in inventories........................ (4,840) (57,490) (42,852)
Decrease (increase) in other current assets.... (162,592) 102,105 74,058
Increase (decrease) in accounts payable and
accrued liabilities.......................... 2,062,411 (628,419) (276,783)
Increase in accrued pension liability.......... 112,849 -- --
Increase (decrease) in advance contract
billings..................................... (5,050) (516,568) 132,402
----------- ----------- ------------
Net cash used in operating activities............... (1,804,160) (3,049,751) (9,253,119)
----------- ----------- ------------
Cash flows from investing activities:
Acquisition costs................................. (1,250,000) -- --
Capital expenditures.............................. (129,280) (104,893) (1,029,395)
----------- ----------- ------------
Net cash used in investing activities............... (1,379,280) (104,893) (1,029,395)
----------- ----------- ------------
Cash flows from financing activities:
Net contribution from parent company.............. -- 3,154,644 10,282,014
Proceeds from issuance of common stock............ 5,850 -- --
Proceeds from issuance of notes payable........... 5,600,000 -- --
----------- ----------- ------------
Net cash provided by financing activities........... 5,605,850 3,154,644 10,282,014
----------- ----------- ------------
Net increase (decrease) in cash and cash
equivalents....................................... 2,422,410 -- (500)
Cash and cash equivalents at beginning of year...... 1,500 1,500 2,000
----------- ----------- ------------
Cash and cash equivalents at end of year............ $ 2,423,910 $ 1,500 $ 1,500
=========== =========== ============
Supplementary disclosure of non-cash financing
activities:
Purchase of common stock of PerImmune, Inc. with a
note payable (Note 2).......................... $ 9,234,935 -- --
Acquisition costs paid through issuance of common
stock.......................................... 100,000 -- --
Consideration paid in excess of net assets
acquired....................................... 1,015,035 -- --
=========== =========== ============
</TABLE>
See Accompanying Notes to Financial Statements.
F-60
<PAGE> 143
PERIMMUNE HOLDINGS, INC. AND SUBSIDIARY,
AND PREDECESSOR COMPANY
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
PerImmune Holdings, Inc. and Subsidiary is composed of PerImmune Holdings,
Inc. (Holdings) and PerImmune, Inc. (the Company or PerImmune). Holdings was
incorporated on June 28, 1996 for the purpose of acquiring the Company in a
leveraged buyout transaction.
Between 1985 and 1996, the Company was owned by Organon Teknika Corporation
(the Parent Company or OTC), a subsidiary of Akzo Nobel, Inc., which is
wholly-owned by Akzo Nobel, NV (Netherlands). Prior to December 20, 1994, the
Company operated as a division of OTC, and was known as Biotechnology Research
Institute (BRI). On December 20, 1994, PerImmune (the Predecessor Company) was
formed as a wholly-owned corporation of OTC with the issuance of 1,000 shares of
common stock in exchange for all the assets and liabilities related to the
PerImmune business. Effective August 3, 1996, the Company was acquired by
Holdings through a leveraged buyout (see Note 2). Holdings has no substantive
operations.
The Company is a research oriented healthcare company that applies
biotechnology and other techniques of modern biology and chemistry to develop,
produce and sell products intended to improve the quality of life by diagnosing,
preventing and treating human disease. The Company's focus is on the development
of human monoclonal antibodies for cancer and infectious disease applications,
as well as, cancer vaccines, specific and non-specific immunotherapy and
cardiovascular disease test products. Historically, the Company's primary
sources of revenue have been research and development contracts with affiliated
companies, revenues generated from government contracts and sales of products
and services. PerImmune markets its products in the United States, Europe and
other geographic regions.
While the Company was held by OTC, it successfully developed a number of
profitable products for the Parent Company including bladder cancer therapeutic,
food pathogen and HIV tests. Most of PerImmune's products are intended for human
use and are, therefore, regulated by the United States Food and Drug
Administration.
Basis of Presentation
The consolidated financial statements as of December 31, 1996 and for the
period from August 3, 1996 through December 31, 1996 include the accounts of
Holdings and the Company. All significant intercompany accounts and transactions
have been eliminated in consolidation.
The financial statements for the year ended December 31, 1995 and for the
period from January 1, 1996 through August 2, 1996 represent the stand-alone
results of operations of PerImmune, Inc., a wholly-owned subsidiary of OTC.
Due to the change in ownership of the Company, the comparability of the
financial statements is affected. In particular, equity has changed
significantly due to the new ownership and debt related to the acquisition. Cash
and cash equivalents is also different as balances are no longer managed by the
former Parent Company. In addition, certain liabilities which were paid for by
the Parent Company and allocated to the division or the subsidiary through the
intercompany accounts have been recognized by the Company subsequent to the LBO
transaction (see Note 3). Also, certain research and development activities
performed prior to the leveraged buyout for affiliates and were reimbursed under
the contractual arrangements described in Note 3, are subsequently performed for
the Company's benefit and are not reimbursed.
F-61
<PAGE> 144
PERIMMUNE HOLDINGS, INC. AND SUBSIDIARY,
AND PREDECESSOR COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (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 and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ materially from those estimates.
Cash Equivalents
Cash equivalents consist of highly liquid investments with original
maturities of three months or less at the date of investment by the Company.
Inventories
Inventories are stated at the lower of cost or market using the FIFO cost
method.
Plant and Equipment
Plant and equipment are stated at cost. Depreciation on plant and equipment
is computed by the straight-line method over the estimated useful lives of the
assets of 3 to 7 years. Leasehold improvements are amortized on a straight-line
basis over the remaining lease term or asset useful life, whichever is shorter.
Construction in progress represents buildings, leasehold improvements and
other capital expenditures for facilities under construction and machinery
pending installation. This includes the costs of construction, plant and
machinery and costs related to obtaining appropriate regulatory approvals.
Construction in progress costs are transferred to other plant and equipment
categories when the construction/installation is completed, appropriate
regulatory approvals have been obtained and the asset is ready for use.
Acquisition Costs
Acquisition costs represent costs incurred related to the leveraged buyout
transaction (see Note 2). Amortization of acquisition costs is computed on a
straight-line basis over 5 years.
Income Taxes
The Company was included in the Akzo Nobel, Inc. consolidated Federal
income tax return for the year ended December 31, 1995, and for the period
January 1, 1996 through August 2, 1996. The Company will file a separate
consolidated Federal income tax return for the period August 3, 1996 through
December 31, 1996. Prior to August 3, 1996, deferred income taxes were reflected
in stockholders' equity (deficit).
Deferred tax assets and liabilities are determined based on differences
between the financial reporting and tax basis of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. The measurement of deferred tax assets is
reduced, if necessary, by a valuation allowance for any tax benefits which are
not expected to be realized. The effect on deferred tax assets and liabilities
of changes in tax rates is recognized in the period that such tax rate changes
are enacted.
Fair Value of Financial Instruments
The carrying amount of current financial instruments approximate fair value
because of the short-term nature of these instruments. The Company has notes
payable related to the leveraged buyout for which it is
F-62
<PAGE> 145
PERIMMUNE HOLDINGS, INC. AND SUBSIDIARY,
AND PREDECESSOR COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
not practicable to estimate the fair value of these notes since they are not
traded, and no quoted values are readily available for similar financial
instruments. However, management believes that there has been no permanent
impairment in the value of these notes.
Stock-based Compensation
The Company accounts for share option issuances in accordance with the
provisions of APB No. 25, Accounting for Stock Issued to Employees, and related
interpretations. As such, deferred compensation is recorded to the extent that
the market value of the underlying stock exceeds the exercise price on the date
of grant. Such deferred compensation is amortized over the respective vesting
periods of such option grants. On January 1, 1996, the Company adopted the
disclosure requirements of SFAS No. 123, Accounting for Stock-Based
Compensation, which allows entities to continue to apply the provisions of APB
No. 25 for financial statement reporting purposes and provide pro forma net
income (loss) footnote disclosures for employee stock option grants made in 1995
and 1996 as if the fair-value based method defined in SFAS No. 123 had been
applied. The Company has elected to continue to apply the financial statement
reporting provisions of APB No. 25 and to provide the pro forma disclosure
provisions of SFAS No. 123. Transactions with non-employees, in which goods or
services are the consideration received for the issuance of equity instruments,
are accounted for under the fair-value based method defined in SFAS No. 123 (see
Note 11).
Revenue Recognition
Revenue from sales of products is recognized on the date of delivery to
customers or upon shipment, based upon the contractual terms of applicable
agreements.
The Company has entered into various research and development and licensing
agreements (see Notes 3 and 4). Research and development revenue from
cost-reimbursement agreements is recorded as the related expenses are incurred,
up to contractual limits and when the Company meets its performance obligations
under the respective agreements. Contract revenue is recognized under other
agreements when milestones are met and the Company's performance obligations
have been satisfied in accordance with the terms of the respective agreements.
Cash received that is related to future performance under such contracts is
deferred and recognized as revenue when earned.
The Company engages in research and development contracts with Organon
Teknika International (OT BV) and Organon International (OI). Through August 2,
1996, these contracts were funded by OT BV and OI at the Company's costs plus a
7% fee. Amounts due under these funding commitments were recorded as
contributions from Parent Company as the related costs were incurred. Subsequent
to August 2, 1996, the contract revenue was recorded on a cost-plus-fixed-fee
basis.
The Company also engages in contracts with commercial entities and agencies
of the U.S. government (Department of Defense and the National Institutes of
Health) on either a cost-plus-fixed-fee, fixed price or a
cost-plus-percentage-fee basis. Revenue on cost-plus-fixed-fee, fixed price and
cost-plus-percentage-fee contracts is recognized based on the total direct and
indirect costs incurred during the period to total estimated costs using the
percentage-of-completion method. Estimates to complete are reviewed periodically
and revised as required in the period the revision is determined. Provisions are
made for the full amount of anticipated losses, if any, on all contracts in the
period in which they are first known and estimable. Contracts with the U.S.
government are subject to government audit upon contract completion and
therefore, all contract costs are potentially subject to adjustment, even after
reimbursement. Management believes adequate provisions for such adjustments, if
any, have been made in the financial statements. Expense recovery rates have
been audited through 1995.
F-63
<PAGE> 146
PERIMMUNE HOLDINGS, INC. AND SUBSIDIARY,
AND PREDECESSOR COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Research and Development, Patent and Royalty Costs
Research and development, patent and royalty costs are expensed as
incurred.
Concentration of Credit Risk
The Company performs research and development services to both affiliated
and non-affiliated entities. The Company generally does not require collateral
or other security in extending credit to its customers. The Company had three
customers which contributed ten percent or more of revenues. OTC contributed 7%,
41% and 55% of total revenues in the period from August 3, 1996 through December
31, 1996, the period from January 1, 1996 through August 2, 1996 and the year
ended 1995, respectively. The U.S. Federal Government contributed 62%, 28% and
34% of total revenues in the period from August 3, 1996 through December 31,
1996, the period from January 1, 1996 through August 2, 1996 and the year ended
1995, respectively. In addition, Baxter Healthcare Corporation contributed 14%
of the Company's revenue for the period from August 3, 1996 through December 31,
1996.
(2) LEVERAGED BUYOUT
In May 1996, Holdings engaged an investment advisor to advise Holdings with
regards to the purchase of PerImmune from Akzo Nobel, Inc., for which the
investment advisor's fee totaled $1,250,000 of which $1,225,000 is included in
accounts payable as of December 31, 1996. The investment advisor also received
8.5 shares of the Company's common stock in exchange for funding certain related
legal expenses on behalf of the Company totaling $100,000. The shares are
protected from dilution through certain future third-party financings.
Effective August 3, 1996, 100% of the Company's common stock was acquired
by Holdings from OTC in exchange for a $9,234,935 note payable (see Note 8). The
transaction was accounted for in accordance with EITF No. 88-16, Basis in
Leveraged Buyout Transactions. Because the transaction was wholly financed by
OTC, all such consideration was determined to be nonmonetary and, under the
provisions of EITF 88-16, the assets and liabilities of PerImmune were carried
over at historical cost.
Concurrent with the leveraged buyout, the ownership rights of certain
patents and other technology rights developed under the research and development
contracts with affiliates, which pertain to the business of PerImmune, were
transferred to Holdings. Under the terms of the transfer, Holdings is required
to make certain milestone payments of up to $10 million if specific future
conditions are met, and will make payments of between 5% and 7.5% of net product
sales and 50% of license revenue. Any future milestone payments will be recorded
as research and development expense when the milestone is achieved.
(3) RELATIONSHIPS WITH RELATED PARTIES
Akzo Nobel, NV
Prior to the leveraged buyout of PerImmune, ownership rights or patents
developed under the research and development contracts with OT BV and OI
belonged to these affiliates. Expenses incurred by the Company in developing and
obtaining these patents plus a fee (Note 1) were charged to Akzo Nobel, NV and
were recorded as contributions from Parent Company prior to August 3, 1996 and
as contract research and development revenue thereafter.
Organon Teknika Corporation
Prior to the incorporation of PerImmune, Inc., OTC provided certain
accounting, computer and other administrative services to PerImmune for a
management fee which was based on PerImmune's proportionate share of total OTC
expenses using a formula considering revenues, property and equipment and
payroll factors. OTC also paid all payroll taxes, medical claims, pension and
other employee benefit expenses which
F-64
<PAGE> 147
PERIMMUNE HOLDINGS, INC. AND SUBSIDIARY,
AND PREDECESSOR COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(3) RELATIONSHIPS WITH RELATED PARTIES (CONTINUED)
were allocated to PerImmune and other affiliates based on the total wages of the
respective participating entities. In addition, OTC paid PerImmune's payroll,
bonuses, general insurance, relocation and personal property tax expenses, which
were charged to PerImmune on a specific identification basis. OTC also provided
materials at its cost for certain products for resale by PerImmune. Subsequent
to PerImmune, Inc.'s incorporation, the Company was responsible for paying its
own payroll taxes, personal property taxes and certain other items. Amounts
arising from the transactions described above were treated as expenses and
contributions from Parent Company by PerImmune. Product sales to OTC were
$432,645, $605,703 and $643,434 in the period from August 3, 1996 through
December 31, 1996, the period from January 1, 1996 through August 2, 1996 and
the year ended 1995, respectively.
Effective August 3, 1996, Holdings and OTC entered into a services
agreement to provide each party, including PerImmune, with mutually agreed-upon
services. OTC will provide Holdings for varying periods of time with such
services as employee benefit plan administration, administrative regulatory
support, patent and trademark prosecution and computer and other services.
Holdings will provide OTC with various product support and research services.
Each party is compensated for services as defined in the agreement, generally
cost plus a fee. Revenues and costs related to the research activities are
recorded as affiliates revenue and costs in the statement of operations.
(4) CONTRACTS AND AGREEMENTS
PerImmune has a license agreement with the Arch Development Corporation
(Arch) to make and sell products under the patent rights for Apotek Lp(a)
developed at the University of Chicago. The agreement requires the Company to
pay Arch a royalty of 4 percent of product sales. PerImmune is also
collaborating with Stanford University to develop an active-specific
immunotherapy vaccine for low grade B-cell lymphomas.
Agreement with Baxter
On January 1, 1996, PerImmune entered into a research collaboration and
license agreement with Baxter Healthcare Corporation (Baxter) whereby the
Company agreed to provide certain research, development and pilot manufacturing
services for Baxter in exchange for reimbursement of research and development
costs, milestone payments and certain royalty payments. The Company received a
non-refundable milestone payment of $1,500,000 in January 1996 which was
recognized upon receipt as commercial contract research and development revenue.
Furthermore the Company is reimbursed for actual costs incurred plus a fee of
16% during the term of the agreement. Baxter is also obligated to make up to
$3,000,000 in additional milestone payments, if the Company achieves certain
stages of U.S. and European regulatory approvals for the serotherapy products
for infectious and autoimmune diseases under development. In addition, the
Company earns a royalty ranging between 4% and 8% of gross profit with a minimum
royalty ranging between 2% and 4% of net sales, as defined in the agreement, on
sales of products depending on whether the product is a result of previously
existing technology of the Company or new technology resulting from this
development agreement. As of December 31, 1996, no royalty or additional
milestone payments were earned. The agreement has a term of three years with an
option for a fourth year. Either party may terminate this agreement at any time
without cause. All patents and technology developed under this agreement are the
property of Baxter.
Other Contracts and Agreements
The Company has entered into various other licensing and research and
development agreements whereby they are committed to participate in research and
development projects, either on a best efforts basis or upon attainment of
certain performance milestones, as defined, or both, for various periods unless
canceled
F-65
<PAGE> 148
PERIMMUNE HOLDINGS, INC. AND SUBSIDIARY,
AND PREDECESSOR COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(4) CONTRACTS AND AGREEMENTS (CONTINUED)
by the respective parties. Such future amounts to be paid to the Company will
primarily be determined on a cost-plus basis, and are subject to specific
performance criteria.
(5) INVENTORIES
Inventories at December 31, 1996, are summarized as follows:
<TABLE>
<S> <C>
Finished goods............................................ $186,837
Work-in-process........................................... 1,337
Raw materials............................................. 187,314
--------
$375,488
========
</TABLE>
(6) PLANT AND EQUIPMENT
Plant and equipment at December 31, 1996, are summarized as follows:
<TABLE>
<S> <C>
Leasehold improvements.................................. $ 990,573
Computers............................................... 453,946
Machinery and equipment................................. 3,735,691
Construction in progress................................ 5,935,047
-----------
11,115,257
Less accumulated depreciation and amortization.......... 3,831,542
-----------
$ 7,283,715
===========
</TABLE>
(7) COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON UNCOMPLETED CONTRACTS
The following is a summary of costs and estimated earnings in excess of
billings on uncompleted contracts as of December 31, 1996:
<TABLE>
<S> <C>
Costs incurred on uncompleted contracts..................... $28,548,030
Estimated earnings.......................................... 2,154,438
-----------
Total costs and estimated earnings.......................... 30,702,468
Less:
Billings to date.......................................... 29,836,800
Allowance for losses...................................... 116,629
-----------
$ 749,039
===========
</TABLE>
(8) DEBT OBLIGATIONS
Current notes payable at December 31, 1996 is summarized as follows:
<TABLE>
<S> <C>
Secured promissory note -- OTC, 8% interest, due January
1997...................................................... $3,600,000
Working capital secured note -- OTC, 8% interest, due August
1997...................................................... 2,000,000
----------
$5,600,000
==========
</TABLE>
In August 1996, in connection with the leveraged buyout, Holdings issued an
8% secured promissory note to OTC for $9,234,935 to purchase the outstanding
common stock of PerImmune, Inc. The note matures in
F-66
<PAGE> 149
PERIMMUNE HOLDINGS, INC. AND SUBSIDIARY,
AND PREDECESSOR COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(8) DEBT OBLIGATIONS (CONTINUED)
August 1998. In addition, Holdings issued an 8% secured note for a credit
facility permitting draws of $720,000 per month up to $3,600,000 and a
$2,871,532 working capital facility to provide capital for operations, both with
OTC. The Company has borrowed $3,600,000 and $2,000,000, respectively, against
the facilities as of December 31, 1996. These notes mature on January and August
1997, respectively, when all principal and accrued interest is due. The note
which matured in January 1997 was repaid in full at that time. These notes are
all secured by the patents, patent applications and trademarks acquired in the
leveraged buyout. The secured promissory note is also secured by the plant and
equipment acquired in the leveraged buyout.
(9) ACCRUED LIABILITIES
Accrued liabilities at December 31, 1996, are summarized as follows:
<TABLE>
<S> <C>
Accrued payroll............................................. $ 166,853
Accrued bonuses............................................. 313,004
Accrued interest -- OTC promissory note..................... 306,990
Other....................................................... 600,487
----------
$1,387,334
==========
</TABLE>
(10) EMPLOYEE RETIREMENT BENEFIT PLANS
Pension Plan
The Company has a noncontributory defined benefit pension plan (the Plan)
covering substantially all of its employees. In December 1996, the Company
decided to establish a noncontributory defined benefit pension plan retroactive
to the date of the leveraged buyout. This plan has terms similar to those of the
Akzo Nobel Retirement Plan (ANRP) and covers substantially all of the Company's
employees. Under the terms of this plan employees are given credit for prior
service. Pursuant to the term of the purchase agreement, the fair value of the
plan assets equal to the present value of the accumulated pension benefit
accrued as determined by an actuarial valuation as of the date of the leveraged
buyout were transferred from the ANRP to PerImmune's new pension trust in April
1997.
F-67
<PAGE> 150
PERIMMUNE HOLDINGS, INC. AND SUBSIDIARY,
AND PREDECESSOR COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(10) EMPLOYEE RETIREMENT BENEFIT PLANS (CONTINUED)
The following table sets forth the funded status of the plan at December
31, 1996 and the composition of net periodic pension cost and significant
assumptions for the period from August 3, 1996 through December 31, 1996:
<TABLE>
<S> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested
benefits of $1,133,561................................. $1,362,971
Effect of anticipated increase in compensation levels..... 718,744
----------
Projected benefit obligation................................ 2,081,715
Plan assets at fair value................................... 1,238,260
----------
Excess of projected benefit obligation over plan assets..... (843,455)
Unrecognized prior service cost............................. --
Unrecognized net investment gain............................ (92,424)
----------
Total pension liability..................................... $ (935,879)
==========
Net periodic pension cost includes the following components:
Service cost -- benefits earned during the period......... $ 93,606
Interest cost on projected benefit obligation............. 61,916
Actual return on assets................................... (135,097)
Net amortization and deferred investment gain............. 92,424
----------
Net periodic pension cost................................... $ 112,849
==========
</TABLE>
Significant assumptions used were as follows:
<TABLE>
<S> <C>
Discount rate............................................... 7.5%
Rate of increase in compensation levels (graded by age of
participant).............................................. 4.0 to 10.5%
Expected rate of return of assets........................... 9.5%
============
</TABLE>
Retirement Savings Plan
The Company maintains a defined-contribution savings plan under Section
401(k) of the Internal Revenue Code. The plan covers substantially all full-time
employees. Participating employees may defer a portion of their pretax earnings
up to the Internal Revenue Service annual contribution limit. The Company
matches employee contributions according to a specified formula. The Company's
matching contributions totaled $72,779, $101,890 and $168,040 in the period from
August 3, 1996 through December 31, 1996, the period from January 1, 1996
through August 2, 1996, and the year ended 1995, respectively.
(11) STOCKHOLDERS' EQUITY
Common Stock
On December 20, 1994, PerImmune, Inc. was incorporated and authorized
100,000 shares and issued 1,000 shares of common stock.
On June 28, 1996, PerImmune Holdings, Inc. was formed. A total of 1,000
shares of common stock were authorized and 585 shares were issued for $105,850.
Holding's investment advisor was also issued 8.5 shares of common stock in 1996
in connection with the leveraged buyout (see Note 2).
F-68
<PAGE> 151
PERIMMUNE HOLDINGS, INC. AND SUBSIDIARY,
AND PREDECESSOR COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(11) STOCKHOLDERS' EQUITY (CONTINUED)
Options
In August 1996, Holdings granted 255 stock options to members of
management. The options vest over three years and expire ten years from the date
of grant. Stock option activity is summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
OPTIONS EXERCISE PRICE
------- ----------------
<S> <C> <C>
Outstanding at August 3, 1996....................... -- $ --
Granted............................................. 255 2,725
Exercised........................................... -- --
Canceled............................................ -- --
--- ------
Outstanding at December 31, 1996.................... 255 $2,725
=== ======
Options exercisable at December 31, 1996............ -- --
=== ======
</TABLE>
Options outstanding and exercisable by price range as of December 31, 1996
are as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------------- -----------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
RANGE OF OUTSTANDING AVERAGE AVERAGE EXERCISABLE AVERAGE
EXERCISE AS OF REMAINING EXERCISE AS OF EXERCISE
PRICES DECEMBER 31, 1996 CONTRACTUAL LIFE PRICES DECEMBER 31, 1996 PRICES
-------- ----------------- ---------------- --------- ----------------- ---------
<S> <C> <C> <C> <C> <C> <C>
$2,725 255 9.75 years $2,725 -- --
====== === ========== ====== === ======
</TABLE>
Pro forma Option Information
The per share weighted average fair value of all stock options granted
during 1996 was $1,377 on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions: expected
dividend yield 0%, risk-free interest rate of 6.28%, volatility of 70% and an
expected life of 3 years.
The Company applies APB No. 25 and related interpretations in accounting
for its stock options granted to employees. Accordingly, the Company has
recognized no compensation expense in connection with its stock option grants
for the period from August 3, 1996 through December 31, 1996, the period from
January 1, 1996 through August 2, 1996, and the year ended 1995. Had
compensation expense been determined based on the fair value at date of grant
for its stock option under SFAS No. 123, net income (loss) would have been
reported as the pro forma amounts indicated below:
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
AUGUST 3, 1996 JANUARY 1, 1996
THROUGH THROUGH YEAR ENDED
NET LOSS DECEMBER 31, 1996 AUGUST 2, 1996 1995
-------- ----------------- --------------- ------------
<S> <C> <C> <C>
As reported.................................... $(4,575,320) $(4,515,118) $(10,002,928)
----------- ----------- ------------
Pro forma...................................... $(4,604,552) $(4,515,118) $(10,002,928)
=========== =========== ============
</TABLE>
Pro forma net income (loss) reflects only options granted from August 31,
1996 through December 31, 1996. The effects of applying SFAS No. 123 in the pro
forma net income (loss) above may not be representative of the effects on such
pro forma information for future years.
F-69
<PAGE> 152
PERIMMUNE HOLDINGS, INC. AND SUBSIDIARY,
AND PREDECESSOR COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(12) COMMITMENTS
PerImmune leases laboratory, office and manufacturing facilities and
equipment under noncancellable operating leases which expire at various times
through January 1, 2007 (including the lease transaction described in Note 14
which is also reflected in the amounts below).
Future minimum lease payments under these leases are as follows:
<TABLE>
<S> <C>
1997............................................ $ 1,744,809
1998............................................ 1,797,334
1999............................................ 1,771,120
2000............................................ 1,798,251
2001............................................ 1,849,638
Thereafter...................................... 10,298,844
-----------
$19,259,996
===========
</TABLE>
Rent expense was $588,311 for the period from August 3, 1996 through
December 31, 1996, $782,088 for the period from January 1, 1996 through August
2, 1996 and $1,238,370 for the year ended December 31, 1995. Rent expense is
included in both selling, general and administrative expenses and costs of
contracts in the statements of operations.
(13) INCOME TAXES
The Company was included in the Akzo Nobel, Inc., consolidated Federal
income tax return for the year ended December 31, 1995, and for the period
January 1, 1996 through August 2, 1996. They are presented below, however, on a
separate company basis. The Company will file a separate consolidated Federal
income tax return for the period August 3, 1996 through December 31, 1996.
The amount computed by applying the Federal corporate income tax rate of
34% to loss before income taxes is reconciled to the provision for income taxes
as follows:
<TABLE>
<CAPTION>
PERIMMUNE
HOLDINGS
CONSOLIDATED PREDECESSOR COMPANY
------------ ---------------------------
PERIOD FROM PERIOD FROM
AUGUST 3, JANUARY 1,
1996 THROUGH 1996 THROUGH
DECEMBER 31, AUGUST 2, YEAR ENDED
1996 1996 1995
------------ ------------ -----------
<S> <C> <C> <C>
Income tax benefit computed at statutory
rates..................................... $(1,555,609) $(1,535,140) $(3,400,996)
State income tax benefit net of Federal
tax....................................... (205,675) (206,748) (472,696)
Expenses not deductible for tax purposes.... 1,623 3,036 3,818
Valuation allowance adjustment.............. 1,759,661 1,738,852 3,869,874
----------- ----------- -----------
$ -- $ -- $ --
=========== =========== ===========
</TABLE>
F-70
<PAGE> 153
PERIMMUNE HOLDINGS, INC. AND SUBSIDIARY,
AND PREDECESSOR COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(13) INCOME TAXES (CONTINUED)
Deferred income tax (assets)and liabilities as of December 31, 1996 are
summarized as follows:
<TABLE>
<S> <C>
Excess of book over tax (tax over book) basis of assets..... $ (193,529)
Allowance for doubtful accounts and other reserves.......... (11,539)
Accrued expenses............................................ (520,257)
Non-SRLY net operating loss carryovers...................... (1,802,118)
Other....................................................... (11,567)
-----------
(2,539,010)
Valuation allowance......................................... 2,539,010
-----------
$ --
===========
</TABLE>
Prior to the leveraged buyout, the provision for Federal and state income
taxes is recorded using the overall effective tax rate of the consolidated group
applied to the Company's pre-tax earnings before adjustments for permanent
differences. Deferred income tax assets and liabilities are recorded for the
Company's temporary differences using the same effective tax rate. Prior to the
leveraged buyout, the total provision for income taxes represents income taxes
currently payable to the former Parent Company and has been treated as
contributions from parent.
At December 31, 1996, the Company has a net operating loss carryforward for
both Federal and state purposes of $4,681,000 which expires in the year 2011.
This net operating loss carryforward relates to the period August 3, 1996
through December 31, 1996 and as such, is not limited under existing tax laws.
However, this carryforward may be significantly limited under the Internal
Revenue Code as a result of future ownership changes by the Company.
It is more likely than not that the net deferred tax assets reflected above
will not be realized in future years. Therefore, a valuation allowance of
$2,539,010 has been established for the year ended December 31, 1996. The
$478,887 difference between the $2,107,355 net increase in the valuation
allowance from December 31, 1995 to December 31, 1996, and the $1,628,468
increase that reconciles expected to actual tax expense in 1996, is related to
the increase in deferred tax assets which results from the LBO transaction.
Future reductions of the valuation allowance will be reported as reductions of
income tax expense in the period(s) in which it becomes more likely than not
that the tax benefits will be realized.
(14) SUBSEQUENT EVENTS
Sale Leaseback of Facility
On January 15, 1997, PerImmune exercised its option to purchase the land
and building it occupies in Rockville, Maryland for a pre-established price of
$7.9 million. Concurrent to the purchase, PerImmune sold the property to a
third-party (Buyer). The sale included part of the building, improvements,
certain equipment and other items previously owned by the Company and shown in
Plant and Equipment at December 31, 1996. The sales price excluding settlement
and transfer costs was $14,150,000, and the loss resulting from this transaction
was approximately $350,000, after consideration of estimated costs for repairs
described below. The Company received approximately $5.2 million at the closing
of the transaction. This transaction will be treated as a sale-leaseback. As
such, the plant and equipment previously owned by the Company will be removed
from the balance sheet and the loss will be recognized immediately.
In conjunction with the sale, PerImmune has agreed to make certain repairs
at its own expense and to obtain the release of certain liens against the
property. To ensure compliance with these provisions of the agreement, PerImmune
deposited $500,000 and $100,000 into escrow accounts. In addition, PerImmune has
F-71
<PAGE> 154
PERIMMUNE HOLDINGS, INC. AND SUBSIDIARY,
AND PREDECESSOR COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(14) SUBSEQUENT EVENTS (CONTINUED)
agreed to deposit, on a monthly basis from February 1997 through January 2002,
$3,333 for costs to be used for elevator repairs and refurbishment. The Company
is entitled to any amounts not spent for the described purpose.
PerImmune also issued to Buyer in connection with the sale leaseback
transaction a warrant for the purchase of 25,000 shares of PerImmune common
stock if the company consummates an initial public offering (IPO) or if certain
other events occur, such as a capital reorganization, recapitalization,
dissolution or liquidation. The warrants are exercisable on or for three years
following the date of one of the previously described events. The warrants
expire in July 1999 if one of the above events has not occurred. The warrant
purchase price in an IPO would be the offering price and in one of the other
events described above, the price would be determined by a formula described in
the warrant agreement.
In January 1997, Holdings issued three uncollateralized, non-interest
bearing promissory notes, for a total face amount of $232,500, to its advisors
on the sale leaseback transaction. Each promissory note is convertible into two
shares of Holdings $0.01 par value common stock and have no specified maturity
date.
Syncor Agreement
On April 23, 1997, Holdings issued 100 shares of its Series A Mandatorily
Redeemable Convertible Preferred Stock (par value .01/share) (Series A) to
Syncor International Corporation (Syncor) for $4.5 million. Dividends are
payable if and when declared by the Board of Directors at the rate of 7% of the
Liquidation Preference per annum, where the Liquidation Preference is initially
defined as $45,000, subject to certain adjustments. Each share of Series A may
be converted into common stock before the Redemption Date (as defined below) at
the option of the holder, or is automatically converted on the date of a
qualifying initial public offering, using a conversion rate as defined in the
agreement. The Company shall redeem the Series A five years after the issuance
date (the Redemption Date) in the event that all shares have not been converted
by this date. If such redemption occurs, the redemption price shall equal the
amount of the Liquidation Preference plus any declared but unpaid dividends. In
the event of liquidation or dissolution, Syncor shall be entitled to be paid
from the assets of Holdings, in preference to the common stockholders, but on an
equal basis with Series B stockholders (see below), the Liquidation Preference
plus all declared but unpaid dividends. Holdings shall also have the right of
first refusal to repurchase these shares should Syncor wish to sell them. In
connection with this issuance, Syncor and the holders of Holding's common stock
were also granted certain registration rights as contained in the Registration
Rights Agreement.
On April 1, 1997, the Company also entered into a distribution agreement
for certain products with Syncor. Under this agreement, Syncor will pay the
Company 50% of net sales, as defined, and right of return exists in certain
situations. The Company is obligated annually to spend 15% of sales of products
covered by this agreement on research and development to improve upon the
existing or develop new products. The Company will also reimburse Syncor for all
expenses related to marketing these products up to $1.5 million, plus 50% of
amounts over $1.5 million provided the expenditures are in accordance with the
annual market plan as prepared by the two companies. This agreement has a term
of five years and is renewable for two additional two-year terms.
Mentor Agreement
On June 16, 1997, the Company issued 20 shares of Series B Mandatorily
Redeemable Convertible Preferred Stock (par value .01/share) (Series B) to
Mentor Corporation (Mentor) for $1 million. Dividends are payable if and when
declared by the Board of Directors at the rate of 7% of the Liquidation
Preference per annum, where Liquidation Preference is defined as $50,000,
subject to certain adjustments. Each share of
F-72
<PAGE> 155
PERIMMUNE HOLDINGS, INC. AND SUBSIDIARY,
AND PREDECESSOR COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(14) SUBSEQUENT EVENTS (CONTINUED)
Series B shall have the same rights, preferences and terms as Series A described
above. Series A and B shall have equal preference.
On June 16, 1997, the Company also entered into a distribution agreement
for certain products with Mentor with an initial term of 5 years. Under this
agreement, Mentor will pay the Company 50% of net sales, as defined in the
agreement. The Company is obligated to provide up to 12,000 units of products
per year to be used by Mentor for promotional purposes, which will not be
reimbursed by Mentor.
F-73
<PAGE> 156
- ---------------------------------------------------------
- ---------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDER
OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER TO BUY THE SHARES BY ANYONE IN ANY
JURISDICTION WHERE SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE
PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL CREATE ANY
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary............................ 3
Risk Factors.................................. 8
The Company................................... 20
Use of Proceeds............................... 21
Dividend Policy............................... 21
Capitalization................................ 22
Dilution...................................... 23
Pro Forma Consolidated Financial
Information................................. 24
Selected Financial Data....................... 25
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................. 27
Business...................................... 33
Management.................................... 63
Principal and Selling Stockholders............ 71
Description of Capital Stock.................. 73
Shares Eligible for Future Sale............... 78
Underwriting.................................. 79
Legal Matters................................. 80
Experts....................................... 80
Available Information......................... 81
Index to Consolidated Financial Statements.... F-1
</TABLE>
UNTIL , 1999 (25 DAYS AFTER THE COMMENCEMENT OF THIS
OFFERING), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- ---------------------------------------------------------
- ---------------------------------------------------------
- ---------------------------------------------------------
- ---------------------------------------------------------
4,000,000 SHARES
LOGO
COMMON STOCK
------------------------
PROSPECTUS
------------------------
DONALDSON, LUFKIN & JENRETTE
PIPER JAFFRAY INC.
, 1999
- ---------------------------------------------------------
- ---------------------------------------------------------
<PAGE> 157
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Other expenses in connection with the issuance and distribution of the
securities to be registered hereunder, all of which will be paid by the
Registrant, will be substantially as follows:
<TABLE>
<CAPTION>
ITEM AMOUNT
<S> <C>
Commission Registration Fee................................. $17,602
*Nasdaq National Market Filing Fee.......................... 90,000
*NASD filing fee............................................ 6,480
*Blue Sky Fees and Expenses (including legal fees).......... +
*Accounting Fees and Expenses............................... +
*Legal Fees and Expenses.................................... 600,000
*Printing and Engraving..................................... +
*Registrar and Transfer Agent's Fees........................ +
*Underwriters' Expenses..................................... +
*Miscellaneous Expenses..................................... +
-------
Total............................................. $ +
=======
</TABLE>
- ---------------
* Estimated
+ To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Certificate of Incorporation provides that a director of the
Company shall not be personally liable to the Company or its stockholders for
monetary damages for breach of the fiduciary duty as a director, except for
liability, to the extent imposed by applicable law, for: (i) any breach of the
director's duty of loyalty to the Company or its stockholders; (ii) acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law; (iii) liability for payments of dividends or stock purchases
or redemptions in violation of Section 174 of the Delaware Law; or (iv) any
transaction from which the director derived an improper personal benefit. The
Bylaws provide for the indemnification of officers and directors to the full
extent permitted by the DGCL, as it now exists or may in the future by amended
(but, in the case of such amendment, only to the extent that such amendment
permits the Company to provide broader indemnification rights than permitted
prior thereto), or by other applicable law as then in effect, against all
expenses, liabilities and losses actually and reasonably incurred or suffered in
connection with service for or on behalf of the Company, including payment of
expenses in defending an action or proceeding upon receipt of any undertaking by
the person indemnified to repay such payment if it is ultimately determined that
such person is not entitled to indemnification. Such indemnification will
continue to an indemnified person who has ceased to be a director, officer,
employee or agent and will inure to the benefit of the indemnified person's
heirs, executors and administrators.
The Company's Bylaws provide that the Company may maintain insurance, at
its expense, to protect itself and any indemnified party against any expense,
liability or loss, whether or not the Company would have the power to indemnify
such person against such expense, liability or loss under the DGCL. The Company,
without further stockholder approval, may enter into contracts with any
indemnified person in furtherance of the indemnification provisions contained in
the Bylaws and may create a trust fund, grant a security interest or use other
means (including without limitation, a letter of credit) to ensure the payment
of such amounts as may be necessary to effect indemnification as provided in the
Bylaws.
The Company has agreed to indemnify the Underwriters and their controlling
persons, and the Underwriters have agreed to indemnify the Company and its
controlling persons, against certain liabilities,
II-1
<PAGE> 158
including liabilities under the Securities Act. Reference is made to the
Underwriting Agreement filed as Exhibit 1 hereto.
For information regarding the Company's undertaking to submit to
adjudication the issue of indemnification for violation of the securities, see
Item 17 hereof.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
All references in this Item 15 to common stock reflect a 2-for-1 split
effective December 31, 1997 and a 2-for-3 reverse stock split approved by the
Board of Directors on December 28, 1998. All sales, unless otherwise noted, were
made in reliance on Section 4(2) of the Securities Act and/or Regulation D or
Rule 701 promulgated under the Securities Act and were made without general
solicitation or advertising. The purchasers were sophisticated investors with
access to all relevant information necessary to evaluate these investments, and
who represented to the Registrant that the shares were being acquired for
investment.
COMMON STOCK
<TABLE>
<CAPTION>
DATE OF ISSUANCE SHARES ISSUED CONSIDERATION PAID NAME OF PURCHASER
- ------------------------------ ------------- ------------------ -----------------------------------
<S> <C> <C> <C>
April 8, 1996................. 2,149 $8,050 Walter Kiel
(exercise ($2.50
of options) exercise price)
October 18, 1996.............. 591 $3,937 Perry Rosenthal
November 18, 1997............. 212,099 $1,431,657 CoreStates Enterprise Fund
74,221 $500,994 Thomas Ole Dial
81,400 $549,450 Dublind Partners Inc.
924 $6,327 John Erdman
39,183 $264,483 Scott Fleming
38,257 $258,237 Mark Lieb
40,149 $271,008 Charles Lindsay (Gales & Co.)
2,962 $19,998 Charles Lindsay C/F Maxwell Lindsay
2,962 $19,998 Charles Lindsay C/F Michael Lindsay
2,962 $19,998 Charles Lindsay C/F Sally Lindsay
2,962 $19,998 Charles Lindsay C/F Susan Lindsay
148,148 $999,999 Northstar Balance Sheet Opportunities
22,221 $149,994 Nestor Olivier
129,659 $875,196 Security Insurance Company of
Hartford
463 $3,123 William Trice
7,407 $715,833 Charles Lindsay (Gales & Co.)
