<PAGE> 1
As filed with the Securities and Exchange Commission on April 10, 1997
Registration No. 333-22817
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------
TRANSCEND THERAPEUTICS, INC.
(Exact name of registrant as specified in its charter)
------------------------
<TABLE>
<S> <C> <C>
DELAWARE 2836 04-3174575
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
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640 MEMORIAL DRIVE, CAMBRIDGE, MASSACHUSETTS 02139 (617) 374-1200
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
------------------------
HECTOR J. GOMEZ, M.D., PH.D.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
TRANSCEND THERAPEUTICS, INC.
640 MEMORIAL DRIVE
CAMBRIDGE, MASSACHUSETTS 02139 (617) 374-1200
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------
Copies to:
<TABLE>
<S> <C>
STEVEN D. SINGER, ESQ. CHARLES W. MULANEY, JR., ESQ.
PHILIP P. ROSSETTI, ESQ. RODD M. SCHREIBER, ESQ.
HALE AND DORR LLP SKADDEN, ARPS, SLATE, MEAGHER
60 State Street & FLOM (ILLINOIS)
Boston, Massachusetts 02109 333 W. Wacker Drive, Suite 2100
(617) 526-6000 Chicago, Illinois 60606
(312) 407-0700
</TABLE>
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Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date hereof.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY
DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES
MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE
REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH
OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED APRIL 10, 1997
PROSPECTUS
2,000,000 SHARES
[TRANSCEND THERAPEUTICS LOGO]
COMMON STOCK
All of the 2,000,000 shares of Common Stock offered hereby are being sold
by Transcend Therapeutics, Inc. ("Transcend" or the "Company"). Prior to the
Offering, there has been no public market for the Common Stock of the Company.
It is currently estimated that the initial public offering price will be between
$12.00 and $14.00 per share. See "Underwriting" for a discussion of the factors
to be considered in determining the initial public offering price. The Company
has applied to list the Common Stock for quotation on the Nasdaq National Market
under the symbol "TSND."
In addition to the shares offered hereby, on or prior to the closing of the
Offering, Boehringer Ingelheim International GmbH will purchase $5.0 million of
Common Stock from the Company in a private placement at the price to public set
forth below pursuant to its collaboration with the Company. See
"Business -- Boehringer Ingelheim."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS," BEGINNING ON PAGE 7.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
================================================================================
<TABLE>
<CAPTION>
UNDERWRITING
DISCOUNTS AND PROCEEDS TO
PRICE TO PUBLIC COMMISSIONS(1) COMPANY(2)
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.................................... $ $ $
- ------------------------------------------------------------------------------------------------------------------
Total(3)..................................... $ $ $
==================================================================================================================
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses of the Offering payable by the Company, estimated
at $824,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
300,000 additional shares of Common Stock on the same terms and conditions
set forth above, solely to cover over-allotments, if any. If such option is
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $ , $ , and $ ,
respectively. See "Underwriting."
---------------------------
The shares of Common Stock offered by the Underwriters are subject to prior
sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that delivery of such shares will be made at the
offices of the agent of Vector Securities International, Inc., in New York, New
York, on or about , 1997.
---------------------------
Vector Securities International, Inc. EVEREN Securities, Inc.
, 1997
<PAGE> 3
- --------------------------------------------------------------------------------
In connection with the onset of acute respiratory distress syndrome ("ARDS"),
neutrophils, a type of white blood cell, activate and adhere to the surface of
pulmonary capillaries. These neutrophils then release reactive oxygen species
("ROS") and protease enzymes which cause damage to lung tissue. Glutathione,
which is normally present in lung cells and lung fluid in high concentrations,
neutralizes or inactivates these ROS and limits oxidative damage. Anti-protease
enzymes are present in the lung under normal conditions and protect the lung
against oxidative tissue damage. The protective effect of anti-proteases is
lost in the presence of excessive ROS. Preclinical studies indicate that
glutathione may also prevent further lung damage indirectly by blocking ROS
inhibition of anti-proteases.
Glutathione Depletion
And Oxidative
Tissue Damage
[Picture]
blood vessel
activated neutrophil
damaged lung tissue
release of ROS and proteases
endothelial cell
[Flow chart]
glutamate
Procysteine(R) - Procysteine(R) - cysteine - GSH (glutathione)
glycine
- --------------------------------------------------------------------------------
Treatment with Procysteine is a novel pharmacological approach to diseases
associated with oxidative tissue damage. A number of published studies have
indicated decreased levels of glutathione in conditions where excessive
production of ROS has caused severe tissue damage. Of the three amino acids
which comprise glutathione, it is the lack of available cysteine that limits
glutathione synthesis. Procysteine provides method for introducing the amino
acid cysteine into cells. Preclinical studies have documented Procysteine's
ability to increase intracellular levels of glutathione and prevent ROS damage.
Procysteine has not been approved by the United States Food and Drug
Administration (the "FDA") or any foreign regulatory agency. There can be no
assurance that Procysteine will be approved by the FDA or any foreign regulatory
agency on a timely basis, if at all. See "Risk Factors - No Assurance of FDA
Approval; Comprehensive Government Regulation."
- --------------------------------------------------------------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF THE
COMPANY, INCLUDING BY ENTERING STABILIZING BIDS OR EFFECTING SYNDICATE COVERING
TRANSACTIONS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
Procysteine(R) is a registered trademark and Transcend Therapeutics(TM) is a
trademark of Transcend Therapeutics, Inc. All other trademarks or trade names
referred to in this Prospectus are the property of their respective owners.
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and Financial Statements and Notes thereto appearing elsewhere in
this Prospectus, including information under "Risk Factors."
THE COMPANY
Transcend Therapeutics, Inc. ("Transcend" or the "Company") develops novel
pharmaceuticals for the treatment of diseases associated with oxidative stress
and resultant tissue damage, with a particular therapeutic focus on products for
the critical care market. The Company's lead product candidate, Procysteine(R),
has been evaluated in two Phase II clinical trials involving patients with acute
respiratory distress syndrome ("ARDS"). In the second quarter of 1997, the
Company plans to begin a pivotal Phase III clinical trial of Procysteine to
determine its safety and efficacy in the treatment of ARDS. In addition, by the
end of 1997, the Company plans to initiate a Phase II clinical trial of
Procysteine for the prevention and treatment of multiple organ dysfunction
("MOD"). In February 1997, the Company and Boehringer Ingelheim International
GmbH ("BI") entered into a Development and License Agreement (the "BI
Agreement") relating to the worldwide development and marketing of intravenous
formulations of Procysteine ("Procysteine i.v."). BI has agreed to pay Transcend
up to $46.0 million (consisting of $10.0 million in up-front payments and $36.0
million in contingent milestone payments related to ARDS and MOD), as well as
royalties on any related product sales.
The Company's initial product candidates are small molecule,
glutathione-repleting agents designed to prevent or limit oxidative tissue
damage from reactive oxygen species ("ROS"), highly reactive toxic molecules
produced as part of the body's immune response. Glutathione, a molecule found in
high concentrations throughout the body, is one of the principal mechanisms for
neutralizing ROS. Preclinical and clinical studies have demonstrated that in
some conditions involving massive acute inflammation, including severe
infection, multiple trauma and extensive burns, large quantities of ROS may be
produced. Studies have also indicated decreased levels of glutathione in such
conditions. When the body's production of ROS increases and exceeds the capacity
of glutathione and other antioxidant systems to combat oxidative stress, tissue
damage in the body's major organs can result, leading to organ dysfunction and,
in many cases, death.
ARDS, a disorder characterized by severe lung dysfunction, is a devastating
complication of conditions associated with massive acute inflammation, such as
severe infection, multiple trauma and extensive burns. This disorder affects an
estimated 150,000 patients in the United States annually, and has a mortality
rate of approximately 40 percent. There are currently no commercially available
drug treatments for ARDS. Treatment for patients suffering from ARDS is
administered in a hospital intensive care unit and is generally limited to
supportive care consisting of highly invasive mechanical ventilation. Mechanical
ventilation involves forcing air containing high concentrations of oxygen into
the lungs via an endotracheal tube inserted through a patient's nose or mouth.
Due to the invasive nature of this procedure, mechanical ventilation places a
patient at an increased risk of serious complications, including
hospital-acquired infection with drug resistant organisms.
MOD, the failure of two or more organs, generally has catastrophic
consequences for the patient. Organ systems that are frequently involved in MOD
include the lungs (ARDS), the kidneys (acute renal failure), the liver (acute
hepatic failure) and the heart (cardiovascular collapse). The mortality rate for
MOD patients is approximately 60 percent when two organs fail and exceeds 90
percent when a third organ fails. The Company estimates that there are over
750,000 patients annually in the United States at risk of MOD. Currently, there
are no commercially available drugs to prevent or treat MOD.
Treatment with Procysteine is a novel pharmacological approach to diseases
associated with oxidative stress and resultant tissue damage such as ARDS and
MOD. Procysteine provides a method for introducing into cells the amino acid
cysteine, an essential building block of glutathione. Preclinical studies have
documented Procysteine's ability to increase intracellular levels of glutathione
and
2
<PAGE> 5
prevent ROS damage. The Company has developed intravenous and oral formulations
of Procysteine and has characterized the safety profile and pharmacokinetics of
these formulations in clinical trials involving over 265 subjects in total.
Company-sponsored Phase II trials with intravenously administered
Procysteine have indicated the potential efficacy of Procysteine in the
treatment of patients with ARDS. In the first Phase II trial, which involved 32
patients treated with Procysteine or placebo, Procysteine-treated patients
gained independence from mechanical ventilation a median of five days earlier
than did placebo-treated patients. The second Phase II trial, which involved a
total of 25 patients, indicated a similar reduction in median days on mechanical
ventilation among Procysteine-treated patients as compared with placebo-treated
patients. Procysteine-treated patients also regained efficiency in transporting
oxygen to the blood stream to a greater degree than did placebo-treated
patients, as indicated by an established measure of lung function.
Under the BI Agreement, the Company granted BI an exclusive worldwide
license to use and sell Procysteine i.v. for all pharmaceutical applications.
The Company has principal responsibility for, and will bear all expenses related
to, clinical development of Procysteine i.v. for use in the treatment of ARDS.
The Company has also granted BI the right, at its election, to participate in
the development of and to commercialize Procysteine i.v. worldwide for the
treatment and prevention of MOD. The Company has retained the right to
co-promote Procysteine i.v. in the United States. The Company is responsible for
manufacturing and supplying BI with Procysteine i.v. for clinical trials and
commercial purposes, including responsibility for manufacturing-related
regulatory compliance. Pursuant to the BI Agreement, BI has agreed to make
up-front payments totaling $10.0 million (consisting of a $5.0 million license
fee and a $5.0 million equity investment in Common Stock to be made on or prior
to the closing of the Offering at the initial public offering price). BI has
also agreed to make additional payments to the Company, which could total up to
$36.0 million, upon the achievement of clinical development and regulatory
milestones relating to ARDS and, if BI exercises its participation rights, to
MOD. More than half of the milestone payments are payable with respect to
MOD-related development. In addition, BI will pay the Company royalties (and, if
applicable, co-promotion payments in the United States) on any sales of
Procysteine i.v.
The Company's strategy is to exploit the potential of the
glutathione-repleting agents currently in its portfolio, with a particular
therapeutic focus on products for the critical care market and to enhance its
product pipeline through collaborations with academic and research institutions.
The Company plans to commercialize its product candidates through strategic
alliances, as in its alliance with BI, and to retain strategically important
development, marketing or co-promotion rights in order to enhance its product
development opportunities.
Based on Procysteine's mechanism of action, the Company believes that the
drug has potential applications in other diseases. Transcend has conducted Phase
I/II clinical trials with Procysteine to determine its potential application for
the treatment of amyotrophic lateral sclerosis and atherosclerotic
cardiovascular disease. The Company plans to use the results of these trials to
select at least one indication to advance into expanded Phase II clinical trials
during 1997.
The Company was organized in Delaware in December 1992 under the name Free
Radical Sciences, Inc. and changed its name to Transcend Therapeutics, Inc. in
June 1995. The Company's executive office is located at 640 Memorial Drive,
Cambridge, Massachusetts 02139 and its telephone number is (617) 374-1200.
3
<PAGE> 6
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered.................................... 2,000,000 shares
Additional Common Stock to be purchased by BI........... 384,615 shares(1)
Common Stock to be outstanding after the Offering....... 6,136,481 shares(2)
Use of proceeds......................................... To fund clinical trials and research and
development programs, to redeem all
outstanding shares of Nonconvertible
Redeemable Preferred Stock, to acquire
and/or license technology rights,
products or businesses and for other
general corporate purposes.
Proposed Nasdaq National Market symbol.................. TSND
</TABLE>
- ---------------
(1) Under the BI Agreement, BI has agreed to make a $5.0 million equity
investment in unregistered Common Stock on or prior to the closing of the
Offering at the initial public offering price. The number of shares set
forth above assumes an initial public offering price of $13.00 per share
(the midpoint of the filing range). See "Business -- Boehringer Ingelheim."
(2) Based on shares outstanding as of December 31, 1996. Includes 384,615 shares
of Common Stock to be purchased by BI pursuant to the BI Agreement, assuming
an initial public offering price of $13.00 per share. Excludes (i) 370,324
shares of Common Stock issuable upon exercise of outstanding options as of
December 31, 1996 at a weighted average exercise price of $1.20 per share;
(ii) 378,295 additional shares of Common Stock reserved for future grants of
options or awards under the Company's Amended and Restated 1994 Equity
Incentive Plan as of December 31, 1996; (iii) 5,000 shares of Common Stock
reserved for issuance upon exercise of a warrant outstanding as of December
31, 1996 at an exercise price of $5.00 per share; and (iv) $346,300 of
Common Stock reserved for issuance upon the exercise of warrants to purchase
such stock at the initial public offering price (26,639 shares of Common
Stock assuming an initial public offering price of $13.00 per share). See
"Management -- Amended and Restated 1994 Equity Incentive Plan,"
"Business -- Boehringer Ingelheim," "Certain Transactions" and "Description
of Capital Stock."
4
<PAGE> 7
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1993 1994 1995 1996
------ ------- ------- -------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue............................................ $6,095(1) $ -- $ -- $ --
Total operating expenses........................... 6,123 3,742 4,384 3,802
------ ------- ------- -------
Loss from operations............................... (28) (3,742) (4,384) (3,802)
Other income (expense)............................. -- 139 (66) (325)
------ ------- ------- -------
Net loss........................................... $ (28) $(3,603) $(4,450) $(4,127)
====== ======= ======= =======
Net loss to common stockholders.................... $ (28) $(4,714) $(5,931) $(9,207)
====== ======= ======= =======
Pro forma net loss per common share(2)............. $ (2.35)
=======
Pro forma weighted average common shares
outstanding(2).................................. 3,922
=======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------------------------
PRO FORMA
ACTUAL PRO FORMA(3) AS ADJUSTED(4)
-------- ------------ -----------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.......................... $ 640 $ 6,679 $ 34,331
Working capital.................................... 96 6,135 33,862
Total assets....................................... 1,566 7,605 34,847
Redeemable preferred stock......................... 20,176(5) 861 --
Deficit accumulated during the development stage... (19,719) (14,719) (14,897)
Total stockholders' equity (deficit)............... (19,235) 6,119 34,297
</TABLE>
- ---------------
(1) Reflects a one-time contract research fee of $6,095,000 for various research
and development services. See Note 2 of Notes to Financial Statements.
(2) See Note 2 of Notes to Financial Statements for information concerning the
computation of pro forma net loss per common share.
(3) Presented on a pro forma basis to give effect to (i) the sale by the Company
of an aggregate of 1,039,000 shares of Nonconvertible Redeemable Preferred
Stock and warrants to purchase $346,300 of Common Stock, exercisable at the
initial public offering price (26,639 shares of Common Stock assuming an
initial public offering price of $13.00 per share), and the receipt of
approximately $1.0 million in proceeds therefrom in March 1997; (ii) the
automatic conversion of all of the outstanding shares of Series A, Series B
and Series C Convertible Preferred Stock upon the closing of the Offering
into an aggregate of 2,972,485 shares of Common Stock; and (iii) the receipt
of a $5.0 million license fee from BI in March 1997 under the BI Agreement.
See "Business -- Boehringer Ingelheim" and "Certain Transactions."
(4) As adjusted to give effect to (i) the sale of 2,000,000 shares of Common
Stock offered hereby, at an assumed initial public offering price of $13.00
per share (after deducting estimated underwriting discounts and commissions
and estimated expenses of the Offering) and the receipt of the estimated net
proceeds therefrom; (ii) the redemption of all outstanding shares of
Nonconvertible Redeemable Preferred Stock for approximately $1.0 million
from the proceeds of the Offering; and (iii) the sale to BI of $5.0 million
of Common Stock at the initial public offering price on or prior to the
closing of the Offering (384,615 shares of Common Stock assuming an initial
public offering price of $13.00 per share) and the receipt by the Company of
the proceeds therefrom. See "Use of Proceeds," "Capitalization,"
"Business -- Boehringer Ingelheim" and "Certain Transactions."
(5) Includes all issued and outstanding shares of Series A, Series B and Series
C Convertible Preferred Stock and Nonconvertible Redeemable Preferred Stock.
See "Capitalization," "Certain Transactions" and "Description of Capital
Stock."
------------------------
Except as otherwise noted, all information in this Prospectus, including
financial information, share and per share data: (i) has been adjusted to
reflect the conversion of all outstanding shares of Series A, Series B and
Series C Convertible Preferred Stock into an aggregate of 2,972,485 shares of
Common Stock upon the closing of the Offering; (ii) has been adjusted to reflect
a one-for-five reverse split of the Common Stock effected in February 1997; and
(iii) assumes no exercise of the Underwriters' over-allotment option. See
"Certain Transactions," "Description of Capital Stock" and "Underwriting."
5
<PAGE> 8
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING
FACTORS SHOULD BE CONSIDERED CAREFULLY BY POTENTIAL INVESTORS IN EVALUATING AN
INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY. THIS PROSPECTUS
CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE
COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN
THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH DIFFERENCES
INCLUDE THOSE DISCUSSED BELOW.
EARLY STAGE OF PRODUCT DEVELOPMENT. The Company has not completed
development of any drugs and does not expect that any drugs resulting from its
development efforts will be available for several years, if at all. All of the
Company's potential products are in research, preclinical development or
clinical trials. Product development of new pharmaceuticals, including
Procysteine and the Company's other glutathione-repleting agents (the TR-500
compounds), is highly uncertain, and unanticipated developments, clinical or
regulatory delays, unexpected adverse side effects or inadequate therapeutic
efficacy could slow or prevent the product development efforts of the Company
and have a materially adverse effect on the Company's business, financial
condition and results of operations. There can be no assurance that the
Company's current potential products or any future potential products will
advance to clinical trials, prove safe and effective in clinical trials, meet
applicable regulatory standards, be capable of being produced in commercial
quantities at acceptable cost or be successfully marketed.
DEPENDENCE ON PROCYSTEINE. Since its inception, the Company has devoted
its efforts almost entirely to the development of its lead product candidate,
Procysteine, which is the only potential product currently under development by
the Company that is in human clinical trials. Procysteine will require
substantial additional clinical testing and substantial further investment to
determine whether it will prove to be safe and effective. Clinical testing of
safety and efficacy can take several years. There can be no assurance that any
such testing, including the Company's Phase III acute respiratory distress
syndrome ("ARDS") clinical trial, will confirm that Procysteine is safe or
efficacious. In addition, the successful commercialization of Procysteine is
subject to the risks of failure inherent in the development of drug and
biological products and products based on new technologies. These risks include
the possibility that the use of Procysteine as an approach to the treatment of
ARDS or other indications targeted by the Company will not be successful; that
Procysteine will not be safer, more effective or more economical than
pharmaceutical or non-pharmaceutical products or treatments currently on the
market or subsequently introduced; that third parties will market superior or
equivalent products for the treatment of ARDS or other indications targeted by
the Company; that Procysteine will not prove safe or effective or will fail to
receive necessary regulatory clearance; that Procysteine will be difficult or
uneconomical to manufacture on a large scale; or that proprietary rights of
third parties will preclude the Company from marketing Procysteine, any of which
would have a material adverse effect on the Company's business, financial
condition and results of operations and could result in the Company being forced
to discontinue operations. The Company does not currently conduct any internal
discovery or research. In addition, the Company's product development efforts
are based on its approach of repleting glutathione to treat or prevent diseases
associated with oxidative tissue damage. As a result, in the event that the
Company is unsuccessful in completing the development and commercialization of
Procysteine as a treatment for ARDS or other indications targeted by the Company
or if such approach is otherwise unsuccessful, the Company will be required to
identify and license or acquire alternative technologies or compounds in order
to develop product candidates, of which there can be no assurance. In the event
that Procysteine does not prove to be safe, effective and commercially
attractive, it is unlikely that the Company would continue to pursue development
of the use of intracellular glutathione-repleting agents for the treatment of
oxidative stress, and the Company's business, financial condition and results of
operations would be materially and adversely affected.
DEPENDENCE ON BOEHRINGER INGELHEIM. The Company has entered into a
Development and License Agreement with Boehringer Ingelheim International GmbH
("BI") (the "BI Agreement") for the worldwide development and marketing of
intravenous formulations of Procysteine ("Procys-
6
<PAGE> 9
teine i.v."). Under the BI Agreement, the Company granted BI an exclusive
worldwide license to use and sell Procysteine i.v. for all pharmaceutical
applications. The Company has retained certain rights with respect to marketing
and sales of Procysteine. See "Business -- Boehringer Ingelheim." The BI
Agreement requires BI, at its own expense, to use reasonable diligence to market
Procysteine i.v. in each major market country, following receipt of necessary
regulatory approvals, with a level of effort consistent with the efforts used
for other BI products having similar commercial potential. There can be no
assurance, however, that BI will commit sufficient marketing resources to the
commercialization of Procysteine i.v. or otherwise perform its obligations under
the BI Agreement. The failure of BI to commit sufficient marketing resources to
the commercialization of Procysteine i.v. or otherwise perform its obligations
under the BI Agreement would have a material adverse effect on the Company's
business, financial condition and results of operations.
Under the BI Agreement, the Company has principal responsibility for, and
will bear all expenses related to, the clinical development of Procysteine i.v.
for use in the treatment of ARDS in countries other than Japan. BI has certain
rights, exercisable until the end of 1997, to develop and commercialize
Procysteine in Japan. If BI does not exercise its rights during 1997, all rights
to Procysteine i.v. in Japan will revert to the Company. The Company is also
responsible for the expenses of obtaining any necessary regulatory approvals in
these countries. In addition, the Company is responsible for manufacturing and
supplying BI with Procysteine i.v. for clinical trials and commercial purposes,
including responsibility for manufacturing-related regulatory compliance. The
Company's right to receive milestone payments and, ultimately, royalties is
based upon successful performance of such obligations. There can be no assurance
that the Company will have the financial or logistical resources to meet these
obligations or that the Company will achieve the development and regulatory
milestones necessary to earn such payments. Failure to perform these obligations
or achieve such milestones would have a material adverse effect on the Company's
business, financial condition and results of operations.
Pursuant to the BI Agreement, BI has agreed to make up-front payments
totalling $10.0 million, consisting of a $5.0 million license fee (the "BI
License Fee") and a $5.0 million equity investment in Common Stock to be made on
or prior to the closing of the Offering at the initial public offering price
(the "BI Equity Investment"). BI has agreed to make additional payments to the
Company, which could total up to $36.0 million, upon the achievement of clinical
development and regulatory milestones relating to the ARDS and multiple organ
dysfunction ("MOD") indications. Of such amount, more than half is payable only
with respect to development relating to MOD. BI has the right, but not the
obligation, to participate in the development of and to commercialize
Procysteine i.v. for the treatment and prevention of MOD. The Company intends to
commence a Phase II clinical trial of Procysteine i.v. for the treatment and
prevention of MOD by the end of 1997. If BI exercises its rights with respect to
the MOD indication, it will be required to share in clinical development funding
or reimburse the Company for clinical development costs. However, BI is not
required to exercise its rights until late in the product development process,
if at all. There can be no assurance that BI will exercise its rights with
respect to MOD. As such, there can be no assurance that the Company will be able
to gain access to the resources (financial and other) necessary to conduct a
pivotal MOD trial or complete the development of Procysteine i.v. for MOD if BI
declines to exercise its rights or defers such exercise until later in the
product development process or that the Company will ever receive milestone
payments in connection with its MOD program.
The BI Agreement is subject to termination by either party for a material
breach by the other party which is not cured within 90 days. In addition, BI has
the right to terminate the agreement at any time (i) within six months after
completion of Phase III clinical trials of Procysteine i.v. for the treatment of
ARDS, or (ii) within 30 days after notice that the Company intends, without the
consent of BI, to file an NDA for Procysteine i.v. for the treatment of ARDS.
Any such termination would have a material adverse effect on the Company's
business, financial condition and results of operations.
UNCERTAINTY ASSOCIATED WITH CLINICAL TRIALS. Before obtaining regulatory
approvals for the commercial sale of any of the Company's potential products,
the products will be subjected to extensive preclinical and clinical testing to
demonstrate their safety and efficacy in humans. Preclinical studies of
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product candidates may not predict and do not ensure safety or efficacy in
humans and are not necessarily indicative of the results that may be achieved in
clinical trials with humans. To date, the Company has tested its lead product
candidate, Procysteine, in limited numbers of subjects in Phase I and Phase II
clinical trials. The results from these clinical trials are not necessarily
predictive of results that will be obtained from subsequent more extensive
clinical testing, including Phase III clinical trials. There can be no assurance
that additional clinical trials, including Phase III clinical trials, will
demonstrate the safety and efficacy of Procysteine to the extent necessary to
obtain regulatory approvals. Companies in the biotechnology industry have
suffered significant setbacks in advanced clinical trials, even after promising
results in earlier trials. The dosage level of Procysteine to be administered in
the Phase III clinical trial is higher than that administered in the earlier
human clinical trials. There can be no assurance that administration of
Procysteine at the dosage level required in the Phase III trial planned by the
Company, or at such other dosage level required for therapeutic efficacy, will
result in a safety profile comparable to or more favorable than earlier studies.
The failure to adequately demonstrate the safety and efficacy of Procysteine or
any other product candidate could delay or prevent regulatory approval and would
have a material adverse effect on the business, financial condition and results
of operations of the Company. See "Business -- Product Development Programs."
The rate of completion of clinical trials is dependent upon, among other
factors, the enrollment of patients. Patient accrual is a function of many
factors, including the size of the patient population, the proximity of patients
to clinical sites, the eligibility criteria for the trial to be performed and
the existence of competitive clinical trials. The protocol for the Company's
Phase III trial of Procysteine for ARDS calls for an interim analysis to confirm
the appropriateness of the sample size. The results of the analysis could lead
the Company to increase the number of patients in the trial. Delays in planned
patient enrollment or increases in the number of required patients in the
Company's Phase III clinical testing of Procysteine or future clinical trials of
Procysteine or other potential products may result in increased costs, program
delays or both, which would have a material adverse effect on the Company. In
addition, the Company has a limited clinical staff and, as a result, will rely
on third parties to assist it in overseeing and monitoring the Phase III
clinical trials, which may result in delays in completing, or failure to
complete, clinical trials if such third parties fail to perform under their
agreements with the Company or fail to meet regulatory standards in the
performance of their obligations under such agreements. There can be no
assurance that, if Phase III clinical trials of Procysteine are completed, the
Company will be able to submit a new drug application ("NDA") or its equivalent
in countries outside the United States as scheduled or that any such application
will be reviewed and approved by the United States Food and Drug Administration
(the "FDA") or comparable agencies in foreign countries in a timely manner, or
at all. See "Business -- Government Regulation." Even if cleared by the FDA or
the regulatory authorities of other countries, Procysteine may later be shown to
be unsafe or to not have its purported effect, thereby preventing its widespread
use or requiring its withdrawal from the market.
