<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 4, 1999
REGISTRATION NO. 333-58819.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
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
(I.R.S. EMPLOYER IDENTIFICATION
(STATE OF INCORPORATION) (PRIMARY STANDARD INDUSTRIAL NUMBER)
CLASSIFICATION CODE 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
- ------------------------------------------------------------------------------------------------------------
Common Stock, $.0001 par value.............. $57,500,000 $16,963(2)
Common Stock, $.0001 par value.............. $ 2,300,000 $ 639
------------ --------
------------ --------
Total............................. $59,800,000 $17,602(2)
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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.
(2) A registration fee of $16,963 was paid on July 9, 1998.
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 4, 1999
PROSPECTUS
, 1999
4,000,000 SHARES
INTRACEL CORPORATION
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.
Application has been made to have the common stock approved for quotation
on the Nasdaq National Market under the symbol "ICEL."
------------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 7 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)
- -------------------------------------------------------------------------------------------------------
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
NATIONSBANC MONTGOMERY SECURITIES LLC
<PAGE> 3
[PICTURE OF COMPANY FACILITIES]
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, 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. 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. 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
3
<PAGE> 5
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. 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. In a phase III clinical trial
the Company believes that HumaSPECT demonstrated significant 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.
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.
4
<PAGE> 6
THE OFFERING
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Common Stock Offered by the Company.......... 4,000,000 shares
Common Stock to be Outstanding After the
Offering................................... 15,397,538 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) 1,351,594 shares of common stock
issuable upon exercise of stock options outstanding as of September 30,
1998, at a weighted-average exercise price of $3.57 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 exercise price of $7.96 per share; and 1,083,339 shares
which are exercisable at $15.00 per share.
RISK FACTORS
This offering involves a high degree of risk. See "Risk Factors."
5
<PAGE> 7
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 NINE MONTHS ENDED
YEAR ENDED JUNE 30 ENDED DECEMBER 31 YEAR ENDED SEPTEMBER 30,
------------------------- DECEMBER 31 ----------------- DECEMBER 31 -------------------------
1993 1994 1995 1995 1996 1997 1997(1) 1997 1998(2)
------ ------ ------- ----------- ------- ------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (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 $10,231 $ 14,244
Cost of revenue......... 533 449 824 1,779 8,265 8,661 15,277 5,909 9,588
Selling, general and
administrative........ 962 801 1,580 2,593 5,740 8,478 12,922 5,912 11,101
Research and
development........... 785 1,078 1,174 1,118 1,043 556 8,633 523 8,420
Acquired research and
development........... 2,100 37,718
Amortization of cost in
excess of net assets
acquired.............. 151 908 908 993 681 744
Reorganization
expense............... 917
------ ------ ------- ------- ------- ------- -------- ------- --------
Total operating
expense............. 2,280 2,328 3,578 7,741 16,873 18,603 37,825 13,025 67,571
------ ------ ------- ------- ------- ------- -------- ------- --------
Loss from operations.... (504) (710) (2,012) (5,315) (2,155) (5,151) (16,484) (2,794) (53,327)
Interest income
(expense), net........ 47 22 68 (135) (2,235) (2,913) (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.... (457) (688) (1,944) (5,450) (4,390) (8,064) (20,569) (4,894) (54,547)
Extraordinary gain on
early extinguishment
of debt............... 1,367 785
------ ------ ------- ------- ------- ------- -------- ------- --------
Net loss.............. $ (457) $ (688) $(1,944) $(4,083) $(4,390) $(8,064) $(20,569) $(4,894) $(53,762)
====== ====== ======= ======= ======= ======= ======== ======= ========
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<CAPTION>
SEPTEMBER 30, 1998
--------------------------------------------
PRO FORMA
ACTUAL PRO FORMA(4) AS ADJUSTED(5)
----------- ------------- --------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
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BALANCE SHEET DATA:
Cash, cash equivalents, pledged securities and restricted
cash(3)................................................. $ 11,392 $ 15,400 $ 58,760
Working capital........................................... 4,817 9,392 52,752
Total assets.............................................. 51,960 55,968 99,328
Long-term debt, non-convertible, including current
portion................................................. 35,038 35,038 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.
(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 repayment of $5,000,000 of
indebtedness, but does not reflect the repayment of $6,000,000 of long-term
debt that if requested by the noteholder, must be redeemed in whole or in
part upon completion of this offering.
6
<PAGE> 8
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. The FDA has raised questions regarding the manufacture
of OncoVAX(CL) 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 that is likely to predict
clinical benefit based on the product's effect on a clinical endpoint or
surrogate endpoint. 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 not made available comprehensive guidelines with
respect to these requirements and retains 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
7
<PAGE> 9
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 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 generally 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 study to commence or
to accept the BLA for filing.
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, 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
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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 -- 1998 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 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
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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 -- Therapeutic Products -- OncoVAX(CL) for the
treatment of colon cancer" 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 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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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 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
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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. 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 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
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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 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
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<PAGE> 15
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 -- 1998 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,
the Company will be required to offer to prepay certain of the Company's
material debt obligations. See "Business -- 1998 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
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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 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."
15
<PAGE> 17
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 24.40%
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."
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
16
<PAGE> 18
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 74.02% 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 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
17
<PAGE> 19
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 two years, 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.
18
<PAGE> 20
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 -- 1998 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.
19
<PAGE> 21
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 and (iv) 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.
20
<PAGE> 22
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 $ 15,400 $ 58,760
======== ========== ============
Long-term debt, non-convertible, including current
portion................................................... $ 35,038 $ 35,038 $ 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; 11,397,538 shares issued and outstanding, pro
forma; and 15,397,538 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 $ 44,972 $ 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.
(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 $5,000,000 of
indebtedness, but does not reflect the repayment of $6,000,000 of long-term
debt that, if requested by the noteholder, must be redeemed in whole or in
part 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 $3.57 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.
21
<PAGE> 23
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 11,397,538 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>
22
<PAGE> 24
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.
23
<PAGE> 25
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) (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.
24
<PAGE> 26
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 Peat Marwick 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 Peat Marwick 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 Peat Marwick 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 Peat Marwick 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 Peat Marwick 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.
25
<PAGE> 27
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.
26
<PAGE> 28
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 -- 1998 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.
27
<PAGE> 29
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
28
<PAGE> 30
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
29
<PAGE> 31
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 -- 1998 Debt Refinancings" and elsewhere in this Prospectus.
30
<PAGE> 32
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 two years, 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.
31
<PAGE> 33
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. 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. 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. 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 IND for OncoVAX(CL) with the FDA to commence a Phase III
32
<PAGE> 34
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.
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> 35
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> 36
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> 37
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
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<PAGE> 38
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
37
<PAGE> 39
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. 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 a staff of production technicians
and a
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<PAGE> 40
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. 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 will be the sole shareholders. In
connection with the formation of such new entity, the Company will then purchase
the Equipment in exchange for a promissory note made by the Company and payable
to Lehigh Valley Hospital in the maximum amount of approximately $663,518,
convertible into shares of the Company's common stock at a conversion price of
not less than 75% of the per share price to the public of common stock in this
offering and 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 to serve as "medical director" to the OncoVAX Centers in exchange
for 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 to be determined by
the Company's Board of Directors on January 8, 1999. The anticipated price is
expected to be at 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 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
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<PAGE> 41
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
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
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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 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
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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 -- Therapeutic Products -- OncoVAX(CL) for the treatment of
colon cancer" 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, 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 fully responded
to all issues raised by the FDA. 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.
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.
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
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<PAGE> 47
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 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.
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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, 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
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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 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
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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.
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
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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 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
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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. 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
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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.
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 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 intends to do with Lehigh Valley
Hospital. As long as such relationships involve the lease or purchase by the
Company of space, products or services 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 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 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
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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 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.
Facility Licensure and Corporate Practice of Medicine
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.
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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. The
Company intends to retain supervising physicians 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, 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
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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 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.
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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 "-- 1998 Debt Refinancings."
1998 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 32,710 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 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,
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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 1,083,339 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 is 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 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
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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. Pursuant to the
terms of the August 1998 Escrow Notes, the Company must notify the noteholders
of its sale of common stock offered hereby 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), when and as the
Company receives the net proceeds from the sale of common stock offered hereby.
See "Use of Proceeds."
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.
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.
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The August 1998 Warrants are exercisable until August 25, 2003 at an
exercise price which as of the date hereof equals the price to the public set
forth on the cover page of this Prospectus, less the underwriting discounts and
commissions, per share, subject to certain anti-dilution adjustments. 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."
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 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.
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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.
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.
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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.
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> 64
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. Mr.
Schuyler is a Senior Vice President and Chief Investment Officer of Orion
Capital and Security Insurance Co. of Hartford, one of Intracel's principal
institutional stockholders. 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 Klibanov serve as Class I Directors, Messrs. Schuyler
and Caligiuri serve as Class II Directors and Messrs. Hanna and McKenzie serve
as Class III Directors.
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<PAGE> 65
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 10,000
shares at an exercise price of $4.50 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. Subsequent to a
two-for-one split of the common stock effected as of December 31, 1997 and a
two-for-three reverse stock split on December 28, 1998. This option has been
adjusted to 13,333 shares at an exercise price of $6.75 per share.
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<PAGE> 66
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.
65
<PAGE> 67
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, the agreement provides for a $50,000
bonus if a private placement of the Company's equity securities aggregating not
less than $3,000,000 is consummated by December 31, 1998 and a bonus of $50,000
if a public offering of the Company's equity securities registered under the
Securities Act aggregating not less than $20,000,000 is consummated by December
31, 1998. 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 66,666 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 $160,000, 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 66,666 shares of its common stock at an exercise
price of $15.00 per share vesting at a rate of 25% on the
66
<PAGE> 68
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.
STOCK OPTION PLANS
Intracel Stock Option Plans
The Company has reserved 533,333 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 588,013 shares of common stock at $1.50 to $15.00 per
share were outstanding, of which 316,419 were vested and exercisable. A meeting
of the Company's Board of Directors is scheduled to be held on January 8, 1999
for the purpose, among other things, of authorizing an increase in the maximum
number of shares of common stock available for issuance under the 1989 plan from
533,333 shares to an amount to be determined by the Board of Directors. See Note
10 to the Company's consolidated financial statements contained elsewhere in
this Prospectus.
The Company's 1999 Plan will be 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 shares of common stock have been reserved for issuance under the
1999 Plan. 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
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<PAGE> 69
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 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
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<PAGE> 70
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 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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<PAGE> 71
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
NAME, TITLE AND --------------------
ADDRESS OF OFFICERS, NUMBER OF SHARES PRIOR TO AFTER
DIRECTORS AND BENEFICIAL OWNERS(1) BENEFICIALLY OWNED 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) 884,451 7.73 5.73
600 Fifth Avenue
New York, NY 10020
Simon R. McKenzie(7) 798,961 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) 53,332 * *
Director
Lawrence Bloom(14) 19,166 * *
Chief Financial Officer
Joseph Caligiuri(15) 18,216 * *
Director
Daniel S. Reale(16) 16,666 * *
Senior Vice President and President, OncoVAX(CL) Division
Carl Foster(16) 16,666 * *
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) 4,861,618 39.80% 26.25%
</TABLE>
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* 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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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, 36,432 shares of
common stock which will be issued under automatic conversion features of
certain outstanding debt, and 493,783 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, 53,333 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 26,666 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 16,666 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; 493,783
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 36,432 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 -- 1998 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 7,772,511 shares of common stock (the "Holders"), including
3,849,669 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 453,137 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 4,861,618 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 4,861,618 shares of common stock (including
approximately 323,311 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 7,354,874 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. 7,772,510 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 and second 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."
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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 NationsBanc Montgomery Securities LLC 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.........
NationsBanc Montgomery Securities LLC.......................
---------
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.
78
<PAGE> 80
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.
EXPERTS
The consolidated financial statements of the Company 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 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 Peat Marwick 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 Peat Marwick 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 consolidated statements of operations, stockholders' equity
(deficit), and cash flows for the year
79
<PAGE> 81
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 Peat Marwick 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
Peat Marwick 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.
80
<PAGE> 82
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 (unaudited)................ 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
(unaudited)............................................ 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 (unaudited)... 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
(unaudited)............................................ F-7
Notes to Consolidated Financial Statements................ F-8
PERIMMUNE HOLDINGS, INC. AND SUBSIDIARY
Report of PricewaterhouseCoopers LLP, independent
accountants............................................ F-35
Consolidated Balance Sheets as of December 31, 1997 and
1996................................................... F-36
Consolidated Statements of Operations for the year ended
December 31, 1997 and the period from August 3, 1996
through December 31, 1996.............................. F-37
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-38
Consolidated Statements of Cash Flows for the year ended
December 31, 1997 and the period from August 3, 1996
through December 31, 1996.............................. F-39
Notes to Consolidated Financial Statements................ F-40
PERIMMUNE HOLDINGS, INC. AND SUBSIDIARY; AND PREDECESSOR
COMPANY
Report of KPMG Peat Marwick LLP, independent certified
public accountants..................................... F-53
Consolidated Balance Sheet as of December 31, 1996........ F-54
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-55
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-56
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-57
Notes to Financial Statements............................. F-58
</TABLE>
F-1
<PAGE> 83
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Intracel Corporation
In our opinion, the accompanying consolidated balance sheet 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 December 31, 1997, and the consolidated results of its operations
and its 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
Seattle, Washington
April 24, 1998, except for the
second paragraph of Note 12
as to which the date is May
14, 1998,
and the first paragraph
of Note 9 and Notes 14 and 15
as to which the date is
December 28, 1998
F-2
<PAGE> 84
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 12 of Note 10, as to
which the date is January 2,
1998 and Note 15, as to which
the date is December 10, 1998.
- ----------------------------------
The foregoing report is in the form that will be signed upon completion of
the reverse stock split described in paragraph 17 of Note 14 to the financial
statements.
ERNST & YOUNG LLP
Seattle, Washington
December 30, 1998
F-3
<PAGE> 85
INTRACEL CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- SEPTEMBER 30,
1996 1997 1998
ASSETS ------------ ------------ -------------
(UNAUDITED)
<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> 86
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) (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> 87
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. (unaudited)... 3,652,436 365 35,421,649 35,422,014
Common stock issued in
exchange for 1997 placement
costs (unaudited)........... 46,669 5 315,104 315,109
Preferred stock
dividends/accretions
(unaudited)................. 2,967 1 (920,425) (920,424)
Cash dividends accrued for
Series B-1 and B-2 preferred
stock (unaudited)........... (567,192) (567,192)
Stock options exercised
(unaudited)................. 162,208 16 457,977 (300,000) 157,993
Redemption of Series A-2
preferred stock
(unaudited)................. (47,030) (5) (4,876,418) (4,876,423)
Warrants issued in conjunction
with the issuance of August
1998 Note (unaudited)....... 6,751,050 6,751,050
Re-evaluation of existing
stock warrants
(unaudited)................. 190,000 190,000
Other (unaudited)............. (28,495) (28,495)
Net loss (unaudited).......... (53,762,042) (53,762,042)
------- --- ---------- ------ ----------- ------------ --------- ------------
BALANCE AT SEPTEMBER 30, 1998
(UNAUDITED)................. $ 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> 88
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) (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 2,798,248
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> 89
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
Consist of US backed treasury bills with terms ranging from 6 months.
Securities held in escrow and 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 (unaudited), 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 (unaudited), 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> 90
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> 91
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> 92
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) (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> 93
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
---------- ----------------- ---------- ---------- -------------
(UNAUDITED)
<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 (unaudited),
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
F-12
<PAGE> 94
INTRACEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
accounts receivable from a single customer. The Company reviews the credit
histories of potential customers 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 December 31, 1997.
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 December 31, 1997.
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, 1998 and 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, 1998
and 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.
F-13
<PAGE> 95
INTRACEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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 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.
3. INVENTORIES:
Inventories consisted of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ SEPTEMBER 30,
1996 1997 1998
---------- ---------- -------------
(UNAUDITED)
<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>
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- SEPTEMBER 30,
1996 1997 1998
----------- ----------- -------------
(UNAUDITED)
<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 periods 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 (unaudited), respectively.
F-14
<PAGE> 96
INTRACEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. ACCRUED LIABILITIES:
Accrued liabilities consisted of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ SEPTEMBER 30,
1996 1997 1998
---------- ---------- -------------
(UNAUDITED)
<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>
6. LONG-TERM DEBT:
Long-term debt consisted of:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1997
----------- -----------
<S> <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"). See note
14 for discussion of the August 1998 notes................ $ 8,250,000 $ 6,000,000
</TABLE>
F-15
<PAGE> 97
INTRACEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT: (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1997
----------- -----------
<S> <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. See note 14 for
discussion 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-16
<PAGE> 98
INTRACEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT: (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1997
----------- -----------
<S> <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. See note 14 for
discussion 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 has accrued the additional
amount. The Company, however, is disputing these amounts
(see Note 11). During August 1998 the Company settled such
dispute (see Note 14)..................................... 1,500,000 1,500,000
</TABLE>
F-17
<PAGE> 99
INTRACEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT: (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1997
----------- -----------
<S> <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
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
----------- -----------
22,244,067 19,775,223
Less current portion...................................... (3,505,122) (2,144,729)
----------- -----------
$18,738,945 $17,630,494
=========== ===========
</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, retroactive to January 1, 1997 which remain in
effect to June 30, 1998. The amendments and waivers became effective upon the
closing of the merger agreement with PerImmune Holdings, Inc. on January 2, 1998
(see Note 11).
Future minimum debt payments at December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998............................................ $ 2,144,729
1999............................................ 3,628,722
2000............................................ 8,485,707
2001............................................ 5,399,238
2002............................................ 116,827
-----------
$19,775,223
===========
</TABLE>
As of September 30, 1998, the Company's debt increased by approximately
$26,298,000 of which approximately $10,393,000 is related to the merger, (see
Note 11 for additional discussion of the merger), $2,798,000 is related to
additional interest payments made "in kind," and approximately $13,107,000 is
related to the April and August 1998 refinancing. See Note 14 for additional
discussion of the Company's refinancing.
F-18
<PAGE> 100
INTRACEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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. See Note 14
for additional discussion of the Company's refinancing.