November 18, 1997 (exercise of 924 $5,544 John Erdman
warrants)................... ($4 exercise
price)
924 $5,544 Mark Lieb
1,849 $11,096 Scott Fleming
20,800 $124,800 Security Insurance Company of
Hartford
December 31, 1997............. 70,794 $60,000 Simon McKenzie
January 2, 1998 (merger)...... 57,686 9.5 shares of Craigie Company
PerImmune
Holdings, Inc.
Common Stock
</TABLE>
II-2
<PAGE> 159
<TABLE>
<CAPTION>
DATE OF ISSUANCE SHARES ISSUED CONSIDERATION PAID NAME OF PURCHASER
- ------------------------------ ------------- ------------------ -----------------------------------
<S> <C> <C> <C>
3,594,751 592 shares of Mike Hanna (voting trust)
PerImmune
Holdings, Inc.
Common Stock
March 11, 1998................ 46,683 $315,108 Dublind Securities
April 29, 1998................ 26,666 $100,000 Alexander Klibanov
(exercise
of option)
May 26, 1998.................. 45,421 $20,438 Janet Hanlon
(exercise
option)
June 9, 1998.................. 133 $500 Stephen Vehslage
(exercise
of option)
</TABLE>
PREFERRED STOCK
Series A-1 Preferred
<TABLE>
<CAPTION>
COMMON SHARES
SHARES CONSIDERATION ISSUABLE UPON
DATE OF ISSUANCE ISSUED PAID CONVERSION NAME OF PURCHASER
---------------- ------- ------------- ------------- --------------------------------------
<S> <C> <C> <C> <C>
September 22, 1995... 6,250 $ 50,000 8,333 Charles J. Lindsay,
IRA Acct
43,750 $ 350,000 58,333 Dublind Partners
6,250 $ 50,000 8,333 Mark Lieb
200,000 $1,600,000 266,666 Northstar Advantage
High Total Return Fund II
12,500 $ 100,000 16,666 Northstar High Yield Fund
12,500 $ 100,000 16,666 Raymond Schuyler
12,500 $ 100,000 16,666 Scott Fleming
125,000 $1,000,000 166,666 Security Insurance Company of Hartford
125,000 $1,000,000 166,666 TD Partners
November 18, 1995.... 125,000 $1,000,000 166,666 Credianstalt American Corporation
</TABLE>
Series A-2 Preferred
<TABLE>
<CAPTION>
COMMON SHARES
SHARES CONSIDERATION ISSUABLE UPON
DATE OF ISSUANCE ISSUED PAID CONVERSION NAME OF PURCHASER
---------------- ------- ------------- ---------------- -----------------
<S> <C> <C> <C> <C>
March 12, 1997....................... 40,000 $4,000,000 Series A-2 not Northstar High
convertible into Total Return Fund
common stock
</TABLE>
Series A-3 Preferred
<TABLE>
<CAPTION>
COMMON SHARES
SHARES CONSIDERATION ISSUABLE UPON
DATE OF ISSUANCE ISSUED PAID CONVERSION NAME OF PURCHASER
---------------- ------- ----------------- ------------- -----------------
<S> <C> <C> <C> <C>
June 25, 1997.................... 139,390 Series A-1 185,853 Creditanstalt
Preferred Shares American
exchanged for an Corporation
equal number of
Series A-3
Preferred Shares
</TABLE>
II-3
<PAGE> 160
Series B-1 Preferred
<TABLE>
<CAPTION>
COMMON SHARES
SHARES CONSIDERATION ISSUABLE UPON
DATE OF ISSUANCE ISSUED PAID CONVERSION NAME OF PURCHASER
---------------- ------- ----------------- ------------- -----------------
<S> <C> <C> <C> <C>
January 2, 1998.................. 100 100 Shares of 607,288 Syncor Corporation
PerImmune
Holdings, Inc.
Series A
Preferred Stock
</TABLE>
Series B-2 Preferred
<TABLE>
<CAPTION>
COMMON SHARES
SHARES CONSIDERATION ISSUABLE UPON
DATE OF ISSUANCE ISSUED PAID CONVERSION NAME OF PURCHASER
---------------- ------- ------------------ ------------- -----------------
<S> <C> <C> <C> <C>
January 2, 1998................. 120 120 Shares of Per- 728,598 Mentor Corporation
Immune Holdings,
Inc. Series B
Convertible
Preferred Stock
</TABLE>
OPTIONS
<TABLE>
<CAPTION>
NUMBER OF
OPTIONS EXERCISE
DATE OF GRANT GRANTED PRICE/SHARE NAME OF GRANTEE
------------- ---------- ----------- ---------------
<S> <C> <C> <C>
January 8, 1996....................... 13,333 $ 3.75 Scott Bleczinski
July 1, 1996.......................... 40,000 $ 3.75 Matthew Root
August 14, 1996....................... 13,333 $ 3.75 Ingo Beck
6,666 $ 3.75 Rebecca Fuller
September 1, 1996..................... 13,333 $ 6.00 Cheryl Cataldo
13,333 $ 6.00 Glenn Pilkington
13,333 $ 3.75 Raymond Schuyler
20,000 $ 3.75 Bruce Jensen
40,000 $ 3.75 William Wong
2,666 $ 3.75 Patricia Walker
December 6, 1996...................... 3,000 $ 3.75 Patricia Harris
September 12, 1997.................... 13,333 $ 6.75 Pete Finlon
December 31, 1997..................... 6,666 $ 6.75 Ingo Beck
13,333 $ 6.75 Larry Bloom
13,333 $ 6.75 Pete Carbonaro
13,333 $ 6.75 Michael Carrcasino
3,333 $ 6.75 Alex Denogean
3,333 $ 6.75 John Kohl
3,333 $ 6.75 Scott Snyder
13,333 $ 6.75 Persis Strong
3,333 $ 6.75 Debbie Zumerling
January 2, 1998....................... 1,560,554 $ 6.75 Holders of PerImmune
Holdings Options
January 12, 1998...................... 13,333 $ 6.75 Peggy McGaw
February 16, 1998..................... 66,666 $11.25 Robert Pevenstein
March 9, 1998......................... 66,666 $11.25 Daniel Reale
April 8, 1998......................... 10,000 $11.25 Larry Bloom
10,000 $11.25 Persis Strong
1,666 $11.25 Roger Sweaney
May 8, 1998........................... 3,333 $11.25 Michael Chioti
16,666 $11.25 Herbert C. Hoover
3,333 $11.25 Ronald Levy
3,333 $11.25 Kim H. Lyerly
</TABLE>
II-4
<PAGE> 161
<TABLE>
<CAPTION>
NUMBER OF
OPTIONS EXERCISE
DATE OF GRANT GRANTED PRICE/SHARE NAME OF GRANTEE
------------- ---------- ----------- ---------------
<S> <C> <C> <C>
16,666 $11.25 H.M. Pinedo
3,333 $11.25 Bruce Wolf
June 15, 1998......................... 66,666 $15.00 Carl Foster
June 22, 1998......................... 6,666 $15.00 Carrie Mulherin
August 25, 1998....................... 23,333 $15.00 Patricia Barnett
August 31, 1998....................... 7,500 $15.00 Roger Sweaney
December 28, 1998..................... 16,666 $15.00 Joseph W. Bartlett
December 28, 1998..................... 16,667 $15.00 Lawerence Bloom
</TABLE>
WARRANTS
<TABLE>
<CAPTION>
NUMBER OF
WARRANTS
DATE OF ISSUANCE ISSUED EXERCISE PRICE NAME OF PURCHASER
---------------- --------- -------------- -----------------
<S> <C> <C> <C>
September 27, 1995................... 115,282 $ 6.00 Dublind Partners
November 21, 1995.................... 121,569 $10.50 Creditanstalt American
Corporation
125,347 $10.50 Northstar High Yield Fund
June 11, 1996........................ 212,097 $10.50 CoreStates Enterprise Fund
June 21, 1996........................ 106,049 $10.50 Northstar Advantage High Total
Return Fund
January 2, 1998...................... 452,894 $ 6.75 Simon McKenzie
April 1, 1998........................ 32,711 $11.46 Northstar High Total Return
Fund
December 28, 1995.................... 32,711 $11.46 Northstar High Yield Fund
August 25, 1998...................... 118,903 $15.00 Northstar High Yield Fund
686,996 $15.00 Northstar High Total Return
Fund
237,806 $15.00 Northstar High Total Return
Fund II
39,634 $15.00 Northstar Strategic Income
Fund
</TABLE>
II-5
<PAGE> 162
PROMISSORY NOTES
<TABLE>
<CAPTION>
DATE OF ISSUANCE PRINCIPAL AMOUNT AMOUNT OF DISCOUNT NAME OF PAYEE
---------------- ---------------- ------------------ -------------
<S> <C> <C> <C>
October 1995................. $ 1,500,000 none Zynaxis, Inc.
November 16, 1995............ $ 9,000,000 none Creditanstalt Bankervein
November 15, 1995............ $ 4,667,000 none Dade International, Inc.
December 1995................ $ 6,265,000 $1,565,000 Northstar Advantage High Total
Return Fund
December 6, 1996............. $ 500,000 none Transamerica Business Credit
Corporation
June 11, 1996................ $ 4,000,000 none Corestates Enterprise Fund
June 21, 1996................ $ 2,000,000 $ 140,000 Northstar Advantage High Total
Return Fund
September 30, 1997........... $ 1,500,000 none Washington Economic Development
Finance Authority
April 1, 1998................ $ 4,000,000 none Northstar High Yield Fund
April 1, 1998................ $ 6,000,000 none Northstar High Total Return Fund
II
August 1998.................. $ 3,841,463 none Northstar High Yield
Fund
$22,195,122 none Northstar High Total
Return Fund
$ 7,682,927 none Northstar High Total
Return Fund II
$ 1,280,488 none Northstar Strategic
Income Fund
$ 658,537 none Northstar High Yield
Fund
$ 3,804,878 none Northstar High Total
Return Fund
$ 1,317,073 none Northstar High Total
Return Fund II
$ 219,512 none Northstar Strategic
Income Fund
</TABLE>
II-6
<PAGE> 163
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE.
I. EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
<S> <C>
1 Form of Underwriting Agreement by and among the
Representatives, the Selling Stockholder and the Company.
3.1 Amended and Restated Certificate of Incorporation of the
Company, as amended.
3.2 Bylaws of the Company.
4.1 Reference is made to Exhibits 3.1 and 3.2.
4.2 Specimen Common Stock Certificate.+
4.3 Registration Rights Agreement, dated as of August 25, 1998,
by and among Intracel Corporation and Northstar High Total
Return Fund, Northstar High Total Return Fund II, Northstar
High Yield Fund, Northstar Strategic Income Fund, Northstar
Balance Sheet Opportunities.*
5 Opinion of Morrison & Foerster LLP.
10.1 Lease, dated January 15, 1997, between PW Acquisitions 1,
LLC and PerImmune, Inc.*
10.2 Lease Agreement, dated April 30, 1991, between Ward
Corporation and Organon Teknika Corporation.*
10.3 Commercial Lease Agreement, dated June 1, 1993, between
Rowley Enterprises, Inc. and Polymer Technology
International for the property located at 1871 NW Gilman
Blvd., Issaquah, Washington.*
10.4 Lease Agreement, dated August 22, 1988, between Issaquah #1
Limited Partnership and Baxter Healthcare Corporation for
the premises located at I-90 Lake Place, 2005 N.W. Sammish
Road, Issaquah, Washington.*
10.5 Lease, dated February 1, 1998, between P.K. Projects Ltd.
and Intracel Corporation for the premises located at
Commerce Parkway, Richmond, British Colombia.*
10.6 Agreement and Plan of Reorganization, dated November 26,
1997, among PerImmune Holdings, Inc., Intracel Corporation
and Intracel Acquisition Sub, Inc.*
10.7 Employment Agreement, dated January 2, 1998, between Michael
G. Hanna, Jr. and Intracel Corporation.*
10.8 Employment Agreement, dated January 2, 1998, between Simon
R. McKenzie and Intracel Corporation.*
10.9 Employment Agreement between Daniel Reale and Intracel
Corporation.*
10.10 Employment Agreement between Persis Strong and Intracel
Corporation.+
10.11 Employment Agreement between Lawrence Bloom and Intracel
Corporation.+
10.12 Employment Agreement between Carl Foster and Intracel
Corporation.*
10.13 Preferred Stock Purchase Agreement, dated as of March 12,
1997, between Intracel Corporation and Northstar High Total
Return Fund.*
10.14 Note and Series A-IV Warrant Purchase Agreement, dated as of
June 21, 1996, between Intracel Corporation and Northstar
Advantage High Total Return Fund.*
10.15 Note and Series A-III Warrant Purchase Agreement, dated as
of June 11, 1996, between Intracel Corporation and
CoreStates Enterprise Fund.*
10.16 Note and Series A-V Warrant Purchase Agreement, dated as of
April 1, 1998, between Intracel Corporation and Northstar
High Yield Fund and Northstar High Total Return Fund II.*
10.17 Loan and Security Agreement, dated September 30, 1997,
between the Washington Economic Development Finance
Authority and Intracel Corporation.*
10.18 Tax Certificate and Regulatory Agreement, dated September
11, 1997 between the Washington Economic Development Finance
Authority and Intracel Corporation.*
</TABLE>
II-7
<PAGE> 164
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
<S> <C>
10.19 Stock Purchase Agreement, dated July 1, 1996, between
PerImmune Holdings, Inc. and Organon Teknika Corporation.*
10.20 Agreements between the Intracel Corporation and Thomas
Jefferson University.*
10.21 Product Development and License Agreement, between
PerImmune, Inc, and Sigma Diagnostics, Inc.*
10.22 Research, Collaboration and Distribution Agreement, dated
December 22, 1997, between PerImmune, Inc. and Mentor
Corporation.*
10.23 Distribution Agreement, dated June 16, 1997, between
PerImmune, Inc. and Mentor Corporation.*
10.24 Intellectual Property Agreement, dated August 2, 1996, by
and among Akzo Nobel Pharma International, B.V. and
PerImmune Holdings, Inc.*
10.25 Intellectual Property Security Agreement, dated August 13,
1996, by and among PerImmune Holdings, Inc., PerImmune,
Inc., Akzo Nobel Pharma International, B.V. and Organon
Teknika Corporation.*
10.26 1989 Stock Option Plan.
10.27 1996 Stock Option Plan of PerImmune Holdings, Inc.
10.28 1999 Stock Incentive Plan.
10.29 Securities Purchase Agreement, dated as of August 25, 1998,
among Intracel Corporation, Bartels, Inc., PerImmune
Holdings, Inc., PerImmune, Inc. and Northstar High Yield
Fund, Northstar High Total Return Fund, Northstar High Total
Return Fund II, Northstar Strategic Income Fund.*
10.30 Interest Escrow Security Agreement, dated as of August 25,
1998, among Northwestern Trust and Investors Advisory
Company, Northstar High Yield Fund, Northstar High Total
Return Fund, Northstar High Total Return Fund II, Northstar
Strategic Income Fund and Intracel Corporation.*
10.31 Security Agreement, dated as of August 25, 1998, among
Intracel Corporation, Bartels, Inc., PerImmune Holdings,
Inc., PerImmune, Inc. and Northstar High Yield Fund,
Northstar High Total Return Fund, Northstar High Total
Return Fund II, Northstar Strategic Income Fund.*
10.32 Intellectual Property Security Agreement, dated as of August
25, 1998, among Intracel Corporation, Bartels, Inc.,
PerImmune Holdings, Inc., PerImmune, Inc. and Northstar High
Yield Fund, Northstar High Total Return Fund, Northstar High
Total Return Fund II, Northstar Strategic Income Fund.*
10.33 Pledge Agreement, dated as of August 25, 1998, between
Intracel Corporation and PerImmune Holdings, Inc. and
Northstar High Yield Fund, Northstar High Total Return Fund,
Northstar High Total Return Fund II, Northstar Strategic
Income Fund.*
10.34 Funded Commitment Facility Escrow Agreement, dated as of
August 24, 1998, by and among Northstar High Yield Fund,
Northstar High Total Return Fund, Northstar High Total
Return Fund II, Northstar Strategic Income Fund, Intracel
Corporation and Bank of America NT & SA (doing business as
Seattle First National Bank).*
10.35 Agreement, dated as of August 20, 1998, by and between
Intracel Corporation and First National Bank.*
10.36 Amendment No. 1, dated July 31, 1998, between Organon
Teknika Corporation, PerImmune Holdings, Inc., Akzo Nobel
Pharma International, B.V. and PerImmune, Inc., to (a) the
Promissory Note, dated August 2, 1996, by and among
PerImmune Holdings, Inc. to Organon Teknika Corporation, (b)
the Intellectual Property Security Agreement, dated as of
August 13, 1996, by and among PerImmune Holdings, Inc.,
PerImmune, Inc., Akzo Nobel Pharma International, B.V. and
Organon Teknika Corporation, and (c) the Intellectual
Property Agreement, dated August 2, 1996, by and among
PerImmune Holdings, Inc. and Akzo Nobel International, B.V.*
</TABLE>
II-8
<PAGE> 165
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
<S> <C>
10.37 Joint Venture Agreement dated December 11, 1998 by and
between Intracel Corporation and Lehigh Valley Hospital and
Health Network.*
10.38 Amended and Restated OncoVAX Center Lease dated as of
December 11, 1998 by and between Lehigh Valley Hospital and
Health Network, as landlord and Intracel Corporation, as
Tenant.*
10.39 Initial Medical Director Services Agreement dated as of
December 11, 1998, by and between Intracel Corporation and
Lehigh Valley Hospital and Health Network.*
10.40 Research and Center Agreement, dated December 28, 1998,
between Intracel Corporation and Duke University.
10.41 First Amendment and Waiver Agreement, dated as of
January 20, 1999, by and among Intracel Corporation,
PerImmune Holdings, Inc., PerImmune, Inc., Bartels, Inc. and
Northstar High Yield Fund, Northstar High Total Return Fund,
Northstar High Total Return Fund II and Northstar Strategic
Income Fund.
21 List of Subsidiaries of the Company.*
23.1 Consent of PricewaterhouseCoopers LLP, independent
accountants -- Intracel Corporation.
23.2 Consent of PricewaterhouseCoopers LLP, independent
accountants -- PerImmune Holdings, Inc.
23.3 Consent of Ernst & Young LLP, independent auditors.
23.4 Consent of KPMG LLP, independent certified public
accountants.
24 Power of Attorney (set forth on signature page to
Registration Statement).*
27.1 Financial Data Schedule for the year ended December 31,
1997.*
27.2 Financial Data Schedule for the three months ended March 31,
1998.*
27.3 Financial Data Schedule for the six months ended June 30,
1998.*
27.4 Financial Data Schedule for the nine months ended September
30, 1998.*
</TABLE>
- ---------------
* Previously filed.
+ To be filed by amendment.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denomination and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered in the Offering, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For the purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4), or 497(h)
II-9
<PAGE> 166
under the Securities Act, shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-10
<PAGE> 167
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this Amendment No. 3 to
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Rockville, State of Maryland, on January 21,
1999.
INTRACEL CORPORATION
By: /s/ SIMON R. MCKENZIE
------------------------------------
Simon R. McKenzie
President, Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Act, this Amendment No. 3 to
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME AND SIGNATURE TITLE DATE
<S> <C> <C>
* Chairman of the Board and January 21, 1999
- ----------------------------------------------------- Chief Scientific Officer
Michael G. Hanna
/s/ SIMON R. MCKENZIE President, Chief Executive January 21, 1999
- ----------------------------------------------------- Officer and Director
Simon R. McKenzie (principal executive officer)
/s/ LAWRENCE A. BLOOM Chief Financial Officer January 21, 1999
- ----------------------------------------------------- (principal financial officer)
Lawrence A. Bloom
* Director January 21, 1999
- -----------------------------------------------------
Raymond Schuyler
* Director January 21, 1999
- -----------------------------------------------------
Joseph Caligiuri
* Director January 21, 1999
- -----------------------------------------------------
Steven Gerber
* Director January 21, 1999
- -----------------------------------------------------
Alexander Klibanov
*By: /s/ SIMON R. MCKENZIE
---------------------------------------------------
Simon R. McKenzie as Attorney-in-fact
</TABLE>
II-11
<PAGE> 1
EXHIBIT 1
4,000,000 Shares
INTRACEL CORPORATION
Common Stock
UNDERWRITING AGREEMENT
__________, 1999
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
PIPER JAFFRAY INC.
As representatives of the several Underwriters
named in Schedule I hereto
c/o Donaldson, Lufkin & Jenrette Securities Corporation
277 Park Avenue
New York, New York 10172
Dear Sirs:
Intracel Corporation, a Delaware corporation (the "COMPANY"), proposes
to issue and sell to the several underwriters named in Schedule I hereto (the
"UNDERWRITERS") an aggregate of 4,000,000 shares of the common stock, par value
$.0001 per share, of the Company (the "FIRM SHARES"). The Company also proposes
to issue and sell to the several Underwriters, and the stockholder of the
Company named in Schedule II hereto , (the "SELLING STOCKHOLDER") proposes to
sell to the several Underwriters, not more than an additional 600,000 shares, in
the aggregate, of the Company's common stock, par value $.0001 per share, (the
"ADDITIONAL SHARES") if requested by the Underwriters as provided in Section 2
hereof, of which 300,000 shares are to be issued and sold by the Company and
300,000 shares are to be sold by the Selling Stockholder. The Firm Shares and
the Additional Shares are hereinafter referred to collectively as the "SHARES".
The shares of common stock of the Company to be outstanding after giving effect
to the sales contemplated hereby are hereinafter referred to as the "COMMON
STOCK". The Company and the Selling Stockholder are hereinafter sometimes
referred to collectively as the "SELLERS".
SECTION 1. Registration Statement and Prospectus. The Company has
prepared and filed with the Securities and Exchange Commission (the
"COMMISSION") in accordance with the provisions of the Securities Act of 1933,
as amended, and the rules and regulations of the Commission thereunder
(collectively, the "ACT"), a registration statement on Form S-1, including a
prospectus, relating to the Shares. The registration statement, as amended at
the time it became effective, including the information (if any) deemed to be
part of the registration statement at the time of effectiveness pursuant to Rule
430A under the Act, is hereinafter referred to as the "REGISTRATION STATEMENT";
and the prospectus in the form first
1
<PAGE> 2
used to confirm sales of Shares is hereinafter referred to as the "PROSPECTUS".
If the Company has filed or is required pursuant to the terms hereof to file a
registration statement pursuant to Rule 462(b) under the Act registering
additional shares of Common Stock (a "RULE 462(B) REGISTRATION STATEMENT"),
then, unless otherwise specified, any reference herein to the term "Registration
Statement" shall be deemed to include such Rule 462(b) Registration Statement.
SECTION 2. Agreements to Sell and Purchase and Lock-Up Agreements. On
the basis of the representations and warranties contained in this Agreement, and
subject to its terms and conditions, (i) the Company agrees to issue and sell
the Firm Shares and (ii) each Underwriter agrees, severally and not jointly, to
purchase from the Company at a price per Share of $______ (the "PURCHASE PRICE")
the number of Firm Shares set forth opposite the name of such Underwriter in
Schedule I hereto.
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, (i) the Company agrees to
issue and sell 300,000 Additional Shares, (ii) the Selling Stockholder agrees to
sell 300,000 Additional Shares and (iii) the Underwriters shall have the right
to purchase, severally and not jointly, up to an aggregate of 600,000 Additional
Shares from the Sellers at the Purchase Price. In the event that the
Underwriters elect to purchase any Additional Shares, the Underwriters shall
purchase the first 300,000 Additional Shares of such Additional Shares from the
Selling Stockholder. Additional Shares may be purchased solely for the purpose
of covering over-allotments made in connection with the offering of the Firm
Shares. The Underwriters may exercise their right to purchase Additional Shares
in whole or in part from time to time by giving written notice thereof to the
Sellers within 30 days after the date of this Agreement. You shall give any such
notice on behalf of the Underwriters and such notice shall specify the aggregate
number of Additional Shares to be purchased pursuant to such exercise and the
date for payment and delivery thereof, which date shall be a business day (i) no
earlier than two business days after such notice has been given (and, in any
event, no earlier than the Closing Date (as hereinafter defined)) and (ii) no
later than ten business days after such notice has been given. If any Additional
Shares are to be purchased, each Underwriter, severally and not jointly, agrees
to purchase from the Sellers the number of Additional Shares (subject to such
adjustments to eliminate fractional shares as you may determine) which bears the
same proportion to the total number of Additional Shares to be purchased from
the Sellers as the number of Firm Shares set forth opposite the name of such
Underwriter in Schedule I bears to the total number of Firm Shares.
Each Seller hereby agrees not to (i) offer, pledge, sell, contract to
sell, sell any option or contract to purchase, purchase any option or contract
to sell, grant any option, right or warrant to purchase, or otherwise transfer
or dispose of, directly or indirectly, any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock or
(ii) enter into any swap or other arrangement that transfers all or a portion of
the economic consequences associated with the ownership of any Common Stock
(regardless of whether any of the transactions described in clause (i) or (ii)
is to be settled by the delivery of Common Stock, or such other securities, in
cash or otherwise), except to the Underwriters pursuant to this Agreement, for a
period of one year after the date of the Prospectus without the prior written
consent of Donaldson, Lufkin & Jenrette Securities Corporation. Notwithstanding
the foregoing, during such period (i) the Company may grant stock options
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pursuant to the Company's existing stock option plans and (ii) the Company may
issue shares of Common Stock upon the exercise of an option or warrant or the
conversion of a security outstanding on the date hereof. The Company also agrees
not to file any registration statement with respect to any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock for a period of one year after the date of the Prospectus without
the prior written consent of Donaldson, Lufkin & Jenrette Securities
Corporation. In addition, the Selling Stockholder agrees that, for a period of
one year after the date of the Prospectus without the prior written consent of
Donaldson, Lufkin & Jenrette Securities Corporation, it will not make any demand
for, or exercise any right with respect to, the registration of any shares of
Common Stock or any securities convertible into or exercisable or exchangeable
for Common Stock. The Company shall, prior to or concurrently with the execution
of this Agreement, deliver an agreement executed by (i) the Selling Stockholder,
(ii) each of the directors and officers of the Company other than the Selling
Stockholder and (iii) each stockholder listed on Annex I hereto to the effect
that such person will not, during the period commencing on the date such person
signs such agreement and ending one year after the date of the Prospectus, in
the case of the Selling Stockholder, directors and executive officers, and 180
days after the date of the Prospectus in the case of other stockholders listed
on Annex I hereto, without the prior written consent of Donaldson, Lufkin &
Jenrette Securities Corporation, (A) engage in any of the transactions described
in the first sentence of this paragraph or (B) make any demand for, or exercise
any right with respect to, the registration of any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock.
SECTION 3. Terms of Public Offering. The Sellers are advised by you that
the Underwriters propose (i) to make a public offering of their respective
portions of the Shares as soon after the execution and delivery of this
Agreement as in your judgment is advisable and (ii) initially to offer the
Shares upon the terms set forth in the Prospectus.
SECTION 4. Delivery and Payment. The Shares shall be represented by
definitive certificates and shall be issued in such authorized denominations and
registered in such names as Donaldson, Lufkin & Jenrette Securities Corporation
shall request no later than two business days prior to the Closing Date or the
applicable Option Closing Date (as defined below), as the case may be. The
Shares shall be delivered by or on behalf of the Sellers, with any transfer
taxes thereon duly paid by the respective Sellers, to Donaldson, Lufkin &
Jenrette Securities Corporation through the facilities of The Depository Trust
Company ("DTC"), for the respective accounts of the several Underwriters,
against payment to the Sellers of the Purchase Price therefore by wire transfer
of Federal or other funds immediately available in New York City. The
certificates representing the Shares shall be made available for inspection not
later than 9:30 A.M., New York City time, on the business day prior to the
Closing Date or the applicable Option Closing Date (as defined below), as the
case may be, at the office of DTC or its designated custodian (the "DESIGNATED
Office"). The time and date of delivery and payment for the Firm Shares shall be
9:00 A.M., New York City time, on ________, 1999 or such other time on the same
or such other date as Donaldson, Lufkin & Jenrette Securities Corporation and
the Company shall agree in writing. The time and date of delivery and payment
for the Firm Shares are herein referred to as the "CLOSING DATE". The time and
date of delivery and payment for any Additional Shares to be purchased by the
Underwriters shall be 9:00 A.M., New York City time, on the date specified in
the applicable exercise notice given by you pursuant to Section 2 or such other
time on the same or such
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other date as Donaldson, Lufkin & Jenrette Securities Corporation and the
Company shall agree in writing. The time and date of delivery and payment for
any Additional Shares are herein referred to as the "OPTION CLOSING DATE".
The documents to be delivered on the Closing Date or any Option Closing
Date on behalf of the parties hereto pursuant to Section 9 of this Agreement
shall be delivered at the offices of Brown & Wood LLP, One World Trade Center,
New York, New York 10048, and the Shares shall be delivered at the Designated
Office, all on the Closing Date or such Option Closing Date, as the case may be.
SECTION 5. Agreements of the Company. The Company agrees with you:
(a) To advise you promptly and, if requested by you, to confirm such
advice in writing, (i) of any request by the Commission for amendments to the
Registration Statement or amendments or supplements to the Prospectus or for
additional information, (ii) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or of the suspension
of qualification of the Shares for offering or sale in any jurisdiction, or the
initiation of any proceeding for such purposes, (iii) when any amendment to the
Registration Statement becomes effective, (iv) if the Company is required to
file a Rule 462(b) Registration Statement after the effectiveness of this
Agreement, when the Rule 462(b) Registration Statement has become effective and
(v) of the happening of any event during the period referred to in Section 5(d)
below which makes any statement of a material fact made in the Registration
Statement or the Prospectus untrue or which requires any additions to or changes
in the Registration Statement or the Prospectus in order to make the statements
therein not misleading. If at any time the Commission shall issue any stop order
suspending the effectiveness of the Registration Statement, the Company will use
its best efforts to obtain the withdrawal or lifting of such order at the
earliest possible time.
(b) To furnish to you three signed copies of the Registration Statement
as first filed with the Commission and of each amendment to it, including all
exhibits, and to furnish to you and each Underwriter designated by you such
number of conformed copies of the Registration Statement as so filed and of each
amendment to it, without exhibits, as you may reasonably request.
(c) To prepare the Prospectus, the form and substance of which shall be
satisfactory to you, and to file the Prospectus in such form with the Commission
within the applicable period specified in Rule 424(b) under the Act; during the
period specified in Section 5(d) below, not to file any further amendment to the
Registration Statement and not to make any amendment or supplement to the
Prospectus of which you shall not previously have been advised or to which you
shall reasonably object after being so advised; and, during such period, to
prepare and file with the Commission, promptly upon your reasonable request, any
amendment to the Registration Statement or amendment or supplement to the
Prospectus which may be necessary or advisable in connection with the
distribution of the Shares by you, and to use its best efforts to cause any such
amendment to the Registration Statement to become promptly effective.
(d) Prior to 10:00 A.M., New York City time, on the first business day
after the date of this Agreement and from time to time thereafter for such
period as in the opinion of
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counsel for the Underwriters a prospectus is required by law to be delivered in
connection with sales by an Underwriter or a dealer, to furnish in New York City
to each Underwriter and any dealer as many copies of the Prospectus (and of any
amendment or supplement to the Prospectus) as such Underwriter or dealer may
reasonably request.
(e) If during the period specified in Section 5(d), any event shall
occur or condition shall exist as a result of which, in the opinion of counsel
for the Underwriters, it becomes necessary to amend or supplement the Prospectus
in order to make the statements therein, in the light of the circumstances when
the Prospectus is delivered to a purchaser, not misleading, or if, in the
opinion of counsel for the Underwriters, it is necessary to amend or supplement
the Prospectus to comply with applicable law, forthwith to prepare and file with
the Commission an appropriate amendment or supplement to the Prospectus so that
the statements in the Prospectus, as so amended or supplemented, will not in the
light of the circumstances when it is so delivered, be misleading, or so that
the Prospectus will comply with applicable law, and to furnish to each
Underwriter and to any dealer as many copies thereof as such Underwriter or
dealer may reasonably request.
(f) Prior to any public offering of the Shares, to cooperate with you
and counsel for the Underwriters in connection with the registration or
qualification of the Shares for offer and sale by the several Underwriters and
by dealers under the state securities or Blue Sky laws of such jurisdictions as
you may request, to continue such registration or qualification in effect so
long as required for distribution of the Shares and to file such consents to
service of process or other documents as may be necessary in order to effect
such registration or qualification; provided, however, that the Company shall
not be required in connection therewith to qualify as a foreign corporation in
any jurisdiction in which it is not now so qualified or to take any action that
would subject it to general consent to service of process or taxation other than
as to matters and transactions relating to the Prospectus, the Registration
Statement, any preliminary prospectus or the offering or sale of the Shares, in
any jurisdiction in which it is not now so subject.
(g) To mail and make generally available to its stockholders as soon as
practicable an earnings statement covering the twelve-month period ending
___________, 2000 that shall satisfy the provisions of Section 11(a) of the Act,
and to advise you in writing when such statement has been so made available.
(h) During the period of three years after the date of this Agreement,
to furnish to you as soon as available copies of all reports or other
communications furnished to the record holders of Common Stock or furnished to
or filed with the Commission or any national securities exchange on which any
class of securities of the Company is listed and such other publicly available
information concerning the Company and its subsidiaries as you may reasonably
request.
(i) Whether or not the transactions contemplated in this Agreement are
consummated or this Agreement is terminated, to pay or cause to be paid all
expenses incident to the performance of the Sellers' obligations under this
Agreement, including: (i) the fees, disbursements and expenses of the Company's
counsel, the Company's accountants and the Selling Stockholder's counsel (in
addition to the Company's counsel) in connection with the registration and
delivery of the Shares under the Act and all other fees and expenses in
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connection with the preparation, printing, filing and distribution of the
Registration Statement (including financial statements and exhibits), any
preliminary prospectus, the Prospectus and all amendments and supplements to any
of the foregoing, including the mailing and delivering of copies thereof to the
Underwriters and dealers in the quantities specified herein, (ii) all costs and
expenses related to the transfer and delivery of the Shares to the Underwriters,
including any transfer or other taxes payable thereon, (iii) all costs of
printing or producing this Agreement and any other agreements or documents in
connection with the offering, purchase, sale or delivery of the Shares, (iv) all
expenses in connection with the registration or qualification of the Shares for
offer and sale under the securities or Blue Sky laws of the several states and
all costs of printing or producing any Preliminary and Supplemental Blue Sky
Memoranda in connection therewith (including the filing fees and fees and
disbursements of counsel for the Underwriters in connection with such
registration or qualification and memoranda relating thereto), (v) the filing
fees and disbursements of counsel for the Underwriters in connection with the
review and clearance of the offering of the Shares by the National Association
of Securities Dealers, Inc., (vi) all fees and expenses in connection with the
preparation and filing of the registration statement on Form 8-A relating to the
Common Stock and all costs and expenses incident to the listing of the Shares on
the Nasdaq National Market, (vii) the cost of printing certificates representing
the Shares, (viii) the costs and charges of any transfer agent, registrar and/or
depositary, and (ix) all other costs and expenses incident to the performance of
the obligations of the Company and the Selling Stockholder hereunder for which
provision is not otherwise made in this Section. The provisions of this Section
shall not supersede or otherwise affect any agreement that the Company and the
Selling Stockholder may otherwise have for allocation of such expenses between
themselves.
(j) To use its best efforts to list for quotation the Shares on the
Nasdaq National Market and to maintain the listing of the Shares on the Nasdaq
National Market for a period of three years after the date of this Agreement.
(k) To use its best efforts to do and perform all things required or
necessary to be done and performed under this Agreement by the Company prior to
the Closing Date or any Option Closing Date, as the case may be, and to satisfy
all conditions precedent to the delivery of the Shares.
(l) If the Registration Statement at the time of the effectiveness of
this Agreement does not cover all of the Shares, to file a Rule 462(b)
Registration Statement with the Commission registering the Shares not so covered
in compliance with Rule 462(b) by 10:00 P.M., New York City time, on the date of
this Agreement and to pay to the Commission the filing fee for such Rule 462(b)
Registration Statement at the time of the filing thereof or to give irrevocable
instructions for the payment of such fee pursuant to Rule 111(b) under the Act.
SECTION 6. Representations and Warranties of the Company. The Company
and the Selling Stockholder represents and warrants to each Underwriter that:
(a) The Registration Statement has become effective (other than any Rule
462(b) Registration Statement to be filed by the Company after the effectiveness
of this Agreement); any Rule 462(b) Registration Statement filed after the
effectiveness of this Agreement will
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become effective no later than 10:00 P.M., New York City time, on the date of
this Agreement; and no stop order suspending the effectiveness of the
Registration Statement is in effect, and no proceedings for such purpose are
pending before or threatened by the Commission.
(b) (i) The Registration Statement (other than any Rule 462(b)
Registration Statement to be filed by the Company after the effectiveness of
this Agreement), when it became effective, did not contain and, as amended, if
applicable, will not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, (ii) the Registration Statement (other than
any Rule 462(b) Registration Statement to be filed by the Company after the
effectiveness of this Agreement) and the Prospectus comply and, as amended or
supplemented, if applicable, will comply in all material respects with the Act,
(iii) if the Company is required to file a Rule 462(b) Registration Statement
after the effectiveness of this Agreement, such Rule 462(b) Registration
Statement and any amendments thereto, when they become effective (A) will not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading and (B) will comply in all material respects with the Act and (iv)
the Prospectus does not contain and, as amended or supplemented, if applicable,
will not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, except that the
representations and warranties set forth in this paragraph do not apply to
statements or omissions in the Registration Statement or the Prospectus based
upon information relating to any Underwriter furnished to the Company in writing
by such Underwriter through you expressly for use therein.
(c) Each preliminary prospectus filed as part of the registration
statement as originally filed or as part of any amendment thereto, or filed
pursuant to Rule 424 under the Act, complied when so filed in all material
respects with the Act, and did not contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in the light of the circumstances under which
they were made, not misleading, except that the representations and warranties
set forth in this paragraph do not apply to statements or omissions in any
preliminary prospectus based upon information relating to any Underwriter
furnished to the Company in writing by such Underwriter through you expressly
for use therein.
(d) Each of the Company and its subsidiaries has been duly incorporated,
is validly existing as a corporation in good standing under the laws of its
jurisdiction of incorporation and has the corporate power and authority to carry
on its business as described in the Prospectus and to own, lease and operate its
properties, and each is duly qualified and is in good standing as a foreign
corporation authorized to do business in each jurisdiction in which the nature
of its business or its ownership or leasing of property requires such
qualification, except where the failure to be so qualified would not have a
material adverse effect on the business, prospects, financial condition or
results of operations of the Company and its subsidiaries, taken as a whole.
(e) There are no outstanding subscriptions, rights, warrants, options,
calls, convertible securities, commitments of sale or liens granted or issued by
the Company or any
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of its subsidiaries relating to or entitling any person to purchase or otherwise
to acquire any shares of the capital stock of the Company or any of its
subsidiaries, except as otherwise disclosed in the Registration Statement.
(f) All the outstanding shares of capital stock of the Company
(including the Shares to be sold by the Selling Stockholder) have been duly
authorized and validly issued and are fully paid, non-assessable and not subject
to any preemptive or similar rights; and the Shares to be issued and sold by the
Company have been duly authorized and, when issued and delivered to the
Underwriters against payment therefor as provided by this Agreement, will be
validly issued, fully paid and non-assessable, and the issuance of such Shares
will not be subject to any preemptive or similar rights.
(g) All of the outstanding shares of capital stock of each of the
Company's subsidiaries have been duly authorized and validly issued and are
fully paid and non-assessable, and are owned by the Company, directly or
indirectly through one or more subsidiaries, free and clear of any security
interest, claim, lien, encumbrance or adverse interest of any nature.
(h) The authorized capital stock of the Company conforms as to legal
matters to the description thereof contained in the Prospectus.
(i) Neither the Company nor any of its subsidiaries is in violation of
its respective charter or by-laws or in default in the performance of any
obligation, agreement, covenant or condition contained in any indenture, loan
agreement, mortgage, lease or other agreement or instrument that is material to
the Company and its subsidiaries, taken as a whole, to which the Company or any
of its subsidiaries is a party or by which the Company or any of its
subsidiaries or their respective property is bound.
(j) The execution, delivery and performance of this Agreement by the
Company, the compliance by the Company with all the provisions hereof and the
consummation of the transactions contemplated hereby will not (i) require any
consent, approval, authorization or other order of, or qualification with, any
court or governmental body or agency (except such as may be required under the
securities or Blue Sky laws of the various states), (ii) conflict with or
constitute a breach of any of the terms or provisions of, or a default under,
the charter or by-laws of the Company or any of its subsidiaries or any
indenture, loan agreement, mortgage, lease or other agreement or instrument that
is material to the Company and its subsidiaries, taken as a whole, to which the
Company or any of its subsidiaries is a party or by which the Company or any of
its subsidiaries or their respective property is bound, (iii) violate or
conflict with any applicable law or any rule, regulation, judgment, order or
decree of any court or any governmental body or agency having jurisdiction over
the Company, any of its subsidiaries or their respective property or (iv) result
in the suspension, termination or revocation of any Authorization (as defined
below) of the Company or any of its subsidiaries or any other impairment of the
rights of the holder of any such Authorization.