HISTORY OF LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY. The Company is a
development stage company that commenced operations in January 1993. The Company
has incurred operating losses since its inception, and had a deficit accumulated
during the development stage of approximately $19.7 million as of December 31,
1996. No revenues have been generated from product sales, and product sales
revenues are not anticipated for a number of years, if at all. The continued
development of the Company's products will require the commitment of substantial
resources to conduct or contract with others to conduct research and preclinical
development and clinical testing, and to establish sales, marketing, quality
control, regulatory and administrative capabilities. Accordingly, the Company
expects to continue to incur substantial operating losses for at least the next
several years. The size of net losses and the time required by the Company to
reach and to sustain profitability are highly uncertain. To achieve
profitability, the Company must, alone or with others, successfully complete
development of Procysteine, obtain necessary regulatory approvals, establish
manufacturing, sales and marketing capabilities and successfully market such
product. As such, there can be no assurance that the Company will be able to
achieve or, if achieved, sustain, profitability.
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NO ASSURANCE OF FDA APPROVAL; COMPREHENSIVE GOVERNMENT REGULATION. The
research, development, clinical testing, manufacturing and marketing of
therapeutic products are subject to extensive regulation by numerous
governmental authorities in the United States and other countries. All of the
Company's potential products will require governmental approvals for
commercialization, which approvals have not yet been obtained and are not
expected to be obtained for several years, if at all. Preclinical and clinical
trials and manufacturing of all of the Company's potential products, including
its lead product candidate, Procysteine, will be subject to the rigorous testing
and approval processes of the FDA and corresponding foreign regulatory
authorities. The regulatory process, which includes preclinical studies and
clinical testing of potential products to establish their safety and efficacy,
requires many years to complete and the expenditure of substantial resources.
Data obtained from preclinical and clinical activities are susceptible to
varying interpretations which could delay, limit or prevent regulatory approval.
In addition, delays or rejection may be encountered based upon changes in, or
additions to, regulatory policies for drug approval during the period of product
development and regulatory review. The Company, an independent Institutional
Review Board ("IRB") or the FDA may suspend clinical trials at any time if the
participants in such trials are being exposed to unacceptable health risks.
Delays in obtaining such approvals could adversely affect the marketing of
products developed by the Company and the Company's ability to generate
commercial product revenues. There can be no assurance that requisite regulatory
approvals will be obtained within a reasonable period of time, if at all.
Moreover, if regulatory approval of a product is granted, such approval may
impose limitations on the indicated uses for which such product may be marketed.
Further, even if such regulatory approval is obtained, a marketed product, its
manufacturer and its manufacturing facilities are subject to continual review
and periodic inspections. Among the conditions for product approval and
continued marketing approval is that the quality control and manufacturing
procedures of the Company or its collaborative partners or contract
manufacturers conform to the FDA's current good manufacturing practice ("cGMP")
regulations which must be followed at all times. In complying with cGMP
requirements, manufacturers must expend time, money and effort on a continuing
basis in production, record keeping and quality control. Manufacturing
establishments, both domestic and foreign, are subject to inspection by or under
the authority of the FDA and by other federal, state and local agencies. Failure
to pass such inspections may subject the manufacturer to possible FDA actions
such as the suspension of manufacturing, seizure of the product, withdrawal of
approval or other regulatory sanctions. The FDA also may require the
manufacturer to recall a product from the market. The Company is responsible for
ensuring manufacturing-related regulatory compliance under the BI Agreement. The
failure by the Company, its corporate collaborators or contract manufacturers to
comply with cGMP could result in a breach of the BI Agreement and could have a
material adverse effect on the business, financial condition and results of
operations of the Company.
Discovery of previously unknown problems with a product, manufacturer or
facility may result in restrictions on such product or manufacturer, including
withdrawal of the product from the market. Failure to comply with the applicable
regulatory requirements can, among other things, result in fines, suspensions of
regulatory approvals, product recalls, operating restrictions and criminal
prosecution. The Company is also subject to numerous environmental, health and
workplace safety laws and regulations, including those governing laboratory
procedures and the handling of biohazardous materials. Any violation of, and the
cost of compliance with, such laws and regulations could adversely affect the
Company's operations. See "Business -- Government Regulation."
UNCERTAINTY OF MARKET ACCEPTANCE. The Company's success, growth and
profitability will depend primarily on market acceptance of Procysteine, if
cleared for marketing by the FDA, for the treatment of ARDS and other
indications targeted by the Company. Physicians may be reluctant or unwilling to
prescribe a product such as Procysteine unless they determine that the clinical
benefits to the patient and the cost savings achieved through the use of
Procysteine are significant. Such determination will depend, in part, upon
Procysteine's effectiveness, safety, ease of use and level of third-party
reimbursement. Even if the benefits of Procysteine are established as clinically
significant, physicians, pharmacists and other health care providers may elect
not to purchase, prescribe or administer Procysteine for any number of reasons.
As a result, there can be no assurance that demand
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for Procysteine will be sufficient to allow for profitable operations. Because
Procysteine represents the Company's primary product focus, if Procysteine does
not achieve a significant level of market acceptance, the Company's business,
financial condition and results of operation would be materially and adversely
affected.
NEED FOR SUBSTANTIAL ADDITIONAL FUNDS. The Company expects negative
cash-flows from operations to continue and to increase for the foreseeable
future. The Company will need substantial additional funds to fund its existing
and planned preclinical studies and clinical trials, and other operating
expenses. The Company anticipates that the net proceeds from the Offering, and
the proceeds of the $5.0 million BI Equity Investment and the $5.0 million BI
License Fee payment, including interest thereon, together with the Company's
existing funds, will be sufficient to fund its operating expenses and capital
requirements as currently planned for at least the next 24 months. However,
there can be no assurance that the Company's assumptions regarding future
operating losses and operating expenses will be accurate. In addition, the $10.0
million in aggregate proceeds from the BI Equity Investment and the BI License
Fee may be used only for the clinical development of Procysteine i.v. for use in
the treatment of ARDS. The Company's actual working capital needs and funding
requirements will depend upon numerous factors, including the progress of the
external research and development programs being supported by the Company, the
magnitude and scope of these activities, the timing and results of preclinical
development and clinical testing, the timing and costs of obtaining regulatory
approvals, the level of resources that the Company commits to the development of
manufacturing, marketing and sales capabilities, if any, whether BI elects to
participate in and co-fund the development of the Company's MOD program, the
ability of the Company to establish new and maintain existing collaborative
arrangements with BI and other companies to provide funding to the Company, the
costs of any acquisitions and/or licensing of technology rights, products or
businesses, the technological advances and activities of competitors, the cost
involved in preparing, filing, prosecuting, maintaining, enforcing and defending
patent claims and other intellectual property rights, developments related to
regulatory and reimbursement matters and other factors. The Company intends to
seek additional funding through corporate collaborations such as its
collaboration with BI. There can be no assurance that the Company will be able
to negotiate such agreements on acceptable terms, or at all. The Company will
also seek additional funding through public or private financings. If additional
funds are raised by issuing equity securities, further dilution to stockholders
will result. Debt financing, if available, may involve restrictive covenants. If
adequate funds are not available, the Company may be required to delay, scale
back or eliminate certain of its product development programs, license to others
rights to commercialize products or technologies that the Company would
otherwise seek to develop and commercialize itself or cease operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
DEPENDENCE ON RESEARCH AND CLINICAL COLLABORATORS AND SCIENTIFIC
ADVISORS. The Company does not have any research facilities and does not intend
to conduct internal discovery activities. Substantially all of the Company's
research and clinical testing activities are performed by third parties. The
Company's strategy for development and commercialization of products depends
upon the formation of collaborations with academic and other institutions to
perform research, development and clinical testing functions for the Company and
to access technology. The Company is dependent upon creating and maintaining
relationships with collaborators at academic and other institutions who conduct
a substantial portion of the Company's research, development and clinical
testing. Such collaborators are not employees of the Company. All of the
Company's consultants are employed by employers other than the Company and may
have commitments to, or consulting or advisory contracts with other entities
that may limit their availability to the Company. As a result, the Company has
limited control over their activities and, except as otherwise required by its
collaboration and consulting agreements, can expect only limited amounts of
their time to be spent on the Company's activities. The failure of these third
parties to perform their obligations under such agreements or to devote adequate
time to the Company's projects could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
also seeks to protect its proprietary
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technology, including technology which may not be patented or patentable, in
part by confidentiality agreements and, if applicable, inventor's rights
agreements with its collaborators, advisors, employees and consultants. There
can be no assurance that these agreements will not be breached, that the Company
will have adequate remedies for any breach, or that the Company's trade secrets
will not be otherwise disclosed to or discovered by competitors. Any
unauthorized dissemination of the Company's confidential information could have
an adverse effect on the Company's business. The Company's implementation of the
proposed Phase III clinical trial for Procysteine and the research and
development of and access to other potential products or technologies will
depend on continued collaborations with researchers at academic and other
institutions. There can be no assurance that the Company will be able to
negotiate additional acceptable collaborations with collaborators at academic
and other institutions or that its existing collaborations will be successful.
RAPID TECHNOLOGICAL CHANGE; INTENSE COMPETITION. The biotechnology and
pharmaceutical industries are subject to rapid and significant technological
change. The Company competes with all entities developing and producing
pharmaceuticals for the treatment of ARDS or MOD or other diseases which may be
the subject of future product development efforts of the Company. Competitors of
the Company in the United States and abroad are numerous and include, among
others, pharmaceutical and biotechnology companies, universities and other
research institutions. The Company's competitors may succeed in identifying and
developing products that are more effective than those of the Company or in
obtaining regulatory approvals of their drugs more rapidly than the Company and
such success could render the Company's products obsolete or non-competitive and
have a material adverse effect on the Company's business, financial condition
and results of operations. As a result, the Company's success depends upon
developing and maintaining a competitive position in the development of products
and technologies in its area of focus.
Competition in the pharmaceutical and biotechnology industry is intense and
is expected to continue to increase. Many of the Company's competitors are
actively engaged in the research and development of products in the Company's
targeted areas. Many of these competitors have substantially greater financial
and technical resources and product and marketing capabilities than the Company,
as well as considerable experience in preclinical testing, human clinical trials
and other regulatory approval procedures, and certain of these competitors may
compete with the Company in establishing development and marketing agreements
with pharmaceutical companies. There is currently no commercially available drug
to treat ARDS. However, The Liposome Company, Inc. ("Liposome") initiated in
September 1995 a Phase III study for a drug designed to treat ARDS through a
mechanism different from that of Procysteine. There can be no assurance that
research and development by Liposome or others will not render any of the
Company's planned products obsolete or uneconomical, or result in therapies
superior to any developed by the Company, or that any products developed by the
Company will be preferred to any existing or newly developed technologies or
therapies.
LIMITED SOURCE OF SUPPLY; DEPENDENCE ON THIRD-PARTY MANUFACTURERS. To be
successful, the Company's products, including Procysteine, if successfully
developed, must be manufactured in commercial quantities in accordance with
regulations prescribed by the FDA, at acceptable costs and on a timely basis and
in accordance with the Company's obligations to any collaborators, including BI.
The Company is responsible for manufacturing and supplying BI with Procysteine
i.v. for clinical and commercial purposes. The Company does not have the
capability to manufacture products under cGMP regulations prescribed by the FDA
and does not intend to develop such a capability in the near future.
Accordingly, the Company anticipates that, for the foreseeable future, it will
pursue a strategy of seeking production capability from outside vendors or
corporate collaborators. The Company does not have a long term, fixed price
supply agreement for Procysteine, but rather obtains Procysteine by issuing
purchase orders to its supplier on an as needed basis. There can be no assurance
that the Company's existing or future outside vendors or prospective corporate
collaborators will be able to manufacture Procysteine or any other product which
is successfully developed by the Company on a commercial scale in compliance
with cGMP or other regulatory guidelines or that any collaborator or
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vendor will be able to manufacture such products on a timely basis or in
quantities of a quality or at prices which will be commercially viable or
beneficial for the Company or will satisfy the Company's obligations to any
collaborators, including BI. In February 1997, the Company's sole supplier of
bulk drug substance for Procysteine was issued a warning letter by the FDA for
failure to be in compliance with cGMP. The FDA has indicated that, until the
supplier is in compliance with cGMP, it will recommend disapproval of any NDA
listing this supplier as the supplier of bulk drug substance. As the Company
already has sufficient supplies to complete its currently contemplated clinical
trials, it does not believe that the supplier's existing issues with the FDA
will affect the completion of such clinical trials, although no assurance to
that effect can be given. If the supplier does not resolve its noncompliance
prior to the time, if ever, that the Company files an NDA and if an alternate
supplier, if needed, is not available on acceptable terms prior to such NDA
filing, the Company would be materially and adversely affected. While the
Company also believes that alternate suppliers of its bulk drug substance for
Procysteine would be available, such suppliers would need to be identified and
qualified by the FDA. There can be no assurance that any such suppliers would be
qualified by the FDA or be able to satisfy the Company's requirements on a
timely basis, if at all. In addition, a termination or interruption in the
Company's supply of bulk drug substance for Procysteine or a failure generally
to obtain third-party manufacturing on commercially acceptable terms and on a
timely basis, would delay or foreclose the Company's ability to commercialize
products, in which case its business, financial condition and results of
operations would be materially and adversely affected.
LACK OF COMMERCIAL SALES AND MARKETING EXPERIENCE; DEPENDENCE ON STRATEGIC
ALLIANCES. The Company does not have experience in marketing, sales,
distribution or support of commercial products. To succeed in marketing any of
its products, the Company must develop and maintain a sales force with
sufficient marketing and technical expertise to commercialize and provide
support for its products. Alternatively, the Company must obtain such
capabilities through third parties. To date, the Company has entered into one
strategic alliance for the development and marketing of intravenous formulations
of the Company's lead product candidate, Procysteine. See "Risk
Factors -- Dependence on Boehringer Ingelheim." There can be no assurance that
the Company will be able to establish in-house sales and distribution
capabilities or gain market acceptance for its products or enter into other
strategic relationships without undue delays or expenditures. Any such delay or
expenditure could have a material adverse effect on the Company's business,
financial condition and results of operations. There can be no assurance that
current or future collaborators, if any, will commit sufficient marketing and
other resources towards developing, promoting and commercializing its products.
Further, competitive conflicts may arise among these third parties that could
prevent them from working cooperatively with the Company. The amount and timing
of resources devoted to these activities by such parties generally would be
controlled by such partners. In addition, strategic relationships generally
provide the collaborator with the right to terminate an agreement in part or in
full under certain circumstances. Any termination of a strategic relationship
for any reason could substantially reduce the likelihood that the collaborative
product candidate would be developed, would obtain regulatory approvals and be
successfully commercialized on a timely basis, if at all, and any such
termination could, therefore, have a material adverse effect on the Company's
business, financial condition and results of operations. The Company's royalties
from sales of products licensed to collaborators, if any, may be less than the
revenues the Company could have generated had it commercialized and marketed
products itself. There can be no assurance that the Company would be successful
in establishing or maintaining future collaborative arrangements, that any
collaborative partners would be successful in developing and commercializing
products or that the Company would generate revenues from royalties sufficient
to offset the Company's significant investment in research and development and
other costs.
PATENTS AND PROPRIETARY RIGHTS; THIRD-PARTY RIGHTS. The Company's
commercial success will depend, to a significant extent, on the Company's and
any licensor's ability to obtain patent protection for its products and methods,
including methods for treating or preventing human disease. The Company is
conducting research and expects to seek additional patents in the future. The
Company's success will depend to a significant extent on its ability to obtain
and enforce patents, maintain trade secret protection and operate without
infringing the patents and proprietary rights of third parties.
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The Company has obtained from the Cornell Research Foundation ("Cornell"),
an exclusive license (the "Cornell Agreement") under certain patents covering
methods of using Procysteine, the Company's lead product candidate, to increase
intracellular levels of glutathione and/or cysteine. The last of these United
States patents licensed from Cornell expires in 2004. The expiration of such
U.S. patent protection may have a material adverse effect on the ability of the
Company to exclude others from making, using or selling Procysteine for use in
methods of treating or preventing the diseases discussed in this Prospectus. The
Company has also licensed corresponding patents in Canada, United Kingdom,
Germany, France, Austria and Sweden. The Company's rights under the Cornell
Agreement further include an exclusive license under a United States patent to a
composition of matter for the TR-500 series of glutathione-repleting agents. In
addition, the Company owns a United States patent application for the use of
Procysteine in treating pulmonary disease, including ARDS, with a corresponding
European patent, which has issued as national patents in Austria, Belgium,
Denmark, France, Germany, Greece, Italy, Luxembourg, Monaco, Netherlands,
Portugal, Spain, Sweden, Switzerland and the United Kingdom, which national
patents expire in 2011. Corresponding patent applications are pending in Canada,
Australia and Japan. By July 16, 1997, any person may give notice to the
European Patent Office of opposition to the European patent. An adverse decision
in any such opposition may result in revocation of the European patent and the
national patents which issued therefrom. The Company may be required to obtain
licenses to patents or other proprietary rights of third parties in addition to
its license from Cornell. No assurance can be given that any licenses required
under any such patents or proprietary rights would be made available on terms
acceptable to the Company, if at all. If the Company does not obtain such
licenses, it could encounter delays in product market introductions while it
attempts to design around such patents or other rights, or it may be unable to
develop, manufacture or sell products.
The patent positions of pharmaceutical and biotechnology firms, including
the Company, are uncertain and involve complex legal and factual questions for
which important legal principles are largely unresolved, particularly in regard
to methods for treating or preventing human diseases, and most particularly for
diseases such as ARDS and MOD for which the Company believes there is currently
no commercially available drug for prevention or treatment. Substantial periods
of time pass before the United States Patent & Trademark Office ("USPTO")
responds on the merits to patent applications and submissions on behalf of the
inventors. In addition, the coverage originally claimed in a patent application
can be significantly reduced or modified before and after a patent is issued.
Consequently, there can be no assurance that any of the Company's or any
licensor's pending or future patent applications will result in the issuance of
patents or, if any patents are issued, whether the patents will be subjected to
further proceedings limiting their scope, and whether they will provide
significant proprietary protection or competitive advantage, or will be
circumvented or invalidated. Because patent applications in the United States
are maintained in secrecy until patents issue and patent applications in certain
other countries generally are not published until more than 18 months after they
are filed, and since publication of inventions in scientific or patent
literature often lags behind actual dates of invention, the Company cannot be
certain that it or any licensor was the first inventor of inventions covered by
pending patent applications or that it or such licensor was the first to file
patent applications on such inventions.
There can be no assurance that the Company's or any licensor's patents, if
issued, would not be found invalid or unenforceable by a court or that such
patents would cover products or technologies of the Company's competitors.
Competitors or potential competitors may have filed applications for or received
patents, and may obtain additional patents and proprietary rights relating to
products or methods for treating or preventing human disease that are
competitive with those of the Company. To protect its proprietary rights, the
Company may be required to participate in interference proceedings declared by
the USPTO to determine priority of invention, which could result in substantial
cost to the Company. Moreover, even if the Company's patents issue, there can be
no assurance that they will provide sufficient proprietary protection or will
not be later limited, circumvented or invalidated.
There is substantial uncertainty concerning whether human clinical data
will be required for the issuance of patents for methods of treating or
preventing human disease, particularly for diseases such
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as ARDS and MOD, for which the Company believes there is currently no
commercially available drug for prevention or treatment. If such data is
required, the Company's ability to obtain patent protection could be delayed or
otherwise adversely affected. Although the USPTO issued new utility guidelines
in July 1995 that address the requirements for demonstrating utility for
biotechnology inventions, including inventions relating to methods for treating
or preventing human diseases, there can be no assurance that USPTO patent
examiners will follow such guidelines or that the USPTO's position will not
change with respect to what is required to establish utility for methods of
using Procysteine or future potential products of the Company in the treatment
of human diseases. Nor can it be assured that compliance with such guidelines
will result in patents that are valid and enforceable. Furthermore, the
enactment of legislation implementing the General Agreement on Trade and Tariffs
has resulted in certain changes to United States patent laws that became
effective on June 8, 1995. Most notably, the term of patents that issue from
patent applications filed on or after June 8, 1995 is no longer a period of 17
years from the date of grant. The new term of United States patents will
commence on the date of issuance and terminate 20 years from the earliest
claimed filing date of the application. Because the time from filing to issuance
of biotechnology patent applications is often more than three years, a 20-year
term from the claimed date of filing may result in a substantially shortened
term of patent protection, which may adversely impact the Company's patent
position. In addition, if this change results in a shorter period of patent
coverage, and if the Company negotiates royalties based on the existence of a
valid patent, the Company's business could be adversely affected.
The Company was independently approached by two individuals, each claiming
to be the first and sole inventor of the use of Procysteine in the treatment of
patients with amyotrophic lateral sclerosis ("ALS"). One of those individuals is
employed by Massachusetts General Hospital, where the Company has sponsored a
clinical trial for the administration of Procysteine to ALS patients. Two
identical patent applications, each naming one of the individuals as sole
inventor, have been filed at the Company's expense and with full disclosure of
the two patent applications to each individual and Massachusetts General
Hospital. There can be no assurance that the subject matter of these patent
applications is patentable over prior art. If the claims are found allowable in
the two applications, it is expected that an interference will be declared
between the two patent applications and the USPTO will determine priority of
invention. There can be no assurance that the Company will be able to obtain a
license to any patent that issues or that any such license, if obtained, would
be on terms acceptable to the Company. If the Company cannot obtain such a
license, the Company will not be able to develop, market and sell Procysteine
for use in the treatment of ALS.
The Company also seeks to protect its proprietary technology, including
technology which may not be patented or patentable, in part by confidentiality
agreements and, if applicable, inventor's rights agreements with its
collaborators, advisors, employees and consultants. There can be no assurance
that these agreements will not be breached, that the Company will have adequate
remedies for any breach, or that the Company's trade secrets will not be
otherwise disclosed to, or discovered by, competitors. Moreover, the Company
conducts a significant amount of research through academic advisors and
collaborators who are prohibited from entering into confidentiality or
inventor's rights agreements by their academic institutions. Any unauthorized
dissemination of the Company's confidential information could have an adverse
effect on the Company's business.
MANAGEMENT OF GROWTH; RISK OF ACQUIRING NEW TECHNOLOGIES. One of the
Company's strategies and potential significant use of the proceeds from the
Offering is to build a product pipeline by acquiring and/or licensing technology
rights, products or businesses. The Company's strategy could involve the
retention of additional personnel, the establishment of new or expanded
facilities and the acquisition of technology rights, products, equipment,
businesses or assets of other companies. There can be no assurance that the
Company's management personnel, systems, procedures and controls will be
adequate to support the expansion of the Company's operations. The acquisition
of additional personnel, technology rights, products, equipment, businesses or
assets of other companies, as well as the entry into new areas of scientific
research, will require the dedication of management resources in order to
achieve its strategic objectives. There can be no assurance that the Company
will be able to manage successfully the growth and expansion of its operations.
Failure of the Company to manage its
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growth, or any specific acquisition of additional capabilities, could have a
material adverse effect on the Company's business, operating results and
financial condition.
POTENTIAL FOR CONFLICT WITH CLINTEC. In connection with the formation of
the Company and the contribution of certain assets and technology to the Company
by Clintec Nutrition Company ("Clintec") and Cornell, the Company holds the
rights to certain patents and related technology covering methods of using
Procysteine and the TR-500 Compounds ("Covered Technology"). The Company has
granted to Clintec an exclusive, royalty-free sub-license to the use of the
Covered Technology for certain clinical nutrition and nutritional applications
while retaining exclusive rights to all pharmaceutical applications. In
addition, the Company agreed, until April 1999, not to develop any other
competitive compounds based on glutathione manipulation ("Other Compounds") for
use in certain clinical nutritional applications, and Clintec agreed, during the
same period, not to develop Other Compounds for use in pharmaceutical
applications. Such provision does not affect the exclusive right of the Company
and Clintec to develop and commercialize the Covered Technology in their
respective fields. Although no disputes have arisen to date regarding the
exclusive rights of the Company, Clintec or its successors in their respective
fields, such a dispute could have a material adverse effect on the Company's
ability to enter into corporate alliances and license arrangements, and if
resolved in a manner adverse to the Company would have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Business -- Technology and License Agreements."
PRODUCT LIABILITY. The testing, marketing and sale of human therapeutic
products entail an inherent risk of exposure to product liability claims by
consumers, health care providers, pharmaceutical and biotechnology companies or
other sellers of the Company's products. There can be no assurance that
substantial product liability claims will not be asserted against the Company.
While the Company has liability insurance with respect to clinical trials, there
can be no assurance that the Company will be able to maintain clinical trial
liability insurance on acceptable terms or that such insurance will provide
adequate coverage against potential liabilities. The Company does not have
product liability insurance coverage for the commercial sale of Procysteine, the
Company's lead product candidate. The Company will seek to obtain product
liability insurance coverage for commercial sales if and when its products are
commercialized. However, there can be no assurance that adequate insurance
coverage will be available in sufficient amounts and at acceptable costs, if at
all. In addition, pursuant to the terms of the licensing agreements entered into
by the Company, including the agreement licensing methods of using Procysteine
in the treatment of human diseases, the Company has agreed to indemnify certain
third parties with respect to losses incurred as a result of the manufacture,
supply or sale of potential product candidates. The Company has also agreed to
indemnify BI with respect to any claims relating primarily to the manufacture of
Procysteine i.v. Any indemnification or product liability claim or product
recall could inhibit or prevent commercialization of products being developed by
the Company and otherwise have a material adverse effect on the Company's
business, financial condition and results of operations.
UNCERTAINTY OF PHARMACEUTICAL PRICING, REIMBURSEMENT AND RELATED
MATTERS. The Company's business, financial condition and results of operations
may be materially adversely affected by the continuing efforts of government and
third-party payors to contain or reduce the costs of health care through various
means. For example, in certain foreign markets, pricing and profitability of
prescription pharmaceuticals are subject to government control. In the United
States, the Company expects that there will continue to be a number of federal
and state proposals to implement similar government control. While the Company
cannot predict whether any such regulatory proposals will be adopted or the
effect such proposals may have on its business, the pendency of such proposals
could have a material adverse effect on the Company's ability to raise capital,
and the adoption of such proposals could have a material adverse effect on the
Company in general. In addition, increasing emphasis on managed care in the
United States will continue to put pressure on the pricing of pharmaceutical
products. Cost control initiatives could decrease the price that the Company or
its strategic partners, if any, receive for any products in the future and could
have a material adverse effect on the Company's business, financial condition
and results of operations.
16
<PAGE> 18
The ability of the Company to commercialize pharmaceutical products may
depend in part on the extent to which reimbursement for the products will be
available from government and health administration authorities, private health
insurers and other third-party payors. Significant uncertainty exists as to the
reimbursement status of newly approved health care products. Third-party payors,
including Medicare, increasingly are challenging the price and cost
effectiveness of medical products and services. Government and other third-party
payors are increasingly attempting to contain health care costs by limiting both
coverage and the level of reimbursement for new therapeutic products and by
refusing in some cases to provide coverage for uses of approved products for
disease indications for which the FDA has not granted labeling approval. There
can be no assurance that any third-party insurance will cover use by patients of
Procysteine or products developed by the Company or its strategic partners, if
any, or that adequate third-party reimbursement will be available to enable the
Company to maintain price levels sufficient to realize an appropriate return on
its investment in product development. Failure to achieve sufficient price
levels for its drugs could adversely affect the Company's business, financial
condition and results of operations. In addition, if adequate coverage and
reimbursement levels are not provided by government and other third-party payors
for the Company's products, the market acceptance of these products may be
reduced, which may have a material adverse effect on the Company's business,
financial condition and results of operations.