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 December 31, 1997 the Company had net operating loss carryforwards for
federal income tax purposes of approximately $17 million which expire through
2012. Utilization of net operating loss carryforwards will be subject to certain
limitations under Section 382 of the Internal Revenue Code.
The following is a reconciliation of the income tax benefit to the amount
based on the statutory Federal rate of 34%:
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
YEAR ENDED ENDED DECEMBER 31,
JUNE 30, DECEMBER 31, ---------------
1995 1995 1996 1997
---------- ------------ ----- -----
<S> <C> <C> <C> <C>
Federal income tax benefit at statutory
rate..................................... (34)% (34)% (34)% (34)%
Change in valuation allowance.............. 34 % 34 % 34 % 34 %
----- ----- ----- -----
===== ===== ===== =====
</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,
------------------------
1996 1997
---------- ----------
<S> <C> <C>
Deferred income tax assets:
Tax loss carryforwards............................ $3,392,000 $5,930,000
Tax credit carryforwards.......................... 96,000 96,000
Property, plant and equipment..................... 171,000
Inventories....................................... 548,000
Other............................................. 333,000 438,000
---------- ----------
3,992,000 7,012,000
Deferred income tax liabilities:
Other............................................. (65,000) (61,000)
---------- ----------
3,927,000 6,951,000
Valuation allowance................................. (3,927,000) (6,951,000)
---------- ----------
Net deferred taxes assets........................... $ $
========== ==========
</TABLE>
A full valuation allowance has been recorded at December 31, 1997, 1996,
and September 30, 1998 (unaudited) based on management's determination that the
recognition criteria for realization has not been met.
F-19
<PAGE> 101
INTRACEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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 $783,000,
$1,466,000, $200,000, and $192,000 for 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 December 31:
1998................................................... $ 681,347
1999................................................... 335,761
2000................................................... 46,802
2001................................................... 43,491
2002................................................... 43,491
----------
Total minimum lease payments............................. $1,150,892
==========
</TABLE>
Refer to Note 12 for discussion of a contingent liability related to a
joint venture investment.
Refer to Note 6 for discussion of potential contingent consideration
related to the acquisition of certain assets.
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-20
<PAGE> 102
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
------- -------- ------- ------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<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
(unaudited).......................... 100 120
Dividend payments in kind
(unaudited).......................... 37,017 39,783 2,967 9,038
Redemption of preferred stock
(unaudited).......................... (47,030)
------- -------- ------- ------- --- ---
BALANCES AT SEPTEMBER 30, 1998
(UNAUDITED).......................... 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 $4.00 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-21
<PAGE> 103
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 912,031 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
F-22
<PAGE> 104
INTRACEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. CAPITAL STOCK AND STOCKHOLDERS' DEFICIT: (CONTINUED)
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).
Stock options
The Company's 1989 Stock Option Plan (the "Plan"), provides for the
issuance of incentive and nonqualified stock options to employees, directors,
and consultants. There are 800,000 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 has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 (SFAS No. 123), "Accounting for
Stock-Based Compensation." 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.
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.
(unaudited)............................................ 1,560,554 0.51
Options granted (unaudited)............................... 316,667 12.27
Options canceled (unaudited).............................. (942,775) 1.73
Options exercised (unaudited)............................. (162,208) 2.82
----------
Options outstanding, September 30, 1998 (unaudited)......... 1,351,594 $3.57
==========
</TABLE>
F-23
<PAGE> 105
INTRACEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. CAPITAL STOCK AND STOCKHOLDERS' DEFICIT: (CONTINUED)
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
(unaudited) 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
December 31, 1997:
<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>
$1.50 - $3.75............... 466,023 $3.21 1.81 years 418,023 $3.14
$6.00 - $6.75............... 113,333 6.57 5.81 years 17,499 6.38
------- --------
579,356 3.87 2.59 years 435,522 3.27
======= ========
</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 1997 and 1996 (no options were
granted during the six months ended December 31, 1995 or the year ended June 30,
1995) were estimated at the date of grant using the minimum value method and the
following weighted-average assumptions:
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Risk free interest rate................................. 6.41% 6.28%
Expected holding period................................. 4 years 6 years
Dividend yield.......................................... 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>
YEAR ENDED
DECEMBER 31,
--------------
1996 1997
----- -----
<S> <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
===== =====
</TABLE>
F-24
<PAGE> 106
INTRACEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. CAPITAL STOCK AND STOCKHOLDERS' DEFICIT: (CONTINUED)
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,
--------------------------
1996 1997
PRO FORMA PRO FORMA
----------- -----------
<S> <C> <C>
Net loss -- as reported........................... $(4,389,973) $(8,063,633)
Net loss -- pro forma............................. (4,420,723) (8,105,094)
Loss per share -- as reported..................... (1.99) (3.43)
Loss per share -- pro forma....................... (2.00) (3.45)
</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 December 31, 1997, 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
-------
619,133
=======
</TABLE>
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
F-25
<PAGE> 107
INTRACEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. ACQUISITIONS: (CONTINUED)
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 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.
(See Note 14. Subsequent Events -- Settlements)
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
F-26
<PAGE> 108
INTRACEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. ACQUISITIONS: (CONTINUED)
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 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 December 31, 1997,
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 December 31, 1997,
PerImmune has not incurred any 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.
F-27
<PAGE> 109
INTRACEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. ACQUISITIONS: (CONTINUED)
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 year ended December 31, 1997, PerImmune 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.
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 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. 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
F-28
<PAGE> 110
INTRACEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. ACQUISITIONS: (CONTINUED)
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>
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 1998, the Company received approximately $225,000 (unaudited) which
the Company considers a recovery of an investment that was previously written
off. While not guaranteed, GAIFAR has notified the Company of its intent to
remit an additional 150,000 DM at a future date as settlement in full for the
transfer of all joint venture shares.
13. EMPLOYEE BENEFIT PLAN:
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
F-29
<PAGE> 111
INTRACEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. EMPLOYEE BENEFIT PLAN: (CONTINUED)
401(k) savings plan in the 1997, 1996 and 1995 periods. The Company does not
provide other post-retirement benefits.
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."
14. SUBSEQUENT EVENTS:
Refinancing
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
Notes 6 and 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 July 31, 1998 the Company's subsidiary, PerImmune holdings, entered into
an agreement with one of its lenders whereby the agreement extended the maturity
date of approximately $10.4 million of debt incurred by PerImmune Holdings to
January 15, 2000, increased the rate of interest after certain dates from 8% to
10%, and made the Company a guarantor of the related debt. The terms of
scheduled repayment are variable depending on the Company's cash position on
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.
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
F-30
<PAGE> 112
INTRACEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. SUBSEQUENT EVENTS: (CONTINUED)
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
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 will 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
F-31
<PAGE> 113
INTRACEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. SUBSEQUENT EVENTS: (CONTINUED)
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.
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.
Management believes the proceeds from these debt-related transactions and
the successful launch of OncoVAX(CL) will provide sufficient funding to meet the
Company's continued operations and its research and development of other
products through at least December 31, 1999.
Settlements
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.
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.
F-32
<PAGE> 114
INTRACEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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.
F-33
<PAGE> 115
INTRACEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. RESTATEMENT: (CONTINUED)
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-34
<PAGE> 116
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-35
<PAGE> 117
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-36
<PAGE> 118
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-37
<PAGE> 119
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-38
<PAGE> 120
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-39
<PAGE> 121
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-40
<PAGE> 122
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-41
<PAGE> 123
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-42
<PAGE> 124
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-43
<PAGE> 125
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-44
<PAGE> 126
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
F-45
<PAGE> 127
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-46
<PAGE> 128
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-47
<PAGE> 129
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-48
<PAGE> 130
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-49
<PAGE> 131
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-50
<PAGE> 132
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-51
<PAGE> 133
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-52
<PAGE> 134
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 PEAT MARWICK LLP
Baltimore, Maryland
February 28, 1997, except as to
note 14 which is as of April 23, 1997
and June 16, 1997
F-53
<PAGE> 135
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-54
<PAGE> 136
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-55
<PAGE> 137
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-56
<PAGE> 138
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-57
<PAGE> 139
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-58
<PAGE> 140
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-59
<PAGE> 141
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-60
<PAGE> 142
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-61
<PAGE> 143
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-62
<PAGE> 144
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-63
<PAGE> 145
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-64
<PAGE> 146
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-65
<PAGE> 147
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-66
<PAGE> 148
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-67
<PAGE> 149
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-68
<PAGE> 150
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-69
<PAGE> 151
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-70
<PAGE> 152
- ---------------------------------------------------------
- ---------------------------------------------------------
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.................................. 7
The Company................................... 19
Use of Proceeds............................... 20
Dividend Policy............................... 20
Capitalization................................ 21
Dilution...................................... 22
Pro Forma Consolidated Financial
Information................................. 23
Selected Financial Data....................... 24
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................. 26
Business...................................... 32
Management.................................... 62
Principal and Selling Stockholders............ 70
Description of Capital Stock.................. 72
Shares Eligible for Future Sale............... 77
Underwriting.................................. 78
Legal Matters................................. 79
Experts....................................... 79
Available Information......................... 80
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
INTRACEL CORPORATION
COMMON STOCK
------------------------
PROSPECTUS
------------------------
DONALDSON, LUFKIN & JENRETTE
NATIONSBANC MONTGOMERY SECURITIES LLC
, 1999
- ---------------------------------------------------------
- ---------------------------------------------------------
<PAGE> 153
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................................. $16,963
*Nasdaq National Market Filing Fee.......................... $ +
*Blue Sky Fees and Expenses (including legal fees).......... $ +
*Accounting Fees and Expenses............................... $ +
*Legal Fees and Expenses.................................... $ +
*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, including liabilities under
the Securities Act. Reference is made to the Underwriting Agreement filed as
Exhibit 1 hereto.
II-1
<PAGE> 154
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 split effective 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
3,594,751 592 shares of Mike Hanna (voting trust)
PerImmune
Holdings, Inc.
Common Stock
</TABLE>
II-2
<PAGE> 155
<TABLE>
<CAPTION>
DATE OF ISSUANCE SHARES ISSUED CONSIDERATION PAID NAME OF PURCHASER
- ------------------------------ ------------- ------------------ -----------------------------------
<S> <C> <C> <C>
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> 156
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> 157
<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 31, 1998....................... 7,500 $15.00 Roger Sweaney
</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> 158
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> 159
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE.
I. EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
<S> <C>
1 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> 160
<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 Option 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> 161
<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.
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 Peat Marwick 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) 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-9
<PAGE> 162
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. 2 to
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Rockville, State of Maryland, on December ,
1998.
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. 2 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 December 31, 1998
- ----------------------------------------------------- Chief Scientific Officer
Michael G. Hanna
/s/ SIMON R. MCKENZIE President, Chief Executive December 31, 1998
- ----------------------------------------------------- Officer and Director
Simon R. McKenzie (principal executive
officer)
/s/ LAWRENCE A. BLOOM Chief Financial Officer December 31, 1998
- ----------------------------------------------------- (principal financial
Lawrence A. Bloom officer)
* Director December 31, 1998
- -----------------------------------------------------
Raymond Schuyler
* Director December 31, 1998
- -----------------------------------------------------
Joseph Caligiuri
* Director December 31, 1998
- -----------------------------------------------------
Steven Gerber
* Director December 31, 1998
- -----------------------------------------------------
Alexander Klibanov
*By: /s/ SIMON R. MCKENZIE
---------------------------------------------------
Simon R. McKenzie as Attorney-in-fact
</TABLE>
II-10
<PAGE> 163
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
<S> <C>
1 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.*
10.19 Stock Purchase Agreement, dated July 1, 1996, between
PerImmune Holdings, Inc. and Organon Teknika Corporation.*
</TABLE>
<PAGE> 164
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
<S> <C>
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 Option 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.*
10.37 Joint Venture Agreement dated December 11, 1998 by and
between Intracel Corporation and Lehigh Valley Hospital and
Health Network.
</TABLE>
<PAGE> 165
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
<S> <C>
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.
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 Peat Marwick 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.
<PAGE> 1
EXHIBIT 10.37
JOINT VENTURE AGREEMENT
THIS JOINT VENTURE AGREEMENT (this "AGREEMENT") is entered into as of
December 11, 1998 by and between INTRACEL CORPORATION ("INTRACEL"), a Delaware
corporation having its principal office at 1330 Piccard Drive, Rockville, MD,
and LEHIGH VALLEY HOSPITAL AND HEALTH NETWORK ("LEHIGH"), a Pennsylvania
non-profit corporation having its principal office at Cedar Crest & I-78,
Allentown, PA.
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 as agreed to by the parties to be used in the treatment of cancer;
WHEREAS, Lehigh and its medical staff have 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
production and delivery of OncoVax to certain patients in the mid-Atlantic
region;
WHEREAS, Intracel and Lehigh desire to form Intracel Cancer Center of
Pennsylvania, Inc. ("ICC") as a for-profit Delaware corporation to operate a
center for the manufacture of OncoVax and other oncological products as agreed
to by the parties, and to provide, or arrange for the provision of, such
products to cancer patients; and
WHEREAS, the parties wish to set forth herein and in the documents and
agreements attached hereto and/or referenced herein the terms on which ICC would
be formed, capitalized, governed, and operated, as well as the obligations and
rights of the parties prior to such formation.
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:
1. DEFINITIONS
The following terms used in this Agreement (including the Exhibits
hereto), and the singular and plural thereof, which are not otherwise defined
herein, shall have the meanings ascribed to them in this Section 1.
<PAGE> 2
"AMENDED AND RESTATED INITIAL ONCOVAX CENTER LEASE" means the Amended
and Restated Initial OncoVax Center Lease, substantially in the form attached
hereto as Exhibit N, to be entered into by the parties on the date hereof.
"BEST EFFORTS" means, as to a party hereto, an undertaking by such party
to perform or satisfy an obligation or duty or otherwise act in a manner
reasonably calculated to obtain the intended result by action or expenditure not
disproportionate or unduly burdensome in the circumstances, which means, among
other things, that such party shall not be required to (i) expend funds other
than for payment of the reasonable and customary costs and expenses of
employees, counsel, consultants, representatives or agents of such party in
connection with the performance or satisfaction of such obligation or duty or
other action or (ii) institute litigation or arbitration as part of its best
efforts.
"BUSINESS PLAN" means the business plan to be developed by Intracel and
Lehigh as described in Section 5.1 below.
"CLEAN ROOM" means the laboratory room as described in Exhibit H leased
to Intracel or ICC, as the case may be, by Lehigh under the terms of either the
Amended and Restated Initial OncoVax Center Lease or the Final OncoVax Center
Lease.
"COMMON STOCK" means the common stock of ICC, par value $.01 per share.
"COMMON STOCK PURCHASE PRICE" means the amount to be paid in
consideration of the Common Stock pursuant to Section 3.2 below.
"EQUIPMENT" or "CLEAN ROOM EQUIPMENT" means the Equipment located in the
Clean Room as described in Exhibit J attached hereto.
"FINAL CLOSING" means the closing of the transactions described in
Section 16.1 below.
"FINAL CLOSING DATE" means the date mutually agreed upon in writing by
the parties pursuant to Section 16.1 below, which is within 30 days of the
receipt of FDA approval to market OncoVax to cancer patients at the OncoVax
Center.
"FINAL ONCOVAX CENTER LEASE" means the Final OncoVax Center Lease,
substantially in the form attached hereto as Exhibit G, to be entered into by
Lehigh and Intracel at the Final Closing pursuant to Section 5.3 below.
"ICC SERVICE AREA" shall mean the following counties in Pennsylvania:
Bradford, Susquehanna, Wayne, Lycoming, Sullivan, Wyoming, Lackawanna,
Northumberland, Montour, Columbia, Luzerne, Pike, Dauphin, Schuylkill, Carbon,
Monroe, York, Lebanon, Lancaster, Berks, Lehigh, Northampton, Chester,
Montgomery, Bucks and Delaware, and the following counties in New Jersey:
Sussex, Warren, Hunterdon, Somerset and Morris.
- 2 -
<PAGE> 3
"INITIAL FUNDING SCHEDULE" means the operating budget for ICC to be
developed by Intracel and Lehigh as described in Section 3.3 below. The Initial
Funding Schedule shall set forth, among other things, ICC's projected working
capital needs for the initial operation of ICC following the Final Closing Date.
"INITIAL CLOSING" means the closing of the transactions described in
Section 15.1 below.
"INITIAL CLOSING DATE" means December 11, 1998 or such other date as
mutually agreed upon in writing by the parties to this Agreement pursuant to
Section 15.1 below.
"INTERIM PHASE" means the period of time commencing on the Initial
Closing Date and ending on the Final Closing Date during which time the OncoVax
Center shall be operated in accordance with Section 10 below.
"MEDICAL DIRECTOR" means the medical director of the OncoVax Center.
"ONCOVAX CENTER" means the location from which Intracel or ICC, as the
case may be, shall manufacture, market and provide, or arrange for the provision
of, OncoVax or any other oncological product agreed to by the parties to cancer
patients.
"INTRACEL CANCER CENTER OF PENNSYLVANIA, INC." or "ICC" means a Delaware
corporation, which shall be organized by Intracel and Lehigh as contemplated in
Section 2.1 below.
"OPERATIONS AGREEMENT" means the agreement to be entered into by and
between ICC, Intracel and Lehigh on the Final Closing Date, which will set forth
the obligations of ICC, Intracel and Lehigh during the Operational Phase as more
fully described in Section 9 below.
"OPERATIONAL PHASE" means the period of time from the Final Closing Date
until the termination of this Agreement during which time the OncoVax Center
shall be operated in accordance with Section 5 below.
"STOCKHOLDERS' AGREEMENT" means the Stockholders' Agreement
substantially in the form of Exhibit F attached hereto to be entered into by and
among ICC, Intracel and Lehigh as described in Section 4 below.
"SUPERMAJORITY VOTE" shall have the meaning set forth in the
Stockholders' Agreement.
- 3 -
<PAGE> 4
2. FORMATION AND ORGANIZATION OF ICC
2.1. GENERALLY
Prior to and as a condition to the Final Closing, the parties
shall incorporate ICC as a for-profit corporation under the Delaware General
Corporation Law by filing a Certificate of Incorporation substantially in the
form of Exhibit A attached hereto. The parties shall thereafter, but prior to
the Final Closing, cause the adoption of the organizational resolutions and
bylaws of ICC substantially in the form of Exhibits B-1 and B-2 attached hereto.