(k) There are no legal or governmental proceedings pending or threatened
to which the Company or any of its subsidiaries is or could be a party or to
which any of their respective property is or could be subject that are required
to be described in the Registration Statement or the Prospectus and are not so
described; nor are there any statutes, regulations,
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contracts or other documents that are required to be described in the
Registration Statement or the Prospectus or to be filed as exhibits to the
Registration Statement that are not so described or filed as required.
(l) Any real property and buildings held under lease by the Company and
its subsidiaries are held by them under valid, subsisting and enforceable leases
with such exceptions as are not material and do not interfere with the use made
and proposed to be made of such property and buildings by the Company and its
subsidiaries, in each case except as described in the Prospectus.
(m) The Company and its subsidiaries own or possess, or can acquire on
reasonable terms, all patents, patent rights, licenses, inventions, copyrights,
know-how (including trade secrets and other unpatented and/or unpatentable
proprietary or confidential information, systems or procedures), trademarks,
service marks and trade names ("INTELLECTUAL PROPERTY") currently employed by
them in connection with the business now operated by them except where the
failure to own or possess or otherwise be able to acquire such intellectual
property would not, singly or in the aggregate, have a material adverse effect
on the business, prospects, financial condition or results of operation of the
Company and its subsidiaries, taken as a whole; and neither the Company nor any
of its subsidiaries has received any notice of infringement of or conflict with
asserted rights of others with respect to any of such intellectual property
which, singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, would have a material adverse effect on the business,
prospects, financial condition or results of operations of the Company and its
subsidiaries, taken as a whole.
(n) Except as otherwise stated in the Prospectus with respect to
commercial product liability insurance, the Company and each of its subsidiaries
are insured by insurers of recognized financial responsibility against such
losses and risks and in such amounts as are prudent and customary in the
businesses in which they are engaged; and neither the Company nor any of its
subsidiaries (i) has received notice from any insurer or agent of such insurer
that substantial capital improvements or other material expenditures will have
to be made in order to continue such insurance or (ii) has any reason to believe
that it will not be able to renew its existing insurance coverage as and when
such coverage expires or to obtain similar coverage from similar insurers at a
cost that would not have a material adverse effect on the business, prospects,
financial conditions or results of operations of the Company and its
subsidiaries, taken as a whole.
(o) No relationship, direct or indirect, exists between or among the
Company or any of its subsidiaries on the one hand, and the directors, officers,
stockholders, customers or suppliers of the Company or any of its subsidiaries
on the other hand, which is required by the Act to be described in the
Registration Statement or the Prospectus which is not so described.
(p) There is no (i) significant unfair labor practice complaint,
grievance or arbitration proceeding pending or threatened against the Company or
any of its subsidiaries before the National Labor Relations Board or any state
or local labor relations board, (ii) strike, labor dispute, slowdown or stoppage
pending or threatened against the Company or any of its subsidiaries or (iii)
union representation question existing with respect to the employees of
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the Company and its subsidiaries, except for such actions specified in clause
(i), (ii) or (iii) above, which, singly or in the aggregate, would not have a
material adverse effect on the business, prospects, financial condition or
results of operations of the Company and its subsidiaries, taken as a whole. To
the best of the Company's knowledge, no collective bargaining organizing
activities are taking place with respect to the Company or any of its
subsidiaries.
(q) The Company and each of its subsidiaries maintains a system of
internal accounting controls sufficient to provide reasonable assurance that (i)
transactions are executed in accordance with management's general or specific
authorizations; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain asset accountability; (iii) access to
assets is permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(r) All material tax returns required to be filed by the Company and
each of its subsidiaries in any jurisdiction have been filed, other than those
filings being contested in good faith, and all material taxes, including
withholding taxes, penalties and interest, assessments, fees and other charges
due pursuant to such returns or pursuant to any assessment received by the
Company or any of its subsidiaries have been paid, other than those being
contested in good faith and for which adequate reserves have been provided.
(s) Neither the Company nor any of its subsidiaries has violated any
foreign, federal, state or local law or regulation relating to the protection of
human health and safety, the environment or hazardous or toxic substances or
wastes, pollutants or contaminants ("ENVIRONMENTAL LAWS"), any provisions of the
U.S. Employee Retirement Income Security Act of 1974, as amended, any provisions
of the U.S. Federal Food, Drug and Cosmetic Act, as amended, or any provisions
of the Foreign Corrupt Practices Act or the rules and regulations promulgated
thereunder, except for such violations which, singly or in the aggregate, would
not have a material adverse effect on the business, prospects, financial
condition or results of operations of the Company and its subsidiaries, taken as
a whole.
(t) Each of the Company and its subsidiaries has such permits, licenses,
consents, exemptions, franchises, authorizations and other approvals (each, an
"AUTHORIZATION") of, and has made all filings with and notices to, all
governmental or regulatory authorities and self-regulatory organizations and all
courts and other tribunals, including, without limitation, under any applicable
Environmental Laws, as are necessary to own, lease, license and operate its
respective properties and to conduct its business, except where the failure to
have any such Authorization or to make any such filing or notice would not,
singly or in the aggregate, have a material adverse effect on the business,
prospects, financial condition or results of operations of the Company and its
subsidiaries, taken as a whole. Each such Authorization is valid and in full
force and effect and each of the Company and its subsidiaries is in compliance
with all the terms and conditions thereof and with the rules and regulations of
the authorities and governing bodies having jurisdiction with respect thereto;
and no event has occurred (including, without limitation, the receipt of any
notice from any authority or governing body) which allows or, after notice or
lapse of time or both, would allow,
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revocation, suspension or termination of any such Authorization or results or,
after notice or lapse of time or both, would result in any other impairment of
the rights of the holder of any such Authorization; and such Authorizations
contain no restrictions that are burdensome to the Company or any of its
subsidiaries; except where such failure to be valid and in full force and effect
or to be in compliance, the occurrence of any such event or the presence of any
such restriction would not, singly or in the aggregate, have a material adverse
effect on the business, prospects, financial condition or results of operations
of the Company and its subsidiaries, taken as a whole.
(u) There are no costs or liabilities associated with Environmental Laws
(including, without limitation, any capital or operating expenditures required
for clean-up, closure of properties or compliance with Environmental Laws or any
Authorization, any related constraints on operating activities and any potential
liabilities to third parties) which would, singly or in the aggregate, have a
material adverse effect on the business, prospects, financial condition or
results of operations of the Company and its subsidiaries, taken as a whole.
(v) This Agreement has been duly authorized, executed and delivered by
the Company.
(w) Each of PricewaterhouseCoopers LLP, Ernst & Young LLP, KPMG LLP
are independent public accountants with respect to the Company and its
subsidiaries as required by the Act.
(x) The consolidated financial statements included in the Registration
Statement and the Prospectus (and any amendment or supplement thereto), together
with related schedules and notes, present fairly the consolidated financial
position, results of operations and changes in financial position of the Company
and its subsidiaries and the predecessors of the Company or its subsidiaries on
the basis stated therein at the respective dates or for the respective periods
to which they apply; such statements and related schedules and notes have been
prepared in accordance with generally accepted accounting principles
consistently applied throughout the periods involved, except as disclosed
therein; the supporting schedules, if any, included in the Registration
Statement present fairly in accordance with generally accepted accounting
principles the information required to be stated therein; and the other
financial and statistical information and data set forth in the Registration
Statement and the Prospectus (and any amendment or supplement thereto) are, in
all material respects, accurately presented and prepared on a basis consistent
with such financial statements and the books and records of the Company.
(y) The pro forma consolidated financial statements of the Company and
its subsidiaries and the related notes thereto set forth in the Registration
Statement and the Prospectus (and any supplement or amendment thereto) have been
prepared on a basis consistent with the historical financial statements of the
Company and its subsidiaries and the Company's predecessors, give effect to the
assumptions used in the preparation thereof on a reasonable basis and in good
faith and present fairly the historical and proposed transactions contemplated
by the Registration Statement and the Prospectus. Such pro forma financial
statements have been prepared in accordance with the applicable requirements of
Rule 11-02 of Regulation S-X promulgated by the Commission. The other pro forma
financial and statistical information and data set forth in the Registration
Statement and the Prospectus (and
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any supplement or amendment thereto) are, in all material respects, accurately
presented and prepared on a basis consistent with the pro forma financial
statements.
(z) The Company is not and, after giving effect to the offering and sale
of the Shares and the application of the proceeds thereof as described in the
Prospectus, will not be, an "investment company" as such term is defined in the
Investment Company Act of 1940, as amended.
(aa) There are no contracts, agreements or understandings between the
Company and any person granting such person the right to require the Company to
file a registration statement under the Act with respect to any securities of
the Company or to require the Company to include such securities with the Shares
registered pursuant to the Registration Statement, except for such agreements
that expressly permit the Underwriters to advise the Company that any such
securities should not be included with the Shares registered pursuant to the
Registration Statement.
(bb) Since the respective dates as of which information is given in the
Prospectus other than as set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this Agreement), (i)
there has not occurred any material adverse change or any development involving
a prospective material adverse change in the condition, financial or otherwise,
or the earnings, business, management or operations of the Company and its
subsidiaries, taken as a whole, (ii) there has not been any material adverse
change or any development involving a prospective material adverse change in the
capital stock or in the long-term debt of the Company or any of its subsidiaries
and (iii) neither the Company nor any of its subsidiaries has incurred any
material liability or obligation, direct or contingent.
(cc) Each certificate signed by any officer of the Company and delivered
to the Underwriters or counsel for the Underwriters shall be deemed to be a
representation and warranty by the Company to the Underwriters as to the matters
covered thereby.
SECTION 7. Representations and Warranties of the Selling Stockholder The
Selling Stockholder represents and warrants to each Underwriter that:
(a) The Selling Stockholder is the lawful owner of the Shares to be sold
by the Selling Stockholder pursuant to this Agreement and has, and on the
Closing Date will have, good and clear title to such Shares, free of all
restrictions on transfer, liens, encumbrances, security interests, equities and
claims whatsoever.
(b) The Shares to be sold by the Selling Stockholder have been duly
authorized and are validly issued, fully paid and non-assessable.
(c) The Selling Stockholder has, and on the Closing Date will have, full
legal right, power and authority, and all authorization and approval required by
law, to enter into this Agreement, the Custody Agreement signed by the Selling
Stockholder and , as Custodian, relating to the deposit of the Shares to be sold
by the Selling Stockholder (the "CUSTODY AGREEMENT") and the Power of Attorney
of the Selling Stockholder appointing certain individuals as the Selling
Stockholder's attorneys-in-fact (the "ATTORNEYS") to the
12
<PAGE> 13
extent set forth therein, relating to the transactions contemplated hereby and
by the Registration Statement and the Custody Agreement (the "POWER OF
ATTORNEY") and to sell, assign, transfer and deliver the Shares to be sold by
the Selling Stockholder in the manner provided herein and therein.
(d) This Agreement has been duly authorized, executed and delivered by
or on behalf of the Selling Stockholder.
(e) The Custody Agreement of the Selling Stockholder has been duly
authorized, executed and delivered by the Selling Stockholder and is a valid and
binding agreement of the Selling Stockholder, enforceable in accordance with its
terms.
(f) The Power of Attorney of the Selling Stockholder has been duly
authorized, executed and delivered by the Selling Stockholder and is a valid and
binding instrument of the Selling Stockholder, enforceable in accordance with
its terms, and, pursuant to such Power of Attorney, the Selling Stockholder has,
among other things, authorized the Attorneys, or any one of them, to execute and
deliver on the Selling Stockholder's behalf this Agreement and any other
document that they, or any one of them, may deem necessary or desirable in
connection with the transactions contemplated hereby and thereby and to deliver
the Shares to be sold by the Selling Stockholder pursuant to this Agreement.
(g) Upon delivery of and payment for the Shares to be sold by the
Selling Stockholder pursuant to this Agreement, good and clear title to such
Shares will pass to the Underwriters, free of all restrictions on transfer,
liens, encumbrances, security interests, equities and claims whatsoever.
(h) The execution, delivery and performance of this Agreement and the
Custody Agreement and Power of Attorney of the Selling Stockholder by or on
behalf of the Selling Stockholder, the compliance by the Selling Stockholder
with all the provisions hereof and thereof and the consummation of the
transactions contemplated hereby and thereby will not (i) require any consent,
approval, authorization or other order of, or qualification with, any court or
governmental body or agency (except such as may be required under the securities
or Blue Sky laws of the various states), (ii) conflict with or constitute a
breach of any of the terms or provisions of, or a default under, any indenture,
loan agreement, mortgage, lease or other agreement or instrument to which the
Selling Stockholder is a party or by which the Selling Stockholder or any
property of the Selling Stockholder is bound or (iii) violate or conflict with
any applicable law or any rule, regulation, judgment, order or decree of any
court or any governmental body or agency having jurisdiction over the Selling
Stockholder or any property of the Selling Stockholder.
(i) The information in the Registration Statement under the caption
"Principal and Selling Stockholders" which specifically relates to the Selling
Stockholder does not, and will not on the Closing Date, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
13
<PAGE> 14
(j) At any time during the period described in Section 5(d), if there is
any change in the information referred to in Section 7(i), the Selling
Stockholder will immediately notify you of such change.
(k) Each certificate signed by or on behalf of the Selling Stockholder
and delivered to the Underwriters or counsel for the Underwriters shall be
deemed to be a representation and warranty by the Selling Stockholder to the
Underwriters as to the matters covered thereby.
SECTION 8. Indemnification.
(a) The Sellers, jointly and severally, agree to indemnify and hold
harmless each Underwriter, its directors, its officers and each person, if any,
who controls any Underwriter within the meaning of Section 15 of the Act or
Section 20 of the Securities Exchange Act of 1934, as amended (the "EXCHANGE
ACT"), from and against any and all losses, claims, damages, liabilities and
judgments (including, without limitation, any legal or other expenses incurred
in connection with investigating or defending any matter, including any action,
that could give rise to any such losses, claims, damages, liabilities or
judgments) caused by any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement (or any amendment
thereto), the Prospectus (or any amendment or supplement thereto) or any
preliminary prospectus, or caused by any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, except insofar as such losses, claims,
damages, liabilities or judgments are caused by any such untrue statement or
omission or alleged untrue statement or omission based upon information relating
to any Underwriter furnished in writing to the Company by such Underwriter
through you expressly for use therein provided, however, that the foregoing
indemnity agreement with respect to any preliminary prospectus shall not inure
to the benefit of any Underwriter who failed to deliver a Prospectus (as then
amended or supplemented, provided by the Company to the several Underwriters in
the requisite quantity and on a timely basis to permit proper delivery on or
prior to the Closing Date) to the person asserting any losses, claims, damages
and liabilities and judgments caused by any untrue statement or alleged untrue
statement of a material fact contained in any preliminary prospectus, or caused
by any omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading, if
such material misstatement or omission or alleged material misstatement or
omission was cured in such Prospectus and such Prospectus was required by law to
be delivered at or prior to the written confirmation of sale to such person.
Notwithstanding the foregoing, the aggregate liability of the Selling
Stockholder pursuant to this Section 8(a) shall be limited to an amount equal to
the total proceeds (before deducting underwriting discounts and commissions and
expenses) received by the Selling Stockholder from the Underwriters for the sale
of the Shares sold by the Selling Stockholder hereunder.
(b) Each Underwriter agrees, severally and not jointly, to indemnify and
hold harmless the Company, its directors, its officers who sign the Registration
Statement, each person, if any, who controls the Company within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act and the Selling
Stockholder to the same extent as the foregoing indemnity from the Sellers to
such Underwriter but only with reference to information relating to such
Underwriter furnished in writing to the Company by such
14
<PAGE> 15
Underwriter through you expressly for use in the Registration Statement (or any
amendment thereto), the Prospectus (or any amendment or supplement thereto) or
any preliminary prospectus.
(c) In case any action shall be commenced involving any person in
respect of which indemnity may be sought pursuant to Section 8(a) or 8(b) (the
"INDEMNIFIED PARTY"), the indemnified party shall promptly notify the person
against whom such indemnity may be sought (the "INDEMNIFYING PARTY") in writing
and the indemnifying party shall assume the defense of such action, including
the employment of counsel reasonably satisfactory to the indemnified party and
the payment of all fees and expenses of such counsel, as incurred (except that
in the case of any action in respect of which indemnity may be sought pursuant
to both Sections 8(a) and 8(b), the Underwriter shall not be required to assume
the defense of such action pursuant to this Section 8(c), but may employ
separate counsel and participate in the defense thereof, but the fees and
expenses of such counsel, except as provided below, shall be at the expense of
such Underwriter). Any indemnified party shall have the right to employ separate
counsel in any such action and participate in the defense thereof, but the fees
and expenses of such counsel shall be at the expense of the indemnified party
unless (i) the employment of such counsel shall have been specifically
authorized in writing by the indemnifying party, (ii) the indemnifying party
shall have failed to assume the defense of such action or employ counsel
reasonably satisfactory to the indemnified party or (iii) the named parties to
any such action (including any impleaded parties) include both the indemnified
party and the indemnifying party, and the indemnified party shall have been
advised by such counsel that there may be one or more legal defenses available
to it which are different from or additional to those available to the
indemnifying party (in which case the indemnifying party shall not have the
right to assume the defense of such action on behalf of the indemnified party).
In any such case, the indemnifying party shall not, in connection with any one
action or separate but substantially similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances, be
liable for (i) the fees and expenses of more than one separate firm of attorneys
(in addition to any local counsel) for all Underwriters, their officers and
directors and all persons, if any, who control any Underwriter within the
meaning of either Section 15 of the Act or Section 20 of the Exchange Act, (ii)
the fees and expenses of more than one separate firm of attorneys (in addition
to any local counsel) for the Company, its directors, its officers who sign the
Registration Statement and all persons, if any, who control the Company within
the meaning of either such Section and (iii) the fees and expenses of more than
one separate firm of attorneys (in addition to any local counsel) for the
Selling Stockholder, and all such fees and expenses shall be reimbursed as they
are incurred. In the case of any such separate firm for the Underwriters, their
officers and directors and such control persons of any Underwriters, such firm
shall be designated in writing by Donaldson, Lufkin & Jenrette Securities
Corporation. In the case of any such separate firm for the Company and such
directors, officers and control persons of the Company, such firm shall be
designated in writing by the Company. In the case of any such separate firm for
the Selling Stockholder, such firm shall be designated in writing by the
Attorneys. The indemnifying party shall indemnify and hold harmless the
indemnified party from and against any and all losses, claims, damages,
liabilities and judgments by reason of any settlement of any action (i) effected
with its written consent or (ii) effected without its written consent if the
settlement is entered into more than twenty business days after the indemnifying
party shall have received a request from the indemnified party for reimbursement
for the fees and expenses of counsel (in any case where
15
<PAGE> 16
such fees and expenses are at the expense of the indemnifying party) and, prior
to the date of such settlement, the indemnifying party shall have failed to
comply with such reimbursement request. No indemnifying party shall, without the
prior written consent of the indemnified party, effect any settlement or
compromise of, or consent to the entry of judgment with respect to, any pending
or threatened action in respect of which the indemnified party is or could have
been a party and indemnity or contribution may be or could have been sought
hereunder by the indemnified party, unless such settlement, compromise or
judgment (i) includes an unconditional release of the indemnified party from all
liability on claims that are or could have been the subject matter of such
action and (ii) does not include a statement as to or an admission of fault,
culpability or a failure to act, by or on behalf of the indemnified party.
(d) To the extent the indemnification provided for in this Section 8 is
unavailable to an indemnified party or insufficient in respect of any losses,
claims, damages, liabilities or judgments referred to therein, then each
indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages, liabilities and judgments (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Sellers on the one hand and the Underwriters on the other hand from the offering
of the Shares or (ii) if the allocation provided by clause 8(d)(i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause 8(d)(i) above but also the
relative fault of the Sellers on the one hand and the Underwriters on the other
hand in connection with the statements or omissions which resulted in such
losses, claims, damages, liabilities or judgments, as well as any other relevant
equitable considerations. The relative benefits received by the Sellers on the
one hand and the Underwriters on the other hand shall be deemed to be in the
same proportion as the total net proceeds from the offering (after deducting
underwriting discounts and commissions, but before deducting expenses) received
by the Sellers, and the total underwriting discounts and commissions received by
the Underwriters, bear to the total price to the public of the Shares, in each
case as set forth in the table on the cover page of the Prospectus. The relative
fault of the Sellers on the one hand and the Underwriters on the other hand
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the Company or the
Selling Stockholder on the one hand or the Underwriters on the other hand and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such statement or omission.
The Sellers and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 8(d) were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to in the immediately preceding paragraph. The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages, liabilities or judgments referred to in the immediately
preceding paragraph shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses incurred by such indemnified party in
connection with investigating or defending any matter, including any action,
that could have given rise to such losses, claims, damages, liabilities or
judgments. Notwithstanding the provisions of this Section 8, no Underwriter
shall be required to contribute any amount in excess of the amount by which
16
<PAGE> 17
the total price at which the Shares underwritten by it and distributed to the
public were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute
pursuant to this Section 8(d) are several in proportion to the respective number
of Shares purchased by each of the Underwriters hereunder and not joint.
(e) The remedies provided for in this Section 8 are not exclusive and
shall not limit any rights or remedies which may otherwise be available to any
indemnified party at law or in equity.
(f) The Selling Stockholder hereby designates [NAME OF COMPANY],
[ADDRESS OF COMPANY], as its authorized agent, upon which process may be served
in any action which may be instituted in any state or federal court in the State
of New York by any Underwriter, any director or officer of any Underwriter or
any person controlling any Underwriter asserting a claim for indemnification or
contribution under or pursuant to this Section 8, and the Selling Stockholder
will accept the jurisdiction of such court in such action, and waives, to the
fullest extent permitted by applicable law, any defense based upon lack of
personal jurisdiction or venue. A copy of any such process shall be sent or
given to the Selling Stockholder, at the address for notices specified in
Section 12 hereof.
SECTION 9. Conditions of Underwriters' Obligations. The several
obligations of the Underwriters to purchase the Firm Shares under this Agreement
are subject to the satisfaction of each of the following conditions:
(a) All the representations and warranties of the Company contained in
this Agreement shall be true and correct on the Closing Date with the same force
and effect as if made on and as of the Closing Date.
(b) If the Company is required to file a Rule 462(b) Registration
Statement after the effectiveness of this Agreement, such Rule 462(b)
Registration Statement shall have become effective by 10:00 P.M., New York City
time, on the date of this Agreement; and no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been commenced or shall be pending
before or contemplated by the Commission.
(c) You shall have received on the Closing Date a certificate dated the
Closing Date, signed by Simon R. McKenzie and Lawrence A. Bloom, in their
capacities as the President and Chief Executive Officer and the Chief Financial
Officer of the Company, confirming the matters set forth in Sections 6(bb), 9(a)
and 9(b) and that the Company has complied with all of the agreements and
satisfied all of the conditions herein contained and required to be complied
with or satisfied by the Company on or prior to the Closing Date.
(d) Since the respective dates as of which information is given in the
Prospectus other than as set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this Agreement), (i)
there shall not have occurred any change or
17
<PAGE> 18
any development involving a prospective change in the condition, financial or
otherwise, or the earnings, business, management or operations of the Company
and its subsidiaries, taken as a whole, (ii) there shall not have been any
change or any development involving a prospective change in the capital stock or
in the long-term debt of the Company or any of its subsidiaries and (iii)
neither the Company nor any of its subsidiaries shall have incurred any
liability or obligation, direct or contingent, the effect of which, in any such
case described in clause 9(d)(i), 9(d)(ii) or 9(d)(iii), in your judgment, is
material and adverse and, in your judgment, makes it impracticable to market the
Shares on the terms and in the manner contemplated in the Prospectus.
(e) All the representations and warranties of the Selling Stockholder
contained in this Agreement shall be true and correct on the Closing Date with
the same force and effect as if made on and as of the Closing Date and you shall
have received on the Closing Date a certificate dated the Closing Date from the
Selling Stockholder to such effect and to the effect that the Selling
Stockholder has complied with all of the agreements and satisfied all of the
conditions herein contained and required to be complied with or satisfied by the
Selling Stockholder on or prior to the Closing Date.
(f) You shall have received on the Closing Date an opinion (satisfactory
to you and counsel for the Underwriters), dated the Closing Date, of Morrison &
Foerster LLP, counsel for the Company and the Selling Stockholder.
(g) You shall have received on the Closing Date an opinion (satisfactory
to you and counsel for the Underwriters), dated the Closing Date, of Morrison &
Foerster LLP, patent counsel for the Company.
(h) You shall have received on the Closing Date an opinion (satisfactory
to you and counsel for the Underwriters), dated the Closing Date, of Hogan &
Hartson L.L.P., regulatory counsel for the Company.
The opinions of Morrison & Foerster LLP and Hogan & Hartson L.L.P.
described in Sections 9(f), (g) and (h) shall be rendered to you at the request
of the Company and the Selling Stockholder and shall so state therein.
(i) You shall have received on the Closing Date an opinion, dated the
Closing Date, of Brown & Wood LLP, counsel for the Underwriters, as to the
matters referred to in Sections 9(f)(iv), 9(f)(vi) (but only with respect to the
Company), 9(f)(ix) (but only with respect to the statements under the caption
"Description of Capital Stock" and "Underwriting") and 9(f)(xvii).
In giving such opinions with respect to the matters covered by Section
9(f)(xvii), counsel for the Company and the Selling Stockholder and counsel for
the Underwriters may state that their opinion and belief are based upon their
participation in the preparation of the Registration Statement and Prospectus
and any amendments or supplements thereto and review and discussion of the
contents thereof, but are without independent check or verification except as
specified.
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<PAGE> 19
(j) You shall have received, on each of the date hereof and the Closing
Date, a letter dated the date hereof or the Closing Date, as the case may be, in
form and substance satisfactory to you, from PricewaterhouseCoopers LLP, Ernst &
Young LLP, and KPMG LLP, independent public accountants, containing
the information and statements of the type ordinarily included in accountants'
"comfort letters" to Underwriters with respect to the financial statements and
certain financial information contained in the Registration Statement and the
Prospectus.
(k) The Company shall have delivered to you the agreements specified in
Section 2 hereof which agreements shall be in full force and effect on the
Closing Date.
(l) The Shares shall have been duly listed for quotation on the Nasdaq
National Market.
(m) The Company and the Selling Stockholder shall not have failed on or
prior to the Closing Date to perform or comply with any of the agreements herein
contained and required to be performed or complied with by the Company or the
Selling Stockholder, as the case may be, on or prior to the Closing Date.
The several obligations of the Underwriters to purchase any Additional
Shares hereunder are subject to the delivery to you on the applicable Option
Closing Date of such documents as you may reasonably request with respect to the
good standing of the Company, the due authorization and issuance of such
Additional Shares and other matters related to the issuance of such Additional
Shares.
SECTION 10. Effectiveness of Agreement and Termination. This Agreement
shall become effective upon the execution and delivery of this Agreement by the
parties hereto.
This Agreement may be terminated at any time on or prior to the Closing
Date by you by written notice to the Sellers if any of the following has
occurred: (i) any outbreak or escalation of hostilities or other national or
international calamity or crisis or change in economic conditions or in the
financial markets of the United States or elsewhere that, in your judgment, is
material and adverse and, in your judgment, makes it impracticable to market the
Shares on the terms and in the manner contemplated in the Prospectus, (ii) the
suspension or material limitation of trading in securities or other instruments
on the New York Stock Exchange, the American Stock Exchange, the Chicago Board
of Options Exchange, the Chicago Mercantile Exchange, the Chicago Board of Trade
or the Nasdaq National Market or limitation on prices for securities or other
instruments on any such exchange or the Nasdaq National Market, (iii) the
suspension of trading of any securities of the Company on any exchange or in the
over-the-counter market, (iv) the enactment, publication, decree or other
promulgation of any federal or state statute, regulation, rule or order of any
court or other governmental authority which in your opinion materially and
adversely affects, or will materially and adversely affect, the business,
prospects, financial condition or results of operations of the Company and its
subsidiaries, taken as a whole, (v) the declaration of a banking moratorium by
either federal or New York State authorities or (vi) the taking of any action by
any federal, state or local government or agency in respect of its monetary or
fiscal affairs which in your opinion has a material adverse effect on the
financial markets in the United States.
19
<PAGE> 20
If on the Closing Date or on an Option Closing Date, as the case may be,
any one or more of the Underwriters shall fail or refuse to purchase the Firm
Shares or Additional Shares, as the case may be, which it has or they have
agreed to purchase hereunder on such date and the aggregate number of Firm
Shares or Additional Shares, as the case may be, which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase is not more
than one-tenth of the total number of Firm Shares or Additional Shares, as the
case may be, to be purchased on such date by all Underwriters, each
non-defaulting Underwriter shall be obligated severally, in the proportion which
the number of Firm Shares set forth opposite its name in Schedule I bears to the
total number of Firm Shares which all the non-defaulting Underwriters have
agreed to purchase, or in such other proportion as you may specify, to purchase
the Firm Shares or Additional Shares, as the case may be, which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase on such
date; provided that in no event shall the number of Firm Shares or Additional
Shares, as the case may be, which any Underwriter has agreed to purchase
pursuant to Section 2 hereof be increased pursuant to this Section 10 by an
amount in excess of one-ninth of such number of Firm Shares or Additional
Shares, as the case may be, without the written consent of such Underwriter. If
on the Closing Date any Underwriter or Underwriters shall fail or refuse to
purchase Firm Shares and the aggregate number of Firm Shares with respect to
which such default occurs is more than one-tenth of the aggregate number of Firm
Shares to be purchased by all Underwriters and arrangements satisfactory to you,
the Company and the Selling Stockholder for purchase of such Firm Shares are not
made within 48 hours after such default, this Agreement will terminate without
liability on the part of any non-defaulting Underwriter, the Company or the
Selling Stockholder. In any such case which does not result in termination of
this Agreement, either you or the Sellers shall have the right to postpone the
Closing Date, but in no event for longer than seven days, in order that the
required changes, if any, in the Registration Statement and the Prospectus or
any other documents or arrangements may be effected. If, on an Option Closing
Date, any Underwriter or Underwriters shall fail or refuse to purchase
Additional Shares and the aggregate number of Additional Shares with respect to
which such default occurs is more than one-tenth of the aggregate number of
Additional Shares to be purchased on such date, the non-defaulting Underwriters
shall have the option to (i) terminate their obligation hereunder to purchase
such Additional Shares or (ii) purchase not less than the number of Additional
Shares that such non-defaulting Underwriters would have been obligated to
purchase on such date in the absence of such default. Any action taken under
this paragraph shall not relieve any defaulting Underwriter from liability in
respect of any default of any such Underwriter under this Agreement.
SECTION 11. Agreements of the Selling Stockholder. The Selling
Stockholder agrees with you and the Company:
(a) To pay or to cause to be paid all transfer taxes payable in
connection with the transfer of the Shares to be sold by the Selling Stockholder
to the Underwriters.
(b) To do and perform all things to be done and performed by the Selling
Stockholder under this Agreement prior to the Closing Date and to satisfy all
conditions precedent to the delivery of the Shares to be sold by the Selling
Stockholder pursuant to this Agreement.
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<PAGE> 21
SECTION 12. Miscellaneous. Notices given pursuant to any provision of
this Agreement shall be addressed as follows: (i) if to the Company, to Intracel
Corporation, 1330 Piccard Drive, Rockville, Maryland 20850, Attn.: [ ], (ii) if
to the Selling Stockholder, to [NAME OF ATTORNEY-IN-FACT] c/o [ADDRESS OF
ATTORNEY-IN-FACT] and (iii) if to any Underwriter or to you, to you c/o
Donaldson, Lufkin & Jenrette Securities Corporation, 277 Park Avenue, New York,
New York 10172, Attention: Syndicate Department, or in any case to such other
address as the person to be notified may have requested in writing.
The respective indemnities, contribution agreements, representations,
warranties and other statements of the Company, the Selling Stockholder and the
several Underwriters set forth in or made pursuant to this Agreement shall
remain operative and in full force and effect, and will survive delivery of and
payment for the Shares, regardless of (i) any investigation, or statement as to
the results thereof, made by or on behalf of any Underwriter, the officers or
directors of any Underwriter, any person controlling any Underwriter, the
Company, the officers or directors of the Company, any person controlling the
Company, or the Selling Stockholder, (ii) acceptance of the Shares and payment
for them hereunder and (iii) termination of this Agreement.
If for any reason the Shares are not delivered by or on behalf of any
Seller as provided herein (other than as a result of any termination of this
Agreement pursuant to Section 10), the Sellers agree, jointly and severally, to
reimburse the several Underwriters for all out-of-pocket expenses (including the
fees and disbursements of counsel) incurred by them. Notwithstanding any
termination of this Agreement, the Company shall be liable for all expenses
which it has agreed to pay pursuant to Section 5(i) hereof. The Sellers also
agree, jointly and severally, to reimburse the several Underwriters, their
directors and officers and any persons controlling any of the Underwriters for
any and all fees and expenses (including, without limitation, the fees
disbursements of counsel) incurred by them in connection with enforcing their
rights hereunder (including, without limitation, pursuant to Section 8 hereof).
Except as otherwise provided, this Agreement has been and is made solely
for the benefit of and shall be binding upon the Company, the Selling
Stockholder, the Underwriters, the Underwriters' directors and officers, any
controlling persons referred to herein, the Company's directors and the
Company's officers who sign the Registration Statement and their respective
successors and assigns, all as and to the extent provided in this Agreement, and
no other person shall acquire or have any right under or by virtue of this
Agreement. The term "successors and assigns" shall not include a purchaser of
any of the Shares from any of the several Underwriters merely because of such
purchase.
This Agreement shall be governed and construed in accordance with the
laws of the State of New York.
This Agreement may be signed in various counterparts which together
shall constitute one and the same instrument.
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<PAGE> 22
Please confirm that the foregoing correctly sets forth the agreement
among the Company, the Selling Stockholder and the several Underwriters.
Very truly yours,
INTRACEL CORPORATION
By:
--------------------------------------
Name:
Title:
THE SELLING STOCKHOLDER
By:
--------------------------------------
Attorney-in-fact
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
PIPER JAFFRAY INC.
Acting severally on behalf of
themselves and the several
Underwriters named in
Schedule I hereto
By: DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By:
-----------------------------
Name:
Title:
22
<PAGE> 23
SCHEDULE I
<TABLE>
<CAPTION>
Number of Firm Shares
Underwriters to be Purchased
- ------------ ----------------------
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation......
Piper Jaffray Inc........................................
-------------
Total
</TABLE>
I-1
<PAGE> 24
SCHEDULE II
Selling Stockholder
<TABLE>
<CAPTION>
Number of Additional
Name Shares Being Sold
- ---- --------------------
<S> <C>
Michael G. Hanna..............................
-------------
Total
</TABLE>
II-1
<PAGE> 25
Annex I
[Insert names of stockholders of the Company who will be required to
sign lock-ups]
A-1
<PAGE> 1
EXHIBIT 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
INTRACEL CORPORATION
1. The name of the Corporation is Intracel Corporation.
2. The address of its registered office in the State of Delaware is 1209
Orange Street, in the City of Wilmington, 19801, County of New Castle. The name
of its registered agent at such address is The Corporation Trust Company.
3. The nature of the business of the Corporation and the objects or
purposes to be transacted, promoted or carried on by it are as follows: To
engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of the State of Delaware.
4. The total number of shares of all classes of stock that the
Corporation is authorized to issue is Fifty-Five Million (55,000,000) shares,
consisting of Fifty Million (50,000,000) shares of Common Stock with a par value
of $.0001 per share and Five Million (5,000,000) shares of Preferred Stock with
a par value of $.0001 per share.
Any of the shares of Preferred Stock may be issued from time to time
in one or more series. Subject to the limitations and restrictions in this
paragraph 4 set forth, the Board of Directors or a Committee of the Board of
Directors, to the extent permitted by law and the Bylaws of the Corporation or a
resolution of the Board of Directors, by resolution or resolutions, is
authorized to create or provide for any such series, and to fix the
designations, preferences and relative, participating, optional or other special
rights, and qualifications, limitations or restrictions thereof, including,
without limitation, the authority to fix or alter the dividend rights, dividend
rates, conversion rights, exchange rights, voting rights, rights and terms of
redemption (including sinking and purchase fund provisions), the redemption
price or prices, the dissolution preferences and the rights in respect to any
distribution of assets of any wholly unissued series of Preferred Stock and the
number of shares constituting any such series, and the designation thereof, or
any of them and to increase or decrease the number of shares of any series so
created, subsequent to the issue of that series but not below the number of
shares of such series then outstanding. In case the number of shares of any
series shall be so decreased, the shares constituting such decrease shall resume
the status which they had prior to the adoption of the resolution originally
fixing the number of shares of such series.
There shall be no limitation or restriction on any variation between
any of the different series of Preferred Stock as to the designations,
preferences and relative, participating, optional or other special rights, and
the qualifications, limitations or restrictions thereof; and the
1
<PAGE> 2
several series of Preferred Stock may, except as hereinafter in this paragraph 4
otherwise expressly provided, vary in any and all respects as fixed and
determined by the resolution or resolutions of the Board of Directors or by
Committee of the Board of Directors, providing for the issuance of the various
series; provided, however, that all shares of any one series of Preferred Stock
shall have the same designation, preferences and relative, participating,
optional or other special rights and qualifications, limitations and
restrictions.
Except as otherwise required by law, or as otherwise fixed by
resolution or resolutions of the Board of Directors with respect to one or more
series of Preferred Stock, the entire voting power and all voting rights shall
be vested exclusively in the Common Stock, and each stockholder of the
Corporation who at the time possesses voting power for any purpose shall be
entitled to one vote for each share of such stock standing in his name on the
books of the Corporation.
5. The following provisions are inserted for the management of the
business and the conduct of the affairs of the Corporation, and for further
definition, limitation and regulation of the powers of the Corporation and of
its directors and stockholders:
(1) The business and affairs of the Corporation shall be managed by
or under the direction of the Board of Directors.
(2) The directors shall have concurrent power with the stockholders
to make, alter, amend, change, add to or repeal the Bylaws of the
Corporation.
(3) The number of directors of the Corporation shall be as from time
to time determined by resolution adopted by the Board of Directors.
Election of directors need not be by written ballot unless the Bylaws so
provide.
(4) To the fullest extent permitted by Delaware statutory or
decisional law, as amended or interpreted, no director of this
Corporation shall be personally liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a
director. Any amendment to or repeal of this Article 5 subsection (4)
shall not adversely affect any right or protection of a director of this
Corporation for or with respect to any acts or omissions of such
director occurring prior to such amendment or repeal. This Article 5
subsection (4) does not affect the availability of equitable remedies
for breach of fiduciary duties.
(5) In addition to the powers and authority hereinbefore or by
statute expressly conferred upon them, the directors are hereby
empowered to exercise all such powers and do all such acts and things as
may be exercised or done by the Corporation, subject, nevertheless, to
the provisions of the DGCL, this Certificate of Incorporation, and any
Bylaws adopted by the stockholders; provided, however, that no Bylaws
hereafter adopted by the stockholders shall invalidate any prior act of
the directors which would have been valid if such Bylaws had not been
adopted.
2
<PAGE> 3
(6) The directors shall be divided, with respect to the terms for
which they severally hold office, into three classes, as nearly equal in
number of directors as possible, as determined by the Board of
Directors, with the term of office of the first class to expire at the
first Annual Meeting of Stockholders to be held after the effectiveness
of the Corporation's registration statement on Form S-1 relating to its
initial public offering, the term of office of the second class to
expire at the second Annual Meeting of Stockholders to be held after the
effectiveness of such registration statement, and the term of office of
the third class to expire at the third Annual Meeting of Stockholders to
be held after the effectiveness of such registration statement with each
class of directors to hold office until their successors are duly
elected and have qualified. At each Annual Meeting of Stockholders
following such initial classification and election, directors elected to
succeed those directors whose terms expire at such annual meeting, other
than those directors elected under particular circumstances by a
separate class vote of the holders of any class or series of stock
having a preference over the Common Stock as to dividends or upon
liquidation of the Corporation, shall be elected to hold office for a
term expiring at the Annual Meeting of Stockholders in the third year
following the year of their election and until their successors are duly
elected and have qualified. When the number of directors is changed, any
newly created directorships or any decrease in directorships shall be so
apportioned among the classes as to make all classes as nearly equal in
number of directors as possible, as determined by the Board of
Directors. No decrease in the number of directors constituting the Board
of Directors shall shorten the term of any incumbent director.
