UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
Commission file number 333-09349
AVAX TECHNOLOGIES, INC.
(Name of small business issuer in its charter)
Delaware 13-3575874
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
4520 Main Street
Suite 930
Kansas City, MO 64111
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (816) 960-1333
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $.004 per share
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained herein and, to the best of the
registrant's knowledge, will not be contained in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or by any
amendment to this Form 10-KSB. |_|
The issuer's revenues for the period ended December 31, 1998 were $ -0-.
As of March 3, 1999, 10,238,640 shares of the registrant's common stock, par
value $.004 per share, were outstanding. The aggregate market value of the
voting and non-voting common equity held by non-affiliates computed by reference
to the average bid and asked price of such common equity on the Nasdaq SmallCap
Market, on March 3, 1999, was $28,746,668. Shares of common stock, beneficially
owned by each executive officer and director and each person who beneficially
owns 10% or more of the outstanding shares of common stock, have been excluded,
in that such persons may be deemed to be affiliates of the Company. This
determination of affiliate status is not necessarily conclusive.
Documents incorporated by reference: The information required by Part III of
Form 10-KSB is incorporated herein by reference to the registrant's definitive
Proxy Statement relating to its 1999 Annual Meeting of Stockholders which will
be filed with the Commission within 120 days of the end of the registrant's
fiscal year.
Transitional Small Business Disclosure Format: Yes |_| No |X|
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AVAX Technologies, Inc.
Index to Form 10-KSB
PART I Page
----
Item 1. Description of Business..............................................1
Item 2. Description of Property.............................................21
Item 3. Legal Proceedings...................................................22
Item 4. Submission of Matters to a Vote of Security Holders.................22
PART II
Item 5. Market for Common Equity and Related Stockholder Matters............23
Item 6. Management's Discussion and Analysis
of Financial Condition and Plan of Operation........................23
Item 7. Financial Statements................................................25
Item 8. Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure..............................25
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act...................26
Item 10. Executive Compensation..............................................26
Item 11. Security Ownership of Certain Beneficial Owners and Management......26
Item 12. Certain Relationships and Related Transactions......................26
Item 13. Exhibits and Reports on Form 8-K....................................26
Signatures....................................................................27
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Unless the context otherwise requires, all references to the Company's common
stock, par value $.004 per share (the "Common Stock"), are to the Company's
Common Stock after giving effect to the 1-for-2 reverse split of the Common
Stock effected on May 15, 1996 and the 1-for-2 reverse split of the Common Stock
effected on May 13, 1997.
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995. Certain written and oral statements
made or incorporated by reference by the Company or its representatives in this
Report and other reports and filings with the Securities and Exchange Commission
(the "Commission"), press releases, conferences or otherwise, are "forward
looking statements", within the meaning of the Private Securities Litigation
Reform Act of 1995 ("PSLRA") and Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Forward-looking statements
include, without limitation, any statement that may predict, forecast, indicate,
or imply future results, performance or achievements, and may contain the words
"estimate", "project", "intend", "forecast", "anticipate", "plan", "planning",
"expect", "believe", "will", "will likely", "should", "could", "would", "may" or
words or expressions of similar meaning. In addition, except for historical
matters, certain other statements set forth in this Report and elsewhere by the
Company from time to time, including, without limitation, the Company's research
and development programs, the possible filing of INDs or marketing applications
for M-Vax(TM), O-Vax(TM),, or any other products the Company may develop, the
seeking of joint development or licensing arrangements with pharmaceutical
companies, the research and development of particular compounds and technologies
for particular indications and the period of time for which the Company's
existing resources will enable the Company to fund its operations and to meet
the continuing listing requirements for the quotation of its securities on the
Nasdaq SmallCap Market and the possibility of contracting with other parties
additional licenses to develop, manufacture and market commercially viable
products, are forward-looking statements within the meaning of the PSLRA. Such
forward-looking statements are based upon the Company's current belief as to the
outcome, occurrence and timing of future events or current expectations and
plans based upon, among other things, assumptions made by, and information
currently available to management, including management's own knowledge and
assessment of the Company's industry, competition and current regulatory
environment. All such statements involve significant risks and uncertainties.
Many important factors affect the Company's ability to achieve the stated
outcomes and to develop successfully and commercialize its product candidates,
including (1) the ability to obtain substantial additional funds as needed to
fund anticipated continuing operating losses, (2) to obtain and maintain all
necessary patents or licenses, (3) to demonstrate the safety and efficacy of
product candidates at each stage of development, (4) to meet applicable
regulatory standards and receive required regulatory approvals, (5) to meet
obligations and required milestones under its license agreements, (6) to be
capable of producing drug candidates in commercial quantities at reasonable
costs, (7) to compete successfully against other products and (8) to market
products in a profitable manner. Although the Company believes that its
assumptions underlying the forward-looking statements are reasonable, any of the
assumptions could prove inaccurate and, therefore, there also can be no
assurance that the statements included in this Report and elsewhere will prove
to be accurate. In addition, such risks and uncertainties included herein and
elsewhere are not exhaustive. Other sections of this Report and the Company's
other filings with the Commission from time to time, may include additional
factors which could adversely affect the Company's business and other financial
performance. Moreover, the Company operates in a very competitive and rapidly
changing environment. New risk factors emerge from time to time and it is not
possible for management to predict all such risk factors, nor can it assess the
impact of all such factors on the Company's business or the extent to which any
factor, or combination of factors, may cause actual results to differ materially
from those contained in any forward-looking statements. Accordingly, in light of
the significant uncertainties inherent in these statements included herein, the
inclusion of such information should not be regarded as a representation by the
Company or any other person that the objectives and plans of the Company will be
achieved; in fact, actual results could differ materially from those
contemplated by such forward-looking statements. Given these risks,
uncertainties and limitations, investors should not rely upon forward-looking
statements as a predictor of actual results. The Company does not undertake any
obligation to release publicly any revisions to these forward-looking statements
or to reflect the occurrence of unanticipated events.
AVAX(TM), AC Vaccine(TM), M-Vax(TM) and O-Vax(TM)are trademarks of the Company.
This Report also includes trademarks of other companies.
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AVAX TECHNOLOGIES, INC.
PART I
ITEM 1. Description of Business
GENERAL
AVAX Technologies, Inc. ("AVAX" or the "Company"), is a development stage
biopharmaceutical company which is acquiring and developing technologies and
products for the treatment of cancer and other life-threatening diseases. The
Company is focusing its efforts primarily on the development of immunotherapies
and chemotherapies for cancer. Immunotherapy is a rapidly developing segment of
the cancer therapeutic market.
In 1995, the Company licensed (the "TJU License") from Thomas Jefferson
University ("TJU") an issued U.S. patent and certain U.S. and foreign patent
applications covering a cancer vaccine containing a cancer patient's own
modified tumor cells, and a method for making and using that vaccine. This
technology allows the Company to produce an autologous cell vaccine (an " AC
Vaccine(TM)") that attempts to stimulate the patient's immune system to
eliminate the cancer. This technology has emerged from research conducted at TJU
and primarily involves the removal of a patient's own tumor cells, modifying
them with a small molecule known as a hapten, and reintroducing the product back
into the patient. The approach is based on the premise that a patient's immune
response to a strongly immunogenic, hapten-conjugated tumor antigen may be
followed by the development of an immune response to the unmodified tumor
antigen, somewhat analogous to the phenomenon of drug-induced autoimmune
disease. David Berd, M.D., Professor of Medicine and Clinical Oncologist at TJU
and the inventor of the AC Vaccine(TM) technology, has conducted the ongoing
clinical trials at TJU pursuant to an FDA-approved, physician-sponsored
Investigational New Drug application ("IND").
The Company's initial AC Vaccine(TM), M-Vax(TM), is currently undergoing
physician-sponsored human clinical trials based on an experimental protocol at
TJU as an outpatient, post-surgical, adjunct therapy for the treatment of
melanoma, and is believed by the Company to be the first therapeutic cancer
vaccine to show a substantial increase in the survival rate for patients with
stage 3 melanoma. In the ongoing clinical trials at TJU, over 350 melanoma
patients have been treated post-surgically on an outpatient basis with
M-Vax(TM). In 62 patients with stage 3 melanoma in protocols in which there has
been sufficient time for long-term follow-up, the five-year survival rate is
approximately 55%. This compares with the historical and control group stage 3
survival rate of approximately 20%, and the survival rate for treatment with
high dose alpha interferon of approximately 32% in stage 3 patients who the
Company believes to be comparable to those treated with M-Vax(TM). In patients
over 50 years old treated with M-Vax(TM), the five-year survival rate was
approximately 71%. In a separate study of 16 patients with Stage 4 malignant
melanoma lung tumors, there was documented evidence of tumor shrinkage caused
solely by the vaccine. In the over 350 patients treated in studies only
relatively minor side effects, such as mild transient nausea and soreness and
swelling at the site of the application of M-Vax(TM), have been reported to
date. See "Technology Applications and Product Candidates - Clinical Trials".
In 1998, the Company obtained from the FDA a Company-sponsored IND to allow the
Company to proceed with a multi-center clinical trial intended to support a
biologics license application. Depending upon the results of these clinical
trials, the Company intends to use the Company-sponsored clinical trial results,
along with the results of the TJU clinical trials, as the basis for filing an
application for FDA approval to market M-Vax(TM). The Company is also pursuing
strategies for commercial acceptance (including any applicable regulatory
approvals) of M-Vax and other AC Vaccine product candidates in various foreign
countries, although such strategies have not yet been finalized.
Denial of any regulatory approvals or any significant delays in obtaining any
regulatory approvals would have a material adverse effect on the Company.
The Company also believes that the AC Vaccine(TM) technology may have
applications in the treatment of other cancers, which may include ovarian,
breast, prostate, lung, renal cell and colorectal cancers and acute myelogenous
leukemia (AML). The Company is funding the pre-clinical and initial clinical
development of this technology for certain of these indications. Accordingly, in
addition to continuing the clinical work on M-Vax(TM), the Company has also
entered into a sponsored research agreement with TJU relating to the development
of additional immunotherapies based on the AC Vaccine(TM)
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technology. For example, the Company is treating post-surgical stage 3 patients
in its Phase I/II clinical trial of O-Vax(TM), its AC Vaccine(TM) for ovarian
cancer. This trial is being conducted at TJU under the direction of Dr. David
Berd and has shown a positive immune response to haptenized tumor cells in the
first nine of nine patients treated, and has also shown a positive immune
response to unhaptenized tumor cells in the first eight of nine patients
treated, both as measured by a delayed type hypersensitivity (DTH) test.
Recently, the Company has received agreement from National Cancer Institute
("NCI") for NCI to sponsor a Phase I/II trial in ovarian cancer, which trial the
Company intends to begin later this year.
In connection with the Company's strategy to acquire, develop and commercialize
other potential biotechnology products and technologies, the Company has
licensed from Rutgers University and the University of Medicine and Dentistry of
New Jersey (collectively, "Rutgers"), certain patent applications relating to a
series of topoisomerase inhibitor compounds for the potential treatment of
cancer and infectious diseases (the "Rutgers License"). The Company also has
licensed from The Texas A&M University System ("Texas A&M"), an issued U.S.
patent and certain patent applications relating to a series of novel
anti-estrogen compounds for the potential treatment of cancer (the "Texas A&M
License"). Pursuant to the Rutgers License and the Texas A&M License (and under
its related sponsored research agreements with each of Rutgers and Texas A&M),
the Company intends to continue to expend significant resources on the research
and development of these compounds.
In order to contain costs, the Company may continue to use sponsored research
agreements and contract research organizations to help it develop its
technologies. At the appropriate time the Company may seek corporate partners to
provide the necessary resources and expertise for clinical development and to
manufacture, market or distribute products. In addition, the Company may seek to
explore the acquisition and subsequent development and commercialization of
additional commercially promising immunotherapy, chemotherapy and adjuvant
technologies. No assurance can be given that the Company will have the requisite
resources or that any such projects will be identified on terms favorable to the
Company, if at all.
The Company was incorporated in the State of New York on January 12, 1990, under
the name Nehoc, Inc. On May 29, 1992, it changed its name to Appex Technologies,
Inc. On October 22, 1992, the Company merged into Walden Laboratories, Inc., a
Delaware corporation, which was incorporated on September 18, 1992. On December
27, 1995, Walden Laboratories, Inc. sold its former leading product under
development, an over-the-counter nutritional dietary, medicinal and/or
elixorative food supplement or drug and related patents and intellectual
property to a subsidiary of Interneuron Pharmaceuticals, Inc. The Company
changed its name from Walden Laboratories, Inc., to AVAX Technologies, Inc.,
effective March 26, 1996.
BACKGROUND AND SCIENTIFIC RATIONALE OF THE AC VACCINE(TM) TECHNOLOGY
Cancer is characterized by the uncontrolled growth and spread of abnormal cells
which escape the body's protective immune surveillance system, invade healthy
tissues and destroy normal tissue function and ultimately lead to a person's
death if untreated. Cancers, composed of either solid tumors or blood-borne
cancerous cells, tend to spread over time to other tissues and organs in the
body (metastasis). Cancer may be diagnosed at any stage of the disease, from
very early (best prognosis) to very late (worst prognosis). When cancer is
detected early and has not yet metastasized (spread) to other organs and
tissues, surgical removal of the tumor is often effective. Unfortunately, many
cancers are not discovered until metastatic cancer cells from the primary tumor
have already entered the blood or lymphatic system and established new tumors at
distant sites. These cells, and the tumors they form, are difficult to diagnose
and treat with current technology.
As of 1997, the NCI estimates that approximately 7.4 million people living in
the United States were diagnosed as having cancer. The incidence of cancer
continues to increase. The NCI also estimates that the overall annual cost to
the health care system of treating these patients is approximately $104 billion.
The Company is aware of estimates that deaths from cancer will surpass
cardiovascular mortality worldwide by the end of this year.
Although some progress has been made, few effective treatments are available for
most adult solid tumors, which often metastasize and invade other organs before
they are detected. The standard treatment for solid tumors is surgery. While
this treatment is effective in many types of cancers, in cases in which removal
of the tumor is incomplete or in which the tumor has metastasized, the patient's
prognosis is poor. Chemotherapy and radiation therapy are rather crude
treatments because they kill cells indiscriminately, destroying normal as well
as malignant cells, leading to toxic side-effects and thereby
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limiting the usefulness of these therapies. A safe, effective treatment for
residual and metastatic disease is clearly needed. Such a treatment, if
effective and safe, would increase patient survival and may, therefore, be
widely adopted.
Although, many different types of drugs are used to treat a variety of cancers,
no one drug has been found to be a cure for the disease. Given the need for new
effective treatments for cancer, a drug which may effectively treat cancer could
have a large market potential. Although there can be no assurance, the Company
believes that an AC Vaccine(TM), developed to treat effectively the recurrence
of cancer after surgery, is likely to have a sizable market share. Surgery, in
many cases is the first treatment performed on cancer patients, and if a
treatment following surgery were to prove broadly applicable and safe, its
market potential could be significant, while enabling the health care system to
realize significant overall cost savings due to a reduction in the number of
cases of recurrent disease requiring hospitalization and ongoing clinical and
home care.
Immunotherapy is an emerging cancer treatment modality that the Company believes
shows promise for utilizing a patient's own immune system to recognize and
eliminate cancer cells. There are a number of different types of immunotherapies
such as cytokines, antibodies, activated cell therapy and vaccines currently
under development by unrelated companies. See "Competition." In all cases,
immunotherapies attempt to modulate the body's immune system to contain and
eliminate cancer cells. In concept, immunotherapies should have fewer
side-effects than chemotherapies and should be relatively well-tolerated by the
patient. Thus, although there can be no assurance of success, the Company
believes immunotherapies have the potential to be effective and, by reason of
their selectivity, relatively safe anti-cancer therapeutic agents.
TECHNOLOGY APPLICATIONS AND PRODUCT CANDIDATES
The AC Vaccine(TM) Technology
The Company's primary proprietary technology is a patented autologous cell
vaccine that attempts to stimulate the patient's own immune system to recognize,
contain and eliminate cancer cells. The technology primarily involves the
removal of a patient's own tumor cells, conjugating them to a small molecule
known as a hapten-dinitro phenyl (DNP) and reintroducing the product back into
the patient with an adjuvant, which is an immunological agent that increases the
immune response. Haptenization is the process of modifying a larger molecule
with a smaller molecule. The small molecule known as a hapten, is recognized by
the immune system and elicits an immune response against the larger molecule.
The approach is based on the premise that a patient's immune response to a
strongly immunogenic, hapten-modified tumor antigen may be followed by the
development of an immune response to the unmodified tumor antigen, somewhat
analogous to the phenomenon of drug-induced autoimmune disease. Therefore, the
process of haptenizing a patient's tumor cells may allow the unhaptenized cancer
cells to be recognized by the body's immune system leading to an immune response
against the patient's tumor cells and their potential elimination from the body.
In practice, the Company's initial therapy would be used as an adjunct to
surgical treatment of tumors. In one proposed model, the surgeon would remove
the patient's tumor and send the cells to the Company where cancer cells would
be processed and stored. The vaccine would then be created and sent to the
patient's doctor as each dose is required for administration of the vaccine on
an outpatient basis. The patient's response to the treatment would then be
monitored using standard protocols.
The Company is initially developing this technology for the treatment of
metastatic melanoma but believes that it possibly could have applications in the
treatment of a variety of solid tumors such as ovarian, breast, prostate, lung
and colorectal cancer and may have applications in the treatment of acute
myelogenous leukemia (AML).
M-Vax(TM)
General. The Company's leading product, M-Vax(TM), is a post-surgical treatment
for stage 3 melanoma. Melanoma is a highly malignant tumor that can spread so
rapidly that it can be fatal within months of diagnosis. The incidence of
melanoma is increasing at a faster rate than most other cancers in the United
States, Australia, northern Europe and Canada. Although there are several
causative factors, rising exposure by the general population to UV radiation in
sunlight appears to be the most significant factor behind this increase. With
the incidence growing at a rate in excess of 6% annually, it is estimated that
there are approximately 200,000 existing cases of melanoma in the United States,
with approximately 40,300 new cases diagnosed in 1997.
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Melanoma patients may be categorized according to the following staging system:
o Stage 1 -- lesion less than 1.5mm thickness and no apparent
metastasis;
o Stage 2 -- lesion greater than 1.5mm thickness and local spreading
from primary cancer site;
o Stage 3 -- metastasis to regional draining lymph nodes and regional
spread from primary cancer site; and
o Stage 4 -- distant metastasis.
Current treatment for Stage 3 melanoma patients includes surgical excision of
the tumor mass and any of the nearby lymph nodes into which there has been
metastasis, followed by a year long regimen of alpha interferon administration,
which is currently the only FDA-approved treatment for patients with stage 3
melanoma. I In many cases however, survival is restricted by the inability of
surgery to guarantee removal of all the tumor cells. It is highly possible for
the post-surgery patient to remain with undetected metastasis. Further, use of
alpha interferon is associated with many severe side effects, often leading to
either reduction in dosage or complete discontinuation before the full course of
treatment is completed. Due to its limited efficacy and highly toxic side
effects, chemotherapy and radiation have not been widely used in the treatment
of these patients. The five-year survival rate for these patients is believed by
the Company to be approximately 20%. In clinical studies, alpha interferon
demonstrated a five-year survival rate that the Company believes to be
approximately 32% in stage 3 patients whom the Company believes to be comparable
to those treated with M-Vax(TM). Thus, the Company believes that there is a
clear need for an effective post-surgical treatment of stage 3 melanoma
patients.
Clinical Trials. Dr. David Berd, the inventor of the patented technology
licensed to the Company by TJU, is a clinical oncologist at TJU. Dr. Berd has
been conducting physician-sponsored clinical trials at TJU for the treatment of
melanoma using M-Vax(TM) for approximately ten years.
In the ongoing clinical trials at TJU, over 350 melanoma patients have been
treated post-surgically on an outpatient basis with M-Vax(TM). In 62 patients
with stage 3 melanoma in protocols in which there has been sufficient time for
long-term follow-up, the five-year survival rate is approximately 55%. This
compares with the historical and control group survival rates of about 20%, and
the survival rate for treatment with alpha interferon of approximately 32% in
stage 3 patients whom the Company believes to be comparable to those treated
with M-Vax(TM). In patients over 50 years old treated with M-Vax(TM), the
five-year survival rate was approximately 71%. The Company believes that the
results to date of the ongoing clinical trial represent the first substantial
increase in survival for stage 3 melanoma patients treated by immunotherapy. In
the over 350 patients treated in studies, only relatively minor side effects,
such as soreness and mild transient nausea and swelling at the site of the
application of the M-Vax(TM) vaccine, have been reported to date.
In 1998, the Company obtained from the FDA a Company-sponsored IND to allow the
Company to proceed with a multi-center clinical trial intended to support a
biologics license application. Depending upon the results of these clinical
trials, the Company intends to use the Company-sponsored clinical trial results,
along with the results of the TJU clinical trials, as the basis for filing an
application for FDA approval to market M-Vax(TM). The Company is also pursuing
strategies for commercial acceptance (including any applicable regulatory
approvals) of M-Vax and other AC Vaccine product candidates in various foreign
countries, although such strategies have not yet been finalized. The Company's
management estimates that it may be in the position to submit an application in
2001 or 2002. The targeted timetable for filing a marketing application depends
upon the rate of enrollment of both clinical sites and patients in the
registration studies, the adequacy of the overall clinical outcome data from
these trials, and ultimately acceptance by the FDA of the studies. A delay in
enrollment of either clinical sites or patients would delay completion of the
trials. Moreover, equivocal clinical outcomes from these trials would have the
effect of at least delaying the timetable for submission of a marketing
application and would negatively affect regulatory acceptance of the studies in
connection with the possible approval of such marketing application.
Denial of any regulatory approvals or any significant delays in obtaining any of
the regulatory approvals, would have a material adverse effect on the Company.
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The Company is treating post-surgical stage 3 patients in its Phase I/II
clinical trial of O-Vax(TM),, its AC Vaccine(TM) for ovarian cancer. This trial
is being conducted at TJU under the direction of Dr. David Berd and has shown a
positive immune response to haptenized tumor cells in the first nine of nine
patients treated, and has also shown a positive immune response to unhaptenized
tumor cells in the first eight of nine patients treated, both as measured by a
delayed type hypersensitivity (DTH) test. Recently, the Company has received
agreement from the NCI for NCI to sponsor a Phase I/II trial in ovarian cancer,
which trial the Company intends to begin this year. In addition, the Company
intends to begin enrolling in a multi-center Phase II clinical trial for
O-Vax(TM) this year.
There can be no assurance, however, that the foregoing forward-looking
statements with respect to the Company's intended timetable for the completion
of the pivotal registration clinical trials for M-Vax(TM), the eventual filing
of a marketing application for M-Vax(TM) and the Company's intended timetable
for clinical trials for O-Vax(TM), will be met.
In addition, the Company has recently entered into a Technical Testing Agreement
(the "Illinois Agreement") with the University of Illinois ("Illinois"),
pursuant to which Illinois will conduct testing in order to determine whether an
animal model can be used to demonstrate the therapeutic potential of
DNP-vaccine, such as the Company's AC Vaccine(TM), in experimental tumor models,
and the value of adjunctive therapies. The Company has agreed to fund
approximately $160,000 for the expected two-year term of this study.
Topoisomerase Inhibitors
The Rutgers License relates to a series of novel anticancer compounds being
prepared and studied under the direction of Professors Edmund LaVoie and Leroy
Liu at Rutgers University (the "Rutgers Compounds"). The Rutgers Compounds have
proven effective on animal models during pre-clinical studies. The Rutgers
Compounds fall into six distinct and varied chemical classes, and have been
shown to inhibit topoisomerase I or topoisomerase II activities, depending on
the exact structure. Topoisomerases are key enzymes needed for remolding DNA, a
necessary function for malignant tumor growth. Inhibitors of these enzymes have
been proven to be clinically-useful anticancer therapies. In addition to having
topoisomerase-inhibiting characteristics, some of the Rutgers Compounds have
shown activity against fungal as well as parasitic organisms. Both United States
and non-U.S. patents have been filed for the Rutgers Compounds and their
anticancer and anti-infective uses. During 1998 a U.S. Patent was issued to the
Company granting claims to novel compounds which inhibit activity of
topoisomerase I, a natural enzyme needed to support malignant tumor growth.
Although these compounds are in an early stage of pre-clinical development for
solid tumor, antifungal and parasitic indications, the Company intends to pursue
development of one or more of these compounds. The Company's management
anticipates that the pre-clinical work may lead to identification of a lead
compound during 1999, and that an IND for that compound may be filed with the
FDA during 1999. However, there can be no assurance that any of the Rutgers
Compounds will ultimately reach a stage of clinical testing or
commercialization.
Novel Anti-Estrogens
The Texas A&M License relates to a series of novel anticancer compounds (the
"Texas A&M Compounds") being prepared and studied under the direction of
Professor Stephen Safe at Texas A&M University. The unique activity against
solid tumors exhibited by the Texas A&M Compounds can be classified as
anti-estrogen, although they appear to act indirectly on the estrogen receptor
through a novel pathway. Anti-estrogens have been proven to be clinically-useful
anticancer therapies. United States patents for both the Texas A&M Compounds and
their anticancer uses have been filed. Although non-U.S. patent filings have not
yet been made, the Company expects that foreign patent coverage will be pursued
as the result of ongoing laboratory research. These compounds are in an early
stage of pre-clinical development for solid tumor indications. The Company's
management anticipates that the pre-clinical work may lead to identification of
a lead compound during 1999, and that an IND for such compound may be filed with
the FDA during 1999. However, there can be no assurance that any such compounds
will ultimately reach a stage of clinical testing or commercialization.
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RESEARCH AND DEVELOPMENT
Autologous Cell Vaccines
In connection with the TJU License entered into in November 1995, TJU, Dr. Berd,
as TJU's principal investigator, and the Company entered into a Clinical Study
and Research Agreement. Under that agreement, TJU and Dr. Berd began a research
and clinical study program for the further development of the AC Vaccine(TM)
technology for additional cancer targets and the Company agreed to provide
certain funding for the research.. . During 1998, the agreement was amended to
provide research funding for the fourth year of the agreement of $279,690. The
Company is presently obligated to spend a minimum of $500,000 per year on the
development of the AC Vaccine(TM) technology until commercialized in the United
States. If the Company files for FDA approval of a Company-sponsored marketing
application for the right to market a product arising from such technology, the
Company may elect to spend less than $500,000 per year on the development of the
AC Vaccine(TM) technology during the period of time the marketing application is
under review by the FDA. If the Company does not meet its financial,
development, or other obligations in a timely manner under the TJU license or
related sponsored research agreement, the Company could lose the rights to this
proprietary technology or the right to have TJU conduct its research and
development efforts, any of which could have a material adverse effect on the
Company. TJU has the right to terminate the agreement on 30 days' written notice
if it becomes unable for any reason to complete the study. See "Risk
Factors--Dependence on Licenses and Sponsored Research Agreements."
Topoisomerase Inhibitors
The Company has committed to fund research for each of the first three years of
the Rutgers License at a rate of $100,000 per year as well as the payment of
certain indirect overhead costs. The Company also is obligated to pay Rutgers
for certain overhead costs on a deferred basis. In addition, the Company is
obligated to spend an aggregate of $200,000 in the first year, $300,000 in the
second year and $500,000 each year thereafter until the first year of commercial
marketing of a product derived from the Rutgers Compounds, for the development,
research (including the $100,000 research funding commitment in each of the
first three years), manufacture, regulatory approval, marketing and selling of a
product derived from the Rutgers Compounds. If the Company fails to make
payments in accordance with the terms of the Rutgers License, Rutgers would be
entitled to terminate the Rutgers License, which could have a material adverse
effect on the Company. See "Risk Factors--Dependence on Licenses and Sponsored
Research Agreements."
The research effort with respect to these compounds is conducted at Rutgers
under the direction of Edmond J. LaVoie, Ph.D., the co-originator of the
technology underlying the Rutgers License. Dr. LaVoie is Professor of Medicinal
Chemistry and Chairman of the Department of Pharmaceutical Chemistry at Rutgers
and is a member of the Company's Scientific Advisory Board. See
"Management--Scientific Advisory Board."
Novel Anti-Estrogens
The Company has committed to fund research relating to the Texas A&M Compounds
in the amount of $108,750 for each of the first three years of the Texas A&M
license. In addition, the Company is required to achieve certain milestones
toward development of a licensed product within certain specified time frames.
If the Company fails to make such payments or achieve such milestones in
accordance with the terms of the Texas A&M License, Texas A&M would be entitled
to terminate the agreement. The termination of the Texas A&M License could have
a material adverse effect on the Company. See "Risk Factors--Dependence on
Licenses and Sponsored Research Agreements."
It is anticipated that the research effort with respect to the potential
anti-cancer compounds licensed under the Texas A&M License will be conducted at
Texas A&M under the direction of Stephen H. Safe, Ph.D., the originator of the
technology underlying the Texas A&M License. Dr. Safe is Sid Kyle Professor of
Toxicology at Texas A&M and is a member of the Company's Scientific Advisory
Board.
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PROPRIETARY RIGHTS
The TJU License
Pursuant to the TJU License, the Company has licensed an issued U.S. patent and
certain U.S. and foreign patent applications covering a process for the
modification of a patient's own tumor cells into a cancer vaccine. The TJU
License is a royalty-bearing license for the rights to such patented vaccine
technology, and provides for certain payments upon the occurrence of certain
milestones. As consideration for the TJU License, the Company paid $10,000 to
TJU, and issued 229,121 shares of Common Stock to each of TJU and Dr. Berd,
representing 7.5% (15% in the aggregate) of the Company's total outstanding
voting securities at the time of issuance in 1995.
The Company is obligated to make certain milestone payments to TJU as follows:
$10,000 upon initiation of the first clinical trial that is approved by the FDA
(or comparable international agency), $10,000 upon the first filing of a
marketing application with the FDA (or comparable filing with a comparable
international agency), and $25,000 upon receipt by the Company of approval from
the FDA (or comparable international agency) to market products relating to the
AC Vaccine(TM) technology. In addition, the Company is obligated to pay
royalties on its net sales revenue and a percentage of all revenues received
from sublicenses relating to the AC Vaccine(TM) technology. Failure to comply
with the terms of the TJU License may cause its termination, which would have a
material adverse effect on the Company. See "Risk Factors--Dependence on
Licenses and Sponsored Research Agreements."
The Rutgers License
Pursuant to the Rutgers License, the Company has licensed certain U.S. and
foreign patent applications relating to the Rutgers Compounds. The Company paid
$15,000 as consideration for the Rutgers License, and has agreed to pay an
additional $15,000 license maintenance feeeach year. The license maintenance fee
is not payable in years where research funding is equal to or greater than
$100,000. The Company has issued to Rutgers warrants to purchase 125,000 shares
of Common Stock at a price of $8.24 per share. Such warrants are exercisable
upon the achievement of certain development-related milestones. The first 75,000
of the warrants will expire in 2006 and the final 50,000 warrants will expire in
2011. These warrants provide for cashless exercise, piggyback registration
rights and certain anti-dilution rights.
The Company is also obligated to make certain milestone payments as follows:
$15,000 on the earlier of October 31, 1999 or the date of first filing of an IND
application with the FDA, or comparable international agency, $25,000 on the
earlier of October 31, 2001 or the date of initiation of Phase II trials in the
United States or another major market country, $45,000 on the earlier of October
31, 2005 or the date of first filing of a marketing application with the FDA, or
comparable international agency and $150,000 on the earlier of October 31, 2008
or the date of receipt by the Company of approval from the FDA or comparable
international agency to market products. In addition, the Company is required to
pay royalties on its worldwide net sales revenue derived from the Rutgers
Compounds and a percentage of all revenues received from sublicenses of products
derived from these compounds. Failure to comply with the terms of the Rutgers
License may cause its termination, which could have a material adverse effect on
the Company. See "Risk Factors--Dependence on Licenses and Sponsored Research
Agreements."
The Texas A&M License
Pursuant to the Texas A&M License, the Company has licensed an issued U.S.
patent and certain U.S. and foreign patent applications relating to the Texas
A&M Compounds. Under the terms of the agreement, the Company is obligated to pay
future milestone payments, royalties on its net sales revenue derived from these
compounds and a percentage of all revenues received from sublicenses of such
compounds. The Company also has agreed to fund research in the amount of
$108,750 for each of the first three years of the Texas A&M License. Failure to
comply with the terms of the Texas A&M License may cause its termination, which
could have a material adverse effect on the Company. See "Risk
Factors--Dependence on Licenses and Sponsored Research Agreements."
In the future, the Company may require additional licenses from other parties to
develop, manufacture and market commercially viable products effectively. The
Company's commercial success will depend in part on obtaining and maintaining
such licenses. There can be no assurance that such licenses can be obtained or
maintained on commercially reasonable terms, if at all, that the patents
underlying such licenses will be valid and enforceable or that the proprietary
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nature of the technology underlying such licenses will remain proprietary. The
Company presently intends to pursue aggressively the broadest patent coverage
possible for all of its intellectual property. See "Risk Factors--Uncertainty
Regarding Patents and Proprietary Rights."
COMPETITION
The Company is aware of estimates that more than 300 companies are reported to
have approximately 1,250 cancer drugs under development worldwide, of which a
substantial number are under development in the United States. Many of these
drugs or other substances under development involve chemotherapeutic agents and
cancer immunotherapies and, thus, are, or may be, in direct competition with the
Company's AC Vaccine(TM) or compounds resulting from development work pursuant
to the Rutgers License or the Texas A&M License. Future competitor products and
drugs may perform more effectively or safely than the Company's product
candidates.
Many of the companies engaged in anticancer research and development and in
acquiring rights to the products of such research and development, including
biotechnology companies, have substantially greater financial, technical,
scientific, manufacturing, marketing and other resources than the Company and
have more experience in developing, marketing and manufacturing therapeutics,
including performing the pre-clinical testing and clinical trials that are
required for obtaining FDA and other regulatory approvals. Included among the
Company's competitors are: (i) large established pharmaceutical and
biotechnology companies with commitments to oncology or antiviral research,
development and marketing, including, without limitation, Schering Plough
Corporation, Chiron Corporation, Bristol-Myers Squibb and Johnson & Johnson;
(ii) smaller biotechnology companies with similar strategies, including IDEC
Pharmaceuticals, Inc. and Biomira Diagnostics; and (iii) many development stage
companies licensing or developing oncology therapeutics.
In addition, many research institutes, hospitals and universities are working to
develop products and processes in the same field of cancer that may in the
future be in direct competition with the Company's technologies.
A number of companies or research institutions are developing cancer vaccines,
including, without limitation, Ribi ImmunoChem Research, Inc. and Progenics,
Inc., in melanoma; AltaRex, Genentech and Biomira, in ovarian cancer; and
Intracell and Aphton Corporation, in colorectal cancer. The principal
competitive factors in the area of cancer immunotherapies are (i) the efficacy
of the product and (ii) the timing of the entry of the product into the market.