DEPENDENCE ON KEY PERSONNEL. The Company is highly dependent on the
members of its management and scientific staff, the loss of one or more of whom
could have a material adverse effect on the Company. The Company's employment
agreements with each of its executive officers may be terminated by the employee
upon short notice. The Company also depends on its scientific collaborators and
advisors, all of whom have commitments that may limit their availability to the
Company. In addition, the Company believes that its future success will depend
in large part upon its ability to attract and retain highly skilled scientific,
managerial and marketing personnel, particularly as the Company expands its
activities in clinical trials, the regulatory approval process and sales and
marketing. The Company faces significant competition for such personnel from
other companies, research and academic institutions, government entities and
other organizations. There can be no assurance that the Company will be
successful in hiring or retaining the personnel it requires for continued
growth. The failure to hire and retain such personnel could materially and
adversely affect the Company's prospects.
MANAGEMENT DISCRETION AS TO USE OF PROCEEDS. The Company expects to use
approximately $8.0 million of the net proceeds of the Offering (in addition to
the proceeds of the BI Equity Investment and BI License Fee) to fund currently
planned clinical trials and research and development programs and $1.0 million
for the redemption of the Nonconvertible Redeemable Preferred Stock. The Company
will use the remaining net proceeds of the Offering for other research and
development, preclinical and clinical programs, to acquire and/or license
technology rights, products or businesses and for other general corporate
purposes. As such, the Company's management will retain broad discretion as to
the allocation of a significant portion (approximately 60%) of the net proceeds
of the Offering. As a result of such discretion, the Company's management could
allocate the proceeds of the Offering to uses which the shareholders may not
deem desirable. In addition, there can be no assurance that the proceeds can or
will be invested to yield an acceptable return. See "Use of Proceeds."
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS. Sales of substantial
amounts of Common Stock in the public market after the Offering, or the
possibility of such sales occurring, could adversely affect prevailing market
prices for the Common Stock or the future ability of the Company to raise
capital through an offering of equity securities. On or prior to the closing of
the Offering, the Company will issue $5.0 million in shares of Common Stock to
BI pursuant to the BI Equity Investment. See "Business -- Boehringer Ingelheim."
Assuming an initial public offering price of $13.00 per share, the Company will
sell 384,615 shares of Common Stock to BI on or prior to the Offering. Of the
6,136,481 shares to be outstanding after the Offering (including the 384,615
shares to be issued to BI assuming an initial public offering price of $13.00
per share), the 2,000,000 shares of Common Stock offered hereby will be freely
tradeable without restriction in the public market unless such shares are held
by "affiliates" of the Company, as that term is defined in Rule 144 under the
Securities Act of 1933, as
17
<PAGE> 19
amended (the "Securities Act"). The remaining 4,136,481 shares of Common Stock
are restricted securities under the Securities Act, and may be sold in the
public market only if they are registered or if they qualify for exemption from
registration under Rule 144 or Rule 701 under the Securities Act. Pursuant to
"lock-up" agreements, certain of the Company's stockholders and employees and
all of its executive officers and directors, who collectively hold 3,654,284 of
such restricted securities have agreed not to offer, sell or otherwise dispose
of (i) any of their restricted securities for a period of 180 days from the date
of this Prospectus (the "Initial Lock-Up Period") and (ii) in excess of 50
percent of such restricted securities for a period of 90 days following the
Initial Lock-Up Period (the "Secondary Lock-Up Period"), without the prior
written consent of Vector Securities International, Inc. ("Vector Securities").
In addition, BI has agreed not to offer, sell or otherwise dispose of its shares
of Common Stock for a period of 360 days from the date of this Prospectus (the
"BI Lock-Up Period"), without the prior written consent of Vector Securities.
The Company has also agreed that it will not offer, sell or otherwise dispose of
Common Stock for a period of 180 days from the date of this Prospectus without
the prior written consent of Vector Securities, other than pursuant to existing
stock option plans or upon exercise of currently outstanding warrants. Upon
termination of each of the Initial Lock-Up Period and the Secondary Lock-Up
Period, approximately 1,824,142 shares of the restricted securities will be
available for immediate sale in the public market, subject to certain volume,
manner of sale, and other limitations under Rule 144. Upon termination of the BI
Lock-Up Period, the 384,615 shares purchased by BI (assuming an initial public
offering price of $13.00 per share) will be eligible for immediate sale in the
public market, subject to certain volume, manner of sale, and other limitations
under Rule 144. BI also has the right to cause the Company to register these
shares under the Securities Act at any time following the BI Lock-Up Period. See
"Description of Capital Stock -- Registration Rights." In addition, of the
restricted securities not subject to lock-up agreements, approximately 46,741
shares will be eligible for sale without limitation under Rule 144(k) and 56,840
shares will be eligible for sale beginning 90 days after the date of this
Prospectus, subject to certain volume, manner of sale and other limitations
under Rule 144 and Rule 701. Vector Securities may, in its sole discretion and
at any time without notice, release all or any portion of the shares subject to
such lock-up agreements.
After the Offering, holders of an aggregate of 4,037,099 shares of Common
Stock will be entitled to certain rights with respect to the registration of
such shares for resale under the Securities Act. In addition, the Company
intends to file a Registration Statement on Form S-8 after the date of this
Prospectus to register an aggregate of 370,324 shares of Common Stock reserved
for issuance upon exercise of outstanding options and an aggregate of 378,295
shares of Common Stock reserved for issuance pursuant to future option grants
under the Company's Amended and Restated 1994 Equity Incentive Plan. If such
registrations cause a large number of shares to be registered and sold in the
public market, such sales could have an adverse effect on the market price for
the Company's Common Stock. See "Description of Capital Stock -- Registration
Rights" and "Shares Eligible for Future Sale."
CONTROL BY EXISTING STOCKHOLDERS. Following the Offering and the BI Equity
Investment, the Company's directors, executive officers and principal
stockholders and certain of their affiliates will beneficially own approximately
47.8 percent of the outstanding shares of Common Stock (45.6 percent if the
Underwriters' over-allotment option is exercised in full). Accordingly, if
acting in concert, they will have the ability to substantially influence the
election of the Company's directors and other actions requiring stockholder
approval. This concentration of ownership may have the effect of delaying or
preventing a change of control of the Company.
ABSENCE OF PRIOR TRADING MARKET; POTENTIAL VOLATILITY OF STOCK
PRICE. Prior to the Offering, there has been no public market for the Common
Stock, and there can be no assurance that an active public market for the Common
Stock will develop or be sustained after the Offering. The initial public
offering price will be determined by negotiations between the Company and
representatives of the Underwriters. The trading price of the Common Stock could
be subject to wide fluctuations in response to quarterly variations in the
Company's operating results, shortfalls in such operating results from levels
forecast by securities analysts, announcements of technological innovations or
new commercial products by the Company or its competitors, progress with
clinical trials, government regulations,
18
<PAGE> 20
changes in third-party reimbursement, changes in the Company's relationships
with BI or with future collaborative partners, public concern as to the safety
and efficacy of drugs developed by the Company and its competitors and other
events or factors. In addition, the stock market has, from time to time,
experienced extreme price and volume fluctuations that have particularly
affected the market prices for companies in the biotechnology and pharmaceutical
industries and that have often been unrelated to the operating performance of
the affected companies. Announcements of changes in reimbursement policies of
third-party payors, regulatory developments, economic news and other external
factors may have a significant impact on the market price of biotechnology and
pharmaceutical stocks. Broad market fluctuations of this type may adversely
affect the future market price of the Common Stock. See "Underwriting."
ANTI-TAKEOVER PROVISIONS. Certain provisions of the Company's Restated
Certificate of Incorporation and By-laws, as in effect upon the closing of the
Offering, and Section 203 of the Delaware General Corporate Law may have the
effect of deterring hostile takeovers or delaying or preventing changes in
control or management of the Company, including transactions in which
stockholders might otherwise receive a premium for their shares over then
current market prices. In addition, these provisions may limit the ability of
stockholders to approve transactions that they may deem to be in their best
interests. The Restated Certificate of Incorporation provides, among other
things, for a classified Board of Directors, and that members of the Board of
Directors may be removed only for cause upon the affirmative vote of holders of
at least two-thirds of the shares of capital stock of the Company entitled to
vote. The Company's Board of Directors is also authorized to issue up to
5,000,000 shares of Preferred Stock and to determine the price, rights,
preferences and privileges of those shares without further vote or action by the
Company's stockholders. The rights of the holders of Common Stock will be
subject to, and may be adversely affected by, the rights of the holders of any
such shares of Preferred Stock that may be issued in the future. Any such
Preferred Stock may have other rights, including economic rights senior to the
Common Stock, and, as a result, the issuance thereof could have a material
adverse effect on the market value of the Common Stock. Furthermore, the Company
is subject to anti-takeover provisions of Section 203 of the Delaware General
Corporation Law, which prohibits the Company from engaging in a "business
combination" with an "interested stockholder," unless the business combination
is approved in a prescribed manner. See "Description of Capital Stock --
Delaware Anti-Takeover Law and Certain Charter and By-Law Provisions."
SUBSTANTIAL DILUTION TO NEW INVESTORS. The initial public offering price
per share of the Company's Common Stock will be substantially higher than the
book value per share of Common Stock. Investors purchasing shares of Common
Stock in the Offering will experience immediate and substantial dilution of
$7.47 per share. To the extent outstanding options and warrants to purchase
Common Stock are exercised, there will be a further dilution of $.02 per share
to new investors. See "Dilution."
ABSENCE OF DIVIDENDS. The Company has never declared or paid cash
dividends on the Common Stock. The Company currently anticipates that it will
retain all future earnings for use in the operation and growth of its business
and, therefore, does not anticipate paying any cash dividends in the foreseeable
future. See "Dividend Policy."
19
<PAGE> 21
USE OF PROCEEDS
The net proceeds from the sale of the 2,000,000 shares of Common Stock
offered hereby at an assumed initial public offering price of $13.00 per share
are estimated to be $23.4 million ($27.0 million if the Underwriters'
over-allotment option is exercised in full), after deducting estimated
underwriting discounts and commissions and estimated expenses of the Offering.
The Company will use approximately $1.0 million of the net proceeds of the
Offering to redeem all outstanding shares of Nonconvertible Redeemable Preferred
Stock and up to $3.0 million to fund additional costs associated with the Phase
III clinical development of Procysteine i.v. for the treatment of ARDS which are
not otherwise funded by payments from BI under the BI Agreement. In addition,
the Company intends to use up to $3.0 million of the net proceeds of the
Offering to fund costs associated with the Phase II clinical development of
Procysteine i.v. in the treatment and/or prevention of MOD and $2.0 million to
fund costs associated with the Phase II clinical development of oral Procysteine
for the treatment of either ALS or atherosclerotic cardiovascular disease
("ASCVD") and the preclinical development of TR-500 compounds. The Company
intends to use the balance of the net proceeds of the Offering for other
research and development, preclinical and clinical programs, working capital and
general corporate purposes. The Company may also use a portion of the net
proceeds of the Offering to acquire and/or license technology rights, products
or businesses, although the Company has no agreements or commitments for any
such acquisitions. See "Risk Factors -- Need for Substantial Additional Funds."
In February 1997, the Company received the $5.0 million BI License Fee from
BI in connection with the BI Agreement. In addition, on or prior to the closing
of the Offering, the Company expects to issue $5.0 million of Common Stock to BI
pursuant to the BI Equity Investment. The Company has agreed with BI to use the
aggregate $10.0 million in proceeds from BI only for the clinical development of
Procysteine i.v. for use in the treatment of ARDS.
The Company anticipates that the net proceeds from the Offering and the
proceeds of the BI Equity Investment and the BI License Fee, including interest
thereon together with the Company's existing funds, will be sufficient to fund
its operating expenses and capital requirements as currently planned for at
least the next 24 months. However, there can be no assurance that the Company's
assumptions regarding future operating losses and operating expenses will be
accurate. The Company's actual working capital needs and funding requirements
will depend upon numerous factors, including the progress of the external
research and development programs being supported by the Company, the magnitude
and scope of these activities, the timing and results of preclinical and
clinical testing, the timing and costs of obtaining regulatory approvals, the
level of resources that the Company commits to the development of manufacturing,
marketing and sales capabilities, if any, whether BI elects to participate in
and co-fund the development of the Company's MOD program, the ability of the
Company to establish new and maintain existing collaborative arrangements with
BI and other companies to provide funding to the Company, the costs of any
acquisitions and/or licensing of technology rights, products or businesses, the
technological advances and activities of competitors, the costs involved in
preparing, filing, prosecuting, maintaining, enforcing and defending patent
claims and other intellectual property rights, developments related to
regulatory and reimbursement matters and other factors. If adequate funds are
not available, the Company may be required to delay, scale back or eliminate
certain of its product development programs, license to others rights to
commercialize products or technologies that the Company would otherwise seek to
develop and commercialize itself, or cease operations. See "Risk Factors -- Need
for Substantial Additional Funds" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
DIVIDEND POLICY
The Company has never declared or paid cash dividends on the Common Stock.
The Company currently anticipates that it will retain all future earnings for
use in the operation and growth of its business and, therefore, does not
anticipate paying any cash dividends in the foreseeable future.
20
<PAGE> 22
CAPITALIZATION
The following table sets forth as of December 31, 1996 (i) the actual
capitalization of the Company as if the one-for-five reverse split of the Common
Stock had been effected prior to December 31, 1996; (ii) the pro forma
capitalization of the Company as described in Note 1 below; and (iii) the pro
forma capitalization of the Company as adjusted to reflect the transactions
described in Note 2 below, including the issuance and sale of the 2,000,000
shares of Common Stock offered hereby at an assumed initial public offering
price of $13.00 per share, after deducting estimated underwriting discounts and
commissions and estimated expenses of the Offering and the receipt and
application of the proceeds therefrom. See "Use of Proceeds" and "Description of
Capital Stock." This table should be read in conjunction with the Company's
Financial Statements and the Notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------------------------------
PRO FORMA
ACTUAL PRO FORMA(1) AS ADJUSTED(2)
-------- ------------ --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Redeemable preferred stock:
Series A Redeemable Convertible Preferred Stock, $.01 par value;
12,991,000 shares authorized; 9,916,330 shares issued and
outstanding (actual); no shares authorized, issued and
outstanding (pro forma and pro forma as adjusted).............. $ 9,140 $ -- $ --
Series B Redeemable Convertible Preferred Stock, $.01 par value;
3,000,000 shares authorized; 690,775 shares issued and
outstanding (actual); no shares authorized, issued and
outstanding (pro forma and pro forma as adjusted).............. 1,036 -- --
Series C Redeemable Convertible Preferred Stock, $.01 par value;
4,255,319 shares authorized, issued and outstanding (actual);
no shares authorized, issued and outstanding (pro forma and pro
forma as adjusted)............................................. 10,000 -- --
Nonconvertible Redeemable Preferred Stock, $.01 par value; no
shares authorized, issued and outstanding (actual); 1,039,000
shares authorized, issued and outstanding (pro forma); no
shares authorized, issued and outstanding (pro forma as
adjusted)...................................................... -- 861 --
Stockholders' equity (deficit):
Common Stock, $.01 par value; 25,000,000 shares authorized,
779,381 shares issued and outstanding (actual); 25,000,000
authorized, 3,751,866 shares issued and outstanding (pro
forma); 25,000,000 shares authorized, 6,136,481 shares issued
and outstanding (pro forma as adjusted)(3)..................... 8 37 61
Preferred Stock, $.01 par value; no shares authorized (actual and
pro forma); 5,000,000 shares authorized, no shares issued and
outstanding (pro forma as adjusted)............................ -- -- --
Additional paid-in capital....................................... 1,454 21,779 50,111
Deferred compensation(4)......................................... (978) (978) (978)
Deficit accumulated during the development stage................. (19,719) (14,719) (14,897)
------ ------ ------
Total stockholders' equity (deficit)........................... (19,235) 6,119 34,297
------ ------ ------
Total capitalization......................................... $ 941 $ 6,980 $ 34,297
====== ====== ======
</TABLE>
- ---------------
(1) Presented on a pro forma basis to give effect to (i) the sale by the Company
of an aggregate of 1,039,000 shares of Nonconvertible Redeemable Preferred
Stock and warrants to purchase $346,300 of Common Stock, exercisable at the
initial public offering price (26,639 shares of Common Stock assuming an
initial public offering price of $13.00 per share), and the receipt of
approximately $1.0 million in proceeds therefrom in March 1997; (ii) the
automatic conversion of all of the outstanding shares of Series A, Series B
and Series C Convertible Preferred Stock upon the closing of the Offering
into an aggregate of 2,972,485 shares of Common Stock; and (iii) the receipt
of a $5.0 million license fee from BI in March 1997 under the BI Agreement.
See "Business -- Boehringer Ingelheim" and "Certain Transactions."
(2) As adjusted to give effect to (i) the sale of 2,000,000 shares of Common
Stock offered hereby, at an assumed initial public offering price of $13.00
per share (after deducting estimated underwriting discounts and commissions
and estimated expenses of the Offering) and the receipt of the estimated net
proceeds therefrom; (ii) the redemption of all outstanding shares of
Nonconvertible Redeemable Preferred Stock for approximately $1.0 million
from the proceeds of the Offering; and (iii) the sale to BI of $5.0 million
of Common Stock at the initial public offering price on or prior to the
closing of the Offering (384,615 shares of Common Stock assuming an initial
public offering price of $13.00 per share) and the receipt by the Company of
the proceeds therefrom. See "Use of Proceeds," "Business -- Boehringer
Ingelheim" and "Certain Transactions."
(3) Excludes (i) 370,324 shares of Common Stock issuable upon exercise of
outstanding options as of December 31, 1996 at a weighted average exercise
price of $1.20 per share; (ii) 378,295 additional shares of Common Stock
reserved for future grants of options or awards under the Company's Amended
and Restated 1994 Equity Incentive Plan as of December 31, 1996; (iii) 5,000
shares of Common Stock reserved for issuance upon exercise of a warrant
outstanding as of December 31, 1996 at an exercise price of $5.00 per share;
and (iv) $346,300 of Common Stock reserved for issuance upon the exercise of
warrants to purchase such stock at the initial public offering price (26,639
shares of Common Stock assuming an initial public offering price of $13.00
per share). See "Management -- Amended and Restated 1994 Equity Incentive
Plan," "Business -- Boebringer Ingelheim," "Certain Transactions" and
"Description of Capital Stock."
(4) See Note 7 of Notes to the Financial Statements for information concerning
the computation of deferred compensation.
21
<PAGE> 23
DILUTION
The pro forma net tangible book value of the Company as of December 31,
1996 was $5.3 million or $1.42 per share. Pro forma net tangible book value per
share is equal to the Company's pro forma net tangible assets (pro forma
tangible assets less pro forma total liabilities), divided by the pro forma
number of shares of Common Stock outstanding on December 31, 1996 (as if the
one-for-five reverse stock split of the Company's Common Stock had occurred
prior to December 31, 1996), assuming (i) the sale by the Company of an
aggregate of 1,039,000 shares of Nonconvertible Redeemable Preferred Stock and
warrants to purchase $346,300 of Common Stock exercisable at the initial public
offering price (26,639 shares of Common Stock assuming an initial public
offering price of $13.00 per share), and the receipt of approximately $1.0
million in proceeds therefrom in March 1997; (ii) the automatic conversion of
all of the outstanding shares of Series A, Series B and Series C Convertible
Preferred Stock upon the closing of the Offering into an aggregate of 2,972,485
shares of Common Stock; and (iii) the receipt of a $5.0 million license fee from
BI in March 1997 under the BI Agreement. Without taking into account any other
changes in pro forma net tangible book value other than to give effect to the
sale of the 2,000,000 shares of Common Stock in the Offering (at an assumed
initial public offering price of $13.00 per share) and the receipt and
application of the estimated net proceeds therefrom and the sale to BI of $5.0
million of Common Stock at the initial public offering price on or prior to the
closing or the Offering (384,615 shares of Common Stock assuming an initial
public offering price of $13.00 per share) and the receipt by the Company of the
proceeds therefrom, the pro forma net tangible book value of the Company as of
December 31, 1996 would have been approximately $33.9 million or $5.53 per
share. This represents an immediate increase in pro forma net tangible book
value of $4.11 per share to existing stockholders and an immediate dilution in
pro forma net tangible book value of $7.47 per share to new investors. The
following table sets forth the per share dilution to new investors in the
Offering:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................... $13.00
Pro forma net tangible book value per share as of December 31,
1996 ........................................................ $1.42
Increase per share attributable to new investors................ 4.11
-----
Pro forma net tangible book value per share after the Offering.... 5.53
------
Dilution per share to new investors............................... $ 7.47
======
</TABLE>
The following table sets forth, on a pro forma basis as of December 31,
1996, the differences between existing stockholders, new investors and BI with
respect to the number of shares of Common Stock purchased from the Company, the
total consideration paid and the average price paid per share (at an assumed
initial public offering price of $13.00 per share and before deducting estimated
underwriting discounts and commissions and estimated expenses of the Offering):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ----------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders.................... 3,751,866 61% $12,504,000 29% $ 3.33
New investors............................ 2,000,000 33 26,000,000 60 13.00
BI Equity Investment..................... 384,615 6 5,000,000 11 13.00
--------- ------- ----------- -------
Total............................... 6,136,481 100% $43,504,000 100%
========= ======= ============ =======
</TABLE>
The foregoing tables assume no exercise of any outstanding stock options or
warrants subsequent to December 31, 1996, except as described above. As of
December 31, 1996, there were (i) 370,324 shares of Common Stock issuable upon
exercise of outstanding options at a weighted average exercise price of $1.20
per share; (ii) 5,000 shares of Common Stock reserved for issuance upon the
exercise of a warrant at an exercise price of $5.00 per share; and (iii)
$346,300 of Common Stock reserved for issuance upon the exercise of warrants to
purchase such stock at the initial public offering price (26,639 shares of
Common Stock assuming an initial public offering price of $13.00 per share). To
the extent that these options or warrants are exercised, there will be a further
dilution of $.02 per share to new investors. See "Management -- Amended and
Restated 1994 Equity Incentive Plan," "Certain Transactions" and "Description of
Capital Stock."
22
<PAGE> 24
SELECTED FINANCIAL DATA
The following selected financial data are derived from the audited
financial statements of Transcend Therapeutics, Inc. The data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Financial Statements and related Notes
thereto, and other financial information included elsewhere herein.
<TABLE>
<CAPTION>
PERIOD
JANUARY 1, 1993
YEAR ENDED DECEMBER 31, (COMMENCEMENT
------------------------------------------- OF OPERATIONS) TO
1993 1994 1995 1996 DECEMBER 31, 1996
------ ------- ------- -------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue............................................ $6,095(1) $ -- $ -- $ -- $ 6,095(1)
Operating expenses:
Research and development......................... 4,498 2,627 2,739 1,968 11,832
General administration........................... 1,625 1,115 1,645 1,834 6,219
--------
-
------ ------- -------
Total operating expenses....................... 6,123 3,742 4,384 3,802 18,051
--------
-
------ ------- -------
Loss from operations............................... (28) (3,742) (4,384) (3,802) (11,956)
Other income (expense)............................. -- 139 (66) (325) (252)
--------
-
------ ------- -------
Net loss........................................... (28) (3,603) (4,450) (4,127) $ (12,208)
Accretion of Nonconvertible Redeemable Preferred
Stock............................................ -- (1,111) (1,481) (5,080)(2)
--------
-
------ ------- -------
Net loss to common stockholders.................... $ (28) $(4,714) $(5,931) $ (9,207)
====== ======= ========= =======
Pro forma net loss per common share(3)............. $ (2.35)
=======
Pro forma weighted average common shares
outstanding(3)................................... 3,922
=======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------------
PRO FORMA
ACTUAL PRO FORMA(4) AS ADJUSTED(5)
---------------------------------------- ------------ --------------
1993 1994 1995 1996 1996 1996
------ ------- ------- -------- ------------ --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................... $ 66 $ 3,461 $ 1,276 $ 640 $ 6,679 $ 34,331
Working capital (deficit)................... (63) 3,136 733 96 6,135 33,862
Total assets................................ 107 4,257 1,866 1,566 7,605 34,847
Senior secured convertible notes............ -- -- 2,000 -- -- --
Redeemable preferred stock(6)............... -- 8,100 9,581 20,176 861 --
Deficit accumulated during the development
stage..................................... (28) (3,631) (8,081) (19,719) (14,719) (14,897)
Total stockholders' equity (deficit)........ (28) (4,368) (10,297) (19,235) 6,119 34,297
</TABLE>
- ---------------
(1) Reflects a one-time contract research fee of $6,095,000 for various research
and development services. See Note 2 of Notes to Financial Statements.
(2) Includes approximately $4.0 million of additional accretion relating to the
exchange of the Series C Convertible Preferred Stock in September 1996. See
"Certain Transactions."
(3) See Note 2 of Notes to Financial Statements for information concerning the
computation of pro forma net loss per common share.
(4) Presented on a pro forma basis to give effect to (i) the sale by the Company
of an aggregate of 1,039,000 shares of Nonconvertible Redeemable Preferred
Stock and warrants to purchase $346,300 of Common Stock, exercisable at the
initial public offering price (26,639 shares of Common Stock assuming an
initial public offering price of $13.00 per share), and the receipt of
approximately $1.0 million in proceeds therefrom in March 1997; (ii) the
automatic conversion of all of the outstanding shares of Series A, Series B
and Series C Convertible Preferred Stock upon the closing of the Offering
into an aggregate of 2,972,485 shares of Common Stock; and (iii) the receipt
of a $5.0 million license fee from BI in March 1997 under the BI Agreement.
See "Business -- Boehringer Ingelheim" and "Certain Transactions."
(5) As adjusted to give effect to (i) the sale of 2,000,000 shares of Common
Stock offered hereby, at an assumed initial public offering price of $13.00
per share (after deducting estimated underwriting discounts and commissions
and estimated expenses of the Offering) and the receipt of the estimated net
proceeds therefrom; (ii) the redemption of all outstanding shares of
Nonconvertible Redeemable Preferred Stock for approximately $1.0 million
from the proceeds of the Offering; and (iii) the sale to BI of $5.0 million
of Common Stock at the initial public offering price on or prior to the
closing of the Offering (384,615 shares of Common Stock assuming an initial
public offering price of $13.00 per share) and the receipt by the Company of
the proceeds therefrom. See "Use of Proceeds," "Capitalization,"
"Business -- Boehringer Ingelheim" and "Certain Transactions."
(6) Includes all issued and outstanding shares of Series A, Series B and Series
C Convertible Preferred Stock and Nonconvertible Redeemable Preferred Stock.
See "Capitalization," "Certain Transactions" and "Description of Capital
Stock."
23
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the results of operations and
financial condition of the Company should be read in conjunction with the
Financial Statements and Notes thereto included elsewhere in this Prospectus.
OVERVIEW
The Company develops novel pharmaceuticals for the treatment of diseases
associated with oxidative stress and resulting tissue damage, with a particular
therapeutic focus on critical care. Since inception, the Company has devoted
substantially all of its resources to the development of Procysteine and related
compounds. The Company has generated no revenue from product sales and has been
dependent upon funding from external financing, contract research and interest
income. In February 1997, BI agreed to purchase $5.0 million of Common Stock on
or prior to the closing of the Offering at the initial public offering price. In
March 1997, BI made a license fee payment to the Company of $5.0 million.