To the extent that any holders of any class or series of stock
other than Common Stock issued by the Corporation shall have the
separate right, voting as a class or series, to elect directors, the
directors elected by such class or series shall be deemed to constitute
an additional class of directors and shall have a term of office for one
year or such other period as may be designated by the provisions of such
class or series providing such separate voting right to the holders of
such class or series of stock, and any such class of directors shall be
in addition to the classes designated above.
6. Elections of directors need not be by written ballot unless the
bylaws of the Corporation shall so provide.
7. Whenever a compromise or arrangement is proposed between this
Corporation and its creditors or any class of them and/or between this
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this Corporation or of any creditor or stockholder thereof, or on the
application of any receiver or receivers appointed for this Corporation under
the provisions of Section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers appointed
for this Corporation under the provisions of Section 279 of Title 8 of the
Delaware Code order a meeting of the creditors or class of creditors, and/or of
the stockholders or class of stockholders of this Corporation, as the case may
be, to be summoned in
3
<PAGE> 4
such manner as the said court directs. If a majority in number representing
three-fourths in value of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of this Corporation, as the case may be,
agree to any compromise or arrangement and to any reorganization of this
Corporation as a consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be binding on all the
creditors or class of creditors, and/or on all the stockholders or class of
stockholders, of this Corporation, as the case may be, and also on this
Corporation.
8. The Corporation reserves the right to amend, alter, change or repeal
any provision contained in this Certificate of Incorporation, in the manner now
or hereafter prescribed by statute, and all rights conferred upon stockholders
herein are granted subject to this reservation.
9. Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the DGCL) outside the State of Delaware
at such place or places as may be designated from time to time by the Board of
Directors or in the Bylaws of the Corporation.
Any action required or permitted to be taken at any annual or special
meeting of the stockholders of the Corporation may not be taken without a
meeting, without prior written notice and without a vote; provided, however,
that any action required or permitted to be taken at any meeting of a class of
holders of Preferred Stock of the Corporation, may be taken without a meeting,
without prior notice and without a vote, if a consent in writing, setting forth
the action so taken, shall be signed by the class of holders of outstanding
Preferred Stock having not less than the minimum number of votes that would be
necessary to authorize or taken such action at a meeting at which all shares of
Preferred Stock entitled to vote thereon were present and voted. Prompt notice
of the taking of the corporate action without a meeting by less than unanimous
written consent shall be given to those holders of Preferred Stock who have not
consented in writing.
4
<PAGE> 1
EXHIBIT 3.2
AMENDED AND RESTATED
BYLAWS
OF
INTRACEL CORPORATION
(A Delaware corporation)
<PAGE> 2
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
SECTION 1 OFFICES..............................................................1
SECTION 2 STOCKHOLDERS.........................................................1
2.1 Annual Meeting.........................................................1
2.2 Special Meetings.......................................................1
2.3 Place of Meeting.......................................................1
2.4 Notice of Meeting......................................................1
2.5 Waiver of Notice.......................................................2
2.5.1 Waiver in Writing.............................................2
2.5.2 Waiver by Attendance..........................................2
2.6 Fixing of Record Date for Determining Stockholders.....................2
2.6.1 Meetings......................................................2
2.6.2 Dividends, Distributions and Other Rights.....................2
2.7 Voting List............................................................3
2.8 Nature of Business.....................................................3
2.9 Quorum.................................................................5
2.10 Manner of Acting.......................................................5
2.11 Proxies................................................................5
2.11.1 Appointment...................................................5
2.11.2 Delivery to Corporation; Duration.............................6
2.12 Voting of Shares.......................................................6
2.13 Voting for Directors...................................................6
SECTION 3 BOARD OF DIRECTORS...................................................6
3.1 General Powers.........................................................6
3.2 Number and Tenure......................................................6
3.3 Annual and Regular Meetings............................................7
3.4 Special Meetings.......................................................7
3.5 Nomination of Directors................................................7
3.6 Meetings by Telephone..................................................8
3.7 Notice of Special Meetings.............................................8
3.7.1 Personal Delivery.............................................9
3.7.2 Delivery by Mail..............................................9
3.7.3 Delivery by Private Carrier...................................9
3.7.4 Facsimile Notice..............................................9
3.7.5 Delivery by Telegraph.........................................9
3.7.6 Oral Notice...................................................9
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C>
3.8 Waiver of Notice.......................................................9
3.8.1 In Writing....................................................9
3.8.2 By Attendance................................................10
3.9 Quorum................................................................10
3.10 Manner of Acting......................................................10
Presumption of Assent........................................................10
3.12 Action by Board or Committees Without a Meeting.......................10
3.13 Resignation...........................................................10
3.14 Removal...............................................................11
3.15 Vacancies.............................................................11
3.16 Committees............................................................11
3.16.1 Creation and Authority of Committees.........................11
3.16.2 Minutes of Meetings..........................................12
3.16.3 Quorum and Manner of Acting..................................12
3.16.4 Resignation..................................................12
3.16.5 Removal......................................................12
3.17 Compensation..........................................................12
SECTION 4 OFFICERS............................................................12
4.1 Number................................................................12
4.2 Election and Term of Office...........................................13
4.3 Resignation...........................................................13
4.4 Removal...............................................................13
4.5 Vacancies.............................................................13
4.6 Chairman of the Board.................................................13
4.7 President.............................................................14
4.8 Vice President........................................................14
4.9 Secretary.............................................................14
4.10 Treasurer.............................................................14
4.11 Salaries..............................................................15
SECTION 5 CONTRACTS, LOANS, CHECKS AND DEPOSITS...............................15
5.1 Contracts.............................................................15
5.2 Loans to the Corporation..............................................15
5.3 Checks, Drafts, Etc...................................................15
5.4 Deposits..............................................................15
SECTION 6 CERTIFICATES FOR SHARES AND THEIR TRANSFER..........................15
6.1 Issuance of Shares....................................................15
6.2 Certificates for Shares...............................................16
6.3 Stock Records.........................................................16
6.4 Restriction on Transfer...............................................16
6.5 Transfer of Shares....................................................17
6.6 Lost or Destroyed Certificates........................................17
</TABLE>
iii
<PAGE> 4
<TABLE>
<S> <C> <C>
6.7 Shares of Another Corporation.........................................17
SECTION 7 BOOKS AND RECORDS...................................................17
SECTION 8 ACCOUNTING YEAR.....................................................17
SECTION 9 SEAL................................................................17
SECTION 10 INDEMNIFICATION.....................................................18
10.1 Right to Indemnification..............................................18
10.2 Right of Indemnitee to Bring Suit.....................................18
10.3 Nonexclusivity of Rights..............................................19
10.4 Insurance, Contracts and Funding......................................19
10.5 Indemnification of Employees and Agents of the Corporation............19
10.6 Persons Serving Other Entities........................................20
SECTION 11 AMENDMENTS OR REPEAL................................................20
</TABLE>
iv
<PAGE> 5
AMENDED AND RESTATED
BYLAWS
OF
INTRACEL CORPORATION
SECTION 1 OFFICES
The principal office of the corporation shall be located at its
principal place of business or such other place as the Board of Directors (the
"Board") may designate. The corporation may have such other offices, either
within or without the State of Delaware, as the Board may designate or as the
business of the corporation may require from time to time.
SECTION 2 STOCKHOLDERS
2.1 ANNUAL MEETING
The annual meeting of the stockholders shall be held each year within 90
to 180 days after the fiscal year end of the corporation at a date, time and
location determined by resolution of the Board for the purpose of electing
Directors and transacting such other business as may properly come before the
meeting. If the day fixed for the annual meeting is a legal holiday at the place
of the meeting, the meeting shall be held on the next succeeding business day.
If the annual meeting is not held on the date designated therefor, the Board
shall cause the meeting to be held on such other date as may be convenient.
2.2 SPECIAL MEETINGS
The Chairman of the Board or the President may call special meetings of
the stockholders for any purpose, and special meetings shall be called by either
the Chairman of the Board or the President at the written request of a majority
of the Board.
2.3 PLACE OF MEETING
All meetings shall be held at the principal office of the corporation or
at such other place as designated by the Board, by any person entitled to call a
meeting hereunder.
2.4 NOTICE OF MEETING
Notice of an annual or special meeting of stockholders as provided for
herein shall be delivered to each stockholder entitled to notice of or to vote
at the meeting either personally or by mail, not less than 10 nor more than 60
days before the meeting, written notice stating the place, day and hour of the
meeting and, in the case of a special meeting, the purpose or purposes for which
the meeting is called. If such notice is mailed, it shall
<PAGE> 6
be deemed delivered when deposited in the official government mail properly
addressed to the stockholder at such stockholder's address as it appears on the
stock transfer books of the corporation with postage prepaid. If the notice is
telegraphed, it shall be deemed delivered when the content of the telegram is
delivered to the telegraph company. Notice given in any other manner shall be
deemed delivered when dispatched to the stockholder's address, telephone number
or other number appearing on the stock transfer records of the corporation.
2.5 WAIVER OF NOTICE
2.5.1 WAIVER IN WRITING
Whenever any notice is required to be given to any stockholder under the
provisions of these Bylaws, the Certificate of Incorporation or the General
Corporation Law of the State of Delaware, as now or hereafter amended (the
"DGCL"), a waiver thereof in writing, signed by the person or persons entitled
to such notice, whether before or after the time stated therein, shall be deemed
equivalent to the giving of such notice.
2.5.2 WAIVER BY ATTENDANCE
The attendance of a stockholder at a meeting shall constitute a waiver
of notice of such meeting, except when a stockholder attends a meeting for the
express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened.
2.6 FIXING OF RECORD DATE FOR DETERMINING STOCKHOLDERS
2.6.1 MEETINGS
For the purpose of determining stockholders entitled to notice of and to
vote at any meeting of stockholders or any adjournment thereof, the Board may
fix a record date, which record date shall not precede the date upon which the
resolution fixing the record date is adopted by the Board, and which record date
shall be nor more than 60 (or the maximum number permitted by applicable law) or
less than 10 days before the date of such meeting. If no record date is fixed by
the Board, the record date for determining stockholders entitled to notice of
and to vote at a meeting of stockholders shall be at the close of business on
the day next preceding the day on which notice is given or, if notice is waived,
at the close of business on the day next preceding the day on which the meeting
is held. A determination of stockholders of record entitled to notice of and to
vote at the meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the board may fix a new record date for the
adjourned meeting.
2.6.2 DIVIDENDS, DISTRIBUTIONS AND OTHER RIGHTS
For the purpose of determining stockholders entitled to receive payment
of any dividend or other distribution or allotment of any rights or the
stockholders entitled to exercise any rights in respect of any change,
conversion or exchange of stock, or for the
-2-
<PAGE> 7
purpose of any other lawful action, the Board may fix a record date, which
record date shall not precede the date upon which the resolution fixing the
record date is adopted, and which record date shall be not more than 60 (or the
maximum number permitted by applicable law) days prior to such action. If no
record date is fixed, the record date for determining stockholders for any such
purpose shall be at the close of business on the day on which the Board adopts
the resolution relating thereto.
2.7 VOTING LIST
At least 10 days before each meeting of stockholders, a complete list of
the stockholders entitled to vote at such meeting, or any adjournment thereof,
shall be made, arranged in alphabetical order, with the address of and number of
shares held by each stockholder. This list shall be open to examination by any
stockholder, for any purpose germane to the meeting, during ordinary business
hours, for a period of 10 days prior to the meeting, either at a place within
the city where the meeting is to be held, which place shall be specified in the
notice of the meeting, or, if not so specified, at the place where the meeting
is to be held. This list shall also be produced and kept at such meeting for
inspection by any stockholder who is present.
2.8 NATURE OF BUSINESS
At any meeting, only such business shall be conducted as shall have been
brought before the meeting by or at the direction of the Board or by any
stockholder who complies with the procedures set forth in this Section 2.8.
No business may be transacted at any meeting of stockholders, other than
business that is either (a) specified in the notice of meeting (or any
supplement thereto) given by or at the direction of the Board (or any duly
authorized committee thereof), (b) otherwise properly brought before such
meeting of stockholders by or at the direction of the Board (or any duly
authorized committee thereof) or (c) in the case of an annual meeting of the
stockholders, otherwise properly brought before such meeting by any stockholder
(i) who is a stockholder of record on the date of the giving of the notice
provided for in this Section 2.8 and on the record date for the determination of
stockholders entitled to vote at such annual meeting of the stockholders and
(ii) who complies with the notice procedures set forth in this Section 2.8.
In addition to any other applicable requirements, for business to be
properly brought before an annual meeting of the stockholders by a stockholder,
such stockholder must have given timely notice thereof in proper written form to
the Secretary.
To be timely, a stockholder's notice to the secretary must be delivered
to or mailed and received at the principal executive offices of the corporation
not less than 45 days nor more than 75 days prior to the date on which the
corporation first mailed its proxy materials for the previous year's annual
meeting of shareholders (or the date on which the corporation mails its proxy
materials for the current year if during the prior year the corporation did not
hold an annual meeting or if the date of the annual meeting was changed more
than 30 days from the prior year).
-3-
<PAGE> 8
To be in proper written form, a stockholder's notice to the Secretary
must set forth as to each matter such stockholder proposes to bring before the
annual meeting of the stockholders (i) a brief description of the business
desired to be brought before the annual meeting of the stockholders and the
reasons for conducting such business at the annual meeting of the stockholders,
(ii) the name and record address of such stockholder, (iii) the class or series
and number of shares of capital stock of the corporation which are owned
beneficially or of record by such stockholder as of the record date for the
meeting (if such date shall then have been made publicly available and shall
have occurred) and as of the date of such notice, (iv) a description of all
arrangements or understandings between such stockholder and any other person or
persons (including their names) in connection with the proposal of such business
by such stockholder and any material interest of such stockholder in such
business, (v) any other information which would be required to be disclosed in a
proxy statement or other filings required to be made in connection with the
solicitations of proxies for the proposal pursuant to Section 14 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules
and regulations promulgated thereunder if such stockholder were engaged in such
a solicitation, and (vi) a representation that such stockholder intends to
appear in person or by proxy at the annual meeting of the stockholders to bring
such business before the meeting.
No business shall be conducted at the annual meeting of the stockholders
except business brought before the annual meeting of the stockholders in
accordance with the procedures set forth in this Section 2.8, provided, however,
that, once business has been properly brought before the annual meeting of the
stockholders in accordance with such procedures, nothing in this Section 2.8
shall be deemed to preclude discussion by any stockholder of any such business.
The Chairman of an annual meeting shall, if the facts warrant, determine
and declare to the meeting that business was not properly brought before the
meeting in accordance with the provisions of this Section 2.8, and if he should
so determine he shall so declare to the meeting, and any such business not
properly brought before the meeting shall not be transacted.
Nothing in this Section 2.8 shall affect the right of a stockholder to
request inclusion of a proposal in the corporation's proxy statement to the
extent that such right is provided by an applicable rule of the Securities and
Exchange Commission.
When a meeting is adjourned to another time or place, notice of the
adjourned meeting need not be given if the time and place thereof are announced
at the meeting at which the adjournment is taken, unless the adjournment is for
more than 30 days, or unless after the adjournment a new record date is fixed
for the adjourned meeting, in which case notice of the adjourned meeting shall
be given to each stockholder of record entitled to vote at the meeting. At the
adjourned meeting, any business may be transacted that might have been
transacted at the original meeting.
-4-
<PAGE> 9
2.9 QUORUM
A majority of the outstanding shares of the corporation entitled to
vote, present in person or represented by proxy at the meeting, shall constitute
a quorum at a meeting of the stockholders; provided, that where a separate vote
by a class or classes is required, a majority of the outstanding shares of such
class or classes, present in person or represented by proxy at the meeting,
shall constitute a quorum entitled to take action with respect to that vote on
that matter. If less than a majority of the outstanding shares entitled to vote
are represented at a meeting, a majority of the shares so represented may
adjourn the meeting from time to time without further notice. If a quorum is
present or represented at a reconvened meeting following such an adjournment,
any business may be transacted that might have been transacted at the meeting as
originally called. The stockholders present at a duly organized meeting may
continue to transact business until adjournment, notwithstanding the withdrawal
of enough stockholders to leave less than a quorum.
2.10 MANNER OF ACTING
In all matters other than the election of Directors, if a quorum is
present, the affirmative vote of the majority of the outstanding shares present
in person or represented by proxy at the meeting and entitled to vote on the
subject matter shall be the act of the stockholders, unless the vote of a
greater number is required by these Bylaws, the Certificate of Incorporation or
the DGCL. Where a separate vote by a class or classes is required, if a quorum
of such class or classes is present, the affirmative vote of the majority of
outstanding shares of such class or classes present in person or represented by
proxy at the meeting shall be the act of such class or classes. Directors shall
be elected by a plurality of the votes of the shares present in person or
represented by proxy at the meeting and entitled to vote on the election of
Directors.
2.11 PROXIES
2.11.1 APPOINTMENT
Each stockholder entitled to vote at a meeting of stockholders or to
express consent or dissent to corporate action in writing without a meeting may
authorize another person or persons to act for such stockholder by proxy. Such
authorization may be accomplished by the stockholder or such stockholder's
authorized office, Director, employee or agent executing a writing or causing
his or her signature to be affixed to such writing by any reasonable means,
including facsimile signature, or (b) transmitting or authorizing the
transmission of a telegram, cablegram or other means of electronic transmission
to the intended holder of the proxy or to a proxy solicitation firm, proxy
support service or similar agent duly authorized by the intended proxy holder to
receive such transmission; provided, that any such telegram, cablegram or other
electronic transmission must either set forth or be accompanied by information
from which it can be determined that the telegram, cablegram or other electronic
transmission was authorized by the stockholder. Any copy, facsimile
telecommunication or other reliable reproduction of the writing or transmission
by which a stockholder has authorized
-5-
<PAGE> 10
another person to act as proxy for such stockholder may be substituted or used
in lieu of the original writing or transmission for any and all purposes for
which the original writing or transmission could be used, provided that such
copy, facsimile telecommunication or other reproduction shall be a complete
reproduction of the entire original writing or transmission.
2.11.2 DELIVERY TO CORPORATION; DURATION
A proxy shall be filed with the Secretary before or at the time of the
meeting or the delivery to the corporation of the consent to corporate action in
writing. A proxy shall become invalid three years after the date of its
execution unless otherwise provided in the proxy. A proxy with respect to a
specified meeting shall entitle the holder thereof to vote at any reconvened
meeting following adjournment of such meeting but shall not be valid after the
final adjournment thereof.
2.12 VOTING OF SHARES
Each outstanding share entitled to vote with respect to the subject
matter of an issue submitted to a meeting of stockholders shall be entitled to
one vote upon each such issue.
2.13 VOTING FOR DIRECTORS
Each stockholder entitled to vote at an election of Directors may vote,
in person or by proxy, the number of shares owned by such stockholder for as
many persons as there are Directors to be elected and for whose election such
stockholder has a right to vote.
SECTION 3 BOARD OF DIRECTORS
3.1 GENERAL POWERS
The business and affairs of the corporation shall be managed by the
Board.
3.2 NUMBER AND TENURE
The Board shall be composed of not less than six nor more than nine
Directors, the specific number to be set by resolution of the board or the
stockholders, provided that the Board may consist of fewer than three Directors
until vacancies are filled. The number of Directors may be changed from time to
time by amendment to these Bylaws, but no decrease in the number of Directors
shall have the effect of shortening the term of any incumbent Director. Unless a
Director resigns or is removed, he or she shall hold office until the next
annual meeting of stockholders or until his or her successor is elected,
whichever is later. Directors need not be stockholders of the corporation or
residents of the State of Delaware.
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<PAGE> 11
3.3 ANNUAL AND REGULAR MEETINGS
An annual Board meeting shall be held without notice immediately after
and at the same place as the annual meeting of stockholders. By resolution, the
Board or any committee designated by the Board may specify the time and place
either within or without the State of Delaware for holding regular meetings
thereof without other notice than such resolution.
3.4 SPECIAL MEETINGS
Special meetings of the Board or any committee appointed by the Board
may be called by or at the request of the Chairman of the of the Board, the
President, Secretary or, in the case of special Board meetings, any two
Directors and, in the case of any special meeting of any committee appointed by
the Board, by the Chairman thereof. The person or persons authorized to call
special meetings may fix any place either within or without the State of
Delaware as the place for holding any special meeting called by them.
3.5 NOMINATION OF DIRECTORS
Only persons who are nominated in accordance with the following
procedures shall be eligible for election as Directors of the corporation,
except as may be otherwise provided in the Certificate of Incorporation with
respect to the right of holders of preferred stock of the corporation to
nominate and elect a specified number of Directors in certain circumstances.
Nominations of persons for election to the Board may be made at any annual
meeting of the stockholders, or at any special meeting of the stockholders
called for the purpose of electing Directors, (a) by or at the direction of the
Board (or any duly authorized committee thereof) or (b) by any stockholder of
the corporation (i) who is a stockholder of record on the date of the giving of
the notice provided for in this Section 3.5 and on the record date for the
determination of stockholders entitled to vote at such meeting and (ii) who
complies with the notice procedures set forth in this Section 3.5. In addition
to any other applicable requirements, for a nomination to be made by a
stockholder, such stockholder must have given timely notice thereof in proper
written form to the Secretary.
To be timely, a stockholder's notice to the Secretary must be delivered
to or mailed and received at the principal executive offices of the corporation
(a) in the case of an annual meeting of the stockholders, not less than 45 days
nor more than 75 days prior to the date on which the corporation first mailed
its proxy materials for the previous year's annual meeting of shareholders (or
the date on which the corporation mails its proxy materials for the current year
if during the prior year the corporation did not hold an annual meeting or if
the date of the annual meeting was changed more than 30 days from the prior
year); and (b) in the case of a special meeting of the stockholders called for
the purpose of electing Directors, not later than the close of business on the
10th day following the day on which notice of the date of the special meeting of
the stockholders was mailed or public disclosure of the late of the special
meeting of the stockholders was made, whichever first occurs.
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To be in proper written form, a stockholder's notice to the Secretary
must set forth (a) as to each person whom the stockholder proposes to nominate
for election as a Director (i) the name, age, business address and residence
address of the person, (ii) the principal occupation or employment of the
person, (iii) the class or series and number of shares of capital stock of the
corporation which are owned beneficially or of record by the person as of the
record date for the meeting (if such date shall then have been made publicly
available and shall have occurred) and as of the date of such notice and (iv)
any other information relating to the person that would be required to be
disclosed in a proxy statement or other filings required to be made in
connection with solicitations of proxies for election of Directors pursuant to
Section 14 of the Exchange Act, and the rules and regulations promulgated
thereunder; and (b) as to the stockholder giving the notice (i) the name and
record address of such stockholder, (ii) the class or series and number of
shares of capital stock of the corporation which are owned beneficially or of
record by such stockholder as of the record date for the meeting (if such date
shall then have been made publicly available and shall have occurred) and as of
the date of such notice, (iii) a description of all arrangements or
understandings between such stockholder and each proposed nominee and any other
person or persons (including their names) pursuant to which the nominations) are
to be made by such stockholder, (iv) a representation that such stockholder
intends to appear in person or by proxy at the meeting to nominate the persons
named in its notice and (v) any other information relating to such stockholder
that would be required to be disclosed in a proxy statement or other filings
required to be made in connection with solicitations of proxies for election of
Directors pursuant to Section 14 of the Exchange Act and the rules and
regulations promulgated thereunder. Such notice must be accompanied by a written
consent of each proposed nominee to being named as a nominee and to serve as a
Director if elected.
No person shall be eligible for election as a Director of the
corporation unless nominated in accordance with the procedures set forth in this
Section 3.5. The Chairman of the meeting shall, if the facts warrant, determine
and declare to the meeting that a nomination was not made in accordance with the
foregoing procedure, and if he should so determine, he shall so declare to the
meeting and the defective nomination shall be disregarded.
3.6 MEETINGS BY TELEPHONE
Members of the Board or any committee designated by the Board may
participate in a meeting of such Board or committee by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other. Participation by such means
shall constitute presence in person at a meeting.
3.7 NOTICE OF SPECIAL MEETINGS
Notice of a special Board or committee meeting stating the place, day
and hour of the meeting shall be given to a Director in writing or orally by
telephone or in person. Neither the business to be transacted at, nor the
purpose of, any special meeting need be specified in the notice of such meeting.
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3.7.1 PERSONAL DELIVERY
If notice is given by personal delivery, the notice shall be effective
if delivered to a Director at least two days before the meeting.
3.7.2 DELIVERY BY MAIL
If notice is delivered by mail, the notice shall be deemed effective if
deposited in the official government mail properly addressed to a Director at
his or her address shown on the records of the corporation with postage prepaid
at least five days before the meeting.
3.7.3 DELIVERY BY PRIVATE CARRIER
If notice is given by private carrier, the notice shall be deemed
effective when dispatched to a Director at his or her address shown on the
records of the corporation at least three days before the meeting.
3.7.4 FACSIMILE NOTICE
If notice is delivered by wire or wireless equipment that transmits a
facsimile of the notice, the notice shall be deemed effective when dispatched at
least two days before the meeting to a Director at his or her telephone number
or other number appearing on the records of the corporation.
3.7.5 DELIVERY BY TELEGRAPH
If notice is delivered by telegraph, the notice shall be deemed
effective if the content thereof is delivered to the telegraph company at least
two days before the meeting for delivery to a Director at his or her address
shown on the records of the corporation.
3.7.6 ORAL NOTICE
If notice is delivered orally, by telephone or in person, the notice
shall be deemed effective if personally given to the Director at least two days
before the meeting.
3.8 WAIVER OF NOTICE
3.8.1 IN WRITING
Whenever any notice is required to be given to any Director under the
provisions of these Bylaws, the Certificate of Incorporation or the DGCL, a
waiver thereof in writing, signed by the person or persons entitled to such
notice, whether before or after the time stated therein, shall be deemed
equivalent to the giving of such notice. Neither the business to be transacted
at, nor the purpose of, any regular or special meeting of the board or any
committee appointed by the Board need to be specified in the waiver of notice of
such meeting.
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3.8.2 BY ATTENDANCE
The attendance of a Director at a Board or committee meeting shall
constitute a waiver of notice of such meeting, except when a Director attends a
meeting for the express purpose of objecting, at the beginning of the meeting,
to the transaction of any business because the meeting is not lawfully called or
convened.
3.9 QUORUM
A majority of the total number of Directors fixed in the manner provided
in these Bylaws or, if vacancies exist on the Board, a majority of the total
number of Directors then serving on the Board, provided, however, that such
number may be not less than one-third of the total number of Directors fixed in
the manner provided in these Bylaws, shall constitute a quorum for the
transaction of business at any Board meeting. If less than a majority are
present at a meeting, a majority of the Directors present may adjourn the
meeting from time to time without further notice.
3.10 MANNER OF ACTING
The act of the majority of the Directors present at a Board or committee
meeting at which there is a quorum shall be the act of the Board or committee,
unless the vote of a greater number is required by these Bylaws, the Certificate
of Incorporation or the DGCL.
3.11 PRESUMPTION OF ASSENT
A Director of the corporation present at a Board or committee meeting at
which action on any corporate matter is taken shall be presumed to have assented
to the action taken unless his or her dissent is entered in the minutes of the
meeting, or unless such Director files a written dissent to such action with the
person acting as the secretary of the meeting before the adjournment thereof, or
forwards such dissent by registered mail to the Secretary of the corporation
immediately after the adjournment of the meeting. A Director who voted in favor
of such action may not dissent.
3.12 ACTION BY BOARD OR COMMITTEES WITHOUT A MEETING
Any action that could be taken at a meeting of the Board or of any
committee appointed by the Board may be taken without a meeting if a written
consent setting forth the action so taken is signed by each of the Directors or
by each committee member. Any such written consent shall be inserted in the
minute book as if it were the minutes of a Board or a committee meeting.
3.13 RESIGNATION
Any Director may resign at any time by delivering written notice to the
Chairman of the Board, the President, the Secretary or the Board, or to the
registered office of the corporation. Any such resignation shall take effect at
the time specified therein or, if the
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time is not specified, upon delivery thereof and, unless otherwise specified
therein, the acceptance of such resignation shall not be necessary to make it
effective.
3.14 REMOVAL
At a meeting of stockholders called expressly for that purpose, one or
more members of the Board (including the entire Board) may be removed, with or
without cause, by a vote of the holders of a majority of the shares then
entitled to vote on the election of Directors.
Notwithstanding the foregoing, unless the certificate of incorporation
otherwise provides, if the Board is classified, shareholders may effect removal
only for cause.
3.15 VACANCIES
Any vacancy occurring on the Board may be filled by the affirmative vote
of a majority of the remaining Directors though less than a quorum of the Board.
A Director elected to fill a vacancy shall be elected for the unexpired term of
his or her predecessor in office. Any directorship to be filled by reason of an
increase in the number of Directors may be filled by the Board.
3.16 COMMITTEES
3.16.1 CREATION AND AUTHORITY OF COMMITTEES
The Board may, by resolution passed by a majority of the number of
Directors fixed by or in the manner provided in these Bylaws, appoint standing
or temporary committees, each committee to consist of one or more Directors of
the corporation. The Board may designate one or more Directors as alternate
members of any committee, who may replace any absent or disqualified member at
any meeting of the committee. In the absence or disqualification of a member of
a committee, the member or members thereof present at any meeting and not
disqualified from voting, whether or not such member or members constitute a
quorum, may unanimously appoint another member of the Board to act at the
meeting in the place of any such absent or disqualified member. Any such
committee, to the extent provided in the resolution of the Board establishing
such committee or as otherwise provided in these Bylaws, shall have and may
exercise all the powers and authority of the Board in the management of the
business and affairs of the corporation, and may authorize the seal of the
corporation to be affixed to all papers that require it; but no such committee
shall have the power or authority in reference to (a) amending the Certificate
of Incorporation (except that a committee may, to the extent authorized in the
resolution or resolutions providing for the issuance of shares of stock adopted
by the Board as provided in Section 151(a) of the DGCL, fix the designations,
preferences or rights of such shares to the extent permitted under Section 141
of the DGCL), (b) adopting an agreement of merger or consolidation under Section
251 or 252 of the DGCL, (c) recommending to the stockholders the sale, lease or
exchange or other disposition of all or substantially all the property and
assets of the corporation, (d) recommending to the stockholders a dissolution of
the corporation or a revocation of a dissolution, or (e) amending these Bylaws;
and, unless expressly provided by resolution
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of the Board, no such committee shall have the power or authority to declare a
dividend, to authorize the issuance of stock or to adopt a certificate of
ownership and merger pursuant to Section 253 of the DGCL.
3.16.2 MINUTES OF MEETINGS
All committees so appointed shall keep regular minutes of their meetings
and shall cause them to be recorded in books kept for that purpose.
3.16.3 QUORUM AND MANNER OF ACTING
A majority of the number of Directors composing any committee of the
Board, as established and fixed by resolution of the Board, shall constitute a
quorum for the transaction of business at any meeting of such committee but, if
less than a majority are present at a meeting, a majority of such Directors
present may adjourn the meeting from time to time without further notice. The
act of a majority of the members of a committee present at a meeting at which a
quorum is present shall be the act of such committee.
3.16.4 RESIGNATION
Any member of any committee may resign at any time by delivering written
notice to the Chairman of the Board, the President, the Secretary, the Board or
the Chairman of such committee. Any such resignation shall take effect at the
time specified therein or, if the time is not specified, upon delivery thereof
and, unless otherwise specified therein, the acceptance of such resignation
shall not be necessary to make it effective.
3.16.5 REMOVAL
The Board may remove from office any member of any committee elected or
appointed by it, but only by the affirmative vote of not less than a majority of
the number of Directors fixed by or in the manner provided in these Bylaws.
3.17 COMPENSATION
By Board resolution, Directors and committee members may be paid their
expenses, if any, of attendance at each Board or committee meeting, a fixed sum
for attendance at each Board or committee meeting or a stated salary as Director
or a committee member, or a combination of the foregoing. No such payment shall
preclude any Director or committee member from serving the corporation in any
other capacity and receiving compensation therefor.
SECTION 4 OFFICERS
4.1 NUMBER
The officers of the corporation shall be a President, a Secretary and a
Treasurer, each of whom shall be elected by the Board. One or more Vice
Presidents and such other
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officers and assistant officers, including Chairman of the Board, may be elected
or appointed by the Board, such officers and assistant officers to hold office
for such period, have such authority and perform such duties as are provided in
these Bylaws or as may be provided by resolution of the Board. Any officer may
be assigned by the Board any additional title that the Board deems appropriate.
The Board may delegate to any officer or agent the power to appoint any such
subordinate officers or agents and to prescribe their respective terms of
office, authority and duties. Any two or more offices may be held by the same
person.
4.2 ELECTION AND TERM OF OFFICE
The officers of the corporation shall be elected annually by the Board
at the Board meeting held after the annual meeting of the stockholders. If the
election of officers is not held at such meeting, such election shall be held as
soon thereafter as a Board meeting conveniently may be held. Unless an officer
dies, resigns or is removed from office, he or she shall hold office until the
next annual meeting of the Board or until his or her successor is elected.
4.3 RESIGNATION
Any officer may resign at any time by delivering written notice to the
Chairman of the Board, the President, a Vice President, the Secretary or the
Board. Any such resignation shall take effect at the time specified therein or,
if the time is not specified, upon delivery thereof and, unless otherwise
specified therein, the acceptance of such resignation shall not be necessary to
make it effective.
4.4 REMOVAL
Any officer or agent elected or appointed by the Board may be removed by
the Board whenever in its judgment the best interests of the corporation would
be served thereby, but such removal shall be without prejudice to the contract
rights, if any, of the person so removed.
4.5 VACANCIES
A vacancy in any office because of death, resignation, removal,
disqualification, creation of a new office or any other cause may be filled by
the Board for the unexpired portion of the term, or for a new term established
by the Board.
4.6 CHAIRMAN OF THE BOARD
If elected, the Chairman of the Board shall perform such duties as shall
be assigned to him or her by the Board from time to time and shall preside over
meetings of the Board and stockholders unless another officer is appointed or
designated by the Board as Chairman of such meeting.
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4.7 PRESIDENT
The President shall be the chief executive officer of the corporation
unless some other officer is so designated by the Board, shall preside over
meetings of the Board and stockholders in the absence of a Chairman of the Board
and, subject to the Board's control, shall supervise and control all the assets,
business and affairs of the corporation. The President may sign certificates for
shares of the corporation, deeds, mortgages, bonds, contracts or other
instruments, except when the signing and execution thereof have been expressly
delegated by the Board or by these Bylaws to some other officer or agent of the
corporation or are required by law to be otherwise signed or executed by some
other officer or in some other manner. In general, the President shall perform
all duties incident to the office of President and such other duties as are
prescribed by the Board from time to time.
4.8 VICE PRESIDENT
In the event of the death of the President or his or her inability to
act, the Vice President (or if there is more than one Vice President, the Vice
President who was designated by the Board as the successor to the President, or
if no Vice President is so designated, the Vice President first elected to such
office) shall perform the duties of the President, except as may be limited by
resolution of the Board, with all the powers of and subject to all the
restrictions upon the President. Any Vice President may sign with the Secretary
or any Assistant Secretary certificates for shares of the corporation. Vice
Presidents shall have, to the extent authorized by the President or the Board,
the same powers as the President to sign deeds, mortgages, bonds, contracts or
other instruments. Vice Presidents shall perform such other duties as from time
to time may be assigned to them by the President or the Board.
4.9 SECRETARY
The Secretary shall be responsible for preparation of minutes of
meetings of the Board and stockholders, maintenance of the corporation's records
and stock registers, and authentication of the corporation's records and shall
in general perform all duties incident to the office of Secretary and such other
duties as from time to time may be assigned to him or her by the President or
the Board. In the absence of the Secretary, an Assistant Secretary may perform
the duties of the Secretary.
4.10 TREASURER
If required by the Board, the Treasurer shall give a bond for the
faithful discharge of his or her duties in such amount and with such surety or
sureties as the Board shall determine. The Treasurer shall have charge and
custody of and be responsible for all funds and securities of the corporation;
receive and give receipts for moneys due and payable to the corporation from any
source whatsoever, and deposit all such moneys in the name of the corporation in
banks, trust companies or other depositories selected in accordance with the
provisions of these Bylaws; sign certificates for shares of the corporation; and
in general perform all duties incident to the office of Treasurer and such
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other duties as from time to time may be assigned to him or her by the President
or the Board. In the absence of the Treasurer, an Assistant Treasurer may
perform the duties of the Treasurer.
4.11 SALARIES
The salaries of the officers shall be fixed from time to time by the
Board or by any person or persons to whom the Board has delegated such
authority. No officer shall be prevented from receiving such salary by reason of
the fact that he or she is also a Director of the corporation.
SECTION 5 CONTRACTS, LOANS, CHECKS AND DEPOSITS
5.1 CONTRACTS
The Board may authorize any officer or officers, or agent or agents, to
enter into any contract or execute and deliver any instrument in the name of and
on behalf of the corporation. Such authority may be general or confined to
specific instances.
5.2 LOANS TO THE CORPORATION
No loans shall be contracted on behalf of the corporation and no
evidence of indebtedness shall be issued in its name unless authorized by a
resolution of the Board. Such authority may be general or confined to specific
instances.
5.3 CHECKS, DRAFTS, ETC.
All checks, drafts or other orders for the payment of money, notes or
other evidences of indebtedness issued in the name of the corporation shall be
signed by such officer or officers, or agent or agents, of the corporation and
in such manner as is from time to time determined by resolution of the Board.
5.4 DEPOSITS
All funds of the corporation not otherwise employed shall be deposited
from time to time to the credit of the corporation in such banks, trust
companies or other depositories as the Board may select.
SECTION 6 CERTIFICATES FOR SHARES AND THEIR TRANSFER
6.1 ISSUANCE OF SHARES
No shares of the corporation shall be issued unless authorized by the
Board, which authorization shall include the maximum number of shares to be
issued and the consideration to be received for each share.
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6.2 CERTIFICATES FOR SHARES
Certificates representing shares of the corporation shall be signed by
the Chairman of the Board or a Vice Chairman of the Board, if any, or the
President or a Vice President and by the Treasurer or an Assistant Treasurer or
the Secretary or an Assistant Secretary, any of whose signatures may be a
facsimile. The Board may in its discretion appoint responsible banks or trust
companies from time to time to act as transfer agents and registrars of the
stock of the corporation; and, when such appointments shall have been made, no
stock certificate shall be valid until countersigned by one of such transfer
agents and registered by one of such registrars. In case any officer, transfer
agent or registrar who has signed or whose facsimile signature has been placed
upon a certificate shall have ceased to be such officer, transfer agent or
registrar before such certificate is issued, it may be issued by the corporation
with the same effect as if such person was such officer, transfer agent or
registrar at the date of issue. All certificates shall include on their face
written notice of any restrictions that may be imposed on the transferability of
such shares and shall be consecutively numbered or otherwise identified.
6.3 STOCK RECORDS
The stock transfer books shall be kept at the registered office or
principal place of business of the corporation or at the office of the
corporation's transfer agent or registrar. The name and address of each person
to whom certificates for shares are issued, together with the class and number
of shares represented by each such certificate and the date of issue thereof,
shall be entered on the stock transfer books of the corporation. The person in
whose name shares stand on the books of the corporation shall be deemed by the
corporation to be the owner thereof for all purposes.
6.4 RESTRICTION ON TRANSFER
Except to the extent that the corporation has obtained an opinion of
counsel acceptable to the corporation that transfer restrictions are not
required under applicable securities laws, or has otherwise satisfied itself
that such transfer restrictions are not required, all certificates representing
shares of the corporation shall bear a legend on the face of the certificate, or
on the reverse of the certificate if a reference to the legend is contained on
the face, that reads substantially as follows:
"The securities evidenced by this certificate have not be
registered under the Securities Act of 1933, as amended, or any
applicable state law, and no interest therein may be sold,
distributed, assigned, offered, pledged or otherwise transferred
unless (a) there is an effective registration statement under
such Act and applicable state securities laws covering any such
transaction involving said securities or (b) this corporation
receives an opinion of legal counsel for the holder of these
securities (concurred in by legal counsel for this corporation)
stating that such transaction is
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exempt from registration or this corporation otherwise satisfies
itself that such transaction is exempt from registration. Neither
the offering of the securities nor any offering materials have
been reviewed by an administrator under the Securities Act of
1933, as amended, or any applicable state law."
6.5 TRANSFER OF SHARES
The transfer of shares of the corporation shall be made only on the
stock transfer books of the corporation pursuant to authorization or document of
transfer made by the holder of record thereof or by his or her legal
representative, who shall furnish proper evidence of authority to transfer, or
by his or her attorney-in-fact authorized by power of attorney duly executed and
filed with the Secretary of the corporation. All certificates surrendered to the
corporation for transfer shall be cancelled and no new certificate shall be
issued until the former certificates for a like number of shares shall have been
surrendered and cancelled.