2.2. INITIAL DIRECTORS
The members of the initial Board of Directors of ICC shall be
named in the Certificate of Incorporation referred to in Section 2.1 above and
shall consist of (a) 3 directors designated by Intracel and (b) 2 directors
designated by Lehigh. Each of the parties will provide a list of its designees
to the initial ICC Board of Directors as soon as reasonably practicable after
the date hereof and in no event later than 10 days prior to the Final Closing.
2.3. INITIAL OFFICERS
The parties will select, and cause to be elected, the officers
of ICC as soon as possible after the execution and delivery hereof and in any
event prior to the Final Closing.
3. CAPITALIZATION OF ICC
3.1. CONTRIBUTION OF EQUIPMENT AND PURCHASE OF ICC COMMON STOCK BY
INTRACEL
Subject to the terms and conditions hereof, and as set forth in
the Subscription Agreement substantially in the form attached hereto as Exhibit
C and in the Bill of Sale substantially in the form attached hereto as Exhibit D
("ICC BILL OF Sale"), Intracel hereby agrees to contribute the Equipment to ICC
at the Final Closing as further described in Section 6.2 in exchange for 1,900
shares of Common Stock of ICC, which stock shall have an aggregate value equal
to $700,000.
- 4 -
<PAGE> 5
3.2. SUBSCRIPTION FOR AND PURCHASE OF ICC COMMON STOCK BY LEHIGH
Subject to the terms and conditions hereof and as set forth in
the Subscription Agreement attached hereto as Exhibit E, Lehigh shall subscribe
for and shall agree to purchase, at the Final Closing, 100 shares of Common
Stock at an aggregate purchase price equal to $36,482 (the "COMMON STOCK
PURCHASE PRICE").
3.3. CAPITALIZATION OF ICC UPON FINAL CLOSING.
The parties acknowledge and agree that, in accordance with this
Section 3, upon the consummation of the Final Closing, Intracel and Lehigh will
own 95% and 5%, respectively, of the issued and outstanding capital stock of
ICC.
3.4. INITIAL FUNDING SCHEDULE
During the Interim Phase, the parties agree to negotiate in good
faith and use their best efforts to develop the Initial Funding Schedule. The
Initial Funding Schedule shall be mutually agreed upon prior to the Final
Closing and shall (i) set forth, among other things, ICC's projected capital
needs for its initial operation following the Final Closing and (ii) provide
that the parties will contribute funds to ICC in proportion to their relative
ownership interests in ICC.
4. STOCKHOLDERS AGREEMENT AND GOVERNANCE OF ICC
At the Final Closing, Intracel and Lehigh shall execute and
deliver, and cause ICC to execute, a Stockholders' Agreement substantially in
the form attached hereto as Exhibit F (the "STOCKHOLDERS' AGREEMENT"), which
shall contain, among other things, customary covenants, and representations and
warranties, and shall provide that all distributions of dividends by ICC to the
parties be made in proportion to their relative ownership interests in ICC.
Execution and delivery of the Stockholders' Agreement by all of the parties
thereto shall be a condition to the Final Closing.
5. BUSINESS AND OPERATIONS OF ICC
5.1. DEVELOPMENT OF THE BUSINESS PLAN
Intracel and Lehigh, working with ICC management, shall use
their best efforts to develop, as soon as practicable after the Final Closing,
the Business
- 5 -
<PAGE> 6
Plan for ICC. During the Interim Phase, the parties agree to negotiate in good
faith the terms of the Business Plan, which shall be developed on or prior to
the Final Closing. The terms of such Business Plan shall include, among other
things, the establishment and administration of the Initial Funding Schedule. As
more specifically provided in the Stockholders' Agreement, the Business Plan and
any material amendments thereto must be approved by a supermajority vote of the
Board of Directors of ICC. After the Final Closing, Intracel and Lehigh shall
each use its best efforts to cause ICC to fully and faithfully implement the
Business Plan in compliance with the Initial Funding Schedule and in a timely
manner.
5.2. SCOPE OF OPERATIONS
From the Final Closing Date until termination of this Agreement,
in addition to the conduct of Phase III clinical trials ("TRIALS") and in
accordance with the terms of the Operations Agreement (as described in Section 9
below), ICC shall operate the OncoVax Center for the manufacture of OncoVax and
other oncological products as agreed to by the parties and shall provide, or
arrange for the provision of, such products to cancer patients to the extent
permitted by applicable law (the "OPERATIONAL PHASE"). Intracel and Lehigh agree
to cooperate in coordinating publicity with the respect to the operation of the
OncoVax Center during the Operational Phase.
5.3. LEASE OF THE ONCOVAX CENTER
At the Final Closing, Lehigh and ICC shall enter into a lease
substantially in form attached hereto as Exhibit G, which shall provide for the
lease by Lehigh to ICC of the Clean Room, and all clinical patient care,
administrative and storage space, as more particularly described in Exhibit H
attached hereto, reasonably necessary for the operation of the OncoVax Center
(the "FINAL ONCOVAX CENTER LEASE").
5.4. OPERATION OF THE ONCOVAX CENTER
5.4.1. OPERATIONAL POLICIES AND PROCEDURES
The Operations Agreement shall provide that ICC shall adopt and
enforce policies and procedures for the operation of the OncoVax Center during
the Operational Phase, which such policies and procedures shall be consistent
with, and require ICC and its employees and agents to comply with, Lehigh's
Facility Policies, Rules and Regulations. Intracel shall, in accordance with the
terms of the Operations Agreement, have the right to review, amend and approve
all of ICC's operational policies and procedures including those related to
compliance with FDA
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requirements, and any amendments thereto before such
policies and procedures are implemented by ICC. Lehigh shall have the right to
review all such policies and procedures and any amendments thereto and Intracel
shall take any concerns into consideration prior to approving any such policies
and procedures. The Operations Agreement shall provide that ICC shall accept all
amendments submitted by Intracel to ICC in connection with those operational
policies and procedures related to compliance with FDA requirements. Intracel
shall maintain ultimate responsibility for compliance with all applicable FDA
product requirements.
5.4.2. ONCOVAX CENTER PERSONNEL
Except as set forth below, the terms of the Operations Agreement
shall provide that during the Operational Phase, all laboratory, clinical and
administrative personnel working in the OncoVax Center shall be employees of ICC
and subject to ICC's personnel policies and procedures which personnel policies
and procedures shall be adopted only after receipt of approval from both
Intracel and Lehigh, each in its reasonable discretion; provided, however, that
Intracel shall have the right to terminate such employees as further described
in Section 9.1 below. The Medical Director shall be an employee of Lehigh and
provide services to the OncoVax Center as further described in Section 5.4.3
below.
5.4.3. DESIGNATION OF MEDICAL DIRECTOR
Unless the parties otherwise agree, the Medical Director of the
OncoVax Center during the Interim Phase (as designated in accordance with
Section 10.5 below) shall continue as Medical Director of the OncoVax Center
after the Final Closing Date. The Medical Director shall remain an employee of
Lehigh and shall perform services for the OncoVax Center as an independent
contractor pursuant to the terms of a Medical Director Services Agreement,
substantially in the form of Exhibit I attached hereto and made a part hereof
(the "FINAL MEDICAL DIRECTOR SERVICES AGREEMENT"). The parties shall use their
best efforts to cause ICC to execute the Final Medical Director Services
Agreement on the Final Closing Date. The Final Medical Director Services
Agreement shall provide that ICC shall reimburse Lehigh for the Medical
Director's services at the fair market value for such services, which the
parties agree shall be at the rate described in Section 10.5. Lehigh shall at
all times have the right to recommend and approve the appointment of a Medical
Director for the OncoVax Center; provided, however, that Intracel shall have the
right to terminate the services provided by any particular Medical Director as
provided in Section 9.
5.5. LEHIGH AND INTRACEL CONTRACTS WITH ICC
As further developed in the Business Plan and as provided for in
the Operations Agreement, each of the parties intends to enter into a services
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agreement with ICC pursuant to which such party will provide specified
management or administrative services to ICC as further described in Sections
5.5.1 and 5.5.2 below. Each such agreement, and any amendment thereto shall be:
(a) on arms length, fair market value terms and conditions;
and
(b) subject to the prior approval by the Board of Directors
of ICC.
The parties shall use their best efforts to negotiate, enter into and cause ICC
to enter into, such mutually acceptable agreements on the Final Closing Date.
5.5.1. SERVICES PROVIDED BY LEHIGH
At the Final Closing, and from time to time throughout the term
of this Agreement and the term of the Operations Agreement, ICC may purchase
certain services from Lehigh at a price to be agreed upon by Lehigh and ICC,
which services shall include, but shall not be limited to the following:
(a) Support services such as bioengineering and
housekeeping;
(b) Specialized laboratory testing;
(c) Sales and marketing support; and
(d) Assistance with and support for the development of
relationships with managed care entities and physician
groups.
5.5.2. SERVICES PROVIDED BY INTRACEL
At the Final Closing, and from time to time throughout the term
of this Agreement and the term of the Operations Agreement, ICC may purchase
certain
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services from Intracel at a price to be agreed upon by Intracel and ICC, which
services shall include, but shall not be limited to the following:
(a) Case management services;
(b) Reimbursement services;
(c) Accounting and finance services;
(d) Quality assurance and assistance with FDA regulatory
monitoring and compliance;
(e) Sales and marketing services; and
(f) Kits and supplies necessary for the manufacture and
production of OncoVax.
6. PURCHASE AND CONTRIBUTION OF CLEAN ROOM EQUIPMENT
6.1. PURCHASE OF CLEAN ROOM EQUIPMENT AT FINAL CLOSING
Concurrent with the Final Closing, Lehigh shall sell, assign,
and transfer to Intracel, and Intracel shall purchase from Lehigh the equipment
located in the Clean Room and described in Exhibit J attached hereto (the
"EQUIPMENT") for an aggregate purchase price of $700,000 (the "PURCHASE PRICE"),
which the parties agree reflects the fair market value of the Equipment. Upon
the Final Closing, the parties agree that the Purchase Price shall be adjusted
to reflect the amount of the Purchase Price pre-paid by Intracel to Lehigh prior
to the Final Closing Date (the "ADJUSTED PURCHASE PRICE"). The Adjusted Purchase
Price shall be calculated as follows: $700,000 minus the aggregate Principal
Component (as defined in Schedule 6.1) of the aggregate rent paid by Intracel to
Lehigh pursuant to Section 7.1 of each of the Initial OncoVax Center Lease and
the Amended and Restated Initial OncoVax Center Lease. At the Final Closing,
Intracel shall pay $36,842 of the Adjusted Purchase Price by check or wire
transfer of readily available funds and the remainder of the Adjusted Purchase
Price shall be paid in the form of a convertible note substantially in the form
of Exhibit K (the "CONVERTIBLE NOTE"). The principal amount due under the
Convertible Note shall be payable in a balloon payment due on the fifth
anniversary thereof together with interest at a rate equal to the prime rate as
published in the Wall Street Journal. The Convertible Note shall be secured by a
Security Agreement substantially in the form of Exhibit L attached hereto,
pursuant to which Intracel shall grant a security interest in the Equipment to
Lehigh. The terms and conditions of the purchase of the Equipment are more
particularly set forth in the Bill of Sale attached hereto as Exhibit M (the
"LEHIGH BILL OF SALE").
6.2. CONTRIBUTION OF EQUIPMENT AT THE FINAL CLOSING
Concurrent with the purchase and sale of the Equipment, Intracel
agrees to contribute the Equipment to ICC. The parties shall use their best
efforts to cause ICC to accept such Equipment and to issue shares of Common
Stock of ICC to Intracel in exchange for such Equipment as more particularly
described in Section 3.1 and in the ICC Bill of Sale attached hereto as Exhibit
D. Intracel agrees to provide Lehigh with documentation evidencing the
contribution of Equipment to ICC at the Final Closing.
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7. LICENSE OF RIGHTS TO ICC
During the Interim Phase, the parties agree to negotiate in good faith
the terms of the License Agreement (the "LICENSE AGREEMENT") to be entered into
by Intracel and ICC at the Final Closing, pursuant to which Intracel shall grant
to ICC a limited, exclusive right in the ICC Service Area to manufacture,
produce and distribute or arrange for the distribution of, OncoVax and such
other products as the parties may mutually agree on.
8. LIMITATIONS ON ACTIVITIES OF LEHIGH
Lehigh agrees that during the term of this Agreement and for a period of
one year thereafter, it shall not directly or indirectly on its own or through
any joint venture, teaming arrangement, partnership, or other entity or
arrangement, engage in the manufacture, production or distribution of any cancer
related products comparable to any products manufactured, produced or
distributed by Intracel or ICC at any time during the Term of this Agreement.
9. OPERATIONS AGREEMENT
During the Interim Phase, Intracel and Lehigh agree to negotiate
in good faith the terms of an Operations Agreement to be entered into at the
Final Closing by ICC, Intracel and Lehigh (the "OPERATIONS AGREEMENT"). The
Operations Agreement shall set forth all the rights and obligations of ICC,
Intracel and Lehigh during the Operational Phase, including, but not limited to,
those rights and obligations described in Sections 5 and 7 above and the
additional operational rights of Intracel and Lehigh described below. In the
event of an inconsistency between the terms and conditions of this Agreement
relating to the rights and obligations of ICC, Intracel and Lehigh with respect
to those contained in the Operations Agreement, the Operations Agreement's terms
and conditions shall govern. The parties hereto shall each use its best efforts
to cause ICC to execute the Operations Agreement on the Final Closing Date.
9.1. INTRACEL'S OPERATIONAL RIGHTS
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 ICC and the OncoVax Center, (ii) the right to close the
OncoVax Center or otherwise stop ICC from manufacturing OncoVax or any other
drug agreed to by the parties if the OncoVax Center or ICC's manufacturing of
OncoVax or any other drug is not in compliance with applicable laws and
regulations, (iii) the right to terminate any of ICC's employees or terminate
the services of any particular Medical Director if such employee or Medical
Director fails to comply
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with applicable laws and regulations, (iv) the right to represent ICC and the
OncoVax Center in any interaction with the FDA, (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 take all such other
actions with respect to ICC, its operations and its employees in order to comply
with all applicable laws and regulations.
9.2. LEHIGH'S OPERATIONAL RIGHTS
Notwithstanding anything to the contrary herein, the parties
agree that Lehigh shall have the right to (i) audit ICC and the OncoVax Center,
and (ii) review on a regular basis all of ICC's and the OncoVax Center's
operational policies and procedures.
10. INTERIM PHASE OPERATIONS
10.1. INITIAL ONCOVAX CENTER LEASE
On October 21, 1998 and prior to the Initial Closing, the
parties entered in a lease (the "INITIAL ONCOVAX CENTER LEASE") and a letter
agreement relating thereto (the "LETTER AGREEMENT") for the operation of the
OncoVax Center for the period from November 1, 1998 until the Initial Closing.
At the Initial Closing, Lehigh and Intracel shall terminate the Letter Agreement
and enter into an Amended and Restated Initial OncoVax Center Lease,
substantially in the form attached hereto as Exhibit N (the "AMENDED AND
RESTATED INITIAL ONCOVAX CENTER LEASE"), which Amended and Restated Initial
OncoVax Center Lease shall provide for the lease of the Clean Room, Clean Room
Equipment, and clinical patient care, administrative and storage space
(collectively, the "FACILITIES"), each as more particularly described in
Exhibits H and J attached hereto. In the event of the termination of this
Agreement during the Interim Phase for any reason, the Amended and Restated
Initial OncoVax Center Lease shall terminate in accordance with its own terms,
effective as of the date of the termination of this Agreement.
10.2. SCOPE OF OPERATIONS DURING INTERIM PHASE
During the Interim Phase, Intracel shall utilize the Facilities
for the purpose of manufacturing and producing OncoVax for use in the conduct of
the Trials and arranging for and/or sponsoring such Trials at the OncoVax Center
and furnishing OncoVax to patients as permitted under federal law and Food and
Drug Administration ("FDA") guidance. Intracel and Lehigh agree to cooperate in
coordinating publicity with the respect to the opening of the OncoVax Center for
the
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conduct of such Trials. Lehigh agrees that it shall not publicize, advertise
or otherwise use the name of the OncoVax Center or Intracel without the prior
written consent of Intracel, which consent shall not be unreasonably withheld.
10.3. OPERATIONAL POLICIES AND PROCEDURES
Intracel shall adopt and enforce policies and procedures for the
operation of the OncoVax Center during the Interim Phase and shall require that
all Trials be conducted in accordance with (a) all applicable laws and
regulations and (b) Lehigh's Facility Policies, Rules and Regulations.
10.4. SERVICES PROVIDED BY LEHIGH
During the Interim Phase, Intracel shall purchase certain
services from Lehigh at a price to be agreed upon by Lehigh and ICC, which
services shall include the following:
(a) Support services such as bioengineering and
housekeeping;
(b) Specialized laboratory testing; and
(c) Assistance with and support for the development of
relationships with managed care entities and physician
groups.
Such services will be provided pursuant to an agreement
negotiated at arms length and providing for fair market value terms and
conditions.
10.5. ONCOVAX CENTER PERSONNEL
Except as described below, during the Interim Phase all
laboratory, clinical and administrative personnel engaged in the manufacture and
production of OncoVax and the conduct of the Trials, shall be employees of
Intracel and subject to Intracel's personnel policies and procedures. The
medical director of the OncoVax Center during the Interim Phase shall be Herbert
C. Hoover, Jr., M.D. or his designee (the "MEDICAL DIRECTOR"). The Medical
Director shall be an employee of Lehigh and shall render services during the
Interim Phase as an independent contractor pursuant to the terms and conditions
of an initial Medical Director Services Agreement, substantially in the form of
Exhibit O attached hereto and made a part hereof (the "INITIAL MEDICAL DIRECTOR
SERVICES AGREEMENT"). The parties agree that the fair market value of the
services provided by the Medical Director for the OncoVax Center during the
first year shall be $75,000, which compensation pursuant to the terms of the
Initial Medical Director Services Agreement shall be adjusted annually by
Intracel during the Interim Phase to reflect the fair market value of the
Medical Director's services. In the event of the
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termination of this Agreement during the Interim Phase for any reason, the
Initial Medical Director Services Agreement shall automatically terminate in
accordance with its own terms, effective as of the date of termination of this
Agreement.