Although there is significant competition, to date, the Company believes that
none of the competing immunotherapies have demonstrated the increase in survival
over the same period of time that the Company's technology has shown in
melanoma. Although there can be no assurance, the Company also believes that its
AC Vaccine(TM) technology may be applicable to a variety of solid tumors such as
ovarian, breast, prostate, lung, renal cell and colorectal cancer and may have
applications in the treatment of acute myelogenous leukemia (AML) and therefore
may not be as limited as certain other approaches. With respect to the timing of
the entry of the product, there can be no assurance as to when, if at all, any
of the Company's potential products will be approved. See "Risk Factors".
MANUFACTURING AND MARKETING
The Company does not currently have the resources to manufacture commercially or
directly market any products that it may develop. The Company may seek to enter
into collaborative arrangements with pharmaceutical, medical device, health
care, chemical or other companies to assist in development, commercial
manufacturing or marketing of its products if such activities are commercially
feasible, or to provide funding for these efforts. These partners may also be
responsible for commercial scale manufacturing, which will be subject to
compliance with applicable FDA regulations. The Company anticipates that such
arrangements may involve the grant of exclusive or semi-exclusive rights to sell
specific products to specified market segments or particular geographic
territories in exchange for a royalty, joint venture, future co-marketing or
other financial interests.
To date, the Company has not entered into any collaborative commercial
manufacturing or marketing agreements for any of its potential products. There
can be no assurance that the Company will be able to enter into any such
arrangements on favorable terms, if at all. Such collaborative marketing
arrangements, whether licenses, joint ventures or otherwise, may result in lower
revenues than would otherwise be generated if the Company manufactured and
marketed its own products.
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The Company is in the process of completing construction of its GMP
manufacturing facility for the AC Vaccine(TM) (which facility will be used
initially to produce AC Vaccines sufficient to support its clinical programs).
The facility is expected to go on-line in April of this year. To support this
facility, the Company will be required to hire and train significant numbers of
employees and to comply with extensive GMP regulations applicable to the
facility. The establishment of any such facilities and eventual expansion of
operations to commercial levels, as well as the hiring of qualified employees,
could require substantial expenditures. In addition, at least some of the
Company's products produced at its facilities will probably be regulated as
biologics. In that event, the Company would be required to file a biologics
license application with the FDA in order to obtain an establishment license (or
similar license) for its facilities. Any delay in the FDA's approval of (or its
refusal to grant) such a license would delay or prevent marketing of the
relevant product.
GOVERNMENT REGULATION
The research, pre-clinical development, clinical trials, product manufacturing
and marketing conducted by or on behalf of the Company is subject to regulation
by the FDA and similar health authorities in foreign countries. The proposed
products and technologies of the Company also may be subject to certain other
federal, state and local government regulations, including, the Federal Food,
Drug and Cosmetic Act, and their state, local and foreign counterparts.
Generally, the steps required before a pharmaceutical or therapeutic biological
agent may be marketed in the United States include: (i) pre-clinical laboratory
tests, in vivo pre-clinical studies in animals, toxicity studies and formulation
studies; (ii) the submission to the FDA of an IND application for human clinical
testing, that must become effective before human clinical trials commence; (iii)
adequate and well-controlled human clinical trials to establish the safety and
efficacy of the drug; (iv) the submission of a marketing application to the FDA;
and (v) FDA approval of the marketing application prior to any commercial sale
or shipment of the drug.
Pre-clinical studies include laboratory evaluation of the product, mostly
conducted under Good Laboratory Practice (GLP) regulations, and animal studies
to assess the pharmacological activity and the potential safety and
effectiveness of the drug. The results of the pre-clinical studies are submitted
to the FDA in the IND. Unless the FDA objects to an IND, it becomes effective 30
days following submission and the clinical trial described in the IND may then
begin.
Every clinical trial must be conducted under the review and oversight of an
institutional review board (IRB) at each institution participating in the trial.
The IRB evaluates, among other things, ethical factors, the safety of human
subjects, and the possible liability of the institution.
Clinical trials are typically conducted in three sequential phases, although the
phases may overlap. Phase I represents the initial introduction of the drug to a
small group of healthy subjects to test for safety, dosage tolerance, and the
essential characteristics of the drug. Phase II involves studies in a limited
number of patients to test the safety and efficacy of the drug at different
dosages. Phase III trials involve large-scale evaluation of safety and
effectiveness, usually (though not necessarily) in comparison with a placebo or
an existing treatment.
The results of the pre-clinical and clinical trials are submitted to the FDA as
part of an application to market the drug. The marketing application also
includes information pertaining to the chemistry, formulation and manufacture of
the drug and each component of the final product. The FDA review of a marketing
application takes from one to two years on average to complete, though reviews
of treatments for cancer and other life-threatening diseases may be accelerated.
The process may take substantially longer, however, if the FDA has questions or
concerns about a product. Following review, the FDA may ultimately decide that
an application does not satisfy regulatory and statutory criteria for approval.
In some cases, the FDA may approve a product but require additional clinical
tests following approval (i.e., Phase IV).
In addition to obtaining FDA approval for each product, each domestic drug
manufacturing establishment must be registered with, and approved by, the FDA.
Domestic manufacturing establishments are subject to inspections by the FDA and
must comply with Good Manufacturing Practices. To supply products for use in the
United States, foreign manufacturing establishments must comply with GMP and are
subject to periodic inspection by the FDA or by corresponding regulatory
agencies in such countries under reciprocal agreements with the FDA.
If marketing approval of any Company product is granted, the Company must
continue to comply with FDA requirements not only for manufacturing, but also
for labeling, advertising, record keeping, and reporting to the FDA of
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adverse experiences and other information. In addition, the Company must comply
with federal and state health care antikickback laws and other health care fraud
and abuse laws that affect the marketing of pharmaceuticals. Failure to comply
with applicable laws and regulations could subject the Company to administrative
or judicial enforcement actions, including product seizures, injunctions, civil
penalties, criminal prosecution, refusals to approve new products or withdrawal
of existing approvals, as well as increased product liability exposure, any of
which could have a material adverse effect on the Company's business, financial
condition, or results of operations.
For clinical investigation and marketing outside the United States, the Company
also is subject to certain foreign regulatory requirements governing human
clinical trials and marketing approval for drugs. The requirements governing the
conduct of clinical trials, product licensing, pricing and reimbursement vary
widely for European countries both within and outside the European Union ("EU").
Normally, foreign marketing authorizations are applied for at a national level,
although within the EU certain registration procedures are available to
companies wishing to market their products in more than one EU member state. If
any applicable regulatory authority is satisfied that adequate evidence of
safety, quality and efficacy has been presented, a marketing authorization will
be granted. The system for obtaining marketing authorizations within the EU
registration system is a dual one in which certain products, such as
biotechnology and high technology products and those containing new active
substances, will have access to a central regulatory system that provides
registration throughout the entire EU. Other products will be registered by
national authorities in individual EU member states, operating on a principle of
mutual recognition. Any applicable foreign regulatory approval processes
include, at least, all of the risks associated with FDA approval set forth
above. The Company could possibly have greater difficulty in obtaining foreign
approvals and also might find it more difficult to protect its intellectual
property abroad.
SOURCES AND AVAILABILITY OF RAW MATERIALS
The Company does not expect to encounter significant difficulties in obtaining
raw materials for M-Vax(TM) or O-Vax(TM),, because they are primarily composed
of a readily available chemical reagent, DNP, and the patient's own tumor cells.
In addition the vaccine is administered with a chemical adjuvant, BCG, which
assists in stimulating the immune system. Should the supply of DNP or BCG
significantly decrease, the Company may encounter problems preparing M-Vax(TM),
O-Vax(TM), or any other AC Vaccine(TM) based products.
COMPLIANCE WITH ENVIRONMENTAL LAWS
The Company's business may be subject to regulation under federal, state, local,
and foreign laws regarding environmental protection and hazardous substance
control. The Company believes that its compliance with these laws will have no
adverse impact upon its capital expenditures, earnings or competitive position.
Federal, state and foreign agencies and legislative bodies have expressed
interest in the further environmental regulation of the biotechnology industry.
The Company is unable to estimate the extent and impact of such, if any, future
federal, state, local legislation or administrative environmental action may
have on the Company.
EMPLOYEES
The Company utilizes a product development strategy that includes contracting
out its research and development, and to a certain extent, other functions in
order to minimize the expenses and overhead associated with full-time employees.
Consistent with this strategy, as of March 3, 1999, the Company had 13 full-time
employees. Its other consultants, scientific advisors and directors devote only
a portion of their time to the business of the Company. The Company believes
that it maintains good relations with its employees, consultants, scientific
advisors, part-time officers and directors. See "Risk Factors--Lack of
Management and Employees" and "--Dependence Upon Key Personnel and Consultants."
RESEARCH AND DEVELOPMENT EXPENSE
In 1997 and 1998, the Company incurred research and development expense of
$2,448,976 and $4,019,143, respectively. Research and development expense for
the period from inception has been $8,820,428. See "Financial Statements."
Although there can be no assurance it will have the capital resources to do so,
the Company intends to increase its spending on research and development in the
foreseeable future.
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RISK FACTORS
The following important factors, among others, could cause the Company's actual
results, performance or achievements, or industry results, to differ materially
from those expressed in the Company's forward-looking statements in this Report
and presented elsewhere by the Company from time to time. See also "Cautionary
Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities
Litigation Reform Act of 1995".
HISTORY OF OPERATING LOSSES; ACCUMULATED DEFICIT; UNCERTAINTY OF FUTURE
PROFITABILITY
The Company has incurred substantial operating losses since its inception. As of
December 31, 1998, the Company's accumulated deficit was $13,358,277. The
Company expects to incur significant operating losses over the next several
years, primarily due to the expansion of its research and development programs,
including clinical trials for M-Vax(TM) , O-Vax(TM), and pre-clinical studies
and clinical trials for other products that it may acquire or develop. The
Company's ability to achieve profitability depends upon, among other things, its
ability to develop products, obtain regulatory approval for its proposed
products, and enter into agreements for product development, manufacturing and
commercialization. The Company's M-Vax(TM) and O-Vax(TM), products do not
currently generate revenue and the Company does not expect to achieve revenues
from these or other products for the foreseeable future. Moreover, there can be
no assurance that the Company will ever achieve significant revenues or
profitable operations from the sale of M-Vax(TM), O-Vax(TM), or any other
products that it may develop.
NEED FOR ADDITIONAL FINANCING; ISSUANCE OF SECURITIES; FUTURE DILUTION
In the future, the Company will require substantial additional financings to
continue research, undertake product development and pursue the manufacturing
and marketing of any products that it may develop. Although the Company
completed a $10.1 million private placement of series C preferred stock on March
1, 1999, there can be no assurance that any additional financings will be
consummated or that the Company will otherwise be able to obtain additional
funds or that such financings, if available, can be obtained on terms favorable
or acceptable to the Company. If such financings are not consummated or are not
available, the Company will be required to modify its business development plans
or reduce or cease certain or all of its operations. The current cash resources
of the Company (including the net proceeds of the March, 1999 private placement
of series C preferred stock) should be sufficient to fund operations (as
presently conducted and with planned expansions of research and development in
1999) for the next 18-26 months.
If the Company obtains any additional funding, such financings may have a
dilutive effect on the holders of the Common Stock.
DEVELOPMENT STAGE COMPANY
Although the Company was organized in January 1990, it has only conducted
limited research activities, principally since 1995 through its license and
research agreements with TJU, Rutgers and Texas A&M, and has not generated any
significant revenues to date from operations. Accordingly, the Company must be
evaluated in light of the expenses, delays, uncertainties and complications
typically encountered by newly established biopharmaceutical businesses, many of
which uncertainties and complications are beyond the Company's control. These
include, but are not limited to, unanticipated problems relating to product
development, testing, regulatory compliance, manufacturing, marketing and
competition, and additional costs and expenses that may exceed current
estimates. There can be no assurance that the Company will successfully develop
and commercialize any products, generate any revenues or ever achieve profitable
operations.
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TECHNOLOGICAL UNCERTAINTY AND EARLY STAGE OF PRODUCT DEVELOPMENT
The technologies and products that the Company is seeking to develop are in the
early stages of research and development, require significant further research,
development and testing and are subject to the risks of failure inherent in the
development of products based on innovative or novel technologies. These risks
include the possibility that any or all of the Company's proposed products will
be found to be ineffective or unsafe, that the products once developed, although
effective, are uneconomical to market, that third parties hold proprietary
rights that preclude the Company from marketing the products or that third
parties market a superior or equivalent product or that the Company will be
unable to secure a meaningful patent position for its products. See "Uncertainty
Regarding Patents and Proprietary Rights." The results of initial pre-clinical
and clinical testing of the Company's current and proposed products under
development are neither necessarily predictive of results that will be obtained
from more extensive pre-clinical and clinical testing nor necessarily acceptable
to the FDA or other similar foreign agencies to support applications for
marketing permits.
The Company is unable to predict whether the research and development activities
it is funding will result in any commercially viable products or applications.
Further, due to the extended testing required before marketing clearance can be
obtained from the FDA or similar foreign agencies, the Company is not able to
predict with any certainty, when, if ever, it will be able to commercialize any
of its proposed products.
The market for biotechnology products in general, and for cancer immunotherapies
such as the AC Vaccine(TM) technology and other possible future products, in
particular, are characterized by rapidly changing technology, evolving industry
standards and frequent new product introductions. The Company's future success
will depend upon its ability to develop and commercialize its existing product
technologies and to develop new products. There can be no assurance that the
Company will successfully complete the development of its existing product
technologies or of any future product or that the Company's current or future
products will achieve market acceptance. Any delay or failure of M-Vax(TM),
O-Vax(TM), or any future product that the Company may develop, in achieving
market acceptance would materially and adversely affect the Company's business.
In addition, there can be no assurance that products or technologies developed
by others will not materially render the Company's existing or future products
or technologies non-competitive or obsolete.
This Report includes estimates by the Company of the number of patients with a
particular type of cancer or other diseases, the number of patients who were
administered a particular vaccine or drug and the number of patients who
received or might have been candidates for a particular type of treatment. There
can be no assurance that such estimates accurately reflect the true market or
the extent to which any of the Company's products, if successfully developed,
will actually be used by patients. Furthermore, even if patient use occurs,
there can be no assurance that any future sales of its products will be
profitable. Failure of the Company to successfully develop, obtain regulatory
approval for, introduce and market M-Vax(TM), O-Vax(TM), and possible future
products would have a material adverse effect on the Company.
GOVERNMENT REGULATION; NO ASSURANCE OF PRODUCT APPROVAL
The proposed products of the Company will be subject to very stringent federal,
state and local government regulations, including the Federal Food, Drug and
Cosmetic Act, and its state and local counterparts. Similar regulatory
frameworks exist in certain other countries where the Company may consider
marketing its products. To date, TJU and Dr. David Berd, the inventor of the AC
Vaccine technology, have conducted the ongoing clinical trials at TJU pursuant
to an FDA-approved physician sponsored Investigational New Drug Application
("IND"). The Company met earlier with the FDA to discuss the clinical results
obtained with M-Vax, the use of such results in support of the submission of a
Company-sponsored IND to the FDA, which has now been activated by the FDA. Prior
to marketing M-Vax(TM), O-Vax(TM) or any other possible product the Company may
develop, such product must undergo an extensive regulatory approval process. Any
denials or delays in obtaining requisite approvals would be likely to have a
material adverse effect on the Company.
The regulatory process includes extensive pre-clinical and clinical testing of
any product to establish its safety and efficacy. This testing can take many
years and require the expenditure of substantial capital and other resources. In
the U.S., clinical trials are stringently regulated by the FDA, and the FDA may
suspend clinical trials at any time if it determines that patients are being
exposed to an unreasonable health risk, or for certain other reasons. Delays or
denials of marketing approval are encountered regularly due to the submission of
unacceptable or incomplete data as deemed by the FDA or other similar regulatory
agency, or due to regulatory policy for product approvals. In addition, new
government regulations may be
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established that could delay or prevent regulatory approval of the Company's
products under development. These delays may be encountered both domestically
and abroad. There is no assurance that even after clinical testing, regulatory
approval will ever be obtained. If regulatory approval is obtained, the uses for
which any products may be marketed will be limited to specific indications.
Following regulatory approval, if any, a marketed product and its manufacturer
are subject to continual regulatory review and periodic inspections. In the
U.S., the Company would be required to comply with FDA requirements for
manufacturing, labeling, advertising, record keeping and reporting of adverse
experiences and other information. In addition, the Company would be required to
comply with federal and state health care anti-kickback laws and other health
care fraud and abuse laws that pertain to the marketing of pharmaceuticals.
Failure to comply with regulatory requirements could subject the Company to
administrative or judicial enforcement actions, including product seizures,
injunctions, civil penalties, criminal prosecution, refusals to approve new
products or withdrawal of existing approvals, as well as increased product
liability exposure, any of which could have a material adverse affect on the
Company. Development and marketing of the Company's products outside the U.S.
will be subject to foreign regulatory requirements governing clinical trials,
marketing approval, manufacturing and pricing. Failure to comply with these
requirements could result in enforcement actions or penalties or could delay
introduction of the Company's products in certain countries.
Failure of the Company to obtain and maintain regulatory approval of its
proposed products, processes or facilities would have a material adverse effect
on the business, financial condition and results of operations of the Company.
In addition, many academic institutions and companies doing research in the
field of cancer immunotherapy are using a variety of approaches and
technologies. Any adverse results obtained by such researchers in pre-clinical
or clinical studies, even if not directly or indirectly related to the Company's
potential products or approaches, could adversely affect the regulatory
environment for immunotherapy or other biotechnology products generally, and
possibly lead to delays in the approval process for the Company's potential
products.
DEPENDENCE ON OTHERS FOR CLINICAL DEVELOPMENT AND MARKETING OF PHARMACEUTICAL
PRODUCTS
The Company is presently dependent upon TJU, Rutgers and Texas A&M for
substantial all of the Company's current research and clinical development of
its products. Additionally, the Company currently does not have the resources to
directly market or sell M-Vax(TM), O-Vax(TM)or any products it may develop in
the future. The Company anticipates that it may in the future seek to enter into
collaborative agreements with pharmaceutical, or other biotechnology companies,
for the development of, clinical testing of, seeking of regulatory approval for,
and marketing of, certain of its products. Accordingly, the Company is and is
likely to continue to be dependent on others for, and may have only limited
control over, clinical development and marketing and selling of its products.
The inability of the Company to enter into third party distribution, marketing
and selling arrangements for the Company's anticipated products would have a
material adverse effect on the Company's business. There can be no assurance
that the Company will be able to enter into any arrangements for the marketing,
or selling of its products.
The Company anticipates that it may in the future seek to enter into
collaborative agreements with pharmaceutical, or other biotechnology companies,
for the development of, clinical testing of, seeking of regulatory approval for,
and manufacturing, marketing and commercialization of, certain of its products.
The Company may in the future grant to its collaborative partners, if any,
rights to license and commercialize any pharmaceutical products developed under
these collaborative agreements and such rights would limit the Company's
flexibility in considering alternatives for the commercialization of such
products. Although the Company believes that such collaborative partners might
have an economic motivation to commercialize the pharmaceutical products they
may license, the amount and timing of resources devoted to these activities
generally will be controlled by each such individual partner. There can be no
assurance that the Company will be successful in establishing any collaborative
arrangements, or that, if established, such future partners will be successful
in commercializing products or that the Company will derive any revenues from
such arrangements.
DEPENDENCE ON LICENSES AND SPONSORED RESEARCH AGREEMENTS
The Company relies heavily on third parties for a variety of functions,
including certain functions relating to research and development. As of March 3,
1999, the Company had only thirteen employees. The Company is party to several
license and research agreements which place substantial responsibility on the
Company's licensors for research and clinical development of its products and
technologies.
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In particular, the Company is dependent upon the TJU License as the basis of its
proprietary AC Vaccine(TM) technology and is dependent upon a sponsored research
agreement with TJU for research and development efforts in connection therewith.
Pursuant to the TJU License, the Company is obligated to pay an up-front license
fee, to use due diligence in developing and bringing products to market and to
make certain payments upon the achievement of certain milestones. The Company is
also obligated to make royalty payments on the sales, if any, of products
resulting from such licensed technology and, is responsible for the costs of
filing and prosecuting patent applications and maintaining issued patents. In
addition, the Company is required to invest a minimum amount per year in the AC
Vaccine(TM) technology as well as sponsored research at TJU. The Company is
similarly dependent upon the Rutgers License and Texas A&M License for certain
of its technology, and has financial and other obligations thereunder (and under
its related sponsored research agreements with each of Rutgers and Texas A&M)
that are similar to those under the TJU agreements.
If the Company does not meet its financial, development, or other obligations in
a timely manner under its license agreements or related sponsored research
agreements, the Company could lose the rights to its proprietary technology or
the right to have its licensors and others conduct its research and development
efforts, any of which could have a material adverse effect on the Company. TJU
has the right to terminate the TJU research and development agreement on 30
days' written notice if it becomes unable for any reason to complete the Study.
LIMITED MANUFACTURING FACILITIES
In order to successfully commercialize its product candidates, the Company must
be able to manufacture its products in commercial quantities, in compliance with
regulatory requirements, at acceptable costs and in a timely manner, or contract
with a third party to manufacture products on behalf of the Company. The
manufacture of the types of biopharmaceutical products that are likely to be
developed by the Company present several risks and difficulties. For example,
the manufacture of M-Vax(TM), O-Vax(TM) and other compounds the Company may
develop for use in the Company's current and future products and technologies
may be difficult to scale-up when large scale production is required and can be
subject to delays, inefficiencies and poor or low yields of quality products.
The Company may also be subject to risks relating to the expense, or
unavailability of, products and compounds manufactured or sold by third parties
that are required for use on a comparative basis in clinical trials and studies
for the Company's products. There can be no assurance that the Company will be
able to procure such products and compounds at an acceptable cost or in
sufficient quantities without delays or other adverse effects upon the Company's
development programs.
The Company currently has interim manufacturing capacity at TJU and is
completing the construction of a manufacturing facility in Pennsylvania. The TJU
facility has been reasonably adequate to support the clinical programs to date,
and the new Pennsylvania facility is expected to be adequate to support the
planned clinical trial programs. The new Pennsylvania facility, however, has not
yet received FDA licensure as a pharmaceutical manufacturing facility, and there
can be no assurance that the licensure will be obtained.
While the Company is in the process of establishing a new manufacturing
facility, such endeavor will require substantial additional funds, the hiring
and retention of significant additional personnel and compliance with extensive
regulations applicable to such a facility. There can be no assurance that the
Company will be able to successfully establish such a facility, hire such
personnel or successfully manufacture products for sale at competitive prices.
These existing facilities (even after licensure of the Pennsylvania facility and
commencement of manufacturing there) likely will not be sufficient to produce
sufficient quantities of M-Vax(TM) or other products if M-Vax(TM) or any other
product reaches commercialization. Accordingly, the Company anticipates that it
will either expand its current facilities, build an additional facility or
facilities or contract with third parties to assist with production. There can
be no assurance that the Company will be able to obtain from a third party a
satisfactory manufacturing arrangement or that the third party will manufacture
adequate supplies in a timely fashion for commercialization, or that commercial
quantities of any such products, if approved for marketing, will be available
from contract manufacturers at acceptable costs. If the Company seeks to
establish a full-scale commercial manufacturing facility, the Company will
require substantial additional funds and will be required to hire and train
significant numbers of employees and comply with the extensive regulations
applicable to that facility.
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UNCERTAINTY REGARDING PATENTS AND PROPRIETARY RIGHTS
The biotechnology industry places importance on obtaining patent and trade
secret protection for new technologies, products and processes. Also,
particularly in the case of biological therapies, additional protection may be
afforded by the regulatory approval process. The success of the Company will
depend in substantial part on its ability, or the ability of its current
licensors and on the ability of its potential future licensors, if any, to
obtain and defend patents, maintain trade secrets and operate without infringing
upon the proprietary rights of others, both in the United States and in foreign
countries. The patent position of firms relying upon biotechnology is highly
uncertain and involves complex legal and factual questions. To date there has
emerged no consistent policy regarding the breadth of claims allowed in
biotechnology patents or the degree of protection afforded under those patents.
More specifically, the Company relies on TJU's issued patent for its proprietary
patent rights in the AC Vaccine(TM) technology and may rely on certain United
States patents and pending patent applications, as well as a pending foreign
Patent Cooperation Treaty ("PCT") application, relating to various aspects of
its present and future products and processes. The patent application and
issuance process can be expected to take several years and could entail
considerable expense to the Company, as it may be responsible for such costs
under the terms of any technology agreements. There can be no assurance that
patents will issue as a result of any applications or that existing patents and
any patents resulting from such applications, will be sufficiently broad to
afford protection against competitors with similar technology. In addition,
there can be no assurance that any issued patents will be enforceable and will
not be subject to reexamination or reissue, or challenged, invalidated, or
circumvented. There can be no assurance that the rights granted thereunder will
provide competitive advantages to the Company. The commercial success of the
Company will also depend upon avoiding infringement of patents issued to
competitors. A United States patent application is maintained under conditions
of confidentiality while the application is pending, so the Company cannot
determine the inventions being claimed in pending patent applications filed by
third parties. As a result, the Company cannot be certain that its licensors
were the first to make inventions covered by its patents and patent
applications.
If a third party has filed a patent application relating to an invention claimed
in a Company or licensor patent application, the Company or its licensor may be
required to participate in an interference proceeding in the United States
Patent and Trademark Office to determine priority of the invention, which could
result in substantial uncertainties and cost for 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 at an undeterminable cost or to
cease using the technology. In addition to patent litigation and interference, a
third party may at some time seek to have a patent of the Company reexamined in
the Patent Office on the basis of prior art. The Company, or a licensor of the
Company, may also at some time seek reexamination, or reissue, of a Company
patent.
The Company has submitted an application for reissue for the purpose of
strengthening the TJU patent in light of a prior art reference which may have a
material adverse impact on that patent. The prior art reference relates to the
publication, slightly more than one year prior to the filing of the patent, of
an abstract for an oral presentation given by the inventor of the AC Vaccine(TM)
technology. Although the Company believes that there is a sound basis for this
reissue application, there can be no assurance that a patent will issue from the
application, or that any such patent will be enforceable and will not be
challenged, invalidated, or circumvented. In connection with the application for
re-issuance, the Company may seek to have the patent's claims modified to
reconcile such claims with the prior art reference. There can be no assurance
that the validity or enforceability of the Company's patents and its
applications, if issued, would be upheld by a court. In the absence of an
enforceable patent, the Company may rely upon significant regulatory barriers to
competition. The Company has been notified of U. S. Patent No. 5,484,596 to
Hanna et al. The Company has studied this patent and has concluded that no
license is required. While no other patent that could be potentially infringed
by manufacture, use or sale of the Company's product candidates has come to the
attention of the Company, the Company's product candidates are still in the
development stage, and neither their formulations nor their method of
manufacture have been finalized. Thus, there can be no assurance that the
manufacture, use, or sale of the Company's product candidates will not infringe
patent rights of others. The Company may be unable to avoid infringement of any
such patents and may have to seek a license, defend an infringement action, or
challenge the validity of the patents in court. There can be no assurance that a
license will be available to the Company, if at all, upon terms and conditions
acceptable to the Company, or that the Company will prevail in any patent
litigation. Litigation may be necessary to defend or enforce the Company's
patent and license rights, or to determine the scope and validity of others'
proprietary rights. Defense and enforcement of patent claims can be expensive
and time consuming, even in those instances in which the outcome is favorable to
the Company and can result in the
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diversion of substantial resources from the Company's other activities. There
can be no assurance that the Company will have sufficient resources to pursue
such litigation. If the Company does not obtain a license under any such
patents, is found liable for infringement, or is not able to have them declared
invalid, the Company may be liable for significant money damages, may encounter
significant delays in bringing products to market, or may be precluded from
participating in the manufacture, use, or sale of products or methods of
treatment covered by such patents, any of which could have a material adverse
effect on the Company's business, results of operation and financial condition.
In its product development activities, the Company relies substantially on
certain technologies which are not patentable or proprietary and are therefore
available to the Company's competitors. The Company also relies on certain
proprietary trade secrets and know-how which are not patentable. Although the
Company has taken steps to protect its unpatented trade secrets and know-how, in
part through the use of confidentiality agreements with its employees,
consultants and certain of its 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 will not otherwise become
known or be independently developed, or discovered by competitors. If the
Company's employees, scientific consultants or collaborators develop inventions,
or processes, independently that may be applicable to the Company's product
candidates, disputes may arise about ownership of propriety rights to those
inventions and processes. Such inventions and processes will not necessarily
become the Company's property, but may remain the property of those persons or
their employers. Protracted and costly litigation could be necessary to enforce
and determine the scope of the Company's proprietary rights. Failure to obtain
or maintain patent and trade secret protection, for any reason, could have a
material adverse effect on the Company. Certain of the Company's patents are
directed to inventions developed within academic institutions (from which the
Company earlier acquired rights to such patents) with funds from United States
government agencies. As a result of these arrangements, the United States
government may have rights in certain inventions developed during the course of
the performance of federally funded projects as required by law or agreements
with the funding agency. Several bills affecting patent rights have been
introduced in the United States Congress. These bills address various aspects of
patent law, including publication, patent term, re-examination, subject matter
and enforceability. It is not certain whether any of these bills will be enacted
into law or what form new laws may take. Accordingly, the effect of legislative
change on the Company's intellectual property rights is uncertain.
CONDUCTING BUSINESS ABROAD
To the extent the Company conducts business outside the United States, it may do
so through licenses, joint ventures, or other contractual arrangements for the
development, manufacturing and marketing of its products. No assurance can be
given that the Company will be able to establish foreign operations successfully
through such a plan, or that foreign applications will avoid opposition and be
approved. No assurance can be given that the foreign coverage will be available
or that the manufacturing and marketing of its products through such licenses,
joint ventures, or other arrangements will be commercially successful. The
Company might also have greater difficulty obtaining proprietary protection for
its products and technologies outside the United States and enforcing its rights
in foreign courts.
For clinical investigation and marketing outside the United States, the Company
also is subject to any applicable foreign regulatory requirements governing
human clinical trials and marketing approval for drugs. The requirements
governing the conduct of clinical trials, product licensing, pricing and
reimbursement vary widely for European countries both within and outside the EU.
Outside the United States, the Company's ability to market a product is
contingent upon receiving a marketing authorization from the appropriate
regulatory authority. At present, any applicable foreign marketing
authorizations are applied for at a national level, although with the EU certain
registration procedures are available to companies wishing to market their
products in more than one EU member state. If the regulatory authority is
satisfied that adequate evidence of safety, quality and efficacy has been
presented, a marketing authorization will be granted. The system for obtaining
marketing authorizations within the EU registration system is a dual one in
which certain products, such as biotechnology and high technology products and
those containing new active substances, will have access to a central regulatory
system that provides registration throughout the entire EU. Other products will
be registered by national authorities in individual EU member states, operating
on a principle of mutual recognition. Any applicable foreign regulatory approval
process includes, at least, all of the risks associated with FDA approval set
forth above. The Company could possibly have greater difficulty in obtaining any
such approvals and also might find it more difficult to protect its intellectual
property abroad.
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DEPENDENCE UPON KEY PERSONNEL AND CONSULTANTS
The Company is highly dependent upon its officers and directors, as well as its
Scientific Advisory Board members, consultants and collaborating scientists.
Except for its 13 employees, each of the Company's directors, advisors and
consultants devotes only a portion of his or her time to the Company's business
and for the most part are involved with other substantially full-time
activities. The loss of certain of these individuals, including Jeffrey M.
Jonas, M.D., the Company's President and Chief Executive Officer, could have a
material adverse effect on the Company unless the Company could promptly hire
qualified replacements. The Company maintains a key-man life insurance policy on
Dr. Jonas in the amount of only $3 million. Although the Company has entered
into letters of employment with many of its full-time employees, officers and
consultants, such letters of employment do not contain provisions which would
prevent any of them from resigning at any time.
Competition for qualified employees among pharmaceutical and biotechnology
companies is intense, and the loss of any of such persons, or an inability to
attract, retain and motivate any additional highly skilled employees required
for the expansion of the Company's activities, could have a material adverse
effect on the Company. There can be no assurance that the Company will be able
to retain its existing personnel, or to attract additional qualified employees
and such failure likely would have a material adverse effect on the Company.
COMPETITION
The Company's proposed cancer immunotherapy business is characterized by
intensive research efforts and intense competition. Many companies, research
institutes, hospitals and universities are working to develop products and
processes in the Company's fields of research. Most of these entities have
substantially greater financial, technical, manufacturing, marketing,
distribution and other resources than the Company and include, among others,
Schering Plough Corporation, Chiron Corporation, Bristol-Myers Squibb and
Johnson & Johnson. Certain of these companies have experience in undertaking
testing and clinical trials of new or improved products similar in nature to
that which the Company is developing. In addition, certain competitors have
already begun testing similar compounds or processes and may introduce such
products or processes before the Company. Accordingly, other companies may
succeed in developing products earlier than the Company or that are more
effective than those proposed to be developed by the Company. Further, it is
expected that competition in the Company's field will intensify. There can be no
assurance that the Company will be able to compete successfully against these
Companies.
PRODUCT LIABILITY RISKS
If the Company develops and markets any products, the marketing of products may
expose the Company to product liability claims. Although the Company presently
carries product liability insurance, there can be no assurance that the
insurance will protect the Company against all claims of product liability or
that adequate insurance coverage will be available in the future in sufficient
amounts, or at a reasonable cost. The Company may be required to indemnify its
licensors or persons with whom the Company establishes a marketing,
manufacturing or other collaborative arrangement against product liability
claims incurred as a result of the products developed by the Company.
UNCERTAINTY OF PRODUCT PRICING AND REIMBURSEMENT; HEALTH CARE REFORM AND RELATED
MEASURES
The revenues and profitability of pharmaceutical and biotechnology products and
companies may be affected by efforts of governmental and third party payors to
contain, or reduce the costs of health care through various means. For example,
in certain foreign markets, pricing, or profitability of prescription
pharmaceuticals is subject to government control. In the United States there
have been, and the Company expects that there will continue to be, a number of
federal and state proposals to implement similar government control. The United
States Congress continually considers a number of legislative and regulatory
reforms that may affect companies engaged in the health care industry in the
United States. Pricing constraints on the Company's products, if approved, could
have a material adverse effect on the Company. Although the Company cannot
predict whether these proposals will be adopted or what effects such proposals
may have on its business, the mere existence of such proposals could have a
material adverse effect on the Company. In addition, the Company's ability to
commercialize potential pharmaceutical and biotechnology products may be
adversely affected to the extent that such proposals have an adverse effect on
possible reimbursement rates for or pricing of those products.
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In addition, in the United States and elsewhere, sales of medical products and
services are dependent in part on the availability of reimbursement to the
consumer from third party payors, such as government and private insurance
plans. Third party payors are increasingly challenging the prices charged for
medical products and services. If the Company succeeds in bringing one or more
products to the market, there can be no assurance that these products will be
considered cost effective and that reimbursement to the consumer will be
available, or will be sufficient to allow the Company to sell its products on a
competitive basis.