6.6 LOST OR DESTROYED CERTIFICATES
In the case of a lost, destroyed or mutilated certificate, a new
certificate may be issued therefor upon such terms and indemnity to the
corporation as the Board may prescribe.
6.7 SHARES OF ANOTHER CORPORATION
Shares owned by the corporation in another corporation, domestic or
foreign, may be voted by such officer, agent or proxy as the Board may determine
or, in the absence of such determination, by the Chairman of the Board, the Vice
Chairman of the Board, the President or any Vice President of the corporation.
SECTION 7 BOOKS AND RECORDS
The corporation shall keep correct and complete books and records of
account, stock transfer books, minutes of the proceedings of its stockholders
and Board and such other records as may be necessary or advisable.
SECTION 8 ACCOUNTING YEAR
The accounting year of the corporation shall be the calendar year,
provided that if a different accounting year is at any time selected for
purposes of federal income taxes, the accounting year shall be the year so
selected.
SECTION 9 SEAL
The seal of the corporation, if any, shall consist of the name of the
corporation, the state of its incorporation and the year of its incorporation.
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SECTION 10 INDEMNIFICATION
10.1 RIGHT TO INDEMNIFICATION
Each person who was or is made a party or is threatened to be made a
party to or is otherwise involved (including, without limitation, as a witness)
in any actual or threatened action, suit or proceeding, whether civil, criminal,
administrative or investigative (hereinafter a "proceeding"), by reason of the
fact that he or she is or was a Director or officer of the corporation or that,
being or having been such a Director or officer or an employee of the
corporation, he or she is or was serving at the request of the corporation as a
Director, officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to an
employee benefit plan (hereinafter an "indemnitee"), whether the basis of such
proceeding is alleged action in an official capacity as such a Director,
officer, employee or agent or in any other capacity while serving as such a
Director, officer, employee or agent, shall be indemnified and held harmless by
the corporation to the full extent permitted by the DGCL, as the same exists or
may hereafter be amended (but, in the case of any such amendment, only to the
extent that such amendment permits the corporation to provide broader
indemnification rights than permitted prior thereto), or by other applicable law
as then in effect, against all expense, liability and loss (including attorneys'
fees, judgments, fines, ERISA excise taxes or penalties and amounts paid in
settlement) actually and reasonably incurred or suffered by such indemnitee who
has ceased to be a Director, officer, employee or agent and shall inure to the
benefit of the indemnitee's heirs, executors and administrators; provided,
however, that except as provided in subsection 10.2 hereof with respect to
proceedings seeking to enforce rights to indemnification, the corporation shall
indemnify any such indemnitee in connection with a proceeding (or part thereof)
initiated by such indemnitee only if such proceeding (or part thereof) was
authorized or ratified by the Board. The right to indemnification conferred in
this subsection 10.1 shall be a contract right and shall include the right to be
paid by the corporation the expenses incurred in defending any such proceeding
in advance of its final disposition (hereinafter an "advancement of expenses');
provided, however, that if the DGCL requires, an advancement of expenses
incurred by an indemnitee in his or her capacity as a Director or officer (and
not in any other capacity in which service was or is rendered by such
indemnitee, including, without limitation, service to an employee benefit plan)
shall be made only upon delivery to the corporation of an undertaking
(hereinafter an "undertaking"), by or on behalf of such indemnitee, to repay all
amounts so advanced if it shall ultimately be determined by final judicial
decision from which there is no further right to appeal that such indemnitee is
not entitled to be indemnified for such expenses under this subsection 10.1 or
otherwise.
10.2 RIGHT OF INDEMNITEE TO BRING SUIT
If a claim under subsection 10.1 hereof is not paid in full by the
corporation within 60 days after a written claim has been received by the
corporation, except in the case of a claim for an advancement of expenses, in
which case the applicable period shall be 20 days, the indemnitee may at any
time thereafter bring suit against the corporation to recover the unpaid amount
of the claim. If successful in whole or in part in any such suit,
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or in a suit brought by the corporation to recover an advancement of expenses
pursuant to the terms of an undertaking, the indemnitee shall be entitled to be
paid also the expense of prosecuting or defending such suit. The indemnitee
shall be presumed to be entitled to indemnification under this Section 10 upon
submission of a written claim (and, in an action brought to enforce a claim for
an advancement of expenses, where the required undertaking, if any is required,
has been tendered to the corporation), and thereafter the corporation shall have
the burden of proof to overcome the presumption that the indemnitee is not so
entitled. Neither the failure of the corporation (including its Board,
independent legal counsel or its stockholders) to have made a determination
prior to the commencement of such suit that indemnification of the indemnitee is
proper in the circumstances nor an actual determination by the corporation
(including its Board, independent legal counsel or its stockholders) that the
indemnitee is not entitled to indemnification shall be a defense to the suit or
create a presumption that the indemnitee is not so entitled.
10.3 NONEXCLUSIVITY OF RIGHTS
The rights to indemnification and to the advancement of expenses
conferred in this Section 10 shall not be exclusive of any other right that any
person may have or hereafter acquire under any statute, agreement, vote of
stockholders or disinterested Directors, provisions of the Certificate of
Incorporation or these Bylaws or otherwise. Notwithstanding any amendment to or
repeal of this Section 10, any indemnitee shall be entitled to indemnification
in accordance with the provisions hereof with respect to any acts or omissions
of such indemnitee occurring prior to such amendment or repeal.
10.4 INSURANCE, CONTRACTS AND FUNDING
The corporation may maintain insurance, at its expense, to protect
itself and any Director, officer, employee or agent of the corporation or
another corporation, partnership, joint venture, trust or other enterprise
against any expense, liability or loss, whether or not the corporation would
have the power to indemnify such person against such expense, liability or loss
under the DGCL. The corporation, without further stockholder approval, may enter
into contracts with any Director, officer, employee or agent in furtherance of
the provisions of this Section 10 and may create a trust fund, grant a security
interest or use other means (including, without limitation, a letter of credit)
to ensure the payment of such amounts as may be necessary to effect
indemnification as provided in this Section 10.
10.5 INDEMNIFICATION OF EMPLOYEES AND AGENTS OF THE CORPORATION
The corporation may, by action of the Board, grant rights to
indemnification and advancement of expenses to employees or agents or groups of
employees or agents of the corporation with the same scope and effect as the
provisions of this Section 10 with respect to the indemnification and
advancement of expenses of Directors and officers of the corporation; provided,
however, that an undertaking shall be made by an employee or agent only if
required by the Board.
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<PAGE> 24
10.6 PERSONS SERVING OTHER ENTITIES
Any person who is or was a Director, officer or employee of the
corporation who is or was serving (a) as a Director or officer of another
corporation of which a majority of the shares entitled to vote in the election
of its Directors is held by the corporation or (b) in an executive or management
capacity in a partnership, joint venture, trust or other enterprise of which the
corporation or a wholly owned subsidiary of the corporation is a general partner
or has a majority ownership shall be deemed to be so serving at the request of
the corporation and entitled to indemnification and advancement of expenses
under subsection 10.1 hereof.
SECTION 11 AMENDMENTS OR REPEAL
These Bylaws may be amended or repealed and new Bylaws may be adopted by
the stockholders or the Board. The stockholders may also amend and repeal these
Bylaws or adopt new Bylaws, provided, however, that notice of such amendment,
repeal or adoption of new Bylaws be contained in the notice of such meeting of
stockholders or the Board, as the case may be. All such amendments must be
approved by either the holders of 80% of the outstanding capital stock entitled
to vote thereon or by a majority of the entire Board then in office.
Notwithstanding any amendment to Section 10 hereof or repeal of these Bylaws, or
of any amendment or repeal of any of the procedures that may be established by
the Board pursuant to Section 10 hereof, any indemnitee shall be entitled to
indemnification in accordance with the provisions hereof and thereof with
respect to any acts or omissions of such indemnitee occurring prior to such
amendment or repeal.
The foregoing Amended and Restated Bylaws were adopted by the Board of
Directors on January 8, 1999.
___________________________________
Michael Carrisino
Secretary
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<PAGE> 1
EXHIBIT 5
[MORRISON & FOERSTER LLP LETTERHEAD]
January 20, 1999
Intracel Corporation
2005 NW Sammamish Road, Suite 107
Issaquah, WA 98027
Ladies and Gentlemen:
At your request, we have examined the Registration Statement on Form S-1
filed by Intracel Corporation, a Delaware corporation (the "Company"), with the
Securities and Exchange Commission (the "SEC") on July 9, 1998 (Registration No.
333-58819), as amended (collectively, the "Registration Statement"), with
exhibits as filed in connection therewith, and the form of prospectus contained
therein, relating to the registration under the Securities Act of 1933, as
amended (the "Securities Act"), of up to 4,3000,000 shares of the Company's
common stock, $0.0001 par value per share (the "Common Stock") (including shares
of Common Stock subject to the underwriters' over-allotment option) and 300,000
presently issued and outstanding shares being offered by a selling stockholder
(the "Selling Stockholder") pursuant to the underwriters' over-allotment option.
The Common Stock is to be sold to the underwriters named in the Registration
Statement for resale to the public.
As counsel to the Company, we have examined such corporate records,
documents, instruments, certificates of public officials and of the Company and
such questions of law as we have deemed necessary for the purpose of rendering
the opinions set forth herein. In our examination, we have assumed the
genuineness of all signatures, the authenticity of all documents submitted to us
as originals, the conformity to originals of all documents submitted to us as
certified, photostatic or conformed copies, and the authenticity of the
originals of all such latter documents. We have also assumed the due execution
and delivery of all documents where due execution and delivery are prerequisites
to the effectiveness thereof. We have relied upon certificates of public
officials and certificates of officers of the Company for the accuracy of
material, factual matters contained therein which we have not independently
established.
We are of the opinion that (a) the shares of Common Stock to be offered
and sold by the Company have been duly authorized and, when issued and sold by
the Company in the manner described in the Registration Statement and in
accordance with the resolutions adopted by the Board of Directors of the
Company, will be legally issued, fully paid and nonassessable, and (b) the
shares of Common Stock that may be
5
<PAGE> 2
Intracel Corporation
January 20, 1999
Page Two
sold by the Selling Stockholder are legally and validly issued, fully paid and
nonassessable.
We consent to the use of our name under the caption "Legal Matters" in
the Prospectus, constituting part of the Registration Statement, and to the
filing of this opinion as an exhibit to the Registration Statement.
By giving you this opinion and consent, we do not admit that we are
experts with respect to any part of the Registration Statement or Prospectus
within the meaning of the term "expert" as used in Section 11 of the Securities
Act or the rules and regulations promulgated thereunder by the Commission, nor
do we admit that we are in the category of persons whose consent is required
under Section 7 of the Securities Act.
Very truly yours,
/s/ Morrison & Foerster LLP
------------------------------
Morrison & Foerster LLP
<PAGE> 1
EXHIBIT 10.26
AMERICAN BIO-TECHNOLOGIES, INC.
1989 STOCK OPTION PLAN
1. PURPOSE
The purpose of this 1989 Stock Option Plan (the "Plan") is to encourage
directors, consultants and key employees of American Bio-Technologies, Inc. (the
"Company") and its Subsidiaries (as hereinafter defined) to continue their
association with the Company, by providing favorable opportunities for such
persons to participate in the ownership of the Company and in its future growth
through the granting of stock options, some of which, as specially designated
under Section 4 hereof, are designed to qualify as "incentive stock options"
within the meaning of Section 422A of the Internal Revenue Code of 1986, as
amended (the "Code"). The term "Subsidiary" as used in the Plan means a
corporation of which the Company owns, directly or indirectly through an
unbroken chain of ownership, fifty percent (5O%) or more of the total combined
voting power of all classes of stock.
2. ADMINISTRATION OF THE PLAN
The Plan shall be administered by a Stock Options Committee (the
"Committee") of which the initial members shall be Simon R. McKenzie, Wm. Terry
Elliott, Dr. George Jones and Dr. Deborah Pavan-Langston. In the event that a
vacancy occurs on account of the resignation of a member or the removal of a
member by vote of the holders of a majority of the shares of the Company's
common stock, a successor member shall be appointed by vote of the holders of a
majority of the shares of the Company's common stock. No member of the Committee
shall be eligible to vote on the grant to himself of an option under the Plan.
The Committee may from time to time determine to whom options shall be
granted under the Plan, whether the options granted shall be incentive stock
options or non-qualified stock options, the terms of the options, and the number
of shares which may be purchased under the option or options. The Committee
shall report to the Board the names of individuals to whom options are to be
granted, the number of shares covered by each option and the terms and
conditions of each option.
The Committee shall select one of its members as Chairman and shall hold
meetings at such times and places as it may determine. A majority of the
Committee shall constitute a quorum, and acts of the Committee at which a quorum
is present, or acts reduced to or approved in writing by all the members of the
Committee, shall be the valid acts of the Committee. The Committee shall have
the authority to adopt, amend and rescind such rules and regulations as, in its
opinion, may be advisable in the administration of the Plan. All questions of
interpretation and application of such
<PAGE> 2
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rules and regulations, of the Plan or of options granted thereunder (the
"Options") shall be subject to the determination of the Committee, which shall
be final and binding. The Plan shall be administered in such a manner as to
permit those Options granted hereunder and specially designated under Section 4
hereof to qualify as "incentive stock options" as described in Section 422A of
the Code.
3. OPTION SHARES
The stock subject to Options under the Plan shall be shares of the
Company's common stock, no par value. (the "Stock"). The total amount of the
Stock with respect to which Options may be granted shall not exceed in the
aggregate 150,000 shares; provided that such aggregate number of shares shall be
subject to adjustment in accordance with the provisions of Section 17. In the
event that any outstanding Option shall expire for any reason or shall terminate
by reason of the death or severance of employment of the optionee, the surrender
of any such Option, or any other cause, the shares of Stock allocable to the
unexercised portion of such Option may again be subject to an option under the
Plan.
4. AUTHORITY TO GRANT OPTIONS
The Board shall grant from time to time, to such eligible individuals as
the Committee shall from time to time determine, an Option or Options to buy a
stated number of shares of Stock under the terms and conditions of the Plan,
each of which Option or Options shall be designated at the time of grant either
a nonqualified option or an "incentive stock option" within the meaning of
Section 422A of the Code. Subject only to any applicable limitations set forth
elsewhere in the Plan, the number of shares of Stock to be covered by any Option
shall be as determined by the Committee.
5. WRITTEN AGREEMENT
Each Option granted hereunder shall be embodied in a written option
agreement which shall be subject to the terms and conditions prescribed herein
and shall be signed by the optionee and by the President or any Vice President
of the Company for and in the name and an behalf of the Company. Such an option
agreement shall indicate whether the subject Option has been designated a
non-qualified option or an incentive stock option, and shall contain such other
provisions as the Committee in its discretion shall deem advisable.
<PAGE> 3
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6. ELIGIBILITY
The individuals who shall be eligible for grant of Options under the
Plan shall be key employees (including officers who may be members of the Board)
and other individuals who render services of special importance to the
management, operation, or development of the Company or a Subsidiary, and who
have contributed or may be expected to contribute materially to the success of
the Company or a Subsidiary. Options designated incentive stock options shall
not be granted to any individual who is not an employee of the Company or a
Subsidiary.
7. OPTION PRICE
The price at which shares may be purchased pursuant to an Option shall
be specified by the Board at the time the Option is granted, but in the case of
an incentive stock option shall not be less than the fair market value of the
shares of Stock on the date the Option is granted. For purposes of the Plan, the
"fair market value" of a share of Stock at any particular date shall be
determined according to the following rules: (i) if the Stock is not at the time
listed or admitted to trading on a stock exchange, the fair market value shall
be the mean between the lowest reported bid price and highest reported asked
price of the Stock on the date in question in the over-the-counter market, as
such prices are reported in a publication of general circulation selected by the
Board and regularly reporting the price of the Stock in such market; provided,
however, that if the price of the Stock is not so reported, the fair market
value shall be determined by the Board, which may take into consideration (1)
the price paid for the Stock in the most recent trade of a substantial number of
shares known to the Board to have occurred at arm's length between willing and
knowledgeable investors, or (2) an appraisal by an independent party, or (3) any
other method of valuation undertaken in good faith by the Board, or some or all
of the above as the Board shall in its discretion elect; or (ii) if the Stock is
at the time listed or admitted to trading on any stock exchange, then the fair
market value shall be the mean between the lowest and highest reported sale
prices of the Stock on the date in question on the principal exchange on which
the Stock is then listed or admitted to trading. If no reported sale of Stock
takes place on the date in question on the principal exchange, then the reported
closing asked price of the Stock on such date on the principal exchange shall be
determinative of fair market value.
In the case of any employee of the Company or a Subsidiary who owns,
directly or indirectly, Stock possessing more than ten percent (10%) of the
total combined voting power of all classes of stock of the, Company or of any
corporation which on the date of grant of an Option is a Subsidiary, the price
at which shares may be so purchased pursuant to an incentive stock option shall
be not
<PAGE> 4
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less than one hundred ten percent (110%) of the fair market value of the Stock
on the date the Option is granted.
8. DURATION OF OPTIONS
The duration of any Option shall be specified by the Committee, but no
Option designated an incentive stock option shall be exercisable after the
expiration of ten (10) years from the date such Option is granted; and no
incentive stock option granted to an employee of the Company or a Subsidiary who
owns stock possessing more than ten percent (10%) of the total combined voting
power of all classes of stock of the Company or a Subsidiary shall be
exercisable after the expiration of five (5) years from the date such Option is
granted. The Committee, in its discretion, may provide that an Option shall be
exercisable during its entire duration or during any lesser period of time.
9. AMOUNT EXERCISABLE
Each Option may be exercised so long as it is valid and outstanding from
time to time, in part or as a whole, in such manner and subject to such
conditions as the Committee in its discretion may provide in the option
agreement.
10. EXERCISE OF OPTION
Options shall be exercised by the delivery of written notice to the
Company setting forth the number of shares with respect to which the Option is
to be exercised, accompanied by payment of the option price of such shares,
which payment shall be made, subject to the alternative provisions of this
Section 10, in cash or by such cash equivalents, payable to the order of the
Company in an amount in United States dollars equal to the option price of such
shares, as the Board in its discretion shall consider acceptable. Such notice
shall be delivered in person to the Secretary of the Company or shall be sent by
registered mail, return receipt requested, to the Secretary of the Company, in
which case delivery shall be deemed made on the date such notice is deposited in
the mail.
Alternatively, payment of the option price may be made, in whole or in
part, in shares of Stock previously acquired by the optionee. If payment is made
in whole or in part in shares of Stock, then the Optionee shall deliver to the
Company in payment of the option price of the shares with respect of which such
Option is exercised (i) certificates registered in the name of such optionee
representing a number of shares of Stock legally and beneficially owned by such
optionee, free of all liens, claims and encumbrances of every kind and having a
fair market value on the date of delivery of such notice equal to the option
price of the
<PAGE> 5
-5-
shares with respect to which such Option is to be exercised, such certificates
to be accompanied by stock powers duly endorsed in blank by the record holder of
the shares represented by such certificates; and (ii) if the option price of the
shares with respect to which such Option is to be exercised exceeds such fair
market value, cash or such cash equivalents payable to the order to the Company,
in an amount in United States dollars equal to the amount of such excess, as the
Board in its discretion shall consider acceptable. Notwithstanding the foregoing
provisions of this Section 10, the Board, in its sole discretion, may refuse to
accept shares of Stock in payment of the option price of the shares with respect
to which such Option is to be exercised and, in that event, any certificates
representing shares of Stock which were delivered to the Company with such
written notice shall be returned to such optionee together with notice by the
Company to such optionee of the refusal of the Board to accept such shares of
Stock.
Alternatively, if the option agreement so specifies, payment of the
option price may be made in part by a promissory note executed by the optionee
and collaterally secured by the Stock obtained upon exercise of the Option,
providing for repayment at such time or times as the Board shall specify;
provided, however, (a) that such promissory note shall provide for repayment no
later than five (5) years from the date of exercise and for interest at a rate
not less than the "base" rate announced on the date of exercise by The First
National Bank of Boston, (b) that in any event an amount not less than the par
value of the shares of Stock with respect to which the Option is being exercised
must be paid in cash, cash equivalents, or shares of Stock in accordance with
this Section 10 and (c) the payment of such exercise price by promissory note
does not violate any applicable laws or regulations, including, without
limitation, margin lending rules. The decision as to whether to permit partial
payment by a promissory note for Stock to be issued upon exercise of any Option
granted shall rest entirely in the discretion of the Board.
As promptly as practicable after the receipt by the Company of (i)
written notice from the optionee setting forth the number of shares with respect
to which such Option is to be exercised and (ii) payment of the option price of
such shares in the form required by the foregoing provisions of this Section 10,
the Company shall cause to be delivered to such optionee certificates
representing the number of shares with respect to which such Option has been so
exercised.
11. TRANSFERABILITY OF OPTIONS
Options shall not be transferable by the optionee otherwise than by will
or under the laws of descent and distribution, and shall be exercisable during
his lifetime only by him.
<PAGE> 6
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12. TERMINATION OF EMPLOYMENT OR INVOLVEMENT OF OPTIONEE WITH THE
C0MPANY
For purposes of this Section 12, employment by a Subsidiary shall be
considered employment by the Company. Non-qualified options shall be exercisable
following an Optionee's termination of employment to the extent provided below
with respect to incentive stock options, unless otherwise set forth in the
option agreement for such non-qualified options. Except as may be otherwise
expressly provided herein, Options designated incentive stock options shall be
exercisable after the optionee's termination of employment with the Company only
within the period of three (3) months after the date the optionee ceases to be
in the employ of the Company, and only to the extent to which the optionee was
entitled to exercise the Option immediately prior to the termination of his
employment. If, before the date of expiration of the Option, the optionee shall
be retired in good standing from the employ of the Company for reasons of age
under the then established rules of the Company, the Option shall terminate on
the earlier of such date of expiration or three (3) months after the date of
such retirement. In the event of the death of the holder of an Option before the
date of expiration of such Option and while in the employ of the Company or
during the three (3) month period described in the preceding sentence, or in the
event of the retirement of the optionee for reasons of disability (within the
meaning of Section 22(e)(3) of the Code), such Option shall terminate on the
earlier of such date of expiration or one (1) year following the date of such
death or retirement. After the death of the optionee, his executors,
administrators or any persons to whom his Option may be transferred by will or
by the laws of descent and distribution shall have the right at any time prior
to such termination to exercise the Option to the extent to which the optionee
was entitled to exercise the Option on the date of his death.
Authorized leave of absence or absence on military or government service
shall not constitute severance of the employment relationship between the
Company and the optionee for purposes of the Plan, provided that either (i) such
absence is for a period of no more than ninety (90) days or (b) the Employee's
right to re-employment after such absence is guaranteed either by statute or by
contract.
For optionees who are not employees of the Company, options shall be
exercisable for such periods following the termination of the optionee's
involvement with the Company as may be set forth in the specific written option
agreement with the optionee.
13. REQUIREMENTS OF LAW
The Company shall not be required to sell or issue any shares upon the
exercise of any Option if the issuance of such shares shall constitute or result
in a violation by the optionee or the
<PAGE> 7
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Company of any provisions of any law, statute or regulation of any governmental
authority. Specifically, in connection with the Securities Act of 1933, as
amended (the "Securities Act"), upon exercise of any Option the Company shall
not be required to issue such shares unless the Board has received evidence
satisfactory to it to the effect that the holder of such Option will not
transfer such shares except pursuant to a registration statement in effect under
the Securities Act or unless an opinion of counsel satisfactory to the Company
has been received by the Company to the effect that such registration is not
required. Any determination in this connection by the Board shall be final,
binding and conclusive. The Company shall not be obligated to take any other
affirmative action in order to cause the exercise of an Option or the issuance
of shares pursuant thereto to comply with any law or regulations of any
governmental authority, including, without limitation, the Securities Act or
applicable state securities laws.
14. NO RIGHTS AS STOCKHOLDER
No optionee shall have rights as a stockholder with respect to shares
covered by his Option until the date of issuance of a stock certificate for such
shares; except as otherwise provided in Section 18 no adjustment for dividends
or otherwise shall be made if the record date therefor is prior to the date of
issuance of such certificate.
15. EMPLOYMENT OBLIGATION
The granting of any Option shall not impose upon the Company or any
Subsidiary any obligation to employ or continue to employ any optionee, or to
engage or retain the services of any optionee, and the right of the Company or
any Subsidiary to terminate the employment or services of any optionee shall not
be diminished or affected by reason of the fact that an Option has been granted
to him. The existence of any Option shall not be taken into account in
determining any damages relating to termination of employment for any reason.
16. FORFEITURE FOR DISHONESTY
Notwithstanding anything to the contrary in the Plan, if the Board
determines, after full consideration of the facts presented on behalf of both
the Company and the optionee, that the optionee has been engaged in fraud,
embezzlement, theft, commission of a felony or proven dishonesty in the course
of his employment by the Company or a Subsidiary, which damaged the Company or a
Subsidiary, or has made unauthorized disclosure of trade secrets or other
proprietary information of the Company or a Subsidiary or of a third party who
has entrusted such information to the Company or a Subsidiary, the optionee
shall forfeit all unexercised
<PAGE> 8
-8-
Options. The decision of the Board as to the cause of an optionee's discharge
and the damage done to the Company or a Subsidiary shall be final, binding and
conclusive. No decision of the Board, however, shall affect in any manner the
finality of the discharge of such optionee by the Company or a Subsidiary.
17. CHANGES IN THE COMPANY'S CAPITAL STRUCTURE
The existence of outstanding Options shall not affect in any way the
right or power of the Company or its stockholders to make or authorize any or
all adjustments, recapitalizations, reorganizations or other changes in the
Company's capital structure or its business or any merger or consolidation of
the Company or any issue of bonds, debentures, preferred or preference stock,
whether or not convertible into the Stock or other securities, ranking prior to
the Stock or affecting the rights thereof, or warrants, rights or options to
acquire the same, or the dissolution or liquidation of the Company or any sale
or transfer of all or any part of its assets or business or any other corporate
act or proceeding, whether of a similar character or otherwise.
The number of shares covered by any outstanding Option and the price per
share payable upon exercise thereof shall be proportionately adjusted for any
increase or decrease in the number of issued and outstanding shares of Stock
resulting from the subdivision, split, combination or consolidation of shares of
Stock or any other capital adjustment, the payment of a Stock dividend or any
other increase in such shares effected without receipt of consideration by the
Company or any other decrease therein effected without a distribution of cash or
property in connection therewith.
In the event the Company merges or consolidates with one or more
corporations and the Company is the surviving corporation, thereafter upon any
exercise of an Option, the holder thereof shall be entitled to purchase in lieu
of the number of shares of Stock as to which the Option shall then be
exercisable, the number and class of shares of stock and securities to which the
holder would have been entitled pursuant to the terms of the agreement of merger
or consolidation if immediately prior to such merger or consolidation, the
holder had been the holder of record of shares of Stock as to which the Option
is then exercisable.
In the event the Company merges or consolidates with a wholly-owned
subsidiary for the purpose of reincorporating itself under the laws of another
jurisdiction, the optionees will be entitled to acquire shares of the common
stock of the reincorporated Company upon the same terms and conditions as were
in effect immediately prior to such reincorporation and the Plan, unless
otherwise rescinded by the Board, will remain the Plan of the reincorporated
Company.
<PAGE> 9
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Except as otherwise provided in the preceding paragraph, if the Company
is merged into or consolidated with another corporation under circumstances
where the Company is not the surviving corporation, or if the Company is
liquidated or sells or otherwise disposes of all or substantially all of its
assets to another corporation while unexercised Options remain outstanding under
the Plan, (i) subject to the provisions of clause (iii) below, after the
effective date of such merger, consolidation or sale, as the case may be, each
holder of an outstanding Option shall be entitled, upon exercise of such Option,
to receive in lieu of shares of Stock, shares of such stock or other securities
as the holders of shares of Stock received pursuant to the terms of the merger,
consolidation or sale; (ii) the Board may waive any limitations imposed pursuant
to Section 9 so that all Options from and after a date prior to the effective
date of such merger, consolidation, liquidation or sale, as the case may be,
specified by the Board, shall be exercisable in full; and (iii) all outstanding
Options may be cancelled by the Board as of the effective date of any such
merger, consolidation, liquidation or sale provided that notice of such
cancellation shall be given to each holder of an Option not less than thirty
(30) days preceding the effective date of such merger, consolidation,
liquidation, sale or disposition and provided that the Board may in its sole
discretion waive any limitations imposed pursuant to Section 9 with respect to
any Option so that such Option shall be exercisable in full or in part as the
Board may determine during such thirty (30) day period.
Except as hereinbefore expressly provided, the issue by the Company of
shares of Stock or other securities of any class or securities convertible into
shares of Stock or other securities of any class for cash or property or for
labor or services either upon direct sale or upon the exercise of rights or
warrants to subscribe therefor, or upon conversion of shares or obligations of
the Company convertible into such shares or other securities, shall not affect,
and no adjustment by reason thereof shall be made with respect to, the number,
class or price of shares of Stock then subject to outstanding Options.
18. AMENDMENT OR TERMINATION OF PLAN
The Board may modify, revise or terminate the Plan at any time and from
time to time; provided, however, that without the further approval of the
holders of at least a majority of the outstanding shares of Stock, the Board may
not (i) materially increase the benefits accruing to optionees under the Plan;
(ii) change the aggregate number of shares of Stock which may be issued under
Options pursuant to the provisions of the Plan; (iii) reduce the option price at
which incentive stock options may be granted to an amount less than the fair
market value per share at the time the Option is granted; or (iv) change the
class of persons eligible to receive incentive stock options. Notwithstanding
the preceding sentence, the Board shall in all events have the power
<PAGE> 10
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to make such changes in the Plan and in the regulations and administrative
provisions hereunder or in any outstanding Option as, in the opinion of counsel
for the Company, may be necessary or appropriate from time to time to enable any
Option granted pursuant to the Plan to qualify as an incentive stock option or
such other stock option as may be defined under the Code, as amended from time
to time, so as to receive preferential federal income tax treatment.
19. REPURCHASE RIGHTS OF THE COMPANY
Unless an optionee's option agreement specifically provides to the
contrary, the provisions of this Section 19 shall apply to each Option granted
under the Plan and to the shares of Stock acquired on exercise thereof. Shares
of Stock acquired by any person pursuant to an Option or Options granted under
the Plan shall not be transferred by him without the written consent of the
Board. If the optionee's employment by or involvement with the Company
(including, for this purpose, any Subsidiary) shall terminate for any reason
other than his death or retirement for reasons of age or disability in
accordance with the then policy of the Company, the Company shall have the right
to repurchase all or any of such shares of Stock at a price equal to the fair
market value of the shares of Stock at the time of such repurchase. In addition,
if at the time of such termination an employee holds an Option granted under the
Plan which is by its terms exercisable after such termination, the Company shall
have the right to repurchase all or any part of the shares of Stock acquired
pursuant to the exercise of such Option, at a price equal to that described in
the preceding sentence. If the option price for any repurchased shares has been
paid by the optionee's promissory note pursuant to Section 10, then the
repurchase price for such shares of Stock shall be first applied to the
repayment of the outstanding amount, if any, due under such note in respect of
the repurchased shares, and any accrued but unpaid interest thereon. The
Company's right to repurchase shares of Stock may be exercised at any time
during the period beginning on the date of the optionee's termination of
employment and ending ninety (90) days after the later of (i) the date of such
termination and (ii) the date on which shares of Stock subject to the repurchase
rights of this Section 19 are acquired by the employee. Any such shares of Stock
as to which the Company does not exercise its repurchase rights within such
period shall thereafter be free of the restrictions of this Section 19.
20. EFFECTIVE DATE AND DURATION OF THE PLAN
The Plan shall become effective and shall be deemed to have been adopted
on January 1, 1989, subject only to ratification by the holders of at least a
majority of the outstanding shares of Stock within twelve (12) months after such
date. Unless the Plan shall have terminated earlier, the Plan shall terminate on
the
<PAGE> 11
-11-
tenth (10th) anniversary of its effective date, and no Option shall be granted
pursuant to the Plan after the day preceding the tenth (10th) anniversary of its
effective date.
<PAGE> 12
AMERICAN BIO-TECHNOLOGIES, INC.
1990-1991 STOCK OPTION PLAN
1. PURPOSE
The purpose of this 1990-1991 Stock Option Plan (the "Plan") is to
encourage the directors, consultants and key employees of American
Bio-Technologies, Inc. (the "Company") and its Subsidiaries (as hereinafter
defined) to continue their association with the Company, by providing favorable
opportunities for such persons to participate in the ownership of the Company
and in its future growth through the granting of stock options, some of which,
as specially designated under Section 4 hereof, are designed to qualify as
"incentive stock options" within the meaning of Section 422A of the Internal
Revenue Code of 1986, as amended (the "Code"). The term "Subsidiary" as used in
the plan means a corporation of which the Company owns, directly or indirectly
through an unbroken chain of ownership, fifty percent (50%) or more of the
total combined voting power of all classes of stock.
2. ADMINISTRATION
The Plan shall be administered by the Board of Directors of the Company.
No member of the Board shall be eligible to vote on the grant to himself of an
option under the Plan.
The Board may from time to time determine to whom options (the "Options")
shall be granted under the Plan, whether the options granted shall be incentive
stock options or non-qualified stock options, the terms of the Options, and the
number of which which may be purchased under the Option or Options.
The Board shall select one of its members as Chairman and shall hold
meetings at such times and places as it may determine. A majority of the Board
shall constitute a quorum, and acts of the Board at which a quorum is present,
or acts reduced to or approved in writing by all the members of the Board,
shall be the valid acts of the Board. The Board shall have the authority to
adopt, amend and rescind such rules and regulations as, in its opinion, may be
advisable in the administration of the Plan. All questions of interpretation
and application of such rules and regulations, of the Plan or of Options
granted thereunder shall be subject to the determination of the Board, which
shall be final and binding. The Plan shall be administered in such manner as to
permit those options granted hereunder and specially designated under Section 4
hereof to qualify as "incentive stock options" as described in Section 422A of
the Code.
3. OPTION SHARES
The stock subject to Options under the Plan shall be shares of the
Company's common stock, no par value (the "Stock"). The total amount of the
Stock with respect to which Options may be granted shall not exceed in the
aggregate 135,000 shares; provided that such aggregate number of shares shall
be subject to adjustment in accordance with the provisions of Section 17. In
the event that any outstanding Option shall expire for any reason or shall
terminate by reason of the death or severance of employment of the optionee,
the surrender of any such Option, or any other cause, the shares of Stock
allocable to the unexpired portion of such Option may again be subject to an
Option under the Plan.
4. AUTHORITY TO GRANT OPTIONS
The Board shall grant from time to time, to such eligible individuals as
the Board shall from time to time determine, an Option or Options to buy a
stated number of shares of Stock under the terms and conditions of the Plan,
each of which Option or Options shall be designated at the
<PAGE> 13
2
time of grant either a "non-qualified option" or an "incentive stock option"
within the meaning of Section 422A of the Code. Subject only to any applicable
limitations set forth elsewhere in the Plan. The number of shares of Stock to be
covered by any Option shall be as determined by the Board.
5. WRITTEN AGREEMENT
Each Option granted hereunder shall be embodied in a written agreement
which shall be subject to the terms and conditions prescribed herein and shall
be signed by the optionee and by the President or any Vice President of the
Company for and in the name and on behalf of the Company. Such an option
agreement shall indicate whether the subject Option has been designated a
non-qualified option or an incentive stock option, and shall contain such other
provisions as the Board in its discretion shall deem advisable.
6. ELIGIBILITY
The individuals who shall be eligible for grant of Options under the Plan
shall be key employees (including officers who may be members of the Board) and
other individuals who render services of special importance to the management,
operation or development of the Company or a Subsidiary, and who have
contributed or may be expected to contribute materially to the success of the
Company or a Subsidiary. Options designated incentive stock options shall not be
granted to any individual who is not an employee of the Company or a Subsidiary.
7. OPTION PRICE
The price at which shares may be purchased pursuant to an Option shall be
specified by the Board at the time the Option is granted, but in any case shall
not be less than the fair market value of the shares of Stock on the date the
Option is granted. For the purposes of the Plan, the "fair market value" of a
share of Stock at any particular date shall be determined according to the
following rules: (i) if the Stock is not at the time listed or admitted to
trading on a stock exchange, the fair market value shall be the mean between the
lowest reported bid price and the highest reported asked price of the Stock on
the date in question in the over-the-counter market, as such prices are reported
in a publication of general circulation selected by the Board and regularly
reporting the price of the Stock in such market; provided, however, that if the
price of the Stock is not so reported, the fair market value shall be determined
by the Board, which may take into consideration (1) the price paid for the Stock
in the most recent trade of a substantial number of shares known to the Board to
have occurred at arm's length between willing and knowledgeable investors, or
(2) an appraisal by an independent party, or (3) any other method of valuation
undertaken in good faith by the Board, or some or all of the above as the Board
shall in its discretion elect; or (ii) if the Stock is at the time listed or
admitted to trading on any stock exchange, then the fair market value shall be
the mean between the lowest and highest reported sale prices of the Stock on the
date in question on the principal exchange on which the Stock is then listed or
admitted to trading. If no reported sale of Stock takes place on the date in
question on the principal exchange, then the reported closing asked price of the
Stock on such date on the principal exchange shall be determinative of fair
market value.
In the case of any employee of the company or a Subsidiary who owns,
directly or indirectly, Stock possessing more than ten percent (10%) of the
total combined voting power of all classes of stock of the Company or any
corporation which on the date of grant of Option is a subsidiary, the price at
which shares may be so purchased pursuant to an incentive stock option shall be
not less than one hundred and ten percent (110%) of the fair market value of the
stock on the date the Option is granted.
<PAGE> 14
8. DURATION OF OPTIONS
The duration of any Option shall be specified by the Board, but no Option
designated an incentive stock option shall be exercisable after the expiration
of ten (10) years from the date such Option is granted; and no incentive stock
option granted to an employee of the Company or a Subsidiary who owns stock
possessing more than ten percent (10%) of the total combined voting power of
all classes of stock of the Company or a Subsidiary shall be exercisable after
the expiration of five (5) years from the date such Option is granted. The
Board, in its discretion, may provide that an Option shall be exercisable
during its entire duration or during any lesser period of time, provided,
however, that an Option designated an "incentive stock option" shall not be
exercisable within two years immediately following the date the Option is
granted.
9. AMOUNT EXERCISABLE
Each Option may be exercised so long as it is valid and outstanding from
time to time, in part or as a whole, in such manner and subject to such
conditions as the Board in its discretion may provide in the option agreement.
10. EXERCISE OF OPTION
Options shall be exercised by the delivery of written notice to the
Company setting forth the number of shares with respect to which the Option is
to be exercised, accompanied by payment of the option price of such shares,
which payment shall be made, subject to the alternative provisions of this
Section 10, in cash or by such cash equivalents, payable to the order of the
Company in an amount in United States dollars equal to the option price of such
shares, as the Board in its discretion shall consider acceptable. Such notice
shall be sent by registered mail, return receipt requested, to the Clerk of the
Company, in which case delivery shall be deemed made on the date such notice is
deposited in the mail.
Alternatively, payment of the option may be made, in whole or in part, in
shares of Stock previously acquired by the optionee. If payment is made in whole
or in part in shares of Stock, then the optionee shall deliver to the Company in
payment of the option price of the shares with respect to which such Option is
exercised (i) certificates registered in the name of such optionee representing
a number of shares of Stock legally and beneficially owned by such optionee,
free of all liens, claims and encumbrances of every kind and having a fair
market value on the date of delivery of such notice equal to the option price of
the shares with respect to which such Option is to be exercised, such
certificates to be accompanied by stock powers duly endorsed in blank by the
record holder of the shares represented by such certificates; and (ii) if the
option price of the shares with respect to which such Option is to be exercised
exceeds such fair market value, cash or such cash equivalents payable to the
order of the Company, in an amount in United States dollars equal to the
amount of such excess, as the Board in its discretion shall consider acceptable.
Notwithstanding the foregoing provisions of this Section 10, the Board, in its
sole discretion, may refuse to accept shares of Stock in payment of the option
price of the shares with respect to which such Option is to be exercised and, in
that event, any certificates representing shares of Stock which were delivered
to the Company with such written notice shall be returned to such optionee
together with notice by the Company to such optionee of the refusal of the Board
to accept such shares of Stock.
Alternatively, if the option agreement so specifies, payment of the option
price may be made in part by a promissory note executed by the optionee and
collaterally secured by the Stock obtained upon the exercise of the Option,
providing for repayment at such time or times as the Board shall specify;
provided, however, (a) that such promissory note shall provide for repayment no
later than five (5) years from the date of exercise and for interest at a rate
not less than the
<PAGE> 15
"base" rate announced on the date of exercise by The First National Bank of
Boston, (b) that in any event an amount not less than the par value of the
shares of Stock with respect to which the Option is being exercised must be
paid in cash, cash equivalents or shares of Stock in accordance with this
Section 10 and (c) the payment of such exercise price by promissory note does
not violate any applicable laws or regulations, including, without limitation,
margin lending rules. The decision as to whether to permit partial payment by a
promissory note for Stock to be issued upon exercise of any Option granted
shall rest entirely in the discretion of the Board.