The Company has not been profitable since inception and has incurred
accumulated net losses of $19.7 million through December 31, 1996. Losses have
resulted principally from costs incurred for clinical and product development
and from general and administrative expenses. The Company expects to incur
additional operating losses over at least the next several years, and expects
such losses to increase as the Company advances its clinical development
programs. The Company's ability to achieve profitability is dependent on its
ability to successfully complete development of, and obtain regulatory approval
for, its planned products, enter into agreements for commercialization of such
products and successfully market such products, as to which there can be no
assurance. See "Risk Factors -- History of Losses; Uncertainty of Future
Profitability."
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
The Company earned no revenue in 1996, 1995 and 1994.
The Company's total operating expenses for the years ended December 31,
1996, 1995 and 1994 were $3.8 million, $4.4 million and $3.7 million,
respectively. Research and development expenses for the years ended December 31,
1996, 1995 and 1994 were $2.0 million, $2.7 million and $2.6 million,
respectively. Research and development expenses decreased in 1996 from 1995 due
to completion of the Phase II clinical program in ARDS in June 1996, reduced
clinical costs for oral Procysteine, and reduced assay, formulation, development
and clinical material costs. Research and development expenses increased in 1995
from 1994 due to higher clinical development expenditures for the ARDS and MOD
programs. General and administrative expenses for the years ended December 31,
1996, 1995 and 1994 were $1.8 million, $1.6 million and $1.1 million,
respectively. General and administrative expenses increased in 1996 from 1995
due primarily to increased business development expenses. General and
administrative expenses increased in 1995 from 1994 due primarily to increased
administrative personnel and recruitment costs and higher rent and office
expenses.
Other income (expense) for the years ended December 31, 1996, 1995 and 1994
comprises interest income and interest expense. Interest income for the years
ended December 31, 1996, 1995 and 1994 were $30,000, $111,000 and $139,000,
respectively. Interest income decreased in 1996 and 1995 as compared to 1994
primarily due to reduced cash balances available for investment. The Company
incurred interest expense, payable in shares of Series A and Series B
Convertible Preferred Stock, for the years ended December 31, 1996 and 1995, of
$355,000 and $178,000, respectively, related to the Company's senior secured
convertible notes. There were no senior secured convertible notes outstanding in
the year ended December 31, 1994.
Net loss for the years ended December 31, 1996, 1995 and 1994 were $4.1
million, $4.5 million and $3.6 million, respectively.
24
<PAGE> 26
No income tax provision or benefit has been provided for federal income tax
purposes as the Company has incurred losses since inception. As of December 31,
1996, the Company had deferred tax assets of $5.5 million. Because of
uncertainties surrounding the realization of these favorable tax attributes in
future tax periods, all of the net deferred tax assets have been fully offset by
a valuation allowance. As of December 31, 1996, the Company had total net
operating loss carryforwards of $11.9 million and federal and state tax credits
of approximately $775,000, both of which expire on dates through 2011. The
Company's ability to utilize the net operating loss carryforwards in future
years may be limited in some circumstances, including significant changes in
ownership interests, due to certain provisions of the Internal Revenue Code of
1986, as amended. See Note 5 to Notes to Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations primarily with
$12.6 million (excluding the BI Equity Investment and BI License Fee) from the
private sale of equity securities and convertible notes, $6.1 million in
contract research payments, and $280,000 in interest income. In April 1994, the
Company sold an aggregate of 6,500,000 shares of Series A Convertible Preferred
Stock resulting in proceeds to the Company of $6.5 million. In September 1995,
the Company sold $2.0 million in aggregate principal amount of senior secured
convertible notes due 1997 (the "Series A Notes"). Interest on the Series A
Notes was payable in the form of, and the Series A Notes were convertible into,
shares of the Company's Series A Convertible Preferred Stock. In January 1996,
the Company sold an aggregate of 130,000 shares of Series A Convertible
Preferred Stock resulting in proceeds of $130,000 to the Company. In May 1996,
the Company issued an aggregate of $1.0 million in aggregate principal amount of
senior secured convertible notes due 1997 (the "Series B Notes"). Interest on
the Series B Notes was payable in the form of, and the Series B Notes were
convertible into, shares of the Company's Series B Convertible Preferred Stock.
In April 1994, the Company acquired rights to the Covered Technology from
Clintec and Cornell in exchange for 715,026 shares of Common Stock and 9,000
shares of Nonconvertible Redeemable Preferred Stock issued to Clintec and 35,025
shares of Common Stock (of which 7,025 shares of Common Stock were subsequently
returned to the Company) issued to Cornell. See "Certain Transactions."
In September 1996, the Company sold an aggregate of 851,604 shares of
Series C Convertible Preferred Stock to certain investors of the Company (at a
price of $11.75 per share on a Common Stock equivalent basis) (the "September
1996 Financing"). In addition, in September 1996, the Company entered into an
agreement to issue 3,404,255 shares of Series C Convertible Preferred Stock in
exchange for all of its then outstanding shares of Nonconvertible Redeemable
Preferred Stock (the "Nonconvertible Preferred Stock Exchange"). See "Certain
Transactions."
Upon the closing of the September 1996 Financing, (i) the Series A Notes,
including interest thereon, were converted into an aggregate of 2,098,631 shares
of Series A Convertible Preferred Stock and the Series B Notes, including
interest thereon, were converted into an aggregate of 690,775 shares of Series B
Convertible Preferred Stock; and (ii) Series A Convertible Preferred Stock
warrants (the "Series A Warrants") were exercised pursuant to a net exercise
provision resulting in the issuance of an aggregate of 789,894 shares of Series
A Convertible Preferred Stock. See "Certain Transactions."
In February 1997, the Company entered into a development and license
agreement with BI, pursuant to which BI paid the Company an upfront license fee
of $5.0 million in March 1997. Under the BI Equity Investment, BI agreed to
purchase $5.0 million of Common Stock on or prior to the closing of the Offering
at the initial public offering price (384,615 shares of Common Stock assuming an
initial public offering price of $13.00 per share).The Company has agreed with
BI to use the aggregate $10.0 million in proceeds from the BI License Fee and
the BI Equity Investment solely for the development of Procysteine i.v. for use
in the treatment of ARDS.
25
<PAGE> 27
In March 1997, the Company sold an aggregate of 1,039,000 shares of
Nonconvertible Redeemable Preferred Stock and warrants to purchase $346,300 of
Common Stock, exercisable at the initial public offering price (26,639 shares of
Common Stock assuming an initial public offering price of $13.00 per share),
resulting in proceeds to the Company of approximately $1.0 million. All
outstanding shares of Nonconvertible Redeemable Preferred Stock will be redeemed
upon the closing of the Offering for approximately $1.0 million from the
proceeds of the Offering.
The Company expects negative cash flows from operations to continue and to
increase for the foreseeable future. The Company anticipates that the net
proceeds from the Offering and the proceeds of the BI Equity Investment and the
BI License Fee, including interest thereon, together with the Company's existing
funds, will be sufficient to fund its operating expenses and capital
requirements as currently planned for at least the next 24 months. However,
there can be no assurance that the Company's assumptions regarding future
operating losses and operating expenses will be accurate. The Company's actual
working capital needs and funding requirements will depend upon numerous
factors, including the progress of the external research and development
programs being supported by the Company, the magnitude and scope of these
activities, the timing and results of preclinical and clinical testing, the
timing and costs of obtaining regulatory approvals, the level of resources that
the Company commits to the development of manufacturing, marketing and sales
capabilities, if any, whether BI elects to participate in and co-fund the
development of the Company's MOD program, the ability of the Company to
establish new and maintain existing collaborative arrangements with BI and other
companies to provide funding to the Company, the costs of any acquisitions
and/or licensing of technology rights, products or businesses, the technological
advances and activities of competitors, the costs involved in preparing, filing,
prosecuting, maintaining, enforcing and defending patent claims and other
intellectual property rights, developments related to regulatory and
reimbursement matters and other factors. The Company intends to seek additional
funding through corporate collaborations. There can be no assurance that the
Company will be able to negotiate such agreements on acceptable terms, or at
all. The Company will also seek additional funding through public or private
financings. If additional funds are raised by issuing equity securities, further
dilution to stockholders will result. Debt financing, if available, may involve
restrictive covenants. If adequate funds are not available, the Company may be
required to delay, scale back or eliminate certain of its product development
programs, to license to others rights to commercialize products or technologies
that the Company would otherwise seek to develop and commercialize itself or
cease operations. See "Risk Factors -- Need for Substantial Additional Funds"
and "Use of Proceeds."
REVENUE RECOGNITION AND FUNDED RESEARCH
Revenues from the nonrefundable $5.0 million BI license fee payment were
recognized as license revenues upon execution of the BI Agreement.
Non-refundable fees, collection of which is subject to the achievement of
clinical development and regulatory milestones, will be recorded when such
milestones are attained.
26
<PAGE> 28
BUSINESS
The Company develops novel pharmaceuticals for the treatment of diseases
associated with oxidative stress and resultant tissue damage, with a particular
therapeutic focus on critical care. The Company's lead product candidate,
Procysteine, an intracellular glutathione-repleting agent, has been evaluated in
two Phase II clinical trials involving patients with ARDS. In the second quarter
of 1997, the Company plans to begin a pivotal Phase III clinical trial of
Procysteine to determine its safety and efficacy for the treatment of ARDS. In
addition, the Company plans to initiate a Phase II clinical trial of Procysteine
by the end of 1997 for the prevention and treatment of MOD. The Company has also
conducted Phase I/II clinical trials with Procysteine to determine its potential
application for the treatment of ALS and ASCVD.
In February 1997, the Company and BI entered into a collaboration for the
worldwide development and marketing of Procysteine i.v. Under the BI Agreement,
the Company granted BI an exclusive worldwide license to use and sell
Procysteine i.v. for all pharmaceutical applications. The Company has principal
responsibility for, and will bear all expenses related to, clinical development
of Procysteine i.v. for use in the treatment of ARDS. The Company has also
granted BI the right, at its election, to participate in the development of and
to commercialize Procysteine i.v. worldwide for the treatment and prevention of
MOD. The Company has retained the right, exercisable prior to the filing of an
NDA for Procysteine i.v. for ARDS, to participate in the sales and marketing of
Procysteine i.v. in the United States, through the Company's establishment of a
small specialist sales force at its expense. If the Company exercises its
option, the Company will receive a royalty which consists of a fixed component
based on net sales of Procysteine i.v. in the United States plus a variable
component based on BI's net profits from the sale of Procysteine i.v. in the
United States. The Company is responsible for manufacturing and supplying BI
with Procysteine i.v. for clinical trials and commercial purposes. Pursuant to
the BI Agreement, BI has agreed to make up-front payments totaling $10.0 million
(consisting of the $5.0 million BI License Fee and the $5.0 million BI Equity
Investment). BI has also agreed to make additional payments to the Company,
which could total up to $36.0 million, upon the achievement of clinical
development and regulatory milestones relating to ARDS and, if BI exercises its
participation rights, to MOD. More than half of the milestone payments are
payable only with respect to MOD-related development. In addition, BI will pay
the Company royalties (and, if applicable, co-promotion payments in the United
States) on any sales of Procysteine i.v.
BACKGROUND ON OXIDATIVE TISSUE DAMAGE
While oxygen is vital to life, it can also be extremely toxic. As a
by-product of normal metabolism, the body produces small amounts of highly
reactive, toxic molecules called reactive oxygen species ("ROS"). In addition,
larger quantities of ROS are produced by activation of neutrophils, a type of
white blood cell, as part of the body's immune response against infection.
Although ROS help kill infectious organisms, the excessive production of ROS, as
part of the inflammatory response to infection, can also cause oxidative tissue
damage. In some conditions associated with massive acute inflammation, such as
severe infection, multiple trauma and extensive burns, activation of neutrophils
may produce such large quantities of ROS that severe tissue damage in organs
occurs, leading to organ dysfunction and in many cases death. In addition,
oxidative tissue damage is believed to play a causative role in a number of
chronic conditions, such as ALS, ASCVD and hemolytic anemias.
The body employs a number of systems to neutralize or inactivate ROS by
converting them into water and other harmless substances. One of the body's
principal means for protecting cells from oxidative tissue damage is the
molecule glutathione, a small peptide found in high concentrations throughout
the body. Glutathione is produced inside cells from three amino acids,
L-cysteine, L-glutamic acid and glycine, and functions as one of the primary
non-enzymatic, ROS-neutralizing compounds made in the body. Other means for
neutralizing ROS include enzymes, such as superoxide dismutase and catalase,
which are produced in the body and are supplemented by ingested vitamins. Most
enzymatic systems can neutralize only certain types of ROS and cannot be
restored rapidly within cells after depletion. The Company believes that
intracellular glutathione repletion may be a more effective method for
neutralizing ROS than other systems because glutathione can be rapidly
constituted and can neutralize all types of ROS.
27
<PAGE> 29
A number of published studies have indicated decreased levels of
glutathione in conditions where excessive production of ROS has caused severe
tissue damage. In severe inflammatory conditions, the body's production of ROS
increases and exceeds the capacity of glutathione and other antioxidant systems
to combat oxidative stress, resulting in tissue damage.
Ideally, direct replacement of glutathione within cells would reduce or
eliminate additional oxidative tissue damage. However, direct administration of
glutathione does not offer intracellular protection against oxidative damage,
because the physico-chemical properties of glutathione inhibit its passage
through cell membranes. Of the three amino acids which comprise glutathione, it
is the lack of availability of cysteine that limits glutathione synthesis.
Increasing available intracellular levels of cysteine to facilitate the
production of glutathione may, therefore, be a viable therapeutic approach.
However, direct administration of cysteine is not practical because it may be
toxic when present outside of cells at the concentrations required to achieve a
therapeutic effect.
PRODUCT DEVELOPMENT PROGRAMS
Transcend is developing small molecule, intracellular glutathione-repleting
agents designed to limit or prevent oxidative tissue damage. Procysteine, the
Company's first product candidate, is a delivery system for the introduction of
the amino acid cysteine into cells. Procysteine readily enters cells, where it
is converted into cysteine that is then available for glutathione synthesis.
The Company has developed intravenous and oral formulations of Procysteine.
The ability of Procysteine to replenish glutathione when given orally or
intravenously has been documented in published preclinical and clinical studies.
In its clinical trials, Transcend is evaluating the use of this approach to
treat or prevent conditions where oxidative stress results in tissue damage. To
date, the safety profile and pharmacokinetics of Procysteine administered
intravenously or orally have been characterized in over 265 subjects in clinical
trials sponsored by Transcend. The observed serious adverse events in these
trials were consistent with the underlying diseases and the Company believes
that none of these adverse events were drug related. See "Business --
Procysteine - Intravenous Formulation -- Acute Respiratory Distress Syndrome --
Clinical Program." The Company also intends to develop one or more of the TR-500
compounds, a group of glutathione derivatives, as additional
glutathione-repleting agents.
The Company's product development programs are described in the table
below.
<TABLE>
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
INDICATION PRODUCT CANDIDATE STATUS(1) MARKETING RIGHTS
- ------------------------------------------------------------------------------------------------------------------
Acute Respiratory Distress Syndrome Procysteine i.v. Phase II completed Boehringer Ingelheim(2)
Multiple Organ Dysfunction Procysteine i.v. Phase II(3) Boehringer Ingelheim(2)
Amyotrophic Lateral Sclerosis Procysteine (oral) Phase I/II Transcend Therapeutics
Atherosclerotic Cardiovascular Disease Procysteine (oral) Phase I/II Transcend Therapeutics
Hemolytic Anemias TR-500 compounds Preclinical research Transcend Therapeutics
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) "Preclinical research" includes in vitro studies of product candidates and
evaluation in animals. "Phase I/II" refers to clinical trials in which the
compound is tested in a limited patient population for safety,
pharmacokinetics and preliminary indications of biological activity in
patients with the targeted disease. "Phase II" refers to clinical trials in
which the compound is tested in a limited patient population to assess the
efficacy of the drug for a specific indication and to gather additional
evidence relating to safety and potential adverse effects.
(2) The Company has retained the right to co-promote Procysteine i.v. in the
United States.
(3) Phase II trial data regarding the application of Procysteine for the
prevention of MOD was obtained from the Company's latest Phase II ARDS
trial. Additional trials will be required in order to complete a Phase II
program for MOD. See "Business -- Procysteine - Intravenous Formulation --
Multiple Organ Dysfunction."
28
<PAGE> 30
PROCYSTEINE - INTRAVENOUS FORMULATION
Acute Respiratory Distress Syndrome
ARDS, a disorder characterized by severe lung dysfunction, is a devastating
complication of conditions associated with massive acute inflammation, such as
severe infection, multiple traumatic injury and extensive burns. The disorder
affects an estimated 150,000 patients in the United States annually, with a
mortality rate of approximately 40 percent. ARDS is often associated with
dysfunction of other organs such as the kidneys, liver and heart.
There are currently no commercially available drug treatments for ARDS.
Treatment for patients suffering from ARDS is administered in a hospital
intensive care unit and is generally limited to supportive care, consisting of
highly invasive mechanical ventilation. Mechanical ventilation involves forcing
air containing high concentrations of oxygen into the lungs through an
endotracheal tube inserted through a patient's nose or mouth. Patients must be
sedated because this process usually causes extreme discomfort. Patients
requiring mechanical ventilation for more than two weeks generally require
surgical insertion of a tracheostomy tube to avoid complications of prolonged
nasotracheal or orotracheal intubation. As long as the patient is on mechanical
ventilation, there is an increased risk of serious complications, including
hospital-acquired infection with drug resistant organisms.
ROS play a central role in ARDS. In connection with the onset of ARDS,
neutrophils activate and adhere to the surface of pulmonary capillaries. These
neutrophils then release ROS and protease enzymes which cause the damage to lung
tissue. Glutathione, which is normally present in lung cells and in lung fluid
in high concentrations, neutralizes or inactivates these ROS and limits
oxidative damage. Anti-protease enzymes are present in the lung under normal
conditions and protect the lung against damage. The protective effect of
anti-proteases is lost in the presence of excessive ROS. Preclinical studies
indicate that glutathione may prevent further lung damage indirectly, by
blocking ROS inhibition. The clinical result of excess ROS in the lungs is a
swelling of the normally thin walls lining the air spaces that impedes the
movement of oxygen from the air spaces into the bloodstream. Patients with ARDS
require supplemental oxygen and mechanical ventilation in order to maintain
sufficient oxygen for the body's tissues, but the oxygen rich air provided by
the ventilator has the potential to exacerbate oxidative tissue damage.
The Company believes that increasing glutathione levels by administering
Procysteine may prevent additional ROS damage and speed recovery of lung
function, thereby reducing the need for mechanical ventilation. Because of
multiple complications associated with prolonged mechanical ventilation, the
Company also believes that reduced time on the ventilator is a clinically
important goal in the treatment of ARDS patients and will also likely reduce the
cost of treating these patients.
Clinical Program. Transcend has sponsored two randomized, double-blind
placebo-controlled Phase II trials of Procysteine which have indicated potential
efficacy in the treatment of patients with ARDS. An objective of the first Phase
II trial was to assess the effect of Procysteine on patients with ARDS. Of the
ARDS patients studied, 17 received 189 mg/kg/day (milligrams of drug/kilogram of
body weight/day) of Procysteine for up to ten days, and 15 received a placebo.
The study results provided evidence that Procysteine-treated patients gained
independence from mechanical ventilation a median of five days earlier than did
placebo-treated patients, which was a statistically significant difference.
The objective of the second Phase II trial was to assess the effect of
Procysteine on blood glutathione levels. This study was conducted in 25 patients
with sepsis syndrome and organ dysfunction, 23 of whom suffered from pulmonary
dysfunction (either acute lung injury or ARDS). Of the 25 patients, 19 received
200 mg/kg/day of Procysteine for up to 21 days and six patients received a
placebo. Prior to administration of Procysteine or the placebo, the patients in
the study had lower blood glutathione concentrations than a healthy control
population. Following administration, average glutathione concentration
increased to a greater degree in the patients receiving Procysteine than in
placebo-treated patients.
29
<PAGE> 31
As in the first Phase II trial, the results of the second Phase II trial
indicated a reduction in median days on mechanical ventilation among
Procysteine-treated patients compared with placebo patients. However, the study
was not designed to provide statistical evidence of efficacy and this trend did
not reach statistical significance. The results of the study also indicated
that, as measured by PaO(2)/FiO(2) (an established measure of lung function),
Procysteine-treated patients regained efficiency of the lungs in transporting
oxygen to the bloodstream to a greater degree than placebo-treated patients.
Based on the results of the Phase II trials and on discussions with the
FDA, Transcend plans to begin a pivotal Phase III trial in patients with ARDS by
the end of the second quarter of 1997. The trial will be a randomized,
double-blind, placebo-controlled trial of approximately 350 newly-diagnosed ARDS
patients. The protocol calls for an interim analysis to confirm the sufficiency
of the sample size. The results of this analysis could require an increase in
the number of patients in the study. Patients will receive either 210 mg/kg/day
of Procysteine or a placebo for up to 14 days. The trial will involve
approximately 50 centers and the Company expects to complete enrollment in the
trial, once initiated, in approximately 18 months. The trial's primary endpoint
is the number of days patients are alive and off-ventilator over a 30-day trial
period. This endpoint is designed to provide an accurate and quantifiable
measure of the clinical benefit as measured by reduction in ventilator days,
while accounting for the high mortality rate in these patients. Secondary
endpoints in the trial include the effect of Procysteine treatment on mortality,
lung function and other organ function. The Company believes that the use of
non-mortality endpoints has become generally accepted as a measure of clinical
benefit in ARDS treatment studies. In anticipation of its Phase III trial, the
Company has analyzed its initial Phase II trial results using the proposed Phase
III trial primary endpoint and confirmed a trend, although not statistically
significant, in favor of Procysteine-treated patients. The Company intends to
rely on third parties to assist it in monitoring the Phase III trial and
managing data generated in the trial. See "Risk Factors -- Uncertainty
Associated with Clinical Trials."
There can be no assurance that the Company's Phase III trial will be
completed on a timely basis or at all, that the trial will demonstrate the
safety and efficacy of Procysteine to the extent necessary to obtain regulatory
approvals, that, even if the Phase III trial is successful, the FDA will approve
Procysteine for the treatment of ARDS based on the Phase III trial or that the
FDA will not require additional studies to support regulatory approval. In
addition, in earlier trials sponsored by Transcend involving approximately 265
subjects, Procysteine was administered at doses of up to 300 mg/kg/day for one
day and doses of up to 210 mg/kg/day for 21 days. There can be no assurance that
administration of Procysteine at the dosage level contemplated in the Phase III
trial proposed by Transcend, or at any other dosage level required for
therapeutic efficacy, will result in a safety profile comparable to or more
favorable than earlier studies. See "Risk Factors -- Uncertainty Associated with
Clinical Trials."
The Company has been granted orphan-drug designation by the FDA for
Procysteine for the treatment of ARDS. See "Business -- Government Regulation."
Multiple Organ Dysfunction
The failure of one organ, such as the lungs, places other organs at risk of
failure. The failure of two or more organs, known as multiple organ dysfunction
or MOD, generally has catastrophic consequences for the patient. Organ systems
that are frequently affected in MOD include the lungs (ARDS), kidneys (acute
renal failure), the liver (acute hepatic failure) and the heart (cardiovascular
collapse). While the mortality rate of patients with a single organ failure is
30 to 40 percent, the mortality rate rises to more than 60 percent when two
organs fail and exceeds 90 percent when a third organ fails. In addition, MOD
exacts a significant cost on the healthcare system. MOD patients are treated in
intensive care units, with costs averaging $100,000 per patient. The Company
estimates that there are over 750,000 patients annually in the United States at
risk of MOD. These patients include those patients with ARDS as well as those
who suffer from acute conditions such as severe infection, multiple trauma and
extensive burns. Because of the difficulty of determining which patients will
develop MOD and due to the higher rate of mortality that occurs when a single
organ dysfunction progresses to MOD, the Company believes it would be more
effective to administer treatment prophylactically.
30
<PAGE> 32
Currently, there are no commercially available drugs to treat or prevent
MOD. As in ARDS, mechanical support for other failed organs (e.g., dialysis to
support kidney function), and pharmacological treatments for complications
arising from MOD, are the sole available therapies. Because most methods of
mechanical intervention, such as dialysis, are invasive, they also carry
additional risks to patients.
Published clinical studies have indicated that the same process of
oxidative tissue damage that results in ARDS also contributes to the development
of MOD. The Company believes, based on published and Company-sponsored
preclinical studies, that Procysteine may be effective in the prevention of
organ dysfunction in patients with acute conditions such as severe infection,
multiple trauma and extensive burns. In the Company's first ARDS Phase II trial,
there was a statistically significantly lower percentage of patients with new
organ dysfunction (other than lung) in the group receiving Procysteine compared
to the placebo group. In the second trial sponsored by the Company involving
patients with ARDS (and who are at risk of MOD), a reduced level of glutathione
was shown. Additional Phase II work will be required to complete a Phase II
program for the use of Procysteine for the prevention of MOD. The Company's
planned Phase III ARDS trial is also expected to provide data on the potential
of Procysteine to prevent MOD.
The Company plans to initiate a separate Phase II clinical trial of
Procysteine i.v. by the end of 1997 for the prevention of MOD. Under the BI
Agreement, BI has the right to participate in the development of and to
commercialize Procysteine i.v. worldwide for the treatment and prevention of
MOD. If BI exercises this right, it will be required to share in clinical
development funding or reimburse the Company for clinical development costs. See
"Business -- Boehringer Ingelheim." The Company believes that, unlike in ARDS
trials, non-mortality endpoints have not become generally accepted as measures
of clinical benefit in MOD trials, and as a result, additional research will be
necessary to define an appropriate endpoint. Further, since not all patients in
a prevention trial develop MOD, a trial for the prevention of MOD would require
a considerably larger number of patients than a trial for the treatment of ARDS.
If BI does not elect to participate in the development of Procysteine i.v. for
MOD, the Company will be required to raise substantial additional funds to
pursue further research and development. If the Company undertakes the MOD
studies, there can be no assurance that the results of earlier studies on the
use of Procysteine for the prevention of MOD will be predictive of results that
will be obtained from more extensive clinical testing. See "Risk Factors --
Uncertainty Associated with Clinical Trials" and "Risk Factors -- Need for
Substantial Additional Funds."
PROCYSTEINE - ORAL FORMULATION
Transcend has conducted Phase I/II trials with Procysteine to determine its
potential application for the treatment of ALS and ASCVD. The Company plans to
use the results of these trials to select at least one indication to advance
into expanded Phase II clinical trials during 1997.
Amyotrophic Lateral Sclerosis
The inherited form of ALS, a fatal degenerative disorder, is widely
believed to be the result of a malfunctioning enzyme that results in increased
ROS. The Company believes, based on published preclinical studies, that
increasing glutathione levels in nerve cells may reduce or prevent further
oxidative tissue damage. The Company sponsored a Phase I/II clinical trial which
demonstrated that Procysteine entered the cerebrospinal fluid in ALS patients,
indicating that Procysteine is able to gain access to nerve cells. The Company
plans to conduct a Phase II trial to evaluate the efficacy of Procysteine in
limiting neuromuscular degeneration in patients with ALS. There can be no
assurance, however, that the study will be conducted or completed or that the
results of this study will be positive. See "Risk Factors -- Uncertainty
Associated with Clinical Trials" and "Risk Factors -- Patents and Proprietary
Rights; Third-Party Rights."
The Company has been granted orphan drug designation by the FDA for
Procysteine for the treatment of ALS. See "Business -- Government Regulation."