NO ASSURANCE OF IDENTIFICATION OF ADDITIONAL PROJECTS; CERTAIN INTERLOCKING
RELATIONSHIPS; POTENTIAL CONFLICTS OF INTEREST
The Company is engaged primarily in the development and commercialization of the
AC Vaccine(TM) technology, as well as the potential anti-cancer and
anti-infective technology licensed under the Rutgers License and the potential
anti-cancer technology licensed under the Texas A&M License. If and when the
Company's resources allow, the Company may explore the acquisition, development
and commercialization of additional biomedical and pharmaceutical products and
technologies. There can be no assurance, however, that the Company will be able
to identify any additional products or technologies and, even if suitable
products or technologies are identified, there can be no assurance that the
Company will have sufficient resources at that time to acquire the rights to
additional products or technologies.
One director of the Company is an officer of Paramount Capital Investments, LLC.
Paramount Capital Investments, LLC, is a merchant bank specializing in
biotechnology companies. In the regular course of its business, Paramount
Capital Investments, LLC, identifies, evaluates and pursues investment
opportunities in biomedical and pharmaceutical products, technologies and
companies. Generally, Delaware corporate law requires that any transactions
between the Company and any of its affiliates be on terms that, when taken as a
whole, are substantially as favorable to the Company as those then reasonably
obtainable from a person who is not an affiliate in an arms-length transaction.
Nevertheless, neither Paramount Capital Investments, LLC, nor any other person
is obligated under any agreement or understanding with the Company to make any
additional products or technologies available to the Company, and there can be
no assurance or expectation that any biomedical or pharmaceutical product or
technology identified by Paramount Capital Investments, LLC, or any other person
in the future will be made available to the Company. In addition, certain of the
officers, directors, consultants and advisors to the Company serve as officers,
directors, consultants or advisors to other biopharmaceutical or biotechnology
companies. There can be no assurance that such other companies will not in the
future have interests in conflict with those of the Company.
CONTROL BY CURRENT OFFICERS, DIRECTORS AND PRINCIPAL STOCKHOLDERS
The Company's directors, executive officers and principal stockholders have
voting power over approximately 33% of the outstanding shares of Common Stock
(assuming full conversion of the Series B and C Convertible Preferred Stock).
Accordingly, the Company's executive officers, directors, principal stockholders
and certain of their affiliates have the ability to exert substantial influence
over the direction and policies of the Company and, if they choose to act in
concert, the election of the Company's Board of Directors and the outcome of
issues submitted to the Company's stockholders.
VOLATILITY OF STOCK PRICE
The market price of the Common Stock, like that of many other development-stage
pharmaceutical or biotechnology companies, may be highly volatile. Factors such
as announcements of technological innovations or new commercial products by the
Company or its competitors, disclosure of results of pre-clinical and clinical
testing, adverse reactions to products, governmental regulation and approvals,
developments in patent or other proprietary rights, public or regulatory agency
concerns as to the safety of any products developed by the Company and general
conditions may have a significant effect on the market price of the Common
Stock. Also, the trading price of the Common Stock may respond to quarterly
variations in operating results, announcements of innovations or new products by
the Company or its competitors and other events or factors, including the sale
or attempted sale of a large amount of Company securities into the market. In
addition, general market fluctuations may adversely affect the market price of
the Common Stock.
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POTENTIAL ADVERSE EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE
The Company presently has an effective Registration Statement on Form S-3 for
the resale of approximately 527,000 shares of Common Stock. In conjunction with
the March 1, 1999, sale of approximately 101,300 shares of Series C Convertible
Preferred Stock of the Company (the "Series C Preferred Stock"), the Company
agreed to register approximately 3,964,716 shares of Common Stock underlying the
Series C Preferred Stock (and underlying warrants issued in conjunction with the
issuance of the Series C Preferred Stock) by September 1, 1999. The Company
expects to complete the registration of those additional shares of Common Stock
before the September 1, 1999 deadline. Additionally, the Company is required to
maintain the effectiveness of the registration of the new shares of Common Stock
for up to three years after the effectiveness of the registration statement. The
presence of an effective registration statement for such a significant number of
shares of Common Stock and for such a substantial period of time may have an
adverse effect on the market price for the Common Stock. Similarly, the sale of
shares of Common Stock under that registration statement (or the sale of
restricted stock held by affiliates of the Company in reliance on SEC Rule 144)
may have an adverse effect on the market price for the Common Stock.
LIMITED PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
The Common Stock is listed for quotation on the Nasdaq SmallCap Market. The
average daily trading volume in the Common Stock varies significantly, and there
can be no assurance that there will be an active trading market for the Common
Stock at the time any stockholder desires to sell. The absence of an active
trading market would reduce the liquidity of an investment in the Common Stock.
To the extent that brokerage firms act as market makers, they may be a
dominating influence in the market for the Common Stock, and the degree of
participation by such firms may significantly affect the price and liquidity of
the Common Stock. These firms may discontinue market making activities at any
time. The prices at which the Common Stock may be offered in the market will be
determined by these firms and the purchasers and sellers of the Common Stock,
based in part on market factors, and may not necessarily relate to the Company's
assets, book value, results of operations, or other established and quantifiable
criteria of value. The trading price of the Common Stock could be subject to
wide fluctuations in response to quarterly variations in operating results,
announcements of technological innovations or new products by the Company, or
its competitors, and other events or factors. In addition, the stock market has
experienced volatility that has particularly affected the market prices of
equity securities of many biotechnology companies and that often has been
unrelated to the performance of those companies. These broad market fluctuations
may affect adversely the market price of the Common Stock.
UNCERTAINTY OF CONTINUED LISTING ON NASDAQ SMALLCAP MARKET; MARKET ILLIQUIDITY
Although the Common Stock is listed on the Nasdaq SmallCap Market, the Nasdaq
has adopted stricter continuing listing criteria for the SmallCap Market in
1997, which the Company is required to meet. Accordingly, continued inclusion of
the Common Stock on the Nasdaq SmallCap Market pursuant to the recently adopted
stricter standards requires that: (i) the Company have net tangible assets of
$2,000,000, or a market capitalization of $35 million or more, or net income in
two of the three most recent fiscal years of at least $500,000; (ii) the
Company's public float have a market value of at least $1 million and a public
float of at least 500,000 shares; (iii) the minimum bid price for the Common
Stock be at least $1.00 per share; (iv) the Common Stock have at least two
active market makers and be held of record by at least 300 shareholders and (v)
the Company adhere to certain corporate governance provisions. While the Company
presently meets these listing criteria, there can be no assurance that the
Company will continue to satisfy the requirements for maintaining a listing of
the Common Stock on the Nasdaq SmallCap Market.
If the Company is unable to satisfy the continuing listing requirements, the
Common Stock may be delisted from the Nasdaq SmallCap Market. In that event,
trading, if any, in the Common Stock would thereafter probably be conducted on
the OTC Bulletin Board, or in the over-the-counter market through the National
Quotation Bureau (the "pink sheets") and the Company would again be required to
comply with the Nasdaq SmallCap Market's initial listing criteria in order to
have the Common Stock re-approved for listing and quotation thereon.
Consequently, the liquidity of the Common Stock could be impaired materially and
adversely, not only in the number of securities that can be bought and sold at a
given price, but also through delays in the timing of transactions and reduction
in security analysts' and media coverage of the Company, which could result in
lower prices for the Common Stock than might otherwise be attained and could
also result in a larger spread between the bid and asked prices for the Common
Stock.
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RISKS OF LOW-PRICED STOCK; POSSIBLE EFFECT OF "PENNY STOCK" RULES ON LIQUIDITY
FOR THE COMMON STOCK
The Exchange Act requires additional disclosure relating to the market for penny
stocks in connection with trades in any stock defined as a penny stock. The
Commission's regulations generally define a penny stock as any equity security
that has a market price of less than $5.00 per share, subject to certain
exceptions. Such exceptions include any equity security listed on the Nasdaq
SmallCap Market, subject to certain trade reporting requirements, and any equity
security issued by an issuer that meets certain net tangible asset tests. The
penny stock rules require delivery, prior to any transaction in a penny stock,
of a disclosure schedule prepared by the Commission relating to the penny stock
market. Disclosure is also required to be made about sales commissions payable
to both the broker-dealer and the registered representative and current
quotations for the securities. Finally, monthly statements are required to be
sent disclosing recent price information for the penny stock held in the account
and information on the limited market in penny stocks. Although the penny stock
rules do not presently apply to the Common Stock, there can be no assurance that
the trading in the Common Stock will not be subject to the penny stock rules in
the future, in which case the market liquidity for such securities could be
materially and adversely affected.
In addition, if the Common Stock fails to meet certain minimum market price, net
tangible asset or the annual revenue tests, but is quoted on the OTC Bulletin
Board, then trading in the Common Stock would be subject to additional
Commission rules, which may affect the ability of broker-dealers to make a
market in the Common Stock and may affect the ability of holders of Common Stock
to sell in the secondary market.
ANTITAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION AND
DELAWARE LAW
The Company's Articles of Incorporation, as amended, authorize the issuance of
up to 5,000,000 shares of preferred stock, par value $.01 per share, of which
300,000 shares are authorized for issuance as shares of Series B Preferred
Stock, of which approximately 103,814 shares are issued and outstanding as
Series B Preferred Stock, and 120,000 shares are authorized for issuance as
shares of Series C Preferred Stock, of which 101,300 shares are issued and
outstanding. The Company's Certificate of Incorporation authorizes the issuance
of "blank check" preferred stock with such designation, rights and preferences
as may be determined from time to time by the Board of Directors. Accordingly,
the Board of Directors is empowered, without stockholder approval, to issue a
new series of preferred stock with dividend, liquidation, conversion, voting or
other rights which could adversely affect the voting power or other rights of
the holders of the Common Stock. In the event of issuance, the new series of
preferred stock could be utilized, under certain circumstances, as a method of
discouraging, delaying or preventing a change in control of the Company.
Although the Company has no present intention to issue any additional shares of
its preferred stock, other than those already authorized for issuance, there can
be no assurance that the Company will not do so in the future.
The Company is subject to Section 203 of the General Corporation Law of the
State of Delaware which, subject to certain exceptions, prohibits a Delaware
corporation from engaging in any business combination with any interested
stockholder for a period of three years following the date that such stockholder
became an interested stockholder. In general, Section 203 defines an interested
stockholder as any entity or person beneficially owning 15% or more of the
outstanding voting stock of the corporation and any entity or person affiliated
with or controlling or controlled by such entity or person. The foregoing
provisions could have the effect of discouraging others from making tender
offers for the Company's shares and, as a consequence, they also may inhibit
fluctuations in the market price of the Company's shares that could result from
actual or rumored takeover attempts. Such provisions also may have the effect of
preventing changes in the management of the Company.
RIGHTS OF PREFERRED STOCKHOLDERS
The holders of the Series B Preferred Stock and the Series C Preferred Stock
have certain rights that are superior to the rights of holders of the Common
Stock, including particularly a liquidation preference over the Common Stock. In
addition to the normal liquidation preference for the preferred stock (which
entitles each share to receive $135.00 and $100.00 for the Series B and Series
C, respectively, in cash or securities prior to any distributions to the holders
of the Common Stock), the Series C Preferred Stock holders are entitled to
additional rights if the Company ceases to exist by virtue of a merger in which
the Company is not the surviving corporation or if shares of Common Stock is
acquired constituting greater than 50% of the voting power of the Company. In
that event, the holders of the Series C Preferred Stock are entitled to both (1)
the $100.00 liquidation preference per share of Series C Preferred Stock, and
(2) the consideration per share of Common Stock
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otherwise to be received in the transaction assuming all of the Series C
Preferred Stock had been converted into Common Stock immediately prior to the
transaction. These rights of the Series C Preferred Stock holders could result
in the holders of those shares receiving substantially more of the consideration
in a merger transaction than they would otherwise receive if the shares of
Series C Preferred Stock were converted into Common Stock prior to the merger
transaction. The holders of the Common Stock would, accordingly, receive a
lesser amount in a merger transaction of that type than they would have received
if no Series C Preferred Stock were outstanding.
YEAR 2000
The Year 2000 Issue is the result of computer programs being written using two
digits, rather than four, to define the applicable year. As a result, those
computer programs having date-sensitive software would recognize a date with the
year "00" as the year 1900 rather than the year 2000. Systems that calculate,
compare, or sort using the incorrect date may malfunction.
The Company's only date-sensitive information technology is its accounting
software applications, which the Company intends to upgrade to be Year 2000
compliant by June 30, 1999. To the degree the software is found to be
non-compliant, the Company has alternative methods in place to ensure the
functions performed by the software will be completed. Because the Company has
already planned to replace its software in 1999, the Company does not
contemplate any software replacement costs due to Year 2000 issues.
The Company has made inquiries of suppliers and parties with whom it has
significant business relationships regarding compliance with Year 2000 issues.
These include a clinical processing site at TJU, various other clinical sites
and certain financial institutions, such as commercial banks. The Company has
been informed by TJU that TJU will be Year 2000 compliant insofar as the Company
is concerned before the end of the year. Specifically, clinical trial
information that is maintained at TJU is on a standalone computer system. The
software used to monitor clinical trial information will be upgraded to a Year
2000 compliant version during 1999.
To date, the Company is not aware of any financial institution or other third
party with a Year 2000 issue that would materially affect the Company's results
of operations, liquidity or capital resources. The Company has also been advised
by its financial institutions that it will receive certifications confirming
that the computer systems of these institutions are Year 2000 compliant.
Generally, the Company intends to develop contingency plans to address any other
Year 2000 compliance-risks that are uncovered by its continuing evaluation
efforts. Although the Company has no means of ensuring that its suppliers and
financial institutions will be Year 2000 ready, it will continue to monitor, to
the extent practicable, their compliance with the Year 2000 problem. There can
be no assurance, however, that such problems will not arise.
NO DIVIDENDS
The Company has never paid cash dividends on its capital stock and does not
anticipate paying any cash dividends for the foreseeable future.
ITEM 2. Description of Properties
The Company's executive offices are located at 4520 Main, Suite 930, Kansas
City, Missouri 64111. The Company currently leases 4,100 square feet of office
space for a monthly lease cost of $8,100.
In February, 1998 the Company leased a facility at 2000 Hamilton Street,
Philadelphia, Pennsylvania 19103, for the construction and development of its
clinical manufacturing facility. The facility consists of approximately 11,900
square feet of which approximately 9,300 square feet will be utilized for
manufacturing development while the remaining 2,600 square feet will be used for
office space. The Company has options for additional space which become
available from August, 1999 through May, 2002. Monthly rental on the facility is
approximately $10,400.
In 1997 the Company designed and developed a class 10,000 clean room at TJU for
the production of AC Vaccines,
21
<PAGE>
which the Company believes is adequate to support the multi-center pivotal
registration trial for M-Vax(TM). Completion of the Company's clinical programs
and commercial manufacturing, however, is dependent upon the Company's ability
to establish additional Good Manufacturing Practice ("GMP") facilities which
will be needed for compliance with certain regulatory standards promulgated by
the FDA. To that end, the Company is completing construction of its GMP
manufacturing facility in Philadelphia. It is anticipated that the facility will
be on-line in April of this year. While management of the Company anticipates
that this facility will be established in a timely manner, there can be no
assurance of the adequacy of this manufacturing facility or of FDA licensure of
this facility. Delays in either manufacturing capability or regulatory approval
could delay completion of these studies and could have a material adverse effect
on the Company.
ITEM 3. Legal Proceedings
The Company's application for a federal trademark registration for the name AVAX
has been opposed by a third party. This opposition proceeding concerns the right
of the Company to obtain a federal trademark registration in the United States
Patent & Trademark Office for the name AVAX. Although the Company believes there
is a sound basis for denial of the opposition and allowance of its application
to register the name AVAX, there can be no assurance that the Company will
prevail in this proceeding. There is also no assurance that the Company will
desire, or be able to continue to use the name AVAX at some future time. The
Company does not believe that an adverse outcome in this proceeding will
materially affect its business.
The Company is not aware of any other pending or threatened legal actions which,
in the opinion of management, based on known information, is likely to have a
material adverse effect on the Company's business.
ITEM 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the quarter ended
December 31, 1998.
22
<PAGE>
AVAX TECHNOLOGIES, INC.
PART II
ITEM 5. Market For Common Equity And Related Stockholder Matters
The Common Stock was publicly traded on the OTC Bulletin Board from December 19,
1996 through July 9, 1997. Since July 10, 1997, the Common Stock has been listed
for quotation on the Nasdaq SmallCap Market under the symbol "AVXT". The
following table sets forth, for the periods indicated, the high and low closing
bid prices for the Common Stock, as reported by the National Quotation Bureau or
Nasdaq, for the quarters presented. Certain of the prices set forth below may
represent inter-dealer quotations, without adjustment for markups, markdowns and
commissions and may not reflect actual transactions.
-----------------------------------------------------------
High Low
-----------------------------------------------------------
Fiscal year ended December 31, 1998
First quarter $ 4 11/16 $3 5/8
Second quarter 5 3/4 2 7/16
Third quarter 2 29/32 1 7/16
Fourth quarter 2 3/4 1
-----------------------------------------------------------
Fiscal year ended December 31, 1997
First quarter $ 6 3/4 $5 1/2
Second quarter 5 7/8 4 1/4
Third quarter 5 3/8 4
Fourth quarter 4 1/2 3 1/2
-----------------------------------------------------------
The last reported sale price of the Common Stock on the Nasdaq SmallCap Market
on March 3, 1999 was $ 3.75 per share. At March 3, 1999, there were 10,238,640
shares of Common Stock outstanding, which were held by approximately 800
stockholders of record.
The Company has not paid any cash dividends on its Common Stock since its
formation. The payment of dividends, if any, in the future, with respect to the
Common Stock, is within the discretion of the Board of Directors of the Company
and will depend on the Company's earnings, capital requirements, financial
condition and other relevant factors. The Board of Directors of the Company does
not presently intend to declare any dividends on the Common Stock in the
foreseeable future. The Company anticipates that all earnings and other
resources of the Company, if any, will be retained by the Company for investment
in its business.
ITEM 6. Management's Discussion and Analysis of Financial Condition and Plan of
Operation
GENERAL
Since its inception, the Company has concentrated its efforts and resources in
the development and commercialization of biotechnology and pharmaceutical
products and technologies. The Company has been unprofitable since its founding
and has incurred a cumulative net loss of approximately $13,358,277 as of
December 31, 1998. The Company expects to incur increasing operating losses over
the next several years, primarily due to the expansion of its research and
development programs, including clinical trials for M-Vax(TM), O-Vax, and other
pre-clinical studies and clinical trials for other products that may arise from
the AC Vaccine(TM) technology and from the compounds licensed from Rutgers and
Texas A&M and other products that it may acquire or develop.
23
<PAGE>
The Company's ability to achieve profitability depends upon, among other things,
its ability to develop products, obtain regulatory approval for its proposed
products, and enter into agreements for product development, manufacturing and
commercialization. The Company's M-Vax(TM) and O-Vax(TM), products do not
currently generate revenue and the Company does not expect to achieve revenues
from these, or other products, for the foreseeable future. Moreover, there can
be no assurance that the Company will ever achieve significant revenues or
profitable operations from the sale of M-Vax(TM), O-Vax(TM),, or any other
products that it may develop.
PLAN OF OPERATION
The Company is currently engaged in the development and commercialization of
biotechnology and pharmaceutical products and technologies. In November 1995,
the Company acquired the rights to the AC Vaccine(TM) technology pursuant to the
TJU License. The Company initially intends to be engaged primarily in the
development and commercialization of the AC Vaccine(TM) technology, as well as
the potential anti-cancer and anti-infective technology licensed pursuant to the
Rutgers License and the potential anti-cancer technology licensed pursuant to
the Texas A&M License. The Company anticipates that during the next 12 months it
will continue substantial research and development of the AC Vaccine(TM)
technology, including, without limitation, pivotal registration clinical trials
on M-Vax(TM), the Company's lead AC Vaccine(TM) technology for metastatic
melanoma. The Company also anticipates that it will expend substantial resources
on the research and development of that same technology for the treatment of
other cancers, which may include ovarian, breast, prostate, lung, renal cell and
colorectal cancer and acute myelogenous leukemia (AML). For example, the Company
is treating post-surgical stage 3 patients in its Phase I/II clinical trial of
O-Vax(TM),, its AC Vaccine(TM) for ovarian cancer and intends to initiate a
multi-center Phase II trial during 1999. It is expected that during the next 12
months, in order to support these clinical trial efforts, the Company will be
required to expend substantial resources. See Item 1-- "Description of
Business--Technology Applications and Product Candidates," "Research and
Development" and "Manufacturing and Marketing."
In connection with the Company's strategy to acquire, develop and commercialize
other potential biotechnology products and technologies, in December 1996, the
Company acquired the exclusive worldwide rights to a series of compounds for the
potential treatment of cancer and other infectious diseases from Rutgers.
Additionally, in February 1997, the Company acquired the exclusive worldwide
rights to another series of compounds for the potential treatment of cancer from
Texas A&M. Pursuant to the Rutgers License, the Texas A&M License, and the
related sponsored research agreements with each of Rutgers and Texas A&M, the
Company intends to expend substantial resources on the research and development
of these compounds.
While there can be no assurance, the Company may acquire additional products and
technologies during the next 12 months, which may or may not be in the cancer
immunotherapy field. Should the Company acquire additional products or
technologies, it is anticipated that such additional products or technologies
will require substantial resources for research, development and clinical
evaluation. Although the Company completed a $10.1 million private placement of
preferred stock on March 1, 1999, there can be no assurance that the Company
will be able to obtain the additional financing necessary to acquire and develop
additional products and technologies. In addition, there can be no assurance,
that changes in the Company's research and development plans or other changes
which would or could alter the Company's operating expenses will not require the
Company to reallocate funds among its planned activities and curtail certain
planned expenditures. In that event, the Company may need additional financing.
There can be no assurance as to the availability or the terms of any required
additional financing, when and if needed. In the event that the Company fails to
raise any funds it requires, it may be necessary for the Company to curtail
significantly its activities or cease operations.
During the last 12 months, the Company's research and development expenses
increased from $2.4 million to $4.0 million, while general and administrative
expenses decreased from $2.7 million to $2.5 million. The increases in the
research and development expenses relate primarily to the progress made in
advancing M-Vax(TM) into a pivotal registration trial, while also beginning
clinical testing and evaluation of O-Vax(TM),. In addition, the Company
increased development spending on the topoisomearse inhibitors and anti-estrogen
technologies in preparation for advancing these technologies into the clinic.
General and administrative expenses decreased slightly due to the non-recurrence
in 1998 of registration expenses incurred in 1997, offset to some degree by the
hiring of additional staff and management personnel in 1998. The Company
anticipates that, over the next 12 months, research and development expenses
will continue to increase substantially, particularly as development proceeds
with the AC Vaccine(TM) and the Rutgers and Texas A&M Compounds.
24
<PAGE>
Also, during the past 12 months, the Company hired eight new employees and it
anticipates that over the next 12 months it may hire additional new employees,
particularly in connection with the establishment of the new facility for the
manufacture of the AC Vaccine(TM) products. The timing and cost of hiring any
additional employees or the establishment of any such facility may vary
depending on need and currently cannot be predicted with any certainty.
LIQUIDITY AND CAPITAL RESOURCES
On March 1, 1999 the Company completed a private placement of 101,300 shares of
Series C Convertible Preferred Stock to a group of accredited investors. The net
proceeds from the offering, approximately $9.4 million, will be used by the
Company to fund its future operations. Had the private placement been completed
at December 31, 1998, the Company would have had cash and cash equivalents of
approximately $19.1 million, which the Company's management presently estimates
will be sufficient to fund operations (as presently conducted and with planned
expansions of research and development in 1999) for the next 18-26 months.
Changes in the Company's research and development plans, which are under
constant revision, could dramatically alter the time period during which current
cash resources of the Company will cover anticipated future operating losses.
The Company does not currently expect to be required to raise additional capital
in the next 12 months, although from time to time, depending upon its
anticipated future needs, the Company may avail itself of opportunities in the
capital markets to raise additional capital if acceptable terms may be obtained.
Because the Company's working capital requirements will depend upon numerous
factors, including, without limitation, progress of the Company's research and
development programs, pre-clinical and clinical testing, timing and cost of
obtaining regulatory approvals, changes in levels of resources that the Company
devotes to the development of manufacturing and marketing capabilities,
competitive and technological advances, status of competitors, and the ability
of the Company to establish collaborative arrangements with other organizations,
there can be no assurance that the current cash resources of the Company will be
sufficient to fund its operations for the next 18-26 months. Because the Company
has no committed external sources of capital, and expects no product revenues
for the foreseeable future, it will likely require additional financing to fund
future operations. There can be no assurance, however, that the Company will be
able to obtain the additional funds it will require on acceptable terms, if at
all. 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 or development
programs; to obtain funds through arrangements with collaborative partners or
others that may require the Company to relinquish rights to certain
technologies, product candidates or products that the Company would otherwise
seek to develop or commercialize itself; or to license the rights to such
products on terms that are less favorable to the Company that might otherwise be
available.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
None noted.
ITEM 7. Financial Statements
The Company's consolidated financial statements appear following Item 13 of this
Report. See Financial Statements.
ITEM 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
25
<PAGE>
AVAX TECHNOLOGIES, INC.
PART III
ITEM 9. Directors, Executive Officers, Promoters And Control Persons; Compliance
with Section 16(A) of the Exchange Act
Incorporated by reference to the Company's Proxy Statement for its Annual
Meeting of Stockholders to be filed with the Securities and Exchange Commission
within 120 days after the close of the year ended December 31, 1998.
ITEM 10. Executive Compensation
Incorporated by reference to the Company's Proxy Statement for its Annual
Meeting of Stockholders to be filed with the Securities and Exchange Commission
within 120 days after the close of the year ended December 31, 1998.
ITEM 11. Security Ownership of Certain Beneficial Owners and Management
Incorporated by reference to the Company's Proxy Statement for its Annual
Meeting of Stockholders to be filed with the Securities and Exchange Commission
within 120 days after the close of the year ended December 31, 1998.
ITEM 12. Certain Relationships and Related Transactions
Incorporated by reference to the Company's Proxy Statement for its Annual
Meeting of Stockholders to be filed with the Securities and Exchange Commission
within 120 days after the close of the year ended December 31, 1998.
ITEM 13. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibits are listed on the Index to Exhibits at the end of this Report. The
exhibits required by Item 601 of Regulation S-B, listed on such Index in
response to this Item, are incorporated herein by reference.
(b) Reports On Form 8-K
Three reports on Form 8-K were filed by the Company during the quarter ended
December 31, 1998. One report was filed on October 20, 1998, announcing the
Company's results for the quarter ended September 30, 1998. The second report
was filed on October 27, 1998 relating to a press release of October 27, 1998
announcing the Company's initiation of its fifteenth clinical site for the
M-Vax(TM) pivotal registration trial. A third report was filed on December 14,
1998 related to a press release filed on December 14, 1998, related to the
Company being invited to present an initial talk at the National Cancer
Institutue-FDA sponsored workshop on the regulation of new cancer vaccines.
M-Vax(TM)
26
<PAGE>
Financial Statements
AVAX Technologies, Inc.
(a development stage company)
Years ended December 31, 1998 and 1997
and the period from January 12, 1990
(Incorporation) to December 31, 1998
With Report of Independent Auditors
<PAGE>
AVAX Technologies, Inc.
(a development stage company)
Financial Statements
Years ended December 31, 1998 and 1997 and for the period from January 12, 1990
(Incorporation) to December 31, 1998
Contents
Report of Independent Auditors...............................................F-1
Financial Statements
Balance Sheet as of December 31, 1998........................................F-2
Statements of Operations for the years ended December 31, 1998
and 1997 and for the period from January 12, 1990 (incorporation)
to December 31, 1998 ......................................................F-3
Statements of Stockholders' Equity (Deficit) for the years ended December
31, 1998 and 1997 and for the period from January 12, 1990 (incorporation)
to December 31, 1998.......................................................F-4
Statements of Cash Flows for the years ended December 31, 1998
and 1997 and for the period from January 12, 1990 (incorporation) to
December 31, 1998..........................................................F-6
Notes to Financial Statements................................................F-8
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholders
AVAX Technologies, Inc.
We have audited the accompanying balance sheet of AVAX Technologies, Inc. (a
development stage company) as of December 31, 1998, and the related statements
of operations, stockholders' equity (deficit) and cash flows for the years ended
December 31, 1998 and 1997, and for the period from January 12, 1990
(incorporation) to December 31, 1998. 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 required 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 financial position of AVAX Technologies, Inc. at
December 31, 1998 and the results of its operations and its cash flows for the
years ended December 31, 1998 and 1997 and for the period from January 12, 1990
(incorporation) to December 31, 1998 in conformity with generally accepted
accounting principles.
/s/ Ernst & Young, LLP
----------------------------------------
Ernst & Young LLP
Kansas City, Missouri
January 20, 1999
F-1
<PAGE>
AVAX Technologies, Inc.
(a development stage company)
Balance Sheet
December 31,
1998
-------------
Assets
Current assets:
Cash and cash equivalents $ 344,940
Marketable securities 9,377,678
Prepaid expenses and other current assets 230,701
------------
Total current assets 9,953,319
Property, plant and equipment at cost (Note 8) 1,225,891
Less accumulated depreciation 35,477
------------
Net property, plant and equipment 1,190,414
------------
Total assets $ 11,143,733
============
Liabilities and stockholders' equity Current liabilities:
Accounts payable and accrued liabilities
(Note 5) $ 886,646
------------
Total current liabilities 886,646
Commitments and contingencies (Note 7)
Stockholders' equity (Notes 3, 4, and 7):
Preferred stock, $.01 par value:
Authorized shares - 5,000,000,
including Series B - 300,000 shares
Series B convertible preferred stock:
Issued and outstanding shares - 112,689
(liquidation preference - $15,213,015) 1,127
Common stock, $.004 par value:
Authorized shares - 30,000,000
Issued and outstanding shares - 10,007,119 40,028
Additional paid-in capital 23,999,855
Subscription receivable (422)
Deferred compensation (425,224)
Deficit accumulated during the development stage (13,358,277)
------------
Total stockholders' equity 10,257,087
------------
Total liabilities and stockholders' equity $ 11,143,733
============
See accompanying notes.
F-2
<PAGE>
AVAX Technologies, Inc.
(a development stage company)
Statements of Operations
Period from
January 12,
1990
(Incorporation)
Year ended to
December 31, December 31,
1997 1998 1998
--------------------------------------------
Gain from sale of
the Product (Note 2) $ -- $ -- $ 1,951,000
Costs and expenses:
Research and
development 2,448,976 4,019,143 8,820,428
Marketing and selling -- -- 543,646
General and
administrative 2,724,007 2,516,215 8,078,359
--------------------------------------------
Total operating loss (5,172,983) (6,535,358) (15,491,433)
Other income (expense):
Interest income 1,057,460 697,228 2,633,681
Interest expense (150,602) -- (646,293)
Other, net -- -- 145,768
--------------------------------------------
Total other income, net 906,858 697,228 2,133,156
--------------------------------------------
Net loss (4,266,125) (5,838,130) (13,358,277)
Amount payable for
liquidation preference -- -- (1,870,033)
--------------------------------------------
Net loss attributable to
common stockholders $ (4,266,125) $ (5,838,130) $(15,228,310)
============================================
Net loss per common share -
basic $ (1.14) $ (.87)
============================
Weighted average number
of common shares
outstanding 3,750,440 6,731,210
============================
See accompanying notes.
F-3
<PAGE>
AVAX Technologies, Inc.
(a development stage company)
Statements of Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
Series A Series B
Convertible Convertible
Preferred Stock Preferred Stock Common Stock Additional
-------------------------------------------------------------------------- Paid-In
Shares Amount Shares Amount Shares Amount Capital
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock for
services in January 1990 -- $ -- -- $ -- 582,500 $ 2,330 $ 920
Net loss -- -- -- -- -- -- --
------------------------------------------------------------------------------------------
Balance at December 31, 1990 -- -- -- -- 582,500 2,330 920
Issuance of common stock for
services in August 1991 -- -- -- -- 230,000 920 5,830
Net loss -- -- -- -- -- -- --
------------------------------------------------------------------------------------------
Balance at December 31, 1991 -- -- -- -- 812,500 3,250 6,750
Conversion of note payable to
related party to common stock
in June 1992 -- -- -- -- 22,913 92 160,465
Issuance of common stock for
services in May and June 1992 -- -- -- -- 264,185 1,056 6,444
Issuance of Series A convertible
preferred stock, net of
issuance cost in June, July
and September 1992 1,287,500 12,875 -- -- -- -- 2,258,837
Net loss -- -- -- -- -- -- --
------------------------------------------------------------------------------------------
Balance at December 31, 1992 1,287,500 12,875 -- -- 1,099,598 4,398 2,432,496
Issuance of common stock for
services in July and November
1993 -- -- -- -- 8,717 35 24,965
Net loss -- -- -- -- -- -- --
------------------------------------------------------------------------------------------
Balance at December 31, 1993 1,287,500 12,875 -- -- 1,108,315 4,433 2,457,461
Issuance of common stock for
services in July 1994 -- -- -- -- 3,750 15 4,485
Net loss -- -- -- -- -- -- --
------------------------------------------------------------------------------------------
Balance at December 31, 1994 1,287,500 12,875 -- -- 1,112,065 4,448 2,461,946
Common stock returned and
canceled in April and May 1995 -- -- -- -- (307,948) (1,232) --
Shares issued in September and
November 1995 -- -- -- -- 1,777,218 7,109 --
Amount payable for liquidation -- -- -- -- -- -- (738,289)
preference
Net income -- -- -- -- -- -- --
------------------------------------------------------------------------------------------
Balance at December 31, 1995 1,287,500 12,875 -- -- 2,581,335 10,325 1,723,657
<CAPTION>
Deficit
Unrealized Accumulated Total
Loss on During the Stockholders'
Subscription Deferred Marketable Development Equity
Receivable Compensation Securities Stage (Deficit)
-----------------------------------------------------------------------
<C> <C> <C> <C> <C>
<S>
Issuance of common stock for
services in January 1990 $ -- $ -- $ -- $ -- $ 3,250
Net loss -- -- -- (889) (889)
-----------------------------------------------------------------------
Balance at December 31, 1990 -- -- -- (889) 2,361
Issuance of common stock for
services in August 1991 -- -- -- -- 6,750
Net loss -- -- -- (97,804) (97,804)
-----------------------------------------------------------------------
Balance at December 31, 1991 -- -- -- (98,693) (88,693)
Conversion of note payable to
related party to common stock
in June 1992 -- -- -- -- 160,557
Issuance of common stock for
services in May and June 1992 -- -- -- -- 7,500
Issuance of Series A convertible
preferred stock, net of
issuance cost in June, July
and September 1992 -- -- -- -- 2,271,712
Net loss -- -- -- (607,683) (607,683)
-----------------------------------------------------------------------
Balance at December 31, 1992 -- -- -- (706,376) 1,743,393
Issuance of common stock for
services in July and November
1993 -- -- -- -- 25,000
Net loss -- -- -- (1,610,154) (1,610,154)
-----------------------------------------------------------------------
Balance at December 31, 1993 -- -- -- (2,316,530) 158,239
Issuance of common stock for
services in July 1994 -- -- -- -- 4,500
Net loss -- -- -- (781,221) (781,221)
-----------------------------------------------------------------------
Balance at December 31, 1994 -- -- -- (3,097,751) (618,482)
Common stock returned and
canceled in April and May 1995 -- -- -- -- (1,232)
Shares issued in September and
November 1995 (7,109) -- -- -- --
Amount payable for liquidation -- -- -- -- (738,289)
preference
Net income -- -- -- 1,380,571 1,380,571
-----------------------------------------------------------------------
Balance at December 31, 1995 (7,109) -- -- (1,717,180) 22,568
</TABLE>
F-4
<PAGE>
AVAX Technologies, Inc.