As promptly as practicable after the receipt by the Company of (i) written
notice from the optionee setting forth the number of shares with respect to
which such Option is to be exercised and (ii) payment of the option price of
such shares in the form required by the foregoing provisions of this Section
10, the Company shall cause to be delivered to such optionee certificates
representing the number of shares with respect to which such Option has been so
exercised.
11. TRANSFERABILITY OF OPTIONS
Options shall not be transferable by the optionee otherwise than by will
or under the laws of descent and distribution, and shall be exercisable during
his lifetime only by him.
12. TERMINATION OF EMPLOYMENT OR INVOLVEMENT OF OPTIONEE WITH THE COMPANY.
For the purposes of this Section 12, employment by a Subsidiary shall be
considered employment by the Company. Non-qualified options shall be
exercisable following an optionee's termination of employment to the extent
provided below with respect to incentive stock options, unless otherwise set
forth in the option agreement for such non-qualified options. Except as may be
otherwise expressly provided herein, Options designated incentive stock options
shall be exercisable after the optionee's termination of employment with the
Company only within the period of three (3) months after the date the optionee
ceases to be in the employ of the Company, and only to the extent to which the
optionee was entitled to exercise the Option immediately prior to the
termination of his employment. If, before the date of expiration of the Option,
the optionee shall be retired in good standing from the employ of the Company
for reasons of age under the then established rules of the Company, the Option
shall terminate on the earlier of such date of expiration or three (3) months
after the date of such retirement. In the event of the death of the holder of an
Option before the date of expiration of such Option and while in the employ of
the Company or during the three (3) month period described in the preceding
sentence, or in the event of the disability (within the meaning of Section
22(e)(3) of the Code), such Option shall terminate on the earlier of such date
of expiration or one (1) year following the date of such death or retirement.
After the death of the optionee, his executors, administrators or any persons
to whom his Option may be transferred by will or by the laws of descent and
distribution shall have the right at any time prior to such termination to
exercise the Option to the extent to which the optionee was entitled to
exercise the Option on the date of his death.
Authorized leave of absence on military or government service shall not
constitute severance of the employment relationship between the Company and the
optionee for the purposes of the Plan, provided that either (i) such absence is
for a period of no more than ninety (90) days or (b) the employee's right to
re-employment after such absence is guaranteed either by statute or by contract.
For optionees who are not employees of the Company, options shall be
exercisable for such periods following termination of the optionee's
involvement with the Company as may be set forth in the specific written option
agreement with the optionee.
<PAGE> 16
13. REQUIREMENTS OF LAW
The Company shall not be required to sell or issue any shares upon the
exercise of any Option if the issuance of such shares shall constitute or
result in a violation by the optionee or the Company of any provisions of any
law, statute or regulation of any governmental authority. Specifically, in
connection with the Securities Act of 1933, as amended (the "Securities Act"),
upon exercise of any Option the Company shall not be required to issue such
shares unless the Board has received evidence satisfactory to it to the effect
that the holder of such Option will not transfer such shares, except pursuant
to a registration statement in effect under the Securities Act or unless an
opinion of counsel satisfactory to the Company has been received by the Company
to the effect that such registration is not required. Any determination in
this connection by the Board shall be final, binding and conclusive. The
Company shall not be obligated to take any other affirmative action in order to
cause the exercise of an Option or the issuance of shares pursuant thereto to
comply with any law or regulations of any governmental authority, including,
without limitation, the Securities Act or applicable state securities laws.
14. NO RIGHTS AS STOCKHOLDER
No optionee shall have rights as a stockholder with respect to shares
covered by his Option until the date of issuance of a stock certificate for
such shares; except as otherwise provided in Section 18, no adjustment for
dividends or otherwise shall be made if the record date therefor is prior to
the date of issuance of such certificate.
15. EMPLOYMENT OBLIGATION
The granting of any Option shall not impose upon the Company or any
Subsidiary any obligation to employ or continue to employ any optionee, or to
engage or retain the services of any optionee, and the right of the Company or
any Subsidiary to terminate the employment or services of any optionee shall
not be diminished or affected by reason of the fact that an Option has been
granted to him. The existence of any Option shall not be taken into account in
determining any damages relating to termination of employment for any reason.
16. FORFEITURE FOR DISHONESTY
Notwithstanding anything to the contrary in the Plan, if the Board
determines, after full consideration of the facts presented on behalf of both
the Company and the optionee, that the optionee has been engaged in fraud,
embezzlement, theft, commission of a felony or proven dishonesty in the course
of his employment by the Company or a Subsidiary, which damaged the Company or
a Subsidiary, or has made unauthorized disclosure of trade secrets or other
proprietary information of the Company or a Subsidiary or of a third party who
has entrusted such information to the Company or a Subsidiary, the optionee
shall forfeit all unexercised Options. The decision of the Board as to the
cause of an optionee's discharge and the damage done to the Company or a
Subsidiary shall be final, binding and conclusive. No decision of the Board,
however, shall affect in any manner the finality of the discharge of such
optionee by the Company or a Subsidiary.
17. CHANGES IN THE COMPANY'S CAPITAL STRUCTURE
The existence of outstanding Options shall not affect in any way the
right or power of the Company or its stockholders to make or authorize any or
all adjustments, recapitalizations, reorganizations or other changes in the
Company's capital structure or its business or any merger or consolidation of
the Company or any issue of bonds, debentures, preferred or preference
securities, whether or not convertible into the Stock or other securities,
ranking prior to the Stock or affecting the rights thereof, or warrants, rights
or options to acquire the same, or the
<PAGE> 17
dissolution or liquidation of the Company or any sale or transfer of all or any
part of its assets or business or any other corporate act or proceeding, whether
of a similar character or otherwise.
The number of shares covered by any outstanding Option and the price per
share payable upon exercise thereof shall be proportionately adjusted for any
increase or decrease in the number of issued and outstanding shares of Stock
resulting from the subdivision, split, combination or consolidation of shares of
Stock or any other capital adjustment, the payment of a Stock dividend or any
other increase in such shares effected without receipt of consideration by the
Company or any other decrease therein effected without a distribution of cash or
property in connection therewith.
In the event the Company merges or consolidates with one or more
corporations and the Company is the surviving corporation, thereafter upon any
exercise of an Option, the holder thereof shall be entitled to purchase in lieu
of the number of shares of Stock as to which the Option shall then be
exercisable, the number and class of shares of stock and securities to which the
holder would have been entitled pursuant to the terms of the agreement of merger
or consolidation if, immediately prior to such merger or consolidation, the
holder had been the holder of record of shares of Stock as to which the Option
is then exercisable.
In the event the Company merges or consolidates with a wholly-owned
subsidiary for the purpose of reincorporating itself under the laws of another
jurisdiction, the optionees will be entitled to acquire shares of the common
stock of the reincorporated Company upon the same terms and conditions as were
in effect immediately prior to such reincorporation and the Plan, unless
otherwise rescinded by the Board, will remain the Plan of the reincorporated
Company.
Except as otherwise provided in the preceding paragraph, if the Company is
merged into or consolidated with another corporation under circumstances where
the Company is not the surviving corporation, or if the Company is liquidated or
sells or otherwise disposes of all or substantially all of its assets to another
corporation while unexercised Options remain outstanding under the Plan, (i)
subject to he provisions of clause (iii) below, after the effective date of such
merger, consolidation or sale, as the case may be, each holder of an outstanding
Option shall be entitled, upon exercise of such Option, to receive in lieu of
shares of Stock, shares of such stock or other securities as the holders of
shares of Stock received pursuant to the terms of the merger, consolidation or
sale; (ii) the Board may waive any limitations imposed pursuant to Section 9 so
that all Options from and after a date prior to the effective date of such
merger, consolidation, liquidation or sale, as the case may be, specified by the
Board, shall be exercisable in full; and (iii) all outstanding Options may be
cancelled by the Board as of the effective date of any such merger,
consolidation, liquidation or sale provided that notice of such cancellation
shall be given to each holder of an Option not less than thirty (30) days
preceding the effective date of such merger, consolidation, liquidation, sale or
disposition and provided that the Board may, in its sole discretion, waive any
limitations imposed pursuant to Section 9 with respect to any Option so that
such Option shall be exercisable in full or in part as the Board may determine
during such thirty (30) day period.
Except as hereinbefore expressly provided, the issue by the Company of
shares of Stock or other securities of any class or securities convertible into
shares of Stock or other securities of any class for cash or property or for any
labor or services either upon direct sale or upon the exercise of rights or
warrants to subscribe therefor, or upon conversion of shares or obligations of
the Company convertible into such shares or other securities, shall not affect,
and no adjustment by reason thereof shall be made with respect to, the number,
class or price of shares of Stock then subject to outstanding Options.
<PAGE> 18
7
18. AMENDMENT OR TERMINATION OF PLAN
The Board may modify, revise or terminate the Plan at any time and from
time to time; provided, however, that without the further approval of the
holders of at least a majority of the outstanding shares of Stock, the Board may
not (i) materially increase the benefits accruing to optionees under the Plan;
(ii) change the aggregate number of shares of Stock which may be issued under
Options pursuant to the provisions of the Plan; (iii) reduce the option price at
which incentive stock options may be granted to an amount less than the fair
market value per share at the time the Option is granted; or (iv) change the
class of persons eligible to receive incentive stock options. Notwithstanding
the preceding sentence, the Board shall in all events have the power to make
such changes in the Plan and in the regulations and administrative provisions
hereunder or in any outstanding Option as, in the opinion of counsel for the
Company, may be necessary or appropriate from time to time to enable any Option
granted pursuant to the Plan to qualify as an incentive stock option or such
other stock option as may be defined under the Code, as amended from time to
time, so as to receive preferential federal income tax treatment.
19. REPURCHASE RIGHTS OF THE COMPANY
Unless an optionee's option agreement specifically provides to the
contrary, the provisions of this Section 19 shall apply to each Option granted
under the Plan and to the shares of Stock acquired on exercise thereof. Shares
of Stock acquired by any person pursuant to an Option or Options granted under
the Plan shall not be transferred by him without the written consent of the
Board. If the optionee's employment by or involvement with the Company
(including, for this purpose, any Subsidiary) shall terminate for any reason
other than his death or retirement for reasons of age or disability in
accordance with the then policy of the Company, the Company shall have the right
to repurchase all of any of such shares of Stock at a price equal to the fair
market value of the shares of Stock at the time of such repurchase. In addition,
if at the time of such termination an employee holds an Option granted under the
Plan which is by its terms exercisable after such termination, the Company shall
have the right to repurchase all or any part of the shares of Stock acquired
pursuant to the exercise of such Option, at a price equal to that described in
the preceding sentence. If the option price for any repurchased shares has been
paid by the optionee's promissory note pursuant to Section 10, then the
repurchase price for such shares of Stock shall be first applied to the
repayment of the outstanding amount, if any, due under such note in respect of
the repurchased shares, and any accrued but unpaid interest thereon. The
Company's right to repurchase shares of Stock may be exercised at any time
during the period beginning on the date of the optionee's termination of
employment and ending ninety (90) days after the later of (i) the date of such
termination and (ii) the date on which the shares of Stock subject to the
repurchase rights of this Section 19 are acquired by the employee. Any such
shares of Stock as to which the Company does not exercise its repurchase rights
within such period shall thereafter be free of the restrictions of this Section
19.
20. EFFECTIVE DATE AND DURATION OF THE PLAN
The Plan shall become effective and shall be deemed to have been adopted on
January 1, 1990, subject only to ratification by the holders of at least a
majority of the outstanding shares of Stock within twelve (12) months after such
date. Unless the Plan shall have terminated earlier, the Plan shall terminate on
the tenth (10th) anniversary of its effective date, and no Option shall be
granted pursuant to the Plan after the day preceding the tenth (10th)
anniversary of its effective date.
<PAGE> 1
EXHIBIT 10.27
AMENDED AND RESTATED 1996
STOCK OPTION PLAN
FOR DIRECTORS, EXECUTIVE OFFICERS,
KEY EMPLOYEES AND CONSULTANTS
OF
PERIMMUNE HOLDINGS, INC.
PerImmune Holdings, Inc., a corporation organized under the laws of the
State of Delaware, hereby adopts this Amended and Restated 1996 Stock Option
Plan for Directors, Executive Officers, Key Employees and Consultants of
PerImmune Holdings, Inc. and its Subsidiaries. The purposes of this Plan are as
follows:
1. To further the growth, development and financial success of the
Company by providing additional incentives to certain of its directors,
executive officers, other key Employees and consultants who have been or will
be given responsibility for the management or administration of the Company's
business affairs, by assisting them to become owners of the Company's Common
Stock and thus to benefit directly from its growth, development and financial
success.
2. To enable the Company to obtain and retain the services of the type
of professional, technical and managerial employees considered essential to the
long-range success of the Company by providing and offering them an opportunity
to become owners of the Company's Common Stock under options, including options
that are intended to qualify as "incentive stock options" under Section 422 of
the Code.
ARTICLE I
DEFINITIONS
Whenever the following terms are used in this plan, they shall have the
meaning specified below unless the context clearly indicates to the contrary.
The masculine pronoun shall include the feminine and neuter and the singular
shall include the plural, where the context so indicates.
SECTION 1.1. - BOARD
"Board" shall mean the Board of Directors of the Company.
SECTION 1.2. - CODE
"Code" shall mean the Internal Revenue Code of 1986, as amended.
SECTION 1.3. - COMMITTEE
"Committee" shall mean the Stock Option Committee of the Board,
appointed as provided in Section 6.1.
<PAGE> 2
SECTION 1.4. - COMPANY
"Company" shall mean PerImmune Holdings, Inc., a Delaware
corporation. In addition, "Company" shall mean any corporation assuming, or
issuing new employee stock options in substitution for, Incentive Stock
Options, outstanding under the Plan, in a transaction to which Section 424(a)
of the Code applies.
SECTION 1.5. - DIRECTOR
"Director" shall mean a member of the Board.
SECTION 1.6. - EMPLOYEE
"Employee" shall mean any employee (as defined in accordance with the
regulations and revenue rulings then applicable under Section 3401(c) of the
Code) of the Company, or of any corporation which is then a Parent Corporation
or a Subsidiary, whether such employee is so employed at the time this Plan is
adopted or becomes so employed subsequent to the adoption of this Plan.
SECTION 1.7. - EXCHANGE ACT
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
SECTION 1.8. - Incentive Stock Option
"Incentive Stock Option" shall mean an Option which qualifies under
Section 422 of the Code and which is designated as an Incentive Stock Option by
the Committee.
SECTION 1.9. - INDEPENDENT DIRECTOR
"Independent Director" shall mean a member of the Board who is not an
Employee of the Company.
SECTION 1.10. - NON-QUALIFIED OPTION
"Non-Qualified Option" shall mean an Option which is not an Incentive
Stock Option and which is designated as a Non-Qualified Option by the Committee.
SECTION 1.11. - OFFICER
"Officer" shall mean an officer of the Company, as defined in Rule
16a-1(f) under the Exchange Act, as such Rule may be amended in the future.
2
<PAGE> 3
SECTION 1.12. - OPTION
"Option" shall mean an option to purchase Common Stock of the Company,
granted under the Plan. "Options" includes both Incentive Stock Options and
Non-Qualified Options.
SECTION 1.13. - OPTIONEE
"Optionee" shall mean an Employee, consultant or Independent Director
to whom an Option is granted under the Plan.
SECTION 1.14. - PARENT CORPORATION
"Parent Corporation" shall mean any corporation in an unbroken chain
of corporations ending with the Company if each of the corporations other than
the Company then owns stock possessing 50% or more of the total combined voting
power of all classes of stock in one of the other corporations in such chain.
SECTION 1.15. - PLAN
"Plan" shall mean this 1996 Stock Option Plan for Directors,
Executive Officers, Key Employees and Consultants of the Company.
SECTION 1.16. - RULE 16b-3
"Rule 16b-3" shall mean that certain Rule 16b-3 under the Exchange
Act, as such Rule may be amended in the future.
SECTION 1.17. - SECRETARY
"Secretary" shall mean the Secretary of the Company.
SECTION 1.18. - SECURITIES ACT
"Securities Act" shall mean the Securities Act of 1933, as amended.
SECTION 1.19. - SUBSIDIARY
"Subsidiary" shall mean any corporation in an unbroken chain of
corporations beginning with the Company if each of the corporations other than
the last corporation in the unbroken chain then owns stock possessing 50% or
more of the total combined voting power of all classes of stock in one of the
other corporations in such chain.
3
<PAGE> 4
SECTION 1.20. - TERMINATION OF CONSULTANCY
"Termination of Consultancy" shall mean the time when the engagement of an
Optionee as a consult to the Company, a Parent Corporation or a Subsidiary is
terminated for any reason, with or without cause, including, but not by way of
limitation, by resignation, discharge, death or retirement; but excluding
terminations where there is a simultaneous commencement of employment with the
Company, a Parent Corporation or any Subsidiary. The Committee, in its sole
discretion, shall determine the effect of all matters and questions relating to
Termination of Consultancy, including, but not by way of limitation, the
question of whether a Termination of Consultancy resulted from a discharge for
good cause, and questions of whether a particular leave of absence constitutes a
Termination of Consultancy. Notwithstanding any other provision of this Plan,
the Company, a Parent Corporation or any Subsidiary has an absolute and
unrestricted right to terminate a consultant's service at any time for any
reason whatsoever, with or without cause, except to the extent expressly
provided otherwise in writing.
SECTION 1.21. - TERMINATION OF DIRECTORSHIP
"Termination of Directorship" shall mean the time when an Optionee who is
an Independent Director ceases to be a Director for any reason, including, but
not by way of limitation, a termination by resignation, failure to be elected,
removal, death or retirement. The Board, in its sole discretion, shall determine
the effect of all matters and questions relating to Termination of Directorship
with respect to Independent Directors.
SECTION 1.22. - TERMINATION OF EMPLOYMENT
"Termination of Employment" shall mean the time when the employee-employer
relationship between the Optionee and the Company, a Parent Corporation or a
Subsidiary is terminated for any reason, with or without cause, including, but
not by way of limitation, a termination by resignation, discharge, death or
retirement but excluding terminations where there is a simultaneous reemployment
by the Company, a Parent Corporation or a Subsidiary. The Committee, in its
absolute discretion, shall determine the effect of all other matters and
questions relating to Termination of Employment, including, but not by way of
limitation, the question of whether a Termination of Employment resulted from a
discharge for good cause, and all questions of whether particular leaves of
absence constitute Terminations of Employment; provided, however, that, with
respect to Incentive Stock Options, a leave of absence shall constitute a
Termination of Employment if, and to the extent that, such leave of absence
interrupts employment for the Purposes of Section 422(a)(2) of the Code and the
then applicable regulations and revenue rulings under said Section.
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ARTICLE II
SHARES SUBJECT TO PLAN
SECTION 2.1.- SHARES SUBJECT TO PLAN
The shares of stock subject to Options shall be shares of the
Company's $0.01 par value Common Stock. The aggregate number of such shares
which may be issued upon exercise of Options shall not exceed 500.
SECTION 2.2.- UNEXERCISED OPTIONS
If any Option expires or is cancelled without having been fully
exercised, the number of shares subject to such Option but as to which such
Option was not exercised prior to its expiration or cancellation may again be
optioned hereunder, subject to the limitations of Section 2.1.
SECTION 2.3.- CHANGES IN COMPANY'S SHARES
In the event that the outstanding shares of Common Stock of the
Company are hereafter changed into or exchanged for a different number or kind
of shares or other securities of the Company, or of another corporation, by
reason of reorganization, merger, consolidation, recapitalization,
reclassification, stock split-up, stock dividend or combination of shares,
appropriate adjustments shall be made by the Committee in the number and kind of
shares for the purchase of which Options may be granted, including adjustments
of the limitations in Section 2.1 on the maximum number and kind of shares which
may be issued on exercise of Options.
ARTICLE III
GRANTING OF OPTIONS
SECTION 3.1.- ELIGIBILITY
Any executive officer, other key Employee, Independent Director, or
consultant of the Company or of any corporation which is then a Parent
Corporation or a Subsidiary shall be eligible to be granted Options, except as
provided in Section 3.2 and subject to the limitations set forth in Section 3.3.
SECTION 3.2.- QUALIFICATION OF INCENTIVE STOCK OPTIONS
No Incentive Stock Option shall be granted unless such Option, when
granted, qualifies as an "incentive stock option" under Section 422 of the Code.
SECTION 3.3.- GRANTING OF OPTIONS
(a) The Committee shall from time to time, in its absolute
discretion:
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(i) Determine which Employees are executive officers or other key
Employees and, select from among the executive officers, other key
Employees, Independent Directors, or consultants (including those to whom
Options have been previously granted under the Plan) such of them as in
its opinion should be granted Options; and
(ii) Determine the number of shares to be subject to such Options
granted to such selected executive officers, other key Employees,
Independent Directors or consultants, and determine whether such Options
are to be Incentive Stock Options or Non-Qualified Options; and
(iii) Determine the terms and conditions of such Options, consistent
with the Plan.
(b) Upon the selection of an executive officer, other key Employee,
Independent Director, or consultant to be granted an Option, the Committee
shall instruct the Secretary to issue such Option and may impose such
conditions on the grant of such Option as it deems appropriate. Without
limiting the generality of the preceding sentence, the Committee may, in its
discretion and on such terms as it deems appropriate, require as a condition on
the grant of an Option to an Employee, Independent Director or consultant, that
the Employee, Independent Director or consultant, respectively, surrender for
cancellation some or all of the unexercised Options which have been previously
granted to him. An Option the grant of which is conditioned upon such surrender
may have an option price lower (or higher) than the option price of the
surrendered Option, may cover the same (or a lesser or greater) number of
shares as the surrendered Option, may contain such other terms as the Committee
deems appropriate and shall be exercisable in accordance with its terms,
without regard to the number of shares, price, option period or any other term
or condition of the surrendered Option.
ARTICLE IV
TERMS OF OPTIONS
SECTION 4.1. -- OPTION AGREEMENT
Each Option shall be evidenced by a written Stock Option Agreement, which
shall be executed by the Optionee and an authorized Officer of the Company and
which shall contain such terms and conditions as the Committee shall determine,
consistent with the Plan. Stock Option Agreements evidencing Incentive Stock
Options shall contain such terms and conditions as may be necessary to qualify
such Options as "incentive stock options" under Section 422 of the Code.
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SECTION 4.2 - OPTION PRICE
(a) The price of the shares subject to each Option shall be set by the
Committee; provided, however, that (i) in the case of an Incentive Stock Option,
the price per share shall not be less than 100% of the fair market value of such
shares on the date such option is granted, and (ii) in the case of an Incentive
Stock Option which is granted to an individual then owning (within the meaning
of Section 424(d) of the Code) more than 10% of the total combined voting power
of all classes of stock of the Company, any Subsidiary or any Parent
Corporation, the price per share shall be not less than 110% of the fair market
value of such shares on the date such Option is granted.
(b) For purposes of the Plan, the fair market value of a share of the
Company's Common Stock as of a given date shall be: (i) the closing price of a
share of the Company's Common Stock on the principal exchange on which shares of
the Company's Common Stock are then trading, if any, on the day previous to such
date, or, if shares were not traded on the day previous to such date, then on
the next preceding trading day during which a sale occurred; or (ii) if such
Common Stock is not traded on an exchange but is quoted on Nasdaq or a successor
quotation system, (1) the last sales price (if the Company's Common Stock is
then listed as a National Market Issue under the Nasdaq National Market System)
or (2) the mean between the closing representative bid and asked prices (in all
other cases) for the Company's Common Stock on the day previous to such date as
reported by Nasdaq or such successor quotation system; or (iii) if such Common
Stock is not publicly traded on an exchange and not quoted on Nasdaq or a
successor quotation system, the mean between the closing bid and asked prices
for the Company's Common Stock, on the day previous to such date, as determined
in good faith by the Committee; or (iv) if the Company's Common Stock is not
publicly traded, the fair market value established by the Committee acting in
good faith.
SECTION 4.3 - COMMENCEMENT OF EXERCISABILITY
(a) Except as the Committee may otherwise provide with respect to Options
granted to consultants or Employees who are not Officers, no Option may be
exercised in whole or in part during the six months after such Option is
granted.
(b) Subject to the provisions of Sections 4.3(a), 4.3(c) and 7.3, Options
shall become exercisable at such times and in such installments (which may be
cumulative) as the Committee shall provide in the terms of each individual
Option; provided, however, that by a resolution adopted after an Option is
granted the Committee may, on such terms and conditions as it may determine to
be appropriate and subject to Sections 4.3(a), 4.3(c) and 7.3, accelerate the
time at which such Option or any portion thereof may be exercised.
(c) No portion of an Option which is unexercisable at Termination of
Employment, Termination of Consultancy, or Termination of Directorship, shall
thereafter become exercisable.
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(d) To the extent that the aggregate fair market value of stock with
respect to which "incentive stock options" (within the meaning of Section 422
of the code, but without regard to Section 422(d) of the Code) are exercisable
for the first time by an Optionee during any calendar year (under the Plan and
all other incentive stock option plans of the Company, any Subsidiary and any
Parent Corporation) exceeds $100,000, such options shall be taxed as
Non-Qualified Options. The rule set forth in the preceding sentence shall be
applied by taking options into account in the order in which they were granted.
For purposes of this Section 4.3(d), the fair market value of stock shall be
determined as of the time the option with respect to such stock is granted.
SECTION 4.4. - EXPIRATION OF OPTIONS
(a) No Option may be exercised to any extent by anyone after the
first to occur of the following events:
(i) The expiration of ten years from the date the Option was
granted;
(ii) With respect to an Incentive Stock Option, in the case of
an Optionee owning (within the meaning of Section 424(d) of the Code),
at the time the Incentive Stock Option was granted, more than 10% of
the total combined voting power of all classes of stock of the
Company, any Subsidiary or any Parent Corporation, the expiration of
five years from the date the Incentive Stock Option was granted;
(iii) With respect to an Incentive Stock Option, except in the
case of any Optionee who is disabled (within the meaning of
Section 22(e)(3) of the Code), the expiration of three months from the
date of the Optionee's Termination of Employment for any reason other
than such Optionee's death unless the Optionee dies within said
three-month period;
(iv) With respect to an Incentive Stock Option, in the case of
an Optionee who is disabled (within the meaning of Section 22(e)(3) of
the Code), the expiration of one year from the date of the Optionee's
Termination of Employment for any reason other than such Optionee's
death unless the Optionee dies within said one-year period; or
(v) With respect to an Incentive Stock Option, the expiration of
one year from the date of the Optionee's death.
(b) Subject to the provisions of Section 4.4(a), the Committee shall
provide, in the terms of each individual Option, when such Option expires and
becomes unexercisable; and
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(without limiting the generality of the foregoing) the Committee may provide in
the terms of individual Options that said Options expire immediately upon a
Termination of Employment for any reason, Termination of Directorship for any
reason, or Termination of Consultancy for any reason.
SECTION 4.5 -- CONSIDERATION
In consideration of the granting of an Option, the Optionee shall agree, in
the written Stock Option Agreement, to render faithful and efficient services to
the Company, a Parent Corporation or a Subsidiary. Nothing in this Plan or in
any Stock Option Agreement hereunder shall confer upon any Optionee any right to
continue in the employ of, or as a director of or consultant for the Company,
any Parent Corporation or any Subsidiary or shall interfere with or restrict in
any way the rights of the Company, its Parent Corporations and its Subsidiaries,
which are hereby expressly reserved, to discharge any Optionee at any time for
any reason, whatsoever, with or without cause.
SECTION 4.6 -- ADJUSTMENTS IN OUTSTANDING OPTIONS
In the event that the outstanding shares of the stock subject to Options
are changed into or exchanged for a different number or kind of shares of the
Company or other securities of the Company by reason of merger, consolidation,
recapitalization, reclassification, stock split-up, stock dividend or
combination of shares, the Committee shall make an appropriate and equitable
adjustment in the number and kind of shares as to which all outstanding Options,
or portions thereof then unexercised, shall be exercisable, to the end that
after such event the Optionee's proportionate interest shall be maintained as
before the occurrence of such event. Such adjustment in an outstanding Option
shall be made without change in the total price applicable to the Option or the
unexercised portion of the Option (except for any change in the aggregate price
resulting from rounding-off of share quantities or prices) and with any
necessary corresponding adjustment in Option price per share; provided, however,
that, in the case of Incentive stock Options, each such adjustment shall be made
in such manner as not to constitute a "modification" within the meaning of
Section 424(h)(3) of the Code. Any such adjustment made by the Committee shall
be final and binding upon all Optionees, the Company and all other interested
persons.
SECTION 4.7. -- MERGER, CONSOLIDATION, ACQUISITION, LIQUIDATION OR
DISSOLUTION
Notwithstanding the provisions of Section 4.6, in its absolute discretion,
and on such terms and conditions as it deems appropriate, the Committee may
provide by the terms of any Option that such Option cannot be exercised after
one or more of the following events: the merger or consolidation of the Company
with or into another corporation, the acquisition (through sale, lease or other
transfer) by another corporation or person (other than the principals of the
company and their related parties) of all or substantially all of the Company's
assets, 50% or more of the Company's then outstanding voting stock or the
liquidation or dissolution of the Company; and if the Committee so provides, it
may, in its absolute discretion and on such terms and conditions as it deems
appropriate, also provide, either by the terms of such Option or by a
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resolution adopted prior to the occurrence of such merger, consolidated,
acquisition, liquidation or dissolution, that, for some period of time prior to
such event, such Option shall be exercisable as to all shares covered thereby,
notwithstanding anything to the contrary in Section 4.3(a), Section 4.3(b)
and/or any installment provisions of such Option.
ARTICLE V
EXERCISE OF OPTIONS
SECTION 5.1. -- SECTION 5.1 - PERSON ELIGIBLE TO EXERCISE
During the lifetime of the Optionee, only such Optionee may exercise
an Option (or any portion thereof) granted to him. After the death of the
Optionee, any exercisable portion of an Option may, prior to the time when such
portion becomes unexercisable under the Plan or the applicable Stock Option
Agreement, be exercised by his personal representative or by any person
empowered to do so under the deceased Optionee's will or under the then
applicable laws of descent and distribution.
SECTION 5.2. -- PARTIAL EXERCISE
At any time and from time to time prior to the time when any
exercisable Option or exercisable portion thereof becomes unexercisable under
the Plan or the applicable Stock Option Agreement, such Option or portion
thereof may be exercised in whole or in part; provided, however, that the
Company shall not be required to issue fractional shares and the Committee may,
by the terms of the Option, require any partial exercise to be with respect to
a specified minimum number of shares.
SECTION 5.3. -- MANNER OF EXERCISE
An exercisable Option, or any exercisable portion thereof, may be
exercised solely by delivery to the Secretary or his office of all of the
following prior to the time when such Option or such portion becomes
unexercisable under the Plan or the applicable Stock Option Agreement:
(a) Notice in writing signed by the Optionee or other person then
entitled to exercise such Option or portion, stating that such Option or
portion is exercised, such notice complying with all applicable rules
established by the Committee; and
(b) Full payment (in cash or by check) for the shares with respect
to which such Option or portion is thereby exercised;
(i) With the consent of the Committee, (A) shares of the
Company's Common Stock owned by the Optionee duly endorsed for
transfer to the Company or (B) shares of the Company's Common Stock
issuable to the Optionee upon exercise of the Option, with a fair
market value (as determined under Section
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4.2(b)) on the date of Option exercise equal to the aggregate Option
price of the shares with respect to which such Option or portion is
thereby exercised;
(ii) With the consent of the Committee, a full recourse
promissory note bearing interest (at no less than such rate as shall
then preclude the imputation of interest under the Code or any
successor provision) and payable upon such terms as may be prescribed
by the Committee. The Committee may also prescribe the form of such
note and the security to be given for such note. No Option may,
however, be exercised by delivery of a promissory note or by a loan
from the Company when or where such loan or other extension of credit
is prohibited by law; or
(iii) With the consent of the Committee, any combination of
the consideration provided in the foregoing subsections (i), (ii) and
(iii); and
(c) The payment to the Company (or other employer corporation) of all
amounts which it is required to withhold under federal, state or local law in
connection with the exercise of the Option; with the consent of the Committee,
(i) shares of the Company's Common Stock owned by the Optionee duly endorsed
for transfer or (ii) shares of the Company's Common Stock issuable to the
Optionee upon exercise of the Option, valued in accordance with Section 4.2(b)
at the date of Option exercise, may be used to make all or part of such payment;
(d) Such representations and documents as the Committee, in its absolute
discretion, deems necessary or advisable to effect compliance with all
applicable provisions of the Securities Act and any other federal or state
securities laws or regulations. The Committee may, in its absolute discretion,
also take whatever additional actions it deems appropriate to effect such
compliance including, without limitation, placing legends on share certificate
and issuing stop-transfer orders to transfer agents and registrars; and
(e) In the event that the Option or portion thereof shall be exercised
pursuant to Section 5.1 by any person or persons other than the Optionee,
appropriate proof of the right of such person or persons to exercise the Option
or portion thereof.
SECTION 5.4.--CONDITIONS TO ISSUANCE OF STOCK CERTIFICATES
The shares of stock issuable and deliverable upon the exercise of an
Option, or any portion thereof, may be either previously authorized but
unissued shares or issued shares which have then been reacquired by the Company.
The Company shall not be required to issue or deliver any certificate or
certificates for shares of stock purchased upon the exercise of any Option or
portion thereof prior to fulfillment of all of the following conditions:
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(a) The admission of such shares to listing on all stock exchanges
on which such class of stock is then listed;
(b) The completion of any registration or other qualification of
such shares under any state or federal law or under the rulings or regulations
of the Securities and Exchange Commission or any other governmental regulatory
body, which the Committee shall, in its absolute discretion, deem necessary or
advisable;
(c) The obtaining of any approval or other clearance from any state
or federal governmental agency which the Committee shall, in its absolute
discretion, determine to be necessary or advisable;
(d) The payment to the Company (or other employer corporation) of
all amounts which it is required to withhold under federal, state or local law
in connection with the exercise of the Option; and
(e) The lapse of such reasonable period of time following the
exercise of the Option as the Committee may establish from time to time for
reasons of administrative convenience.
SECTION 5.5. - RIGHTS AS SHAREHOLDERS
The holders of Options shall not be, nor have any of the rights or
privileges of, shareholders of the Company in respect of any shares purchasable
upon the exercise of any part of an Option unless and until certificates
representing such shares have been issued by the Company to such holders.
SECTION 5.6. - TRANSFER RESTRICTIONS
The Committee in its absolute discretion, may impose such other
restrictions on the transferability of the shares purchasable upon the exercise
of an Option as it deems appropriate. Any such other restriction shall be set
forth in the respective Stock Option Agreement and may be referred to on the
certificates evidencing such shares. The Committee may require the Employee to
give the Company prompt notice of any disposition of shares of stock, acquired
by exercise of an Incentive Stock Option, within two years from the date of
granting such Option or one year after the transfer of such shares to such
Employee. The Committee may direct that the certificates evidencing shares
acquired by exercise of an Incentive Stock Option refer to such requirement to
give prompt notice of disposition.
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ARTICLE VI
ADMINISTRATION
SECTION 6.1 - STOCK OPTION COMMITTEE
The Stock Option Committee shall consist of two or more Directors,
appointed by and holding office at the pleasure of the Board, each of whom, to
the extent required by Rule 16b-3, is a "non-employee person" as defined by
Rule 16b-3. Appointment of Committee members shall be effective upon acceptance
of appointment, and removal of Committee members may be effected at any time by
action of the Board. Committee members may resign at any time by delivering
written notice to the Board. Vacancies in the Committee shall be filled by the
Board. At the pleasure of the Board, if the Directors determine to not
constitute a Stock Option Committee, then the entire Board shall discharge the
functions of the Stock Option Committee hereunder without there being any need
for a separately constituted Stock Option Committee. In such event, all
references herein to the Stock Option Committee or the Committee shall be
deemed to be references to the Board of Directors.
SECTION 6.2 - DUTIES AND POWERS OF COMMITTEE
It shall be the duty of the Committee to conduct the general
administration of the Plan in accordance with its provisions. The Committee
shall have the power to interpret the Plan and the Options and to adopt such
rules for the administration interpretation and application of the Plan as are
consistent therewith and to interpret, amend or revoke any such rules. Any such
interpretations and rules in regard to Incentive Stock Options shall be
consistent with the basic purpose of the Plan to grant "incentive stock
options" within the meaning of Section 422 of the Code. The Board shall have no
right to exercise any of the rights or duties of the Committee under the Plan.
SECTION 6.3 - MAJORITY RULE
The Committee shall act by a majority of its members in office. The
Committee may act either by vote at a meeting or by a memorandum or other
written instrument signed by a majority of the Committee.
SECTION 6.4. - COMPENSATION; PROFESSIONAL ASSISTANCE; GOOD FAITH ACTIONS
Members of the Committee shall receive such compensation for their
services as members as may be determined by the Board. All expenses and
liabilities incurred by members of the Committee in connection with the
administration of the Plan shall be borne by the Company. The Committee may
employ attorneys, consultants, accountants, appraisers, brokers or other
persons. The Committee, the Company and its Officers and Directors shall be
entitled to rely upon the advice, opinions or valuations of any such persons.
All actions taken and all interpretations and determinations made by the
Committee in good faith shall be final and binding upon all Optionees, the
Company and all other interested persons. No member of the Committee shall be
personally liable for any action, determination or interpretation made in good
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faith with respect to the Plan or the Options, and all members of the Committee
shall be fully protected by the Company in respect to any such action,
determination or interpretation.
ARTICLE VII
OTHER PROVISIONS
SECTION 7.1. - OPTIONS NOT TRANSFERABLE
No Option or interest or right therein or part thereof shall be liable
for the debts, contracts or engagements of the Optionee or his successors in
interest or shall be subject to disposition by transfer, alienation,
anticipation, pledge, encumbrance, assignment or any other means whether such
disposition be voluntary or involuntary or by operation of law by judgment
levy, attachment, garnishment or any other legal or equitable proceedings
(including bankruptcy), and any attempted disposition thereof shall be null and
void and of no effect; provided, however, that nothing in this Section 7.1
shall prevent transfers by will or by the applicable laws of descent and
distribution.
SECTION 7.2. - AMENDMENT, SUSPENSION OR TERMINATION OF THE PLAN
(a) The Plan may be wholly or partially amended or otherwise modified,
suspended or terminated at any time or from time to time by the Committee.
However, without approval of the Company's shareholders given within 12 months
before or after the action by the Committee, no action of the Committee may,
except as provided in Section 2.3, increase any limit imposed in Section 2.1
on the maximum number of shares which may be issued on exercise of Options,
materially modify the eligibility requirements of Section 3.1, reduce the
minimum Option price requirements of Section 4.2(a) or extend the limit imposed
in this Section 7.2 on the period during which Options may be granted or amend
or modify the Plan in a manner requiring shareholder approval under Rule 16b-3.
Neither the amendment, suspension nor termination of the Plan shall, without
the consent of the holder of the Option, impair any rights or obligations under
any Option theretofore granted. No Option may be granted during any period of
suspension nor after termination of the Plan, and in no event may any Option be
granted under this Plan after the expiration of ten years from the date the
Plan is adopted by the Board.
SECTION 7.3. - APPROVAL OF PLAN BY SHAREHOLDERS
This Plan will be submitted for the approval of the Company's
shareholders within 12 months after the date of the Board's initial adoption of
the Plan. Options may be granted prior to such shareholder approval; provided,
however, that such Options shall not be exercisable prior to the time when the
Plan is approved by the shareholders; provided, further, that if such approval
has not been obtained at the end of said 12-month period, all Options
previously granted under the Plan shall thereupon be cancelled and become null
and void. The Company shall take such actions with respect to the Plan as may
be necessary to satisfy the requirements of Rule 16b-3(b).
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SECTION 7.4.- EFFECT OF PLAN UPON OTHER OPTION AND COMPENSATION PLANS
The adoption of this Plan shall not affect any other compensation or
incentive plans in effect for the Company, any Parent Corporation or any
Subsidiary. Nothing in this Plan shall be construed to limit the right of the
Company, any Parent Corporation or any Subsidiary (a) to establish any other
forms of incentives or compensation for employees of the Company, any Parent
Corporation or any Subsidiary or (b) to grant or assume options otherwise than
under this Plan in connection with any proper corporate purpose, including, but
not by way of limitation, the grant or assumption of options in connection with
the acquisition by purchase, lease, merger, consolidation or otherwise, of the
business, stock or assets of any corporation, firm or association.