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Atherosclerotic Cardiovascular Disease
ASCVD, a major risk factor for heart attack and stroke, is characterized by
a narrowing of the arteries by lipid deposits and the loss of blood vessel
elasticity. There is growing evidence in the medical literature that increased
vascular oxidative stress is a primary mechanism of impaired blood vessel
elasticity in patients with atherosclerosis. The Company believes, based on
preclinical studies, that Procysteine administration may improve blood vessel
elasticity. As a result, it may enhance blood flow, and reduce the risk and
severity of heart attack in patients with coronary artery disease. The Company
has completed a Phase I/II clinical trial in which a single, oral dose of
Procysteine rapidly restored blood vessel elasticity in patients with ASCVD. A
similar Phase I/II trial using multiple doses of Procysteine is planned. There
can be no assurance, however, that the study will be conducted or completed or
that the results of this study will be positive. See "Risk
Factors -- Uncertainty Associated with Clinical Trials" and "Risk
Factors -- Patents and Proprietary Rights; Third-Party Rights."
TR-500 COMPOUNDS (GLUTATHIONE-REPLETING AGENTS)
The TR-500 compounds are a group of glutathione derivatives that enable the
direct delivery of glutathione into cells. The Company believes that in clinical
conditions, where glutathione cannot be repleted efficiently through the use of
Procysteine, the TR-500 compounds may serve as second generation
glutathione-repleting agents. The Company believes, based on preclinical
studies, that the TR-500 compounds may have potential therapeutic application in
hemolytic anemias where ROS may play a role in blood cell damage. These anemias
include inherited disorders such as sickle cell disease and thalassemia, and
acquired anemias such as the hemolytic anemia associated with dialysis. During
1997, the Company plans to select one or more of these compounds for further
preclinical development.
BUSINESS STRATEGY
Transcend's strategy is to develop and commercialize novel pharmaceuticals
to treat or prevent disorders associated with oxidative stress and resulting
tissue damage, with a particular therapeutic focus on products for the critical
care market. The Company's strategy involves the following key elements:
Exploit Glutathione Repletion Methodologies. The Company is currently
concentrating on the preclinical and clinical development of the
glutathione-repleting compounds in its portfolio. Transcend's priority is
advancing the clinical program for Procysteine for the treatment of ARDS.
Leverage Development Expertise. Transcend's management and scientific
personnel have considerable experience in the development of novel
pharmaceutical products. The Company uses this expertise to manage the
development of its products through external resources, such as contract
research organizations and contract manufacturers. The Company believes that the
continued focus on development expertise will allow it to benefit from the
commercialization of products without requiring a substantial investment in
costly infrastructure.
Commercialize Products through Collaborations. The Company intends to
enter into strategic alliances and licensing arrangements with corporate
partners in order to accelerate the development and commercialization of its
product candidates. Specifically, the Company plans to establish alliances with
pharmaceutical companies to complete clinical trials, prepare regulatory
submissions and market and sell the Company's products. Consistent with its
strategy, the Company has formed an alliance with BI for the worldwide
development and marketing of Procysteine i.v. As in its alliance with BI, the
Company intends to retain strategically important development, manufacturing,
marketing or co-promotion rights in order to enhance its product development
opportunities.
Enhance Product Pipeline. The Company plans to build a product pipeline,
with a particular therapeutic focus on critical care, through the licensing or
acquisition of compounds from academic laboratories and research institutions,
such as the compounds it has acquired from Cornell. In pursuing this strategy,
the Company may also acquire and/or license complementary technology rights or
other
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businesses. Transcend believes its scientific and development expertise provides
the Company with an ability to recognize opportunities for commercial
development at an early stage.
BOEHRINGER INGELHEIM
In February 1997, the Company entered into an agreement with Boehringer
Ingelheim International GmbH for the worldwide development and commercialization
of Procysteine i.v. Under the BI Agreement, the Company granted BI an exclusive
worldwide license to use and sell Procysteine i.v. for all pharmaceutical
applications.
The Company has principal responsibility for, and will bear all expenses
related to, the clinical development of Procysteine i.v. for use in the
treatment of ARDS in all countries other than Japan. BI has certain rights,
exercisable until the end of 1997, to develop and commercialize Procysteine i.v.
for the treatment of ARDS in Japan. If BI does not exercise its rights during
1997, all rights to Procysteine i.v. in Japan will revert to the Company. The
Company is also responsible for obtaining at its expense any necessary
regulatory approvals relating to the use of Procysteine i.v. for the treatment
of ARDS (other than in Japan, which remains BI's responsibility if it exercises
its Japanese development rights). BI is responsible for the worldwide marketing,
sale and distribution of Procysteine i.v. for the treatment of ARDS. The Company
has retained the right to co-promote Procysteine i.v. in the United States.
The Company has also granted BI the right to participate in the development
of and to commercialize Procysteine i.v. worldwide for the treatment and
prevention of MOD. The Company intends to commence a Phase II clinical trial of
Procysteine i.v. for the treatment and prevention of MOD by the end of 1997. If
BI exercises its rights with respect to the MOD indication, it will be required
to share in clinical development funding or reimburse the Company for clinical
development costs. However, BI is not required to exercise its rights until late
in the product development process, if at all, and there can be no assurance
that the Company will be able to gain access to the resources (financial and
other) necessary to conduct a pivotal MOD trial if BI declines to exercise its
rights or defers such exercise until later in the product development process.
If BI elects not to exercise its participation rights with respect to the MOD
indication, all rights relating thereto will revert to the Company.
The Company has also granted BI the right to participate in the development
of and to commercialize Procysteine i.v. for use in indications other than ARDS
and MOD. The Company has retained the right, subject to a right of first
negotiation with BI, to develop and commercialize oral formulations of
Procysteine, including for ALS and ASCVD. The Company has agreed not to
commercialize oral formulations of Procysteine for any indication for which BI
is participating in the development and commercialization of Procysteine i.v.
The Company has agreed to manufacture, either directly or through contract
manufacturers, and supply BI with Procysteine i.v. for clinical trials and
commercial purposes.
BI has agreed to make up-front payments totaling $10.0 million, consisting
of the $5.0 million BI License Fee and the $5.0 million BI Equity Investment.
The Company has agreed to use these up-front payments exclusively for the
development of Procysteine i.v. for the treatment of ARDS. BI has also agreed to
make additional payments to the Company, which could total up to $36.0 million,
upon the achievement of clinical development and regulatory milestones relating
to ARDS and, if BI exercises its participation rights, to MOD. More than half of
these milestone payments are payable only with respect to MOD-related
development. Because BI is not required to participate in the development and
commercialization of Procysteine i.v. for MOD, there can be no assurance that BI
will be obligated to make any of the milestone payments relating to the
development of Procysteine i.v. for MOD.
BI has also agreed to pay royalties (and, if applicable, co-promotion
payments in the United States) on any sales of Procysteine i.v.
The BI Agreement is subject to termination by either party for a material
breach by the other party which is not cured within 90 days. In addition, BI has
the right to terminate the agreement at any time (i) within six months after
completion of Phase III clinical trials of Procysteine i.v. for the treatment of
ARDS, or (ii) within 30 days after notice that the Company intends, without the
consent of BI, to file an NDA for Procysteine i.v. for the treatment of ARDS.
Any such termination would have a material
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adverse effect on the Company's business, financial condition and results of
operations. See "Risk Factors -- Dependence on Boehringer Ingelheim" and "Risk
Factors -- Lack of Commercial Sales and Marketing Experience; Dependence on
Strategic Alliances."
The Company will be dependent upon the efforts of BI with respect to the
commercialization of Procysteine i.v. There can be no assurance that BI will
commit sufficient marketing resources to the commercialization of the Company's
products. Any failure by BI to commit sufficient marketing resources to the
commercialization of Procysteine i.v. would have a material adverse effect on
the Company's business, financial condition and results of operations. See "Risk
Factors -- Dependence on Boehringer Ingelheim."
MANUFACTURING
The Company is responsible for manufacturing and supplying BI with
Procysteine i.v. for clinical trials and commercial purposes. The Company
currently contracts with third-party manufacturers to produce its compounds for
preclinical research and for clinical trials. The Company expects to utilize
third-party manufacturers for commercial production. The Company has established
relationships with a third party to produce bulk quantities of Procysteine and
with other parties to formulate the compound into intravenous and oral forms of
Procysteine for clinical trials. Through third-party manufacturers and
formulators, the Company has produced sufficient Procysteine for use in its
planned Phase III clinical trial for the treatment of ARDS.
The Company believes that it will be able to reach arrangements with
third-party manufacturers and formulators on commercially reasonable terms, and
that it will not be necessary for it to develop internal manufacturing
capability in order to successfully commercialize Procysteine. The manufacturing
process for Procysteine involves established technology, and the Company
believes that other potential suppliers are available should the Company be
unable to obtain reasonable terms in the future from its current vendors.
However, in the event that the Company is unable to obtain contract
manufacturing or formulation services on reasonable terms, it may need to
acquire manufacturing capability or it may be unable to commercialize its
products as planned or satisfy its obligations under the BI Agreement. In
February 1997, the Company's sole supplier of bulk drug substance for
Procysteine was issued a warning letter by the FDA for failure to be in
compliance with cGMP. The FDA has indicated that, until the supplier is in
compliance with cGMP, it will recommend disapproval of any NDA listing this
supplier as the supplier of bulk drug substance. Based on conversations with the
supplier, the Company currently believes that the noncompliance will be resolved
prior to the time, if ever, that the Company is able to file an NDA. In
addition, the Company believes that alternate suppliers of its bulk drug
substance for Procysteine are available. As the Company already has sufficient
supplies to complete its currently contemplated clinical trials, it does not
believe that the supplier's existing issues with the FDA will affect the
completion of such clinical trials, although no assurance to that effect can be
given. If the supplier does not resolve its noncompliance prior to the time, if
ever, that the Company files an NDA and if an alternate supplier, if needed, is
not available on acceptable terms prior to such NDA filing, the Company would be
materially and adversely affected. In addition, there can be no assurance that
the Company's existing or future outside vendors or prospective corporate
collaborators will be able to manufacture Procysteine or any other developed
product on a commercial scale or that any collaborator or vendor will be able to
manufacture such products on a timely basis, in quantities or at prices which
will be commercially viable or beneficial for the Company or necessary to
satisfy its obligations under the BI Agreement. See "Risk Factors -- Limited
Source of Supply; Dependence on Third-Party Manufacturers."
SALES AND MARKETING
The Company has entered into an agreement with BI pursuant to which BI will
be responsible for marketing Procysteine i.v., subject to certain co-promotion
rights in the United States retained by Transcend. The Company plans to form
additional strategic alliances with established pharmaceutical or biotechnology
companies in order to finance the development of certain of its other product
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candidates. The Company may elect to establish a sales force to market and
distribute those products for which it retains marketing rights or shares rights
with corporate partners, including its co-promotion rights under the BI
Agreement. There can be no assurance that the Company will be able to establish
in-house sales, marketing or distribution capabilities or enter into or maintain
strategic relationships for sales, marketing and distribution on a timely basis,
or at all. Even if the Company does develop or obtain sales, marketing and
distribution capabilities, there can be no assurance that any product developed
by the Company or its strategic partners, including BI, will be successfully
marketed. See "Risk Factors -- Dependence on Boehringer Ingelheim; -- Lack of
Commercial Sales and Marketing Experience; Dependence on Strategic Alliances"
and "Business -- Boehringer Ingelheim."
PATENTS AND PROPRIETARY RIGHTS
The Company's commercial success will depend to a significant extent on
obtaining and enforcing patent protection for its products and methods,
including methods for treating or preventing human disease, or for such products
and methods licensed from third parties, maintaining trade secret protection and
operating without infringing the proprietary rights of third parties. As of
December 31, 1996, the Company owns or has exclusively licensed 16 United States
patents and nine United States applications as well as counterparts of these
patents and applications in various foreign jurisdictions. Of these, nine United
States patents and two United States applications relate to the Company's
business as described in this Prospectus. Specifically, the Company owns a
pending United States patent application for the use of Procysteine in treating
pulmonary disease, including ARDS. A corresponding European patent has issued,
which has issued as national patents in Austria, Belgium, Denmark, France,
Germany, Greece, Italy, Luxembourg, Monaco, Netherlands, Portugal, Spain,
Sweden, Switzerland and the United Kingdom, which national patents expire in
2011. Corresponding patent applications are pending in Canada, Australia and
Japan. By July 16, 1997, any person may give notice to the European Patent
Office of opposition to the European patent. An adverse decision in any such
opposition may result in revocation of the European patent and the national
patents which issued therefrom.
The patent positions of pharmaceutical and biotechnology firms, including
the Company, are uncertain and involve complex legal and factual questions for
which important legal principles are largely unresolved, particularly in regard
to methods for treating or preventing human disease, and most particularly for
diseases such as ARDS and MOD, for which the Company believes there is currently
no commercially available drug for treatment or prevention. Substantial periods
of time pass before the USPTO responds on the merits to patent applications and
submissions on behalf of the inventors. In addition, the coverage claimed in a
patent application can be significantly reduced or modified before and after a
patent is issued. Consequently, there can be no assurance that any of the
Company's or any licensor's pending or future patent applications will result in
the issuance of patents or, if any patents are issued, whether the patents will
be subjected to further proceedings limiting their scope, and whether they will
provide significant proprietary protection or competitive advantage, or will be
circumvented or invalidated. Because patent applications in the United States
are maintained in secrecy until patents issue and patent applications in certain
other countries generally are not published until more than 18 months after they
are filed, and since publication of inventions in scientific or patent
literature often lags behind actual dates of invention, the Company cannot be
certain that it or any licensor was the first inventor of inventions covered by
pending patent applications or that it or such licensor was the first to file
patent applications on such inventions.
There can be no assurance that the Company's or any licensor's patents, if
issued, would not be found invalid or unenforceable by a court or that such
patents would cover products or technologies of the Company's competitors.
Competitors or potential competitors may have filed applications for or received
patents, and may obtain additional patents and proprietary rights relating to
products or methods for treating or preventing human disease that are
competitive with those of the Company. To protect its proprietary rights, the
Company may be required to participate in interference proceedings declared by
the USPTO to determine priority of invention, which could result in substantial
cost to the
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Company. Moreover, even if the Company's or any licensor's patents issue, there
can be no assurance that they will provide sufficient proprietary protection or
will not be later limited, circumvented or invalidated.
The Company may be required to obtain licenses to patents or other
proprietary rights of third parties. No assurance can be given that any licenses
required under any such patents or proprietary rights would be made available on
terms acceptable to the Company, if at all. If the Company does not obtain such
licenses, it could encounter delays in product market introductions while it
attempts to design around such patents or other rights, or it may be unable to
develop, manufacture or sell products. See "Risk Factors -- Patents and
Proprietary Rights; Third Party Rights."
There is substantial uncertainty concerning whether human clinical data
will be required for the issuance of patents for methods of treating or
preventing human disease, particularly for diseases such as ARDS and MOD, for
which the Company believes there is currently no commercially available drug for
treatment or prevention. If such data is required, the Company's ability to
obtain patent protection could be delayed or otherwise adversely affected.
Although the USPTO issued new utility guidelines in July 1995 that address the
requirements for demonstrating utility for biotechnology inventions, including
for inventions relating to methods for treating or preventing human disease,
there can be no assurance that USPTO patent examiners will follow such
guidelines or that the USPTO's position will not change with respect to what is
required to establish utility for Procysteine or future potential products of
the Company in the treatment of human diseases. In addition, there can be no
assurance that compliance with such guidelines will result in valid and
enforceable patents. Furthermore, the enactment of legislation implementing the
General Agreement on Trade and Tariffs has resulted in certain changes to United
States Patent laws that became effective on June 8, 1995. Most notably, the term
of patent protection for patent applications filed on or after June 8, 1995 is
no longer a period of 17 years from the date of grant. The new term of United
States patents will commence on the date of issuance and terminate 20 years from
the earliest effective filing date of the application. Because the time from
filing to issuance of biotechnology patent applications is often more than three
years, a 20-year term from the effective date of filing may result in a
substantially shortened term of patent protection, which may adversely impact
the Company's patent position. In addition, if this change results in a shorter
period of patent coverage, and if the Company negotiates royalties based on the
existence of a valid patent, the Company's business could be adversely affected.
The Company also seeks to protect its proprietary technology, including
technology which may not be patented or patentable, in part by confidentiality
agreements and, if applicable, inventor's rights agreements with its
collaborators, advisors, employees and consultants. There can be no assurance
that these agreements will not be breached, that the Company will have adequate
remedies for any breach, or that the Company's trade secrets will not be
otherwise disclosed to, or discovered by, competitors. Moreover, the Company
conducts a significant amount of research through academic advisors and
collaborators who are prohibited from entering into confidentiality or
inventor's rights agreements by their academic institutions. Any unauthorized
dissemination of the Company's confidential information could have an adverse
effect on the Company's business. See "Risk Factors -- Patents and Proprietary
Rights; Third-Party Rights."
TECHNOLOGY AND LICENSE AGREEMENTS
The Company was formed to develop and commercialize the Covered Technology
which was originally developed at Cornell and licensed to Baxter. In 1989,
Baxter and Nestle established Clintec and Baxter assigned its rights in the
Covered Technology to Clintec. From 1988 to 1994, Baxter and Clintec completed
various studies of Procysteine, including preclinical studies, assay
development, toxicology, formulation and several clinical studies. In April
1994, the Company acquired rights to the Covered Technology from Cornell and
Clintec.
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Cornell Research Foundation
In connection with a Contribution Agreement dated April 5, 1994 (the
"Contribution Agreement") between the Company and Clintec, the Company obtained
an exclusive worldwide license from Cornell (the "Cornell Agreement") to certain
patents covering methods of using Procysteine to increase intracellular levels
of glutathione and/or cysteine. The Company's rights under the Cornell Agreement
include an exclusive license under a composition of matter patent for the TR-500
series of glutathione-repleting agents.
In consideration for the licenses granted to Transcend under the Cornell
Agreement, Cornell received 35,025 shares of Common Stock (of which 7,025 shares
were returned to the Company in settlement of a dispute). See "Certain
Transactions." In addition, Transcend agreed to (i) provide funding to Cornell
Medical College of an aggregate of $400,000 over a three-year period, which
commenced in July 1994; (ii) pay royalties on sales of products covered by the
licensed patents, if any; and (iii) pay annual minimum royalties which would be
credited in any year against earned royalties due for such year. Under the
Cornell Agreement, Transcend agreed to exercise due diligence in development and
commercialization of products covered by the licensed patents. Any failure to
exercise such diligence with respect to a particular technology licensed under
the Agreement would permit Cornell to cause the license to become non-exclusive.
Clintec Nutrition Company
Pursuant to the Contribution Agreement, the Company granted to Clintec an
exclusive, royalty-free sub-license to the use of the Covered Technology for
certain clinical nutrition and nutritional applications, while retaining
exclusive rights to all pharmaceutical applications of the Covered Technology.
The Company also agreed, until April 1999, not to develop Other Compounds for
use in certain clinical nutritional applications, and Clintec also agreed,
during the same period, not to develop Other Compounds for use in pharmaceutical
applications. Such provision does not affect the exclusive right of the Company
and Clintec to develop and commercialize the Covered Technology in their
respective fields. Although no disputes have arisen to date between the Company
and Clintec or its successors regarding the exclusive right of the Company,
Clintec or its successors in their respective fields, such a dispute could have
a material adverse effect on the Company's ability to enter into corporate
alliances and license arrangements, and if resolved in a manner adverse to the
Company would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Risk Factors -- Potential
for Conflict with Clintec."
In addition, the Company acquired various clinical supplies, data, records,
contractual and intellectual property rights related to pharmaceutical
applications of the Covered Technology from Clintec in exchange for 680,000
shares of Common Stock and 9,000 shares of Nonconvertible Redeemable Preferred
Stock. As part of the September 1996 Financing by the Company, all shares of
Nonconvertible Redeemable Preferred Stock held by Clintec were exchanged for
3,404,255 shares of Series C Preferred Stock. The agreement also provides that
if the Company should decide not to maintain the patents or decides to abandon
the application which are the subject of the agreement, the Company will assign
such patents and applications to Clintec. See "Certain Transactions."
COMPETITION
The pharmaceutical and biotechnology industries are characterized by
rapidly advancing technologies, intense competition and a strong emphasis on
proprietary products. Many entities, including pharmaceutical and biotechnology
companies, academic institutions and other research organizations are actively
engaged in the discovery and development of products in the therapeutic areas
pursued by the Company. Many of these entities have greater financial,
technical, manufacturing and marketing resources than the Company. In addition,
many of these competitors have become more active in seeking patent protection
and licensing arrangements in anticipation of collecting royalties for use of
technology that they have developed.
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The Company's ability to compete effectively will depend on its ability to
advance its core technology, maintain a proprietary position on its technology
and products, obtain required governmental approvals on a timely basis, attract
and retain key personnel and develop effective products that can be manufactured
cost-effectively and marketed successfully. The Company expects that competition
among products approved for sales will be based, among other things, on
efficacy, reliability, product safety, price and patent position.
Currently there are no commercially available drugs to prevent or treat
ARDS. However, Liposome initiated in September 1995 a Phase III trial for a drug
designed to treat ARDS through a mechanism different from that of Procysteine.
There can be no assurance that research and development by Liposome and others
will not render any of the Company's planned products obsolete or uneconomical,
or result in therapies superior to any developed by the Company, or that any
products developed by the Company will be preferred to any existing or newly
developed technologies. See "Risk Factors -- Rapid Technological Change; Intense
Competition."
GOVERNMENT REGULATION
The production, marketing, sales and distribution of the Company's products
and its research and development activities are subject to extensive regulation
for safety, efficacy and quality by numerous governmental authorities in the
United States and other countries. In the United States, drugs and certain
biological products are subject to rigorous FDA regulation under the Federal
Food, Drug and Cosmetic Act (the "FDCA"), and the regulations promulgated
thereunder, as well as other federal and state statutes and regulations that
govern, among others, the testing, manufacture, safety, efficacy, labeling,
storage, record keeping, approval, advertising and promotion of the Company's
products. Product development and approval within this regulatory framework can
take a number of years and requires the expenditure of substantial resources.
Any failure by the Company or its collaborators or licensees to obtain
regulatory approval, or any delay in obtaining such approvals, could adversely
affect the marketing of products being developed by the Company, its ability to
receive product or royalty revenues and its liquidity and capital resources.
Human therapeutics are normally subject to rigorous preclinical and
clinical testing. The standard process required by the FDA before a drug may be
marketed in the United States includes (i) preclinical laboratory tests; (ii)
submission to the FDA of an investigational new drug application ("IND"), which
must be approved before human clinical trials may commence; (iii) adequate and
well-controlled human clinical trials to establish the safety and efficacy of
the drug in its intended indication; (iv) submission to the FDA of an NDA; and
(v) FDA approval of the NDA prior to any commercial sale or shipment of the
drug.
Preclinical animal testing is generally conducted in the laboratory to
evaluate the potential safety and efficacy of a drug. Although the results of
preclinical testing may show the efficacy of a product tested in animals, and
may support an application to begin clinical testing, subsequent clinical
testing may not demonstrate comparable effectiveness in humans. The results of
these animal studies are submitted to the FDA as part of the IND and NDA. See
"Risk Factors -- Uncertainty Associated with Clinical Trials."
Clinical trials involve the administration of the investigational new drug
to healthy volunteers or to patients, under the supervision of a qualified
principal investigator. Clinical trials must be conducted in accordance with
good clinical practices under protocols that detail the objectives of the study,
the parameters to be used to monitor safety and, if applicable, the efficacy
criteria to be evaluated. Each protocol must be submitted to the FDA as part of
the IND. Further, each clinical trial must be conducted under the auspices of an
IRB at the institution at which the trial will be conducted. IRBs will consider,
among other things, ethical factors, the safety of human subjects and the
possible liability of the institution. Typically, clinical evaluation involves a
three-phase process. In Phase I, trials are conducted with a small number of
human subjects to determine the safety profile, the pattern of drug distribution
and metabolism. In Phase II, trials are conducted with a larger group of
patients afflicted with a specific
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condition in order to determine preliminary efficacy, optimal dosages and
expanded evidence with respect to safety. In Phase III, large-scale, often
multi-center, comparative trials are conducted with patients afflicted with a
target disease in order to provide enough data for the statistical proof of
safety and efficacy required by the FDA and other regulatory authorities. The
pertinent IRB or the FDA may suspend clinical trials at any time if they believe
that the subjects or patients are being exposed to an unacceptable health risk.
The results of the pharmaceutical development, preclinical studies and
clinical trials are submitted to the FDA in the form of an NDA. The testing and
approval process is likely to require substantial time and effort and there can
be no assurance that any approval will be granted on a timely basis, if at all.
The FDA may deny an NDA if applicable regulatory criteria are not satisfied,
require additional testing or information, or approve an NDA subject to
postmarketing testing and surveillance or limitations on the indicated uses for
which the subject drug may be marketed. Finally, product approvals may be
withdrawn if compliance with regulatory standards is not maintained or if
problems occur following initial marketing.
Domestic manufacturing establishments are subject to inspection by the FDA
and must comply with the FDA's cGMP. To supply products for use in the United
States, foreign manufacturing establishments must comply with cGMP and are
subject to periodic inspection by the FDA or by regulatory authorities in such
countries under reciprocal agreements with the FDA.
The Orphan Drug Act of 1983 generally provides incentives to manufacturers
to undertake development and marketing of products to treat relatively rare
diseases or diseases where fewer than 200,000 persons in the United States would
be likely to receive the treatment. A drug that both receives orphan drug
designation by the FDA and is the first product of a chemical moiety to receive
FDA marketing approval for its indication is entitled to receive up to a
seven-year exclusive marketing period in the United States for that indication.
A drug that is considered by the FDA to be different from a particular orphan
drug is not barred from sale in the United States during such exclusive
marketing period. Legislation has previously been introduced in Congress to
limit the marketing exclusivity provided for certain orphan drugs. Although the
outcome of that legislation, if reintroduced, is uncertain, there remains a
possibility that future legislation will limit the incentives currently afforded
to the developers of orphan drugs.
The Company has been granted orphan drug designation for Procysteine for
the treatment of ARDS and ALS. There can be no assurance, however, that a
product considered by the FDA to be different from Procysteine will not be
successfully introduced by a competitor of the Company. Any such product would
not be barred from sale in the United States by the designation of Procysteine
as an orphan drug. If such a drug proved to be safer, more effective or less
costly than Procysteine, the Company's business could be materially adversely
affected.
If and when the Company markets its products outside the United States,
whether or not FDA approval has been obtained, approval of a pharmaceutical
product by comparable governmental regulatory authorities in foreign
jurisdictions must be obtained prior to the commencement of human clinical
trials or marketing approval for drugs. The requirements governing the conduct
of clinical trials, product licensing, pricing and reimbursement vary widely
from country to country. In addition, the Company's products may be subject to
export control. See "Risk Factors -- No Assurance of FDA Approval; Comprehensive
Government Regulation."
PRODUCT LIABILITY
The testing, marketing and sale of human therapeutic products entail an
inherent risk of exposure to product liability claims by consumers, health care
providers, pharmaceutical and biotechnology companies or other sellers of the
Company's products. There can be no assurance that substantial product liability
claims will not be asserted against the Company. While the Company has liability
insurance with respect to clinical trials, the Company does not have product
liability insurance coverage for the commercial sale of Procysteine, the
Company's lead product candidate. There can be no assurance that the Company
will be able to maintain clinical trials liability insurance on acceptable
39
<PAGE> 41
terms or that such insurance will provide adequate coverage against potential
liabilities. The Company will seek to obtain product liability insurance
coverage for commercial sales if and when its products are commercialized.