(a development stage company)
Statements of Stockholders' Equity (Deficit) (continued)
<TABLE>
<CAPTION>
Series A Series B
Convertible Convertible
Preferred Stock Preferred Stock Common Stock
--------------------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 1,287,500 $ 12,875 -- $ -- 2,581,335 $ 10,325
Repurchase of common stock
in March 1996 -- -- -- -- (77,901) (312)
Payment of subscription
receivable -- -- -- -- -- --
Conversion of Series A
preferred stock in June 1996 (1,287,500) (12,875) -- -- 321,875 1,288
Issuance of common stock and
Series B preferred stock in a
private placement in May and
June 1996 -- -- 258,198 2,582 129,099 516
Issuance of common stock
and Series B preferred
stock for services in
June 1996 -- -- 1,000 10 500 2
Exercise of warrants in June and
July 1996 -- -- -- -- 156,250 626
Amount payable for liquidation -- -- -- -- -- --
preference
Compensation related to stock
options granted in May and
September 1996 -- -- -- -- -- --
Amortization of deferred
compensation -- -- -- -- -- --
Unrealized loss on marketable
securities -- -- -- -- -- --
Net loss -- -- -- -- -- --
--------------------------------------------------------------------------------------------
Balance at December 31, 1996 -- -- 259,198 2,592 3,111,158 12,445
Payment of subscription
receivable -- -- -- -- -- --
Write-off of subscription
receivable -- -- -- -- -- --
Exercise of warrants in
April and June 1997 -- -- -- -- 49,770 199
Conversion of preferred to
common stock -- -- (55,039) (551) 1,421,403 5,685
Repurchase of fractional shares -- -- -- -- (26) --
Realization of loss on marketable
securities -- -- -- -- -- --
Amortization of deferred
compensation -- -- -- -- -- --
Net loss -- -- -- -- -- --
--------------------------------------------------------------------------------------------
Balance at December 31, 1997 -- $ -- 204,159 $ 2,041 4,582,305 $ 18,329
Conversion of preferred to
common stock -- -- (91,470) (914) 2,386,176 9,544
Payment of subscription
receivable -- -- -- -- -- --
Issue shares based upon reset
provisions -- -- -- -- 3,029,339 12,117
Issue compensatory shares to
officer -- -- -- -- 9,301 38
Amortization of deferred
compensation -- -- -- -- -- --
Net loss -- -- -- -- -- --
--------------------------------------------------------------------------------------------
Balance at December 31, 1998 -- $ -- 112,689 $ 1,127 10,007,119 $ 40,028
============================================================================================
<CAPTION>
Deficit
Unrealized Accumulated Total
Additional Loss on During the Stockholders'
Paid-In Subscription Deferred Marketable Development Equity
Capital Receivable Compensation Securities Stage (Deficit)
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ 1,723,657 $ (7,109) $ -- $ -- $ (1,717,180) $ 22,568
Repurchase of common stock
in March 1996 -- 312 -- -- -- --
Payment of subscription
receivable -- 2,771 -- -- -- 2,771
Conversion of Series A
preferred stock in June 1996 11,587 -- -- -- -- --
Issuance of common stock and
Series B preferred stock in a
private placement in May and
June 1996 22,217,397 -- -- -- -- 22,220,495
Issuance of common stock
and Series B preferred
stock for services in
June 1996 99,988 -- -- -- -- 100,000
Exercise of warrants in June and
July 1996 5,624 -- -- -- -- 6,250
Amount payable for liquidation
preference (1,131,744) -- -- -- -- (1,131,744)
Compensation related to stock
options granted in May and
September 1996 1,076,373 -- (1,076,373) -- -- --
Amortization of deferred
compensation -- -- 112,949 -- -- 112,949
Unrealized loss on marketable
securities -- -- -- (2,037) -- (2,037)
Net loss -- -- -- -- (1,536,842) (1,536,842)
--------------------------------------------------------------------------------------------
Balance at December 31, 1996 24,002,882 (4,026) (963,424) (2,037) (3,254,022) 19,794,410
Payment of subscription
receivable -- 1,761 -- -- -- 1,761
Write-off of subscription
receivable (1,833) 1,833 -- -- -- --
Exercise of warrants in
April and June 1997 (199) -- -- -- -- --
Conversion of preferred to
common stock (5,134) -- -- -- -- --
Repurchase of fractional shares (76) -- -- -- -- (76)
Realization of loss on marketable
securities -- -- -- 2,037 -- 2,037
Amortization of deferred
compensation -- -- 269,100 -- -- 269,100
Net loss -- -- -- -- (4,266,125) (4,266,125)
--------------------------------------------------------------------------------------------
Balance at December 31, 1997 $23,995,640 $ (432) $ (694,324) $ -- $ (7,520,147) $ 15,801,107
Conversion of preferred to
common stock (8,630) -- -- -- -- --
Payment of subscription
receivable -- 10 -- -- -- 10
Issue shares based upon reset
provisions (12,117) -- -- -- --
Issue compensatory shares to
officer 24,962 -- -- -- -- 25,000
Amortization of deferred
compensation -- -- 269,100 -- -- 269,100
Net loss -- -- -- -- (5,838,130) (5,838,130)
--------------------------------------------------------------------------------------------
Balance at December 31, 1998 $ 23,999,855 $ (422) $ (425,224) $ -- $(13,358,277) $ 10,257,087
============================================================================================
</TABLE>
See accompanying notes.
F-5
<PAGE>
AVAX Technologies, Inc.
(a development stage company)
Statements of Cash Flows
<TABLE>
<CAPTION>
Period from
January 12,
1990
Incorporation)
Year ended December 31, (to December 31,
1997 1998 1998
--------------------------------------------
<S> <C> <C> <C>
Operating activities
Net loss $ (4,266,125) $ (5,838,130) $(13,358,277)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 282,061 289,610 801,931
Compensatory stock issue -- 25,000 25,000
Gain on sale of the Product -- -- (1,951,000)
Gain on sale of intellectual property -- -- (787)
Accretion of interest on common stock
receivable (150,541) -- (449,000)
Accretion of interest on amount payable
to preferred stockholders and Former
Officer 150,541 -- 449,000
Loss on sale or abandonment of furniture
and equipment -- -- 37,387
Issuance of common stock for services -- -- 147,000
Changes in operating assets and liabilities:
Prepaid expenses and other current
assets (93,644) (75,772) (230,701)
Accounts payable and accrued liabilities 76,048 532,920 886,646
Amount payable to Former Officer -- -- 80,522
--------------------------------------------
Net cash used in operating activities (4,001,660) (5,066,372) (13,562,279)
Investing activities
Purchases of marketable securities (9,102,028) (81,958,707) (98,177,207)
Proceeds from sale of marketable securities -- 81,683,057 81,683,057
Proceeds from sale of short-term investments 6,136,890 -- 7,116,472
Purchases of furniture and equipment (46,182) (1,133,932) (1,291,825)
Proceeds from sale of furniture and equipment -- -- 4,600
Organization costs incurred -- -- (1,358)
--------------------------------------------
Net cash used in investing activities (3,011,320) (1,409,582) (10,666,261)
</TABLE>
F-6
<PAGE>
AVAX Technologies, Inc.
(a development stage company)
Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
Period from
January 12,
1990
(Incorporation)
Year ended December 31 to December
1997 1998 1998
---------------------------------------------
<S> <C> <C> <C>
Financing activities
Proceeds from issuance of notes payable
to related party $ -- $ -- $ 957,557
Principal payments on notes payable to
related party -- -- (797,000)
Proceeds from loans payable -- -- 1,389,000
Principal payments on loans payable -- -- (1,389,000)
Payments for fractional shares from reverse
splits and preferred stock conversions (76) -- (76)
Financing costs incurred -- -- (90,000)
Payments received on subscription receivable 1,761 10 4,542
Proceeds received from exercise of stock
warrants -- -- 6,250
Net proceeds received from issuance of
preferred and common stock -- -- 24,492,207
---------------------------------------------
Net cash provided by financing activities 1,685 10 24,573,480
---------------------------------------------
Net increase (decrease) in cash and cash
equivalents (7,011,295) (6,475,944) 344,940
Cash and cash equivalents at beginning
of period 13,832,179 6,820,884 --
---------------------------------------------
Cash and cash equivalents at end of period $ 6,820,884 $ 344,940 $ 344,940
=============================================
Supplemental disclosure of cash flow
information
Interest paid $ -- $ -- $ 197,072
=============================================
</TABLE>
See accompanying notes.
F-7
<PAGE>
AVAX Technologies
(a development stage company)
Notes to Financial Statements
December 31, 1998 and 1997
1. Description of Business and Significant Accounting Policies
Description of Business
AVAX Technologies, Inc. (the Company) is a development stage biopharmaceutical
company.
In November 1995, the Company sold its leading product under development, an
over-the-counter nutritional, dietary, medicinal and/or elixorative food
supplement or drug and all of the related patents and other intellectual
property (the Product) (see Note 2).
Also in November 1995, the Company entered into a license agreement with Thomas
Jefferson University (TJU) to develop, commercially manufacture and sell
products embodying immunotherapeutic vaccines for the treatment of malignant
melanoma and other cancers (the Invention) (see Note 3).
In December 1996, the Company entered into a license agreement with Rutgers
University (Rutgers) to develop, commercially manufacture and sell products
embodying a series of compounds for the treatment of cancer and infectious
diseases (the Compounds) (see Note 3).
In February 1997, the Company entered into a license agreement with Texas A&M to
develop, commercially manufacture and sell products embodying a series of
compounds for the treatment of cancer (the Texas A&M Compounds) (see Note 3).
The Company's business is subject to significant risks consistent with
biotechnology companies that are developing products for human therapeutic use.
These risks include, but are not limited to, uncertainties regarding research
and development, access to capital, obtaining and enforcing patents, receiving
regulatory approval, and competition with other biotechnology and pharmaceutical
companies. The Company plans to continue to finance its operations with a
combination of equity and debt financing and, in the longer term, revenues from
product sales, if any. However, there can be no assurance that it will
successfully develop any product or, if it does, that the product will generate
any or sufficient revenues.
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 reported period. Actual
results could differ from those estimates.
Cash Equivalents
The Company considers all highly liquid financial instruments with a maturity of
three months or less when purchased to be cash equivalents. At December 31,
1998, all cash and cash equivalents were held at one financial institution.
F-8
<PAGE>
AVAX Technologies
(a development stage company)
Notes to Financial Statements (continued)
1. Description of Business and Significant Accounting Policies (continued)
Cash Equivalents
The Company considers all highly liquid financial instruments with a maturity of
three months or less when purchased to be cash equivalents. At December 31,
1998, all cash and cash equivalents were held at one financial institution.
Marketable Securities
Management determines the appropriate classification of debt securities at the
time of purchase and reevaluates such designation as of each balance sheet date.
Debt securities are classified as held-to-maturity when the Company has the
positive intent and ability to hold the securities to maturity. Held-to-maturity
securities are stated at amortized cost, adjusted for amortization of premiums
and accretion of discounts to maturity. Such amortization and interest on
securities classified as held-to-maturity are included in interest income.
The following is a summary of marketable securities:
<TABLE>
<CAPTION>
Unrealized Estimated
Description of Securities Cost Gain/(Loss) Fair Value
-------------------------------------------------------------------------------
<S> <C> <C> <C>
December 31, 1997
Held-to-maturity debt securities:
Commercial paper $9,024,625 $ -- $9,024,625
U.S. Treasury securities 77,403 -- 77,403
--------------------------------------------
$9,102,028 $ -- $9,102,028
============================================
December 31, 1998
Held-to-maturity debt securities:
Commercial paper $8,845,322 $ -- $8,845,322
U.S. Treasury securities 532,356 -- 532,356
--------------------------------------------
$9,377,678 $ -- $9,377,678
============================================
</TABLE>
The Company's debt securities all mature in 1999.
Depreciation
Depreciation is computed using the straight-line method over the estimated
useful lives of the furniture and equipment, which range from three to ten
years. Depreciation for the Company's manufacturing facility under construction
and related equipment as of December 31, 1998 will be computed using the
straight-line method over estimated useful lives of 5 to 40 years.
F-9
<PAGE>
AVAX Technologies
(a development stage company)
Notes to Financial Statements (continued)
1. Description of Business and Significant Accounting Policies (continued)
Research and Development Costs
Research and development costs, including payments related to patents and
license agreements, are expensed when incurred.
Deferred Compensation
Certain compensation costs are deferred and amortized over the vesting period of
such compensation.
Share Information
On May 15, 1996 (see Note 4), prior to the first closing of a private placement,
the Company effected a 1-for-2 reverse stock split of the Company's common
stock. Pursuant to an amendment to the Company's Certificate of Incorporation
dated May 7, 1997, a second 1-for-2 reverse split of the Company's common stock
was effected as of the close of business on May 13, 1997. All outstanding share
and per share amounts included in the accompanying financial statements have
been adjusted to reflect both 1-for-2 reverse stock splits.
Earnings Per Share
In 1997, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." SFAS No.
128 replaced the calculation of primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share exclude any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very similar to the
previously required fully diluted earnings per share. All earnings per share
amounts for all periods have been presented, and where appropriate, restated to
conform to the SFAS No. 128 requirements.
Net loss per share is based on net loss divided by weighted average number of
shares of common stock outstanding during the respective periods, adjusted to
reflect the reverse stock splits. The weighted average number of common shares
outstanding has been calculated in accordance with Staff Accounting Bulletin 83
(SAB 83) of the Securities and Exchange Commission. SAB 83 requires that shares
of common stock, warrants and options issued one year prior to the initial
filing of a registration statement relating to an initial public offering at
amounts below the public offering price be considered outstanding for all
periods presented in the Company's registration statement. For purposes of
calculating the net loss per share, the private placement of Series B
convertible preferred stock (see Note 4) has been considered to be the
equivalent of an initial filing of a registration statement relating to an
initial public offering, and the initial public offering price was determined to
be $3.92 per share by assuming that the preferred stock issued was immediately
converted into common stock. Those shares of common stock, warrants and options
(see Note 4), considered as cheap stock in accordance with SAB 83, were
considered outstanding for all periods, prior to July 10, 1997, at which time
the Company's registration statement on Form SB-2 to register the shares sold in
the private placement was declared effective.
F-10
<PAGE>
AVAX Technologies
(a development stage company)
Notes to Financial Statements (continued)
1. Description of Business and Significant Accounting Policies (continued)
The following table sets forth the computation of the Company's basic earnings
per share information, adjusted for the SAB 83 requirements, as discussed above.
Diluted earnings per share information is not presented, as the effects of stock
options, warrants and other convertible securities would be antidilutive for the
periods presented.
December 31,
1997 1998
--------------------------
Numerator (basic):
Numerator - loss available to common stockholders $(4,266,125) $(5,838,130)
==========================
Denominator (basic):
Weighted average shares 3,616,906 6,731,210
Effect of stock issuances, stock
options and warrants issued within
one year prior to the initial
public offering (IPO) at prices
below the IPO price 133,534 --
--------------------------
Denominator 3,750,440 6,731,210
==========================
Net loss per share - basic $ (1.14) $ (.87)
==========================
Stock-Based Compensation
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 is effective for fiscal years beginning after
December 31, 1995 and prescribes accounting and reporting standards for all
stock-based compensation plans, including employee stock options, restricted
stock, employee stock purchase plans and stock appreciation rights. SFAS No. 123
requires compensation expense to be recorded (i) using the new fair value method
or (ii) using existing accounting rules prescribed by Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," (APB 25) and
related interpretations, with pro forma disclosure of what net income and
earnings per share would have been had the Company adopted the new fair value
method. The Company has elected to continue to account for its stock-based
compensation plans in accordance with the provisions of APB 25. See Note 4 for
the pro forma effects of applying SFAS No. 123.
2. Sale of the Product
In December 1995, the Company entered into an agreement to sell the Product for
$2.4 million in shares of common stock of Interneuron Pharmaceuticals, Inc.
(IPI), a public company, the parent of the purchaser of the Product (the Stock).
Certain common stockholders of the Company are also common stockholders of IPI.
Pursuant to the terms of the agreement, the purchase price, payable in two equal
installments in December 1996 and 1997, was fixed, and the number of shares of
the Stock would vary depending on the quoted market price of the Stock at such
time.
F-11
<PAGE>
AVAX Technologies
(a development stage company)
Notes to Financial Statements (continued)
2. Sale of the Product (continued)
The first installment was paid on January 3, 1997 in the form of a distribution
of IPI stock directly by IPI to the Series A convertible preferred stockholders,
who were holders of record on the closing date of the agreement for sale, and
the Company's former President and Chief Executive Officer (the Former Officer).
The final installment was received on January 14, 1998.
The sale of the Product was approved by the Company's common and Series A
preferred stockholders subject to the following conditions:
o At approximately the same time each installment was received by the
Company, 95.85% of the Stock was to be distributed by the Company,
or directly by IPI, to the Company's preferred stockholders of
record (referred to herein as the holders of Series A preferred
stock) at the time sale of the Product closed, on a pro rata basis,
to reduce their liquidation preference, provided, however, that if
at the time of each installment, any of the Company's indebtedness
which had been outstanding at the time of the closing of the
agreement to sell the Product (December 27, 1995) and was due and
payable, the Company was to cause such indebtedness to be paid or
provided for, whether by use of available cash, refinancing,
redirecting a portion of the Stock to satisfy such indebtedness, or
otherwise, as the Company would determine in its best interest.
o The remaining 4.15% of the Stock (or a cash payment equal to the
value thereof) was to be distributed to the Former Officer in
partial consideration for his resignation from the Company and the
return to the Company of all common stock of the Company and
cancellation of options to purchase 62,500 shares of common stock.
Other than for the Former Officer, none of the other common stockholders were
entitled to any of the Stock.
Because the Stock was receivable in two equal annual installments, the gain from
the sale of the Product, $1,951,000, was calculated by discounting the value of
the Stock receivable using a discount rate of 15%. In 1995, the Company also
recorded the difference between 95.85% of the discounted net present value of
the Stock to be received and the Company's indebtedness, $1,131,744 at December
31, 1995, as a payable to the preferred stockholders of $738,289 to reduce their
liquidation preference. The present value of the amount payable to the preferred
stockholders, including the accretion of interest thereon, was $2,156,106 at
December 31, 1996, since all of the Company's indebtedness outstanding as of the
date of the sale of the Product was satisfied through sources other than the
Stock to be received. This obligation was settled with the January 1998 receipt
of the final installment of IPI stock, as discussed above.
The discounted net present value of the Stock distributable to the Former
Officer as of the date of sale, amounting to $80,967, was allocated between
common stock ($445) and severance expense ($80,522) based on the fair value of
the Company's common stock ($.004 per share).
3. License and Research Agreements
In November 1995, the Company entered into an agreement with TJU for the
exclusive worldwide license to develop, manufacture and sell the Invention. In
consideration for the license agreement, the Company paid cash of $10,000 and
issued an aggregate of 458,243 shares of common stock to TJU and the scientific
founder (the Scientist). These shares had
F-12
<PAGE>
AVAX Technologies
(a development stage company)
Notes to Financial Statements (continued)
3. License and Research Agreements (continued)
antidilution rights prior to the first equity financing, as defined in the
license agreement, in excess of $1,000,000 by the Company.
Under terms of the license agreement, the Company was required to raise a
minimum of $500,000 of net operating capital by December 1996. Also under the
terms of the license agreement, (i) the Company is obligated to pay certain
milestone payments as follows: $10,000 upon initiation of the first clinical
trial that is approved by the Food and Drug Administration (FDA) or comparable
international agency, $10,000 upon the first filing of a New Drug Application
(NDA) with the FDA or comparable international agency, and $25,000 upon receipt
by the Company of approval from the FDA or comparable international agency to
market products. In addition, the Company is obligated to pay royalties on its
worldwide net sales revenue derived from the Invention and a percentage of all
revenues received from sublicensees of the Invention.
The Company also entered into a research agreement with TJU to fund a study to
be performed by TJU for the development of the technology related to the
Invention (the Study) at approximately $220,000 per annum for the first three
years. The Company, at its discretion, may reduce the funding in the third year
to no less than $100,000. Following the third year, the Company is obligated to
spend a minimum of $500,000 per year on the development of the Invention until
commercialized in the United States. If following the third year, the Company
files for United States marketing approval through a Company sponsored NDA, the
Company may elect to spend less than $500,000 per year on the development of the
Invention during the period of time the NDA is under review by the FDA. The
research agreement will continue until completion of the Study, although it is
terminable, upon notice by either party to the other, at any time. Expenses
incurred related to research funding for TJU were $230,602 and $274,732 for the
years ended December 31, 1998 and 1997, respectively. This level of funding
satisfies the Company's obligation under the agreement.
In December 1996, the Company entered into an agreement with Rutgers for the
exclusive worldwide license to develop, manufacture and sell products embodying
the Compounds. In consideration for the license agreement, the Company paid cash
of $15,000, has agreed to pay $15,000 in each subsequent year as a license
maintenance fee and has committed to the issuance of warrants to Rutgers to
purchase 125,000 shares of common stock at a price of $8.24 per share based on
the achievement of certain development milestones. The first 75,000 warrants
will expire in 2006, and the final 50,000 warrants will expire in 2011. These
warrants, once issued, shall provide for cashless exercise, piggyback
registration rights and certain antidilution rights. The Company has agreed to
fund research in the amount of one hundred thousand dollars ($100,000) per year
for three years. In addition, the Company is obligated to spend an aggregate of
$200,000 in the first year, $300,000 in the second year and $500,000 each year
thereafter until the first year of commercial marketing of a product derived
from the Compounds. The license maintenance fee shall not be payable in years
where research funding is equal to or greater than $100,000. Expenses incurred
related to research funding for Rutgers were $97,500 and $173,612 for the years
ended December 31, 1998 and 1997, respectively. This level of funding satisfies
the Company's obligation under the agreement.
Under the terms of the license agreement, the Company is obligated to pay
certain milestone payments as follows: $15,000 on the earlier of October 31,
1999 or the date of first filing of an Investigational New Drug (IND)
application with the FDA, or comparable international agency; $25,000 on the
earlier of October 31, 2001 or the date of initiation of Phase II trials in the
United States or another major market country; $45,000 on the earlier of October
31, 2005 or the date of first filing of an NDA application with the FDA, or
comparable international agency; and $150,000 on the earlier of October 31, 2008
or the date of receipt by the Company of approval from the FDA, or comparable
international agency, to market products.
F-13
<PAGE>
AVAX Technologies
(a development stage company)
Notes to Financial Statements (continued)
3. License and Research Agreements (continued)
In addition, the Company is obligated to pay royalties on its worldwide net
sales revenue derived from the Compounds and a percentage of all revenues
received from sublicensees of products derived from the Compounds. Such royalty
payments shall be no less than $100,000 in the first year of commercial
marketing, $200,000 in the second year, $250,000 in the third year, $300,000 in
the fourth year, and $350,000 in the fifth and all following years.
In February 1997, the Company entered into an agreement with Texas A&M for the
exclusive worldwide license to develop, manufacture and sell products embodying
the Texas A&M Compounds. Under the terms of the license agreement, the Company
has agreed to fund research in the amount of approximately $108,000 per year for
the next three years. The Company is also obligated to pay certain milestone
payments as follows: $24,000 upon initiation of certain toxicity evaluations;
$12,000 upon completion of toxicity evaluations demonstrating certain acceptable
toxicity levels; $12,000 upon the submission of an IND to the FDA, or comparable
international agency; $5,000 upon completion of the first Phase I clinical
investigation; and $15,000 upon receipt by the Company of NDA approval from the
FDA to market products.
In addition, the Company is obligated to pay royalties on its worldwide net
sales revenue derived from the Compounds and a percentage of all revenues
received from sublicensees of products derived from the Compounds. Such royalty
payments shall be no less than $50,000 in the first year of commercial
marketing, $100,000 in the second year and $200,000 in the third year and all
following years. Expenses incurred related to research funding for Texas A&M was
$81,563 and $108,750 for the years ended December 31, 1998 and 1997,
respectively. This level of funding satisfies the Company's obligation under the
agreement.
4. Equity Transactions
Common and Preferred Stock
Common stock issued for services since 1990 has been recorded based on the value
of the services provided.
In April 1995, in accordance with the terms of his resignation and related
severance arrangements, the Former Officer returned 111,330 shares of common
stock and options to purchase 62,500 shares of common stock. The common stock
returned was valued at $.004 per share. The common stock and options returned
were canceled.
In May 1995, in accordance with the terms of a settlement agreement with a
former officer and director of the Company, the Company agreed to release and
relinquish any claim it may have on certain intellectual property, excluding the
Product, in exchange for 196,618 shares of the Company's common stock owned by
her and her family. The common stock was valued at $.004 per share and was
canceled.
On September 13, 1995, the Company issued 402,490 shares of common stock to
officers of the Company at $.004 per share.
On November 20, 1995, the Company issued an aggregate of 458,243 shares of
common stock to TJU and the Scientist (see Note 3). In addition, on November 20,
1995, the Company issued, in aggregate, an additional 916,485 shares to a
principal stockholder, a third party designated by the principal stockholder,
and an officer, at $.004 per share.
F-14
<PAGE>
AVAX Technologies
(a development stage company)
Notes to Financial Statements (continued)
4. Equity Transactions (continued)
On March 24, 1996, the Company repurchased 77,901 shares of common stock
previously issued to an officer at $.004 per share. The repurchased shares were
canceled.
In May 1996, the Company's authorized capital was increased to 50,000,000 shares
of common stock, par value $.004, and 5,000,000 shares (of which 2,500,000
shares were designated as Series A preferred stock and 300,000 shares were
designated as Series B preferred stock) of preferred stock, par value $.01. In
June 1998, the Company's authorized common stock, par value $.004, was decreased
to 30,000,000 shares.
Pursuant to a private placement in May and June 1996, the Company issued 258,198
shares of Series B convertible preferred stock. The preferred stockholders also
received 129,099 shares of common stock. The total consideration was
$25,819,800. The per share price allocated to common stock and Series B
convertible preferred stock was $1 and $99, respectively. In connection with the
private placement, the Company paid $3,357,000 in commissions and nonaccountable
expenses to the placement agent, a related party, and issued 500 shares of
common stock and 1,000 shares of Series B convertible preferred stock as
consideration for legal services valued at $100,000. In addition, the placement
agent received warrants to purchase 25,819.8 shares of Series B convertible
preferred stock at an exercise price of $110 per share. Such warrants are
exercisable until June 11, 2006, contain certain antidilution provisions and may
be exercised pursuant to a cashless exercise feature. Other share issuance
expenses amounted to $142,000.
The Series B preferred stockholders are entitled to voting rights equivalent to
the number of common shares into which their preferred shares are convertible.
The Series B preferred stockholders are also entitled to receive, in preference
to the holders of common stock, an amount per preferred share of $135 plus any
declared but unpaid dividends.
Pursuant to the terms of the private placement, each share of Series B preferred
stock was convertible at any time, in whole or in part, at the discretion of the
holders, into common stock at $4 per share (the Initial Conversion Price), which
amounted to 6,479,950 shares at December 31, 1996. Twelve months after the final
closing date (the Reset Date), the Company could, at its option, cause
conversion of the preferred stock, in whole or in part, into common stock at the
Initial Conversion Price if the closing price of the common stock exceeded 150%
of the Initial Conversion Price for at least 20 trading days in any
30-consecutive-trading-day period.
At the second closing of the private placement on June 11, 1996, the 1,287,500
shares of Series A preferred stock were automatically converted to 321,875
shares of common stock. Notwithstanding such conversion, holders of the Series A
preferred stock have received pro rata 95.85% of shares of common stock of IPI
associated with the sale of the Product, as discussed in Note 2.
At December 31, 1998, the remaining 112,689 shares of Series B preferred stock
are convertible into 2,939,679 shares of common stock, excluding the effect of
any fractional shares.
In September 1998, the Company issued 9,301 shares of common stock, which is
restricted from trading, to the Company's President. The stock issue was in
compensation for services rendered and accordingly an expense of $25,000 (the
fair market value at issue date) was recorded in general and administrative
expenses.
F-15
<PAGE>
AVAX Technologies
(a development stage company)
Notes to Financial Statements (continued)
4. Equity Transactions (continued)
Conversion Reset
In accordance with the terms of the placement, the Initial Conversion Price was
to be adjusted and reset effective as of the Reset Date if the average closing
bid price for the 30 consecutive trading days immediately preceding the Reset
Date (the 12-Month Trading Price) was less than 135% of the Initial Conversion
Price or $5.40. If such was the case, the Initial Conversion Price would be
reduced to be equal to the greater of the 12-Month Trading Price divided by 1.35
or 50% of the Initial Conversion Price.
The Initial Conversion Price was adjusted effective June 11, 1997, because the
average closing bid price of the common stock for the 30 consecutive trading
days immediately preceding such date was less than $5.40. The average was, in
fact, $5.175 per share. Accordingly, the conversion price was adjusted to $3.83
per share, which corresponds to a new conversion rate of 26.0875 shares of
common stock per share of Series B preferred stock.
Staggered Lock-up
Pursuant to the terms of the placement, 25% of each holder's shares of common
stock issuable upon conversion of the Series B preferred shares (the Conversion
Shares) were not subject to any restriction on resale (Lock-up). The remaining
75% of each holder's Conversion Shares were subject to a staggered Lock-up,
whereby 25% of the Conversion Shares were released from the Lock-up every three
months after the final closing, through and including March 11, 1997.
In March 1997, the Company completed a revision to the staggered Lock-up and
Conversion Reset provision of the private placement. Shareholders owning
approximately 94% of the Series B preferred shares agreed to a modification of
the original subscription agreement, such that the staggered Lock-up would
expire beginning three months after both listing and effectiveness under the
Securities Act of 1933 of the Company's Registration Statement for its common
stock (Effectiveness). As so modified, upon listing and Effectiveness, which
occurred on July 10, 1997, 25% of the Conversion Shares were not subject to any
Lock-up provisions. The remaining 75% of the Conversion Shares were subject to a
staggered Lock-up, such that every three months after July 10, 1997, 25% of the
Conversion Shares were released from Lock-up until April 10, 1998 at which point
all Conversion Shares were no longer subject to any Lock-up.
In addition, for those shareholders who accepted the Lock-up modifications, the
Company agreed to provide additional reset protection, extending the Reset Date
to 12 months following the later of Effectiveness and listing, or July 10, 1998.
The terms of this modified reset were the same as the original reset provision,
except that the Company would not adjust the conversion price, but would issue
additional shares of common stock to effect the principles of the original reset
provision. The average closing bid price for the 30 consecutive trading days
preceding July 10, 1998 was $3.1544 and accordingly, the Company issued
3,029,339 shares of common stock to those holders of Series B Preferred Stock
who had agreed to the lockup and had not converted their Preferred Stock to
Common Stock.
F-16
<PAGE>
AVAX Technologies
(a development stage company)
Notes to Financial Statements (continued)
4. Equity Transactions (continued)
Stock Options
In April 1992, the Board of Directors approved the 1992 Stock Option Plan (the
Plan), which, as amended, authorized up to 437,500 shares of common stock for
granting both incentive and nonqualified stock options to employees, directors,
consultants and members of the scientific advisory board of the Company. The
Plan was amended in June 1998, to increase the number of shares issuable to
1,500,000. The exercise price and vesting period of the options are determined
by the Board of Directors at the date of grant. Options may be granted up to 10
years after the Plan's adoption date and generally expire 10 years from the date
of grant.
The following summarizes activity in the Plan:
Options
---------------
Balance at December 31, 1994 276,375
Canceled (246,375)
--------------
Balance at December 31, 1995, 1996 and 1997 30,000
Granted 600,000
--------------
Balance at December 31, 1998 630,000
==============
In March 1998, options to purchase 30,000 shares of common stock at an exercise
price of $4.00 per share were granted to an employee. Such options vest over
three years and are exercisable for a period of seven years. In June 1998,
options to purchase 75,000 shares of common stock at an exercise price of $2.563
per share were granted to an employee. Such options vest over four years and are
exercisable for a period of seven years. In September 1998, options to purchase
240,000 shares of common stock at an exercise price of $1.81 per share were
granted to an employee. These options vest 40,000 after one year with the
remaining options vesting upon the completion of certain milestones. In October
1998, options to purchase 235,000 shares of common stock at an exercise price of
$1.25 per share were granted to four different employees. The options vest over
four year periods and are exercisable for a period of seven years. In December
1998, options to purchase 20,000 shares of common stock at an exercise price of
$2.25 per share were granted to an employee. Such options vest over four years
and are exercisable for a period of seven years.
Certain officers and employees were also granted stock options in 1996, as
authorized by the Board of Directors, apart from the Plan. In May 1996, the
Company's President and Chief Executive Officer (the President) received options
to purchase 318,873 shares of common stock at $1.00 per share. Such options vest
at a rate of 1/16 per quarter over four years and are exercisable for a period
of seven years. Because the fair value of the Company's common stock at the date
of grant was determined to be $2 per share, the Company recorded $318,873 as
deferred compensation. Such deferred compensation is being amortized over four
years.
In September 1996, certain officers and an employee also received options to
purchase 252,500 shares of common stock at $1.00 per share. Such options vest at
a rate of 1/16 per quarter over four years and are exercisable for a period of
seven years. Because the fair value of the Company's common stock at the date of
grant was determined to be $4 per share, the Company recorded $757,500 as
deferred compensation. Such deferred compensation is being amortized over four
years.
F-17
<PAGE>
AVAX Technologies
(a development stage company)
Notes to Financial Statements (continued)
4. Equity Transactions (continued)
In March 1997, one other employee of the Company received options to purchase
52,500 shares of common stock at $6.00 per share, the closing market price on
the date of grant. In July 1997, the Company withdrew such options and replaced
them with options to purchase 90,000 shares of common stock at an exercise price
of $4.50, the closing market price on the date of grant. The options vest as
follows: 5,000 shares vest on September 1, 1997, 30,000 shares vest at a rate of
1/6 every six months over a three-year period, thereafter, and the remaining
55,000 shares will vest upon the occurrence of certain milestone events relating
to the Company's manufacturing program. Such options are exercisable for a
period of seven years.
In July 1997, the President, certain officers and an employee also received
options to purchase 280,000 shares of common stock at $4.50 per share. The
President's options, which represent 150,000 of these options, vest at a rate of
1/12 per quarter over a three-year period. The remaining options vest at a rate
of 1/16 per quarter over four years and all are exercisable for a period of
seven years.
In July 1997, options were issued to a scientific consultant to purchase 30,000
shares of common stock at $4.50 per share. Such options vest at a rate of 1/3
per year over three years and are exercisable for a period of seven years.