10.6. ADDITIONAL EQUIPMENT; IMPROVEMENTS TO THE CLEAN ROOM
During the Interim Phase, Intracel may purchase additional
equipment for the Clean Room and make improvements to the Clean Room, which
additional equipment and improvements shall be transferred to ICC by Intracel,
as soon as practicable after the Final Closing on a date agreed to by the
parties. The parties agree that any amounts paid by Intracel to purchase such
additional equipment and improvements shall be off-set against any capital
contributions Intracel is required to make pursuant to the Initial Funding
Schedule.
11. REGULATORY APPROVALS
After the Initial Closing and prior to the Final Closing,
Intracel shall use its best 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. Such approvals
and authorizations shall include, without limitation, the FDA's approval and
authorization to market and provide OncoVax, manufactured at the OncoVax Center,
to cancer patients. Lehigh agrees to use its best efforts to cooperate with, and
provide support to, Intracel in complying with current Good Manufacturing
Practices ("CGMPS") and to maintain any state licenses necessary to furnish care
to cancer patients at the OncoVax Center.
12. REPRESENTATIONS AND WARRANTIES
Concurrent with the execution and delivery of this Agreement,
Intracel and Lehigh have each executed and delivered the Certificates attached
hereto as Exhibits P-1 and P-2 containing certain representations and warranties
of the parties.
13. CONDITIONS PRECEDENT TO INITIAL CLOSING
The obligations of each party to consummate the transactions
contemplated in this Agreement and to proceed with the Initial Closing are
subject to the fulfillment at or prior to the Initial Closing, of each of the
following conditions
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(the failure of any of which shall excuse and discharge all obligations of such
party hereunder, unless such failure is agreed to in writing by such party):
(a) the execution and delivery by the parties of the Amended and
Restated Initial OncoVax Center Lease as set forth in Section 10.1 above;
(b) the Letter Agreement shall be terminated;
(c) the execution and delivery by the parties of the Initial
Medical Director Services Agreement; and
(d) the representations and warranties of Intracel and Lehigh
contained in this Agreement shall be true and correct in all material respects
as of the Initial Closing Date as if made at and as of such time, and Intracel
and Lehigh shall have performed or complied with, in all material respects all
agreements and covenants required by this Agreement to be performed or complied
with by it prior to or at and as of the Initial Closing Date.
14. CONDITIONS PRECEDENT TO THE FINAL CLOSING
14.1. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF EACH PARTY
The obligations of each party to consummate the transactions
contemplated in this Agreement and to proceed with the Final Closing are subject
to the fulfillment at or prior to the Final Closing, of each of the following
conditions (the failure of any of which shall excuse and discharge all
obligations of such party hereunder, unless such failure is agreed to in writing
by such party):
(a) Intracel's and Lehigh's designation of the initial ICC board
of directors pursuant to Section 2.2;
(b) the incorporation and organization of ICC as evidenced by
the filing of the Articles of Incorporation of ICC with and issuance of a
Certificate of Incorporation by, the Delaware Secretary of State;
(c) the adoption of the Bylaws of ICC;
(d) the development of the Initial Funding Schedule pursuant to
Section 3.3;
(e) the development of the Business Plan pursuant to Section 5.1
above; and
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(f) FDA approval of OncoVax for use in the treatment of cancer.
14.2. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF INTRACEL
The obligations of Intracel as contemplated in this Agreement
and to proceed with the Final Closing are subject to the fulfillment, at or
prior to the Final Closing, of each of the following conditions (the failure of
any of which shall excuse and discharge all obligations of Intracel hereunder,
unless such failure is excused in writing by Intracel):
(a) the execution of the Lehigh Bill of Sale by Lehigh and the
delivery of the Equipment as set forth in Section 6.1 above;
(b) the execution and delivery of the Stockholders' Agreement by
Lehigh and ICC;
(c) the delivery of the Common Stock Purchase Price by Lehigh
and the delivery of a duly executed Subscription Agreement as set forth in
Section 3.2 above;
(d) the execution and delivery of the Final OncoVax Center Lease
as set forth in Section 5.3 above;
(e) the execution and delivery of the Final Medical Director
Services Agreement as set forth in Section 5.4.3 above;
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(f) the execution and delivery of the License Agreement as set
forth in Section 7 above;
(g) the execution and delivery of the Operations Agreement as
set forth in Section 9 above;
(h) the representations and warranties of Lehigh contained in
this Agreement shall be true and correct in all material respects as of the
Final Closing Date as if made at and as of such time, and Lehigh shall have
performed or complied with, in all material respects all agreements and
covenants required by this Agreement to be performed or complied with by it
prior to or at and as of the Final Closing Date; and
(i) the transaction has been approved by the board of directors
of Lehigh or the executive committee of such board, if any.
14.3. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF LEHIGH
The obligations of Lehigh to consummate the transactions
contemplated in this Agreement and to proceed with the Final Closing are subject
to the fulfillment, at or prior to the Final Closing, of each of the following
conditions (the failure of any of which shall excuse and discharge all
obligations of Lehigh hereunder, unless such failure is excused in writing by
Lehigh):
(a) the execution and delivery of the Stockholders' Agreement by
Intracel and ICC;
(b) Intracel's delivery of the Equipment to ICC pursuant to the
ICC Bill of Sale and the delivery of a duly executed Subscription Agreement as
set forth in Sections 3.1 and 6.2 above;
(c) the execution and delivery of the Final OncoVax Center Lease
as set forth in Section 5.3 above;
(d) the execution and delivery of the Final Medical Director
Services Agreement as set forth in Section 5.4.3 above;
(e) the execution and delivery of the Convertible Note and the
Security Agreement as set forth in Section 6.1 above;
(f) the execution and delivery of the License Agreement as set
forth in Section 7 above;
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(g) the execution and delivery of the Operations Agreement as
set forth in Section 9 above;
(h) the representations and warranties of Intracel contained in
this Agreement shall be true and correct in all material respects as of the
Final Closing Date as if made at and as of such time, and Intracel shall have
performed or complied with, in all material respects all agreements and
covenants required by this Agreement to be performed or complied with by it
prior to or at and as of the Final Closing Date; and
(i) the transaction has been approved by the board of directors
of Intracel or the executive committee of such board.
15. THE INITIAL CLOSING
15.1. GENERALLY
The Initial Closing shall take place at the offices of Lehigh
Valley Hospital and Health Network or at such other place to which the parties
may agree, on December 11, 1998, or such other time as the parties may agree
(the "INITIAL CLOSING DATE"). At the Initial Closing, and as a condition
precedent to the Initial Closing, the parties shall comply with such conditions
and shall deliver such documents as are set forth in Sections 15.2 and 15.3.
15.2. DELIVERIES BY INTRACEL
At the Initial Closing, in addition to any other documents or
agreements required under any other provision of this Agreement, Intracel shall
make the following deliveries and performance (and the obligation of Lehigh to
consummate the Initial Closing shall be conditioned thereon):
(a) this Agreement duly executed by Intracel;
(b) a certificate of good standing for Intracel from the
State of Delaware;
(c) a copy, certified by the Secretary of State of the State
of Delaware, of the Certificate of Incorporation of
Intracel, as amended;
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(d) a copy of the Bylaws of Intracel, as amended, as
certified by the appropriate officers of Intracel as
being true, complete and in full force and effect;
(e) a certificate signed by the appropriate officers of
Intracel certifying resolutions authorizing the
execution of this Agreement and the transactions
hereunder;
(f) the Amended and Restated Initial OncoVax Center Lease
duly executed by Intracel;
(g) the Agreement terminating the Letter Agreement duly
executed by Intracel as required by Section 10.1 (the
"TERMINATION AGREEMENT");
(h) the Initial Medical Director Services Agreement duly
executed by Intracel;
(i) evidence that Intracel has obtained and maintains
insurance as required by Section 18.7.1 below; and
(j) any additional documents that Lehigh may reasonably
require for the proper consummation of the transactions
contemplated by this Agreement.
15.3. DELIVERIES BY LEHIGH
At the Initial Closing, in addition to any other documents or
agreements required under any other provision of this Agreement, Lehigh shall
make the following deliveries and performance (and the obligation of Intracel to
consummate the Initial Closing shall be conditioned thereon):
(a) this Agreement duly executed by Lehigh;
(b) a certificate of good standing for Lehigh from the
Commonwealth of Pennsylvania;
(c) a copy, certified by the Secretary of State of the
Commonwealth of Pennsylvania, of the Articles of
Incorporation of Lehigh, as amended;
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(d) a copy of the Bylaws of Lehigh, as amended, as certified
by the appropriate officers of Lehigh as being true,
complete and in full force and effect;
(e) a certificate signed by the appropriate officers of
Lehigh certifying resolutions authorizing the execution
of this Agreement and the transactions hereunder;
(f) the Amended and Restated Initial OncoVax Center Lease
duly executed by Lehigh;
(g) the Termination Agreement duly executed by Lehigh;
(h) the Initial Medical Director Services Agreement duly
executed by Lehigh;
(i) evidence that Lehigh has obtained and maintains
insurance as required by Section 18.7.2 below; and
(j) any additional documents that Intracel may reasonably
require for the proper consummation of the transactions
contemplated by this Agreement.
16. THE FINAL CLOSING
16.1. GENERALLY
The Final Closing shall take place on a date, mutually agreed
upon by the parties, within 30 days after the receipt of FDA approval to market
OncoVax to cancer patients at the OncoVax Center (the "FINAL CLOSING DATE"), at
Lehigh's facility located at Cedar Crest & I-78, Allentown, PA or at such other
place to which the parties may agree. At the Final Closing, and as a condition
precedent to the Final Closing, the parties shall comply with such conditions
and shall deliver such documents as are set forth in Sections 16.2, 16.3 and
16.4.
16.2. DELIVERIES BY INTRACEL
At the Final Closing, in addition to any other documents or
agreements required under any other provision of this Agreement, Intracel shall
make the following deliveries and performance (and the obligation of Lehigh to
consummate the Final Closing shall be conditioned thereon):
(a) List of Intracel's designees to the initial ICC Board of
Directors;
(b) the Stockholders' Agreement duly executed by Intracel;
(c) the Convertible Note executed by Intracel;
(d) the Security Agreement duly executed by Intracel;
(e) the ICC Bill of Sale duly executed by Intracel, and
delivery of the ICC Bill of Sale and Equipment to ICC,
and documentation evidencing the delivery of the
Equipment to Lehigh;
(f) the License Agreement duly executed by Intracel pursuant
to Section 7;
(g) the Operations Agreement duly executed by Intracel
pursuant to Section 9; and
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(h) any additional documents that Lehigh may reasonably
require for the proper consummation of the transactions
contemplated by this Agreement.
16.3. DELIVERIES BY LEHIGH
At the Final Closing, in addition to any other documents or
agreements required under any other provision of this Agreement, Lehigh shall
make the following deliveries and performance (and the obligation of Intracel to
consummate the Final Closing shall be conditioned thereon):
(a) List of Lehigh's designees to the initial ICC Board of
Directors;
(b) the Stockholders' Agreement duly executed by Lehigh;
(c) the Common Stock Purchase Price;
(d) the Final OncoVax Center Lease duly executed by Lehigh
pursuant to Section 5.3;
(e) the Final Medical Director Services Agreement duly
executed by Lehigh pursuant to Section 5.4.3;
(f) the Lehigh Bill of Sale duly executed by Lehigh pursuant
to Section 6.1 and delivery of the Equipment to
Intracel;
(g) the Operations Agreement duly executed by Lehigh
pursuant to Section 9;
(h) an Opinion of Bond Counsel to Lehigh in a form
satisfactory to Intracel; and
(i) any additional documents that Intracel may reasonably
require for the proper consummation of the transactions
contemplated by this Agreement.
16.4. DELIVERIES BY ICC
At the Final Closing, the parties shall use their best efforts
to cause ICC to:
(a) deliver to Lehigh, against delivery of the Common Stock
Purchase Price, a duly issued stock certificate made out
in Lehigh's name and representing the shares of Common
Stock to be purchased by Lehigh pursuant to Section 3.2
above;
(b) deliver to Intracel, against delivery of the Equipment,
a duly issued stock certificate made out in Intracel's
name and representing the shares of Common Stock to be
purchased by Intracel pursuant to Section 3.1 above;
(c) deliver the Stockholders' Agreement duly executed by
ICC;
(d) deliver the Final OncoVax Center lease duly executed by
ICC pursuant to Section 5.3;
(e) deliver the Final Medical Director Services Agreement
duly executed by ICC pursuant to Section 5.4.3;
(f) deliver the License Agreement duly executed by ICC
pursuant to Section 7; and
(g) deliver the Operations Agreement duly executed by ICC
pursuant to Section 9.
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17. TERMINATION
17.1. TERMINATION
17.1.1. TERMINATION PRIOR TO FINAL CLOSING
This Agreement may be terminated at any time prior to Final
Closing as follows:
(a) immediately upon the mutual written agreement of Intracel
and Lehigh;
(b) immediately by Intracel, after written notice to Lehigh and
the expiration of any applicable cure period, upon a material breach of any
representation, warranty, covenant or agreement on the part of Lehigh set forth
in this Agreement, or if any representation or warranty of Lehigh has become
materially untrue, in either case such that Lehigh is unable to cure such
material breach so that the conditions set forth in Section 14 are incapable of
being satisfied by the Final Closing Date; provided, however, that in any case,
a willful breach will
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<PAGE> 22
be deemed to cause such conditions to be incapable of being satisfied for
purposes of this paragraph (b);
(c) immediately by Lehigh after written notice to Intracel and
the expiration of any applicable cure period, upon a material breach of any
representation, warranty, covenant or agreement on the part of Intracel set
forth in this Agreement, or if any representation or warranty of Intracel has
become materially untrue, in either case such that Intracel is unable to cure
such material breach so that the conditions set forth in Section 14 are
incapable of being satisfied by the Final Closing Date; provided, however, that
in any case, a willful breach will be deemed to cause such conditions to be
incapable of being satisfied for purposes of this paragraph (c); or
(d) immediately upon written notice by either party to the other
party if, through no fault of either party, the Final Closing shall not have
taken place by December 31, 2000, or such other date agreed to by the parties.
17.1.2. TERMINATION AFTER TO FINAL CLOSING
This Agreement may be terminated at any time after the Final
Closing as follows:
(a) immediately by either party after written notice to the
other party and the expiration of any applicable cure period 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
(b) immediately upon written notice by either party to the other
party if FDA approval to market OncoVax is permanently withdrawn.
17.2. EFFECT OF TERMINATION
17.2.1. PRIOR TO FINAL CLOSING
In the event this Agreement is terminated prior to Final Closing
as provided above, (a) each of Lehigh and Intracel shall deliver to the other
party all documents previously delivered (and copies thereof in its possession)
concerning one another and the transactions contemplated hereby, (b) the Amended
and Restated Initial OncoVax Center Lease and the Initial Medical Director
Services Agreement shall terminate effective the date of termination of this
Agreement and the parties shall take any further action required to be taken
pursuant to the terms of
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<PAGE> 23
the Amended and Restated Initial OncoVax Center Lease and the Initial Medical
Director Services Agreement, and (c) neither of the parties nor any of their
respective stockholders, directors, officers or agents shall have any liability
to the other party, except for any deliberate breach or deliberate omission
resulting in 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.
17.2.2. AFTER FINAL CLOSING
In the event this Agreement is terminated after Final Closing as
provided above, (a) each of Lehigh and Intracel shall deliver to the other party
all documents previously delivered (and copies thereof in its possession)
concerning one another and the transactions contemplated hereby, (b) the parties
shall take such steps as are reasonably necessary to cause the dissolution of
ICC in a timely fashion and in accordance with applicable law, (c) the parties
shall take such steps as are reasonably necessary to wind down the affairs of
ICC in accordance with applicable law and to terminate all of the agreements and
arrangements entered into by the parties as contemplated hereunder, (d) the
Final OncoVax Center Lease and the Final Medical Director Services Agreement
shall terminate effective the date of such termination of this Agreement and the
parties shall take any further action required to be taken pursuant to the terms
of the Final OncoVax Center Lease and the Final Medical Director Services
Agreement, (e) the parties shall cause ICC to sell, and ICC shall be obligated
to sell, the Clean Room Equipment to Lehigh, who shall be required to purchase
the Clean Room Equipment at its depreciated book value as of the date of
termination, and (f) neither of the parties nor any of their respective
stockholders, directors, officers or agents shall have any liability to the
other party, except for any deliberate breach or deliberate omission resulting
in 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.
17.2.3. 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.
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<PAGE> 24
18. INDEMNIFICATION; LIMITATION ON LIABILITY; INSURANCE; SURVIVAL
18.1. LEHIGH INDEMNIFICATION OF INTRACEL
Subject to Section 18.6.2 below, Lehigh 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
Lehigh's negligence or any breach of any representation, warranty or covenant on
the part of Lehigh made herein or in any instrument or document delivered by
Lehigh pursuant hereto. Furthermore, Lehigh will indemnify Intracel and
Intracel's successors and assigns from any Losses arising out of any action
relating to or arising out of any action taken by Lehigh, or its employees as
agents, in connection with the Trials to be conducted at the Facilities during
the Interim Phase.
18.2. INTRACEL INDEMNIFICATION OF LEHIGH
Subject to Section 18.6.1 below, Intracel will indemnify, defend
and hold harmless Lehigh and Lehigh's successors and assigns from and against
any and all Losses which may at any time be asserted against or suffered by
Lehigh as a result of or on account of Intracel's negligence or any breach of
any representation, warranty or covenant on the part of Intracel made herein or
in any instrument or document delivered by Intracel pursuant hereto.
Furthermore, Intracel will indemnify Lehigh and Lehigh's successors and assigns
from any Losses arising out of any action relating to or arising out of any
action taken by Intracel, or its employees as agents, in connection with the
Trials to be conducted at the Facilities during the Interim Phase.
18.3. 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 18, 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.
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<PAGE> 25
18.4. 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.
18.5. 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 Party after it receives
payment or other credit hereunder with respect to any Losses, then a refund
equal in 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
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<PAGE> 26
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.