However, there can be no assurance that adequate insurance coverage will be
available in sufficient amounts and at acceptable costs, if at all. In addition,
pursuant to the terms of certain licensing agreements entered into by the
Company, the Company has agreed to indemnify certain third parties with respect
to losses incurred as a result of the manufacture, supply or sale of potential
product candidates. The Company has also agreed to indemnify BI with respect to
any claims relating primarily to the manufacture of Procysteine i.v. Any
indemnification or product liability claim or product recall could inhibit or
prevent commercialization of products being developed by the Company and
otherwise have a material adverse effect on the Company's business, financial
condition and results of operations. See "Risk Factors -- Product Liability."
EMPLOYEES
As of December 31, 1996, the Company employed 13 people, three of whom hold
Ph.D. and/or M.D. degrees. The Company's employees are not members of a union,
and the Company believes that it has good employee relations. All of the
Company's employees have signed agreements obligating them to protect the
proprietary nature of the Company's confidential information. See "Risk Factors
- -- Dependence on Key Personnel."
FACILITIES
The Company currently holds an operating lease on and occupies
approximately 7,700 square feet of leased office and administrative space at 640
Memorial Drive, Cambridge, Massachusetts. The Company pays approximately
$200,000 annually under its facilities lease. The lease on these facilities
expires in December 1999. The Company believes that these facilities should be
sufficient to meet the Company's needs through December 1999.
40
<PAGE> 42
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The current executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------- ---- -----------------------------------------------
<S> <C> <C>
Hector J. Gomez, M.D., Ph.D. ........ 58 President, Chief Executive Officer and Director
John J. Whalen, M.D. ................ 50 Senior Vice President and Chief Scientific
Officer
B. Nicholas Harvey .................. 36 Vice President, Finance, Chief Financial
Officer and Secretary
Jerry T. Jackson(1).................. 55 Chairman of the Board
Philippe Chambon, M.D., Ph.D.(1)..... 39 Director
Frank L. Douglas, M.D., Ph.D.(2)..... 53 Director
Richard W. Hunt, C.P.A.(2)........... 42 Director
William C. Mills III(2).............. 41 Director
Gerard M. Moufflet(1)................ 53 Director
</TABLE>
- ---------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
HECTOR J. GOMEZ, M.D., PH.D. has served as President, Chief Executive
Officer and a director of the Company since November 1994. He previously served
as Vice President of Medical Affairs at Vertex Pharmaceuticals Incorporated, a
rational drug design company, from May 1992 to November 1994. From December 1991
to May 1992, Dr. Gomez served as Associate Vice President at Immunomedics, Inc.,
a biotechnology company. From December 1988 to December 1991, he served as
Executive Director of Cardiovascular Clinical Research at Ciba-Geigy Corporation
("Ciba-Geigy"), a pharmaceutical company. Previously, Dr. Gomez served as
Director of Clinical Research from 1979 to 1984, and as Senior Director of
Clinical Research from 1985 to December 1988, at Merck & Co., Inc. ("Merck"), a
pharmaceutical company. During his tenures at Merck and Ciba-Geigy, Dr. Gomez
successfully directed the clinical development phase of ten NDAs. His
accomplishments include the management of the clinical program, from IND filing
through marketing approval, for enalapril (Vasotec(R)) and lisinopril
(Prinivil(R) and Zestril(R)), cardiovascular products. Dr. Gomez received his
M.D. from National University in Bogota, Colombia, his Ph.D. in Pharmacology
from Marquette University and his Diploma in Clinical Pharmacology from Tulane
University.
JOHN J. WHALEN, M.D. has served as Senior Vice President and Chief
Scientific Officer of the Company since October 1995. In addition, he has served
as Chairman of the Company's Scientific Advisory Board since October 1995. From
1990 to 1995, he served as Senior Vice President and General Manager of the
Pharmaceutical Division at Alpha Therapeutic Corporation, a pharmaceutical
company. He has also held senior management positions as Vice President of
Clinical Research at G.H. Besselaar Associates ("Besselaar") and as Director of
Clinical Research for Cardiovascular/Renal Products at Merck, Sharp & Dohme
Research Laboratories. Dr. Whalen has an extensive background in directing
clinical trials at Besselaar, Merck and Alpha Therapeutic Corporation. Dr.
Whalen's achievements include the clinical development of Fluosol(R),
Lotensin(R), Vasotec I.V.(R), Oncolym(R) and Venoglobulin S(R). Dr. Whalen
received his B.S. in Physics from Rensselaer Polytechnic Institute and his M.D.
from the University of Virginia and participated in a pulmonary fellowship at
New York University.
B. NICHOLAS HARVEY has served as Vice President, Finance, Chief Financial
Officer and Secretary of the Company since December 1992. From February 1992 to
December 1992, he was Treasurer at The Computer Power Group, a computer services
and software company. From May 1986 to February 1989, he was Executive Director
at Brunckhorst & Co., an Australian investment firm that he helped to found.
41
<PAGE> 43
Mr. Harvey received his B.Econ. and LL.B. from the Australian National
University and his M.B.A. from the Harvard Business School in 1991.
JERRY T. JACKSON has served as Chairman of the Board of the Company since
May 1996 and has been a director of the Company since September 1995. He was an
Executive Vice President of Merck from January 1993 until his retirement in
January 1995. During 1994, Mr. Jackson had responsibility for Merck's
International Human Health, Vaccines, AgVet and Astra/Merck U.S. divisions and
for worldwide marketing. In 1993, he also served as President of the Merck Human
Health Division and from February 1986 to December 1992, Mr. Jackson was Senior
Vice President at Merck. Mr. Jackson also serves as a director of Cor
Therapeutics, Inc., SunPharm Corporation and Molecular Biosystems, Inc.
PHILIPPE O. CHAMBON, M.D., PH.D. has been a director of the Company since
November 1995. Dr. Chambon has been with Sprout Group ("Sprout"), a venture
capital firm, since May 1995 and currently serves as General Partner. From May
1993 to April 1995, Dr. Chambon served as a Manager in the Healthcare Practice
of The Boston Consulting Group, a management consulting firm. Dr. Chambon was an
executive with Sandoz Pharmaceuticals Corp., a leading pharmaceutical company,
from September 1987 to April 1993, most recently serving as the Executive
Director of New Product Management.
FRANK L. DOUGLAS, M.D., PH.D. has been a director of the Company since
September 1995. Dr. Douglas is Global Head of Research for Hoechst Marion
Roussel, Inc. since 1995. Prior to its acquisition by Hoechst Marion Roussel,
Dr. Douglas was Executive Vice President of the Research and Development
Division and served as a director at Marion Merrell Dow, Inc. from 1992 to 1995.
In 1992, he was also an Adjunct Professor of Medicine and Pharmacology at the
University of Kansas. In 1991, Dr. Douglas was a Vice President and Partner of
the Biocine Company, a joint venture between Ciba-Geigy and Chiron. From 1988 to
1991, he was Senior Vice President and Director of Research for Ciba-Geigy
Pharmaceutical Corp.
RICHARD W. HUNT, C.P.A. has been a director of the Company since November
1995. Mr. Hunt is Vice President, Finance of Baxter International Inc., a
worldwide developer and manufacturer of health care products and systems. Since
January 1982, Mr. Hunt has held various positions with Baxter International Inc.
From November 1978 to January 1982, Mr. Hunt served in various senior level
financial positions with Searle Pharmaceuticals, Inc.
WILLIAM C. MILLS III has been a director of the Company since April 1994
and was Chairman of the Board from April 1994 to May 1996. He served as interim
Chief Executive Officer of the Company from April 1994 to November 1994. Since
1988, Mr. Mills has been a General Partner of FH&Co. III, L.P., which is a
General Partner of The Venture Capital Fund of New England ("VCFNE"), a venture
capital firm. From 1981 until 1988, he served as a Managing General Partner and
General Partner at PaineWebber Ventures/Ampersand, a venture capital firm. Mr.
Mills also serves as a director of Cytogen Corporation, where he served as
Chairman of the Board from January 1995 to May 1996.
GERARD M. MOUFFLET has been a director of the Company since April 1994.
Since September 1989, Mr. Moufflet has been Senior Vice President in charge of
the medical sector for Advent International Corporation ("Advent"), a private
equity investment firm. Prior to joining Advent, Mr. Moufflet served as
Corporate Vice President in charge of Baxter International and spent 17 years in
various marketing, financial and general management positions. He also serves as
a director of Curative Health Services, Inc.
Certain of the current directors of the Company were nominated and elected
in accordance with a stockholder's voting agreement. This agreement will
terminate upon the consummation of the Offering. See "Certain Transactions."
Each officer serves at the discretion of the Board of Directors. There are no
family relationships among any of the directors or executive officers of the
Company.
42
<PAGE> 44
CLASSIFIED BOARD OF DIRECTORS
The Company's Restated Certificate of Incorporation will be amended upon
the closing of the Offering to provide for a classified Board of Directors
consisting of three classes, as nearly equal in number as possible, with the
directors in each class serving staggered three-year terms. The Class I
directors are Mr. Mills and Drs. Chambon and Douglas; the Class II directors are
Messrs. Moufflet and Hunt; and the Class III directors are Dr. Gomez and Mr.
Jackson. The terms of the Class I, Class II and Class III Directors will expire
initially in 1998, 1999 and 2000, respectively. At each annual meeting of the
stockholders of the Company, the successors to the class of directors whose term
expires at such meeting will be elected to hold office for a term expiring at
the annual meeting of stockholders held in the third year following the year of
their election. See "Description of Capital Stock -- Delaware Anti-Takeover Law
and Certain Charter and By-Law Provisions."
BOARD COMMITTEES
The Board of Directors has a Compensation Committee which has
responsibility for reviewing the performance of the officers of the Company,
making recommendations to the Board concerning salaries and incentive
compensation for such officers and administering the Company's Amended and
Restated 1994 Equity Incentive Plan. The Compensation Committee consists of
Messrs. Moufflet and Jackson and Dr. Chambon.
The Board of Directors also has an Audit Committee which has responsibility
for reviewing the Company's financial statements and significant audit and
accounting practices with the Company's independent auditors and making
recommendations to the Board of Directors with respect thereto. The Audit
Committee consists of Messrs. Mills and Hunt and Dr. Douglas.
BOARD COMPENSATION
The Company's directors do not currently receive any cash compensation for
service on the Board of Directors or any committee thereof, but directors are
reimbursed for certain expenses in connection with attendance at Board of
Directors and committee meetings. Two of the Company's non-employee directors,
Dr. Douglas and Mr. Jackson, were each granted stock options to purchase 8,000
shares of Common Stock in 1995 with an exercise price of $.50 per share in
connection with their service on the Board of Directors. In addition, in July
1996 Mr. Jackson was granted options to purchase 8,000 shares of Common Stock
with an exercise price of $2.50 per share in connection with his appointment as
Chairman of the Board of the Company. Each option vests 50 percent on the first
anniversary of the date of grant, and the remainder of each option vests monthly
over the following year. The options terminate upon the earlier of the tenth
anniversary of the date of grant or the termination of the director's service on
the Board of Directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The current members of the Company's Compensation Committee are Messrs.
Jackson and Moufflet and Dr. Chambon, none of whom is an employee of the
Company.
SCIENTIFIC ADVISORY BOARD
The Company has established a Scientific Advisory Board, whose members
review the Company's research, development and clinical activities and are
available for consultation with the Company's management and scientific staff
relating to their respective areas of expertise. Dr. Whalen, Senior Vice
President and Chief Scientific Officer of the Company, is Chairman of the
Company's Scientific Advisory Board. The other members of the Company's
Scientific Advisory Board and their primary academic or professional
affiliations are listed below:
GORDON R. BERNARD, M.D. chairs the Steering Committee for National
Institutes of Health ("NIH") ARDS Clinical Trials, and is currently a Professor
of Medicine at the Vanderbilt University
43
<PAGE> 45
School of Medicine. In addition, Dr. Bernard has served as principal
investigator for clinical trials of glutathione-repleting agents in ARDS.
MITCHELL P. FINK, M.D. is Surgeon-in-Chief of Beth Israel Deaconess
Hospital and Professor of Surgery at Harvard Medical School. Dr. Fink serves on
the Editorial Board of several key journals, such as Critical Care Medicine,
Journal of Trauma, and Shock. Dr. Fink's major research interests include the
role of neutrophils in septic and traumatic shock and development of novel
therapeutic agents for septic shock.
NORMAN K. HOLLENBERG, M.D., PH.D. is a Professor of Medicine at Harvard
Medical School and the Brigham and Women's Hospital. Dr. Hollenberg's research
interests include renal perfusion and function, and the genetic underpinnings of
hypertension and renal injury.
JOHN E. REPINE, M.D. is the Director of the Webb-Waring Institute for
Biomedical Research, and Professor of Medicine and Associate Dean for Student
Affairs at the University of Colorado Health Sciences Center. Dr. Repine has a
distinguished research record on oxidative stress and disease pathology.
ROBERT T. SCHOOLEY, M.D. is Professor of Medicine and Head of the
Infectious Disease Division at the University of Colorado Health Services
Center. His research includes work on AIDS, immunology, and infectious diseases.
Dr. Schooley served as Chair of numerous groups at the NIH, including the Core
Immunology Committee of the AIDS Clinical Trials Group.
STEVEN R. TANNENBAUM, PH.D. is a Professor of Chemistry and Toxicology at
the Massachusetts Institute of Technology. Dr. Tannenbaum's research efforts
include the chemistry of free radicals in biological systems, and leading work
on N-nitroso compounds and other environmental carcinogens and mutagens.
EXECUTIVE COMPENSATION
The following table sets forth for the fiscal year ended December 31, 1996
the compensation for services rendered to the Company in all capacities with
respect to its Chief Executive Officer and each of its other executive officers
whose cash compensation in 1996 exceeded $100,000 (the Chief Executive Officer
and such other executive officers are hereinafter referred to as the "Named
Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
--------------------
ANNUAL COMPENSATION NUMBER OF SECURITIES
-------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) OPTIONS(#) COMPENSATION($)
- -------------------------------- --------- -------- -------------------- ---------------
<S> <C> <C> <C> <C>
Hector J. Gomez, M.D., Ph.D..... $240,000 $ -- 40,000 $ 1,755(1)
President and
Chief Executive Officer
John J. Whalen, M.D. ........... 160,000 -- 30,000 5,331(2)
Senior Vice President and
Chief Scientific Officer
B. Nicholas Harvey.............. 128,000 -- 30,000 --
Vice President, Finance
and Chief Financial Officer
</TABLE>
- ---------------
(1) Consists of premiums paid by the Company on a term life insurance policy on
behalf of Dr. Gomez.
(2) Consists of relocation expenses reimbursed to Dr. Whalen by the Company.
44
<PAGE> 46
OPTION GRANTS IN LAST FISCAL YEAR
The following table contains information concerning the grant of stock
options to the Named Executive Officers during the fiscal year ended December
31, 1996.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------------
PERCENT POTENTIAL REALIZABLE
OF TOTAL VALUE AT ASSUMED
OPTIONS ANNUAL RATES OF
NUMBER OF GRANTED STOCK PRICE
SECURITIES TO FAIR MARKET APPRECIATION FOR
UNDERLYING EMPLOYEES EXERCISE VALUE ON OPTION TERM($)(2)
OPTIONS IN FISCAL PRICE THE DATE EXPIRATION ------------------------------
NAME GRANTED(#) YEAR(1) ($/SHARE) OF GRANT DATE 0% 5% 10%
- -------------------------------- --------- --------- --------- ----------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Hector J. Gomez, M.D., Ph.D. ... 40,000 31% $2.50 $ 11.00 7/25/06 $340,000 $617,000 $1,041,000
John J. Whalen, M.D. ........... 30,000 23 2.50 11.00 7/25/06 255,000 463,000 781,000
B. Nicholas Harvey ............. 30,000 23 2.50 11.00 7/25/06 255,000 463,000 781,000
</TABLE>
- ---------------
(1) Based on options to purchase 129,298 shares of Common Stock granted to
employees in fiscal 1996.
(2) The potential realizable value of each option at 0% is based on the fair
market value of the Common Stock on the date of grant, $11.00 per share,
minus the exercise price times the number of shares underlying the option.
The potential realizable value of each option at 5% and 10% are based on the
term of the option at its time of grant (ten years). Each is calculated by
assuming that the stock price on the date of grant appreciates at 5% or 10%,
as applicable, compounded annually for the entire term of the option, and
that the option is exercised and sold on the last day of its term for the
appreciated stock price. Actual gains, if any, on stock option exercises
will depend on the future performance of the Common Stock and the date at
which the options are exercised.
AGGREGATE OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUE
The following table sets forth, for each of the Named Executive Officers,
the number of shares acquired on exercise of options during the fiscal year
ended December 31, 1996, the aggregate dollar value realized upon such exercise
and the number and value of unexercised options held by each such officer on
December 31, 1996:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS
SHARES FISCAL YEAR-END AT FISCAL YEAR-END(2)
ACQUIRED ON VALUE ------------------------- -------------------------
NAME EXERCISE REALIZED(1) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---------------------------------- ----------- ----------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Hector J. Gomez, M.D., Ph.D. ..... 1,800 $18,900 59,174/90,826 $621,982/$882,018
John J. Whalen, M.D. ............. -- -- 11,879/46,121 118,484/ 430,516
B. Nicholas Harvey ............... -- -- 27,087/32,488 278,168/ 287,372
</TABLE>
- ---------------
(1) Based on the fair market value of the Common Stock on the date of exercise,
less the option exercise price. Such shares have not actually been sold.
(2) Based on the fair market value of the Common Stock on December 31, 1996
($11.00) less the option exercise price.
EMPLOYMENT AGREEMENTS
On November 29, 1994, the Company entered into an employment agreement with
Dr. Gomez, which provides for an annual base salary of $230,000, subject to
increase upon annual review. Under the agreement, Dr. Gomez received an option
to purchase 110,000 shares of Common Stock at an exercise price of $.50 per
share. Such option vests monthly over four years and terminates on November 28,
2004. Upon termination of employment by the Company other than for cause (as
defined in the agreement), the Company will pay Dr. Gomez his then current
salary, less any consulting income earned by Dr. Gomez, until the earlier of six
months from the date of such termination or the date upon which Dr. Gomez
secures other employment. The agreement provides that, for a period of twelve
months following termination of employment for any reason, Dr. Gomez will not
engage, directly or indirectly, in activities which compete with those of the
Company.
45
<PAGE> 47
AMENDED AND RESTATED 1994 EQUITY INCENTIVE PLAN
The Company's 1994 Equity Incentive Plan was initially adopted by the Board
of Directors and approved by the stockholders in April 1994. The 1994 Equity
Incentive Plan was adopted by the Board of Directors and approved by the
stockholders in August 1996. Under the terms of the 1994 Equity Incentive Plan,
the Company is authorized to make awards of restricted stock and to grant
incentive stock options and non-statutory stock options to employees (including
officers and employee directors) and directors of, and consultants and advisors
to, the Company to purchase shares of the Common Stock of the Company. A total
of 370,324 shares of Common Stock have been reserved for issuance upon exercise
of outstanding options granted under the 1994 Equity Incentive Plan. An
additional 378,295 shares of Common Stock have been reserved for future options
or awards under the 1994 Equity Incentive Plan.
Stock option grants under the 1994 Equity Incentive Plan entitle the
optionee to purchase Common Stock from the Company, for a specified exercise
price, during the periods specified in the applicable option agreement. The
Compensation Committee of the Board of Directors will select the persons to whom
options are granted, and determine the number of shares covered by each option,
its exercise price, its vesting schedule and its expiration date. Options are
generally not assignable or transferable except by will or the laws of descent
and distribution.
Restricted stock awards under the 1994 Equity Incentive Plan entitle the
recipient to purchase Common Stock from the Company under terms which provide
for vesting over a period of time and a right of repurchase of unvested stock
when the recipient's relationship with the Company terminates. The Compensation
Committee of the Board of Directors will select the recipients of restricted
stock awards, determine the times at which restricted stock awards are made, and
determine the number of shares of Common Stock subject to the award, the
purchase price (which can be less than the fair market value of the Common
Stock) and the vesting schedule for such shares. The recipients may not sell,
transfer or otherwise dispose of shares subject to a restricted stock award
until such shares are vested. Upon termination of the recipient's relationship
with the Company, the Company will be entitled to repurchase those shares which
are not vested on the termination date at a price equal to their original
purchase price.
As of December 31, 1996, the Company had 13 employees, all of whom were
eligible to participate in the 1994 Equity Incentive Plan. The number of
individuals receiving stock options varies from year to year depending on
various factors, such as the number of promotions and the Company's hiring needs
during the year.
The Compensation Committee may, in its sole discretion, include additional
provisions in any option or award granted or made under the 1994 Equity
Incentive Plan, including without limitation restrictions on transfer,
repurchase rights, commitments to pay cash bonuses, to make, arrange for or
guaranty loans or to transfer other property to optionees upon exercise of
options, or such other provisions as shall be determined by the Compensation
Committee, provided they are not inconsistent with the 1994 Equity Incentive
Plan and applicable law. The Compensation Committee may also, in its sole
discretion, accelerate or extend the date or dates on which all or any
particular option or options granted under the 1994 Equity Incentive Plan may be
exercised. Each of the options granted to date has provided that, upon certain
events constituting a change of control of the Company, the option becomes fully
exercisable. The Board of Directors has approved the accelerated vesting of
certain stock options held by employees of the Company, including the Named
Executive Officers, effective upon the closing of the Offering (the "IPO
Acceleration"). Under the first of three components of the IPO Acceleration, the
vesting of all stock options granted prior to 1996 will accelerate by one year.
Under the second component, the vesting of stock options granted to each of the
Named Executive Officers prior to 1996 will further accelerate by approximately
one month for each four months of such officer's employment, up to a maximum of
one additional year of acceleration. Under the third component, half of the
30,000 shares of Common Stock subject to an option granted to Mr. Harvey on July
25, 1996 will become exercisable upon the closing of the Offering, subject to
the condition of his continued employment for twelve months following the
Offering.
46
<PAGE> 48
CERTAIN TRANSACTIONS
On April 5, 1994, the Company acquired the Covered Technology from Clintec,
in exchange for 680,000 shares of Common Stock and 9,000 shares of the Company's
Nonconvertible Redeemable Preferred Stock which were exchanged in September 1996
for an aggregate of 3,404,255 shares of Series C Convertible Preferred Stock.
Richard W. Hunt, a director of the Company, is Vice President, Finance of Baxter
International Inc. Concurrently, the Company entered into a license agreement
with Cornell related to the Covered Technology in return for 35,025 shares of
Common Stock, payment of minimum royalties and a three-year research agreement
with Cornell Medical College providing for the payment of $133,000 per year
ending in July 1997. On October 4, 1995, Cornell agreed to return to the Company
7,025 shares of Common Stock in settlement of a dispute related to the
abandonment by Cornell of a patent application in Japan. See
"Business -- Technology and License Agreements."
In connection with the organization of the Company in December 1992, the
Company's two founding scientists from Clintec, Dr. Gary Pace and Dr. Dennis
Goldberg, purchased from the Company 100 shares of Common Stock at a price of
$.05 per share. On April 5, 1994, upon the Company's acquisition of the Covered
Technology from Clintec, the previously issued and outstanding shares of Common
Stock held by Dr. Pace and Dr. Goldberg were exchanged for 44,109 shares of
Common Stock, effected in the form of a stock dividend.
Also on April 5, 1994, the Company issued and sold an aggregate of
6,500,000 shares of Series A Convertible Preferred Stock at a price of $1.00 per
share in a private placement to certain institutional investors, including
3,500,000 shares to entities affiliated with Advent, 1,000,000 shares to
entities affiliated with Sprout, 1,000,000 shares to VCFNE, 500,000 shares to
Baxter and 500,000 shares to NCNI, an entity affiliated with Nestle (the "1994
Financing"). Gerard Moufflet, a director of the Company, is Senior Vice
President of Advent. Philippe Chambon, M.D., Ph.D., a director of the Company,
is a General Partner of Sprout. William C. Mills III, a director of the Company,
is a General Partner of FH & Co. III, L.P., the General Partner of VCFNE. The
Company concurrently issued warrants (the "Series A Warrants") to purchase an
aggregate of 1,625,000 shares of Series A Convertible Preferred Stock to the
same investors at an exercise price of $1.00 per share (including warrants to
purchase 875,000 shares to entities affiliated with Advent, 250,000 shares to
entities affiliated with Sprout, 250,000 shares to VCFNE, 125,000 shares to
Baxter and 125,000 shares to an entity affiliated with Nestle). In accordance
with the terms of such warrants, on September 13, 1995, Series A Warrants for an
aggregate of 250,000 shares of Series A Convertible Preferred Stock were
cancelled. In September 1996, the Series A Warrants were exercised pursuant to a
net exercise provision for an aggregate of 789,894 shares of Series A
Convertible Preferred Stock (including 502,659 shares to Advent, 143,617 shares
to Sprout and 143,617 shares to VCFNE).
In connection with the 1994 Financing, the Company entered into a
Stockholders' Agreement with its stockholders, which was amended and restated on
September 13, 1995 and further amended on May 29, 1996 (as so amended, the
"Stockholders' Agreement"). Each party to the Stockholders' Agreement has agreed
to vote all shares over which such party exercises control to elect as directors
of the Company: (i) one representative designated by VCFNE; (ii) one
representative designated by Advent; (iii) one representative designated by
Sprout; (iv) one representative designated by Clintec; and (v) the Chief
Executive Officer of the Company. Messrs. Mills, Moufflet and Hunt and Dr.
Chambon currently serve as the designees of VCFNE, Advent, Baxter and Nestle,
and Sprout, respectively. The Stockholders' Agreement will terminate upon the
consummation of the Offering.
Also in connection with the 1994 Financing, the Company became a party to a
Right of First Refusal Agreement and a Right of First Refusal and Co-sale
Agreement (collectively, the "Right of First Refusal Agreements") with certain
stockholders of the Company (the "Holders"). The Right of First Refusal
Agreements provide each of the Holders with a right of first refusal with
respect to securities issued by the Company, a right of first refusal with
respect to any proposed transfer of shares by another Holder and a right to
participate in any proposed transfer of shares by any other Holder. The Right of
First Refusal Agreements will terminate upon the consummation of the Offering.
In addition,
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<PAGE> 49
in connection with the 1994 Financing, the Company agreed to register in certain
circumstances shares of its capital stock held by certain investors. See
"Description of Capital Stock -- Registration Rights."
On September 13, 1995, the Company sold Series A Notes in the aggregate
principal amount of $2.0 million to certain institutional investors, including
notes in the aggregate principal amount of $1.3 million to entities affiliated
with Advent, $363,000 to entities affiliated with Sprout and $364,000 to VCFNE.
Interest on the Series A Notes accrued at 30 percent per annum, payable every
four months in the form of shares of Series A Convertible Preferred Stock (at
one share per $1.00 of interest due and payable). The Series A Notes matured on
January 15, 1997, and were convertible into shares of Series A Convertible
Preferred Stock (at one share per $1.00 of principal outstanding) upon the
closing of a private financing resulting in gross proceeds to the Company of
$2.0 million or more. The Company issued an aggregate of 397,806 shares of
Series A Convertible Preferred Stock in lieu of interest payable on the Series A
Notes through May 13, 1996 to the holders thereof. On September 3, 1996, the
Company issued 98,631 shares of Series A Convertible Preferred Stock in full
payment of accrued and unpaid interest through such date (including 62,765
shares to entities affiliated with Advent; 17,933 shares to entities affiliated
with Sprout; and 17,933 shares to VCFNE) Concurrently, the Series A Notes were
converted into an aggregate of 2,000,000 shares of Series A Convertible
Preferred Stock (including 1,272 shares to entities affiliated with Advent;
363,000 shares to entities affiliated with Sprout; and 364,000 shares to
VCFNE)(the "September 1996 Financing").