In September 1997, four directors of the Company each received a grant of 40,000
options to purchase common stock at $4.50 per share. Such options vest at a rate
of 1/16 per quarter over four years, commencing on December 1, 1997, and are
exercisable for a period of seven years.
In December 1997, four directors of the Company each received a grant of 5,161
options to purchase common stock at $3.88 per share. Such options vest at a rate
of 1/4 per quarter over one year, commencing on March 1, 1998, and are
exercisable for a period of seven years.
In March 1998, in consideration for consulting services, the Company issued
options to purchase 50,000 shares of common stock to a consultant of the
Company, exercisable for seven years at an exercise price of $4.00 per share.
Such options vest at a rate of 1/12 per month.
In December 1998, the Company issued options to purchase 21,000 shares of common
stock to a consultant of the Company, exercisable for seven years at an exercise
price of $2.25 per share. Such options vest in equal increments annually over
three years.
Warrants
In June, July and September 1992, the Company issued warrants to purchase 88,769
shares (adjusted to comply with antidilution provisions of the warrants) of the
Company's common stock at a price of $2.59. These warrants were exercised in
April and June 1997 under a cashless exercise provision, resulting in the
issuance of 49,770 shares of common stock.
F-18
<PAGE>
AVAX Technologies
(a development stage company)
Notes to Financial Statements (continued)
4. Equity Transactions (continued)
The Company has issued warrants to purchase 7,750 (May 1993) and 90,000
(January, February and August 1995) shares of the Company's common stock at a
price of $11.00 and $.04 per share, respectively. These warrants are exercisable
at any time and expire in 1998 and 2006, respectively.
In January and February of 1996, the Company issued warrants to purchase 97,500
shares of the Company's common stock at a price of $.04 per share. Such warrants
are exercisable at any time and expire in 2007.
In October 1996, the Company issued warrants to purchase 50,000 shares of common
stock at $6 per share, 25,000 of which were subsequently canceled in April of
1997 (see Note 7). These warrants are exercisable at December 31, 1997 and
expire in 2001.
In December 1996, the Company committed to the future issuance of warrants to
purchase 125,000 shares of the Company's common stock at a price of $8.24 per
share (see Note 3).
In June and July of 1996, warrants to purchase 156,250 shares of common stock at
$.04 per share were exercised.
In February 1997, the Company issued warrants to three outside consultants to
purchase a total of 25,500 shares of common stock at $6.00 per share. These
warrants vested immediately upon issuance and expire in 2004.
In April 1997, the Company issued warrants to purchase 50,000 shares of common
stock at $8.00 per share (see Note 7). Such warrants vest on various dates
through April 1998 and expire in July 2002.
In July 1997, warrants were issued to a consultant to purchase 45,000 shares of
common stock at $4.50 per share. Such warrants were to vest upon the occurrence
of certain milestones and were exercisable for a period of five years. In
December 1997, these warrants were canceled and new warrants to purchase 115,000
shares of common stock at $3.50 per share were issued to the consultant. Such
warrants vest upon the occurrence of certain milestones and are exercisable for
a period of five years.
In December 1997, warrants were issued to a consultant to purchase 200,000
shares of common stock at $3.75 per share. Such warrants vest upon the
achievement of certain performance-based milestones and are exercisable for a
period of five years.
In May 1998, warrants were issued to a financial consultant to purchase 80,000
shares of common stock at $4.03 per share. The agreement was terminated during
the year resulting in only 40,000 shares vesting as of December 31, 1998. These
warrants expire in May 2003.
In October 1998, warrants were issued to a financial consultant to purchase
75,000 shares of common stock at $1.625 per share. Such options vest at various
dates through February 1999 and expire in September 2003.
F-19
<PAGE>
AVAX Technologies
(a development stage company)
Notes to Financial Statements (continued)
4. Equity Transactions (continued)
Authorized but unissued shares of common stock were reserved for issuance at
December 31, 1998 as follows:
December 31,
1998
--------------
Series B convertible preferred stock (Note 4) 2,939,679
Stock option plan 1,500,000
Non Plan options 1,223,016
Warrants to purchase common stock 686,750
Warrants to purchase Series B convertible
preferred stock 673,564
==============
7,023,009
==============
SFAS No. 123 Disclosures
Pro forma information regarding net loss and net loss per share is required by
SFAS No. 123 and has been determined as if the Company had accounted for its
applicable stock options and warrants under the fair value method of the
statement.
The fair value for these options and warrants was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 1998, including a risk free interest rate of 4.63%, a volatility
factor of the expected market price of the Company's common stock of .823 and a
weighted-average remaining contractual life of the option or warrant of 49
months.
This model was developed for use in estimating the fair value of traded options
which have no vesting restrictions and are fully transferable. In addition,
option valuation models require the input of highly subjective assumptions,
including the expected stock price volatility. Because the Company's stock
options and warrants 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 existing
models do not necessarily provide a reliable single measure of the fair value of
its employee stock options or warrants.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the option or warrant vesting period. The effects
of applying SFAS No. 123 for pro forma disclosures are not likely to be
representative of the effects on reported net income or losses for future years.
The Company's pro forma information follows:
1997 1998
----------------------------
Pro forma net loss attributable
to common stockholders $(4,392,301) $(6,246,238)
Pro forma net loss per share (1.17) (.93)
F-20
<PAGE>
AVAX Technologies
(a development stage company)
Notes to Financial Statements (continued)
4. Equity Transactions (continued)
A summary of applicable stock option and warrant activity and related
information for the years ended December 31, 1997 and 1998 is as follows:
<TABLE>
<CAPTION>
1997 1998
--------------------- ---------------------
Weighted Weighted
Average Average
Options and Exercise Options and Exercise
Warrants Price Warrants Price
------------------ ------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 1,549,636 $ 3.21 2,435,080 $ 3.70
Granted 999,213 4.43 786,000 2.00
Exercised 88,769 2.59 -- --
Forfeited 25,000 6.00 7,750 11.00
--------- ---------
Outstanding at end of year 2,435,080 3.70 3,213,330 3.27
========= =========
Exercisable at end of year 1,104,047 $ 3.82 1,603,222 $ 3.64
========= =========
</TABLE>
The weighted-average fair value of options and warrants granted during 1997 and
1998 was $1.39 and $1.20, respectively. Exercise prices for options and warrants
outstanding range from $.04 to $8.24. The option contracts expire at various
times through June of 2006.
5. Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consist of the following:
Professional fees $222,450
Construction fees and equipment (for
manufacturing
facility) 638,159
Other 26,037
--------
$886,646
========
6. Income Taxes
At December 31, 1998, the Company has net operating loss carryforwards of
approximately $12,700,000 for federal income tax purposes that expire in varying
amounts between 2005 and 2013, if not utilized.
F-21
<PAGE>
AVAX Technologies
(a development stage company)
Notes to Financial Statements (continued)
6. Income Taxes (continued)
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 for federal income tax
purposes are as follows:
December 31,
1998
------------
Deferred tax assets:
Net operating losses $ 4,880,000
Deferred compensation 250,000
Other 1,000
------------
Total deferred tax assets 5,131,000
Deferred tax liabilities:
Depreciation expense (12,000)
------------
5,119,000
Valuation allowance (5,119,000)
============
Net deferred tax assets $ --
============
The valuation allowance at December 31, 1997 was $2,883,000.
Under Section 382 of the Tax Reform Act of 1986, the Company's net operating
loss carryforward could be subject to an annual limitation if it should be
determined that a change in ownership of more than 50% of the value of the
Company's stock occurred over a three-year period.
The following summary reconciles the federal statutory rate with the actual
income tax provision (benefit):
December 31,
1997 1998
-----------------------------
Income taxes (benefit) at
statutory rate $(1,450,000) $(1,985,000)
State income taxes, net of
federal benefit (197,000) (270,000)
Change in the valuation
allowance 1,649,000 2,236,000
Other 2,000 19,000
-----------------------------
Provision for income
taxes (benefit) $ -- $ --
=============================
F-22
<PAGE>
AVAX Technologies
(a development stage company)
Notes to Financial Statements (continued)
7. Commitments
Leases
In August 1996, the Company entered into a three-year lease for office
facilities. The lease commenced in October 1996 with a monthly rental of
approximately $5,400, beginning in the fourth month. This lease was amended in
December 1997 to add additional office space for the remainder of the original
lease term which increased the monthly rental by approximately $2,700. This
lease is secured by an irrevocable standby letter of credit whereby the lessor
is the named beneficiary. This $107,000 letter of credit expires at the end of
the original lease term and is automatically reduced by an equal amount each
year.
In December 1997, the Company entered into a 10-year lease agreement for
manufacturing facility space that commenced in February 1998 and contains an
option to terminate after five years. The termination option requires a lump sum
payment at the termination of the lease of $236,057. The monthly rental is
approximately $10,400. The first month's rent was payable upon signing of the
lease along with a security deposit equivalent to two months rental. This lease
is secured by a one-year irrevocable standby letter of credit whereby the lessor
is the named beneficiary. This $379,530 letter of credit automatically renews
each December and will be reduced by the amortized reduction of the landlord
investment each year.
Rent expense under these agreements was approximately $176,000 and $79,000 for
the years ended December 31, 1998 and 1997, respectively.
Future minimum lease payments under the noncancellable operating leases,
assuming the termination payment is made in 2002 on the manufacturing facility
lease, consisted of the following at December 31, 1998:
Year ending
December 31,
---------------
1999 $196,908
2000 $124,071
2001 $140,318
2002 $377,852
Consulting Agreements
Effective in June 1996, the Company entered into consulting agreements with the
Scientist, a director and a former officer. These agreements are for an initial
term of three years through June 1999. Annual consulting fees payable pursuant
to these agreements approximate $66,000.
In April 1997, the Company entered into an agreement with an investment banker
pursuant to which the investment banker may, at the Company's request, perform
certain investment banking services for the Company. In connection with this
agreement, the investment banker was granted warrants to purchase 50,000 shares
of common stock at $8 per share (see Note 4).
F-23
<PAGE>
AVAX Technologies
(a development stage company)
Notes to Financial Statements (continued)
7. Commitments (continued)
In April, May and July 1997, the Company entered into agreements with four
members of the Scientific Advisory Board. These agreements are for initial terms
of two years and require compensation of $2,000 per person per meeting of the
Scientific Advisory Board. In July 1997, the Company entered into a consulting
agreement with a member of its Scientific Advisory Board. In connection with
this agreement, the Company granted options to acquire 30,000 shares of common
stock at $4.50 per share (see Note 4). In addition, the Company entered into a
three year consulting agreement with one of the members of its Scientific
Advisory Board for additional consulting services. The agreement calls for
annual compensation of $20,000 plus options to acquire 21,000 shares of common
stock at $2.25 per share (see Note 4). The options vest annually in arrears.
In August 1998, the Company entered into a consulting agreement with a contract
research organization to assist the Company in performance of its clinical
trials. The agreement has an expected term of over seven years and requires
fixed payments of $120,000 per quarter over a two year period.
In September 1998, the Company entered into an agreement with a financial
advisor, pursuant to which the advisor may, at the Company's request, perform
certain financial advisory services for the Company. The agreement has an
initial term of one year. In connection with this agreement, the advisor was
granted warrants to purchase 75,000 shares of common stock at $1.625.
8. Property, Plant and Equipment
The Company began construction of its GMP (Good Manufacturing Practices)
compliant clinical manufacturing facility during 1998. Costs incurred related to
the planning and construction of the facility have been capitalized and are
included in property, plant and equipment. The facility has not been placed in
service and thus no depreciation has been recorded related to the facility.
As of December 31, 1998, the Company anticipates it will incur an additional
$1,500,000 to complete construction of this facility.
The following shows the composition of the assets included in property, plant
and equipment:
Accumulated
Cost Depreciation Net
--------------------------------------
Office furniture and equipment $ 118,476 $ 35,477 $ 82,999
Manufacturing facility and
related equipment 1,107,415 -- 1,107,415
======================================
Total $1,225,891 $ 35,478 $1,190,414
======================================
Depreciation expense was $20,510 and $12,962 for the years ended December 31,
1998 and 1997, respectively.
F-24
<PAGE>
AVAX Technologies
(a development stage company)
Notes to Financial Statements (continued)
9. Employee Benefit Plan
During 1996, the Company established a 401(k) plan for all employees over the
age of 21. Employee contributions are subject to normal 401(k) plan limitations.
The Company made no matching contributions in 1997 and a $4,000 contribution was
made in 1998.
10. Year 2000 Disclosure (Unaudited)
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. As a result, those
computer programs having date-sensitive software would recognize a date with the
year "00" as the year 1900 rather than the year 2000. Systems that calculate,
compare or sort using the incorrect date may malfunction.
The Company's only date-sensitive information technology is its accounting
software applications, which the Company intends to upgrade to be Year 2000
compliant by June 30, 1999. To the degree the software is found to be
non-compliant, the Company has alternative methods in place to ensure the
functions performed by the software will be completed. Because the Company has
already planned to replace its software in 1999, the Company does not
contemplate any software replacement costs due to Year 2000 issues.
The Company has made inquiries of suppliers and parties with whom it has
significant business relationships regarding compliance with Year 2000 issues.
These include a clinical processing site at Thomas Jefferson University ("TJU"),
various other clinical sites and certain financial institutions such as
commercial banks. The Company has been informed by TJU that TJU will be Year
2000 compliant insofar as the Company is concerned. Specifically, clinical trial
information that is maintained at TJU is on a standalone computer system. TJU
has indicated that the software used to monitor clinical trial information will
be upgraded to a Year 2000 compliant version during 1999.
To date, the Company is not aware of any financial institution or other third
party with a Year 2000 issue that would materially impact the Company's results
of operations, liquidity or capital resources. The Company has also been advised
by its financial institutions that it will receive certifications confirming
that the computer systems of these institutions are Year 2000 compliant.
Generally, the Company intends to develop contingency plans to address any other
Year 2000 compliance-risks that are uncovered by its continuing evaluation
efforts. Although the Company has no means of ensuring that its suppliers and
financial institutions will be Year 2000 ready, it will continue to monitor, to
the extent practicable, their compliance with the Year 2000 problem. There can
be no assurance, however, that such problems will not arise.
F-25
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
AVAX TECHNOLOGIES, INC.
Date: March 29, 1999 By: /s/ Jeffrey M. Jonas, M.D.
--------------------------------------
Jeffrey M. Jonas, M.D.
President, Chief Executive Officer and Director
In accordance with the Exchange Act, this Report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Name & Title Date
--------- ------------ ----
<S> <C> <C>
/s/ Jeffrey M. Jonas, M.D. Jeffrey M. Jonas, M.D. March 29, 1999
--------------------------------- President, Chief Executive Officer
and Director
/s/ David L. Tousley David L. Tousley March 29, 1999
--------------------------------- Chief Financial Officer and Secretary
(Principal Financial Officer)
/s/ Edson D. de Castro Edson D. de Castro March 29, 1999
--------------------------------- Director
/s/ John K. A. Prendergast, Ph.D. John K. A. Prendergast, Ph.D. March 29, 1999
--------------------------------- Director
/s/ Carl Spana, Ph.D. Carl Spana, Ph.D. March 29, 1999
--------------------------------- Director
/s/ James Currie James Currie March 29, 1999
--------------------------------- Director
/s/ Michael S. Weiss Michael S. Weiss March 29, 1999
--------------------------------- Director
</TABLE>
27
<PAGE>
Index to Exhibits
The following exhibits are filed with this Report, or incorporated by reference
as noted:
Exhibit No. Description
## 3.1 Certificate of Incorporation of the Registrant, as amended to
date.
* 3.2 By-laws of the Registrant, as amended to date.
E 3.3 Certificate of Designation of Series C Convertible Preferred
Stock
* 4.1 Reference is made to Exhibits 3.1 and 3.2.
* 4.2 Specimen of Common Stock certificate.
* 4.3 Specimen of Series B Convertible Preferred Stock certificate.
* 4.4 Investors' Rights Agreement dated November 20, 1995, by and
between the Registrant and certain investors.
** 4.5 Form of Subscription Agreement, by and between the Registrant
and certain purchasers of Series B Preferred Stock and Common
Stock.
*** 4.6 Form of Placement Warrant Relating to Offering of Series B
Placement Warrants.
***** 4.7 Form of Amendment to Subscription Agreement--Lock-Up
Provisions.
E 4.8 Form of Class A and Class B Common Stock Purchase Warrant
###+ 10.1 Clinical Study and Research Agreement dated November 20, 1995,
by and between the Registrant and Thomas Jefferson University.
* 10.2 The Registrant's 1992 Stock Option Plan.
## 10.3 Letter of Employment dated May 17, 1996, between the
Registrant and Dr. Jeffrey M. Jonas.
* 10.4 Consulting Agreement dated February 22, 1996, between the
Registrant and Dr. Carl Spana.
* 10.5 Consulting Agreement dated May 9, 1996, between the Registrant
and Dr. David Berd.
###+ 10.6 License Agreement dated November 20, 1995, by and between the
Registrant and Thomas Jefferson University.
## 10.7 Letter of Employment dated September 13, 1996, between the
Registrant and David L. Tousley.
## 10.8 Letter of Employment dated September 13, 1996, between the
Registrant and Ernest W. Yankee, Ph.D.
###+ 10.9 License Agreement dated December 10, 1996, by and between the
Registrant and Rutgers, The State University of New Jersey and
the University of Medicine and Dentistry.
###+ 10.10 License Agreement dated February 17, 1997, by and between the
Registrant and The Texas A&M University System.
i
<PAGE>
## 10.11 Investment Banking Services Agreement dated April 17, 1997, by
and between the Registrant and Hill, Thompson, Magid & Co.
####+ 10.12 Sponsored Research Agreement dated May 2, 1997, by and between
the Registrant and Rutgers, The State University of New Jersey
and the University of Medicine and Dentistry.
####+ 10.13 Sponsored Research Agreement dated May 12, 1997, by and
between the Registrant and The Texas A&M University System.
#####10.14 Lease Agreement dated December 1, 1997 for Kansas City
Facility, as amended.
##### 10.15 Lease Agreement dated December 1, 1997 for Philadelphia
Facility.
E+ 10.16 Series C Convertible Preferred Stock and Warrant Purchase
Agreement
E+ 10.17 Extension to the Clinical Study and Research Agreement dated
November 20, 1995, by and between the Registrant and Thomas
Jefferson University.
E 23.1 Consent of Ernst & Young LLP, Independent Auditors.
E 27.1 Financial Data Schedule.
E Enclosed herewith.
* Previously filed with the Registration Statement on Form SB-2 filed with
the Commission on August 1, 1996.
** Previously filed with Amendment No. 1 to the Registration Statement of
Form SB-2 filed with the Commission in September 23, 1996 and which
superseded such exhibit as previously filed with the Registration
Statement on Form SB-2 filed with the Commission on August 1, 1996.
*** Previously filed with Post Effective amendment No. 6 to the Registration
Statement on Form SB-2 filed with the Commission on August 17, 1998.
**** Previously filed with Amendment No. 2 to the Registration Statement on
Form SB-2 filed with the Commission on November 6, 1996.
***** Previously filed with Amendment No. 4 to the Registration Statement on
Form SB-2 filed with the Commission on February 26, 1997.
## Previously filed with Amendment No. 6 to the Registration Statement on
Form SB-2 filed with the Commission on May 7, 1997.
### Previously filed with Amendment No. 9 to the Registration Statement on
Form SB-2 filed with the Commission on July 3, 1997.
#### Previously filed with Post Effective Amendment No. 1 to the Registration
Statement on Form SB-2 filed with the Commission on August 14, 1997.
##### Previously filed with Post Effective Amendment No. 3 to the Registration
Statement on Form SB-2 filed with the Commission on March 16, 1998.
+ Confidential treatment requested as to certain portions of these exhibits.
Such portions have been redacted.
ii
1
CERTIFICATE OF DESIGNATIONS
OF
SERIES C CONVERTIBLE PREFERRED STOCK
OF
AVAX TECHNOLOGIES, INC.
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
AVAX TECHNOLOGIES, INC., a corporation organized and existing under
the laws of the State of Delaware (the "Corporation"), does certify that,
pursuant to the authority conferred on the Board of Directors of the Corporation
by the Certificate of Incorporation of the Corporation and in accordance with
Section 151 of the General Corporation Law of the State of Delaware, the Board
of Directors of the Corporation adopted the following resolution establishing a
series of 120,000 shares of Preferred Stock of the Corporation designated as
"Series C Convertible Preferred Stock":
RESOLVED, that pursuant to the authority conferred on the Board of
Directors of this Corporation by the Certificate of Incorporation, as
amended, a series of Preferred Stock, par value $.01 per share, of the
Corporation is established and created, and that the designation and
number of shares thereof and the voting and other powers, preferences and
relative, participating, optional or other rights of the shares of such
series and the qualifications, limitations and restrictions thereof are as
follows:
Series C Convertible Preferred Stock
1. Designation and Amount. There shall be a series of Preferred Stock designated
as "Series C Convertible Preferred Stock" and the number of shares constituting
such series shall be 120,000. Such series is referred to herein as the "Series C
Convertible Preferred Stock". Such number of shares may be increased or
decreased by resolution of the Board of Directors of the Corporation; provided,
however, that no decrease shall reduce the number of shares of Series C
Convertible Preferred Stock to less than the number of shares then issued and
outstanding.
2. Dividends. Subject to the prior and superior rights of the holders of any
shares of any series of Preferred Stock ranking prior and superior to the shares
of Series C Convertible Preferred Stock with respect to dividends and
distributions, the holders of shares of Series C Convertible Preferred Stock,
shall be entitled to receive dividends and distributions, when, as and if
declared by the Board of Directors of the Corporation out of funds legally
available for such purpose. If the Corporation declares a dividend or
distribution on the common stock, par value $.004 per share (the "Common
Stock"), of the Corporation, the holders of shares of Series C Convertible
Preferred Stock shall be entitled to receive for each share of Series C
Convertible Preferred Stock a dividend or distribution in the amount of the
dividend or distribution that would be received by a holder of the Common Stock
into which such share of Series C Convertible
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2
Preferred Stock is convertible on the record date for such dividend or
distribution. If the Corporation declares a dividend or distribution on any
other class or series of preferred stock, the holders of shares of Series C
Convertible Preferred Stock shall be entitled to receive a dividend or
distribution in an amount per share in proportion to the dividend or
distribution declared on a share of such other class or series based upon the
liquidation preference of a share of the Series C Convertible Preferred Stock
relative to that of a share of such other class or series, unless the holders of
at least 66-2/3% of the outstanding shares of Series C Convertible Preferred
Stock consent otherwise. In any such case, the Corporation shall declare a
dividend or distribution on the Series C Convertible Preferred Stock at the same
time that it declares a dividend or distribution on the Common Stock or such
other class or series of preferred stock and shall establish the same record
date for the dividend or distribution on the Series C Convertible Preferred
Stock as is established for such dividend or distribution on the Common Stock or
such other class or series of preferred stock. Each such dividend or
distribution will be payable to holders of record of the Series C Convertible
Preferred Stock as they appeared on the records of the Corporation at the close
of business on the record date declared for such dividend or distribution, as
shall be fixed by the Board of Directors of the Corporation. If the corporation
declares or pays a dividend or distribution on the Series C Convertible
Preferred Stock as a result of the declaration or payment of a dividend or
distribution on the Common Stock or any other class or series of preferred stock
as described above, the holders of the Series C Convertible Preferred Stock
shall not be entitled to any additional dividend or distribution solely because
such first dividend or distribution also required the declaration or payment of
a dividend or distribution on any other class or series of preferred stock. Any
reference to "distribution" contained in this Section 2 shall not be deemed to
include any distribution made in connection with any liquidation, dissolution or
winding up of the Corporation, whether voluntary or involuntary.
3. Liquidation Preference. In the event of (i) a liquidation, dissolution or
winding up of the Corporation, whether voluntary or involuntary, (ii) a sale or
other disposition of all or substantially all of the assets of the Corporation
or (iii) any consolidation, merger, combination, reorganization or other
transaction in which the Corporation is not the surviving entity or the shares
of Common Stock constituting in excess of 50% of the voting power of the
Corporation are exchanged for or changed into other stock or securities, cash
and/or any other property (a "Merger Transaction") (clauses 3(i), (ii) and (iii)
being collectively referred to as a "Liquidation Event"), after payment or
provision for payment of debts and other liabilities of the Corporation, the
holders of the Series C Convertible Preferred Stock then outstanding shall be
entitled to be paid out of the assets of the Corporation available for
distribution to its shareholders, whether such assets are capital, surplus, or
earnings, before any payment or declaration and setting apart for payment of any
amount shall be made in respect of the stock junior to the Series C Convertible
Preferred Stock, an amount equal to $100.00 per share plus an amount equal to
all declared and unpaid dividends thereon (the "Liquidating Payment"); provided,
however, in the case of Section 3(iii), such $100.00 per share may be paid in
cash and/or securities (valued at the closing price (as defined below) of such
security) of the entity surviving such Merger Transaction. In case of any
Liquidation Event, (x) after payment to the holders of the Series C Convertible
Preferred Stock of their Liquidating Payment, each share of Series C Convertible
Preferred Stock then outstanding shall be converted in such Liquidating Event on
the terms set forth in Section 4 into the kind and amount of shares of stock or
other consideration receivable in
<PAGE>
3
connection with such transaction by a holder of the number of shares of Common
Stock into which such shares of Series C Convertible Preferred Stock could have
been converted immediately prior to such transaction, and (y) the entire
remaining assets, if any, of the Corporation legally available for distribution,
shall be distributed among the holders of the Common Stock (including any
holders of Common Stock issued upon conversion of shares of Series C Convertible
Preferred Stock and any other series of preferred stock of the Corporation
entitled to participate on an as-converted basis in such transaction with the
Common Stock) in proportion to the shares of Common Stock then held by them. If
upon any Liquidation Event, whether voluntary or involuntary, the assets to be
distributed to the holders of the Series C Convertible Preferred Stock shall be
insufficient to permit the payment to such shareholders of the full Liquidating
Payment, then all of the assets of the Corporation to be distributed shall be so
distributed ratably to the holders of the Series C Convertible Preferred Stock
on the basis of the number of shares of Series C Convertible Preferred Stock
held. A consolidation or merger of the Corporation with or into another
corporation, other than in a transaction described in Section 3(iii), shall not
be considered a liquidation, dissolution or winding up of the Corporation or a
sale or other disposition of all or substantially all of the assets of the
Corporation and accordingly the Corporation shall make appropriate provision to
ensure that the terms of this Certificate of Designations survive such
transaction. All shares of Series C Convertible Preferred Stock shall rank as to
payment upon the occurrence of any of the events described in Sections 3(i),
(ii) and (iii) senior to the Common Stock as provided herein and, unless the
terms of such series shall provide otherwise, senior to all other series of the
Corporation's preferred stock but pari passu with the Corporation's Series B
Convertible Preferred Stock.
The "closing price" for each trading day shall be the reported last sales price
regular way or, in case no such reported sale takes place on such day, the
average of the reported closing bid and asked prices regular way, in either case
on the NASDAQ SmallCap Market or the NASDAQ National Market System ("NMS") (such
markets are collectively referred to as "NASDAQ") or, if the Common Stock is not
quoted on NASDAQ, on the principal national securities exchange on which the
Common Stock is listed or admitted to trading (based on the aggregate dollar
value of all securities listed or admitted to trading) or, if not listed or
admitted to trading on any national securities exchange or quoted on NASDAQ, the
average of the closing bid and asked prices in the over-the-counter market as
furnished by any NASD member firm selected from time to time by the Corporation,
for that purpose, or, if such prices are not available, the fair market value
set by, or in a manner established by, the Board of Directors of the Corporation
in good faith. "Trading day" shall have the meaning given in Section 4(c)(ii).
4. Conversion. (a) Right of Conversion. The shares of Series C Convertible
Preferred Stock shall be convertible, in whole or in part, at the option of the
holder thereof and upon notice to the Corporation as set forth in Section 4(b),
into fully paid and nonassessable shares of Common Stock and such other
securities and property as hereinafter provided. The shares of Series C
Convertible Preferred Stock shall be convertible initially at the rate of
30.76923 shares of Common Stock for each full share of Series C Convertible
Preferred Stock and shall be subject to adjustment as provided herein. For
purposes of this resolution, the "conversion rate" applicable to a share of
Series C Convertible Preferred Stock shall be the number of shares of Common
Stock and number or amount of any other securities and property as hereinafter
provided into which a share a Series C Convertible Preferred Stock is then
convertible and shall
<PAGE>
4
be determined by dividing $100.00 by the then existing conversion price. The
initial conversion price shall be $3.25 (the "conversion price").
(b) Conversion Procedures. (i) Any holder of shares of Series C Convertible
Preferred Stock desiring to convert such shares into Common Stock shall
surrender the certificate or certificates evidencing such shares of Series C
Convertible Preferred Stock at the office of the transfer agent for the Series C
Convertible Preferred Stock, which certificate or certificates, if the
Corporation shall so require, shall be duly endorsed to the Corporation or in
blank, or accompanied by proper instruments of transfer to the Corporation or in
blank, accompanied by irrevocable written notice to the Corporation that the
holder elects so to convert such shares of Series C Convertible Preferred Stock
and specifying the name or names (with address) in which a certificate or
certificates evidencing shares of Common Stock are to be issued. The Corporation
need not deem a notice of conversion to be received unless the holder complies
with all the provisions hereof. The Corporation will instruct the transfer agent
(which may be the Corporation) to make a notation of the date that a notice of
conversion is received, which date shall be deemed to be the date of receipt for
purposes hereof.
(ii) The Corporation shall, as soon as practicable after such deposit of
certificates evidencing shares of Series C Convertible Preferred Stock
accompanied by the written notice and compliance with any other conditions
herein contained, deliver at such office of such transfer agent to the person
for whose account such shares of Series C Convertible Preferred Stock were so
surrendered, or to the nominee or nominees of such person, certificates
evidencing the number of full shares of Common Stock to which such person shall
be entitled as aforesaid, together with a cash adjustment of any fraction of a
share as hereinafter provided. Subject to the following provisions of this
Section 4(b)(ii), such conversion shall be deemed to have been made as of the
date of such surrender of the shares of Series C Convertible Preferred Stock to
be converted, and the person or persons entitled to receive the Common Stock
deliverable upon conversion of such Series C Convertible Preferred Stock shall
be treated for all purposes as the record holder or holders of such Common Stock
on such date; provided, however, that the Corporation shall not be required to
convert any shares of Series C Convertible Preferred Stock while the stock
transfer books of the Corporation are closed for any purpose, but the surrender
of Series C Convertible Preferred Stock for conversion during any period while
such books are so closed shall become effective for conversion immediately upon
the reopening of such books as if the surrender had been made on the date of
such surrender, and the conversion shall be at the conversion rate in effect on
such surrender date. No adjustments in respect of any dividends on shares
surrendered for conversion or any dividend on the Common Stock issued upon
conversion shall be made upon the conversion of any shares of Series C
Convertible Preferred Stock.
(iii) All notices of conversion shall be irrevocable; provided, however, that if
the Corporation has sent notice of an event pursuant to Section 4(g), a holder
of Series C Convertible Preferred Stock may, at its election, provide in its
notice of conversion that the conversion of its shares of Series C Convertible
Preferred Stock shall be contingent upon the occurrence of the record date or
effectiveness of such event (as specified by such holder), provided that such
notice of conversion is received by the Corporation prior to such record date or
effective date, as the case may be.
<PAGE>
5
(c) Certain Adjustments of Conversion Rate. In addition to adjustment pursuant
to Section 4(a), the conversion rate (and the corresponding conversion price)
shall be subject to adjustment from time to time as follows:
(i) In case the Corporation shall (A) pay a dividend in Common Stock or make a
distribution in Common Stock, (B) subdivide its outstanding Common Stock, (C)
combine its outstanding Common Stock into a smaller number of shares of Common
Stock or (D) issue by reclassification of its Common Stock other securities of
the Corporation, then in each such case the conversion rate in effect
immediately prior thereto shall be adjusted so that the holder of any shares of
Series C Convertible Preferred Stock thereafter surrendered for conversion shall
be entitled to receive the kind and number of shares of Common Stock or other
securities of the Corporation which such holder would have owned or would have
been entitled to receive immediately after the happening of any of the events
described above had such shares of Series C Convertible Preferred Stock been
converted immediately prior to the happening of such event or any record date
with respect thereto. Any adjustment made pursuant to this Section 4(c)(i) shall
become effective immediately after the effective date of such event retroactive
to the record date, if any, for such event.
(ii) In case the Corporation shall issue rights, options, warrants or
convertible securities to all or substantially all holders of its Common Stock,
without any charge to such holders, entitling them to subscribe for or purchase
Common Stock at a price per share which is lower at the record date mentioned
below than the closing bid price (as defined below) for the trading day
immediately prior to such record date (the "Current Market Price"), then the
conversion rate shall be determined by multiplying the conversion rate
theretofore in effect by a fraction, of which the numerator shall be the number
of shares of Common Stock outstanding immediately prior to the issuance of such
rights, options, warrants or convertible securities plus the number of
additional shares of Common Stock offered for subscription or purchase, and of
which the denominator shall be the number of shares of Common Stock outstanding
immediately prior to the issuance of such rights, options, warrants or
convertible securities plus the number of shares which the aggregate offering
price of the total number of shares offered would purchase at such Current
Market Price. Such adjustment shall be made whenever such rights, options,
warrants or convertible securities are issued, and shall become effective
immediately and retroactive to the record date for the determination of
stockholders entitled to receive such rights, options, warrants or convertible
securities.
The "closing bid price" for each trading day shall be the reported closing bid
price on the NASDAQ or, if the Common Stock is not quoted on NASDAQ, on the
principal national securities exchange on which common stock is listed or
admitted to trading (based on the aggregate dollar value of all securities
listed or admitted to trading) or, if not listed or admitted to trading on any
national securities exchange or quoted on NASDAQ, the closing bid price in the
over-the-counter market as furnished by any NASD member firm selected from time
to time by the Corporation for that purpose, or, if such prices are not
available, the fair market value set by, or in a manner established by, the
Board of Directors of the Corporation in good faith. "Trading day" shall mean a
day on which the national securities exchange or NASDAQ used to determine the
closing bid price is open for the transaction of business or the reporting of
trades or, if the
<PAGE>
6
closing bid price is not so determined, a day on which NASDAQ is open for the
transaction of business.
(iii) In case the Corporation shall distribute (other than a distribution in
liquidation of the Corporation) to all or substantially all holders of its
Common Stock, without any charge to such holder, evidences of its indebtedness
or assets (excluding cash dividends or distributions out of earnings) or rights,
options, warrants or convertible securities containing the right to subscribe
for or purchase Common Stock (excluding those referred to in Section 4(c)(ii)),
then in each case the Corporation shall simultaneously distribute such evidences
of its indebtedness or assets or such rights, options, warrants or convertible
securities pro rata to the holders of the Series C Convertible Preferred Stock
on the record date or date of effectiveness, as the case may be, fixed for
determining the holders of Common Stock entitled to participate in such
distribution in an amount equal to the amount that such holders of Series C
Convertible Preferred Stock would have been entitled to receive had their shares
of Series C Convertible Preferred Stock been exchanged for Common Stock
immediately prior to the time for determination of the holders of Common Stock
entitled to participate in such distribution.