18.6. LIMITATION OF LIABILITY
18.6.1. 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 Lehigh arising as a result of Intracel's negligent
failure to perform its obligations under this Agreement. Lehigh 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 Lehigh, 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). Notwithstanding any other provision contained in this Agreement,
Intracel's maximum aggregate liability to Lehigh for any and all causes
whatsoever, and Lehigh's remedy, regardless of the form of action, whether in
contract or tort, including negligence, and whether or not pursuant to the
indemnification provisions contained in Section 18.2 and whether or not Intracel
is notified of the possibility of damage to Lehigh, shall be limited to
$3,000,000.
18.6.2. LIMITATION OF LEHIGH'S LIABILITY.
Notwithstanding any other provision contained in this
Agreement, Lehigh's liability under this Agreement shall be limited to actual
and direct losses suffered by Intracel arising as a result of Lehigh's negligent
failure to perform its obligations under this Agreement. Intracel acknowledges
and agrees that Lehigh 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
Lehigh, 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 Lehigh of its obligations under this
Agreement). Notwithstanding any other provision contained in this Agreement,
Lehigh's maximum aggregate liability to Intracel for any and all causes
whatsoever, and Intracel's remedy, regardless of the form of
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<PAGE> 27
action, whether in contract or tort, including negligence, and whether or not
pursuant to the indemnification provisions contained in Section 18.1, and
whether or not Lehigh is notified of the possibility of damage to Intracel,
shall be to $3,000,000.
18.7. INSURANCE
18.7.1. 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
18.7.1. Such insurance policies shall name Lehigh as an additional insured and
Intracel shall provide such evidence as Lehigh may reasonably request from time
to time that Intracel has obtained and continues to maintain in full force and
effect insurance coverage as described in the preceding sentence. If such
insurance is purchased on a claims made basis, upon the termination of this
Agreement for any reason Intracel shall purchase an extended reporting
endorsement in amounts equivalent to the liability coverage maintained on the
date of termination to cover prior acts.
18.7.2. LEHIGH'S OBLIGATION TO INSURE.
Lehigh shall obtain and maintain in effect at all times
during the term of this Agreement insurance as set forth in Schedule 18.7.2.
Such insurance policies shall name Intracel as an additional insured and
Lehigh shall provide such evidence as Intracel may reasonably request from time
to time that Lehigh has obtained and continues to maintain in full force and
effect insurance coverage as described in the preceding sentence. If such
insurance is purchased on a claims made basis, upon the termination of this
Agreement for any reason Lehigh shall purchase an extended reporting endorsement
in amounts equivalent to the liability coverage maintained on the date of
termination to cover prior acts.
18.8. SURVIVAL
All representations, warranties, covenants, indemnities and
other agreements made by any party to this Agreement (including all Exhibits
hereto) or in any document, statement, certificate, or other instrument referred
to herein or delivered at the Initial Closing or the Final Closing in connection
with the transactions contemplated hereby shall survive any investigation made
by or on behalf of any of the parties and shall survive the execution and
delivery of this Agreement, the Initial Closing and the Final Closing, and the
consummation of the transactions contemplated hereby and shall remain in full
force and effect for a period of three years after the Final Closing Date,
except for claims, if any, asserted in writing prior to such third anniversary,
which claims shall survive until finally resolved and satisfied in full.
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<PAGE> 28
19. MISCELLANEOUS
19.1. CONFIDENTIAL AND PROPRIETARY INFORMATION
All non-public information received by Lehigh from Intracel or
by Intracel from Lehigh in connection with the transactions contemplated hereby
will be treated by the recipient as proprietary and will be made available only
to those within its organization who have a "need to know" in connection with
the matters contemplated hereby, to such recipient's attorneys, accountants and
other advisors, and as may be required by applicable law or regulations or may
be requested by any regulatory authority to which Lehigh or Intracel is subject;
provided, however, the foregoing 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.
19.2. 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.
19.3. ASSIGNMENT; BINDING EFFECT
This Agreement, and the rights and obligations of the parties
created hereunder, shall not be assigned or delegated by either Lehigh 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) either party may assign or delegate its rights
and obligations under this Agreement to any successor to such party in the event
of a merger or consolidation of such party with another entity, or to any
purchaser of all or substantially all of the assets or business of such party,
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. Any such
successor, purchaser or Affiliate shall execute a counterpart to the
Stockholders Agreement. For purposes of this Section 19.3, an Affiliate shall
mean, as to any party hereto, any corporation or other entity which,
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<PAGE> 29
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.
19.4. 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 Maryland (excluding the choice of law rules thereof).
19.5. 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.
19.6. 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
prevailing party shall be entitled to recover costs of litigation, including,
but without limitation, reasonable attorneys' fees.
19.7. MODIFICATION; WAIVER
This Agreement shall not be modified or amended except by an
instrument in writing signed by Lehigh 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
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<PAGE> 30
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.
19.8. 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, Maryland 20850
Attn: Daniel S. Reale
Facsimile: (301) 296-0082
with a copy (which shall not constitute notice) to:
Hogan & Hartson L.L.P.
555 13th Street, N. W.
Washington, D.C. 20004-1004
Attn: Donna A. Boswell, Esq.
Facsimile: (202) 637-5910
If to Lehigh:
Lehigh Valley Hospital and Health Network
Cedar Crest & I-78
P.O. Box 689
Allentown, Pennsylvania 18105-1556
Attn: Louis L. Leibhaber
Facsimile: (610) 402-7253
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<PAGE> 31
with a copy (which shall not constitute notice) to:
Tallman, Hudders & Sorrentino
The Paragon Centre
1611 Pond Road, Suite 300
Allentown, Pennsylvania 18104-2256
Attn: Matthew R. Sorrentino, Esq.
Facsimile: (610) 391-1800
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.
19.9. 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.
19.10. 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.
19.11. 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
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<PAGE> 32
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 Lehigh shall amend this Agreement as necessary
to preserve the underlying economic and financial arrangements between Intracel
and Lehigh 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 19.11.
19.12. EXECUTION IN COUNTERPARTS
This Agreement may be executed in counterparts, each of which
shall constitute an original hereof for all purposes.
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<PAGE> 33
IN WITNESS WHEREOF, each of the parties has duly caused this
Agreement to be duly executed in its name and on its behalf, as of the date
first written above.
INTRACEL:
INTRACEL CORPORATION
By:__________________________________
Name:________________________________
Title:_______________________________
LEHIGH:
LEHIGH VALLEY HOSPITAL AND HEALTH NETWORK
By:__________________________________
Name:________________________________
Title:_______________________________
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<PAGE> 1
EXHIBIT 10.38
AMENDED AND RESTATED INITIAL ONCOVAX CENTER LEASE
THIS AMENDED AND RESTATED INITIAL ONCOVAX CENTER LEASE (this
"LEASE"), is entered into as of December 11, 1998 by and between LEHIGH VALLEY
HOSPITAL AND HEALTH NETWORK, a Pennsylvania non-profit corporation ("LANDLORD"),
having its principal office at Cedar Crest & I-78, Allentown, PA and INTRACEL
CORPORATION, a Delaware corporation (the "TENANT"),having its principal office
at 1330 Piccard Drive, Rockville, MD.
WHEREAS, on October 21, 1998 the parties hereto were negotiating
in good faith the terms of a Joint Venture Agreement to be entered into by and
between the parties (the "JOINT VENTURE AGREEMENT"), which contemplated that the
parties would enter into an Initial OncoVax Center Lease (the "INITIAL ONCOVAX
CENTER LEASE") and notwithstanding the fact that the Joint Venture Agreement was
not entered into on such date, the parties entered into the Initial OncoVax
Center Lease and an accompanying letter agreement;
WHEREAS, the parties have concluded the negotiations of the
Joint Venture Agreement and desire to enter into such Joint Venture Agreement;
and
WHEREAS, the parties desire to enter into this Lease to amend
and restate the Initial OncoVax Center Lease in its entirety to reflect all of
the additional terms and conditions relating to said lease as negotiated between
the parties since the execution of the Initial OncoVax Center Lease.
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:
W I T N E S S E T H:
1. LEASED PREMISES; FIXTURES AND EQUIPMENT; COMMON AREAS
Landlord does hereby grant, demise and lease unto Tenant, and
Tenant does hereby lease and take from Landlord, for the Term (as defined below)
and upon the terms and conditions set forth in this Lease, the premises known as
the "Clean Room" which is located on the second floor of the General
Services Building of Landlord's hospital and described on Exhibit A attached
hereto, together with the clinical patient care, administrative and storage
space also
<PAGE> 2
described on Exhibit A, and all improvements made by Landlord, now or hereafter
constructed thereon and all rights, privileges, easements and appurtenances
belonging or pertaining thereto (collectively, the "LEASED PREMISES" ), together
with all of Landlord's fixtures and personal property, whether owned or leased
by Landlord, located on or used or useful or associated with, the Leased
Premises, including but not limited to the Clean Room Equipment (as defined in
Exhibit B), and all other furnishings, machinery, apparatus, movable or
non-movable equipment and materials described in Exhibit B attached hereto
(collectively the "FIXTURES AND EQUIPMENT"). Landlord also hereby grants to
Tenant a nonexclusive license for the benefit of Tenant, its employees, agents
and invitees for access to and from the Leased Premises through the building and
over the property of Landlord appurtenant thereto, and to use those parts of the
building designated by Landlord for use by tenants including, but not limited to
toilet rooms, elevators and unrestricted parking areas, all as more particularly
described in Exhibit C attached hereto (collectively, the "COMMON AREAS").
2. SERVICES
During the Term, Landlord shall provide Tenant with all
services, including, but not limited to, electricity, heat, gas and air
conditioning (collectively "UTILITIES"), removal of hazardous waste, cleaning
services and laundry, necessary and sufficient for Tenant to use the Leased
Premises as described in Section 9.1 below.
3. POSSESSION
Landlord shall deliver to Tenant on the Commencement Date (as
herein defined) actual and exclusive possession of the Leased Premises, free and
clear of all leases, tenancies, agreements, matters, liens and defects in title,
together with exclusive possession of the Fixtures and Equipment.
4. TERM
The term of this Lease (the "TERM") shall commence on November
1, 1998 (the "COMMENCEMENT DATE") and shall end, unless earlier terminated as
described in Section 5 below, on the Final Closing Date as that term is defined
in that certain Joint Venture Agreement (the "JOINT VENTURE AGREEMENT") entered
into by and between the parties hereto and dated of even date herewith. The
parties agree that this Lease shall immediately expire or terminate upon the
Final Closing Date or earlier terminate as described in Section 5 below without
the necessity of any notice from either Landlord or Tenant to terminate the
same, and Tenant hereby expressly waives all right to any notice which may be
required under any laws now or hereafter enacted and in force in Pennsylvania,
including The
2
<PAGE> 3
Landlord and Tenant Act of 1951, Act of April 6, 1951, Act of April 6, 1951,
P.L. 69 as amended (the "Act") upon such expiration or termination.
5. EARLY TERMINATION
5.1. TERMINATION OF JOINT VENTURE AGREEMENT
This Lease shall immediately terminate if the Joint Venture Agreement is
terminated for any reason.
5.2. EVENTS OF DEFAULT; REMEDIES
5.2.1. EVENTS OF DEFAULT BY TENANT
Any of the following occurrences or acts shall constitute an
"Event of Default" under this Lease:
(i) Tenant fails to pay, on the date on which the same
is due and payable, any installment of monthly rent and any additional payments,
within ten days after Landlord notifies that such payment is overdue and due and
owing.
(ii) Except as otherwise provided herein, a party fails
to observe or perform any other provision hereof for 30 days (or such shorter
period of time if such default endangers life or property) after the
non-breaching party shall have delivered to Tenant notice of such failure.
(iii) A party's filing of a petition in bankruptcy under
Title 11 of the United States Code, as amended, or the commencement of a
proceeding under any other applicable law concerning insolvency, reorganization
or bankruptcy or a party becomes generally unable to pay its debts as they
become due; provided, however, if a proceeding with respect to an act of
bankruptcy is filed or commenced against Tenant, the same shall not constitute
an Event of Default if such proceeding is dismissed within 60 days from the date
of such filing.
(iv) The Leased Premises shall have been abandoned.
(v) Any representation or warranty made herein or any
statement or representation made in any certificate, report or opinion
(including legal opinions), financial statement or other instrument furnished in
connection with this Lease, proves to have been incorrect, false or misleading
in any material respect when made.
(vi) A party fails to comply with any requirement of any
governmental authority having jurisdiction within the time required by such
governmental authority; or any proceeding is commenced or action taken to
enforce
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any remedy for a violation of any requirement of a governmental authority or any
restrictive covenant affecting the Leased Premises or any part thereof.
5.2.2. REMEDIES
If an Event of Default shall have happened and be continuing, a
party shall have the right at its election, then or at any time thereafter while
such Event of Default shall continue, to give written notice of its intention to
terminate this Lease on a date specified in such notice. Upon the giving of such
notice, the Term and the estate hereby granted shall expire and terminate on
such date as fully and completely and with the same effect as if such date were
the date hereinbefore fixed for the expiration of the Term.
5.3. OTHER TERMINATION EVENTS
This Lease may also be earlier terminated as further described
in Sections 10.4 and 15 below.
6. ACTIONS UPON TERMINATION
Upon the expiration or termination of this Lease,
(i) Tenant shall immediately permit Landlord and its employees
and agents full access to the Leased Premises to aid in the transition to a new
operator, and further agrees to give up quiet and peaceful possession without
further notice from Landlord.
(ii) If termination results because of Tenant's Event of
Default, Tenant shall continue to pay to Landlord the monthly rent until the end
of the Term; provided, that Tenant shall not be responsible for such rent if the
Leased Premises have been relet.
7. PAYMENTS
7.1. RENTAL PAYMENTS
Tenant shall pay as rent for the Leased Premises and the
Fixtures and Equipment to Landlord during the period of time from the
Commencement Date through the Term monthly installments of Six Thousand Six
Hundred and Ninety Dollars and no cents ($6,690.00), in advance without demand
on or before the first day of each month from and including the month in which
the Commencement Date occurs, which the parties agree (i) reflects the fair
market rental value of the Leased Premises and the Fixtures and Equipment and
(ii) is attributable in its entirety to
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the Fixtures and Equipment. Rent for any partial month shall be prorated based
upon the actual number days in such month.
7.2. ADDITIONAL PAYMENTS
Tenant shall pay as additional payments for the services
provided in Section 2 above (except Utilities which Landlord shall provide to
Tenant without any additional payments), monthly installments of Two Thousand
Dollars and no cents ($2,000.00), in advance without demand on or before the
first day of each month from and including the month in which the Commencement
Date occurs, which the parties agree reflects the fair market value of the
services provided in Section 2.
7.3. DEFAULT
Tenant may not be declared in default for non-payment of rent or
any additional payments due hereunder if such rent or additional payments is/are
received by Landlord by the 10th day of the month.
8. TITLE AND QUIET ENJOYMENT
Subject to Section 18 below, Landlord hereby represents,
warrants and covenants that it has good and marketable fee simple title to the
Leased Premises, that the same is subject to no other leases, tenancies,
agreements, encumbrances (including delinquent taxes), liens or defects in title
affecting said property or the rights granted Tenant in this Lease. Landlord
further covenants that there are no restrictive covenants, zoning or other local
ordinances or regulations which will prevent Tenant from using and occupying the
Leased Premises for a current Good Manufacturing Practices ("CGMP") laboratory
and support area. Landlord further represents, warrants and covenants that it
has good and marketable title to all Fixtures and Equipment and that same are
subject to no leases, agreements, encumbrances, liens or defects in title
affecting said property or the rights granted Tenant in this Lease. Landlord
covenants and agrees that during the Term, Tenant shall, upon paying the rent
and performing the covenants of this Lease on its part to be performed,
peaceably and quietly have, hold and enjoy the Leased Premises and Fixtures and
Equipment and all rights granted Tenant in this Lease.
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9. USES OF LEASED PREMISES; ACCESS TO LEASED PREMISES AND COMMON AREAS
9.1. TENANT'S USE OF LEASED PREMISES
The Leased Premises and the Fixtures and Equipment therein shall
be used for the conduct and operation of a cGMP laboratory and support area in
conformity with applicable law and the terms and conditions of the Joint Venture
Agreement. The Leased Premises shall be operated under the names of "Intracel
Corporation," and no other names shall be permitted to be used in lieu of or in
addition to such name without the prior written consent of Landlord. Tenant
hereby agrees to comply and conform in all material respects with all legal
requirements concerning the use, occupancy and conditions of the Leased Premises
and all machinery, equipment, furnishings, fixtures and improvements therein. If
any such legal requirement requires an occupancy or use permit, license, special
exception, or other local, state or federal agency certification, then Tenant
shall promptly obtain and keep current the same.
9.2. LANDLORD ACCESS TO LEASED PREMISES
Landlord may enter upon the Leased Premises, upon reasonable
notice to Tenant, to inspect, maintain, repair the Leased Premises. Landlord may
enter the Leased Premises at any time to perform emergency repairs to preserve
the Leased Premises and/or the Fixtures and Equipment.
9.3. TENANT'S ACCESS TO LEASED PREMISES AND COMMON AREAS
Landlord shall keep the Leased Premises and the Common Areas
"open" during normal business hours which, for purposes of this Lease, shall
mean 24 hours a day, 365 days a year. Landlord shall provide lighting,
electricity, heat, air conditioning, water, elevator service and other necessary
services for Tenant's use and access to the Leased Premises and the Common Areas
when open. Tenant's use of the Common Areas shall not unreasonably hinder or
interfere with the Landlord's or other tenants' use of their Common Areas.
10. CONDITION OF LEASED PREMISES, FIXTURES AND EQUIPMENT; MAINTENANCE AND
REPAIRS
10.1. CONDITION OF LEASED PREMISES, FIXTURES AND EQUIPMENT
Landlord hereby represents and warrants that the Leased Premises
are constructed substantially in compliance with all applicable building codes
and regulations and substantially in accordance with the plan and specifications
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approved by the Commonwealth of Pennsylvania Board of Health (the "BOARD OF
HEALTH"). Upon the expiration or earlier termination of the Lease, Tenant shall
surrender the Leased Premises in good condition, reasonable wear and tear and
damage by casualty and fire excepted, with all lighting, plumbing, electrical
and life/safety systems and the Fixtures and Equipment, in good working
condition, other than the "Tenant's Fixtures and Equipment Required to be
Removed or Otherwise Transferred" (as defined in Section 11.2).