In January 1996, the Company issued an aggregate of 130,000 shares of
Series A Convertible Preferred Stock to two of its directors, Dr. Douglas and
Mr. Jackson, and one former director of the Company. Such shares were issued (at
$1.00 per share) for an aggregate of $130,000.
On May 29, 1996, the Company issued Series B Notes in the aggregate
principal amount of $1.0 million to certain institutional investors, including
notes in the aggregate principal amount of $636,363 to entities affiliated with
Advent, $181,818 to entities affiliated with Sprout and $181,818 to VCFNE.
Interest on the Series B Notes accrued at 30 percent per annum, payable every
four months in the form of Series B Convertible Preferred Stock (at one share
per $1.50 of interest due and payable). The Series B Notes matured on January
15, 1997, and were convertible into shares of Series B Convertible Preferred
Stock (at one share per $1.50 of principal) upon the closing of a private
financing of $1.0 million. On September 30, 1996, at the closing of the
September 1996 Financing, the Company issued 24,109 shares of Series B
Convertible Preferred Stock in full payment of accrued and unpaid interest on
the Series B Notes through such date (including 15,342 shares to entities
affiliated with Advent; 4,383 shares to entities affiliated with Sprout; and
4,384 shares to entities affiliated with VCFNE). Concurrently, the Series B
Notes were converted into an aggregate of 666,666 shares of Series B Convertible
Preferred Stock (including 424,242 shares to entities affiliated with Advent,
121,212 shares to entities affiliated with Sprout and 121,212 shares to VCFNE).
In the September 1996 Financing, the Company issued 3,404,255 shares of
Series C Convertible Preferred Stock to Clintec in exchange for all of the
outstanding shares of Nonconvertible Redeemable Preferred Stock. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
Pursuant to the September 1996 Financing, the Company issued and sold an
aggregate of 851,064 shares of Series C Convertible Preferred Stock (including
150,205 shares to the Advent Group; 42,953 shares to VCFNE; and 19,342 shares to
Sprout Group) at a price of $11.75 per share. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
In February 1997, the Company entered into an agreement with BI relating to
the worldwide development and commercialization of Procysteine i.v. For a
description of the BI Agreement, see "Business -- Boehringer Ingelheim." In
connection with the execution of the BI Agreement, the Company agreed to issue
and sell $5.0 million of unregistered shares of Common Stock on or prior to the
closing of the Offering at the initial public offering price. Assuming an
initial public offering price of $13.00 per share, BI will purchase 384,615
unregistered shares of Common Stock. In addition, the
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<PAGE> 50
Company agreed in certain circumstances to register the shares received by BI.
See "Description of Capital Stock -- Registration Rights."
In March 1997, the Company issued and sold an aggregate of 1,039,000 shares
of the Company's Nonconvertible Redeemable Preferred Stock and warrants to
purchase $346,300 of Common Stock, exercisable at the initial public offering
price (26,639 shares of Common Stock assuming an initial public offering price
of $13.00 per share), to certain institutional investors, including 434,378
shares to entities affiliated with Advent, 85,000 shares to entities affiliated
with Sprout, 100,554 shares to VCFNE, 319,068 shares to Baxter, 38,000 shares to
Dr. Gomez, 12,000 shares to Dr. Whalen and 50,000 shares to Mr. Jackson (the
"Bridge Financing"), resulting in proceeds to the Company of approximately $1.0
million. All outstanding shares of Nonconvertible Redeemable Preferred Stock
will be redeemed upon the closing of the Offering for approximately $1.0 million
from the proceeds of the Offering.
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<PAGE> 51
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock of the Company as of December 31, 1996, and as
adjusted to reflect the sale of the shares of Common Stock offered hereby, by
(i) each person or entity known to the Company to own beneficially more than 5%
of the Company's Common Stock; (ii) each of the Company's directors; (iii) each
of the Named Executive Officers; and (iv) all directors and executive officers
as a group.
<TABLE>
<CAPTION>
PERCENTAGE
BENEFICIALLY
NUMBER OF OWNED(2)(3)
SHARES ---------------------
BENEFICIALLY PRIOR TO AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER(1) OWNED(2) OFFERING OFFERING
- ------------------------------------------------------------ ------------ -------- --------
<S> <C> <C> <C>
5% STOCKHOLDERS
Advent Group(4)........................................... 1,234,323 32.9% 20.1%
101 Federal Street
Boston, MA 02110
Baxter Healthcare Corporation(5).......................... 908,085 24.2 14.8
One Baxter Parkway
Deerfield, IL 60015
Nestle Clinical Nutrition, Inc. .......................... 780,425 20.8 12.7
900 North Brand Boulevard
Glendale, CA 91203
Clintec International, Inc. .............................. 680,426 18.1 11.1
One Baxter Parkway
Deerfield, IL 60015
Boehringer Ingelheim International GmbH................... 384,615 -- 6.3
D-55216 Ingelheim am Rhein
Germany(6)
The Venture Capital Fund of New England III, L.P. ........ 353,218 9.4 5.8
160 Federal Street, 23rd Floor
Boston, MA 02110
DLJ Capital Corporation(7)................................ 348,490 9.3 5.7
277 Park Avenue
New York, NY 10172
DIRECTORS
Jerry T. Jackson(8)....................................... 18,670 * *
Philippe Chambon, M.D., Ph.D.(7).......................... 348,490 9.3 5.7
Frank L. Douglas, M.D., Ph.D.(9).......................... 16,000 * *
Richard W. Hunt(10)....................................... 908,085 24.2 14.8
William C. Mills III(11).................................. 353,218 9.4 5.8
Gerard M. Moufflet(4)..................................... 1,234,323 32.9 20.1
NAMED EXECUTIVE OFFICERS
Hector J. Gomez, M.D., Ph.D.(12).......................... 68,548 1.8 1.1
John J. Whalen, M.D.(13).................................. 15,504 * *
B. Nicholas Harvey(14).................................... 30,810 * *
All directors and executive officers as a group
(nine persons)(15)..................................... 2,993,648 77.2 47.8
</TABLE>
- ---------------
* Less than 1%
(1) Unless otherwise indicated, the address for each beneficial owner is c/o
the Company, 640 Memorial Drive, Cambridge, Massachusetts 02139.
(2) The inclusion herein of any shares of Common Stock as beneficially owned
does not constitute an admission of beneficial ownership of those shares.
Unless otherwise indicated, each person listed above has sole investment
and voting power with respect to the shares listed. In accordance with the
rules of the Securities and Exchange Commission, each person is deemed to
beneficially own any shares issuable upon exercise of stock options held by
such person that are currently exercisable or that become exercisable
within 60 days after December 31, 1996, and any reference in these
footnotes to shares subject to
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<PAGE> 52
stock options held by the person in question refers only to such shares.
The number and percentage of outstanding shares of Common Stock owned after
the Offering gives effect to the purchase by BI of $5.0 million of Common
Stock at the initial public offering price (384,615 shares assuming an
initial public offering price of $13.00 per share).
(3) The number of shares deemed outstanding for purposes of calculating these
percentages is comprised of the 4,136,481 shares outstanding as of December
31, 1996 (after giving effect to the conversion into shares of Common Stock
of all outstanding shares of Series A, Series B and Series C Preferred
Stock), plus any shares subject to stock options held by the person in
question exercisable within 60 days after December 31, 1996.
(4) Represents 791,981 shares held by Global Private Equity II Limited
Partnership, 318,983 shares held by Rovent II Limited Partnership, 119,827
shares held by Advent Performance Materials Limited Partnership and 3,532
shares held by Advent International Investors II Limited Partnership (the
"Advent Group"). Mr. Moufflet, a director of the Company, is Senior Vice
President of Advent International Corporation, which is a general partner
of Advent International Investors II Limited Partnership and of Advent
International Limited Partnership, the general partner of each of the other
members of the Advent Group. Mr. Moufflet disclaims beneficial ownership of
all such shares.
(5) Includes 680,426 shares held by Clintec International, Inc., a wholly owned
subsidiary of Baxter.
(6) Includes the $5.0 million of unregistered shares of Common Stock to be
purchased pursuant to the BI Equity Investment at the initial public
offering price (assuming an initial public offering price of $13.00 per
share).
(7) Includes 300,848 shares held by Sprout Capital VI, L.P. and 47,642 shares
held by DLJ Capital Corporation, with respect to all of which Dr. Chambon
shares voting and investment power. DLJ Capital Corporation is the managing
general partner of Sprout Capital VI, L.P. Dr. Chambon is General Partner
of Sprout Group.
(8) Includes 8,670 shares subject to stock options held by Mr. Jackson.
(9) Includes 6,000 shares subject to stock options held by Dr. Douglas.
(10) Represents 680,426 shares held by Clintec International, Inc. and 227,659
shares held by Baxter. Mr. Hunt is Vice President, Finance of Baxter
International, Inc. and shares voting power with respect to shares held by
Clintec's sole stockholder, Baxter.
(11) Includes 353,218 shares held by the VCFNE, with respect to which Mr. Mills
shares voting and investment power. Mr. Mills is a general partner of FH &
Co. III, L.P., a general partner of the VCFNE.
(12) Includes 66,748 shares subject to stock options held by Dr. Gomez.
(13) Represents 15,504 shares subject to stock options held by Dr. Whalen.
(14) Represents 30,810 shares subject to stock options held by Mr. Harvey.
(15) Includes 127,732 shares subject to stock options.
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<PAGE> 53
DESCRIPTION OF CAPITAL STOCK
The Company's current Restated Certificate of Incorporation (the
"Certificate of Incorporation"), authorizes 45,255,319 shares of capital stock,
consisting of 25,000,000 shares of Common Stock, $.01 par value, and 20,255,319
shares of Preferred Stock, $.01 par value. In connection with the Offering, the
Company's Certificate of Incorporation will be amended and restated (the
"Restated Certificate of Incorporation"). Upon completion of the Offering, the
Restated Certificate of Incorporation will authorize the issuance of 30,000,000
shares of capital stock, consisting of 25,000,000 shares of Common Stock, par
value $.01 per share, and 5,000,000 shares of Preferred Stock, par value $.01
per share. Set forth below is a description of the capital stock of the Company.
COMMON STOCK
As of December 31, 1996, assuming the conversion all outstanding shares of
Preferred Stock into Common Stock, there were 3,751,866 shares of Common Stock
issued and outstanding held of record by 20 stockholders and 370,324 shares of
Common Stock issuable upon the exercise of outstanding stock options.
The holders of Common Stock are entitled to one vote per share on all
matters submitted to a vote of stockholders and are not entitled to cumulative
voting rights with respect to the election of directors. Accordingly, holders of
a majority of the shares of Common Stock entitled to vote in any election of
directors may elect all of the directors standing for election. Holders of
Common Stock are entitled to receive ratably such dividends, if any, as may be
declared by the Board of Directors out of funds legally available therefor,
subject to preferences that may be applicable to any outstanding Preferred
Stock. In the event of liquidation, dissolution or winding up of the Company,
holders of Common Stock are entitled to share ratably in all net assets
remaining after payment of liabilities and the liquidation preference of any
outstanding Preferred Stock. Holders of Common Stock have no preemptive,
subscription, redemption, conversion or other subscription rights, and there are
no sinking fund provisions applicable to the Common Stock. All currently
outstanding shares of Common Stock are, and the shares of Common Stock being
issued and sold in the Offering will be, duly authorized, validly issued, fully
paid and nonassessable.
SERIES CONVERTIBLE PREFERRED STOCK
The Company currently has outstanding 9,916,330 shares of Series A
Convertible Preferred Stock and 690,775 shares of Series B Convertible Preferred
Stock, and 4,255,319 shares of Series C Convertible Preferred Stock, $.01 par
value per share (respectively, the "Series A Preferred Stock," "Series B
Preferred Stock" and "Series C Preferred Stock"). See "Certain Transactions."
Because of the one-for-five reverse stock split, effected in February 1997, each
share of Convertible Preferred Stock will automatically convert into one-fifth
of a share of Common Stock upon closing of the Offering.
Following completion of the Offering and the conversion of all of the
outstanding shares of Preferred Stock, the Board of Directors will have the
authority to issue from time to time up to 5,000,000 shares of Preferred Stock
in one or more series and to fix the powers, designations, preferences and
relative, participating, optional or other rights thereof, including dividend
rights, conversion rights, voting rights, redemption terms, liquidation
preferences and the number of shares constituting each such series, without any
further vote or action by the Company's stockholders. The issuance of Preferred
Stock could adversely affect the rights of holders of Common Stock and could
have the effect of delaying, deferring or preventing a change in control of the
Company. The Company has no present plans to issue any of these shares of
Preferred Stock.
NONCONVERTIBLE REDEEMABLE PREFERRED STOCK
The Company has outstanding 1,039,000 shares of Nonconvertible Redeemable
Preferred Stock, $.01 par value per share (the "Nonconvertible Preferred
Stock"). All outstanding shares of Nonconvertible Preferred Stock will be
redeemed upon the closing of the Offering for approximately $1.0
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<PAGE> 54
million from the proceeds of the Offering. Except as required by law, the
Nonconvertible Redeemable Preferred Stock has no voting rights. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
WARRANTS
In February 1997, upon the issuance of shares of Nonconvertible Preferred
Stock, the Company also issued warrants to purchase $346,300 of Common Stock,
exercisable at the initial public offering price (26,639 shares of Common Stock
assuming an initial public offering price of $13.00 per share). Such warrants
are exercisable upon issuance and expire five years from the date of issuance.
In connection with the execution of a lease of real property from the
Massachusetts Institute of Technology ("MIT") in October 1994, the Company
issued a warrant to MIT to purchase 5,000 shares of Common Stock at a price of
$5.00 per share. This warrant expires on October 28, 1999.
REGISTRATION RIGHTS
At the completion of the Offering, certain stockholders of the Company (the
"Rightsholders") will be entitled to certain rights with respect to the
registration under the Securities Act of a total of 4,037,099 shares of Common
Stock (the "Registrable Shares") pursuant to the terms of an agreement among the
Company and the Rightsholders (the "Registration Rights Agreement"). Under the
Registration Rights Agreement beginning 6 months after the effective date of the
Company's registration statement relating to the Offering, on not more than one
occasion and subject to certain limitations, the Company is required to use its
best efforts to file a registration statement under the Securities Act if
requested by the holders of (i) 35 percent of the outstanding shares of
Preferred Stock held by Rightsholders immediately prior to the Offering (the
"Preferred Rightsholders"); or (ii) 35 percent of the outstanding shares of
Common Stock held by Rightsholders immediately prior to the Offering (the
"Common Rightsholders"). In addition, at any time after the Company becomes
eligible to use Form S-3, or not more than one occasion, the Company is required
to use its best efforts to file a registration statement on Form S-3 if
requested by (i) 35 percent of the Preferred Rightsholders or (ii) 35 percent of
the Common Rightsholders. The Registration Rights Agreement also provides that
in the event the Company proposes to file a registration statement under the
Securities Act with respect to an offering by the Company, the Rightsholders
shall be entitled to include Registrable Shares in such registration, subject to
the right of the managing underwriter of any such offering to exclude some or
all of such Registrable Shares from such registration if and to the extent that
inclusion of such Shares would adversely affect the marketing of the shares to
be sold by the Company. In such event, the amount of Registrable Shares to be
offered for the accounts of the Rightsholders shall be reduced pro rata among
all of the requesting Rightsholders based upon the number of shares requested to
be included in such registration by all requesting Rightsholders. The Company is
required to bear the expenses of the first registration requested by Preferred
Rightsholders and the first registration requested by Common Rightsholders,
except underwriting discounts and commissions and fees of more than one counsel
to the Rightsholders. Prior to the closing of the Offering, the Registration
Rights Agreement will be amended and restated to (i) provide the foregoing
rights to BI with respect to any shares of Common Stock issued pursuant to the
BI Equity Investment, and (ii) provide BI with the right, exercisable once,
beginning one year after the closing of the Offering, to require the Company to
register any shares of Common Stock issued to BI pursuant to the BI Equity
Investment and to bear the expenses of such registration, except underwriting
discounts and commissions and fees of more than one counsel to BI. The
Rightsholders and BI are subject to certain lock-up agreements. See "Shares
Eligible For Future Sale."
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS
The Company is subject to the provisions of Section 203 of the General
Corporation Law of Delaware. Section 203 prohibits a publicly-held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the
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<PAGE> 55
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. A "business
combination" includes mergers, asset sales and other transactions resulting in a
financial benefit to the interested stockholder. Subject to certain exceptions,
an "interested stockholder" is a person who, together with affiliates and
associates, owns, or within three years did own, 15 percent or more of the
corporation's voting stock.
The Restated Certificate of Incorporation provides for the division of the
Board of Directors into three classes as nearly equal in size as possible with
staggered three-year terms. See "Management." In addition, the Restated
Certificate of Incorporation provides that directors may be removed only for
cause by the affirmative vote of the holders of two-thirds of the shares of
capital stock of the corporation entitled to vote. Under the Restated
Certificate of Incorporation, any vacancy on the Board of Directors, however
occurring, including a vacancy resulting from an enlargement of the Board, may
only be filled by vote of a majority of the directors then in office. The
classification of the Board of Directors and the limitations on the removal of
directors and filling of vacancies could have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
acquiring, control of the Company.
The Restated Certification of Incorporation also provides that after the
closing of the Offering, any action required or permitted to be taken by the
stockholders of the Company at an annual meeting or special meeting of
stockholders may only be taken if it is properly brought before such meeting and
may not be taken by written action in lieu of a meeting. The Restated
Certificate of Incorporation further provides that special meetings of the
stockholders may only be called by the Chairman of the Board of Directors, the
Chief Executive Officer or, if none, the President of the Company or by the
Board of Directors. Under the Company's Amended and Restated By-Laws (the
"By-Laws"), in order for any matter to be considered "properly brought" before a
meeting, a stockholder must comply with certain requirements regarding advance
notice to the Company. The foregoing provisions could have the effect of
delaying until the next stockholders meeting stockholder actions which are
favored by the holders of a majority of the outstanding voting securities of the
Company. These provisions may also discourage another person or entity from
making a tender offer for the Company's Common Stock, because such person or
entity, even if it acquired a majority of the outstanding voting securities of
the Company, would be able to take action as a stockholder (such as electing new
directors or approving a merger) only at a duly called stockholders meeting, and
not by written consent.
The General Corporation Law of Delaware provides generally that the
affirmative vote of a majority of the shares entitled to vote on any matter is
required to amend a corporation's certificate of incorporation or by-laws,
unless a corporation's certificate of incorporation or by-laws, as the case may
be, requires a greater percentage. The Restated Certificate of Incorporation and
the By-Laws require the affirmative vote of the holders of at least 66 2/3
percent of the shares of capital stock of the Company issued and outstanding and
entitled to vote to amend or repeal any of the provisions described in the prior
two paragraphs.
The Restated Certificate of Incorporation contains certain provisions
permitted under the General Corporation Law of Delaware relating to the
liability of directors. The provisions eliminate a director's liability for
monetary damages for a breach of fiduciary duty, except in certain circumstances
involving wrongful acts, such as the breach of a director's duty of loyalty or
acts or omissions which involve intentional misconduct or a knowing violation of
law. Further, the Restated Certificate of Incorporation contains provisions to
indemnify the Company's directors and officers to the fullest extent permitted
by the General Corporation Law of Delaware. The Company believes that these
provisions will assist the Company in attracting and retaining qualified
individuals to serve as directors.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is ChaseMellon
Shareholder Services.
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<PAGE> 56
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there has not been any public market for the Common
Stock and there can be no assurance that a significant public market for the
Common Stock will be developed or be sustained after the Offering. Sales of
substantial amounts of Common Stock in the public market after the Offering, or
the possibility of such sales occurring, could adversely affect prevailing
market prices for the Common Stock or the future ability of the Company to raise
capital through an offering of equity securities. See "Risk Factors -- Shares
Eligible for Future Sale; Registration Rights."
After the Offering, the Company will have outstanding 6,136,481 shares of
Common Stock (6,436,481 shares if the Underwriters' over-allotment option is
exercised in full). Such number of shares assumes the issuance of 384,615 shares
of Common Stock to BI as a result of the BI Equity Investment (assuming an
initial public offering price of $13.00 per share). See "Capitalization" and
"Certain Transactions." Of these shares, the 2,000,000 shares offered hereby
will be freely tradable in the public market without restriction under the
Securities Act, unless such shares are held by "affiliates" of the Company, as
that term is defined in Rule 144 under the Securities Act.
The remaining 4,136,481 shares of Common Stock outstanding upon completion
of the Offering will be "restricted securities" as that term is defined in Rule
144 (the "Restricted Shares"). The Restricted Shares were issued and sold by the
Company in private transactions in reliance upon exemptions from registration
under the Securities Act. Restricted Shares may be sold in the public market
only if they are registered or if they qualify for an exemption from
registration under the Securities Act, including an exemption under Rule 144 or
701, which are summarized below.
Pursuant to "lock-up" agreements, all of the Company's executive officers
and directors and certain employees and stockholders of the Company, who
collectively hold 3,654,284 of such Restricted Shares (excluding BI), have
agreed not to offer, sell, or otherwise dispose of (i) any of their Restricted
Shares for a period of 180 days from the date of this Prospectus (the "Initial
Lock-Up Period"), and (ii) in excess of 50 percent of such Restricted Shares for
a period of 90 days following such 180-day period (the "Secondary Lock-Up
Period"), without the prior written consent of Vector Securities. In addition,
BI has agreed not to offer, sell or otherwise dispose of the 384,615 Restricted
Shares to be purchased in the BI Equity Investment for a period of 360 days from
the date of this Prospectus, without the prior written consent of Vector
Securities (the "BI Lock-Up Period"). The Company has also agreed that it will
not offer, sell or otherwise dispose of Common Stock for a period of 180 days
from the date of this Prospectus, other than pursuant to existing stock option
plans or upon exercise of currently outstanding warrants, without the prior
written consent of Vector Securities. Upon termination of each of the Initial
Lock-Up Period and the Secondary Lock-Up Period, approximately 1,824,142 shares
of the Restricted Shares will be eligible for immediate sale in the public
market, subject to certain volume, manner of sale, and other limitations under
Rule 144. Upon termination of the BI Lock-Up Period, the shares purchased by BI
will be eligible for immediate sale in the public market, subject to certain
volume, manner of sale and other limitations under Rule 144. In addition, BI has
the right to cause the Company to register these shares under the Securities Act
at any time following the BI Lock-Up Period. See "Description of Capital
Stock -- Registration Rights." In addition, of the Restricted Shares not subject
to lock-up agreements, approximately 46,741 shares will be eligible for
immediate sale, without limitation under Rule 144(k), and approximately 56,840
of such Restricted Shares will be eligible for sale beginning 90 days after the
date of this Prospectus, subject to certain volume, manner of sale and other
limitations under Rule 144 and Rule 701.
Following the expiration of such lock-up periods, certain shares issued
upon exercise of options granted by the Company prior to the date of this
Prospectus will also be available for sale in the public market pursuant to Rule
701 under the Securities Act. Rule 701 permits resales of such shares in
reliance upon Rule 144 but without compliance with certain restrictions,
including the holding period requirement, imposed under Rule 144. In general,
under Rule 144 as currently in effect, beginning 90 days after the date of this
Prospectus, a person (or persons whose shares of the Company are aggregated) who
has beneficially owned Restricted Shares for at least one year (including the
holding period of any
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<PAGE> 57
prior owner who is not an affiliate of the Company) would be entitled to sell
within any three-month period a number of shares that does not exceed the
greater of one percent of the then outstanding shares of Common Stock
(approximately 61,365 shares immediately after the Offering) or the average
weekly trading volume of the Common Stock during the four calendar weeks
preceding the filing of a report on Form 144 with respect to such sale. Sales
under Rule 144 are also subject to certain manner of sale and notice
requirements and to the availability of current public information about the
Company. Under Rule 144(k), a person who is not deemed to have been an affiliate
of the Company at any time during the 90 days preceding a sale and who has
beneficially owned the shares proposed to be sold for at least two years
(including the holding period of any prior owner who is not an affiliate of the
Company) is entitled to sell such shares without complying with the manner of
sale, public information, volume limitation or notice provisions of Rule 144.
As of December 31, 1996, options to purchase a total of 370,324 shares of
Common Stock were outstanding under the Company's 1994 Equity Incentive Plan. Of
such shares, an aggregate of approximately 289,775 shares are subject to lock-up
agreements as described above, and the remaining 80,549 shares will be available
for sale in the public market 90 days after the date of this Prospectus pursuant
to Rule 701. As of December 31, 1996, 378,295 shares were available for future
option grants under the 1994 Equity Incentive Plan.
The Company intends to file after the effective date of the Offering a
Registration Statement on Form S-8 to register an aggregate of 748,619 shares of
Common Stock reserved for issuance under the 1994 Equity Incentive Plan. Such
Registration Statement will become effective automatically upon filing. Shares
issued under the 1994 Equity Incentive Plan, after the filing of the
Registration Statement on Form S-8, may be sold in the open market, subject, in
the case of certain holders, to the Rule 144 limitations applicable to
affiliates, the above-referenced lock-up agreements and vesting restrictions
imposed by the Company.
At the completion of the Offering, certain stockholders will be entitled to
certain rights with respect to the registration of shares for resale under the
Securities Act. See "Description of Capital Stock."
56
<PAGE> 58
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
underwriters (the "Underwriters") named below, for whom Vector Securities and
EVEREN Securities, Inc. are acting as representatives (the "Representatives"),
have severally agreed to purchase, subject to the terms and conditions of the
Underwriting Agreement, and the Company has agreed to sell to the Underwriters,
the following respective number of shares of Common Stock.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
----------------------------------------------------------------- ---------
<S> <C>
Vector Securities International, Inc. ...........................
EVEREN Securities, Inc. .........................................
---------
Total....................................................... 2,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent, including the absence
of any material adverse change in the Company's business and the receipt of
certain certificates, opinions and letters from the Company and its counsel and
independent auditors. The nature of the Underwriters' obligation is such that
they are committed to purchase all shares of Common Stock offered hereby if any
of such shares are purchased.
The Underwriters propose to offer the shares of Common Stock to the public
at the offering price set forth on the cover page of this Prospectus, and to
certain dealers at such price less a concession not in excess of $ per
share. The Underwriters may allow to selected dealers and such dealers may
reallow a concession not in excess of $ per share to certain other dealers.
After the initial public offering of the shares of Common Stock, the offering
price and other selling terms may be changed by the Representatives.
The Company has granted to the Underwriters an option, exercisable at any
time during the 30-day period after the date of this Prospectus, to purchase up
to an additional 300,000 shares of Common Stock at the initial public offering
price set forth on the cover page of this Prospectus, less underwriting
discounts and commissions. The Underwriters may exercise such option solely for
the purpose of covering over-allotments, if any, in connection with the
Offering. To the extent such option is exercised, each Underwriter will be
obligated, subject to certain conditions, to purchase approximately the same
percentage of such additional shares as the number of shares set forth next to
such Underwriter's name in the preceding table bears to the total number of
shares listed in the table.
The offering of the shares is made for delivery when, as and if accepted by
the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the Offering without notice. The Underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
In connection with the Offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Common Stock. Specifically, the Underwriters may over-allot the Offering,
creating a syndicate short position. In addition, the Underwriters may bid for
and purchase shares of Common Stock in the open market to cover syndicate short
positions or to stabilize the price of the Common Stock. Finally, the
underwriting syndicate may reclaim selling concessions from syndicate members in
the Offering, if the syndicate repurchases previously distributed Common Stock
in syndicate covering transactions, in stabilization transactions or otherwise.
Any of these activities may stabilize or maintain the market price of the Common
Stock above independent market levels. The Underwriters are not required to
engage in these activities, and may end any of these activities at any time.