(iv) Upon the expiration of any rights, options, warrants or convertible
securities referred to in Section 4(c)(ii), if such shall not have been
exercised, the conversion rate shall, upon such expiration, be readjusted and
shall thereafter be such as it would have been had it been originally adjusted
(or had the original adjustment not been required, as the case may be) on the
basis of (A) the fact that the Common Stock, if any, was actually issued or sold
upon the exercise of such rights, options, warrants or conversion privileges,
and (B) the fact that such shares of Common Stock, if any, were issued or sold
for the consideration actually received by the Corporation upon such exercise
plus the consideration, if any, actually received by the Corporation for the
issuance, sale or grant of all such rights, options, warrants or conversion
privileges whether or not exercised
(v) No adjustment in the conversion rate shall be required unless such
adjustment would require an increase or decrease of at least 1% in such rate;
provided, however, that the Corporation may make any adjustment that is less
than a 1% increase or decrease at its election; and provided, further, that any
adjustments which by reason of this Section 4(c)(v) are not required to be made
shall be carried forward and cumulated with amounts in any subsequent
adjustment. All calculations that shall be required pursuant to this Section 4
shall be made to the nearest cent or to the nearest one-hundredth of a share, as
the case may be.
(vi) Whenever the conversion rate is adjusted as provided in any provision of
this Section 4:
(A) the Corporation shall compute (or may retain a firm of independent public
accountants (which may be any such firm regularly employed by the Corporation)
to compute) the adjusted conversion rate in accordance with this Section 4 and
shall prepare a certificate signed by the principal financial officer of the
Corporation (or cause any such independent public accountants to execute a
certificate) setting forth the adjusted conversion rate and showing in
reasonable detail the facts upon which such adjustment is based, and such
certificate shall forthwith be filed with the transfer agent of the Series C
Convertible Preferred Stock; and
<PAGE>
7
(B) a notice stating that the conversion rate has been adjusted and setting
forth the adjusted conversion rate, and as soon as practicable after an
adjustment is required, such notices shall be mailed by the Corporation to all
record holders of Series C Convertible Preferred Stock at their last addresses
as they shall appear in the stock transfer books of the Corporation.
(vii) In the event that at any time, as a result of any adjustment made pursuant
to this Section 4, the holder of any shares of Series C Convertible Preferred
Stock thereafter surrendered for conversion shall become entitled to receive any
shares of the Corporation other than shares of Common Stock or to receive any
other securities, the number of such other shares or securities so receivable
upon conversion of any share of Series C Convertible Preferred Stock shall be
subject to adjustment from time to time in a manner and on terms as nearly
equivalent as practicable to the provisions contained in this Section 4 with
respect to the Common Stock.
(d) No Fractional Shares. No fractional shares or scrip representing fractional
shares of Common Stock shall be issued upon conversion of Series C Convertible
Preferred Stock. If more than one certificate evidencing shares of Series C
Convertible Preferred Stock shall be surrendered for conversion at one time by
the same holder, the number of full shares issuable upon conversion thereof
shall be computed on the basis of the aggregate number of shares of Series C
Convertible Preferred Stock so surrendered. Instead of any fractional share of
Common Stock which would otherwise be issuable upon conversion of any shares of
Series C Convertible Preferred Stock, the Corporation shall pay a cash
adjustment in respect of such fractional interest in an amount equal to the same
fraction of the market price per share of Common Stock (which shall be the
closing price as defined in Section 3) at the close of business on the day of
conversion.
(e) Reservation of Shares; Transfer Taxes; Etc. (i) The Corporation shall at all
times reserve and keep available, out of its authorized and unissued stock,
solely for the purposed of effecting the conversion of the Series C Convertible
Preferred Stock, such number of shares of its Common Stock free of preemptive
rights as shall from time to time be sufficient to effect the conversion of all
shares of Series C Convertible Preferred Stock from time to time outstanding at
the then existing conversion price. The Corporation shall use its best efforts
from time to time, in accordance with the laws of the State of Delaware, to
increase the authorized number of shares of Common Stock if at any time the
number of shares of Common Stock not outstanding shall not be sufficient to
permit the conversion of all the then-outstanding shares of Series C Convertible
Preferred Stock.
(ii) The Corporation shall pay any and all issue or other taxes that may be
payable in respect of any issue or delivery of shares of Common Stock on
conversion of the Series C Convertible Preferred Stock. The Corporation shall
not, however, be required to pay any tax which may be payable in respect of any
transfer involved in the issue or delivery of Common Stock (or other securities
or assets) in a name other than that in which the shares of Series C Convertible
Preferred Stock so converted were registered, and no such issue or delivery
shall be made unless and until the person requesting such issue has paid to the
Corporation the amount of such tax or has established, to the satisfaction of
the Corporation, that such tax has been paid.
(iii) Notwithstanding anything to the contrary herein, before taking any action
that would cause an adjustment reducing the conversion rate or before any such
adjustment is made as a result of a
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8
Reset Event, in either event, such that the effective conversion price (for all
purposes an amount equal to $100.00 divided by the conversion rate as in effect
at such time) would be below the then par value of the Common Stock, the
Corporation shall take any corporate action which may, in the opinion of its
counsel, be necessary in order that the Corporation may validly and legally
issue fully paid and nonassessable shares of Common Stock at the conversion rate
as so adjusted.
(f) Prior Notice of Certain Events. In case: (i) the Corporation shall declare
any dividend (or any other distribution) on its Common Stock; or
(ii) the Corporation shall authorize the granting to all or substantially all
the holders of Common Stock as a class of rights or warrants to subscribe for or
purchase any shares of stock of any class or of any other rights or warrants; or
(iii) of any reclassification of Common Stock (other than a stock split,
subdivision or combination of the outstanding Common Stock, or a change in par
value, or from par value to no par value, or from no par value to par value), or
of any compulsory share exchange whereby the Common Stock is converted into
other securities, cash or other property; or
(iv) of a Liquidation Event;
then the Corporation shall cause to be filed with the transfer agent for the
Series C Convertible Preferred Stock, and shall cause a notice to be mailed by
first class, postage prepaid to the holders of record of the Series C
Convertible Preferred Stock, at their last addresses as they shall appear upon
the stock transfer books of the Corporation, at least 20 days prior to the
applicable date hereinafter specified, stating (x) the date on which a record
(if any) is to be taken for the purpose of such dividend, distribution or
granting of rights or warrants or, if a record is not to be taken, the date as
of which the holders of Common Stock of record to be entitled to such dividend,
distribution, rights or warrants are to be determined and a description of the
cash, securities or other property to be received by such holders upon such
dividend, distribution or granting of rights or warrants or (y) the date on
which such Liquidation Event or reclassification or share exchange is expected
to become effective, the date as of which it is expected that holders of Common
Stock of record shall be entitled to exchange their shares of Common Stock for
securities or other property deliverable upon such exchange, dissolution,
liquidation or winding up and the consideration, including securities or other
property, to be received by such holders upon such event.
(g) Other Changes in Conversion Rate. (i) The Corporation from time to time may
increase the conversion rate by any amount for any period of time if the period
is at least 20 days and if the increase is irrevocable during the period.
Whenever the conversion rate is so increased, the Corporation shall mail to
holders of record of the Series C Convertible Preferred Stock a notice of the
increase at least 10 days before the date the increased conversion rate takes
effect, and such notice shall state the increased conversion rate and the period
it will be in effect.
(ii) The Corporation may make such increases in the conversion rate, in addition
to those required or allowed by this Section 4, as shall be determined by it, as
evidenced by a resolution of the Board of Directors of the Corporation, to be
advisable in order to avoid or diminish any
<PAGE>
9
income tax to holders of Common Stock resulting from any dividend or
distribution of stock or issuance of rights or warrants to purchase or subscribe
for stock or from any event treated as such for income tax purposes.
(h) Ambiguities/Errors. The Board of Directors of the Corporation shall have the
power to resolve any ambiguity or correct any error in the provisions relating
to the convertibility of the Series C Convertible Preferred Stock, and its
actions in so doing shall be final and conclusive.
5. Mandatory Conversion at Option of Corporation. If the Common Stock is listed
for quotation on the NMS, the Corporation, at its option, may cause the Series C
Convertible Preferred Stock to be converted in whole, or in part, on a pro rata
basis, into fully paid and nonassessable shares of Common Stock and such other
securities and property as herein provided if the closing bid price of Common
Stock shall have exceeded 300% of the then applicable conversion price for at
least 20 trading days in any 30 consecutive trading day period. Any shares of
Series C Convertible Preferred Stock so converted shall be treated as having
been surrendered by the holder thereof for conversion pursuant to Section 4 on
the date of such mandatory conversion (unless previously converted at the option
of the holder).
Not more than 60 days nor less than 10 days prior to the date of any such
mandatory conversion, notice by first class mail, postage prepaid, shall be
given to the holders of record of the Series C Convertible Preferred Stock to be
converted, addressed to such holders at their last addresses as shown on the
stock transfer books of the Corporation. Each such notice shall specify the date
fixed for conversion, the place or places for surrender of shares of Series C
Convertible Preferred Stock, and the then effective conversion rate pursuant to
Section 4.
Any notice which is mailed as herein provided shall be conclusively presumed to
have been duly given by the Corporation on the date deposited in the mail,
whether or not the holder of the Series C Convertible Preferred Stock receives
such notice; and failure properly to give such notice by mail, or any defect in
such notice, to the holders of the shares to be converted shall not affect the
validity of the proceedings for the conversion of any other shares of Series C
Convertible Preferred Stock. On or after the date fixed for conversion as stated
in such notice, each holder of shares called to be converted shall surrender the
certificate evidencing such shares to the Corporation at the place designated in
such notice for conversion. Notwithstanding that the certificates evidencing any
shares properly called for conversion shall not have been surrendered, the
shares shall no longer be deemed outstanding and all rights whatsoever with
respect to the shares so called for conversion (except the right of the holders
to convert such shares upon surrender of their certificates therefor) shall
terminate.
6. Voting Rights.
(a) General. Except as otherwise provided herein, in the Certificate of
Incorporation, as amended, or the Bylaws of the Corporation, the holders of
shares of Series C Convertible Preferred Stock, the holders of shares of Common
Stock and the holders of any other class or series of shares entitled to vote
with the Common Stock shall vote together as one class on all matters submitted
to a vote of stockholders of the Corporation. In any such vote, each share of
Series C Convertible Preferred Stock shall entitle the holder thereof to cast
the number of votes
<PAGE>
10
equal to the number of votes which could be cast in such vote by a holder of the
Common Stock into which such share of Series C Convertible Preferred Stock is
convertible on the record date for such vote, or if no record date has been
established, on the date such vote is taken. Any shares of Series C Convertible
Preferred Stock held by the Corporation or any entity controlled by the
Corporation shall not have voting rights hereunder and shall not be counted in
determining the presence of a quorum.
(b) Class Voting Rights. In addition to any vote specified in Section 6(a), so
long as 25% of the shares of Series C Convertible Preferred Stock shall be
outstanding, the Corporation shall not, without the affirmative vote or consent
of the holders of at least 66-2/3% of all outstanding shares of Series C
Convertible Preferred Stock voting separately as a class, (i) amend, alter or
repeal any provision of the Certificate of Incorporation, as amended, or the
Bylaws of the Corporation so as to affect adversely the relative rights,
preferences, qualifications, limitations or restrictions of the Series C
Convertible Preferred Stock, (ii) authorize or issue, or increase the authorized
amount of, any additional class or series of stock, or any security convertible
into stock of such class or series, ranking prior to the Series C Convertible
Preferred Stock upon liquidation, dissolution or winding up of the Corporation
or a sale of all or substantially all of the assets of the Corporation or as to
dividends or distributions. A class vote on the part of the Series C Convertible
Preferred Stock shall, without limitation, specifically not be deemed to be
required (except as otherwise required by law or resolution of the Board of
Directors of the Corporation) in connection with: (a) the authorization,
issuance or increase in the authorized amount of Common Stock or of any shares
of any other class or series of stock ranking junior to or pari passu with the
Series C Convertible Preferred Stock in respect of distributions upon
liquidation, dissolution or winding up of the Corporation; (b) the
authorization, issuance or increase in the amount of the Series C Convertible
Preferred Stock or any bonds, mortgages, debentures or other obligations of the
Corporation (other than bonds, mortgages, debentures or other obligations
convertible into or exchangeable for or having option rights to purchase any
shares of stock of the Corporation the authorization issuance or increase in
amount of which would require the consent of the holders of the Series C
Convertible Preferred Stock); or (c) any consolidation or merger of the
Corporation with or into another corporation, a sale or transfer of all or part
of the Corporation's assets for cash, securities or other property, or a
compulsory share exchange.
7. Outstanding Shares. For purposes of this Certificate of Designations, all
shares of Series C Convertible Preferred Stock shall be deemed outstanding
except (i) from the date, or the deemed date, of surrender of certificates
evidencing shares of Series C Convertible Preferred Stock, all shares of Series
C Convertible Preferred Stock converted into Common Stock, (ii) from the date of
registration of transfer, all shares of Series C Convertible Preferred Stock
held of record by the Corporation or any subsidiary of the Corporation and (iii)
any and all shares of Series C Convertible Preferred Stock held in escrow prior
to delivery of such stock by the Corporation to the initial beneficial owners
thereof.
8. Status of Acquired Shares. Shares of Series C Convertible Preferred Stock
received upon conversion pursuant to Section 4 or Section 5 or otherwise
acquired by the Corporation will be restored to the status of authorized but
unissued shares of Preferred Stock, without designation as to class, and may
thereafter be issued, but not as shares of Series C Convertible Preferred Stock.
<PAGE>
11
9. Preemptive Rights. The Series C Convertible Preferred Stock is not entitled
to any preemptive or subscription rights in respect of any securities of the
Corporation.
10. Severability of Provisions. Whenever possible, each provision hereof shall
be interpreted in a manner as to be effective and valid under applicable law,
but if any provision hereof is held to be prohibited by or invalid under
applicable law, such provision shall be ineffective only to the extent of such
prohibition or invalidity, without invalidating or otherwise adversely affecting
the remaining provisions hereof. If a court of competent jurisdiction should
determine that a provision hereof would be valid or enforceable if a period of
time were extended or shortened or a particular percentage were increased or
decreased, then such court may make such change as shall be necessary to render
the provision in question effective and valid under applicable law.
IN WITNESS WHEREOF, AVAX TECHNOLOGIES, INC. has caused this certificate to be
signed on its behalf by Jeffrey M. Jonas, M.D., its President and Chief
Executive Officer, this 1st day of March, 1999.
AVAX TECHNOLOGIES, INC.
By: /s/ Jeffrey M. Jonas, M.D.
------------------------------------
Name: Jeffrey M. Jonas, M.D.
Title: President and Chief
Executive Officer
[Form of Class A and Class B Common Stock Purchase Warrant]
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE SECURITIES ISSUABLE UPON
EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR
THE SECURITIES LAWS OF ANY STATE. NEITHER SUCH WARRANTS NOR SUCH SECURITIES MAY
BE SOLD, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED WITHOUT SUCH
REGISTRATION, EXCEPT UPON DELIVERY TO THE COMPANY OF SUCH EVIDENCE AS MAY BE
SATISFACTORY TO COUNSEL FOR THE COMPANY TO THE EFFECT THAT ANY SUCH TRANSFER
SHALL NOT BE IN VIOLATION OF THE SECURITIES ACT OF 1933 OR APPLICABLE STATE
SECURITIES LAWS OR ANY RULE OR REGULATION PROMULGATED THEREUNDER.
AVAX TECHNOLOGIES, INC.
Warrant for the Purchase of Shares of
Common Stock
No. [A][B]W [__] Delaware, U.S.A.
FOR VALUE RECEIVED, AVAX TECHNOLOGIES, INC., a Delaware corporation
(the "Company"), hereby certifies that ___________ (the "Holder"), its designee
or its permitted assigns is entitled to purchase from the Company, at any time
or from time to time commencing on March 1, 1999 and prior to 5:00 P.M., New
York City time, on March 1, 2004, up to _________ (_______) fully paid and
non-assessable shares of common stock (subject to adjustment), $.004 par value
per share, of the Company for $____ per share (subject to adjustment) and an
aggregate purchase price of $[________]. (Hereinafter, (i) said common stock,
$.004 par value per share, of the Company, is referred to as the "Common Stock,"
(ii) the shares of the Common Stock purchasable hereunder or under any other
Warrant (as hereinafter defined) are referred to as the "Warrant Shares," (iii)
the aggregate purchase price payable for the Warrant Shares purchasable
hereunder is referred to as the "Aggregate Warrant Price," (iv) the price
payable (initially $[4.00][4.50] per share, subject to adjustment) for each of
the Warrant Shares is referred to as the "Per Share Warrant Price," (v) this
Warrant, all similar Warrants issued on the date hereof and all warrants
hereafter issued in exchange or substitution for this Warrant or such similar
Warrants are referred to as the "Warrants," and (vi) the holder of this Warrant
is referred to as the "Holder" and the holder of this Warrant and all other
Warrants and Warrant Shares are referred to as the "Holders" and Holders of more
than 50% of the outstanding Warrants and Warrant Shares are referred to as the
"Majority of the Holders"). The Aggregate Warrant Price is not subject to
adjustment.
<PAGE>
2
This Warrant, together with Class __ Warrants of like tenor,
constituting in the aggregate Warrants to purchase _______ Warrant Shares, was
originally issued pursuant to a Series C Convertible Preferred Stock and Warrant
Purchase Agreement dated as of March 1, 1999 (the "Purchase Agreement") by and
among the Company and the purchasers thereto. By acceptance of this Warrant, the
Holder agrees to comply with all applicable provisions of the Purchase Agreement
to the same extent as if it were a party thereto.
1. Exercise of Warrant. (a) This Warrant may be exercised in whole
at any time, or in part from time to time, commencing on March 1, 1999 and prior
to 5:00 P.M., Eastern Standard Time, on March 1, 2004 by the Holder by the
surrender of this Warrant (with the subscription form at the end hereof duly
executed) at the address set forth in Section 9(a) hereof, together with proper
payment of the Aggregate Warrant Price, or the proportionate part thereof if
this Warrant is exercised in part, with payment for the Warrant Shares made by
certified or official bank check payable to the order of the Company; or
(b) If this Warrant is exercised in part, this Warrant must be
exercised for a number of whole shares of the Common Stock and the Holder is
entitled to receive a new Warrant covering the Warrant Shares that have not been
exercised and setting forth the proportionate part of the Aggregate Warrant
Price applicable to such Warrant Shares.
(c) Upon surrender of this Warrant, the Company will (i) issue a
certificate or certificates in the name of the Holder for the largest number of
whole shares of the Common Stock to which the Holder shall be entitled and, if
this Warrant is exercised in whole, in lieu of any fractional share of the
Common Stock to which the Holder shall be entitled, pay to the Holder cash in an
amount equal to the fair value of such fractional share (determined in such
reasonable manner as the Board of Directors of the Company shall determine), and
(ii) deliver the other securities and properties receivable upon the exercise of
this Warrant, or the proportionate part thereof if this Warrant is exercised in
part, pursuant to the provisions of this Warrant.
2. Reservation of Warrant Shares; Listing. The Company agrees that,
prior to the expiration of this Warrant, the Company shall at all times (i) have
authorized and in reserve, and shall keep available, solely for issuance and
delivery upon the exercise of this Warrant, the shares of the Common Stock and
other securities and properties as from time to time shall be receivable upon
the exercise of this Warrant, free and clear of all restrictions on sale or
transfer, other than under Federal or state securities laws, and free and clear
of all preemptive rights and rights of first refusal and (ii) use its best
efforts to keep the Warrant Shares authorized for listing on the Nasdaq National
Market, the Nasdaq SmallCap Market or any national securities exchange on which
the Company's Common Stock is traded.
3. Protection Against Dilution. (a) If the Company shall hereafter
(i) pay a dividend or make a distribution on its capital stock in shares of
Common Stock, (ii) subdivide its outstanding shares of Common Stock into a
greater number of shares, (iii) combine its outstanding shares of Common Stock
into a smaller number of shares or (iv) issue by reclassification of its Common
Stock any shares of capital stock of the Company, then (x) the Per Share Warrant
Price (but not the Aggregate Warrant Price) and (y) the number of Warrant Shares
issuable hereunder (collectively the "Exercise Terms") shall be adjusted so that
the
<PAGE>
3
Holder upon the exercise hereof shall be entitled to receive the number of
shares of Common Stock or other capital stock of the Company which the Holder
would have owned immediately following such action had the Warrants been
exercised immediately prior thereto. An adjustment made pursuant to this Section
3(a) shall become effective immediately after the record date in the case of a
dividend or distribution and shall become effective immediately after the
effective date in the case of a subdivision, combination or reclassification. If
the Board of Directors of the Company shall declare any dividend or distribution
or resolve to take any action referred to in this Section 3(a), it shall provide
written notice thereof to the Holders not less than 10 days prior to the record
date fixed for determining the stockholders entitled to participate therein.
(b) In the case of any capital reorganization or reclassification,
or any consolidation or merger to which the Company is a party other than a
merger or consolidation in which the Company is the continuing corporation, or
in the case of any sale or conveyance to another entity of the property of the
Company as an entirety or substantially as an entirety, or in the case of any
statutory exchange of securities with another corporation (including any
exchange effected in connection with a merger of a third corporation into the
Company), the Holder shall have the right thereafter to receive on the exercise
of the Warrants the kind and amount of securities, cash or other property which
the Holder would have owned or have been entitled to receive immediately after
such reorganization, reclassification, consolidation, merger, statutory
exchange, sale or conveyance had the Warrants been exercised immediately prior
to the effective date of such reorganization, reclassification consolidation,
merger, statutory exchange, sale or conveyance and in any such case, if
necessary, appropriate adjustment shall be made in the application of the
provisions set forth in this Section 3 with respect to the rights and interests
thereafter of the Holder to the end that the provisions set forth in this
Section 3 shall thereafter correspondingly be made applicable, as nearly as may
reasonably be, in relation to any shares of stock or other securities or
property thereafter deliverable on the exercise of the Warrants. Notice of any
such reorganization, reclassification, consolidation, merger, exchange, sale or
conveyance shall be mailed to the Holders not less than 30 days prior to such
event. The above provisions of this Section 3(b) shall similarly apply to
successive reorganizations, reclassifications, consolidations, mergers,
statutory exchanges, sales or conveyances. The Company shall require the issuer
of any shares of stock or other securities or property thereafter deliverable on
the exercise of the Warrants to be responsible for all of the agreements and
obligations of the Company hereunder.
(c) In case the Company shall issue rights, options, warrants or
convertible securities to all or substantially all holders of its Common Stock,
without any charge to such holders, entitling them to subscribe for or purchase
Common Stock at a price per share which is lower at the record date mentioned
below than the closing bid price (as defined below) for the trading day
immediately prior to such record date (the "Current Market Price"), then the Per
Share Warrant Price shall be determined by multiplying the Per Share Warrant
Price theretofore in effect by a fraction, of which the numerator shall be the
number of shares of Common Stock outstanding immediately prior to the issuance
of such rights, options, warrants or convertible securities plus the number of
additional shares of Common Stock offered for subscription or purchase, and of
which the denominator shall be the number of shares of Common Stock outstanding
immediately prior to the issuance of such rights, options, warrants or
convertible securities plus the number of shares which the aggregate offering
price of the total number of
<PAGE>
4
shares offered would purchase at such Current Market Price. Such adjustment
shall be made whenever such rights, options, warrants or convertible securities
are issued, and shall become effective immediately and retroactive to the record
date for the determination of stockholders entitled to receive such rights,
options, warrants or convertible securities.
The "closing bid price" for each trading day shall be the reported
closing bid price on the NASDAQ SmallCap Market or the NASDAQ National Market
System ("NMS") (such markets are collectively referred to as "NASDAQ") or, if
the Common Stock is not quoted on NASDAQ, on the principal national securities
exchange on which common stock is listed or admitted to trading (based on the
aggregate dollar value of all securities listed or admitted to trading) or, if
not listed or admitted to trading on any national securities exchange or quoted
on NASDAQ, the closing bid price in the over-the-counter market as furnished by
any NASD member firm selected from time to time by the Company for that purpose,
or, if such prices are not available, the fair market value set by, or in a
manner established by, the Board of Directors of the Company in good faith.
"Trading day" shall mean a day on which the national securities exchange or
NASDAQ used to determine the closing bid price is open for the transaction of
business or the reporting of trades or, if the closing bid price is not so
determined, a day on which NASDAQ is open for the transaction of business.
(d) In case the Company shall distribute (other than a distribution
in liquidation of the Company) to all or substantially all holders of its Common
Stock, without any charge to such holder, evidences of its indebtedness or
assets (excluding cash dividends or distributions out of earnings) or rights,
options, warrants or convertible securities containing the right to subscribe
for or purchase Common Stock (excluding those referred to in Section 3(c)), then
in each case the Company shall simultaneously distribute such evidences of its
indebtedness or assets or such rights, options, warrants or convertible
securities pro rata to the Holders of Warrants on the record date or date of
effectiveness, as the case may be, fixed for determining the holders of Common
Stock entitled to participate in such distribution in an amount equal to the
amount that such Holders would have been entitled to receive had their Warrants
been exercised for shares of Common Stock immediately prior to the time for
determination of the holders of Common Stock entitled to participate in such
distribution.
(e) No adjustments in the Exercise Terms shall be required:
(i) Unless such adjustment would require an increase or decrease of
at least $0.05 per share of Common Stock; provided, however, that
the Company may make any such adjustment that is less than a $0.05
increase or decrease per share of Common Stock at its election,
provided, that any adjustments which by reason of this Section
3(e)(i) are not required to be made shall be carried forward and
cumulated with amounts in any subsequent adjustment, and provided,
further, however, that adjustments shall be required and made in
accordance with the provisions of this Section 3 (other than this
Section 3(i)) not later than such time as may be required in order
to preserve the tax-free nature of a distribution to the Holder of
this Warrant or Common Stock issuable upon the exercise hereof. All
calculations that shall be required pursuant to this Section 3 shall
be made to the nearest cent or to the nearest one-hundredth of a
share, as the case may be..
<PAGE>
5
Anything in this Section 3 to the contrary notwithstanding, the
Company shall be entitled to make such adjustments to the Exercise
Terms, in addition to those required by this Section 3 as it in its
discretion shall deem to be advisable in order that any stock
dividend, subdivision of shares or distribution of rights to
purchase stock or securities convertible or exchangeable for stock
hereafter made by the Company to its stockholders shall not be
taxable;
(ii) In the case of the issuance by the Company of Common Shares
pursuant to (i) (a) the exercise of the Warrants of the Company, or
a portion thereof, or (b) the exercise of the Class [_] Warrants, or
a portion thereof, (ii) the conversion of shares of Series C
Convertible Preferred Stock, $.001 par value, $100 stated value, of
the Company into Common Stock, or other capital stock of the Company
as the case may be, or (iii) pursuant to the exercise of any stock
options or warrants currently outstanding or securities issued after
the date hereof pursuant to any Company benefit plan; and
(iii) In the case of issuance by the Company of Common Shares,
directly or indirectly, pursuant to the unit purchase option (or
portion thereof) granted to Paramount Capital, Inc. ("Paramount"),
and its designees, in connection with Paramount's acting as finder
for the Company in connection with the transactions contemplated by
the Purchase Agreement.
(f) Whenever the conversion rate is adjusted as provided in any
provision of this Section 3:
(i) the Company shall compute (or at the request of a Majority of
Holders shall retain a firm of independent public accountants (which may
be any such firm regularly employed by the Company) to compute) the
adjusted Exercise Terms in accordance with this Section 3 and shall
prepare a certificate signed by the principal financial officer of the
Company (or cause any such independent public accountants to execute a
certificate) setting forth the adjusted conversion rate and showing in
reasonable detail the facts upon which such adjustment is based, and such
certificate shall forthwith be filed with the registrar of the Warrant;
and
(ii) a notice stating that the Exercise Terms have been adjusted and
setting forth such adjusted Exercise Terms, and as soon as practicable
after an adjustment is required, such notices shall be mailed by the
Company to all record holders of Warrants at their last addresses as they
shall appear in the records of the Company.
4. Fully Paid Stock; Taxes. The shares of the Common Stock
represented by each and every certificate for Warrant Shares delivered on the
exercise of this Warrant shall at the time of such delivery, be duly authorized,
validly issued and outstanding, fully paid and nonassessable, and not subject to
preemptive rights or rights of first refusal, and the Company will take all such
actions as may be necessary to assure that the par value, if any, per share of
the Common Stock is at all times equal to or less than the then Per Share
Warrant Price. The Company shall pay all documentary, stamp or similar taxes and
other similar governmental
<PAGE>
6
charges that may be imposed with respect to the issuance or delivery of any
Common Shares upon exercise of the Warrants (other than income taxes); provided,
however, that if the Common Shares are to be delivered in a name other than the
name of the Holder, no such delivery shall be made unless the person requesting
the same has paid to the Company the amount of transfer taxes or charges
incident thereto, if any.
5. Registration Under Securities Act of 1933. (a) The Holder shall
have the right to participate in the registration rights granted to Holders of
Registrable Securities (as defined in the Purchase Agreement") with respect to
the Warrant Shares, as adjusted, pursuant to Section 8 of the Purchase
Agreement. By acceptance of this Warrant, the Holder agrees to comply with the
provisions of Section 8 of the Purchase Agreement to the same extent as if it
were a party thereto.
(b) Until all of the Warrant Shares have been sold under a
registration statement declared effective by the Securities and Exchange
Commission or pursuant to Rule 144, the Company shall use its reasonable best
efforts to file with the Securities and Exchange Commission all current reports
and the information as may be necessary to enable the Holder to effect sales of
its shares in reliance upon Rule 144 promulgated under the Securities Act of
1933, as amended (the "Act").
6. Investment Intent; Limited Transferability. (a) The Holder
represents, by accepting this Warrant, that it understands that this Warrant and
any securities obtainable upon exercise of this Warrant have not been registered
for sale under Federal or state securities laws and are being offered and sold
to the Holder pursuant to one or more exemptions from the registration
requirements of such securities laws. In the absence of an effective
registration of such securities or an exemption therefrom, any certificates for
such securities shall bear the legend set forth on the first page hereof. The
Holder understands that it must bear the economic risk of its investment in this
Warrant and any securities obtainable upon exercise of this Warrant for an
indefinite period of time, as this Warrant and such securities have not been
registered under Federal or state securities laws and therefore cannot be sold
unless subsequently registered under such laws, unless an exemption from such
registration is available.
(b) The Holder, by its acceptance of this Warrant, represents to the
Company that it is acquiring this Warrant and will acquire any securities
obtainable upon exercise of this Warrant for its own account for investment and
not with a view to, or for sale in connection with, any distribution thereof in
violation of the Act. The Holder agrees that this Warrant and any such
securities will not be sold or otherwise transferred unless (i) a registration
statement with respect to such transfer is effective under the Act and any
applicable state securities laws or (ii) such sale or transfer is made pursuant
to one or more exemptions from the Act.
(c) In addition to the limitations set forth in Section 1, this
Warrant may not be sold, transferred, assigned or hypothecated by the Holder
except in compliance with the provisions of the Act and the applicable state
securities "blue sky" laws, and is so transferable only upon the books of the
Company which it shall cause to be maintained for such purpose. The Company may
treat the registered Holder of this Warrant as he or it appears on the Company's
books at any time as the Holder for all purposes. The Company shall permit any
<PAGE>
7
Holder of a Warrant or his duly authorized attorney, upon written request during
ordinary business hours, to inspect and copy or make extracts from its books
showing the registered holders of Warrants. All Warrants issued upon the
transfer or assignment of this Warrant will be dated the same date as this
Warrant, and all rights of the holder thereof shall be identical to those of the
Holder.
(d) The Holder has been afforded (i) the opportunity to ask such
questions as it has deemed necessary of, and to receive answers from,
representatives of the Company concerning the terms and conditions of the
Warrants or the exercise of the Warrants; and (ii) the opportunity to request
such additional information which the Company possesses or can acquire without
unreasonable effort or expense.
(e) The Holder did not (A) receive or review any advertisement,
article, notice or other communication published in a newspaper or magazine or
similar media or broadcast over television or radio, whether closed circuit, or
generally available; or (B) attend any seminar, meeting or investor or other
conference whose attendees were, to such Holder's knowledge, invited by any
general solicitation or general advertising.
(f) The Holder is an "accredited investor" within the meaning of
Regulation D under the Act. Such Holder is acquiring the Warrants for its own
account and not with a present view to, or for sale in connection with, any
distribution thereof in violation of the registration requirements of the
Securities Exchange Act of 1934, without prejudice, however, to such Holder's
right, subject to the provisions of the Purchase Agreement and this Warrant, at
all times to sell or otherwise dispose of all or any part of such Warrants and
Warrant Shares.
(g) Either by reason of such Holder's business or financial
experience or the business or financial experience of its professional advisors
(who are unaffiliated with and who are not compensated by the Company or any
affiliate, finder or selling agent of the Company, directly or indirectly), such
Holder has the capacity to protect such Holder's interests in connection with
the transactions contemplated by this Warrant and the Purchase Agreement.
7. Loss, etc., of Warrant. Upon receipt of evidence satisfactory to
the Company of the loss, theft, destruction or mutilation of this Warrant, and
of indemnity reasonably satisfactory to the Company, if lost, stolen or
destroyed, and upon surrender and cancellation of this Warrant, if mutilated,
the Company shall execute and deliver to the Holder a new Warrant of like date,
tenor and denomination.
8. Warrant Holder Not Stockholder. This Warrant does not confer upon
the Holder any right to vote on or consent to or receive notice as a stockholder
of the Company, as such, in respect of any matters whatsoever, nor any other
rights or liabilities as a stockholder, prior to the exercise hereof; this
Warrant does, however, require certain notices to Holders as set forth herein.
<PAGE>
8
9. Communication. No notice or other communication under this
Warrant shall be effective unless, but any notice or other communication shall
be effective and shall be deemed to have been given if, the same is in writing
and is mailed by first-class mail, postage prepaid, addressed to:
(a) the Company at AVAX Technologies, Inc.,4520 Main Street, Suite
930, Kansas City, MO 64111, Attn: Jeffrey M. Jonas, M.D., President and
Chief Executive Officer or such other address as the Company has
designated in writing to the Holder, or
(b) the Holder at [INSERT ADDRESS] or other such address as the
Holder has designated in writing to the Company.
10. Headings. The headings of this Warrant have been inserted as a
matter of convenience and shall not affect the construction hereof.
11. Applicable Law. This Warrant shall be governed by and construed
in accordance with the laws of the State of Delaware without giving effect to
the principles of conflicts of law thereof.
12. Amendment, Waiver, etc. Except as expressly provided herein,
neither this Warrant nor any term hereof may be amended, waived, discharged or
terminated other than by a written instrument signed by the party against whom
enforcement of any such amendment, waiver, discharge or termination is sought;
provided, however, that any provisions hereof may be amended, waived, discharged
or terminated upon the written consent of the Company and the Majority of the
Holders.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed
by its President and attested by its Secretary this __ day of March, 1999.