10.2. TENANT'S MAINTENANCE AND REPAIRS
During the Term of this Lease, Tenant, at its expense, hereby
agrees to clean, and maintain and keep in good repair its equipment.
10.3. LANDLORD'S MAINTENANCE AND REPAIRS
Landlord shall make and pay for all repairs, replacements and
maintenance which are necessary for the operation of the Leased Premises, the
Common Areas, and the Fixtures and Equipment, excluding repairs or maintenance
necessitated by Tenant's willful acts or gross negligence. Tenant agrees to
notify Landlord of any necessary repairs within a reasonable period time of its
discovery. If Landlord fails to commence to perform any such maintenance,
replacement and repair after five days notice from Tenant, Tenant shall have the
right to undertake such maintenance, replacement and repair and to deduct any
expenditures associated therewith from the rent payments due under Section 7.1
above.
10.4. FIRE OR OTHER HAZARD
Tenant hereby agrees to notify Landlord of any damages to
the Leased Premises resulting from fire or other hazard and also of any
dangerous or hazardous condition within the Leased Premises immediately upon the
occurrence of such fire or other hazard or discovery of such condition, or as
soon as practicable thereafter. Upon occurrence of a fire, repairs shall be made
by Landlord as soon as reasonably may be done unless the costs of repairing the
Leased Premises exceed 25% of the replacement cost of the building in which case
the Landlord may, at its option, terminate this Lease by giving Tenant written
notice of termination within 45 days of the date of such fire. If the Landlord
does not terminate this Lease as described above, then Landlord has 45 days
after the date of such fire to give written notice to Tenant setting forth
Landlord's unqualified commitment to make all necessary repairs or replacements,
the projected date of commencement of such repairs, and Landlord's good faith
estimate of the date of completion of the same. If Landlord fails to give such
notice, or if the date of completion is more than 90 days after the date of the
fire or other hazard, then Tenant may, at its option, terminate this Lease and
Landlord will be obligated to refund to Tenant any rent allocable to the period
subsequent to the date of the fire. During any period of restoration and
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repair Tenant shall continue to operate within the Leased Premises to the extent
practicable, with a pro-rata reduction in the rental payments based upon the
usable portions of the Leased Premises.
11. ALTERATIONS AND REMODELING OF LEASED PREMISES, AND FIXTURES AND
EQUIPMENT
11.1. ALTERATIONS AND MODIFICATIONS TO THE LEASED PREMISES
Tenant may, at its own expense, from time to time during the
term of this Lease, upon the prior written approval of Landlord as described in
Section 11.3 below, make such structural alterations, additions, replacements
and changes, in and to the Leased Premises, and any buildings thereon, as it
finds necessary or desirable for the operation of the Leased Premises as a cGMP
laboratory. All such alterations, demolitions, additions, replacements and
changes shall be made in accordance with plans and specifications prepared by
Tenant and approved by Landlord, in conformity with applicable building laws and
regulations. Except for Fixtures and Equipment acquired, or purchased and
contributed to ICC (as defined below) by Tenant pursuant to Section 11.2 below,
such alterations, additions, replacements and changes shall become a part of the
Leased Premises, shall be maintained and kept in repair in accordance with the
provisions of Section 10, and at the expiration or termination of this Lease
shall become the property of Landlord without the payment of any money or other
consideration.
11.2. ALTERATIONS AND MODIFICATIONS TO THE FIXTURES AND EQUIPMENT
Tenant may, at its own expense, from time-to-time during the
term of this Lease, install, replace and operate in the Leased Premises such
removable medical equipment and personal property ("TENANT'S FIXTURES AND
EQUIPMENT") as it shall deem necessary or desirable in the conduct of its
business, provided all laws, rules and regulations of governmental bodies with
respect thereto shall be in all material respects complied with by Tenant.
Tenant may also, upon the prior written approval of Landlord as described in
Section 11.3 below, make such alterations, additions, replacements and changes,
in and to the Fixtures and Equipment, as it finds necessary or desirable for the
operation of a cGMP laboratory. The Clean Room Equipment as described on Exhibit
B shall be sold to Tenant by Landlord as of the Final Closing Date and this
Lease's expiration date pursuant to Section 6.1 of the Joint Venture Agreement
and together with any alterations, additions, replacements and changes thereto
shall be concurrently contributed to Intracel Cancer Center of Pennsylvania,
Inc. ("ICC") pursuant to Sections 3.1 and 6.2 of the Joint Venture Agreement. If
this Lease is earlier terminated by Tenant pursuant to Section 5.2.1 above, the
Clean Room Equipment and together with any alterations, additions, replacements
and changes thereto shall remain Landlord's property and Landlord shall
reimburse Tenant the actual
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costs of all alterations, additions, replacements and changes thereto. Prior to
the expiration or termination of this Lease, Landlord and Tenant shall designate
those items of Tenant's Fixtures and Equipment that Landlord or Tenant desires
be removed from the Leased Premises, and the Clean Room Equipment to be
purchased by Tenant and contributed to ICC upon the expiration or termination of
the Lease ("TENANT'S FIXTURES AND EQUIPMENT REQUIRED TO BE REMOVED OR
CONTRIBUTED"). With the exception of Tenant's Fixtures and Equipment Required to
be Removed or Contributed, all of the Fixtures and Equipment shall remain on the
Leased Premises at the termination of this Lease and shall remain the property
of Landlord.
11.3. LANDLORD'S CONSENT
Landlord agrees not to unreasonably withhold, delay or condition
its consent to any action proposed by Tenant pursuant to this Section 11,
provided that (i) the alterations, construction or installation shall not have a
material adverse effect on the structure, appearance or use of the Leased
Premises or the building in which the Leased Premises are located or Fixtures
and the Equipment, in the reasonable judgment of Landlord, (ii) all such
alterations, construction and installations shall be expeditiously completed in
compliance with all legal requirements, (iii) all work done in connection with
any such alterations, construction or installation shall comply with the
requirements of any insurance policy required to be maintained by Tenant
hereunder, (iv) Tenant shall promptly pay all costs and expenses of any such
alteration, construction or installation and shall discharge all liens filed
against any of the Leased Premises or the Fixtures and Equipment arising out of
the same, (v) Tenant shall procure and pay for all permits and licenses required
in connection with any such alteration, construction or installation, (vi) such
alterations shall comply with any recorded lien or covenant affecting the Leased
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Premises, and (vii) Landlord shall incur no expense or cost whatsoever in
connection with such alterations, including without limitation, costs for
reviewing and approving plans, or tap fees or other utility fees. Landlord may
require, as a condition to its consent to any alterations, reasonable
appropriate payments, bonds, assurances and undertakings from Tenant to ensure
that all such conditions are satisfied. Notwithstanding the foregoing, it shall
not be unreasonable for Landlord to withhold its consent, or to condition its
consent, if the holder of a mortgage withholds its consent to any of the
foregoing, or requires that certain conditions or requirements be satisfied or
observed.
11.4. LIENS OR ENCUMBRANCES
Except as permitted under Section 18, neither Tenant nor Landlord will
directly or indirectly, create or permit to be created or to remain, and will
promptly discharge, at its expense, any lien or encumbrance with respect to, the
Leased Premises or any part thereof, or the Fixtures and Equipment or either
party interest therein as a result of any alteration, construction, installation
or other action of either party. The existence of any mechanic's, laborer's,
materialman's, supplier's or vendor's lien, or any right in respect thereof,
shall not constitute a violation of this Section 11.4 if payment is not yet due
upon the contract or for the goods or services in respect of which any such lien
has arisen so long as such payment is made or bonded off within 30 days after
the later to occur of the completion of the work which gave rise to the
imposition of said liens or the rendering of the invoice, statement or demand
for such payment. Nothing contained in this Lease shall be construed as
constituting the consent or request of Landlord, expressed or implied, of any
contractor, subcontractor, laborer, materialman or vendor to or for the
performance of any labor or services or other furnishing of any materials for
any construction, alteration, addition, repair or demolition of or to the Leased
Premises or any part thereof.
12. ENVIRONMENTAL MATTERS
12.1. DEFINITIONS
As used in herein, the following items shall have meanings set
forth below:
(i) "CAA" shall mean the Clean Air Act, codified at 42
U.S.C. Section 7401, et seq., as amended.
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(ii) "CERCLA" shall mean the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, codified at 42 U.S.C.
Section 9601, et seq., as amended.
(iii) "CWA" shall mean the Clean Water Act, codified at
33 U.S.C. Section 407, et seq., as amended.
(iv) "ENFORCEMENT AGENCY" shall mean, collectively, the
Environmental Protection Agency ("EPA") and any state, county, municipal or
other agency having authority to enforce any Environmental Laws.
(v) "ENVIRONMENTAL LAWS" - shall mean CERCLA, HMTA,
RCRA, CAA, CWA, TSCA, RHA and the Right-to-Know Act and all other federal, local
and municipal laws, statutes, ordinances and codes, guidelines and standards
relating to health, safety, sanitation, and the protection of the environment or
governing the use, storage, treatment, generation, transportation, processing,
handling, production or disposal of Hazardous Materials, including, without
limitation, the Pennsylvania Solid Waste Management Act, 35 P.S. Section
6018.103, et. seq., the Pennsylvania Hazardous Sites Clean Up Act (Act 108 of
1988), laws and regulations regarding the discharge of water or other materials
or fluids into waterways, and the rules, regulations, guidelines, decisions,
orders and directives of federal, local and municipal governmental agencies,
authorities and courts with respect thereto presently in effect or hereafter
enacted, promulgated or implemented.
(vi) "ENVIRONMENTAL PERMITS" - shall mean all permits,
licenses, approvals, authorizations, consents or registrations required by any
applicable Environmental Laws, on either an individual or group basis, in
connection with the construction, ownership, use or operation of the Leased
Premises, or the storage, treatment, generation, transportation, processing,
handling, production or disposal of Hazardous Materials related to the Leased
Premises.
(vii) "HAZARDOUS MATERIALS" - shall mean, without
limitation, flammable, explosives, radioactive materials, asbestos, urea
formaldehyde foam insulation, polychlorinated biphenyls, petroleum or petroleum
based or related substances, hydrocarbons or like substances and their additives
or constituents, and any substances now or hereafter defined as "hazardous
substances," "extremely hazardous substances," "hazardous wastes," "infectious
wastes" or "toxic chemicals" in any Environmental Laws, or in any regulation or
order issued pursuant to any Environmental Laws.
(viii) "HMTA" - shall mean the Hazardous Materials
Transportation Act, codified at 49 U.S.C. Section 1801, et seq., as
amended.
(ix) "RCRA" - shall mean the Resource Conservation and
Recovery Act of 1976, codified at 42 U.S.C. Section 6801, et seq., as amended.
(x) "RELEASE" - shall have the same meaning as given to
that term in CERCLA, as amended, and the regulations promulgated thereunder.
(xi) "RHA" - shall mean the Rivers and Harbors
Appropriation Act, codified at 33 U.S.C. Section 401, et seq., as
amended.
(xii) "RIGHT-TO-KNOW ACT" - shall mean the Emergency
Planning and Community Right-To-Know Act, codified at 42 U.S.C. Section
11001, et seq., as amended.
(xiii) "TSCA" - shall mean the Toxic Substances Control
Act, codified at 15 U.S.C. Section 2601, et seq., as amended.
12.2. LANDLORD OBLIGATIONS; REPRESENTATION AND WARRANTIES
Landlord hereby represents and warrants to Tenant that on the
Commencement Date the Leased Premises does not contain asbestos or any Hazardous
Materials. Landlord shall be responsible for costs, expenses, damages and
penalties resulting from the existence of any Hazardous Materials in the
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Leased Premises at the date of execution of this Lease and all alterations made
by Landlord to the Leased Premises or the Common Areas shall be made in
accordance any comply with all Environmental Laws and the requirements of any
Enforcement Agencies.
12.3. TENANT OBLIGATIONS
Tenant shall comply at all times and in all respects with the
provisions of all Environmental Laws and Environmental Permits, and shall not
commit any actions or omissions that result in the incurrence of any liability
under such Environmental Laws and Environmental Permits. Tenant shall obtain,
whenever necessary and in its own name, appropriate Environmental Permits for
its operations and shall comply in all respects with the requirements of such
Environmental Permits. All alterations made in the Leased Premises made by
Tenant shall be made in accordance with and shall comply with all Environmental
Laws and the requirements of any Enforcement Agencies. If any statutes, laws,
ordinances, rules or regulations are promulgated at any time after the date of
execution of this Lease for the removal, abatement or containment of Hazardous
Materials in the Leased Premises or any portion of the Leased Premises and, in
the reasonable judgment of Landlord, it is hazardous for the Tenant to remain in
the Leased Premises during such removal, abatement, or containment of the
Hazardous Materials, Tenant shall vacate the Leased Premises or that portion of
the Leased Premises that is hazardous and, provided that such condition did not
result from Tenant's acts, omissions, or operations, Tenant's rent shall be
abated proportionately for the period of time in which Tenant's use of such
portion of the Leased Premises has been interrupted. Tenant shall not
intentionally or unintentionally use, store, handle, spill or discharge any
Hazardous Materials at or in the vicinity of the Leased Premises, other than
those Hazardous Materials generally used, stored or handled in a cGMP
laboratory. Tenant shall promptly deliver to Landlord copies of all notices made
by Tenant to, or received by Tenant from, any Enforcement Agency or from the
United States Occupational Safety and Health Administration concerning
environmental matters or Hazardous Materials at the Leased Premises.
12.4. INDEMNIFICATION; HOLD HARMLESS
Landlord shall indemnify, defend and hold Tenant harmless of and
from actual and direct losses arising out of or relating to any and all claims
arising from the existence, removal, containment, or abatement of any Hazardous
Materials from the Leased Premises related to Hazardous Materials existing in
the Leased Premises prior to the Commencement Date. Tenant shall indemnify,
defend and hold Landlord harmless of and from actual and direct losses arising
out of or relating to any and all claims arising by reason of any violation by
Tenant of the
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provisions of Section 12.3 above. This indemnity provision shall survive
expiration or earlier termination of this Lease.
12.5. INSPECTIONS
At any time throughout the Term of this Lease, Landlord may
cause an inspection to be made of the Leased Premises and its surrounding area
for the purpose of determining whether any Hazardous Materials is present
thereon.
13. INSURANCE
13.1. TENANT INSURANCE
Tenant shall, at all times through the Term and at its sole expense,
maintain professional and general liability insurance (through third party
insurers) against claims for bodily injury or death occurring in or about the
Leased Premises, such insurance to provide coverage not less than $3,000,000 per
occurrence, $5,000,000 per annual aggregate. In addition, Tenant shall, at all
times through the Term and at its sole expense, maintain insurance for the
Fixtures and Equipment at replacement cost value, without coinsurance
provisions, against fire and such other hazards as are included within extended
coverage and against earthquake and flood damage, which insurance shall also
include major mechanical system repair and replacement coverage. All such
insurance shall name Landlord as an additional insured and shall provide that
Landlord be given 30 days prior notice of any material change or cancellation of
such insurance. Copies of such insurance policies shall be delivered to
Landlord, upon Landlord's request. The parties shall mutually determine how to
distribute any insurance proceeds received to replace any or all of the Fixtures
and Equipment.
13.2. LANDLORD'S INSURANCE
Landlord shall, at all times through the Term and at its sole
expense, maintain insurance for the Leased Premises and the Common Areas at
replacement cost value, without coinsurance provisions, against fire and such
other hazards as are included within extended coverage and against earthquake
and flood damage, which insurance shall also include major mechanical system
repair and replacement coverage. Copies of such insurance policies shall be
delivered to Tenant, upon Tenant's request.
14. LIABILITY OF LANDLORD
Landlord shall be liable for all loss of property by theft or
otherwise, for all damage to property, for all injuries to persons while on the
Leased Premises
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from escape or leakage of water, rain, snow, or steam from any part of the
building on which the Leased Premises are located or from the pipes or plumbing
system therein, and for all damage resulting from the short circuiting of
electricity or from any other cause, where any such losses, damages and/or
injuries are due to the willful acts or negligence of the Landlord, its servant,
agents, or employees.
15. CONDEMNATION
If all or a part of the Leased Premises and/or Common Areas are
taken by eminent domain or conveyed in lieu thereof and such Leased Premises
cannot then be used by Tenant for its intended use as set forth in Section 9.1
above, this Lease shall immediately terminate as of the date that the condemning
authority takes possession of the Leased Premises, subject to the following:
(i) All compensation awarded for the taking (or the proceeds of any
sale in lieu thereof) of the Leased Premises and/or Common Areas
shall be the property of the Landlord;
(ii) All compensation awarded for the taking or loss of any of the
Tenant's Fixtures and Equipment or for moving or relocation
expenses shall be the property of Tenant; and
(iii) If only part of the Leased Premises and/or Common Areas are
taken such that Tenant may still use the Leases Premises for its
intended use, this Lease shall remain in effect with a pro-rata
reduction in the rental payments based upon the usable portions
of the Leased Premises.
16. ASSIGNING OR SUBLETTING
Tenant shall not assign, sublet or in any manner transfer this
Lease or any estate or interest therein, or grant a license, concession or other
right of occupancy, to all or part of the Leased Premises, without Landlord's
prior written consent, except that Tenant may assign, sublet or in any manner
transfer this Lease of any estate or interest therein, or grant a license,
concession or other right of occupancy, to all of part of the Leased Premises
(i) to any successor to Tenant in the event of a merger or consolidation of
Tenant with another entity, or to any purchaser of all or substantially all of
the assets or business of Tenant, and (ii) to an Affiliate (as defined below).
For purposes of this Section 16, 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. In the
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event of any permitted assignment, all rights, obligations and liabilities
herein shall extend to any successors or assigns.
17. WAIVER OF SUBROGATION
To the extent permitted by their insurers, Landlord hereby
releases Tenant, and Tenant hereby releases Landlord, and their respective
shareholders or members, directors, officers, employees and agents, from any and
all claims or demands for damages, losses, expenses, or injury to the Leased
Premises, or to the Fixtures and Equipment, or the inventory or other property
of Landlord or Tenant, as the case may be, in, or about, the Leased Premises
which may be caused by or results from events or happenings which
are covered by insurance carried by the respective parties and in force at the
time of any such damages, losses, expenses, or injury.