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EXHIBIT 10.28
INTRACEL CORPORATION
1999 STOCK INCENTIVE PLAN
1. Purposes of the Plan. The purposes of this Stock Incentive Plan are
to attract and retain the best available personnel, to provide additional
incentive to Employees, Directors and Consultants and to promote the success of
the Company's business.
2. Definitions. As used herein, the following definitions shall apply:
(a) "Administrator" means the Board or any of the Committees
appointed to administer the Plan.
(b) "Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 promulgated under the Exchange Act.
(c) "Applicable Laws" means the legal requirements relating to the
administration of stock incentive plans, if any, under applicable provisions of
federal securities laws, state corporate and securities laws, the Code, the
rules of any applicable stock exchange or national market system, and the rules
of any foreign jurisdiction applicable to Awards granted to residents therein.
(d) "Award" means the grant of an Option, SAR, Dividend Equivalent
Right, Restricted Stock, Performance Unit, Performance Share, or other right or
benefit under the Plan.
(e) "Award Agreement" means the written agreement evidencing the
grant of an Award executed by the Company and the Grantee, including any
amendments thereto.
(f) "Board" means the Board of Directors of the Company.
(g) "Cause" means, with respect to the termination by the Company
or a Related Entity of the Grantee's Continuous Service, that such termination
is for "Cause" as such term is expressly defined in a then-effective written
agreement between the Grantee and the Company or such Related Entity, or in the
absence of such then-effective written agreement and definition, is based on, in
the determination of the Administrator, the Grantee's: (i) refusal or failure to
act in accordance with any specific, lawful direction or order of the Company or
a Related Entity; (ii) unfitness or unavailability for service or unsatisfactory
performance (other than as a result of Disability); (iii) performance of any act
or failure to perform any act in bad faith and to the detriment of the Company
or a Related Entity; (iv) dishonesty, intentional misconduct or material breach
of any agreement with the Company or a Related Entity; or (v) commission of a
crime involving dishonesty, breach of trust, or physical or emotional harm to
any person. At least 30 days prior to the termination of the Grantee's
Continuous Service pursuant to (i) or (ii) above, the Administrator shall
provide the Grantee with notice of the Company's or such Related Entity's intent
to terminate, the reason therefor, and an opportunity for the Grantee to cure
such defects in his or her service to the Company's or such Related Entity's
satisfaction. During this
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30 day (or longer) period, no Award issued to the Grantee under the Plan may be
exercised or purchased.
(h) "Change in Control" means a change in ownership or control of
the Company effected through either of the following transactions:
(i) the direct or indirect acquisition by any person or
related group of persons (other than an acquisition from or by the Company or by
a Company-sponsored employee benefit plan or by a person that directly or
indirectly controls, is controlled by, or is under common control with, the
Company) of beneficial ownership (within the meaning of Rule 13d-3 of the
Exchange Act) of securities possessing more than fifty percent (50%) of the
total combined voting power of the Company's outstanding securities pursuant to
a tender or exchange offer made directly to the Company's stockholders which a
majority of the Continuing Directors who are not Affiliates or Associates of the
offeror do not recommend such stockholders accept, or
(ii) a change in the composition of the Board over a period
of thirty-six (36) months or less such that a majority of the Board members
(rounded up to the next whole number) ceases, by reason of one or more contested
elections for Board membership, to be comprised of individuals who are
Continuing Directors.
(i) "Code" means the Internal Revenue Code of 1986, as amended.
(j) "Committee" means any committee appointed by the Board to
administer the Plan.
(k) "Common Stock" means the common stock of the Company.
(l) "Company" means Intracel Corporation, a Delaware corporation.
(m) "Consultant" means any person (other than an Employee or,
solely with respect to rendering services in such person's capacity as a
Director) who is engaged by the Company or any Related Entity to render
consulting or advisory services to the Company or such Related Entity.
(n) "Continuing Directors" means members of the Board who either
(i) have been Board members continuously for a period of at least thirty-six
(36) months or (ii) have been Board members for less than thirty-six (36) months
and were elected or nominated for election as Board members by at least a
majority of the Board members described in clause (i) who were still in office
at the time such election or nomination was approved by the Board.
(o) "Continuous Service" means that the provision of services to
the Company or a Related Entity in any capacity of Employee, Director or
Consultant, is not interrupted or terminated. Continuous Service shall not be
considered interrupted in the case of (i) any approved leave of absence, (ii)
transfers between locations of the Company or among the Company, any Related
Entity, or any successor, in any capacity of Employee, Director or
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Consultant, or (iii) any change in status as long as the individual remains in
the service of the Company or a Related Entity in any capacity of Employee,
Director or Consultant (except as otherwise provided in the Award Agreement). An
approved leave of absence shall include sick leave, military leave, or any other
authorized personal leave. For purposes of Incentive Stock Options, no such
leave may exceed ninety (90) days, unless reemployment upon expiration of such
leave is guaranteed by statute or contract.
(p) "Corporate Transaction" means any of the following
transactions:
(i) a merger or consolidation in which the Company is not
the surviving entity, except for a transaction the principal purpose of which is
to change the state in which the Company is incorporated;
(ii) the sale, transfer or other disposition of all or
substantially all of the assets of the Company (including the capital stock of
the Company's subsidiary corporations) in connection with the complete
liquidation or dissolution of the Company;
(iii) any reverse merger in which the Company is the
surviving entity but in which securities possessing more than fifty percent
(50%) of the total combined voting power of the Company's outstanding securities
are transferred to a person or persons different from those who held such
securities immediately prior to such merger; or
(iv) an acquisition by any person or related group of
persons (other than the Company or by a Company-sponsored employee benefit plan)
of beneficial ownership (within the meaning of Rule 13d-3 of the Exchange Act)
of securities possessing more than fifty percent (50%) of the total combined
voting power of the Company's outstanding securities (whether or not in a
transaction also constituting a Change in Control), but excluding any such
transaction that the Administrator determines shall not be a Corporate
Transaction.
(q) "Director" means a member of the Board or the board of
directors of any Related Entity.
(r) "Disability" means that a Grantee would qualify for benefit
payments under the long-term disability policy of the Company or the Related
Entity to which the Grantee provides services regardless of whether the Grantee
is covered by such policy.
(s) "Dividend Equivalent Right" means a right entitling the
Grantee to compensation measured by dividends paid with respect to Common Stock.
(t) "Employee" means any person, including an Officer or Director,
who is an employee of the Company or any Related Entity. The payment of a
director's fee by the Company or a Related Entity shall not be sufficient to
constitute "employment" by the Company.
(u) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
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(v) "Fair Market Value" means, as of any date, the value of Common
Stock determined as follows:
(i) Where there exists a public market for the Common
Stock, the Fair Market Value shall be (A) the closing price for a Share for the
last market trading day prior to the time of the determination (or, if no
closing price was reported on that date, on the last trading date on which a
closing price was reported) on the stock exchange determined by the
Administrator to be the primary market for the Common Stock or the Nasdaq
National Market, whichever is applicable or (B) if the Common Stock is not
traded on any such exchange or national market system, the average of the
closing bid and asked prices of a Share on the Nasdaq Small Cap Market for the
day prior to the time of the determination (or, if no such prices were reported
on that date, on the last date on which such prices were reported), in each
case, as reported in The Wall Street Journal or such other source as the
Administrator deems reliable; or
(ii) In the absence of an established market for the Common
Stock of the type described in (i), above, the Fair Market Value thereof shall
be determined by the Administrator in good faith.
(w) "Good Reason" means the occurrence after a Corporate
Transaction, Change in Control or a Related Entity Disposition of any of the
following events or conditions unless consented to by the Grantee:
(i) (A) a change in the Grantee's status, title, position
or responsibilities which represents an adverse change from the Grantee's
status, title, position or responsibilities as in effect at any time within six
(6) months preceding the date of a Corporate Transaction, Change in Control or
Related Entity Disposition or at any time thereafter or (B) the assignment to
the Grantee of any duties or responsibilities which are inconsistent with the
Optionee's status, title, position or responsibilities as in effect at any time
within six (6) months preceding the date of a Corporate Transaction, Change in
Control or Related Entity Disposition or at any time thereafter;
(ii) reduction in the Grantee's base salary to a level
below that in effect at any time within six (6) months preceding the date of a
Corporate Transaction, Change in Control or Related Entity Disposition or at any
time thereafter; or
(iii) requiring the Grantee to be based at any place
outside a 50-mile radius from the Grantee's job location or residence prior to
the Corporate Transaction, Change in Control or Related Entity Disposition,
except for reasonably required travel on business which is not materially
greater than such travel requirements prior to the Corporate Transaction, Change
in Control or Related Entity Disposition.
(x) "Grantee" means an Employee, Director or Consultant who
receives an Award pursuant to an Award Agreement under the Plan.
(y) "Incentive Stock Option" means an Option intended to qualify
as an incentive stock option within the meaning of Section 422 of the Code.
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(z) "Non-Qualified Stock Option" means an Option not intended to
qualify as an Incentive Stock Option.
(aa) "Officer" means a person who is an officer of the Company or
a Related Entity within the meaning of Section 16 of the Exchange Act and the
rules and regulations promulgated thereunder.
(bb) "Option" means an option to purchase Shares pursuant to an
Award Agreement granted under the Plan.
(cc) "Parent" means a "parent corporation," whether now or
hereafter existing, as defined in Section 424(e) of the Code.
(dd) "Performance Shares" means Shares or an Award denominated in
Shares which may be earned in whole or in part upon attainment of performance
criteria established by the Administrator.
(ee) "Performance Units" means an Award which may be earned in
whole or in part upon attainment of performance criteria established by the
Administrator and which may be settled for cash, Shares or other securities or a
combination of cash, Shares or other securities as established by the
Administrator.
(ff) "Plan" means this 1999 Stock Incentive Plan.
(gg) "Registration Date" means the first to occur of (i) the
closing of the first sale to the general public of (A) the Common Stock or (B)
the same class of securities of a successor corporation (or its Parent) issued
pursuant to a Corporate Transaction in exchange for or in substitution of the
Common Stock, pursuant to a registration statement filed with and declared
effective by the Securities and Exchange Commission under the Securities Act of
1933, as amended; and (ii) in the event of a Corporate Transaction, the date of
the consummation of the Corporate Transaction if the same class of securities of
the successor corporation (or its Parent) issuable in such Corporate Transaction
shall have been sold to the general public pursuant to a registration statement
filed with and declared effective by, on or prior to the date of consummation of
such Corporate Transaction, the Securities and Exchange Commission under the
Securities Act of 1933, as amended.
(hh) "Related Entity" means any Parent, Subsidiary and any
business, corporation, partnership, limited liability company or other entity in
which the Company, a Parent or a Subsidiary holds a substantial ownership
interest, directly or indirectly.
(ii) "Restricted Stock" means Shares issued under the Plan to the
Grantee for such consideration, if any, and subject to such restrictions on
transfer, rights of first refusal, repurchase provisions, forfeiture provisions,
and other terms and conditions as established by the Administrator.
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(jj) "Rule 16b-3" means Rule 16b-3 promulgated under the Exchange
Act or any successor thereto.
(kk) "SAR" means a stock appreciation right entitling the Grantee
to Shares or cash compensation, as established by the Administrator, measured by
appreciation in the value of Common Stock.
(ll) "Share" means a share of the Common Stock.
(mm) "Subsidiary" means a "subsidiary corporation," whether now or
hereafter existing, as defined in Section 424(f) of the Code.
(nn) "Related Entity Disposition" means the sale, distribution or
other disposition by the Company of all or substantially all of the Company's
interests in any Related Entity effected by a sale, merger or consolidation or
other transaction involving that Related Entity or the sale of all or
substantially all of the assets of that Related Entity.
3. Stock Subject to the Plan.
(a) Subject to the provisions of Section 10, below, the maximum
aggregate number of Shares which may be issued pursuant to all Awards (including
Incentive Stock Options) is 3,000,000 Shares, plus an annual increase to be
added on the first day of the Company's fiscal year beginning in 2000 equal to
two percent (2%) of the number of Shares outstanding as of such date or a lesser
number of Shares determined by the Administrator. Notwithstanding the foregoing,
subject to the provisions of Section 10, below, of the number of Shares
specified above, the maximum aggregate number of Shares available for grant of
Incentive Stock Options shall be 3,000,000 Shares, plus an annual increase to be
added on the first day of the Company's fiscal year beginning in 2000 equal to
the lesser of (x) 500,000 Shares, (y) two percent (2%) of the number of Shares
outstanding as of such date, or (z) a lesser number of Shares determined by the
Administrator. The Shares to be issued pursuant to Awards may be authorized, but
unissued, or reacquired Common Stock.
(b) Any Shares covered by an Award (or portion of an Award) which
is forfeited or canceled, expires or is settled in cash, shall be deemed not to
have been issued for purposes of determining the maximum aggregate number of
Shares which may be issued under the Plan. If any unissued Shares are retained
by the Company upon exercise of an Award in order to satisfy the exercise price
for such Award or any withholding taxes due with respect to such Award, such
retained Shares subject to such Award shall become available for future issuance
under the Plan (unless the Plan has terminated). Shares that actually have been
issued under the Plan pursuant to an Award shall not be returned to the Plan and
shall not become available for future issuance under the Plan, except that if
unvested Shares are forfeited, or repurchased by the Company at their original
purchase price, such Shares shall become available for future grant under the
Plan.
4. Administration of the Plan.
(a) Plan Administrator.
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(i) Administration with Respect to Directors and Officers.
With respect to grants of Awards to Directors or Employees who are also Officers
or Directors of the Company, the Plan shall be administered by (A) the Board or
(B) a Committee designated by the Board, which Committee shall be constituted in
such a manner as to satisfy the Applicable Laws and to permit such grants and
related transactions under the Plan to be exempt from Section 16(b) of the
Exchange Act in accordance with Rule 16b-3. Once appointed, such Committee shall
continue to serve in its designated capacity until otherwise directed by the
Board.
(ii) Administration With Respect to Consultants and Other
Employees. With respect to grants of Awards to Employees or Consultants who are
neither Directors nor Officers of the Company, the Plan shall be administered by
(A) the Board or (B) a Committee designated by the Board, which Committee shall
be constituted in such a manner as to satisfy the Applicable Laws. Once
appointed, such Committee shall continue to serve in its designated capacity
until otherwise directed by the Board. The Board may authorize one or more
Officers to grant such Awards and may limit such authority as the Board
determines from time to time.
(iii) Administration Errors. In the event an Award is
granted in a manner inconsistent with the provisions of this subsection (a),
such Award shall be presumptively valid as of its grant date to the extent
permitted by the Applicable Laws.
(b) Powers of the Administrator. Subject to Applicable Laws and
the provisions of the Plan (including any other powers given to the
Administrator hereunder), and except as otherwise provided by the Board, the
Administrator shall have the authority, in its discretion:
(i) to select the Employees, Directors and Consultants to
whom Awards may be granted from time to time hereunder;
(ii) to determine whether and to what extent Awards are
granted hereunder;
(iii) to determine the number of Shares or the amount of
other consideration to be covered by each Award granted hereunder;
(iv) to approve forms of Award Agreements for use under the
Plan;
(v) to determine the terms and conditions of any Award
granted hereunder;
(vi) to amend the terms of any outstanding Award granted
under the Plan, provided that any amendment that would adversely affect the
Grantee's rights under an outstanding Award shall not be made without the
Grantee's written consent;
(vii) to construe and interpret the terms of the Plan and
Awards granted pursuant to the Plan, including without limitation, any notice of
Award or Award Agreement, granted pursuant to the Plan;
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(viii) to establish additional terms, conditions, rules or
procedures to accommodate the rules or laws of applicable foreign jurisdictions
and to afford Grantees favorable treatment under such laws; provided, however,
that no Award shall be granted under any such additional terms, conditions,
rules or procedures with terms or conditions which are inconsistent with the
provisions of the Plan; and
(ix) to take such other action, not inconsistent with the
terms of the Plan, as the Administrator deems appropriate.
(c) Effect of Administrator's Decision. All decisions,
determinations and interpretations of the Administrator shall be conclusive and
binding on all persons.
5. Eligibility. Awards other than Incentive Stock Options may be granted
to Employees, Directors and Consultants. Incentive Stock Options may be granted
only to Employees of the Company, a Parent or a Subsidiary. An Employee,
Director or Consultant who has been granted an Award may, if otherwise eligible,
be granted additional Awards. Awards may be granted to such Employees, Directors
or Consultants who are residing in foreign jurisdictions as the Administrator
may determine from time to time.
6. Terms and Conditions of Awards.
(a) Type of Awards. The Administrator is authorized under the Plan
to award any type of arrangement to an Employee, Director or Consultant that is
not inconsistent with the provisions of the Plan and that by its terms involves
or might involve the issuance of (i) Shares, (ii) an Option, a SAR or similar
right with a fixed or variable price related to the Fair Market Value of the
Shares and with an exercise or conversion privilege related to the passage of
time, the occurrence of one or more events, or the satisfaction of performance
criteria or other conditions, or (iii) any other security with the value derived
from the value of the Shares. Such awards include, without limitation, Options,
SARs, sales or bonuses of Restricted Stock, Dividend Equivalent Rights,
Performance Units or Performance Shares, and an Award may consist of one such
security or benefit, or two (2) or more of them in any combination or
alternative.
(b) Designation of Award. Each Award shall be designated in the
Award Agreement. In the case of an Option, the Option shall be designated as
either an Incentive Stock Option or a Non-Qualified Stock Option. However,
notwithstanding such designation, to the extent that the aggregate Fair Market
Value of Shares subject to Options designated as Incentive Stock Options which
become exercisable for the first time by a Grantee during any calendar year
(under all plans of the Company or any Parent or Subsidiary) exceeds $100,000,
such excess Options, to the extent of the Shares covered thereby in excess of
the foregoing limitation, shall be treated as Non-Qualified Stock Options. For
this purpose, Incentive Stock Options shall be taken into account in the order
in which they were granted, and the Fair Market Value of the Shares shall be
determined as of the date the Option with respect to such Shares is granted.
(c) Conditions of Award. Subject to the terms of the Plan, the
Administrator shall determine the provisions, terms, and conditions of each
Award including, but not limited to, the
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Award vesting schedule, repurchase provisions, rights of first refusal,
forfeiture provisions, form of payment (cash, Shares, or other consideration)
upon settlement of the Award, payment contingencies, and satisfaction of any
performance criteria. The performance criteria established by the Administrator
may be based on any one of, or combination of, increase in share price, earnings
per share, total stockholder return, return on equity, return on assets, return
on investment, net operating income, cash flow, revenue, economic value added,
personal management objectives, or other measure of performance selected by the
Administrator. Partial achievement of the specified criteria may result in a
payment or vesting corresponding to the degree of achievement as specified in
the Award Agreement.
(d) Acquisitions and Other Transactions. The Administrator may
issue Awards under the Plan in settlement, assumption or substitution for,
outstanding awards or obligations to grant future awards in connection with the
Company or a Related Entity acquiring another entity, an interest in another
entity or an additional interest in a Related Entity whether by merger, stock
purchase, asset purchase or other form of transaction.
(e) Deferral of Award Payment. The Administrator may establish one
or more programs under the Plan to permit selected Grantees the opportunity to
elect to defer receipt of consideration upon exercise of an Award, satisfaction
of performance criteria, or other event that absent the election would entitle
the Grantee to payment or receipt of Shares or other consideration under an
Award. The Administrator may establish the election procedures, the timing of
such elections, the mechanisms for payments of, and accrual of interest or other
earnings, if any, on amounts, Shares or other consideration so deferred, and
such other terms, conditions, rules and procedures that the Administrator deems
advisable for the administration of any such deferral program.
(f) Award Exchange Programs. The Administrator may establish one
or more programs under the Plan to permit selected Grantees to exchange an Award
under the Plan for one or more other types of Awards under the Plan on such
terms and conditions as determined by the Administrator from time to time.
(g) Separate Programs. The Administrator may establish one or more
separate programs under the Plan for the purpose of issuing particular forms of
Awards to one or more classes of Grantees on such terms and conditions as
determined by the Administrator from time to time.
(h) Early Exercise. The Award Agreement may, but need not, include
a provision whereby the Grantee may elect at any time while an Employee,
Director or Consultant to exercise any part or all of the Award prior to full
vesting of the Award. Any unvested Shares received pursuant to such exercise may
be subject to a repurchase right in favor of the Company or a Related Entity or
to any other restriction the Administrator determines to be appropriate.
(i) Term of Award. The term of each Award shall be the term stated
in the Award Agreement, provided, however, that the term of an Incentive Stock
Option shall be no more than ten (10) years from the date of grant thereof.
However, in the case of an Incentive Stock Option granted to a Grantee who, at
the time the Option is granted, owns stock
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representing more than ten percent (10%) of the voting power of all classes of
stock of the Company or any Parent or Subsidiary, the term of the Incentive
Stock Option shall be five (5) years from the date of grant thereof or such
shorter term as may be provided in the Award Agreement.
(j) Transferability of Awards. Incentive Stock Options may not be
sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner
other than by will or by the laws of descent or distribution and may be
exercised, during the lifetime of the Grantee, only by the Grantee; provided,
however, that the Grantee may designate a beneficiary of the Grantee's Incentive
Stock Option in the event of the Grantee's death on a beneficiary designation
form provided by the Administrator. Other Awards shall be transferable to the
extent provided in the Award Agreement.
(k) Time of Granting Awards. The date of grant of an Award shall
for all purposes be the date on which the Administrator makes the determination
to grant such Award, or such other date as is determined by the Administrator.
Notice of the grant determination shall be given to each Employee, Director or
Consultant to whom an Award is so granted within a reasonable time after the
date of such grant.
7. Award Exercise or Purchase Price, Consideration, Taxes and Reload
Options.
(a) Exercise or Purchase Price. The exercise or purchase price, if
any, for an Award shall be as follows:
(i) In the case of an Incentive Stock Option:
(A) granted to an Employee who, at the time of the
grant of such Incentive Stock Option owns stock representing more than ten
percent (10%) of the voting power of all classes of stock of the Company or any
Parent or Subsidiary, the per Share exercise price shall be not less than one
hundred ten percent (110%) of the Fair Market Value per Share on the date of
grant; or
(B) granted to any Employee other than an Employee
described in the preceding paragraph, the per Share exercise price shall be not
less than one hundred percent (100%) of the Fair Market Value per Share on the
date of grant.
(ii) In the case of a Non-Qualified Stock Option, the per
Share exercise price shall be not less than one hundred percent (100%) of the
Fair Market Value per Share on the date of grant unless otherwise determined by
the Administrator.
(iii) In the case of other Awards, such price as is
determined by the Administrator.
(iv) Notwithstanding the foregoing provisions of this
Section 7(a), in the case of an Award issued pursuant to Section 6(d), above,
the exercise or purchase price for the Award shall be determined in accordance
with the principles of Section 424(a) of the Code.
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(b) Consideration. Subject to Applicable Laws, the consideration to be
paid for the Shares to be issued upon exercise or purchase of an Award including
the method of payment, shall be determined by the Administrator (and, in the
case of an Incentive Stock Option, shall be determined at the time of grant). In
addition to any other types of consideration the Administrator may determine,
the Administrator is authorized to accept as consideration for Shares issued
under the Plan the following, provided that the portion of the consideration
equal to the par value of the Shares must be paid in cash or other legal
consideration permitted by the Delaware General Corporation Law:
(i) cash;
(ii) check;
(iii) delivery of Grantee's promissory note with such
recourse, interest, security, and redemption provisions as the Administrator
determines as appropriate;
(iv) if the exercise or purchase occurs on or after the
Registration Date, surrender of Shares or delivery of a properly executed form
of attestation of ownership of Shares as the Administrator may require
(including withholding of Shares otherwise deliverable upon exercise of the
Award) which have a Fair Market Value on the date of surrender or attestation
equal to the aggregate exercise price of the Shares as to which said Award shall
be exercised (but only to the extent that such exercise of the Award would not
result in an accounting compensation charge with respect to the Shares used to
pay the exercise price unless otherwise determined by the Administrator);
(v) with respect to Options, if the exercise occurs on or
after the Registration Date, payment through a broker-dealer sale and remittance
procedure pursuant to which the Grantee (A) shall provide written instructions
to a Company designated brokerage firm to effect the immediate sale of some or
all of the purchased Shares and remit to the Company, out of the sale proceeds
available on the settlement date, sufficient funds to cover the aggregate
exercise price payable for the purchased Shares and (B) shall provide written
directives to the Company to deliver the certificates for the purchased Shares
directly to such brokerage firm in order to complete the sale transaction; or
(vi) any combination of the foregoing methods of payment.
(c) Taxes. No Shares shall be delivered under the Plan to any
Grantee or other person until such Grantee or other person has made arrangements
acceptable to the Administrator for the satisfaction of any foreign, federal,
state, or local income and employment tax withholding obligations, including,
without limitation, obligations incident to the receipt of Shares or the
disqualifying disposition of Shares received on exercise of an Incentive Stock
Option. Upon exercise of an Award, the Company shall withhold or collect from
Grantee an amount sufficient to satisfy such tax obligations.
(d) Reload Options. In the event the exercise price or tax
withholding of an Option is satisfied by the Company or the Grantee's employer
withholding Shares otherwise
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deliverable to the Grantee, the Administrator may issue the Grantee an
additional Option, with terms identical to the Award Agreement under which the
Option was exercised, but at an exercise price as determined by the
Administrator in accordance with the Plan.
8. Exercise of Award.
(a) Procedure for Exercise; Rights as a Stockholder.
(i) Any Award granted hereunder shall be exercisable at
such times and under such conditions as determined by the Administrator under
the terms of the Plan and specified in the Award Agreement.
(ii) An Award shall be deemed to be exercised when written
notice of such exercise has been given to the Company in accordance with the
terms of the Award by the person entitled to exercise the Award and full payment
for the Shares with respect to which the Award is exercised, including, to the
extent selected, use of the broker-dealer sale and remittance procedure to pay
the purchase price as provided in Section 7(b)(v). Until the issuance (as
evidenced by the appropriate entry on the books of the Company or of a duly
authorized transfer agent of the Company) of the stock certificate evidencing
such Shares, no right to vote or receive dividends or any other rights as a
stockholder shall exist with respect to Shares subject to an Award,
notwithstanding the exercise of an Option or other Award. The Company shall
issue (or cause to be issued) such stock certificate promptly upon exercise of
the Award. No adjustment will be made for a dividend or other right for which
the record date is prior to the date the stock certificate is issued, except as
provided in the Award Agreement or Section 10, below.
(b) Exercise of Award Following Termination of Continuous Service.
(i) An Award may not be exercised after the termination
date of such Award set forth in the Award Agreement and may be exercised
following the termination of a Grantee's Continuous Service only to the extent
provided in the Award Agreement.
(ii) Where the Award Agreement permits a Grantee to
exercise an Award following the termination of the Grantee's Continuous Service
for a specified period, the Award shall terminate to the extent not exercised on
the last day of the specified period or the last day of the original term of the
Award, whichever occurs first.
(iii) Any Award designated as an Incentive Stock Option to
the extent not exercised within the time permitted by law for the exercise of
Incentive Stock Options following the termination of a Grantee's Continuous
Service shall convert automatically to a Non-Qualified Stock Option and
thereafter shall be exercisable as such to the extent exercisable by its terms
for the period specified in the Award Agreement.
(c) Buyout Provisions. The Administrator may at any time offer to
buy out for a payment in cash or Shares, an Award previously granted, based on
such terms and conditions as the Administrator shall establish and communicate
to the Grantee at the time that such offer is made.
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9. Conditions Upon Issuance of Shares.
(a) Shares shall not be issued pursuant to the exercise of an
Award unless the exercise of such Award and the issuance and delivery of such
Shares pursuant thereto shall comply with all Applicable Laws, and shall be
further subject to the approval of counsel for the Company with respect to such
compliance.
(b) As a condition to the exercise of an Award, the Company may
require the person exercising such Award to represent and warrant at the time of
any such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares if, in the
opinion of counsel for the Company, such a representation is required by any
Applicable Laws.
10. Adjustments Upon Changes in Capitalization. Subject to any required
action by the shareholders of the Company, the number of Shares covered by each
outstanding Award, and the number of Shares which have been authorized for
issuance under the Plan but as to which no Awards have yet been granted or which
have been returned to the Plan, the exercise or purchase price of each such
outstanding Award, as well as any other terms that the Administrator determines
require adjustment shall be proportionately adjusted for (i) any increase or
decrease in the number of issued Shares resulting from a stock split, reverse
stock split, stock dividend, combination or reclassification of the Shares, (ii)
any other increase or decrease in the number of issued Shares effected without
receipt of consideration by the Company, or (iii) as the Administrator may
determine in its discretion, any other transaction with respect to Common Stock
to which Section 424(a) of the Code applies; provided, however that conversion
of any convertible securities of the Company shall not be deemed to have been
"effected without receipt of consideration." Such adjustment shall be made by
the Administrator and its determination shall be final, binding and conclusive.
Except as the Administrator determines, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason hereof shall be made with respect to,
the number or price of Shares subject to an Award.
11. Corporate Transactions/Changes in Control/Related Entity
Dispositions. Except as may be provided in an Award Agreement:
(a) In the event of any Corporate Transaction, each Award which is
at the time outstanding under the Plan automatically shall become fully vested
and exercisable and be released from any restrictions on transfer (other than
transfer restrictions applicable to Incentive Stock Options) and repurchase or
forfeiture rights, immediately prior to the specified effective date of such
Corporate Transaction, for all of the Shares at the time represented by such
Award. Effective upon the consummation of the Corporate Transaction, all
outstanding Awards under the Plan shall terminate. However, all such Awards
shall not terminate if the Awards are, in connection with the Corporate
Transaction, assumed by the successor corporation or Parent thereof. In
addition, an outstanding Award under the Plan shall not so fully vest and be
exercisable and released from such limitations if and to the extent: (i) such
Award is, in connection with the Corporate Transaction, either assumed by the
successor corporation or
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Parent thereof or replaced with a comparable Award with respect to shares of the
capital stock of the successor corporation or Parent thereof or (ii) such Award
is to be replaced with a cash incentive program of the successor corporation
which preserves the compensation element of such Award existing at the time of
the Corporate Transaction and provides for subsequent payout in accordance with
the same vesting schedule applicable to such Award; provided, however, that such
Award (if assumed), the replacement Award (if replaced), or the cash incentive
program automatically shall become fully vested, exercisable and payable and be
released from any restrictions on transfer (other than transfer restrictions
applicable to Incentive Stock Options) and repurchase or forfeiture rights
immediately upon termination of the Grantee's Continuous Service (substituting
the successor employer corporation for "Company or Related Entity" for the
definition of "Continuous Service") if such Continuous Service is terminated by
the successor company without Cause or voluntarily by the Grantee with Good
Reason within twelve (12) months of the Corporate Transaction. The determination
of Award comparability above shall be made by the Administrator, and its
determination shall be final, binding and conclusive.
(b) Following a Change in Control (other than a Change in Control
which also is a Corporate Transaction) and upon the termination of the
Continuous Service of a Grantee if such Continuous Service is terminated by the
Company or Related Entity without Cause or voluntarily by the Grantee with Good
Reason within twelve (12) months of a Change in Control, each Award of such
Grantee which is at the time outstanding under the Plan automatically shall
become fully vested and exercisable and be released from any restrictions on
transfer (other than transfer restrictions applicable to Incentive Stock
Options) and repurchase or forfeiture rights, immediately upon the termination
of such Continuous Service.
(c) Effective upon the consummation of a Related Entity
Disposition, for purposes of the Plan and all Awards, the Continuous Service of
each Grantee who is at the time engaged primarily in service to the Related
Entity involved in such Related Entity Disposition shall terminate and each
Award of such Grantee which is at the time outstanding under the Plan
automatically shall become fully vested and exercisable and be released from any
restrictions on transfer (other than transfer restrictions applicable to
Incentive Stock Options) and repurchase or forfeiture rights for all of the
Shares at the time represented by such Award and be exercisable in accordance
with the terms of the Award Agreement evidencing such Award. However, such
Continuous Service shall be not be deemed to terminate if such Award is, in
connection with the Related Entity Disposition, assumed by the successor entity
or its Parent. In addition, such Continuous Service shall be not be deemed to
terminate and an outstanding Award under the Plan shall not so fully vest and be
exercisable and released from such limitations if and to the extent: (i) such
Award is, in connection with the Related Entity Disposition, either to be
assumed by the successor entity or its parent or to be replaced with a
comparable Award with respect to interests in the successor entity or its parent
or (ii) such Award is to be replaced with a cash incentive program of the
successor entity which preserves the compensation element of such Award existing
at the time of the Related Entity Disposition and provides for subsequent payout
in accordance with the same vesting schedule applicable to such Award; provided,
however, that such Award (if assumed), the replacement Award (if replaced), or
the cash incentive program automatically shall become fully vested, exercisable
and payable and be released from any restrictions on transfer (other than
transfer restrictions applicable to Incentive Stock Options) and
14
<PAGE> 15
repurchase or forfeiture rights immediately upon termination of the Grantee's
Continuous Service (substituting the successor employer entity for "Company or
Related Entity" for the definition of "Continuous Service") if such Continuous
Service is terminated by the successor entity without Cause or voluntarily by
the Grantee with Good Reason within twelve (12) months of the Related Entity
Disposition. The determination of Award comparability above shall be made by the
Administrator, and its determination shall be final, binding and conclusive.
(d) The portion of any Incentive Stock Option accelerated under
this Section 11 in connection with a Corporate Transaction, Change in Control or
Related Entity Disposition shall remain exercisable as an Incentive Stock Option
under the Code only to the extent the $100,000 dollar limitation of Section
422(d) of the Code is not exceeded. To the extent such dollar limitation is
exceeded, the accelerated excess portion of such Option shall be exercisable as
a Non-Qualified Stock Option.
12. Effective Date and Term of Plan. The Plan shall become effective
upon the earlier to occur of its adoption by the Board or its approval by the
stockholders of the Company. It shall continue in effect for a term of ten (10)
years unless sooner terminated. Subject to Section 17, below, and Applicable
Laws, Awards may be granted under the Plan upon its becoming effective.
13. Amendment, Suspension or Termination of the Plan.
(a) The Board may at any time amend, suspend or terminate the
Plan. To the extent necessary to comply with Applicable Laws, the Company shall
obtain stockholder approval of any Plan amendment in such a manner and to such a
degree as required.
(b) No Award may be granted during any suspension of the Plan or
after termination of the Plan.
(c) Any amendment, suspension or termination of the Plan
(including termination of the Plan under Section 12, above) shall not affect
Awards already granted, and such Awards shall remain in full force and effect as
if the Plan had not been amended, suspended or terminated, unless mutually
agreed otherwise between the Grantee and the Administrator, which agreement must
be in writing and signed by the Grantee and the Company.
14. Reservation of Shares.
(a) The Company, during the term of the Plan, will at all times
reserve and keep available such number of Shares as shall be sufficient to
satisfy the requirements of the Plan.
(b) The inability of the Company to obtain authority from any
regulatory body having jurisdiction, which authority is deemed by the Company's
counsel to be necessary to the lawful issuance and sale of any Shares hereunder,
shall relieve the Company of any liability in respect of the failure to issue or
sell such Shares as to which such requisite authority shall not have been
obtained.
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<PAGE> 16
15. No Effect on Terms of Employment/Consulting Relationship. The Plan
shall not confer upon any Grantee any right with respect to the Grantee's
Continuous Service, nor shall it interfere in any way with his or her right or
the Company's right to terminate the Grantee's Continuous Service at any time,
with or without cause.
16. No Effect on Retirement and Other Benefit Plans. Except as
specifically provided in a retirement or other benefit plan of the Company or a
Related Entity, Awards shall not be deemed compensation for purposes of
computing benefits or contributions under any retirement plan of the Company or
a Related Entity, and shall not affect any benefits under any other benefit plan
of any kind or any benefit plan subsequently instituted under which the
availability or amount of benefits is related to level of compensation. The Plan
is not a "Retirement-Plan" or "Welfare Plan" under the Employee Retirement
Income Security Act of 1974, as amended.
17. Stockholder Approval. The grant of Incentive Stock Options under the
Plan shall be subject to approval by the stockholders of the Company within
twelve (12) months before or after the date the Plan is adopted excluding
Incentive Stock Options issued in substitution for outstanding Incentive Stock
Options pursuant to Section 424(a) of the Code. Such stockholder approval shall
be obtained in the degree and manner required under Applicable Laws. The
Administrator may grant Incentive Stock Options under the Plan prior to approval
by the stockholders, but until such approval is obtained, no such Incentive
Stock Option shall be exercisable. In the event that stockholder approval is not
obtained within the twelve (12) month period provided above, all Incentive Stock
Options previously granted under the Plan shall be exercisable as Non-Qualified
Stock Options.
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<PAGE> 1
EXHIBIT 10.40
RESEARCH AND CENTER AGREEMENT
BETWEEN
INTRACEL CORPORATION
AND
DUKE UNIVERSITY
DURHAM, NORTH CAROLINA
DECEMBER 28, 1998
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
1. SCOPE OF RESEARCH..................................................1
2. WORKPLAN/PAYMENT...................................................2
3. OPERATION OF THE ONCOVAX CENTER................................... 3
3.1 Operational Policies and Procedures......................... 3
3.2 Personnel................................................... 3
3.3 Designation of Medical Director............................. 3
4. REGULATORY APPROVALS/INTRACEL OVERSIGHT........................... 4
5. TERM & TERMINATION................................................ 4
6. INDEMNIFICATION; LIMITATION ON LIABILITY; INSURANCE;
SURVIVAL.......................................................... 5
6.1 Hospital Indemnification of Intracel........................ 5
6.2 Intracel Indemnification of Hospital........................ 5
6.3 Notice...................................................... 6
6.4 Third Party Actions......................................... 6
6.5 Other Recoveries............................................ 6
6.6 Limitation of Liability..................................... 7
6.6.1 Limitation of Intracel's Liability.................... 7
6.6.2 Limitation of Hospital's Liability.................... 7
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C>
6.7 Insurance.................................................. 7
6.7.1 Intracel's Obligation to Insure...................... 7
6.7.2 Hospital's Obligation to Insure...................... 8
6.8 Survival................................................... 8
7. MISCELLANEOUS.................................................... 8
7.1 Confidential and Proprietary Information................... 8
7.2 Institutional Review Board Approval........................ 9
7.3 Clinical Data and Reporting................................ 9
7.4 Publication................................................ 9
7.5 Adverse Effects............................................ 10
7.6 Further Assurances......................................... 10
7.7 Assignment; Binding Effect................................. 10
7.8 Governing Law.............................................. 10
7.9 Severability............................................... 10
7.10 Expenses; Attorneys' Fees.................................. 11
7.11 Modification; Waiver....................................... 11
7.12 Notice..................................................... 11
7.13 Benefit of This Agreement.................................. 12
7.14 Complete Agreement......................................... 12
7.15 Contract Modifications for Prospective Legal Events........ 13
7.16 Execution in Counterparts.................................. 13
7.17 Use of a Party's Name...................................... 13
7.18 Independent Contractor..................................... 13
</TABLE>
<PAGE> 4
RESEARCH AND CENTER AGREEMENT
THIS RESEARCH AND CENTER AGREEMENT (this "Agreement") is entered into as of
December 28, 1998, (the "Effective Date") by and between Intracel Corporation
("Intracel"), a Delaware corporation having its principal office at 1330
Piccard Drive, Rockville, MD 20850, and Duke University ("Hospital"), a North
Carolina non-profit corporation having its principal office at Durnham, North
Carolina.
WHEREAS, Intracel has (i) developed OncoVAXcl(R) ("OncoVAX") to be
utilized in the treatment of colon cancer and (ii) the technical expertise
necessary for the manufacture, production and distribution of OncoVAX and other
drugs to be used in the treatment of cancer and for clinical trials;
WHEREAS, Hospital and its medical staff has the knowledge and expertise,
as well as the facilities reasonably necessary to support the diagnoses and
treatment of certain oncological diseases and the location necessary for the
preparation and delivery of OncoVAX to appropriate patients enrolled in a
clinical research study;
WHEREAS, Intracel desires to utilize Hospital's facilities for preparing
OncoVAX and other materials required for the conduct of certain clinical
research studies;
WHEREAS, Hospital desires to make available certain facilities and
personnel with the requisite skills to Intracel for the establishment of the
Center; and
WHEREAS, the fulfillment of this Agreement is of mutual interest and
benefit to Hospital and Intracel, and will further the instructional and
research objectives of Hospital in a manner consistent with its status as
a non-profit educational health care institution;
NOW THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements hereinafter set forth, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the parties hereto hereby agree as follows:
Scope of Operations
1. SCOPE OF RESEARCH
Hospital shall prepare, in compliance with FDA cGMP regulations, OncoVAX
and other materials required for the conduct of clinical research studies as
the parties may mutually agree. Materials prepared by Hospital under this
Agreement shall be used solely for such research purposes; however, Intracel
may recover costs associated with the preparation of such Materials by charging
patients as allowed by, and in strict accordance with, applicable FDA and other
governmental regulations. If Intracel obtains FDA marketing approval for
OncoVAX, Hospital and Intracel agree to use reasonable efforts to permit
Intracel to use facilities controlled by Hospital for
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<PAGE> 5
commercial production on OncoVAX provided that such use is consistent with
Hospital's tax exempt status, applicable Hospital policies and Hospital's own
need for such facility.