AVAX TECHNOLOGIES, INC.
By: /s/ Jeffrey M. Jonas, M.D.
----------------------------------------
Name: Jeffrey M. Jonas, M.D.
Title: President and Chief Executive
Officer
ATTEST:
- ------------------------------
Secretary
<PAGE>
SUBSCRIPTION (cash)
The undersigned, ___________________, pursuant to the provisions of
the foregoing Warrant, hereby agrees to subscribe for and purchase
____________________ shares of the Common Stock, par value $.004 per share, of
AVAX Technologies, Inc. covered by said Warrant, and makes payment therefor in
full at the price per share provided by said Warrant.
Dated:_______________ Signature:_________________________
Address:___________________________
ASSIGNMENT
FOR VALUE RECEIVED _______________ hereby sells, assigns and
transfers unto ____________________ the foregoing Warrant and all rights
evidenced thereby, and does irrevocably constitute and appoint
_____________________, attorney, to transfer said Warrant on the books of AVAX
Technologies, Inc.
Dated:_______________ Signature:_________________________
Address:___________________________
PARTIAL ASSIGNMENT
FOR VALUE RECEIVED _______________ hereby assigns and transfers unto
____________________ the right to purchase _______ shares of Common Stock, par
value $.004 per share, of AVAX Technologies, Inc. covered by the foregoing
Warrant, and a proportionate part of said Warrant and the rights evidenced
thereby, and does irrevocably constitute and appoint ____________________,
attorney, to transfer such part of said Warrant on the books of the Company.
Dated:_______________ Signature:_________________________
Address:___________________________
================================================================================
SERIES C CONVERTIBLE PREFERRED STOCK
AND WARRANT PURCHASE AGREEMENT
among
AVAX TECHNOLOGIES, INC.,
and
THE SEVERAL PURCHASERS NAMED IN EXHIBIT A
Dated as of March 1, 1999
================================================================================
<PAGE>
EXECUTION COPY
SERIES C CONVERTIBLE PREFERRED STOCK AND WARRANT PURCHASE
AGREEMENT (this "Agreement") dated as of March 1, 1999, among AVAX
TECHNOLOGIES, INC., a Delaware corporation (the "Company"), and the
several PURCHASERS named in Exhibit A (individually a "Purchaser"
and collectively, the "Purchasers").
The Company desires to issue and sell to Purchasers, and Purchasers
desire to purchase from the Company, shares (the "Preferred Shares") of Series C
Convertible Preferred Stock, par value $.001 per share, stated value $100 per
share, of the Company (the "Series C Preferred Stock"), having the rights,
designations and preferences set forth in the Certificate of Designations of the
Company (the "Certificate of Designations") in the identical form and substance
of Exhibit B, upon and subject to the terms and conditions of this Agreement.
Pursuant to the terms of the Certificate of Designations, the
Preferred Shares will be convertible into shares ("Common Shares") of common
stock, par value $.004 per share, of the Company ("Common Stock"), and pursuant
to the terms of this Agreement, the Purchasers will have certain registration
rights with respect to the Common Shares issuable upon such conversion and upon
exercise of the Warrants (as defined below).
To induce Purchasers to purchase the Preferred Shares, the Company
shall issue to each of the Purchasers (i) certain warrants (in the form attached
as Exhibit C) to purchase shares of Common Stock at an exercise price of $4.00
per share and (ii) certain warrants (in the form attached as Exhibit D) to
purchase shares of Common Stock at an exercise price of $4.50 per share
(collectively, the "Warrants"). Unless the context otherwise requires, the term
Common Shares shall be deemed to include any shares of Common Stock issued or
issuable upon conversion of Preferred Shares and any shares of Common Stock
issuable upon exercise of the Warrants (the "Conversion Shares").
Accordingly, in consideration of the premises and the mutual
agreements contained herein, and for other good and valuable consideration, the
Company and Purchasers agree as follows:
Section 1. Purchase of Company Securities.
1.1. Purchase and Sale of the Preferred Shares and the Warrants.
Subject to the terms and conditions of this Agreement, the Company (i) shall
issue and sell to Purchasers, and each Purchaser, severally and not jointly,
shall purchase from the Company the aggregate number of Preferred Shares set
forth on Exhibit A (allocated among the Purchasers as set forth on Exhibit A) at
the aggregate purchase price set forth opposite the name of such Purchaser on
Exhibit A ("Aggregate Purchase Price"), and (ii) to induce Purchasers to
purchase such Preferred Shares, issue the aggregate number of Warrants set forth
on Exhibit A (allocated among the Purchasers as set forth on Exhibit A) at no
additional consideration. The Company may issue
<PAGE>
2
and sell to the Purchasers fractional Preferred Shares and issue to the
Purchasers Warrants to purchase fractional shares of Common Stock.
Section 2. Closing. The closing (the "Closing") of the purchase and
sale of the Preferred Shares and the issuance of the Warrants (the "Offering")
shall take place at the offices of Roberts, Sheridan & Kotel, A Professional
Corporation, at Tower Forty-Nine, 12 East 49th Street, 30th Floor, New York, New
York, 10017. The Closing will take place at 10:00 A.M., local time, on March 1,
1999; provided that the Closing may take place at such other time, place or
earlier date as may be mutually agreed upon by the Company and Purchasers. The
date of the Closing is referred to as the "Closing Date." At the Closing, the
Company shall issue to each Purchaser (i) stock certificates representing the
Preferred Shares and (ii) the Warrants being purchased by such Purchaser in
accordance with the allocation on Exhibit A, against payment of each Purchaser's
Aggregate Purchase Price by wire transfer of immediately available United States
funds payable to the Company's account pursuant to the wire transfer
instructions set forth on Exhibit A. The Preferred Shares and the Warrants shall
be registered in Purchasers' names or the names of the nominees of Purchasers in
such denominations as Purchasers shall request pursuant to instructions
delivered to the Company not less than two business days prior to the Closing
Date and shall be delivered to Purchasers within 10 business days after the
Closing Date.
Section 3. Conditions to the Obligations of Purchasers at Closing.
The obligation of each Purchaser to purchase and pay for the Preferred Shares
and Warrants at Closing is subject to the satisfaction on or prior to the
Closing Date of the following conditions, each of which may be waived by
Purchasers:
3.1 Opinion of Counsel to the Company. The Purchasers shall have
received from Roberts, Sheridan & Kotel, A Professional Corporation, counsel for
the Company, its opinion dated the Closing Date in the form of Exhibit E.
3.2 Representations and Warranties. The representations and
warranties of the Company contained in Section 6 shall be true and correct in
all material respects as of the Closing Date except to the extent that such
representations and warranties relate to an earlier date in which case such
representations and warranties shall be true and correct in all material
respects as of such earlier date.
3.3 Performance of Covenants. The Company shall have performed or
complied in all material respects with all covenants and agreements required to
be performed by it on or prior to the Closing pursuant to this Agreement.
3.4 No Injunctions; etc. No court or governmental injunction, order
or decree prohibiting the purchase and sale of the Preferred Shares and Warrants
shall be in effect. There shall not be in effect any law, rule or regulation
prohibiting or restricting such sale or requiring any consent or approval of any
person which shall not have been obtained to issue and sell the Preferred Shares
and Warrants to Purchasers.
3.5 Closing Documents. The Company shall have delivered to
Purchasers the following:
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3
(a) a certificate of the Secretary of the Company, dated as of the
Closing Date, as to the continued existence of the Company, certifying (i) the
attached copies of the Certificate of Incorporation and By-laws of the Company,
and (ii) the resolutions of the Board of Directors of the Company authorizing
the execution, delivery and performance of this Agreement, the Warrants and the
Certificate of Designations; and
(b) a certificate of the Secretary of State of the State of
Delaware, dated a recent date, to the effect that the Company is in good
standing in the State of Delaware and that all annual reports, if any, have been
filed as required and that all taxes and fees have been paid in connection
therewith.
3.6 Election of Directors. James Currie shall have been nominated
and appointed as a member of the Board of Directors of the Company as
contemplated by Section 7.1.
3.7 Certificate of Designations. The Company shall have filed the
Certificate of Designations with the Secretary of State of the State of
Delaware.
3.8 Delivery of Stock Certificates. The Company shall have issued to
such Purchaser the stock certificate(s) representing the Preferred Shares and
Warrants, registered in the name of such Purchaser, each in a form satisfactory
to such Purchaser.
3.9 Investments. With respect to the obligations of each Designated
Purchaser (as defined in Section 7.1), the other Designated Purchaser shall have
purchased its Preferred Shares subject only to the condition that the other
Designated Purchaser has purchased its Preferred Shares.
3.10 Waivers and Consents. The Company shall have obtained all
material consents and waivers necessary to execute and deliver this Agreement
and all related documents and agreements and to issue and deliver the Preferred
Shares and Warrants, and all such consents and waivers shall be in full force
and effect.
Section 4. Conditions to the Obligations of the Company at Closing.
The obligation of the Company to issue and sell the Preferred Shares and the
Warrants to Purchasers at Closing is subject to the satisfaction on or prior to
the Closing Date of the following conditions, each of which may be waived by the
Company:
4.1 Representations and Warranties. The representations and
warranties of Purchasers contained in this Agreement shall be true and correct
in all material respects as of the Closing Date.
4.2 No Injunctions. No court or governmental injunction, order or
decree prohibiting the purchase and sale of the Preferred Shares and Warrants
shall be in effect.
Section 5. Representations and Warranties of Purchasers. Each
Purchaser severally and not jointly represents and warrants to the Company that:
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4
5.1 Accredited Investor. Such Purchaser is an "accredited investor"
within the meaning of Regulation D under the Securities Act of 1933 (the
"Securities Act"). Such Purchaser is acquiring the Preferred Shares and the
Warrants for its own account and not with a present view to, or for sale in
connection with, any distribution thereof in violation of the registration
requirements of the Securities Exchange Act of 1934 (the "Exchange Act"),
without prejudice, however, to such Purchaser's right, subject to the provisions
of this Agreement, at all times to sell or otherwise dispose of all or any part
of such Preferred Shares, Warrants and Conversion Shares.
5.2 Authority, etc. Such Purchaser has the power and authority to
execute and deliver this Agreement and to perform its obligations hereunder,
having obtained all required consents, if any, and this Agreement, when executed
and delivered by such Purchaser, will constitute a legal valid and binding
obligation of such Purchaser.
5.3 No Brokers. Other than Paramount Capital, Inc. ("Paramount") (as
finder on behalf of the Company only with respect to those Purchasers so
indicated on Exhibit A), no finder, broker, agent, financial person or other
intermediary has acted on behalf of such Purchaser in connection with the
offering of the Preferred Shares or the Warrants or the consummation of this
Agreement or any of the transactions contemplated hereby.
5.4 Certain Trading Activity. Such Purchaser and its affiliates have
not directly or indirectly sold any shares of Common Stock since the earlier of
(a) the 20 "trading days" (as such term is defined in the Certificate of
Designations) preceding the Closing Date or (b) the date on which such Purchaser
entered into its respective Confidentiality Agreement with the Company. As of
the Closing Date, such Purchaser does not directly or indirectly have a "short"
position and has not directly or indirectly entered into any hedging transaction
with respect to the Common Stock.
5.5 Ability to Bear Risks of Investment. Such Purchaser is able to
bear the economic risk of an investment in the Preferred Shares and Warrants and
is able to afford a complete loss of such investment.
5.6 Access to Information. Such Purchaser acknowledges that it has
been afforded (i) the opportunity to ask such questions as it has deemed
necessary of, and to receive answers from, representatives of the Company
concerning the terms and conditions of the offering of the Preferred Shares and
Warrants; and (ii) the opportunity to request such additional information which
the Company possesses or can acquire without unreasonable effort or expense.
5.7 No General Solicitation. Such Purchaser did not (A) receive or
review any advertisement, article, notice or other communication published in a
newspaper or magazine or similar media or broadcast over television or radio,
whether closed circuit, or generally available; or (B) attend any seminar,
meeting or investor or other conference whose attendees were, to such
Purchaser's knowledge, invited by any general solicitation or general
advertising.
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5
5.8 Investment Experience. Either by reason of such Purchaser's
business or financial experience or the business or financial experience of its
professional advisors (who are unaffiliated with and who are not compensated by
the Company or any affiliate, finder or selling agent of the Company, directly
or indirectly), such Purchaser has the capacity to protect such Purchaser's
interests in connection with the transactions contemplated by this Agreement.
5.9 Organization, Good Standing, etc. If such Purchaser is an
entity, it is a corporation, limited liability company, trust or partnership or
other similar entity duly organized, validly existing and in good standing under
the laws of its jurisdiction. Such Purchaser has full power and authority
(corporate, trust or partnership, as the case may be, statutory and otherwise)
to execute and deliver this Agreement and to purchase the Preferred Shares and
Warrants. The execution and delivery by such Purchaser of this Agreement and the
consummation of the transactions contemplated hereby have been duly authorized
by all necessary corporate or partnership, as the case may be, action on the
part of such Purchaser. If an individual, such Purchaser has the legal capacity
to enter into this Agreement. This Agreement constitutes a legal, valid and
binding obligation of such Purchaser, enforceable against such Purchaser in
accordance with its terms, subject to laws of general application relating to
bankruptcy, insolvency and the relief of debtors and rules of law governing
specific performance, injunctive relief or other equitable remedies, and to
limitations of public policy.
5.10 Due Authorization. If such Purchaser is a corporation, limited
liability company, trust, partnership, employee benefit plan, individual
retirement account, Keogh Plan, or other tax-exempt entity, it is authorized and
qualified to become an investor in the Company on the terms and conditions set
forth herein and the person signing this Agreement on behalf of such entity has
been duly authorized by such entity to do so.
5.11 No Conflicts. No court or governmental injunction, order or
decree affecting such Purchaser and prohibiting the execution and delivery by
such Purchaser of this Agreement and the consummation of the transactions
contemplated hereby is in effect and no provision of the Certificate or Articles
of Incorporation or by-laws (or comparable charter, partnership or other
organizational documents) of such Purchaser, will conflict with, or result in a
material breach or violation of, any of the terms or provisions of, or
constitute (with due notice or lapse of time or both) a material default under,
any material lease, loan agreement, mortgage, security agreement, trust
indenture or other agreement or instrument to which such Purchaser is a party or
by which it is bound or to which any of its material properties or assets is
subject, nor result in the creation or imposition of any lien upon any of the
material properties or assets of such Purchaser.
5.12 Consents, Approvals, etc. No material consent, approval,
license, permit, order or authorization of, or registration, declaration or
filing with, any court, administrative agency or commission or other
governmental authority or instrumentality, domestic or foreign, remains to be
obtained or is otherwise required to be obtained by such Purchaser in connection
with the authorization, execution and delivery of this Agreement or the
consummation of the transactions contemplated hereby, including, without
limitation the purchase and sale of the Preferred Shares and Warrants.
<PAGE>
6
5.13 Legal Representation. Each Purchaser other than the Designated
Purchasers acknowledges that (i) Hughes & Luce, L.L.P. has not represented or
advised such Purchaser with respect to this Agreement, the Preferred Shares or
the Warrants or the transactions contemplated by this Agreement and the
Preferred Shares and the Warrants and (ii) such Purchaser has had the
opportunity to obtain separate legal representation in connection with the
transactions contemplated by this Agreement and the Preferred Shares and the
Warrants and has either obtained such legal advice and representation as such
Purchaser considers necessary and appropriate or has elected not to do so.
Section 6. Representations and Warranties of the Company. The
Company represents and warrants to each Purchaser that:
6.1 Organization, Good Standing and Qualification. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware. The Company has full corporate power and authority to
own and hold its properties and to conduct its business. The Company is duly
licensed or qualified to do business, and in good standing, in each jurisdiction
in which the nature of its business requires such licensing, qualification or
good standing, except for any such failure to be so licensed or qualified or in
good standing that would not have a material adverse effect on the Company or
its results of operations, assets, or financial condition or on its ability to
perform its obligations under this Agreement, the Preferred Shares or the
Warrants (a "Material Adverse Effect"). The Company does not, directly or
indirectly, legally or beneficially own (or direct the voting of) any "equity
security" (as such term is defined in Rule 3a11-1 of the Exchange Act) of any
other corporation, partnership or limited liability company and is not a general
partner (or able to exercise the powers of a general partner) with respect to
any such entity.
6.2 Capitalization. As of the Closing Date, the authorized capital
stock of the Company consists of 30,000,000 shares of Common Stock, par value
$.004 per share, and 5,000,000 shares of Preferred Stock, par value $0.01 per
share, of which (i) 300,000 shares are designated Series B Convertible Preferred
Stock (the "Series B Preferred Stock") and (ii) of which, immediately prior to
the Closing Date 120,000 shares will be designated Series C Convertible
Preferred Stock. As of the Closing Date, (i) 10,238,640 shares of Common Stock
were issued and outstanding, (ii) 103,814 shares of Series B Preferred Stock
were issued and outstanding and were convertible into 2,708,161 shares of Common
Stock, (iii) 1,500,000 shares of Common Stock were reserved for issuance upon
exercise of outstanding options issued or issuable under the Company's 1992
Stock Option Plan (the "Option Plan"), (iv) an aggregate of 1,255,420 shares of
Common Stock were reserved for issuance under stock options granted by the
Company outside the Option Plan, (v) an aggregate of 686,750 shares of Common
Stock were reserved for issuance under outstanding warrants, and (vi) 673,564
shares of Common Stock were reserved for issuance upon conversion of 25,819.5
shares of Series B Preferred Stock issuable upon the exercise of outstanding
warrants. As of the Closing Date, 155,384 shares of Series B Preferred Stock had
been converted into shares of Common Stock. Before giving effect to the
transactions contemplated by this Agreement, Schedule 6.2 sets forth a true and
correct list as of the Closing Date, of all holders of options and warrants to
purchase directly or indirectly shares of Common Stock and Preferred Stock, the
number of such options and warrants outstanding as of such date and the exercise
price per option or warrant. All the outstanding
<PAGE>
7
shares of Common Stock have been duly authorized and validly issued and are
fully paid and nonassessable and free of preemptive rights created by or through
the Company. Except as set forth in this Section 6.2 and Schedule 6.2 there are
no other options, warrants or other rights, convertible debt, agreements,
arrangements or commitments of any character obligating the Company or any of
its subsidiaries to issue or sell any shares of capital stock of or other equity
interests in the Company. The Company is not obligated to retire, redeem,
repurchase or otherwise reacquire any of its capital stock or other securities.
6.3 Corporate Power, Authorization; Enforceability. The Company has
full corporate power and authority to execute, deliver and enter into this
Agreement and to consummate the transactions contemplated hereby. All action on
the part of the Company, its directors or stockholders necessary for the
authorization, execution, delivery and performance of this Agreement by the
Company, the authorization, sale, issuance and delivery of the Preferred Shares
and Warrants contemplated hereby and the performance of the Company's
obligations hereunder and thereunder has been taken. The Preferred Shares to be
purchased on the Closing Date have been duly authorized and, when issued in
accordance with this Agreement, will be validly issued, fully paid and
nonassessable and will be free and clear of all liens, adverse claims or
encumbrances (collectively, "Liens") imposed by or through the Company other
than restrictions imposed by this Agreement and applicable securities laws. The
Warrants to be purchased on the Closing Date have been duly authorized and, when
issued in accordance with this Agreement, will be validly issued and free and
clear of all Liens imposed by or through the Company other than restrictions
imposed by this Agreement and applicable securities laws. The Common Shares
issuable upon conversion of the Preferred Shares are and will, at all times
until their issuance, be duly authorized and reserved, and such Common Shares,
upon conversion of such Preferred Shares in accordance with the terms and
conditions of the Certificate of Designations and this Agreement, upon issuance,
will be validly issued, fully paid and nonassessable shares of Common Stock and
will be free and clear of all Liens imposed by or through the Company other than
restrictions imposed by this Agreement and applicable securities laws. The
Common Shares issuable upon the exercise of the Warrants are and will, at all
times until their issuance, be duly authorized and reserved, and upon the
exercise of the Warrants in accordance with the terms and conditions thereof and
this Agreement, will be validly issued, fully paid and nonassessable shares of
Common Stock and will be free and clear of all Liens imposed by or through the
Company other than restrictions imposed by this Agreement and applicable
securities laws. This Agreement has been duly executed and delivered by the
Company and constitutes a legal, valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms, subject to laws of
general application relating to bankruptcy, insolvency and the relief of debtors
and rules of law governing specific performance, injunctive relief or other
equitable remedies, and to limitations of public policy.
6.4 Financial Statements and SEC Documents. (a) Attached as Schedule
6.4 are true and complete copies of the audited balance sheet (the "Balance
Sheet") of the Company as of December 31, 1998, and the related audited
statements of operations, stockholders' equity (deficit) and cash flows for the
years ended December 31, 1998 and 1997 and for the period from January 12, 1990
(date of incorporation) to December 31, 1998 (the "Financial Statements"),
accompanied by the report of Ernst & Young LLP. The Financial Statements have
been prepared in accordance with generally accepted accounting principles,
applied consistently with the past
<PAGE>
8
practices of the Company (except as may be indicated in the notes thereto), and
as of their respective dates, fairly present, in all material respects, the
financial position of the Company and the results of its operations as of the
time and for the periods indicated therein.
(b) The Company has made available (including via the EDGAR System)
to each Purchaser a copy of each report, schedule, registration statement and
definitive proxy statement filed by the Company with the Securities and Exchange
Commission (the "SEC") since July 3, 1997, the date the Company's initial
registration statement under the Exchange Act became effective with the SEC (as
such documents may have been amended since the time of their filing, the "SEC
Documents"), which are all the documents (other than preliminary material) that
the Company was required to file with the SEC since such date. The Company has
provided to each Purchaser a true and complete copy of each SEC Document that
the Company was required to file since January 1, 1998. As of their respective
filing dates, each SEC Document complied in all material respects with the
requirements of the Securities Act or the Exchange Act, as applicable, and the
rules and regulations of the SEC thereunder applicable to such SEC Document and
no such SEC Document contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading. As of their respective filing dates, the financial
statements of the Company included in the SEC Documents complied as to form in
all material respects with then applicable accounting requirements and with the
published rules and regulations of the SEC with respect thereto, were prepared
in accordance with generally accepted accounting principles, applied
consistently with the past practices of the Company, and as of their respective
dates, fairly present in all material respects the financial position of the
Company and the results of its operations as of the time and for the periods
indicated therein (except as may be indicated in the notes thereto or, in the
case of the unaudited statements, as permitted by Form 10-QSB, and Regulations
S-B and S-X of the SEC).
6.5 No Material Adverse Changes. Since December 31, 1998, except as
disclosed in the SEC Documents filed subsequent to that date, if any, there has
not been any material adverse change in the business, financial condition or
operating results of the Company except for any such changes which, individually
or in the aggregate, have not had or resulted in a Material Adverse Effect.
6.6 Absence of Certain Developments. Except as contemplated by this
Agreement, the SEC Documents or the Schedules hereto, since December 31, 1998
through the date immediately preceding the Closing Date, the Company has not (a)
issued any stock, options, bond or other corporate security, (b) borrowed any
amount or incurred or became subject to any liabilities (absolute, accrued or
contingent), other than current liabilities incurred in the ordinary course of
business and liabilities under contracts entered into in the ordinary course of
business, (c) discharged or satisfied any lien or adverse claim or paid any
obligation or liability (absolute, accrued or contingent), other than current
liabilities shown on the Balance Sheet and current liabilities incurred in the
ordinary course of business; (d) declared or made any payment or distribution of
cash or other property to the stockholders of the Company or purchased or
redeemed any securities of the Company; (e) mortgaged, pledged or subjected to
any lien or adverse claim any of its properties or assets, except for liens for
taxes not yet due and payable or
<PAGE>
9
otherwise in the ordinary course of business; (f) sold, assigned or transferred
any of its assets, tangible or intangible, except in the ordinary course of
business or in an amount less than $250,000, (g) suffered any extraordinary
losses or waived any rights of material value other than in the ordinary course
of business; (h) made any capital expenditures or commitments therefor other
than in the ordinary course of business or in an amount less than $250,000; (i)
entered into any other transaction other than in the ordinary course of business
in an amount less than $250,000 or entered into any material transaction,
whether or not in the ordinary course of business; (j) made any charitable
contributions or pledges; (k) suffered any damages, destruction or casualty
loss, whether or not covered by insurance, affecting any of the properties or
assets of the Company or any other properties or assets of the Company which
could, individually or in the aggregate, have or result in a Material Adverse
Effect; (l) made any material change in the nature or operations of the business
of the Company; or (m) entered into any agreement or commitment to do any of the
foregoing.
6.7 No Conflict; Governmental Consents. (a) The execution and
delivery by the Company of this Agreement and the consummation of the
transactions contemplated hereby will not (i) result in the violation of any
provision of the Certificate of Incorporation or By-laws of the Company, (ii)
result in any violation of any law, statute, rule, regulation, order, writ,
injunction, judgment or decree of any court or governmental authority to or by
which the Company is bound, or (iii) conflict with, or result in a breach or
violation of, any of the terms or provisions of, or constitute (with due notice
or lapse of time or both) a default under, any lease, loan agreement, mortgage,
security agreement, trust indenture or other agreement to which the Company is a
party or by which it is bound or to which any of its properties or assets is
subject, nor result in the creation or imposition of any Lien upon any of the
properties or assets of the Company.
(b) No consent, approval, license, permit, order or authorization
of, or registration, declaration or filing with, any court, administrative
agency or commission or other governmental authority remains to be obtained or
is otherwise required to be obtained by the Company in connection with the
authorization, execution and delivery of this Agreement or the consummation of
the transactions contemplated hereby, including, without limitation the issue
and sale of the Preferred Shares and Warrants, except such filings as may be
required to be made by the Company after the Closing with (i) the SEC, (ii) the
National Association of Securities Dealers, Inc. ("NASD"), (iii) the Nasdaq
SmallCap Market and (iv) with any state blue sky or other securities regulatory
authority.
6.8 Licenses. The Company has sufficient licenses, permits and other
governmental authorizations currently required for the conduct of its current
business and the ownership of its properties and is in all respects complying
therewith.
6.9 Litigation. Except as set forth in Schedule 6.9, there are no
pending, or to the Company's knowledge, threatened, legal or governmental
proceedings against the Company.
6.10 Investment Company. The Company is not an "investment company"
within the meaning of such term under the Investment Company Act of 1940, as
amended, and the rules and regulations of the SEC thereunder.
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10
6.11 No Default or Violation. The Company is not (i) in default
under or in violation of any indenture, loan or credit agreement or any other
agreement or instrument to which it is a party of by which it or any of its
properties is bound or (ii) in violation of any order of any court, arbitrator
or governmental body, except for any of the foregoing that is not reasonably
expected to, individually or in the aggregate, have or result in a Material
Adverse Effect.
6.12 Listing and Maintenance Requirements Compliance. The Company
has not in the two years preceding the date hereof received notice (written or
oral) from any stock exchange or market on which the Common Stock is or has been
listed (or on which it has been quoted) to the effect that the Company is not in
compliance with the continuing listing or maintenance requirements of such
exchange or market.
6.13 Patents and Trademarks. The Company has, or has rights to use,
all patents, patent applications, trademarks, trademark applications, service
marks, trade names, copyrights and licenses (collectively, the "Intellectual
Property Rights") which are necessary for use in connection with its business as
presently conducted and which the failure to have would have a Material Adverse
Effect and to the Company's knowledge, there is no existing infringement by
another person or entity of any of the Intellectual Property Rights which are
necessary for use in connection with the Company's business as presently
conducted.
6.14 Environment Matters. The Company has obtained all permits,
licenses and other authorizations which are required under federal, state and
local laws relating to pollution or protection of the environment, including
laws related to emissions, discharges, releases or threatened releases of
pollutants, contaminants or hazardous or toxic material or wastes into ambient
air, surface water, ground water or land, or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling or pollutants, contaminants or hazardous or toxic
materials or wastes ("Environmental Laws"), except for any failures to obtain
such permits, licenses or authorizations which would not, individually or in the
aggregate, have or result in a Material Adverse Effect. The Company is in
compliance with all terms and conditions of such required permits, licenses and
authorizations and is also in full compliance with all other limitations,
restrictions, conditions and requirements contained in the Environmental Laws or
contained in any plan, order, judgement, decree or notice, except for any
non-compliance which could not, individually or in the aggregate, have or result
in a Material Adverse Effect. The Company is not aware of, nor has the Company
received notice of, any events, conditions, circumstances, actions or plans
which may interfere with or prevent continued compliance or which would give
rise to any liability under any Environmental Laws, except for any liability
which could not, individually or in the aggregate, have or result in a Material
Adverse Effect.
Section 7. Covenants of the Company. Until such time as the
following two Purchasers: (i) Essex Woodlands Health Ventures Fund IV, L.P. and
its affiliates and (ii) Petrus Fund, L.P. (the "Designating Purchasers") and its
affiliates beneficially own less than 50% of the Conversion Shares issuable
pursuant to the Preferred Shares and Warrants issued to them at the Closing,
including all such Conversion Shares deemed beneficially owned by such holders'
<PAGE>
11
"affiliates" (such term being used in this Agreement as defined in Rule 12b-2 of
the Exchange Act) and by any other person or entity whose beneficial ownership
would be aggregated for purposes of determining whether a "group" exists under
Section 13(d) of the Exchange Act, the Company covenants and agrees with the
Designating Purchasers as follows:
7.1 Director. (a) The Designating Purchasers shall be entitled to
designate a Director to the Board of Directors of the Company. The Company shall
nominate such person (it is currently contemplated that such person shall be
James Currie) for election in connection with any stockholder vote for
Directors. Subject to the fiduciary duties of the Directors of the Company, the
Company agrees to vote all voting securities for which the Company holds
proxies, granting it voting discretion, or is otherwise entitled to vote
("Company Directed Shares"), and shall recommend that its stockholders vote in
favor of the individual proposed by the Designating Purchasers. In the event
that a vacancy is created on the Board of Directors at any time by the death,
disability, resignation or removal (with or without cause) of any such
individual proposed and nominated by the Designating Purchasers pursuant to this
Agreement, the Company will vote all its Company Directed Shares to elect, and
recommend that its stockholders vote in favor of, the individual proposed by the
Designating Purchasers to fill such vacancy and serve as a voting Director.
(b) If the Designating Purchasers give notice to the Company that
they desire to remove the Director proposed by the Designating Purchasers
pursuant to this Section 7.1, the Company shall vote all its Company Directed
Shares in favor of removing such Director, and shall recommend to its
stockholders that they vote in favor of such removal, if a vote of holders of
such securities shall be required to remove the Director, and the Company agrees
to take any reasonable action to facilitate such removal.
(c) The Director designated by the Designating Purchasers pursuant
to this Section 7.1 shall be entitled to the same type and amount of
compensation as shall be paid to other non-executive Directors for serving in
such capacity. Such Director shall also be entitle to the same type of
reimbursement for reasonable expenses as is generally provided to other
non-Executive directors for attending meetings of the Board of Directors.
(d) "Beneficial ownership" shall be computed pursuant to Rule 13d-3
of the Exchange Act.
7.2 Independent Directors. (a) Subject to the last sentence of this
Section 7.2(a), the Company shall use its best efforts to nominate a new
Director to the Board of Directors of the Company in addition to the person
provided for by Section 7.1 at or prior to its next annual meeting of
stockholders ("Annual Meeting") who shall be (x) "independent" within the
meaning of the rules of the NASD for an issuer whose securities are listed on
the Nasdaq SmallCap Market and (y) satisfactory to the Chief Executive Officer
of the Company; provided, however, that if it is impractical to nominate and
elect the additional "independent" director in connection with the Annual
Meeting because of time constraints relating to the requirement that the proxy
statement for the Annual Meeting presently is anticipated to be mailed by
approximately April 8, 1999, the Company shall be permitted to use its best
efforts to nominate and elect such additional "independent" Director by the
later of (A) June 30, 1999 and (B) 30
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12
days after the Annual Meeting. Subject to the foregoing proviso and the
fiduciary duties of the Directors of the Company, the Company agrees to vote all
Company Directed Shares, and shall recommend that its stockholders vote, in
favor of such individual at the Annual Meeting.
(b) The Company shall use its best efforts to maintain compliance
with NASD Rule 4310(c)(25)(B), which currently requires that it maintain a
minimum of two "independent" directors on its Board of Directors.
Section 8. Registration of Common Stock.
8.1. Registrable Securities. For the purposes of this Agreement,
"Registrable Securities" shall mean (a) shares of Common Stock issued or
issuable upon the conversion of Preferred Shares, (b) shares of Common Stock
issued or issuable upon exercise of the Warrants (including, without limitation,
any shares of Common Stock directly or indirectly issued or issuable upon
exercise of any warrants issued to Paramount (or its designees) in acting in the
capacity as a finder in connection with the Offering) or (c) shares of Common
Stock issued as a distribution with respect to the shares referred to in (a) and
(b) above; provided that (i) any such shares of Common Stock shall cease to be
Registrable Securities, and (ii) the Company shall not be obligated to maintain
the effectiveness of the Shelf Registration Statement (as defined below), and
the Company's obligations under this Section 8 shall cease, with respect to a
holder's (a "Holder") Registrable Securities following the earlier of (x) the
third anniversary of the date the Shelf Registration Statement becomes effective
and (y) at such time as the Company shall deliver an opinion of counsel in form
and substance reasonably satisfactory to such Holder that (1) such Holder may
sell in a single transaction all Registrable Securities then held or issuable to
such Holder on a registered securities exchange or Nasdaq market under an
applicable exemption from the registration requirements of the Securities Act
and all other applicable securities laws (including, without limitation,
pursuant to Rule 144 under the Securities Act) and (2) all transfer restrictions
and restrictive legends with respect to such Registrable Securities would be
removed upon the consummation of such sale. The period of time that the Company
may be required to keep the Shelf Registration Statement effective pursuant to
(x) above shall be extended for a period of time equal to the period the Holder
is unable to make sales of Registrable Securities pursuant to Section 8.6(a) and
(b). The period of time during which the Company is required to keep the Shelf
Registration Statement effective is referred to herein as the "Registration
Period."
8.2 Registration (a) The Company will as soon as practicable
following 90 days after the Closing Date but not later than 180 days after the
Closing Date (the "Filing Period"), file with the SEC a shelf registration
statement on Form S-3 or successor form or such other form as shall be selected
by the Company that is available to it under the Securities Act (the "Shelf
Registration Statement") with respect to the Registrable Securities beneficially
owned by Purchasers following the Closing. If permitted by the SEC's rules, the
Shelf Registration Statement may be filed as a post-effective amendment to the
Company's existing Registration Statement on Form S-3, File No. 333-09349. The
Company shall be entitled to amend the Shelf Registration Statement from time to
time to register securities other than Registrable Securities for sale for the
account of any person or entity; provided, however, that such amendment shall be
permitted only so long as the SEC rules provide that such amendment does not
give the SEC the right to review such registration statement.