18. SUBORDINATION; ESTOPPEL CERTIFICATES
Subject to Section 8 above, this Lease is subordinate to the
lien of all present or future mortgages which affect the Leased Premises and to
all renewals, modifications, replacements and extensions thereof. This provision
shall be self-operative, but in any event Tenant hereby agrees to execute
promptly and deliver any estoppel certificate or other assurances that Landlord
may request in furtherance hereof. In the event of any foreclosure of any such
mortgage or modification, Tenant shall attorn to the purchaser in foreclosure of
who shall be named in any deed in lieu of foreclosure, shall recognize any such
purchaser as the Landlord under this Lease, and so long as Tenant is not in
default hereunder, this Lease shall remain in full force and effect.
19. MISCELLANEOUS
19.1. 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 Lease 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:
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If to Intracel:
Intracel Corporation
1330 Piccard Drive
Rockville, Maryland 20850
Attn: Daniel S. Reale
Facsimile: (301) 296-0082
with a copy (which shall not constitute notice) to:
Hogan & Hartson L.L.P.
555 13th Street, N. W.
Washington, D.C. 20004-1004
Attn: Donna A. Boswell, Esq.
Facsimile: (202) 637-5910
If to Lehigh:
Lehigh Valley Hospital and Health Network
Cedar Crest & I-78
P.O. Box 689
Allentown, Pennsylvania 18105-1556
Attn: Louis L. Liebhaber
Facsimile: (610) 402-7253
with a copy (which shall not constitute notice) to:
Tallman, Hudders & Sorrentino
The Paragon Centre
1611 Pond Road, Suite 300
Allentown, Pennsylvania 18104-2256
Attn: Matthew R. Sorrentino, Esq.
Facsimile: (610) 391-1800
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.
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19.2. COMPLETE AGREEMENT
This Lease, and all Exhibits hereto and incorporated agreements
(including the Joint Venture Agreement) set forth the entire agreement of the
parties hereto with respect to its subject matter and any and all prior
agreements, whether oral or written, between or among the parties hereto and
relating to the subject matter hereof are superseded hereby.
19.3. GOVERNING LAW
This Lease and the rights and obligations of the parties hereto
shall be governed by and construed and enforced in accordance with the laws of
the Commonwealth of Pennsylvania (excluding choice of laws rules thereof).
19.4. PARAGRAPH HEADINGS
The paragraph headings in this Lease are for convenience only
and are not a part of this Lease and do not in any way limit or amplify the
terms and provisions hereof and in no way shall be held to explain, modify or
aid in the interpretation, construction or meaning of the provisions of this
Lease.
19.5. SEVERABILITY
In the event that a court of competent jurisdiction holds that a
particular provision or requirement of this Lease 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 Lease shall remain in full force
and effect.
19.6. MODIFICATION; WAIVER
This Lease shall not be modified or amended except by an
instrument in writing signed by Landlord and Tenant. No delay or failure on the
part of any party hereto in exercising any right, power, or privilege under this
Lease or any other instruments executed and delivered in connection with or
pursuant to this Lease, 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.
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<PAGE> 18
19.7. BENEFIT OF THIS LEASE
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 Lease against any
of the parties hereto, and that the covenants, undertakings, and agreements set
forth in this Lease 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.
19.8. SIGNAGE ON LEASED PREMISES
Landlord shall, at its own expense, erect all exterior and
interior signage at the Leased Premises as approved by Tenant.
19.9. INDEPENDENT CONTRACTOR
Tenant shall lease and operate the Leased Premises as an
independent contractor, and shall not be considered an agent, employee of,
partner of or joint venturer with Landlord.
19.10. EXECUTION IN COUNTERPARTS
This Lease may be executed in counterparts, each of which shall
constitute an original hereof for all purposes.
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<PAGE> 19
IN WITNESS WHEREOF, each of the parties intending to be legally
bound has duly caused this Lease to be duly executed and delivered in its name
and on its behalf, as of the date first written above.
TENANT:
INTRACEL CORPORATION
By:___________________________________
Name:________________________________
Title:_________________________________
LANDLORD:
LEHIGH VALLEY HOSPITAL AND HEALTH NETWORK
By:___________________________________
Name:________________________________
Title:_________________________________
19
<PAGE> 20
EXHIBIT A
DESCRIPTION OF CLEAN ROOM, AND CLINICAL PATIENT CARE,
ADMINISTRATIVE AND STORAGE SPACE
SEE ATTACHED
<PAGE> 21
EXHIBIT B
DESCRIPTION OF FIXTURES AND EQUIPMENT
Set forth below is a description of the Fixtures and Equipment.
1. Clean Room Equipment. For purposes of this Lease, the term "Clean
Room Equipment" shall include all of the following equipment:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
EQUIPMENT NAME MANUFACTURER MODEL # SERIAL #
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Bio Safety Hood, 4' Baker SG400 58432
- ---------------------------------------------------------------------------------------------------
Bio Safety Hood, 6' Baker SG600 58388
- ---------------------------------------------------------------------------------------------------
Bio Safety Hood, 6' Baker SG601 58382
- ---------------------------------------------------------------------------------------------------
Gammacell Irradiator Nordion 1000 A 247
- ---------------------------------------------------------------------------------------------------
Controlled Rate Freezer Gordinier 7009 06911-0497
- ---------------------------------------------------------------------------------------------------
Freezer Chamber Gordinier 8753 06911-0497
- ---------------------------------------------------------------------------------------------------
MVE-TEC 2000 Storage MVE XLC-500F CDRA97B101
- ---------------------------------------------------------------------------------------------------
Incubator, CO2 Sanyo MCO-17AI 60905781
- ---------------------------------------------------------------------------------------------------
Incubator, CO2 Sanyo MCO-17AI 60905783
- ---------------------------------------------------------------------------------------------------
Ultralow Freezer Sanyo MDF-U6088SC 61006995
- ---------------------------------------------------------------------------------------------------
Water Bath, 1 of 2 Precision 180 697050163
- ---------------------------------------------------------------------------------------------------
Water Bath, 2 of 2 Precision 180 697030900
- ---------------------------------------------------------------------------------------------------
Refrigerator/Freezer Kenmore 363-9662825 L70640925
- ---------------------------------------------------------------------------------------------------
Chemical Fume Hood Kewaunee H05 R106417
- ---------------------------------------------------------------------------------------------------
Balance Ainsworth De410-D 73866
- ---------------------------------------------------------------------------------------------------
Microscope Nikon Labophot-2 462566
- ---------------------------------------------------------------------------------------------------
Refrigerator, undercounter Kenmore 564.9936111 961003215
- ---------------------------------------------------------------------------------------------------
Refrigerator, undercounter Kenmore 564.9936111 960901790
- ---------------------------------------------------------------------------------------------------
Immersible Stirrer VWR 230 0094
- ---------------------------------------------------------------------------------------------------
Immersible Stirrer VWR 230 0066
- ---------------------------------------------------------------------------------------------------
Immersible Stirrer VWR 230 0086
- ---------------------------------------------------------------------------------------------------
Immersible Stirrer VWR 230 0092
- ---------------------------------------------------------------------------------------------------
Pipetman Rainin P-1000
- ---------------------------------------------------------------------------------------------------
Pipetman Rainin P-200
- ---------------------------------------------------------------------------------------------------
Pipetman Rainin P-200
- ---------------------------------------------------------------------------------------------------
Pipetman Rainin P-200
- ---------------------------------------------------------------------------------------------------
Magnahelic Gauge Sure Flow
- ---------------------------------------------------------------------------------------------------
Magnahelic Gauge Sure Flow
- ---------------------------------------------------------------------------------------------------
Megafuge 1.0R Hereaus 75003062/02 232331
- ---------------------------------------------------------------------------------------------------
Calibrated Timer VWR
- ---------------------------------------------------------------------------------------------------
4 Work Stations with Divider Panels
- ---------------------------------------------------------------------------------------------------
3 Two Drawer Lateral Files
- ---------------------------------------------------------------------------------------------------
4 Office Chairs
- ---------------------------------------------------------------------------------------------------
5 Lab Chairs
- ---------------------------------------------------------------------------------------------------
Six door locker
- ---------------------------------------------------------------------------------------------------
2 two drawer file cabinets
- ---------------------------------------------------------------------------------------------------
1 Four Drawer File Cabinet
- ---------------------------------------------------------------------------------------------------
1 Six Drawer Lateral File Cabinet
- ---------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 22
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
EQUIPMENT NAME MANUFACTURER MODEL # SERIAL #
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
3 Four Drawer File Cabinets
- ---------------------------------------------------------------------------------------------------
Computer Workstation with Printer
- ---------------------------------------------------------------------------------------------------
Fax Machine Murata
- ---------------------------------------------------------------------------------------------------
</TABLE>
2. Other furnishings, machinery, apparatus, movable or non-movable
equipment and materials. For purposes of this Lease, the term "Other
furnishings, machinery, apparatus, movable or non-movable equipment and
materials" shall include all of the following:
NONE
<PAGE> 23
EXHIBIT C
DESCRIPTION OF COMMON AREAS
SEE ATTACHED
<PAGE> 1
EXHIBIT 10.39
INITIAL MEDICAL DIRECTOR SERVICES AGREEMENT
This Initial Medical Director Services Agreement (this "AGREEMENT")
is entered into as of December 11, 1998, by and between Intracel Corporation, a
Delaware for-profit corporation ("INTRACEL"), and Lehigh Valley Hospital and
Health Network, a Pennsylvania non-profit corporation ("LEHIGH") (each a
"PARTY", and collectively "PARTIES").
WHEREAS, Intracel Corporation ("INTRACEL") and Lehigh have entered
into a Joint Venture Agreement dated as of December 11, 1998 (the "JOINT VENTURE
AGREEMENT") pursuant to which they intend to form a corporation ("ICC") to
operate a center for the manufacture and provision of OncoVax[cl](R)
("ONCOVAX"), a product developed by Intracel to be utilized in the treatment of
colon cancer and other oncological products as agreed to by Intracel and Lehigh;
WHEREAS, during the period between the Effective Date and the
formation and capitalization of ICC, ICC and Lehigh have entered into an amended
and restated lease with the same effective date as this Agreement (the "AMENDED
AND RESTATED INITIAL ONCOVAX CENTER LEASE") pursuant to which Intracel is
leasing from Lehigh the necessary space and equipment to operate a laboratory
and support area in compliance with current Good Manufacturing Practices to
manufacture and provide OncoVax and other oncological products as agreed to by
Intracel and Lehigh (the "ONCOVAX CENTER");
WHEREAS, Herbert C. Hoover, Jr., M.D. is a physician employed by
Lehigh Valley Physician Group, which is a Pennsylvania non-profit corporation
and wholly-owned subsidiary of Lehigh;
WHEREAS, Herbert C. Hoover, Jr., M.D. serves as the Chair of Surgery
for Lehigh pursuant to an agreement between Lehigh Valley Physician Group and
Lehigh;
WHEREAS, Intracel desires to obtain the services of Herbert C.
Hoover, Jr., M.D. ("MEDICAL DIRECTOR") or his designee on an initial part-time,
independent contractor basis from Lehigh for the provision of certain Medical
Director services at the OncoVax Center as set forth more fully in Section 1.1
("SERVICES");
WHEREAS, pursuant to the Joint Venture Agreement, Lehigh has agreed
to provide the Services of the Medical Director on an initial part-time,
independent contractor basis to Intracel for Intracel's Service Fee (as defined
below) to Lehigh; and
WHEREAS, the Parties desire to enter into this Agreement to set forth
the terms and conditions under which Lehigh will provide the Services to
Intracel, and Intracel will compensate Lehigh for such Services.
<PAGE> 2
NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Parties agree as follows:
1. MEDICAL DIRECTOR SERVICES
1.1 GENERAL DESCRIPTION OF SERVICES
During the Term (as defined in Section 6), Lehigh shall provide the
Services to Intracel through Medical Director, or as described in Section 1.9
below, through the Medical Director's designee. The Services shall include: (a)
assisting Intracel in establishing and enhancing the OncoVax Center, including
assisting with the clinical design of the center and the establishment of
protocols and systems; and (b) serving the OncoVax Center once it is operational
as a medical director, including (1) participating in administrative meetings
and performing other administrative duties as requested by Intracel, (2)
recommending rules and policies for the operation of the center, (3) serving as
a liaison with Lehigh and Lehigh physicians, and (4) assisting in the assessment
of outcomes and other clinical data with respect to OncoVax and other Intracel
products. Medical Director and Lehigh acknowledge and agree that, depending upon
certain development decisions and other circumstances, some details of Medical
Director's duties may change over time. This Agreement shall remain in effect
notwithstanding such changes. Intracel agrees to discuss any such changes with
Medical Director and to consider his input in these decisions. No activities or
services performed by Medical Director pursuant to this Agreement shall
constitute the practice of medicine. Any evaluations, diagnoses, treatments,
procedures or other professional health care services furnished to patients by
Medical Director will be provided in his individual capacity as a practicing
physician or employee of Lehigh or other entity, and will not be provided by
Medical Director in his capacity as an independent contractor to Intracel
pursuant to this Agreement.
1.2 BEST EFFORTS
Medical Director shall devote his best efforts to performing the
Services. In doing so, Medical Director shall use his full education, skills,
and professional energy, consistent with his training and experience, to advance
the business interests of Intracel. During the Term of this Agreement, Medical
Director shall not engage in any other activity or occupation for compensation,
or any non-compensated activity, that in Intracel's reasonable opinion is
competitive with or adverse to the interests of Intracel, without the prior
written consent of Intracel. Notwithstanding the foregoing, nothing in this
Section 1.2 or elsewhere in this Agreement shall prevent Medical Director,
during the time not required for the performance of the Services, from
maintaining his individual medical practice or performing his duties as the
Chair of Surgery for Lehigh or an employee of Lehigh Valley Physician Group.
2
<PAGE> 3
1.3 HOURS AND RECORDS
Notwithstanding any other provision of this Agreement, Medical Director
shall not spend less than 15 hours per month or be required to spend more than
25 hours per month, on average, performing the Services. The Parties agree that
these minimum and maximum numbers are annual averages, and that Medical Director
may spend less than 15 hours or more than 25 hours in any particular month
depending on Intracel's needs and Medical Director's availability. Within ten
(10) days following the end of each calendar month during the Term of this
Agreement, Lehigh shall provide Intracel with a record of time Medical Director
spent performing the Services in the previous month. Such accounting shall
include the dates on which Medical Director performed Services, a description of
the Services performed on each date, and the amount of time spent performing
those Services.
1.4 REPORTING TO INTRACEL
Lehigh and/or Medical Director shall notify Intracel in writing within
one working day of the occurrence of any of the following: (a) Medical
Director's being notified that any written complaint or report concerning him
has been filed with the Pennsylvania state medical board or the National
Practitioner Data Bank; (b) Medical Director's being notified that any written
complaint has been filed against him, or any adverse action has been proposed
(whether final or not), at any hospital, other health care facility, health
maintenance organization, preferred provider organization, insurer or health
plan, professional review organization, professional association or governmental
body; (c) Medical Director's receiving a summons and complaint or a subpoena
relating to his professional practice; (d) Medical Director's being charged with
any crime (excluding minor traffic violations); (e) any other event which
reasonably might be anticipated to expose Intracel to a legal claim or adverse
publicity, or interfere with Medical Director's discharging his responsibilities
under this Agreement; or (f) any other disciplinary or professional liability
actions initiated against Medical Director. Medical Director acknowledges and
agrees that Intracel may inform malpractice carriers or other appropriate
parties of any such occurrence.
1.5 COMPLIANCE WITH LAW
Lehigh and Medical Director shall perform the Services faithfully,
diligently, ethically, in a professional manner and in accordance with all
applicable laws, regulations and currently recognized professional standards.
1.6 COMPLIANCE WITH INTRACEL RULES
Lehigh and Medical Director shall comply in all material respects with
the reasonable rules and policies of Intracel and the OncoVax Center, as they
now exist or as they may from time to time be amended, including rules and
policies governing the
3
<PAGE> 4
provision of services, billing, records, and relationships with OncoVax Center
employees.
1.7 COOPERATION IN PROCEEDINGS
During and after the Term (and notwithstanding expiration or termination
of this Agreement for whatever reason), Lehigh and Medical Director shall,
without additional compensation, provide all reasonable assistance requested by
Intracel in order to (a) assert Intracel's rights under any insurance policies;
or (b) assist Intracel in defense of professional liability or other actions.
1.8 PROFESSIONAL LIABILITY INSURANCE
Lehigh covenants that the Medical Director shall at all times during the
Term be covered by professional liability insurance that meets all requirements
of the Pennsylvania Healthcare Malpractice Act, as amended, and that such
coverage will be provided at Lehigh's cost.
1.9 MEDICAL DIRECTOR'S DESIGNEE
The Parties agree that Medical Director may delegate the provision of
Services to a designee, which designee shall be Sarah Stevens, M.D. unless the
Parties mutually agree on another designee. Notwithstanding anything in Section
1.3 to the contrary, Medical Director's designee shall devote a minimum of fifty
percent (50%) of her professional time to the performance of the Services. In
the event of such delegation, Medical Director's designee shall be subject to
all the terms and conditions under this Agreement which are applicable to
Medical Director as if a reference to such designee was expressly set forth in
each provision applicable to Medical Director. Any breach of any term or
condition as applied to any designee shall be a breach thereof in the same
manner as if applied to Medical Director himself.
2. REPRESENTATION AND WARRANTIES OF LEHIGH
2.1 GENERAL REPRESENTATIONS AND WARRANTIES
Lehigh hereby represents and warrants that (a) Medical Director
possesses and throughout the Term shall maintain, a current, valid, and
unencumbered license to practice medicine in the State of Pennsylvania; (b)
Medical Director either (1) is not subject to any actual or threatened
investigation, disciplinary proceeding, ethics action, public or private suit or
claim as to malpractice or professional misconduct, and his performance in his
job functions is not impaired due to a physical or mental condition or substance
abuse, or (2) as to any such matter to which Medical Director is subject, full
information has been disclosed in writing to Intracel; (c) Medical
4
<PAGE> 5
Director either (1) knows of no existing circumstances that would provide a
basis for revoking or suspending his medical license, or subjecting him to suit,
or which would be harmful to Intracel in engaging Medical Director, or (2) has
disclosed the same in writing to Intracel; (d) Medical Director has adequate
malpractice "occurrence" coverage or "tail" coverage under existing insurance
with limits of liability of not less than $1 million per occurrence and $3
million in the aggregate, covering any claims relating to activities in his
private medical practice, and Lehigh shall indemnify and hold harmless Intracel
from and against any claims, costs or expenses arising from such activities; and
(e) execution and performance of this Agreement does not violate any contract,
agreement, regulatory ruling or judicial order to which Lehigh or Medical
Director is subject (including both the Medical Director's employment agreement
and Lehigh's agreement with Lehigh Valley Physician Group), or to the best of
Lehigh's knowledge, violate any law.