2. WORKPLAN/PAYMENT
2.1 Each research study to be performed under this Agreement will be
documented in a mutually agreed Workplan which will include, but not be limited
to the study protocol, budget and payment schedule. Each Workplan may be
updated from time to time by mutual agreement between Intracel and Hospital.
Each Workplan will be reviewed on at least a quarterly basis and updated as the
parties may agree.
2.2 The Workplan will include activities to be performed with respect to:
(a) support of Intracel research protocols concerning tumor diagnosis and
treatment including preparation of autologous tumor vaccines,
comprising viable but non-tumorigenic cells from a patient's own
tumor;
(b) numbers and type of personnel required to manage anticipated
activity. Intracel authorizes the retention of two full time
employees at the inception of the Agreement.
(c) Hospital's obligation to conduct work under a particular protocol or
Workplan shall be contingent upon approval of its Institutional
Review Board and such other boards, committees, or officials as may
be required by its policies.
2.3 Payment Terms/Supplies. The parties agree that the Workplan will
include estimates of Hospital's expenses incurred in providing
service under the Agreement. Intracel will pay Hospital on a monthly
basis for these expenses. The aggregate amount will be based on an
estimate of direct employee expenses, supply expenses and an indirect
expense allocation of 28%. Intracel agrees to provide at its own
expense certain critical supplies for the manufacture of OncoVAX
including, but not limited to, Fresh Frozen TICEBCG, Collagenase
Solutions, DNA ase solutions, HBSS, DMSO, HSA in HBSS, and kits and
supplies developed by Intracel. Intracel agrees to pay Hospital for
other expenses including employee transportation costs. Hospital will
invoice Intracel on a monthly basis for total additional costs.
Intracel may audit Hospital's records supporting these other expenses.
2.4 Equipment. Intracel may provide such other equipment as is necessary
for the proper running of the Center. Service and maintenance of this
equipment is Intracel's responsibility. Intracel will retain title to
this equipment and will remove it at the end of this Agreement.
2
<PAGE> 6
3. OPERATION OF THE CENTER
3.1 OPERATIONAL POLICIES AND PROCEDURES
Hospital shall adopt and enforce policies and procedures provided by
Intracel for the operation of the operation of the OncoVAX Center. Intracel
shall maintain ultimate responsibility for compliance with all applicable United
States Food And Drug Administration ("FDA") product requirements. Hospital
agrees to conduct all research under this Agreement shall be conducted in
accordance with all applicable federal, state, and local laws and regulations.
3.2 PERSONNEL
(a) All laboratory, clinical and administrative personnel working in
the OncoVAX Center shall be employees of Hospital with the exception of the
Intracel employee described in Section 3.2(b) and subject to Hospital's
personnel policies and procedures. Hospital shall provide the services of a
physician who will, on behalf of Hospital, act as the medical director of the
OncoVAX Center (the "Medical Director"). The Medical Director shall be an
employee of Hospital and provide professional research services as further
described in Section 3.3 below.
(b) Intracel may employ an on-site employee who is responsible for
overseeing the preparation of OncoVAX, and to train and direct the activity of
Hospital employees as it relates to said preparation. Intracel shall be
responsible for all compensation and insurance coverage, including workers'
compensation, for this Intracel employee, and Hospital shall have no obligation
to provide any such compensation or insurance, or any other benefits normally
provided by Hospital to its employees. Intracel agrees to assume all risks
incident to this Intracel's employee's research activity at Hospital (including
the risk of personal injury or property damage) regardless of their causes,
which may include but are not limited to laboratory accidents, and the failure
to supervise any persons, unless due to the negligence or material breach of
Hospital or its agents or employees.
3.3 DESIGNATION OF MEDICAL DIRECTOR
The Medical Director or designee shall serve as Principal Investigator for
each Study and shall exert best efforts to perform the work required under this
Agreement. The Medical Director or designee shall devote a minimum of ten
percent (10%) of his professional time to the performance of the research
contemplated hereunder and shall provide Intracel with a monthly report on the
progress of such research. If the Principal Investigator is unable to continue
to serve in that capacity and a successor acceptable to both DUKE and SPONSOR
is not available, this Agreement will be terminated in accordance with Article
5.3. Intracel shall pay Hospital in compensation for the Medical Director's
effort at the rate of $30,000 for the first year of the subject research
payable in monthly installments of $2,500 per month. The payment shall be made
in arrears at the end of each month. The payment shall be adjusted annually to
reflect changes in Hospital's normal charges for such efforts.
3
<PAGE> 7
4. REGULATORY APPROVALS/INTRACEL OVERSIGHT
Hospital shall use reasonable efforts to obtain any authorizations,
consent, and approvals of any federal, state, local, foreign or other
governmental agency, instrumentality, commission, authority, board or body or
other person or entity, including the FDA, for the transactions contemplated
hereunder. Intracel shall cooperate with and assist Hospital in providing
information and other documentation required by such bodies. Hospital agrees to
use its best efforts to cooperate with, and provide support to, Intracel in
complying with current Good Manufacturing Practices ("cGMP"). Intracel shall use
its best efforts to cooperate with, and provide support to, Hospital in
complying with current Good Manufacturing Practices (cGMP) and shall be
responsible for training Hospital employees in such practices. Notwithstanding
anything to the contrary in this Agreement, the parties agree that Intracel
shall have, among others, the following rights: (i) the right to audit the
Center, (ii) the right to close the Center or otherwise stop Hospital from
preparing OncoVAX and other materials required for the research contemplated by
this Agreement if Hospital's facilities are not in compliance with applicable
laws and regulations, (iii) the right to approve all personnel working on the
subject research, and to require removal from the research of any such
personnel, including the Medical Director if they fail in any material way to
comply with applicable laws and regulations, (iv) responsible for any
interaction with the FDA with respect to OncoVAX or any other product agreed to
by the parties, (v) the right to require implementation of any actions or
changes in order to assure full compliance with all applicable FDA requirements,
and (vi) the right to terminate this Agreement should the Hospital not take
actions with respect to the Center, its operations and its employees in order to
comply with all applicable laws and regulations. Intracel shall not make binding
commitments with FDA for Hospital without Hospital's prior written consent which
will not be unreasonably withheld, and Hospital may participate in said
discussions with the FDA as it relates to the Center. Hospital agrees not to
manufacture or use OncoVAX for any purpose without Intracel's prior approval.
5. TERM & TERMINATION
5.1 The term of this Agreement shall commence on the Effective Date and
shall, unless earlier terminated as described in Section 5.2 below, end on the
fourth anniversary of said Effective Date. The parties shall meet prior to each
such anniversary plan to agree on the Workplan as described in Section 2 for the
coming year. If the parties are unable to agree upon a Workplan, this Agreement
shall immediately terminate.
5.2 This Agreement may be terminated at any time by either party by
written notice to the other party in the event that the other party has
materially breached a representation, warranty, covenant or agreement contained
in this Agreement or in any other agreement or document contemplated hereunder
and such breach has not been cured within 30 days of written notice thereof by
the non-breaching party; or
4
<PAGE> 8
5.3 EFFECT OF TERMINATION
In the event this Agreement is terminated as provided above,
Hospital will proceed in an orderly fashion to terminate any outstanding
commitments and to stop the work as soon as it is practicable to do so. All
reasonable costs to Hospital associated with termination will be considered
reimbursable costs, including costs incurred prior to the notice of termination
but which have not yet been reimbursed, and commitments existing at the time
the notice of termination is received which cannot be cancelled. Neither of the
parties, nor any of their respective stockholders, directors, officers,
officers or agents shall have any liability to the other party, except for any
deliberate breach or deliberate omission resulting in material breach of any of
the provisions of this Agreement. In such case, the breaching party shall be
liable only for the expenses and costs of the non-breaching party, and in no
event shall either party be liable for anticipated profits or consequential
damages.
5.4 GENERALLY
After termination, each party shall keep confidential all information
provided by the other pursuant to this Agreement which is not in the public
domain, shall exercise the same degree of care in handling such information as
it would exercise with similar confidential information of its own, and shall
return any such information upon the other party's request.
6. INDEMNIFICATION; LIMITATION ON LIABILITY; INSURANCE; SURVIVAL
6.1 HOSPITAL INDEMNIFICATION OF INTRACEL
Hospital will indemnify, defend and hold harmless Intracel and
Intracel's successors and assigns from and against any and all actual and
direct claims, damages, losses and liabilities (including reasonable attorneys'
fees) ("Losses") which may at any time be asserted against or suffered by
Intracel as a result of or on account of any material breach of any
representation, warranty or covenant on the part of Hospital made herein or in
any instrument or document delivered pursuant hereto.
6.2 INTRACEL INDEMNIFICATION OF HOSPITAL
Intracel will indemnify, defend and hold harmless Hospital and
Hospital's successors and assigns from and against any and all Losses which may
at any time be asserted against or suffered by Hospital as a result of or on
account of any breach of any representation, warranty or covenant on the part
of Intracel made herein or in any instrument or document delivered pursuant
hereto. In addition, Intracel agrees to indemnify, hold harmless and defend
Hospital, its trustees, officers, employees, and agents from and against any
and all claims, suits, losses, damages, costs, fees, expenses (including
reasonable attorneys' fees), and other liabilities asserted by third parties,
both government and non-government, resulting from or arising out of the
clinical study and research program carried out pursuant to this Agreement;
provided,
5
<PAGE> 9
however, that Intracel shall not be liable for DUKE's negligence, intentional
wrongdoing, or its failure to follow a mutually agreed protocol.
6.3 NOTICE
A party (an "Indemnified Party") shall give prompt written notice to
an indemnifying party (the "Indemnifying Party") of any payments, demands,
claims, suits, judgments, liabilities, losses, costs, damages or expenses (a
"Claim") in respect of which such Indemnifying Party has a duty to provide
indemnity to such Indemnified Party under this Section 6.3, except that any
delay or failure to notify the Indemnifying Party only shall relieve the
Indemnifying Party of its obligations hereunder to the extent, if at all, that
it is prejudiced by reason of such delay or failure.
6.4 THIRD PARTY ACTIONS
In the event any claim is made, suit is brought, or other proceeding
instituted against a party to this Agreement which involves or appears
reasonably likely to involve a Loss, the Indemnified Party will, within 10 days
after receipt of notice of any such claim, suit, or proceeding for which
indemnification may be sought, notify the Indemnifying Party in writing of the
commencement thereof; provided, however, that failure to give such notification
shall not affect the indemnification provided hereunder except to the extent the
Indemnifying Party can demonstrate actual monetary prejudice as a direct or
indirect result of such failure.
The Indemnified Party may elect, within 30 days after the
Indemnifying Party's receipt of such notice, or five days before the return date
required by any citation, claim, or other statute, whichever occurs earlier, to
contest or defend against such claim at the Indemnifying Party's expense, and
shall give written notice to the Indemnifying Party of the commencement of such
defense. The Indemnifying Party, its subsidiaries, successors, and assigns shall
be entitled to participate with the Indemnified Party in such event (at the
Indemnifying Party's cost and expense). In the event that the Indemnified Party
does not elect to contest, defend, settle, or pay the claim as provided above,
the Indemnifying Party, its subsidiaries, successors, or assigns shall have the
exclusive right to prosecute, defend, compromise, settle, or pay the claim in
its sole discretion and pursue its rights under this Agreement but shall not be
entitled in any way to release, waive, settle, modify, or pay such claim without
the consent of the Indemnified Party. Each party, its subsidiaries, successors,
and assigns shall cooperate in the defense of such action and the records of
each shall be available to the other with respect to such defense.
6.5 OTHER RECOVERIES
The amount of any Losses recoverable by an Indemnified Party
hereunder shall be reduced by the amount, if any, of the recovery (net of
reasonable expenses incurred in obtaining said recovery) the Indemnified Party
hereunder shall have received with respect thereto from any other party, person,
or entity, other than an insurer of the Indemnified Party unless such insurer
has expressly waived all rights of subrogation with respect to such recovery. In
the event such a recovery is made by an Indemnified
6
<PAGE> 10
Party after it receives payment or other credit hereunder with respect to any
Losses, then a refund equal to aggregate amount to the recovery, net of
reasonable expenses incurred in obtaining that recovery, shall be made promptly
to the Indemnifying Party making such payment. Without limiting the foregoing,
in the event that a claim or benefit is created in connection with the
occurrence of any Losses which have not been collected by the Indemnified Party
at the time payment with respect to such Losses is made by the Indemnifying
Party, the Indemnified Party shall assign such benefit or claim to the
Indemnifying Party as a condition to the payment by the Indemnifying Party and
shall cooperate with the Indemnifying Party in its efforts to collect any such
benefit or claim. If such claim or benefit is not assignable under applicable
laws, the Indemnified Party shall cooperate in good faith with the Indemnifying
Party's efforts to collect such claim or benefit.
6.6 LIMITATION OF LIABILITY
6.6.1 LIMITATION OF INTRACEL'S LIABILITY
Notwithstanding any other provision contained in this
Agreement, Intracel's liability under this Agreement shall be limited to actual
and direct losses suffered by Hospital arising as a result of Intracel's
negligent failure to perform its obligations under this Agreement. Hospital
acknowledges and agrees that Intracel shall not be liable for any lost
reimbursement or loss of data, earnings, profits or goodwill or any other
indirect, consequential, incidental, exemplary or punitive damages suffered by
any person or entity, including Hospital, caused directly or indirectly by the
acts or omissions of Intracel, its employees or agents in the course of
performing services or functions contemplated under or related in any way to
this Agreement (including, without limitation, any breach by Intracel of its
obligations under this Agreement).
6.6.2 LIMITATION OF HOSPITAL'S LIABILITY
Notwithstanding any other provision contained in this
Agreement, Hospital's liability under this Agreement shall be limited to actual
and direct losses suffered by Intracel arising as a result of Hospital's
negligent failure to perform its obligations under this Agreement. Intracel
acknowledges and agrees that Hospital shall not be liable for any lost
reimbursement or loss of data, earnings, profits or goodwill or any other
indirect, consequential, incidental, exemplary or punitive damages suffered by
any person or entity, including Intracel, caused directly or indirectly by the
acts or omissions of Hospital, its employees or agents in the course of
performing obligations or functions contemplated under or related in any way to
this Agreement (including, without limitation, any breach by Hospital of its
obligations under this Agreement).
6.7 INSURANCE
6.7.1 INTRACEL'S OBLIGATION TO INSURE
Intracel shall obtain and maintain in effect at all times
during the term of this Agreement insurance as set forth in Schedule 6.7.1.
Such insurance policies shall name Hospital as an additional insured and
Intracel shall provide such
7
<PAGE> 11
restrictions with respect to information furnished to one party by the other
shall not apply to any such information which the receiving party demonstrates
(i) is on the date hereof, or hereafter becomes, generally available to the
public other than as a result of a disclosure, directly or indirectly, by the
receiving party or (ii) was available or becomes available to the receiving
party on a confidential or non-confidential basis from a source other than the
other party hereto, which source was not itself bound by a confidentiality
agreement with such other party and did not receive such information, directly
or indirectly, from a person or entity so bound, (iii) is independently
developed by personnel of the receiving party without use or reliance upon
Confidential Information provided under this Agreement; or (e) is disclosed
pursuant to any judicial or governmental request, requirement or order,
provided that the disclosing party takes reasonable steps to provide the other
party with sufficient prior notice in order to allow the other party to contest
such request, requirement or order. Intracel shall be provided with patient
information as required by mutually agreed protocols and as allowed by law, and
will maintain the confidentiality of all such patient information in accordance
with all applicable laws and regulations.
7.2 INSTITUTIONAL REVIEW BOARD APPROVAL
Intracel shall cooperate with Medical Director in preparing and
filing research protocols, informed consent form, and other information with
Hospital's Institutional Review Board ("IRB"). Medical Director shall apply for
approval to conduct the research protocol with the IRB.
7.3 CLINICAL DATA AND REPORTING
All clinical data, including case report forms and other relevant
information generated during performance under the Agreement will be promptly
and fully disclosed to Intracel, and shall be freely usable by Intracel
consistent with good business judgment. Hospital will submit a complete written
progress report after the Agreement is completed. Hospital shall also submit
interim progress reports.
7.4 PUBLICATION
Hospital shall be free to use the results of the research and
clinical study for its own teaching, research, education, clinical and
publication purposes without the payment of royalties or other fees. Hospital
shall submit to Intracel for its review, a copy of any proposed publication
resulting from the research at least thirty (30) days prior to the estimated
date of publication and if no response is received within thirty (30) days of
the date submitted to Intracel, it will be conclusively presumed that the
publication may proceed without delay. If Intracel determines that the proposed
publication contains patentable subject matter which requires protection,
Intracel may require the delay of publication for a period of time not to
exceed sixty (60) days for the purpose of filing patent applications.
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<PAGE> 12
7.5 ADVERSE EFFECTS
Intracel will reimburse Hospital and/or the patient for the
reasonable costs and expenses incurred in diagnosing and treating unanticipated
adverse effects, injuries, illnesses, or reactions that result from the use or
application of Intracel's investigational drug or device in the course of the
Agreement.
7.6 FURTHER ASSURANCES
The parties hereby agree to take whatever further actions or to
execute and deliver whatever further documents or instruments or make whatever
further filings as may be reasonably necessary or desirable to effectuate the
express provisions or the intent of this Agreement.
7.7 ASSIGNMENT; BINDING EFFECT
This Agreement, and the rights and obligations of the parties created
hereunder, shall not be assigned or delegated by either Hospital or Intracel
without the prior written consent of all parties, and any purported or
attempted assignment or delegation without such consent shall be void and
without effect, except that (i) Intracel may assign or delegate its rights and
obligations under this Agreement to any successor to Intracel in the event of a
merger or consolidation of Intracel with another entity, or to any purchaser of
all or substantially all of the assets or business of Intracel, and (ii) either
party may assign or delegate its rights and obligations under this Agreement to
an Affiliate (as defined below) in which case the assigning or delegating party
shall not be relieved of their obligations hereunder. For purposes of this
Section 7.3, an Affiliate shall mean, as to any party hereto, any corporation
or other entity which, directly or indirectly, through one or more
intermediaries, controls (i.e., possesses, directly or indirectly, the power to
direct or cause the direction of the management and policies of an entity,
whether through ownership of voting securities, by contract, or otherwise) is
controlled by, or is under common control with such party. Subject to the
foregoing, this Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective successors, assigns, heirs, executors,
administrators, and/or personal representatives.
7.8 GOVERNING LAW
This Agreement and the rights and obligations of the parties hereto
shall be governed by and construed and enforced in accordance with the laws of
the North Carolina (excluding the choice of law rules thereof).
7.9 SEVERABILITY
In the event that a court of competent jurisdiction holds that a
particular provision or requirement of this Agreement is in violation of any
applicable law, each such provision or requirement shall be enforced only to
the extent it is not in violation of such law or is not otherwise unenforceable
and all other provisions and requirements of this Agreement shall remain in
full force and effect.
10
<PAGE> 13
7.10 EXPENSES; ATTORNEYS' FEES
The parties shall pay their own respective expenses (including,
without limitation, the fees, disbursements and expenses of their attorneys,
accountants, actuaries, and financial and other advisors) in connection with
the negotiation and preparation of this Agreement and the transactions
contemplated hereby. If any party is required to institute legal action or
arbitration against another party to enforce the provisions of this Agreement,
the court or arbitration panel may award costs of litigation, including, but
without limitation, reasonable attorneys' fees.
7.11 MODIFICATION; WAIVER
This Agreement shall not be modified or amended except by an
instrument in writing signed by Hospital and Intracel. No delay or failure on
the part of any party hereto in exercising any right, power, or privilege under
this Agreement or any other instruments executed and delivered in connection
with or pursuant to this Agreement, shall impair any such right, power, or
privilege or be construed as a waiver of any default hereunder or any
acquiescence therein. No single or partial exercise of any such right, power,
or privilege shall preclude the further exercise of such right, power, or
privilege, or the exercise of any other right, power or privilege. No waiver
shall be valid against any party hereto unless made in writing and signed by
the party against whom enforcement of such waiver is sought and then only to
the extent expressly specified therein.
7.12 NOTICE
All notices, demands, requests or other communications which may be
or are required to be given, served or sent by any party to any other party
pursuant to this Agreement shall be in writing and shall be hand delivered
(including delivery by courier), sent by Federal Express or by other recognized
overnight delivery service, mailed by first-class, registered or certified
mail, return receipt requested, postage prepaid, or sent by telegram, telex, or
facsimile transmission, addressed as follows:
If to Intracel:
Intracel Corporation
1330 Piccard Drive
Rockville, MD 20850
Attn: Daniel S. Reale
FAX 301-296-0082
and
Intracel Corporation
1330 Piccard Drive
Rockville, MD 20850
Attn: Larry Bloom, CFO
FAX 301-296-0082
11
<PAGE> 14
if to Hospital:
Duke University Medical Center
Office of Grants and COntracts
Duke University Medical Center
107 Seeley G. Mudd Building - Box 3001
Durham, North Carolina 27710
with a copy (which shall not constitute notice) to:
Office of Counsel
Duke University
2400 Pratt St. Suite 4000
DUMC Box 3024
Durham, North Carolina 27710
Each party may designate by notice in writing a new address to
which any notice, demand, request or communication may thereafter be so given,
served, or sent. Each notice, demand, request, or communication which shall be
mailed, delivered, or transmitted in the manner described above shall be deemed
sufficiently given, served, sent, or received for all purposes at such time as
it is delivered to the addressee (with the return receipt, the delivery
receipt, the affidavit of messenger, or (with respect to a telex or facsimile)
the answer back being deemed conclusive, but not exclusive, evidence of such
delivery) or at such time as delivery is refused by the addressee upon
presentation.
7.13 BENEFIT OF THIS AGREEMENT
It is the explicit intention of the parties hereto that except as
set forth below no person or entity other than a party hereto is or shall be
entitled to bring any action to enforce any provision of this Agreement against
any of the parties hereto, and that the covenants, undertakings, and agreements
set forth in this Agreement shall be solely for the benefit of, and shall be
enforceable only by, the parties hereto or their respective successors and
assigns as permitted hereunder. Notwithstanding the foregoing, ICC shall be a
third party beneficiary hereto with respect to the enforcement of, and only to
the extent of, any rights it may have hereunder.
7.14 COMPLETE AGREEMENT
This Agreement sets forth the entire agreement of the parties
hereto with respect to its subject matter and any all prior agreements, whether
oral or written, between or among the parties hereto and relating to the
subject matter hereof are superseded hereby.
12
<PAGE> 15
7.15 CONTRACT MODIFICATIONS FOR PROSPECTIVE LEGAL EVENTS
In the event any state or federal laws or regulations, now existing or
enacted or promulgated after the date hereof, are interpreted by judicial
decision, a regulatory agency or legal counsel in such manner as to indicate
that this Agreement or any provision hereof may be in violation of such laws or
regulations, Intracel and Hospital shall amend this Agreement as necessary to
preserve the underlying economic and financial arrangements between Intracel and
Hospital and without substantial economic detriment to either party. Neither
party shall claim or assert illegality as a defense to the enforcement of this
Agreement or any provision hereof; instead any such purported illegality shall
be resolved pursuant to the terms of this Section 7.11.
7.16 EXECUTION IN COUNTERPARTS
This Agreement may be executed in counterparts, each of which shall
constitute an original hereof for all purposes.
7.17 USE OF A PARTY'S NAME
Neither party will, without the prior written consent of the other
party, use in advertising, publicity, or otherwise, the name, trademark, logo,
symbol, or other image of the other party or that party's employee or agent.
7.18 INDEPENDENT CONTRACTOR
Hospital's and the Principal Investigator's relationship to Intracel
under this Agreement shall be that of an independent contractor and not an
agent, joint venturer, or partner of Intracel.
13
<PAGE> 16
IN WITNESS WHEREOF, each of the parties has duly caused this OncoVAX
Center Agreement to be duly executed in its name and on its behalf, as of the
date first written above.
INTRACEL CORPORATION
By:
-----------------------------
Name:
---------------------------
Title:
--------------------------
DUKE UNIVERSITY MEDICAL CENTER
By:
-----------------------------
Name:
---------------------------
Title:
--------------------------
14
<PAGE> 1
Exhibit 10.41
FIRST AMENDMENT AND WAIVER AGREEMENT, dated as of the 20th day of January, 1999,
by and among Intracel Corporation, a Delaware corporation (the "Company"),
PerImmune Holdings, Inc., a wholly-owned subsidiary of the Company ("Holdings"),
PerImmune Inc., a wholly-owned subsidiary of Holdings ("PerImmune"), Bartels,
Inc., a wholly-owned subsidiary of the Company ("Bartels"), and the noteholders
set forth on the signature page hereto (the "Noteholders"). Capitalized terms
used but not defined herein shall have the meanings ascribed to such terms in
the Securities Purchase Agreement.
WITNESSETH:
WHEREAS, in connection with that certain Securities Purchase Agreement
dated August 25, 1998 among the Company, Holdings, PerImmune and the Noteholders
(the "Purchase Agreement"), the Company issued and sold (A) those certain 12%
Senior Secured Primary Promissory Notes dated August 25, 1998 in the original
principal amount of (i) $3,841,463 for the benefit of Northstar High Yield Fund;
(ii) $22,195,122 for the benefit of Northstar High Total Return Fund; (iii)
$7,682,927 for the benefit of Northstar High Total Return Fund II and (iv)
$1,280,488 for the benefit of Northstar Strategic Income Fund (collectively, the
"Senior Notes") and (B) those certain 12% Guaranteed Senior Secured Escrow
Promissory Notes dated August 25, 1998 of Intracel Corporation in the original
principal amount of (i) $658,537 for the benefit of Northstar High Yield Fund;
(ii) $3,804,878 for the benefit of Northstar High Total Return Fund; (iii)
$1,317,073 for the benefit of Northstar High Total Return Fund II and (iv)
$219,512 for the benefit of Northstar Strategic Income Fund (collectively, the
"Escrow Notes" and, together with the Senior Notes, the "Notes");
WHEREAS, pursuant to Section 1(e) of each of the Escrow Notes, upon
receipt of cash proceeds from the sale of debt or equity securities, under
certain circumstances, the Company will be obligated to apply up to $6 million
of such proceeds to pay accrued unpaid past due interest on all Notes and to
reduce the principal of, and accrued unpaid interest on, the Escrow Notes;
WHEREAS, pursuant to the terms of the Interest Escrow Security Agreement
dated as of August 25, 1998 among the Noteholders, the Company and Northwestern
Trust and Investors Advisory Company (the "Interest Escrow Security Agreement"),
the Company is (i) required to obtain the written consent of the Noteholders
prior to the disbursement of any funds from the Securities Account (as defined
therein) and (ii) to replenish the funds in the Securities Account if the
balance in such account is reduced below a specified level;
WHEREAS, the Company seeks (i) to amend Section 3 of the Interest Escrow
Security Agreement to reduce the amount the Company is required to maintain in
the Securities Account, (ii) to obtain the Noteholders' consent to a
disbursement from the Securities Account to pay the interest due on the Notes on
February 25, 1999, and (iii) to obtain a waiver of the Company's failure to
replenish the funds in the Securities Account to the required level prior to the
date hereof;
<PAGE> 2
WHEREAS, the Company seeks to obtain the approval of the Noteholders to
proposed amendments to the Amended and Restated Certificate of Incorporation of
the Company (i) to extend until June 30, 1999 the time period by which an
underwritten public offering must occur for automatic conversion of the
Company's Series A Preferred Stock, Series A-1 Preferred Stock and Series A-3
Preferred Stock into shares of the Company's Common Stock upon the consummation
of an underwritten public offering, (ii) to effect a two-for-three reverse stock
split of each outstanding share of the Company's Common Stock, (iii) to increase
the total authorized shares of the Company's Common Stock to fifty million
(50,000,000) shares, and (iv) to amend and restate the Company's Amended and
Restated Certificate of Incorporation, substantially in the form attached hereto
as Exhibit A (collectively, the "Proposed Charter Amendments");
WHEREAS, the Company has filed a Registration Statement on Form S-1 with
the Securities and Exchange Commission on July 9, 1998 relating to the proposed
sale of shares of its Common Stock to the public (the "Initial Public
Offering");
WHEREAS, the Company has not complied with certain covenants under the
Purchase Agreement and the Ancillary Documents which non-compliance could
constitute an Event of Default under the Notes, the Purchase Agreement, and the
Ancillary Documents and could cause the Notes to become immediately due and
payable;
WHEREAS, the representatives for the underwriters in the Initial Public
Offering, Donaldson, Lufkin & Jenrette Securities Corporation and NationsBanc
Montgomery Securities LLC (the "Representatives") have determined that (i) the
application of the proceeds from the Initial Public Offering or from any other
debt or equity financing concluded prior to the consummation of the Initial
Public Offering to the repayment of principal or interest on the Notes or to the
replenishment of the Securities Account under the Interest Escrow Security
Agreement, and (ii) any Event of Default which could cause the Notes to become
immediately due and payable, would adversely affect the marketing of the
securities to be sold by the Company in the Initial Public Offering; and
WHEREAS, the Noteholders acknowledge and agree that it would be in their
best interests for the Company to consummate the Initial Public Offering as
contemplated by the Representatives.
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein, the parties hereby agree with each other as follows:
1. AMENDMENT TO ESCROW NOTES.
(a) In accordance with Section 10 of each of the Escrow Notes, Section
1(e) of each of the Escrow Notes is hereby amended by deleting the word "and"
immediately
2
<PAGE> 3
before clause (iii) in such paragraph and inserting a new clause (iv)
immediately following clause (iii) in such paragraph to read in its entirety as
follows:
"and (iv) the Company shall have no obligation to make any payments
under this Section 1(e) which result from the sale of debt or equity
securities by the Company in, or prior to the consummation of, the first
offering of its equity securities to the public pursuant to a
registration statement declared effective by the Securities and Exchange
Commission under the Securities Act of 1933, as amended."
(b) As soon as practicable after the date hereof, the Company and the
Noteholders agree to execute Amended and Restated Escrow Notes reflecting the
amendment set forth above and otherwise on the same terms and conditions as the
Escrow Notes (the "Amended Escrow Notes"), which Amended and Restated Escrow
Notes shall be prepared by and at the expense of the Company and shall be
delivered to the respective Noteholders in exchange for the original Escrow
Notes which shall be delivered by the Noteholders to the Company.
2. AMENDMENT TO INTEREST ESCROW SECURITY AGREEMENT. In accordance with Section
17(f) of the Interest Escrow Security Agreement, Section 3 of the Interest
Escrow Security Agreement is hereby amended in its entirety to read as
follows:
"Notice Requirements. The Company shall direct the Purchasers to, and
the Purchasers shall, deposit the Initial Deposit Amount in the
Securities Account by wire transfer in accordance with the written
instruction received from the Depositary on the Closing Date. The
Depositary agrees to send a statement not less frequently than quarterly
by the fifteenth day of each month in which the Depositary provides such
statement, a statement of the balance and activity in the Securities
Account for the period covered by such statement. The Company shall be
entitled to rely conclusively in making the foregoing determinations on
information provided to it by the Depositary."
3. CONSENTS.
(a) The Noteholders hereby consent to the disbursement of funds from the
Securities Account (as defined in the Interest Escrow Security Agreement) in an
amount sufficient to pay all accrued interest on the Notes when due on February
25, 1999, May 25, 1999 and August 25, 1999.
(b) The Noteholders hereby consent to the Proposed Charter Amendments.
(c) The Noteholders hereby consent to the issuance by the Company of any
unsecured debt securities or any equity securities prior to the consummation of
the Initial
3
<PAGE> 4
Public Offering and hereby waive the Company's obligation to notify the
Noteholders five (5) business days prior to the closing of any such proposed
transaction as set forth in Section 5.12(d)(viii) of the Purchase Agreement.
4. WAIVERS OF EVENTS OF DEFAULT AND COVENANTS.
The Noteholders hereby waive any Event of Default under Section 6 of the
Notes which may be deemed to have occurred as a result of the actions or
omissions of the Company set forth below. The Noteholders further agree that the
Company's non-compliance with the covenants and agreements set forth below, or
any other covenant or agreement set forth in the Purchase Agreement or any
Ancillary Documents which may be violated as a result of the actions or
omissions of the Company set forth below, shall not be deemed an Event of
Default under the Notes or a breach of the Company's obligations under the
Purchase Agreement, any of the Ancillary Documents or the Notes. The Noteholders
further agree that the provisions of Section 3(b) of the Guaranty Agreement
executed by each of Holdings, PerImmune and Bartels simultaneously with the
Purchase Agreement shall not be applicable as a result of any of the actions or
omissions of the Company set forth below.
(a) The Company's obligation to obtain and maintain the McKenzie
Policies as required under Sections 5.10, 5.15 and 6.14 of the Purchase
Agreement.
(b) The Company's withdrawal of funds from the Escrow Account (as
defined in the Funded Commitment Facility Escrow Agreement) prior to the date
hereof in violation of Section 5.6(d) of the Purchase Agreement and Section 7 of
the Funded Commitment Facility Escrow Agreement.
(c) The obligation of the Company to replenish the Shortfall to the
Securities Account (in each case, as defined in the Interest Escrow Security
Agreement) as required under Section 3 of the Interest Escrow Security Agreement
prior to the amendment to such section set forth herein.
(d) The Company's obligation under Section 5.16 of the Purchase
Agreement, not to incur additional Debt as the amount of the Company's Debt
which is more than 60 days past due has increased and Holding's obligation to
pay certain amounts due to Akzo Nobel Pharma International B.V. ("Akzo") under
the Intellectual Property Agreement dated August 2, 1996 between Holdings and
Akzo is more than 60 days past due and is in dispute.
(e) The Company's obligation to deliver (i) monthly financial statements
and other information as required under Section 5.12 (a) of the Purchase
Agreement for the months of September, October, November and December of 1998
and for the month of January 1999; (ii) quarterly financial statements for the
quarter ended September 30, 1998 and December 31, 1998 as required under Section
5.12(b) of the Purchase
4
<PAGE> 5
Agreement; (iii) unaudited financial statements as required under Section 5.28
of the Purchase Agreement and (iv) an Officer's Certificate by November 14, 1998
as required under Section 5.12(d)(ix).
(f) The Company's obligation (i) to notify the Noteholders of the filing
of a complaint by Vector Securities International Inc. (as more fully described
in Amendment No. 2 to the Registration Statement, a copy of which has been
delivered to the Noteholders) as required by Section 5.12(d)(iii) of the
Purchase Agreement, (ii) to notify the Noteholders of the trademark opposition
proceeding filed by Jenner Technologies, Inc. against Theriak S.A. as required
by terms of the Intellectual Property Security Agreement and the Notes, and
(iii) to notify the Noteholders that the Company has become aware of, and has
forwarded a notice to, a potential infringer of the patents relating to the
OncoVAX cancer vaccine as required by terms of the Intellectual Property
Security Agreement and the Notes.
(g) The Company's obligation to name the Holders as additional insureds,
beneficiaries, assignees and loan payees under certain insurance policies as
required by Section 5.10 of the Purchase Agreement and Section 2(e) of the
Security Agreement.
5. CONFIRMATION OF INTEREST RATE.
The Noteholders hereby agree and confirm that the rate at which interest
has accrued under the Notes has remained at 12% since the issuance of the Notes
and that no increase in the interest rate has occurred as a result of the
application of either Section 2(a) or Section 6 of the Notes. The Noteholders
agree that the Company complied with the covenant set forth in Section 5.26 of
the Purchase Agreement within the sixty (60) day period set forth in such
section.
5
<PAGE> 6
6. NO MODIFICATIONS.
Except as waived or amended hereby, the terms and conditions of the
Notes, the Purchase Agreement and the Ancillary Documents shall continue in full
force and effect and are hereby in all respects ratified and confirmed.
7. NO KNOWN DEFAULTS; FURTHER ASSURANCES.
The Noteholders hereby represent and warrant that they have no knowledge
of any actions or omissions on the part of any party hereto, other than those
set forth herein, which could form the basis of an Event of Default under the
Notes or a breach of the obligations of any party hereto under the Purchase
Agreement or any Ancillary Document. The Company and the Noteholders agree to
execute and deliver any and all such additional documents, instruments and
notices including, without limitation, any notice evidencing the consent set
forth in Section 3 hereof, as may be necessary or desirable to confirm and carry
into effect the agreements and waivers set forth herein.
8. BINDING EFFECT.
This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and assigns.
9. GOVERNING LAW.
This Agreement shall be construed, and the rights and obligations of the
parties hereunder determined, in accordance with and governed by the internal
laws of the State of New York (as permitted by Section 5-1401 of the New York
General Obligations Law (or any similar successor provision)) without giving
effect to any choice of law rule that would cause the application of the laws of
any jurisdiction other than the internal laws of the State of New York to the
rights and duties of the parties.
10. SEVERABILITY.
If one or more provisions of this Agreement are held to be unenforceable
under applicable law, such provisions shall be excluded from this Agreement and
the balance of this Agreement shall be interpreted as if such provision were so
excluded and shall be enforceable in accordance with its terms.
6
<PAGE> 7
11. COUNTERPARTS.
This Agreement may be executed in counterparts, each of which shall be
deemed an original, and all of which together shall be deemed to constitute one
and the same instrument.
IN WITNESS WHEREOF, this Agreement has been executed as of the date and
year first written above.
INTRACEL CORPORATION
By: /s/ SIMON McKENZIE
--------------------------------
Name: Simon McKenzie
Title: CEO
PERIMMUNE HOLDINGS, INC.
By: /s/ SIMON McKENZIE
--------------------------------
Name: Simon McKenzie
Title: CEO
PERIMMUNE, INC.
By: /s/ SIMON McKENZIE
--------------------------------
Name: Simon McKenzie
Title: CEO
BARTELS, INC.
By: /s/ SIMON McKENZIE
--------------------------------
Name: Simon McKenzie
Title: CEO
7
<PAGE> 8
NOTEHOLDERS:
NORTHSTAR HIGH YIELD FUND
By: /s/ JEFFREY AURIGEMMA
--------------------------------
Name: Jeffrey Aurigemma
Title: Vice President
NORTHSTAR HIGH TOTAL RETURN FUND
By: /s/ JEFFREY AURIGEMMA
--------------------------------
Name: Jeffrey Aurigemma
Title: Vice President
NORTHSTAR HIGH TOTAL RETURN FUND II
By: /s/ JEFFREY AURIGEMMA
--------------------------------
Name: Jeffrey Aurigemma
Title: Vice President
NORTHSTAR STRATEGIC INCOME FUND
By: /s/ JEFFREY AURIGEMMA
--------------------------------
Name: Jeffrey Aurigemma
Title: Vice President
8
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in Intracel Corporation's registration statement on
Form S-1 (File No. 333-58819) of our report dated January 19, 1999, after the
restatement described in Note 15, on our audit of the September 30, 1998 and
December 31, 1997 financial statements of Intracel Corporation. We
also consent to the reference to our firm under the caption "Experts".
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Seattle, Washington
January 20, 1999
- --------------------------------------------------------------------------------
The foregoing report is in the form that will be signed upon completion of the
reverse stock split described in paragraph 13 of Note 10 to the financial
statements.
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in Intracel Corporation's registration statement on
Form S-1 (File No. 333-58819) of our report dated April 2, 1998, except for the
second paragraph of Note 14 as to which the date is June 8, 1998, on our audit
of the 1997 financial statements of Perimmune Holdings, Inc. and Subsidiary. We
also consent to the reference to our firm under the caption "Experts".
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
McLean, Virginia
January 20, 1999
<PAGE> 1
Exhibit 23.3
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and
"Selected Financial Data" and to the use of our report dated December 3, 1997,
except for paragraph 3 of Note 6 and paragraph 10 of Note 10, as to which the
date is January 2, 1998, Note 15, as to which the date is December 10, 1998,
and paragraph 13 of Note 10 as to which the date is __________ __, 1999,
included in Amendment No. 3 to the Registration Statement (Form S-1 No.
333-58819) and related Prospectus of Intracel Corporation for the registration
of shares of its common stock.
Seattle, Washington
January 21, 1999
- --------------------------------------------------------------------------------
The foregoing consent is in the form that will be signed upon the completion of
the reverse stock split described in paragraph 13 of Note 10 to the financial
statements.
ERNST & YOUNG LLP
Seattle, Washington
January 21, 1999
<PAGE> 1
EXHIBIT 23.4
The Board of Directors
Intracel Corporation:
We consent to the use of our reports included herein and to the reference to
our firm under the headings "Selected Financial Data for PerImmune Holdings and
Predecessor Companies" and "Experts" in the prospectus.
/s/ KPMG LLP
Baltimore, Maryland
January 20, 1999