<PAGE>
13
(b) The Filing Period and the Effectiveness Period (as defined
below) shall be extended by the number of days that (i) any delay is due to the
failure of a Holder to reasonably cooperate in providing to the Company such
information as shall be reasonably requested by the Company in writing for use
in connection with the Shelf Registration Statement and (ii) the SEC does not
provide comments to the Company (or declare the Shelf Registration Statement
effective) within (A) 35 days after the initial filing of the Shelf Registration
Statement or (B) seven days after the filing of any pre-effective amendment to
the Shelf Registration Statement, so long as the Company has responded promptly
to any comments pending at the time a pre-effective amendment to the Shelf
Registration Statement is filed.
8.3. Registration Procedures. In connection with the registration of
any Registrable Securities under the Securities Act as provided in this Section
8, the Company will use its reasonable best efforts:
(a) To cause the Shelf Registration Statement (and any other related
registrations, qualifications or compliances as may be reasonably requested and
as would permit or facilitate that sale and distribution of all Registrable
Securities until the distribution thereof is complete) to become effective as
soon as practicable following the filing thereof but not later than 240 days
after the Closing Date (the "Effectiveness Period"); provided that if the Shelf
Registration Statement is not declared effective by the SEC by the end of the
Effective Period (as it may be extended pursuant to Section 8.2(b), then the
exercise price of the Purchasers' Warrants and the conversion price of the
Purchases' Preferred Shares will be reduced by 5% for each 30-day period that
Shelf Registration Statement is not declared effective by the SEC after such
Effectiveness Date.
(b) Prepare and file with the SEC such amendments and supplements to
such Shelf Registration Statement and the prospectus used in connection
therewith and take all other actions as may be necessary to keep such Shelf
Registration Statement continuously effective until the disposition of all
securities in accordance with the intended methods of disposition by the seller
or sellers thereof set forth in such Shelf Registration Statement shall be
completed, and to comply with the provisions of the Securities Act (to the
extent applicable to the Company) with respect to such dispositions;
(c) Furnish to each seller of such Registrable Securities such
reasonable number of copies of such Shelf Registration Statement and of each
such amendment and supplement thereto, such number of copies of the prospectus
included in such Shelf Registration Statement (including each preliminary
prospectus), in conformity with the requirements of the Securities Act, and such
other documents (including exhibits to any of the foregoing), as such seller may
reasonably request, in order to facilitate the disposition of the Registrable
Securities owned by such seller;
(d) To register or qualify such Registrable Securities covered by
such Shelf Registration Statement under such other securities or blue sky laws
of such jurisdictions as any seller reasonably requests, and do any and all
other acts and things which may be reasonably necessary or advisable to enable
such seller to consummate the disposition in such jurisdictions
<PAGE>
14
the Registrable Securities owned by such seller, except that the Company will
not for any such purpose be required to qualify generally to do business as a
foreign corporation in any jurisdiction wherein it would not, but for the
requirements of this Section 8.3(d) be obligated to be qualified, to subject
itself to taxation in any such jurisdiction, or to consent to general service of
process in any such jurisdiction;
(e) Provide a transfer agent and registrar for all such Registrable
Securities covered by such Shelf Registration Statement not later than the
effective date of such Shelf Registration Statement;
(f) Notify each seller of such Registrable Securities at any time
when a prospectus relating thereto is required to be delivered under the
Securities Act, of the happening of any event as a result of which the
prospectus included in such Shelf Registration Statement contains an untrue
statement of a material fact or omits any fact necessary to make the statements
therein not misleading, and, at the request of any such seller, the Company will
promptly prepare a supplement or amendment to such prospectus so that, as
thereafter delivered to the purchasers of such Registrable Securities, such
prospectus will not contain an untrue statement of a material fact or omit to
state any fact necessary to make the statements therein not misleading;
(g) Cause all such Registrable Securities to be listed on each
securities exchange or automated over-the-counter trading system on which
similar securities issued by the Company are then listed;
(h) Enter into such customary agreements (including, in the event
the Holders elect to engage an underwriter in connection with the Shelf
Registration Statement, an underwriting agreement containing customary terms and
conditions) and take all such other actions as reasonably required in order to
expedite or facilitate the disposition of such Registrable Securities; provided,
however, that the Company shall not be liable for any expenses, including,
without limitation, any underwriter's fees, commissions and discounts;
(i) Upon reasonable prior notice, make reasonably available for
inspection by any seller of Registrable Securities, all financial and other
records, pertinent corporate documents and properties of the Company during
normal business hours at the offices of the Company, subject to the Company's
right to condition such inspection upon such seller's execution of an
appropriate confidentiality agreement; and
(j) With a view to making available to the Holders the benefits of
certain rules and regulations of the SEC which at any time permit the sale of
the Registrable Securities to the public without registration, commencing on the
effective date of the Shelf Registration Statement, the Company agrees to use
its reasonable best efforts to:
(i) make and keep public information available, as those terms
are understood and defined in Rule 144 under the Securities Act;
(ii) file with the SEC in a timely manner all reports and
other documents required of the Company under the Exchange Act; and
<PAGE>
15
(iii) so long as a Holder owns any unregistered Registrable
Securities, furnish to such Holder upon any reasonable request a
written statement by the Company as to its compliance with the
public information requirements of Rule 144 under the Securities
Act, and of the Exchange Act, a copy of the most recent annual or
quarterly report of the Company, and such other reports and
documents of the Company as such Holder may reasonably request in
availing itself of any rule or regulation of the SEC allowing a
Holder to sell any such securities without registration (excluding
any such reports or documents of the Company which the Company, in
its sole discretion, shall deem confidential).
(k) Make every reasonable effort to obtain the withdrawal of any
order suspending the effectiveness of the Shelf Registration Statement at the
earliest possible time.
8.4 Registration and Selling Expenses. All expenses incurred by the
Company in connection with the Company's performance of or compliance with this
Section 8, including, without limitation, (i) all registration and filing fees
(including, without limitation, all expenses incident to filing(s) with the
NASD), (ii) blue sky fees and expenses, (iii) all necessary printing and
duplicating expenses, and (iv) all fees and disbursements of counsel and
accountants retained on behalf of the Company (all such expenses being called
"Registration Expenses"), will be paid by the Company. Each Holder may, at its
election, retain its own counsel and other representatives and advisors as it
shall choose at its own expense.
8.5 No Delay. The Holders shall have no right to take any action to
restrain, enjoin or otherwise delay any registration pursuant to Section 8.2
hereof as a result of any dispute, controversy or other matter that may arise
with respect to the interpretation or implementation of this Agreement.
8.6 Certain Obligations of Holders. (a) Each Holder agrees that,
upon receipt of any written request from the Company notifying such Holder of
the happening of any event requiring the preparation of a supplement or
amendment to the Shelf Registration Statement so that, as thereafter delivered
to the Holders, such prospectus will not contain an untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading and requesting that
such Holder discontinue disposition of Registrable Securities pursuant to the
Shelf Registration Statement, each Holder will forthwith discontinue disposition
of Registrable Securities pursuant to the Shelf Registration Statement until its
receipt of copies of the supplemented or amended effective prospectus from the
Company and, if so directed by the Company, each Holder shall deliver to the
Company all copies, other than permanent file copies then in such Holder's
possession, of the prospectus covering such Registrable Securities current at
the time of receipt of such notice.
(b) Each Holder agrees to suspend, upon written request of the
Company, any disposition of Registrable Securities pursuant to the Shelf
Registration Statement during (A) any period not to exceed one 60-day period
within any one 12-month period the Company requires in connection with a primary
public offering of equity securities in which the Company shall engage an
underwriter and (B) any period, not to exceed one 60-day period per 12-month
period,
<PAGE>
16
when the Company determines in good faith that offers and sales pursuant thereto
should not be made by reason of the presence of material undisclosed
circumstances or developments with respect to which the disclosure that would be
required in such a prospectus is premature or would interfere with any material
financing, acquisition, merger, reorganization or other transaction involving
the Company, would have an adverse effect on the Company or is otherwise
inadvisable.
(c) As a condition to the inclusion of its Registrable Securities,
each Holder shall furnish to the Company such information regarding such Holder
and the intended method of distribution of such securities as the Company may
from time to time request or as shall be required in connection with any
registration, qualification or compliance referred to in this Section 5. Each
such Holder promptly shall furnish to the Company all information required to be
disclosed in order to make the information previously furnished to the Company
not materially misleading.
(d) Each Holder hereby covenants with the Company (1) not to make
any sale of the Registrable Securities without effectively causing the
prospectus delivery requirements under the Act to be satisfied, and (2) if such
Registrable Securities are to be sold by any method or in any transaction other
than on Nasdaq (or other national securities exchange), in the over-the-counter
market, in privately negotiated transactions, or in a combination of such
methods, to notify the Company at least five business days prior to the date on
which the Holder first offers to sell any such Registrable Securities.
(e) Each Holder acknowledges and agrees that the Registrable
Securities sold pursuant to the Shelf Registration Statement are not
transferable on the books of the Company unless the stock certificate submitted
to the transfer agent evidencing such Registrable Securities is accompanied by a
certificate reasonably satisfactory to the Company to the effect that (A) the
Registrable Securities have been sold in accordance with such Shelf Registration
Statement and (B) the requirement of delivering a current prospectus has been
satisfied.
(f) Each Holder has been hereby advised that the anti-manipulation
provisions of Regulation M under the Exchange Act may apply to sales of the
Registrable Securities offered pursuant to the Shelf Registration Statement, and
agrees not to take any action with respect to any distribution deemed to be made
pursuant to such Shelf Registration Statement, that constitutes a violation of
Regulation M under the Exchange Act or any other applicable rule, regulation or
law.
(g) At the end of the Registration Period, the Holders of
Registrable Securities included in the Shelf Registration Statement shall
discontinue sales of shares pursuant to such registration statement upon receipt
of notice from the Company of its intention to remove from registration the
shares covered thereby which remain unsold, and such Holders promptly shall
notify the Company of the number of shares registered which remain unsold
immediately upon receipt of such notice from the Company.
(h) The rights to cause the Company to register Registrable
Securities granted to the Holders by the Company under Section 8.2 may be
assigned in whole or in part by a
<PAGE>
17
Holder, provided, that: (i) such transfer may otherwise be effected in
accordance with applicable securities laws; (ii) such transfer involves not less
than the lesser of all of such Holder's Registrable Securities or the equivalent
of 25,000 shares of Common Stock on an as-converted or as-exercised basis; (iii)
such Holder gives prior written notice to the Company; and (iv) such transferee
agrees to comply with the terms and provisions of this Agreement in a written
instrument satisfactory in form and substance to the Company and its counsel.
Except as specifically permitted by this Section 8.6, the rights of a Holder
with respect to Registrable Securities shall not be transferable to any other
person or entity, and any attempted transfer shall cause all rights of such
Holder therein to be forfeited, void ab initio and of no further force and
effect.
(i) With the written consent of the Company and the Holders holding
at least 66 2/3% majority of the Registrable Securities that are then
outstanding, any provision of this Section 8 may be waived (either generally or
in a particular instance, either retroactively or prospectively and either for a
specified period of time or indefinitely) or amended. Upon the effectuation of
each such waiver or amendment, the Company shall promptly give written notice
thereof to the Holders, if any, who have not previously received notice thereof
or consented thereto in writing.
8.7 Indemnification. (a) The Company shall indemnify, to the extent
permitted by law, each Holder of Registrable Securities and each person
controlling such Holder within the meaning of Section 15 of the Securities Act
against all losses, claims, damages, liabilities and expenses (or action in
respect thereof) including any of the foregoing incurred in settlement of any
litigation, commenced or threatened, arising out of or based on any untrue
statement or alleged untrue statement of a material fact contained in any
registration statement or prospectus (or any amendment or supplement thereto) or
any preliminary prospectus, which registration statement, prospectus or
preliminary prospectus shall be prepared in connection with the registration
contemplated by this Section 8, or based on any omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, and will reimburse such Holder and each
controlling person for reasonable legal and other expenses incurred in
connection with investigating or defending any such claim, loss, damage,
liability or action as incurred, except insofar as such losses, claims, damages,
liabilities or expenses are caused by any untrue statement or alleged untrue
statement or by any omission or alleged omission made in reliance upon and in
conformity with written information furnished by such Holder and stated to be
specifically for use in the preparation of such registration statement or
prospectus, provided the Company will not be liable pursuant to this Section 8.7
if such losses, claims, damages, liabilities or expenses have been caused by (i)
any selling security holder's failure to deliver a copy of the Shelf
Registration Statement or prospectus, or any amendments or supplements thereto
at or prior to the time such furnishing is required by the Securities Act or
(ii) the failure by such Holder to discontinue disposition of Registrable
Securities pursuant to the Shelf Registration Statement upon a written request
from the Company in accordance with Sections 8.6(a) or 8.6(b).
(b) In connection with any registration statement in which a Holder
of Registrable Securities is participating, each such Holder shall furnish to
the Company in writing such information as is reasonably requested by the
Company for use in any such registration
<PAGE>
18
statement or prospectus and shall severally, but not jointly, indemnify, to the
extent permitted by law, the Company, its directors and officers and each person
or entity, if any, who controls the Company within the meaning of Section 15 of
the Securities Act, against any losses, claims, damages, liabilities and
expenses resulting from any untrue statement or alleged untrue statement of a
material fact or any omission or alleged omission of a material fact required to
be stated in the registration statement or prospectus or any amendment thereof
or supplement thereto or necessary to make the statements therein not
misleading, but only to the extent such losses, claims, damages, liabilities or
expenses are caused by an untrue statement or alleged untrue statement or by an
omission or alleged omission made in reliance upon and in conformity with such
written information so furnished by such Holder and stated specifically for use
in connection with the preparation of such registration statement or prospectus;
provided that the indemnity shall not apply to the extent that such loss, claim,
damage, liability or expense arises out of or is based upon a violation of this
Agreement by the Company. If the offering pursuant to any such registration is
made through underwriters, each such Holder agrees to enter into an underwriting
agreement in customary form with such underwriters and to indemnify such
underwriters, their officers and directors, if any, and each person or entity
who controls such underwriters within the meaning of the Securities Act to the
same extent as hereinabove provided with respect to indemnification by such
Holder. Notwithstanding the foregoing or any other provision of this Agreement,
in no event shall a Holder of Registrable Securities be liable for any such
losses, claims, damages, liabilities or expenses in excess of the net proceeds
received by such Holder in connection with its disposition of Registrable
Securities.
(c) Promptly after receipt by an indemnified party under Section 8.7
(a) or (b) of notice of any claim as to which indemnity may be sought,
including, without limitation, the commencement of any action or proceeding,
such indemnified party will, if a claim in respect thereof may be made against
the indemnifying party under such Section, promptly notify the indemnifying
party in writing of the commencement thereof; provided that the failure of the
indemnified party so to notify the indemnifying party will not relieve the
indemnifying party from its obligations under such Section except to the extent
that the indemnifying party is adversely affected by such failure. In case any
such action or proceeding is brought against any indemnified party, and it
notifies the indemnifying party of the commencement thereof, the indemnifying
party and its counsel will conduct the defense of any such action with counsel
approved by such indemnified party (which approval shall not be withheld or
delayed unreasonably) although the indemnified party will be entitled to
participate therein, and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party will not be liable to such indemnified party under such
Section for any legal or any other expenses subsequently incurred by such
indemnified party in connection with the defense thereof (other than reasonable
costs of investigation) unless incurred at the written request of the
indemnifying party. Notwithstanding the above, the indemnified party will have
the right to employ counsel of its own choice in any such action or proceeding
(and be reimbursed by the indemnifying party for the reasonable fees and
expenses of such counsel and other reasonable costs of the defense) if
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential differing
interests or conflicts between the indemnified party and any other party
represented by such counsel in such action or proceeding or counsel to the
indemnified party is of the opinion that it would not be desirable for the same
counsel to represent both the indemnifying party and
<PAGE>
19
the indemnified party because such representation might result in a conflict of
interest; provided, however, that the indemnifying party shall not in connection
with any one such action or proceeding or separate but substantially similar
actions or proceedings arising out of the same general allegations, be liable
for the reasonable fees and expenses of more than one separate firm of attorneys
at any time for all indemnified parties, except to the extent that local
counsel, in addition to regular counsel, is required in order to effectively
defend against such action or proceeding. An indemnifying party will not be
liable to any indemnified party for any settlement or entry of judgment
concerning any such action or proceeding effected without the consent of such
indemnifying party.
(d) If the indemnification provided for in Section 8.7(a) or (b) is
held by a court of competent jurisdiction to be unavailable under applicable law
to an indemnified party in respect of any losses, claims, damages or liabilities
referred to therein, then each applicable indemnifying party, in lieu of
indemnifying such indemnified party, shall contribute to the amount paid or
payable by such indemnified party as a result of such losses, claims, damages or
liabilities in such proportion as is appropriate to reflect the relative fault
of the Company on the one hand and of the indemnified party on the other in
connection with the statements or omissions which resulted in such losses,
claims, damages, or liabilities, as well as any other relevant equitable
considerations including the relative benefits to such parties. The relative
fault of the Company on the one hand and of the indemnified party on the other
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission to state a material
fact relates to information supplied by the Company or by the indemnified party
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. The amount paid or
payable by a party as a result of the losses, claims, damages and liabilities
referred to above shall be deemed to include, subject to the limitations set
forth in Section 8.7(c), any legal or other fees or expenses reasonably incurred
by such party in connection with investigating or defending any action or claim.
No person or entity guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Securities Act) will be entitled to contribution from
any person or entity that is not guilty of such fraudulent misrepresentation.
Section 9. Restrictions on Transfer.
(a) From the date hereof and continuing for a period of 180 days
from the Closing Date, each Purchaser shall not, without the prior written
consent of the Company, offer, pledge, sell, contract to sell, grant any option
for the sale of, or otherwise dispose of, directly or indirectly (any of which
being a "Transfer"), any Preferred Shares, Warrants or Conversion Shares except
to an affiliate of such Purchaser that has agreed for the benefit of the Company
to be bound by the terms and conditions of this Agreement in a written
instrument satisfactory in form and substance to the Company and its counsel,
and such Purchaser shall have provided the Company with an opinion of counsel
reasonably satisfactory to the Company that such transfer will be exempt from
registration under the Securities Act and applicable state securities laws.
(b) Each Purchaser agrees that from the date hereof and continuing
for a period of 180 days from the Closing Date, such Purchaser shall not
directly or indirectly, through related parties, affiliates or otherwise sell
"short" or "short against the box" (as those terms are
<PAGE>
20
generally understood) any equity security of the Company or enter into any
hedging transactions with respect to such equity securities.
(c) Notwithstanding anything to the contrary in Section 8, each
Purchaser hereby agrees to be subject to a lock-up period on substantially the
same terms set forth in Section 9(a) starting with the date five days prior to
the Company's good faith estimate of the date of filing of, and ending on a date
60 days after the effective date of, a Company-initiated underwritten
registration in connection with and following any public offering in which the
Company shall engage in an underwriting; provided that the members of the Board
of Directors and executive officers of the Company are subject to an agreement
at least as restrictive as the foregoing.
(d) No Transfer in violation of this Agreement shall be made or
recorded on the books of the Company and any such Transfer or purported Transfer
shall be void ab initio and of no force or effect. Upon request of the Company,
each Purchaser shall certify in writing its compliance with this Section 9.
Section 10. Limitations on Purchasers' Ownership. No Purchaser nor
any of its affiliates (as such term is defined in Rule 12b-2 under the Exchange
Act) shall directly or indirectly without the prior written consent of the Board
of Directors of the Company acquire beneficial ownership within the meaning of
Rule 13d-3 of the Exchange Act (except by way of stock splits, stock dividends
or similar events affecting holders of securities of the Company generally) if
the effect of the acquisition would be to increase the aggregate voting power in
the election of Directors of the Company's Board of Directors of all securities
of the Company owned by such Purchaser and such affiliates to more than 15% of
the total combined voting power of all securities of the Company then
outstanding. No Purchaser or any affiliate thereof shall be required to dispose
of any securities of the Company if their aggregate percentage ownership is
increased as a result of a recapitalization of the Company.
Section 11. Miscellaneous.
11.1 Notices. Any notice or other communication given hereunder
shall be deemed sufficient if in writing and sent by registered or certified
mail, return receipt requested, or delivered by hand against written receipt
therefor, addressed to:
If to the Company:
AVAX Technologies, Inc.
4520 Main Street, Suite 930
Kansas City, MO 64111
Attn: Jeffrey M. Jonas, President and Chief Executive Officer
<PAGE>
21
With a copy to:
Roberts, Sheridan & Kotel,
A Professional Corporation
Tower Forty-Nine
12 East 49th
Street, 30th Floor
New York, NY 10017
Attn: Ira L. Kotel, Esq.
If to Purchasers:
To the names and addresses on Exhibit A.
Notices shall be deemed to have been given or delivered on the date
of mailing, except notices of change of address, which shall be deemed to have
been given or delivered when received.
11.2 Successors and Assigns. Subject to Section 8.6(i), this
Agreement shall be binding upon and inure to the benefit of the parties hereto
and to their respective heirs, legal representatives, successors and assigns.
11.3 Entire Agreement; Survival of Representations and Warranties.
This Agreement sets forth the entire agreement and understanding among the
parties as to the subject matter hereof and merges and supersedes all prior
discussions, agreements and understandings (including, without limitation, the
respective letter agreements dated February 11, 1999 and February 19, 1999,
between the Company and Purchasers) of any and every nature among them; provided
that Sections 2, 3, 4, 5 (the first sentence only), 8, 9 and 12 and Exhibit A
(as such sections or exhibit may have been or may be amended, waived or modified
upon the mutual agreement of the parties thereto) of the Confidentiality
Agreements between the Company and (i) each of the Designating Purchasers
attached as Exhibit F1 and F2, respectively, and (ii) each of the Purchasers
(other than the Designating Purchasers) shall survive. This Agreement may be
amended only by mutual written agreement of the Company and the Purchasers, and
the Company may take any action herein prohibited or omit to take any action
herein required to be performed by it, and any breach of any covenant,
agreement, warranty or representation may be waived, only if the Company has
obtained the written consent or waiver of the Purchasers. The representations
and warranties of the Company set forth in this Agreement shall survive the
Closing Date for 18 months notwithstanding any earlier delivery and conversion
of Preferred Shares or exercise of the Warrants except that the representations
and warranties set forth in Sections 6.2 and 6.3 shall survive such 18-month
period indefinitely. The immediately preceding sentence shall have no force or
effect on the obligations of the parties under this Agreement or any other
operative document relating to the transactions contemplated by this Agreement.
11.4 Governing Law; Consent to Jurisdiction; etc. (a)
Notwithstanding the place where this Agreement may be executed by any of the
parties hereto, the parties expressly agree that all the terms and provisions
hereof shall be construed in accordance with and governed by the laws of the
State of Delaware without regard to that State's conflicts of law principles. In
<PAGE>
22
the event that a judicial proceeding is necessary, the parties who are not
citizens or residents of the United States agree that the sole forum for
resolving disputes arising out of or relating to this agreement is any federal
or state court in the State of Missouri, and all related appellate courts
(collectively, the "Courts"), and further, such non-U.S. parties irrevocably and
unconditionally consent to the jurisdiction of such courts.
(b) Each of the parties who are not citizens or residents of the
United States, irrevocably and unconditionally consents to venue in the Courts,
and irrevocably and unconditionally waives any objection to the laying of venue
of any judicial proceeding in the Courts, and agrees not to plead or claim in
any such Court that any such judicial proceeding brought in any such court has
been brought in an inconvenient forum.
11.5 Severability. The holding of any provision of this Agreement to
be invalid or unenforceable by a court of competent jurisdiction shall not
affect any other provision of this Agreement, which shall remain in full force
and effect. If any provision of this Agreement shall be declared by a court of
competent jurisdiction to be invalid, illegal or incapable of being enforced in
whole or in part, such provision shall be interpreted so as to remain
enforceable to the maximum extent permissible consistent with applicable law and
the remaining conditions and provisions or portions thereof shall nevertheless
remain in full force and effect and enforceable to the extent they are valid,
legal and enforceable, and no provisions shall be deemed dependent upon any
other covenant or provision unless so expressed herein.
11.6 No Waiver. A waiver by either party of a breach of any
provision of this Agreement shall not operate, or be construed, as a waiver of
any subsequent breach by that same party.
11.7 Further Assurances. The parties agree to execute and deliver
all such further documents, agreements and instruments and take such other and
further action as may be necessary or appropriate to carry out the purposes and
intent of this Agreement. Any documentary, stamp tax or similar issuance or
transfer taxes due as a result of the conveyance, transfer or sale of the
Preferred Shares and Warrants between any of the Purchasers (or any of their
permitted transferees), on the one hand, and the Company, on the other hand,
pursuant to this Agreement shall be borne by such Purchasers (or their
respective permitted transferees).
11.8 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which shall
together constitute the same instrument.
11.9 No Third Party Beneficiaries. Nothing in this Agreement shall
create or be deemed to create in any person or entity not a party to this
Agreement any legal or equitable right, remedy or claim under this Agreement,
and this Agreement shall be for the sole and exclusive benefit of the parties
hereto; provided, however, that Hughes & Luce L.L.P., may rely upon and benefit
from the representations in Section 5.13. The parties hereto expressly recognize
that this Agreement is not intended to create a partnership, joint venture or
other similar arrangement between or among any of such parties or their
respective affiliates.
<PAGE>
23
11.10 Publicity Restrictions. No press release or other public
disclosure relating to the transactions contemplated by this Agreement shall be
issued or made by or on behalf of any Purchaser without prior consultation with
the Company, except as required by applicable law, court process or stock
exchange rules, in which case the Purchaser required to make such disclosure
shall allow the Company reasonable time (to the extent practicable) to comment
thereon in advance of such issuance.
11.11 Certain Expenses. The Company shall pay, within 30 days of
receipt of a statement therefor up to $50,000 in the aggregate of the
commercially reasonable fees and disbursements incurred during the period
commencing 60 days prior to the Closing Date and ending 30 days after the
Closing Date by the Designating Purchasers directly in connection with the
transactions contemplated by this Agreement. Except as provided in the
immediately preceding proviso or as otherwise expressly provided in this
Agreement, each Purchaser shall be responsible for its own respective fees and
disbursements incident to this Agreement and the transactions contemplated
hereby.
<PAGE>
24
IN WITNESS WHEREOF, the undersigned have duly executed this
Agreement as of the date first above written.
AVAX TECHNOLOGIES, INC.
/s/ Jeffrey M. Jonas, M.D.
--------------------------------------
Jeffrey M. Jonas, M.D.
President and Chief Executive Officer
ESSEX WOODLANDS HEALTH
VENTURES FUND IV, L.P.
By: /s/ J. L. Currie
----------------------------------
Name: J. L. Currie
Title: Managing Director
PETRUS FUND, L.P.
By: Perot Investments, Inc.,
General Partner
By: /s/ Steven Blasnik
----------------------------------
Name: Steven Blasnik
Title: President
CENTENARY INVESTMENTS, L.P.
By: /s/ John T. Walter, Jr.
--------------------------------------
John T. Walter, Jr.
General Partner
<PAGE>
SAGRES GROUP LTD.
By: /s/ Illegible Signature
--------------------------------------
Name: Illegible Signature
Title: Director
HEPTAGON INVESTMENTS LIMITED
By: /s/ Illegible Signature
--------------------------------------
Name: Illegible Signature
Title: Director
MARIBEL LIMITED
By: /s/ Giuseppe Penati
--------------------------------------
Name: Giuseppe Penati
Title: Director
INVESTISSEMENTS 90 S.A.
By: /s/ Illegible Signature
----------------------------------
Name: Illegible Signature
Title:
J.F. SHEA & CO.
By: /s/ Illegible Signature
----------------------------------
Name: Illegible Signature
Title:
SEXTANT AVAX, LLC
By: /s/ Archibald Cox
----------------------------------
Name: Archibald Cox
Title:
<PAGE>
THE 1992 HOUSTON PARTNERSHIP, L.P.
By: Kilroy Company of Texas, Inc.
General Partner
By: /s/ Illegible Signature
----------------------------------
Name: Illegible Signature
Title:
DONALD R. KENDALL, JR.
By: /s/ Illegible Signature
----------------------------------
Name: Illegible Signature
Title:
TIS PRAGER
By: /s/ Illegible Signature
----------------------------------
Name: Illegible Signature
Title:
KEYS FOUNDATION
By: /s/ Illegible Signature
----------------------------------
Name: Illegible Signature
Title:
DAVID STEINBERG
By: /s/ David Steinberg
----------------------------------
Name: David Steinberg
<PAGE>
JOSEPH RICCARDO
By: /s/ Joseph Riccardo
----------------------------------
Name: Joseph Riccardo
<PAGE>
Exhibit A
---------
Number of Number of Number of Aggregate
Name and Address of Preferred Class A Class B Purchase
Purchasers Shares Warrants Warrants Price
- ------------------- ------ -------- -------- -----
Names and Addresses of
Individual Investors
Deleted
Totals: 101,300 311,692.30 311,692.30 10,130,000
November 24, 1998
Mr. Tom Wudarski
Office of Research Affairs
1020 Locust Street
JAH Room M-5
Philadelphia, Pa. 19107
Dear Tom:
By this letter, I would like to formally propose the extension of funding under
the Clinical Study and Research Agreement (the "Agreement") dated as of November
20, 1995, between AVAX Technologies, Inc. ("AVAX"), Thomas Jefferson University
("TJU"), and David Berd, M.D., as Principal Investigator. I have attached
amendments to Exhibits A and B that would serve to replace those in the original
agreement and which indicate our funding intentions for the next one year
(Exhibit B) and our expectations for accomplishments under the research
initiatives (Exhibit A). Except as expressly provided in this letter, all other
terms, conditions and provisions of the Agreement shall continue in full force
and effect as provided therein.
Additionally, I would like to confirm the intention of paragraph fifteen, which
reads as follows:
"Subject to Paragraph 12 hereof and to the proviso to the immediately
succeeding sentence, title to any equipment, materials, supplies and things
of value purchased, built, manufactured or acquired either from Sponsor or
from third parties in conjunction with performance of the Study shall vest
in TJU. All such equipment shall be and remain the property of TJU."
It is our interpretation that this paragraph applies to those items purchased by
TJU and would exclude those items purchased and/or paid for by AVAX.
I would also like to confirm the intention of paragraph thirteen concerning
indemnification, which reads as follows:
<PAGE>
o Page 2 March 29, 1999
"Sponsor agrees to indemnify, hold harmless and defend TJU, its trustees,
officers, employees, the Principal Investigator and agents from and against
any and all claims, suits, losses, damages, cost, fees, expenses (including
attorney's fees), and other liabilities asserted by third parties, both
government and non-government, resulting from or arising out of the
clinical study and research program carried out pursuant to this Agreement,
provided, however, that Sponsor shall not be liable for TJU's negligence,
intentional wrongdoing, or its failure to follow the Research Protocol."
While it appears the use of the abbreviation "TJU" in the last sentence is
intended to refer to all of the parties listed in the first sentence of the
paragraph, I believe it would be clearer and more reflective of our intent to
amend the last part of the last sentence (in bold italics above) to read as
follows:
"provided, however, that Sponsor shall not be liable for any such claims,
suits, losses, damages, costs, fees, expenses (including attorneys' fees),
and other liabilities asserted by third parties arising out of or related
to (i) the failure of any such person or entity to follow the terms of the
Research Protocol or Sponsor's written instructions concerning use of the
Study drug, (ii) failure of any such person or entity to comply with
applicable FDA or other government requirements, or (iii) the negligence
of, or intentional wrongdoing by, any such person or entity."
Finally, I would like to update paragraph 16 to replace Carl Spana, Ph.D. and
Michael S. Weiss, Esq. as the representatives who should receive notice on
behalf of AVAX, with the following:
Jeffrey M. Jonas, M.D.
President and Chief Executive Officer
AVAX Technologies, Inc.
4520 Main Street
Suite 930
Kansas City, Missouri 64111
With a copy to:
David L. Tousley
Chief Financial Officer
AVAX Technologies, Inc.
4520 Main Street
Suite 930
Kansas City, Missouri 64111
<PAGE>
o Page 3 March 29, 1999
Should you agree with the new Exhibits A and B and the clarifications/amendments
described above, please have the appropriate TJU official and Dr. Berd sign this
letter and return it to me. Upon execution, we will immediately forward a check
for the first quarter's funding of the extension.
Should you have any questions or comments, please feel free to call me.
Sincerely,
AVAX Technologies, Inc.
By:
/s/ Jeffrey M. Jonaas
Name: Jeffrey M. Jonas, M.D.
Title: President and Chief Executive Officer
Accepted this 1st day of January, 1999
On behalf of Thomas Jefferson University
/s/ Thomas Wudarski
--------------------------------------------
Name: Thomas Wudarski
Title: Manager, Research Administration
Accepted this 1st day of January, 1999
/s/ David Berd 1/14/99
--------------------------------------------
Name: David Berd, M.D.
Title: Principal Investigator
<PAGE>
o Page 4 March 29, 1999
Exhibit A
Research Protocol
The study is to evaluate the feasibility of applying the DNP Cancer Vaccine
technology to treatment of malignancies other than melanoma. The ongoing studies
will be conducted with other human cancers such as breast, renal and colon
cancers and may include in vitro testing, cell culture studies, in vivo animal
models and human studies. It may also include studies of potential second
generation products.
Principal Investigator
The Principal Investigator of the Study is Dr. David Berd of Thomas Jefferson
University.
Performance
During the next Agreement year of the Study, from 11/20/98 to 11/19/99, the
Principal Investigator will use best efforts to achieve the following
objectives:
[Redacted information has been separately filed with the Commission for
Confidential Treatment.]
<PAGE>
o Page 5 March 29, 1999
- --------------------------------------------------------------------------------
Exhibit B - Funding for the period from
11/20/1998 to 11/19/1999
[Redacted information has been separately filed
with the Commission for Confidential Treatment.]
Total Funding $ 279,690
Commitment
- --------------------------------------------------------------------------------
Note: Except as provided in the attached letter, the funding above is to be
provided on the same terms, conditions and provisions as specified in the
Clinical Study and Research Agreement dated November 20, 1995.
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-3 No. 333-09349) of AVAX Technologies, Inc. and in the related Prospectus of
our report dated January 20, 1999, with respect to the financial statements of
AVAX Technologies, Inc. included in this Annual Report (Form 10-KSB) for the
year ended December 31, 1998.
/s/ Ernst & Young LLP
--------------------------------------
Ernst & Young LLP
Kansas City, Missouri
March 29, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Electronic
Processing, Inc. Statement of Income for years ended December 31, 1998 and
Balance Sheet as of December 31, 1998, and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 344,940
<SECURITIES> 9,377,678
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 9,953,319
<PP&E> 1,225,891
<DEPRECIATION> 35,477
<TOTAL-ASSETS> 11,143,733
<CURRENT-LIABILITIES> 886,646
<BONDS> 0
0
1,127
<COMMON> 40,028
<OTHER-SE> 10,215,932
<TOTAL-LIABILITY-AND-EQUITY> 11,143,733
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 6,535,358
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (5,838,130)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,838,130)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,838,130)
<EPS-PRIMARY> (.87)
<EPS-DILUTED> (.83)
</TABLE>