2.2 EFFECT OF INACCURATE REPRESENTATIONS OR WARRANTIES
The Parties acknowledge and agree that if any representation or warranty
contained in this Section 2 is untrue or becomes untrue during the Term of this
Agreement, such untrue representation or warranty shall be deemed to be a
material misrepresentation by Medical Director and Intracel shall have the right
to terminate this Agreement pursuant to Section 6.
3. RESPONSIBILITIES OF INTRACEL
3.1 INTRACEL FACILITIES
Throughout the Term of this Agreement, Intracel shall provide clerical
and other administrative support, to the extent Intracel deems reasonable, to
help facilitate Medical Director's performance of the Services.
3.2 BUSINESS AND PROPERTY LIABILITY INSURANCE
Intracel shall maintain general business and property liability
insurance for claims arising from (a) the occupancy of Intracel offices by
Medical Director; and (b) the performance by Medical Director of the Services in
accordance with the terms of this Agreement.
4. REPRESENTATIONS AND WARRANTIES OF INTRACEL
Intracel hereby represents and warrants that (a) it is a corporation
duly organized and validly existing; (b) this Agreement has been duly executed
on behalf of Intracel; (c) this Agreement is a legal, valid and binding
obligation of Intracel; and (d) execution and performance of this Agreement does
not violate any contract,
5
<PAGE> 6
agreement, regulatory ruling, or judicial order to which Intracel is subject, or
to the best of Intracel's knowledge, violate any law.
5. PAYMENT FOR SERVICES
5.1 SERVICE FEE
In return for the Services, Intracel shall pay to Lehigh a monthly
service fee ("SERVICE FEE") payable in arrears at the end of each month during
the Term. The Service Fee shall be $6,250 per month. The Parties agree (i) that
the Service Fee reflects the fair market value for the Services, and (ii) that
Intracel shall annually adjust the Service Fee to reflect the fair market value
of the Services.
5.2 EXPENSES
Subject to reasonable Intracel policies, including advance approval by
Intracel, and up to the reasonable dollar limits specified from time to time by
Intracel, Lehigh shall be entitled to reimbursement by Intracel for reasonable
expenses (including but not limited to reasonable travel expenses) incurred by
Medical Director during the Term of this Agreement in performance of the
Services and upon the presentation of appropriate documentation. It is intended
that all expenses incurred pursuant to this Section 5.2 are to be ordinary and
necessary business expenses. It is therefore agreed that if any expense paid
for, or reimbursed to, Lehigh is disallowed by the Internal Revenue Service as a
federal income tax deduction of Intracel, (1) Intracel shall not be obliged to
contest such ruling, and (2) Lehigh shall reimburse Intracel for such disallowed
expense within sixty (60) days after the final determination of such
disallowance.
6. TERM AND TERMINATION
6.1 TERM
The term of this Agreement (the "TERM") shall commence on the Initial
Closing Date, as that term is defined in the Joint Venture Agreement (the
"EFFECTIVE DATE") and shall end, unless earlier terminated in accordance with
this Section 6, on the Final Closing Date, as that term is defined in the Joint
Venture Agreement.
6.2 TERMINATION BY INTRACEL
Intracel may terminate this Agreement for Cause at any time during the
Term of this Agreement by giving Lehigh written notice at least thirty (30) days
in advance (the "NOTICE PERIOD") of the effective date of such termination (the
"TERMINATION
6
<PAGE> 7
DATE"). Intracel may (without alteration of payment obligations under this
Agreement during the Notice Period) require that Medical Director cease his
performance of the Services at any time during the Notice Period. The following
shall be Cause for termination pursuant to this Section 6.2 (i) Lehigh itself,
or through Medical Director, breaches or fails to perform a material obligation
under this Agreement and that breach or failure is not cured to the reasonable
satisfaction of Intracel within the Notice Period; (ii) any act or omission
constituting fraud or material misrepresentation by Lehigh or Medical Director
in dealing with Intracel or the OncoVax Center; (iii) Medical Director's license
to practice medicine is suspended, limited or revoked, irrespective of other
proceedings, or Medical Director's DEA license to prescribe controlled
substances is revoked, limited or suspended; (iv) Medical Director is suspended
or barred from participation in Medicare; (v) Herbert C. Hoover, Jr. is no
longer the Medical Director performing the Services on behalf of Lehigh, or he
becomes disabled to the extent that he is unable to perform the Services; (vi)
Medical Director becomes ineligible for professional liability coverage on
commercially reasonable terms; (vii) Lehigh is adjudged insolvent or bankrupt or
makes a general assignment for the benefit of creditors; or (viii) Medical
Director is convicted of a crime bearing on the practice of medicine, any crime
involving moral turpitude or fraud, or Medical Director is convicted of any
felony.
6.3 TERMINATION BY LEHIGH
Lehigh may terminate this Agreement for Cause at any time during the
Term of the Agreement by giving Intracel written notice at least thirty (30)
days in advance (the "NOTICE PERIOD") of the effective date of such termination
(the "TERMINATION DATE"). The following shall be Cause for termination pursuant
to this Section 6.3 (i) Intracel becomes insolvent or bankrupt or makes a
general assignment for the benefit of creditors; (ii) Intracel breaches or fails
to perform any material obligation under this Agreement, and such breach or
failure is not cured to the reasonable satisfaction of Lehigh within the Notice
Period; or (iii) Intracel commits fraud or material misrepresentation in its
dealings with Lehigh or Medical Director.
6.4 TERMINATION BY EVENT
Unless the Parties agree in writing to continue this Agreement, this
Agreement shall automatically terminate upon the occurrence, at any time, of any
of the following events: (i) the termination for any reason of the Joint Venture
Agreement, or (ii) in accordance with and only in accordance with the provisions
of Section 8.5, in the event this Agreement is deemed in the reasonable opinion
of either Party to violate law and be incapable of amendment.
7
<PAGE> 8
6.5 COOPERATION
In the event of the expiration or termination of this Agreement for any
reason, Lehigh and Medical Director shall, without further compensation, if so
requested by Intracel, thereafter, promptly (a) respond to requests for
information as reasonably may be necessary to ensure appropriate transfer of
their responsibilities; and (b) advise Intracel if either receives a complaint,
summons, subpoena, or similar court order for records or testimony relating to
performance of the Services.
7. CONFIDENTIALITY
7.1 CONFIDENTIALITY
During the course of Lehigh's performance of the Services, Lehigh and/or
Medical Director may come to know certain confidential and proprietary business
or medical information of or about Intracel, the OncoVax Center, and/or Intracel
affiliates and joint venture partners (collectively, "ENTITIES"), including but
not limited to information concerning (a) business, affairs or operations of the
Entities or their customers, (b) Entity trade secrets, new product developments,
special or unique processes, protocols, or methods, (c) Entity marketing, sales,
advertising or other concepts or plans, (d) Entity fees and billing
arrangements, (e) Entity finances, (f) Entity management systems, or (g) Entity
business plans or prospects ("CONFIDENTIAL INFORMATION"). The term "Confidential
Information" shall exclude any information that is a matter of public knowledge
(except if such public knowledge resulted from an improper act of Medical
Director or Lehigh). Lehigh agrees that both during the Term of this Agreement
and after the expiration or termination of this Agreement for whatever reason,
Lehigh shall hold all such Confidential Information in the strictest confidence,
and shall not disclose, use, display, transfer, sell, publish, or otherwise make
available to any other person or entity, any such Confidential Information
without the prior written consent of Intracel, except as may be specifically
required by law. Lehigh shall protect such Confidential Information in a manner
consistent with the usual manner in which the most confidential business and
professional information is protected. Lehigh shall ensure that Medical Director
complies with the provisions of this Section 7.1.
7.2 ENFORCEMENT OF CONFIDENTIALITY REQUIREMENTS
Lehigh agrees that the restrictions contained in Section 7.1 are
part of the consideration for inducing Intracel to contract with Lehigh to
provide the Services for the fees provided for in this Agreement; that such
restrictions are reasonable and necessary to protect the business interests of
Intracel and the OncoVax Center; and that any violation of such restrictions
will cause substantial and irreparable injury to the Intracel and/or the OncoVax
Center. These restrictions shall be effective and enforceable upon the execution
of this Agreement by Lehigh, irrespective of the
8
<PAGE> 9
length of its Term. The Parties agree that Intracel and the OncoVax Center each
are entitled, in addition to any and all other remedies available at law or in
equity, to a restraining order, preliminary and permanent injunctive relief and
specific performance to prevent a breach or contemplated breach of these
restrictions, without the necessity of proving actual damages. In the event of a
breach of these provisions, Lehigh shall be obligated to pay all costs and
expenses, including reasonable attorneys' fees, incurred by Intracel or the
OncoVax Center due to such breach or threatened breach.
7.3 NO ACQUIRED INTERESTS
Lehigh and Medical Director agree that upon termination or
expiration of this Agreement, all proprietary interest of Intracel or the
OncoVax Center in OncoVax or its other products, in customer accounts, lists,
copyrighted items, trade secrets, proprietary information, including all
intellectual property rights in any materials, documents, protocols, systems,
reports, or inventions, and all business assets, tangible or intangible
(collectively "PROPRIETARY INTERESTS"), with which Lehigh or Medical Director
deals or has access to, or that are developed or improved in whole or in part by
Lehigh or Medical Director in performing the Services during the Term of this
Agreement, shall remain the sole and exclusive property of Intracel and/or the
OncoVax Center, and in no event shall Lehigh or Medical Director, by virtue of
performing the Services, acquire any personal interest in the Proprietary
Interests or any right to use the Proprietary Interests except as specifically
set forth in a license agreement or other agreement executed by the Parties.
Lehigh and Medical Director each hereby assign to Intracel all of Lehigh's or
Medical Director's right, title and interest, including all intellectual
property rights, if any, in any Proprietary Interests developed in whole or in
part by Lehigh or by Medical Director in performance of the Services, which
Proprietary Interests all shall be considered works made for hire. Lehigh and
Medical Director agree that upon termination or expiration of this Agreement
each shall promptly return to Intracel all business, corporate, medical or
financial records, documents, forms, contracts, lists and completed work or work
in progress relating to the affairs of Intracel or the OncoVax Center and any
personal property of Intracel or the OncoVax Center in their possession at the
time of termination or expiration.
8. GENERAL PROVISIONS
8.1 NOTICES
All notices and other communications under this Agreement shall
be in writing and shall be deemed given when delivered personally, sent by
federal express or other recognized overnight delivery service or mailed by
registered or certified mail, return receipt requested, to the Parties as
follows or to such other addressee as a party may in writing designate.
9
<PAGE> 10
If to Lehigh:
Lehigh Valley Hospital and Health Network
Cedar Crest & I-78
P.O. Box 689
Allentown, Pennsylvania 18105-1556
Attn: Louis L. Leibhaber
Facsimile: (610) 402-7253
with a copy to:
Tallman, Hudders & Sorrentino
The Paragon Centre
1611 Pond Road, Suite 300
Allentown, Pennsylvania 18104-2256
Attn: Matthew R. Sorrentino, Esq.
Facsimile: (610) 391-1800
If to Intracel or OncoVax Center:
Intracel Corporation
1330 Piccard Drive
Rockville, Maryland 20850
Attn: Daniel S. Reale
Facsimile: (301) 296-0082
with a copy to:
Donna Boswell, Esq.
Hogan & Hartson, L.L.P.
555 13th Street, N.W.
Washington, D.C. 20004
Facsimile: (202) 637-5910
Each notice, demand, request or communication that shall be given or
made in the manner described in this Section 8.1 shall be deemed sufficiently
given or made for all purposes at such time as it is delivered to the addressee
(with the return receipt, the delivery receipt, or the affidavit of messenger
being deemed conclusive but not exclusive evidence of such delivery) or at such
time as delivery is refused by the addressee upon presentation. This Section 8.1
shall survive termination of this Agreement.
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<PAGE> 11
8.2 ENTIRE AGREEMENT; AMENDMENTS
This Agreement sets forth the entire understanding and agreement between
the parties with respect to the subject matter of this Agreement, and supersedes
all prior undertakings of any kind, whether written or oral. No terms,
conditions, or warranties, other than those contained in this Agreement, and no
amendments or modifications to this Agreement, shall be valid unless made in
writing and signed by the Parties.
8.3 EFFECT AND BENEFIT OF AGREEMENT
This Agreement shall be binding upon and inure to the benefit of the
Parties and their respective successors and permitted assigns. 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 and their permitted
assigns, respective heirs, successors or legal representatives. Nothing in this
Agreement is intended to or shall be construed to, confer upon any person or
entity not a Party to this Agreement, any rights or benefits under this
Agreement.
8.4 ASSIGNMENT
This Agreement and its performance shall not be assigned, sublet,
delegated or transferred by either Party in whole or in part without the prior
written consent of the other party, except that Intracel shall have the right to
assign or delegate its rights and responsibilities under this Agreement, in
whole or in part, without Lehigh's consent, to the OncoVax Center (or a
successor entity) or to any affiliate or subsidiary of, or successor entity to,
Intracel.
8.5 INVALID PROVISIONS
If any provision of this Agreement or other document contemplated in
this Agreement is held to be illegal, invalid, or unenforceable under present or
future laws, such provisions shall be fully severable: (a) the appropriate
documents shall be construed and enforced as if such illegal, invalid, or
unenforceable provision had never comprised a part of the Agreement; (b) the
remaining provisions shall remain in full force and effect and shall not be
affected by the illegal, invalid or unenforceable provision; and (c) the Parties
shall in good faith negotiate and substitute a provision as similar in terms to
such illegal, invalid, or unenforceable provision as may be possible and still
be legal, valid and enforceable, unless the effect of such severance and
substitution would be to deprive a Party substantially of the benefits
contemplated under this Agreement, in which case either Party may terminate this
Agreement upon thirty days written notice to the other Party.
11
<PAGE> 12
8.6 INDEPENDENT CONTRACTORS
The Parties acknowledge and agree that, with respect to this Agreement
and the arrangements set forth in this Agreement, they are independent
contractors and that except as provided in this Agreement, neither Party has the
right to obligate or bind the other Party in any manner whatsoever. Nothing in
this Agreement shall be interpreted, or is intended, to constitute either Party
as the employee or employer, joint venturer, or partner of the other Party. The
Parties understand and agree that (a) Intracel will not withhold on behalf of
Medical Director any sum for income tax, unemployment insurance, social security
or any other withholding applicable to employees, and Intracel will not provide
Medical Director with any of the benefits provided to employees of Intracel or
its affiliates; (b) as between Intracel and Lehigh, all such payments,
withholdings and benefits, if any, shall be the sole responsibility of Lehigh;
and (c) Lehigh will indemnify and hold Intracel harmless from any and all loss
or liability, cost or expense arising with respect to any such payments,
withholds, and benefits.
8.7 ACCESS TO BOOKS AND RECORDS
Until the expiration of six (6) years after expiration or termination of
this Agreement, Intracel and Medical Director each shall make available to the
Secretary, U.S. Department of Health and Human Services, the U.S. Comptroller
General and their representatives, this Agreement and all books, documents and
records necessary to certify the nature and extent of the costs of the services
furnished hereunder and will provide such additional documentation as they
reasonably require. If Medical Director carries out any of the duties of this
Agreement through a subcontract worth ten thousand dollars ($10,000) or more
over a twelve month period with a related organization, the subcontract will
also contain a clause to permit access by the Secretary, Comptroller General,
and their representatives to the related organization's books and records. This
Section 8.7 shall survive termination of this Agreement.
8.8 REMEDIES
Any remedies the Parties may have pursuant to this Agreement or by law
shall be cumulative.
8.9 NO WAIVER
The waiver by either Party of any breach of any provision of this
Agreement shall not be construed as a waiver of any subsequent breach of the
same or another provision. The failure to exercise any right under this
Agreement shall not operate as a waiver of such right. Any waiver must be in
writing and signed by the Party to be charged.
12
<PAGE> 13
8.10 GOVERNING LAW
This Agreement, to the extent any particular issue is controlled by
state law, shall be governed by and construed in accordance with the laws of the
State of Maryland (but not including choice of law rules thereof).
8.11 COUNTERPARTS
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but which together shall constitute one and
the same Agreement.
13
<PAGE> 14
IN WITNESS WHEREOF, each of the Parties intending to be legally
bound has caused this Agreement to be duly executed and delivered in its name
and on its behalf as of the date first set forth above.
INTRACEL CORPORATION
By:
--------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
LEHIGH VALLEY HOSPITAL AND HEALTH NETWORK
By:
--------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
ACKNOWLEDGED AND AGREED:
HERBERT C. HOOVER, JR., M.D.
By:
--------------------------------------
ACKNOWLEDGED AND AGREED:
SARAH STEVENS, M.D.
By:
--------------------------------------
14
<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 April 24, 1998, except for the
second paragraph of Note 12 as to which the date is May 14, 1998 and the first
paragraph of Note 9 and Notes 14 and 15 as to which the date is December 28,
1998, on our audit of the 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
December 31, 1998
<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
December 31, 1998
<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 12 of Note 10, as to which the
date is January 2, 1998 and Note 15, as to which the date is December 10, 1998,
included in Amendment No. 1 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
December 30, 1998
- --------------------------------------------------------------------------------
The foregoing consent is in the form that will be signed upon the completion of
the reverse stock split described in paragraph 17 of Note 14 to the financial
statements.
ERNST & YOUNG LLP
Seattle, Washington
December 30, 1998
<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 PEAT MARWICK LLP
Baltimore, Maryland
December 30, 1998
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
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21,159,361
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