The Representatives of the Underwriters have informed the Company that the
Underwriters do not intend to confirm sales to accounts over which they exercise
discretionary authority.
57
<PAGE> 59
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments that the Underwriters may be required to make in respect thereof.
The executive officers, directors and certain employees of the Company and
other stockholders have agreed that they will not, without the prior written
consent of Vector Securities, offer, sell or otherwise dispose of (i) any shares
of Common Stock, options or warrants to acquire shares of Common Stock, or
securities exchangeable for or convertible into shares of Common Stock for a
period of 180 days from the date of this Prospectus and (ii) in excess of 50
percent of such Common Stock, options or exchangeable securities, during the 90
days following such 180-day period. BI has agreed that it will not, without the
prior written consent of Vector Securities, offer, sell or otherwise dispose of
any shares of Common Stock for a period of 360 days from the date of this
Prospectus. The Company has agreed that it will not, without the prior written
consent of Vector Securities, offer, sell, contract to sell, grant any option to
purchase or otherwise dispose of any shares of Common Stock, options or warrants
to acquire shares of Common Stock or securities exchangeable for or convertible
into shares of Common Stock for a period of 180 days after the date of this
Prospectus, except for securities issued under its option plan or upon exercise
of currently outstanding warrants. See "Shares Eligible for Future Sale."
Prior to the Offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price for the shares of Common
Stock included in the Offering will be determined by negotiations between the
Company and the Representatives. Among the factors considered in determining
such price will be the history of and prospects for the Company's business and
the industry in which it competes, an assessment of the Company's management and
the present state of the Company's development, its past and present operations
and financial performance, the prospects for future earnings of the Company, the
present state of the Company's research programs, the current state of the
economy in the United States and the current level of economic activity in the
industry in which the Company competes and in related or comparable industries,
and the current prevailing condition in the securities markets, including
current market valuations of publicly traded companies that are comparable to
the Company.
Vector Securities has served as a financial advisor to the Company,
including advisory services in connection with the arrangement and negotiation
of the BI Agreement.
LEGAL MATTERS
Hale and Dorr LLP, Boston, Massachusetts will pass upon the validity of the
shares of Common Stock offered by the Company hereby for the Company. Skadden,
Arps, Slate, Meagher & Flom (Illinois), Chicago, Illinois, will pass upon
certain legal matters relating to the Offering for the Underwriters.
EXPERTS
The financial statements of Transcend Therapeutics, Inc. at December 31,
1995 and 1996, and for each of the three years in the period ended December 31,
1996 and for the period January 1, 1993 (commencement of operations) to December
31, 1996 appearing in this Prospectus and Registration Statement have been
audited by Ernst & Young LLP, independent auditors, as stated in their report
thereon (which contains an explanatory paragraph with respect to the Company's
ability to continue as a going concern) appearing elsewhere herein and are
included in reliance upon such report, given upon the authority of such firm as
experts in accounting and auditing.
The statements in this Prospectus under the captions "Risk
Factors -- Patents and Proprietary Rights; Third-Party Rights" and
"Business -- Patents and Proprietary Rights" relating to United States patent
matters have been reviewed and approved by Pennie & Edmonds LLP, New York, New
York,
58
<PAGE> 60
patent counsel to the Company, and have been included herein in reliance upon
the review and approval by such firm as experts in patent law.
ADDITIONAL INFORMATION
As a result of the Offering, the Company will become subject to the
information and reporting requirements of the Securities Exchange Act of 1934,
as amended, and in accordance therewith will file periodic reports, proxy
statements and other information with the Securities and Exchange Commission
(the "Commission"). The Company intends to furnish to its stockholders annual
reports containing financial statements audited by an independent public
accounting firm and will make available copies of quarterly reports containing
unaudited financial statements for the first three quarters of each fiscal year.
The Company has filed with the Commission, Washington, D.C. 20549, a
Registration Statement (which term shall include all amendments, exhibits and
schedules thereto) on Form S-1 under the Securities Act with respect to the
shares of Common Stock offered hereby. This Prospectus, which constitutes a part
of the Registration Statement, does not contain all of the information set forth
in the Registration Statement, certain parts of which are omitted in accordance
with the rules and regulations of the Commission, to which Registration
Statement reference is hereby made. Statements made in this Prospectus as to the
contents of any contract, agreement or other document referred to are not
necessarily complete. With respect to each such contract, agreement or other
document filed as an exhibit to the Registration Statement, reference is made to
the exhibit for a more complete description of the matter involved, and each
such statement shall be deemed qualified in its entirety by such reference. The
Registration Statement and the exhibits thereto may be inspected and copied at
prescribed rates at the public reference facilities maintained by the Commission
at N.W., Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549 and at the regional offices of the Commission located at Seven World Trade
Center, 13th Floor, New York, New York 10048 and 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511. In addition, the Company is required to file
electronic versions of these documents with the Commission through the
Commission's Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system.
The Commission maintains a World Wide Web site at http://www.sec.gov that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission.
59
<PAGE> 61
TRANSCEND THERAPEUTICS, INC.
(A Company in the Development Stage)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Auditors......................................................... F-2
Balance Sheets......................................................................... F-3
Statements of Operations............................................................... F-4
Statements of Redeemable Preferred Stock and Stockholders' Deficit..................... F-5
Statements of Cash Flows............................................................... F-6
Notes to Financial Statements.......................................................... F-7
</TABLE>
F-1
<PAGE> 62
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Transcend Therapeutics, Inc.
We have audited the accompanying balance sheets of Transcend Therapeutics,
Inc. (a company in the development stage) as of December 31, 1996 and 1995, and
the related statements of operations, redeemable preferred stock and
stockholders' deficit, and cash flows for each of the three years in the period
ended December 31, 1996 and the period January 1, 1993 (commencement of
operations) to December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Transcend Therapeutics, Inc.
(a company in the development stage) at December 31, 1996 and 1995, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1996 and the period January 1, 1993 (commencement of
operations) to December 31, 1996 in conformity with generally accepted
accounting principles.
As discussed in Note 1, the Company is a development-stage company with a
net capital deficiency that has not and will not achieve sufficient revenues to
support future operations without additional financing. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are discussed in Note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
ERNST & YOUNG LLP
Boston, Massachusetts
January 10, 1997
F-2
<PAGE> 63
TRANSCEND THERAPEUTICS, INC.
(A Company in the Development Stage)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................... $ 639,626 $ 1,276,305
Prepaid expenses and other current assets............................... 39,579 38,282
Other assets............................................................ 41,328
------------ ------------
Total current assets...................................................... 720,533 1,314,587
Property and equipment, net............................................... 46,108 52,706
Other assets:
Deferred offering costs................................................. 409,548
Patents and licenses, net............................................... 389,576 443,795
Other assets............................................................ 54,600
------------ ------------
$ 1,565,765 $ 1,865,688
============ ============
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses................................... $ 624,535 $ 404,329
Interest payable to related party....................................... 177,534
------------ ------------
Total current liabilities................................................. 624,535 581,863
Senior Secured Convertible Note........................................... 2,000,000
Redeemable Preferred Stock:
Series A Redeemable Convertible Preferred Stock, 12,991,000 shares
authorized, 9,916,330 and 6,500,000 shares issued and outstanding, in
1996 and 1995 respectively, par value $.01 (liquidation preference of
$9,140,187)........................................................... 9,140,187 6,500,000
Series B Redeemable Convertible Preferred Stock, 3,000,000 shares
authorized, 690,775 shares issued and outstanding, par value $.01
(liquidation preference of $1,036,163)................................ 1,036,163
Series C Redeemable Convertible Preferred Stock, 4,255,319 shares
authorized, issued and outstanding, par value $.01 (liquidation
preference of $10,000,000)............................................ 10,000,000
Redeemable Non-convertible Preferred Stock, 9,000 shares authorized,
issued and outstanding, par value $.01................................ 3,081,028
Stockholders' deficit:
Common Stock, par value $0.01, 25,000,000 shares authorized, 779,381 and
763,306 shares issued and outstanding in 1996 and 1995,
respectively.......................................................... 7,793 7,633
Series A Preferred Stock Warrants, par value $0.01, 1,625,000 warrant
shares authorized, 1,375,000, issued and outstanding in 1995.......... 13,750
Additional paid-in capital.............................................. 1,453,848 354,471
Deferred compensation................................................... (977,802)
Accretion of Redeemable Nonconvertible Preferred Stock.................. (2,591,904)
Deficit accumulated during the development stage........................ (19,718,959) (8,081,153)
------------ ------------
Total stockholders' deficit...................................... (19,235,120) (10,297,203)
------------ ------------
$ 1,565,765 $ 1,865,688
============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE> 64
TRANSCEND THERAPEUTICS, INC.
(A Company in the Development Stage)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD
JANUARY 1, 1993
YEARS ENDED DECEMBER 31 (COMMENCEMENT
--------------------------------------- OF OPERATIONS) TO
1996 1995 1994 DECEMBER 31, 1996
----------- ----------- ----------- -----------------
<S> <C> <C> <C> <C>
Research and development contract
revenues.............................. $ 6,095,000
Operating expenses:
Research and development.............. $ 1,967,794 $ 2,738,880 $ 2,626,644 11,831,707
General administration................ 1,834,179 1,645,038 1,114,998 6,219,500
----------- ----------- ----------- ------------
Total operating expenses................ 3,801,973 4,383,918 3,741,642 18,051,207
Other income (expense):
Interest income....................... 30,109 111,465 138,750 280,324
Interest expense...................... (355,066) (177,534) (532,200)
----------- ----------- ----------- ------------
(324,957) (66,069) 138,750 (251,876)
----------- ----------- ----------- ------------
Net loss................................ $(4,126,930) $(4,449,987) $(3,602,892) $ (12,208,083)
----------- ----------- ----------- ============
Accretion of Redeemable Nonconvertible
Preferred Stock....................... (5,080,496) (1,481,088) (1,110,816)
----------- ----------- -----------
Net loss to common stockholders......... (9,207,426) (5,931,075) (4,713,708)
=========== =========== ===========
Pro forma net loss per common share..... $ (2.35)
===========
Pro forma weighted average common shares
outstanding........................... 3,921,765
===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 65
TRANSCEND THERAPEUTICS, INC.
(A Company in the Development Stage)
STATEMENTS OF REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
SERIES C
CONVERTIBLE
SERIES A SERIES B PREFERRED
CONVERTIBLE PREFERRED CONVERTIBLE PREFERRED PREFERRED
PREFERRED STOCK PREFERRED STOCK STOCK
---------------------- ---------------------- ---------
NUMBER OF NUMBER OF NUMBER OF
SHARES AMOUNT SHARES AMOUNT SHARES
--------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Issuance of Common Stock, December 1992 ($.02/share)................
Purchase of Treasury Stock..........................................
Net loss............................................................
Balance at December 31, 1993........................................
April 1994:
Issuance of Common Stock from treasury for services................
Issuance of Series A Redeemable Convertible Preferred Stock
($1.00/share)..................................................... 6,500,000 $6,500,000
Issuance of Redeemable Nonconvertible Preferred Stock for
technology
($1,000/share)....................................................
Issuance of Common Stock for technology ($.50/share)...............
Issuance of Series A Preferred Stock Warrants ($.01/share).........
Accretion of Redeemable Nonconvertible Preferred Stock..............
Net loss............................................................
--------- --------- ------- ---------- ---------
Balance at December 31, 1994........................................ 6,500,000 6,500,000
Cancellation of Cornell's common shares.............................
Extinguishment of Series A Preferred Warrants.......................
Conversion of options to common shares..............................
Accretion of Redeemable Nonconvertible Preferred Stock..............
Net loss............................................................
--------- --------- ------- ---------- ---------
Balance at December 31, 1995........................................ 6,500,000 6,500,000
Issuance of Series A Redeemable Convertible Preferred Stock in
January 1996....................................................... 130,000 130,000
Issuance of Series A Redeemable Convertible Preferred Stock in lieu
of interest in January, May and September 1996 ($1.00/share)....... 496,437 496,437
Issuance of Series B Redeemable Convertible Preferred Stock in lieu
of interest in September 1996 ($1.50/share)........................ 24,109 $ 36,164
Conversion of Senior Secured Convertible Note to Series B Redeemable
Convertible Preferred Stock in September 1996 ($1.50/share)........ 666,666 999,999
Conversion of Redeemable Convertible Senior Secured Convertible Note
to Series A Redeemable Convertible Preferred Stock in September
1996 ($1.00/share)................................................. 2,000,000 2,000,000
Accretion of Redeemable Nonconvertible Preferred Stock..............
Issuance of Series C Redeemable Convertible Preferred Stock in
September 1996 ($2.35/share)....................................... 851,064
Conversion of Redeemable Nonconvertible Preferred Stock to Series C
Redeemable Convertible Preferred Stock in September 1996
($2.35/share)...................................................... 3,404,255
Conversion of Series A Redeemable Convertible Warrants to Series A
Preferred Stock in September 1996 ($.02/share)..................... 789,893 13,750
Exercise of stock options...........................................
Grant of stock options..............................................
Amortization of deferred compensation expense.......................
Net loss............................................................
--------- --------- ------- ---------- ---------
Balance at December 31, 1996........................................ 9,916,330 $9,140,187 690,775 $1,036,163 4,255,319
========= ========= ======= ========== =========
See accompanying notes.
<CAPTION>
SERIES C REDEEMABLE
CONVERTIBLE NONCONVERTIBLE
PREFERRED PREFERRED STOCK COMMON STOCK
PREFERRED ----------------------- ------------------
STOCK NUMBER OF NUMBER OF
AMOUNT SHARES AMOUNT SHARES AMOUNT
----------- --------- ----------- --------- ------
<S> <C>
Issuance of Common Stock, December 1992 ($.02/share)................ 44,109 $ 441
Purchase of Treasury Stock..........................................
Net loss............................................................
------ ------
Balance at December 31, 1993........................................ 44,109 441
April 1994:
Issuance of Common Stock from treasury for services................
Issuance of Series A Redeemable Convertible Preferred Stock
($1.00/share).....................................................
Issuance of Redeemable Nonconvertible Preferred Stock for
technology
($1,000/share).................................................... 9,000 $ 489,124
Issuance of Common Stock for technology ($.50/share)............... 715,025 7,150
Issuance of Series A Preferred Stock Warrants ($.01/share).........
Accretion of Redeemable Nonconvertible Preferred Stock.............. 1,110,816
Net loss............................................................
----------- ------ ---------- ------ ------
Balance at December 31, 1994........................................ 9,000 1,599,940 759,134 7,591
Cancellation of Cornell's common shares............................. (7,025) (70)
Extinguishment of Series A Preferred Warrants.......................
Conversion of options to common shares.............................. 11,197 112
Accretion of Redeemable Nonconvertible Preferred Stock.............. 1,481,088
Net loss............................................................
----------- ------ ---------- ------ ------
Balance at December 31, 1995........................................ 9,000 3,081,028 763,306 7,633
Issuance of Series A Redeemable Convertible Preferred Stock in
January 1996.......................................................
Issuance of Series A Redeemable Convertible Preferred Stock in lieu
of interest in January, May and September 1996 ($1.00/share).......
Issuance of Series B Redeemable Convertible Preferred Stock in lieu
of interest in September 1996 ($1.50/share)........................
Conversion of Senior Secured Convertible Note to Series B Redeemable
Convertible Preferred Stock in September 1996 ($1.50/share)........
Conversion of Redeemable Convertible Senior Secured Convertible Note
to Series A Redeemable Convertible Preferred Stock in September
1996 ($1.00/share).................................................
Accretion of Redeemable Nonconvertible Preferred Stock.............. 999,734
Issuance of Series C Redeemable Convertible Preferred Stock in
September 1996 ($2.35/share)....................................... $ 2,000,000
Conversion of Redeemable Nonconvertible Preferred Stock to Series C
Redeemable Convertible Preferred Stock in September 1996
($2.35/share)...................................................... 8,000,000 (9,000) (4,080,762)
Conversion of Series A Redeemable Convertible Warrants to Series A
Preferred Stock in September 1996 ($.02/share).....................
Exercise of stock options........................................... 16,075 160
Grant of stock options..............................................
Amortization of deferred compensation expense.......................
Net loss............................................................
----------- ------ ---------- ------ ------
Balance at December 31, 1996........................................ $10,000,000 -- $ -- 779,381 $7,793
=========== ====== ========== ====== ======
See accompanying notes.
<CAPTION>
CUMULATIVE
ACCRETION OF
SERIES A PREFERRED DIVIDEND ON
STOCK WARRANTS REDEEMABLE
--------------------- ADDITIONAL NONCONVERTIBLE
NUMBER OF PAID-IN PREFERRED
WARRANTS AMOUNT CAPITAL STOCK
---------- -------- ---------- --------------
Issuance of Common Stock, December 1992 ($.02/share)................ $ (436)
Purchase of Treasury Stock..........................................
Net loss............................................................
--------
Balance at December 31, 1993........................................ (436)
April 1994:
Issuance of Common Stock from treasury for services................
Issuance of Series A Redeemable Convertible Preferred Stock
($1.00/share).....................................................
Issuance of Redeemable Nonconvertible Preferred Stock for
technology
($1,000/share)....................................................
Issuance of Common Stock for technology ($.50/share)............... 350,363
Issuance of Series A Preferred Stock Warrants ($.01/share)......... 1,625,000 $ 16,250
Accretion of Redeemable Nonconvertible Preferred Stock.............. $ (472,500)
Net loss............................................................
--------- ------- -------- -----------
Balance at December 31, 1994........................................ 1,625,000 16,250 349,927 (472,500)
Cancellation of Cornell's common shares............................. (3,442)
Extinguishment of Series A Preferred Warrants....................... (250,000) (2,500) 2,500
Conversion of options to common shares.............................. 5,486
Accretion of Redeemable Nonconvertible Preferred Stock.............. (630,000)
Net loss............................................................
--------- ------- -------- -----------
Balance at December 31, 1995........................................ 1,375,000 13,750 354,471 (1,102,500)
Issuance of Series A Redeemable Convertible Preferred Stock in
January 1996.......................................................
Issuance of Series A Redeemable Convertible Preferred Stock in lieu
of interest in January, May and September 1996 ($1.00/share).......
Issuance of Series B Redeemable Convertible Preferred Stock in lieu
of interest in September 1996 ($1.50/share)........................
Conversion of Senior Secured Convertible Note to Series B Redeemable
Convertible Preferred Stock in September 1996 ($1.50/share)........
Conversion of Redeemable Convertible Senior Secured Convertible Note
to Series A Redeemable Convertible Preferred Stock in September
1996 ($1.00/share).................................................
Accretion of Redeemable Nonconvertible Preferred Stock.............. (425,250)
Issuance of Series C Redeemable Convertible Preferred Stock in
September 1996 ($2.35/share).......................................
Conversion of Redeemable Nonconvertible Preferred Stock to Series C
Redeemable Convertible Preferred Stock in September 1996
($2.35/share)...................................................... 1,527,750
Conversion of Series A Redeemable Convertible Warrants to Series A
Preferred Stock in September 1996 ($.02/share)..................... (1,375,000) (13,750)
Exercise of stock options........................................... 7,877
Grant of stock options.............................................. 1,091,500
Amortization of deferred compensation expense.......................
Net loss............................................................
--------- ------- -------- -----------
Balance at December 31, 1996........................................ -- $ -- $1,453,848 $ --
========= ======= ======== ===========
See accompanying notes.
<CAPTION>
CUMULATIVE
ACCRETION OF
LIQUIDATION
PREFERENCE ON DEFICIT TREASURY
REDEEMABLE ACCUMULATED STOCK
NONCONVERTIBLE DURING ---------
PREFERRED DEFERRED DEVELOPMENT NUMBER OF
STOCK COMPENSATION STAGE SHARES
-------------- ------------ ------------ ---------
Issuance of Common Stock, December 1992 ($.02/share)................
Purchase of Treasury Stock.......................................... 4,959
Net loss............................................................ $ (28,274)
------------ -------
Balance at December 31, 1993........................................ (28,274) 4,959
April 1994:
Issuance of Common Stock from treasury for services................ (4,959)
Issuance of Series A Redeemable Convertible Preferred Stock
($1.00/share).....................................................
Issuance of Redeemable Nonconvertible Preferred Stock for
technology
($1,000/share)....................................................
Issuance of Common Stock for technology ($.50/share)...............
Issuance of Series A Preferred Stock Warrants ($.01/share).........
Accretion of Redeemable Nonconvertible Preferred Stock.............. $ (638,316)
Net loss............................................................ (3,602,892)
----------- --------- ------------ -------
Balance at December 31, 1994........................................ (638,316) (3,631,166)
Cancellation of Cornell's common shares.............................
Extinguishment of Series A Preferred Warrants.......................
Conversion of options to common shares..............................
Accretion of Redeemable Nonconvertible Preferred Stock.............. (851,088)
Net loss............................................................ (4,449,987)
----------- --------- ------------ -------
Balance at December 31, 1995........................................ (1,489,404) (8,081,153) --
Issuance of Series A Redeemable Convertible Preferred Stock in
January 1996.......................................................
Issuance of Series A Redeemable Convertible Preferred Stock in lieu
of interest in January, May and September 1996 ($1.00/share).......
Issuance of Series B Redeemable Convertible Preferred Stock in lieu
of interest in September 1996 ($1.50/share)........................
Conversion of Senior Secured Convertible Note to Series B Redeemable
Convertible Preferred Stock in September 1996 ($1.50/share)........
Conversion of Redeemable Convertible Senior Secured Convertible Note
to Series A Redeemable Convertible Preferred Stock in September
1996 ($1.00/share).................................................
Accretion of Redeemable Nonconvertible Preferred Stock.............. (574,484)
Issuance of Series C Redeemable Convertible Preferred Stock in
September 1996 ($2.35/share).......................................
Conversion of Redeemable Nonconvertible Preferred Stock to Series C
Redeemable Convertible Preferred Stock in September 1996
($2.35/share)...................................................... 2,063,888 (7,510,876)
Conversion of Series A Redeemable Convertible Warrants to Series A
Preferred Stock in September 1996 ($.02/share).....................
Exercise of stock options...........................................
Grant of stock options.............................................. $(1,091,500)
Amortization of deferred compensation expense....................... 113,698
Net loss............................................................ (4,126,930)
----------- --------- ------------ -------
Balance at December 31, 1996........................................ $ -- $ (977,802) $(19,718,959) --
=========== ========= ============ =======
See accompanying notes.
<CAPTION>
TREASURY
STOCK
------
AMOUNT
------
Issuance of Common Stock, December 1992 ($.02/share)................
Purchase of Treasury Stock.......................................... $ (2)
Net loss............................................................
----
Balance at December 31, 1993........................................ (2)
April 1994:
Issuance of Common Stock from treasury for services................ 2
Issuance of Series A Redeemable Convertible Preferred Stock
($1.00/share).....................................................
Issuance of Redeemable Nonconvertible Preferred Stock for
technology
($1,000/share)....................................................
Issuance of Common Stock for technology ($.50/share)...............
Issuance of Series A Preferred Stock Warrants ($.01/share).........
Accretion of Redeemable Nonconvertible Preferred Stock..............
Net loss............................................................
----
Balance at December 31, 1994........................................
Cancellation of Cornell's common shares.............................
Extinguishment of Series A Preferred Warrants.......................
Conversion of options to common shares..............................
Accretion of Redeemable Nonconvertible Preferred Stock..............
Net loss............................................................
----
Balance at December 31, 1995........................................ --
Issuance of Series A Redeemable Convertible Preferred Stock in
January 1996.......................................................
Issuance of Series A Redeemable Convertible Preferred Stock in lieu
of interest in January, May and September 1996 ($1.00/share).......
Issuance of Series B Redeemable Convertible Preferred Stock in lieu
of interest in September 1996 ($1.50/share)........................
Conversion of Senior Secured Convertible Note to Series B Redeemable
Convertible Preferred Stock in September 1996 ($1.50/share)........
Conversion of Redeemable Convertible Senior Secured Convertible Note
to Series A Redeemable Convertible Preferred Stock in September
1996 ($1.00/share).................................................
Accretion of Redeemable Nonconvertible Preferred Stock..............
Issuance of Series C Redeemable Convertible Preferred Stock in
September 1996 ($2.35/share).......................................
Conversion of Redeemable Nonconvertible Preferred Stock to Series C
Redeemable Convertible Preferred Stock in September 1996
($2.35/share)......................................................
Conversion of Series A Redeemable Convertible Warrants to Series A
Preferred Stock in September 1996 ($.02/share).....................
Exercise of stock options...........................................
Grant of stock options..............................................
Amortization of deferred compensation expense.......................
Net loss............................................................
----
Balance at December 31, 1996........................................ $ --
====
See accompanying notes.
</TABLE>
F-5
<PAGE> 66
TRANSCEND THERAPEUTICS, INC.
(A Company in the Development Stage)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD
JANUARY 1, 1993
DECEMBER 31, (COMMENCEMENT
--------------------------------------- OF OPERATIONS) TO
1996 1995 1994 DECEMBER 31, 1996
----------- ----------- ----------- -----------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss............................... $(4,126,930) $(4,449,987) $(3,602,892) $ (12,208,083)
Adjustments to reconcile net loss to
cash provided by operating
activities:
Depreciation........................ 13,230 10,107 8,290 33,814
Amortization........................ 54,219 54,219 40,664 149,102
Issuance of Preferred Stock in lieu
of interest payments.............. 532,601 532,601
Amortization of deferred
compensation expense.............. 113,698 113,698
Loss on sale of property and
equipment......................... 5,408 5,408
Forgiveness of loan due to related
party............................. 304,446 304,446
Change in operating assets and
liabilities:
Prepaid expenses and other current
assets......................... (1,297) 161,689 (193,309) (39,579)
Other assets...................... 13,272 3,513 (50,086) (37,815)
Accounts payable and accrued
expenses....................... 145,664 83,811 233,014 549,993
Interest payable to related
party.......................... (177,534) 142,578 (13,208)
----------- ----------- ----------- ------------
Net cash used in operating
activities.......................... (3,433,077) (3,988,662) (3,273,081) (10,596,415)
INVESTING ACTIVITIES
Purchase of equipment and
improvements........................ (7,417) (29,013) (17,823) (86,877)
Proceeds from sale of equipment........ 784 764 1,548
----------- ----------- ----------- ------------
Net cash used in investing
activities.......................... (6,633) (28,249) (17,823) (85,329)
FINANCING ACTIVITIES
Proceeds from issuance of debt......... 1,000,000 2,000,000 170,000 3,170,000
Payment on note payable to related
party............................... (170,000) (170,000)
Offering costs......................... (335,006) (335,006)
Issuance of Series A Preferred Stock
Warrants............................ 16,250 16,250
Issuance of Series A Redeemable
Convertible Preferred Stock......... 130,000 6,500,000 6,630,000
Issuance of Series C Redeemable
Convertible Preferred Stock......... 2,000,000 2,000,000
Proceeds from exercise of stock
options............................. 8,037 2,086 10,128
Purchase of Treasury Stock............. (2)
----------- ----------- ----------- ------------
Net cash provided by financing
activities.......................... 2,803,031 1,832,086 6,686,250 11,321,370
----------- ----------- ----------- ------------
Increase (decrease) in cash and cash
equivalents............................ (636,679) (2,184,825) 3,395,346 639,626
Cash and cash-equivalents at beginning of
period................................. 1,276,305 3,461,130 65,784
----------- ----------- ----------- ------------
Cash and cash-equivalents at end of
period................................. $ 639,626 $ 1,276,305 $ 3,461,130 $ 639,626
=========== =========== =========== ============
</TABLE>
See accompanying notes.
F-6
<PAGE> 67
TRANSCEND THERAPEUTICS, INC.
(A Company in the Development Stage)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. BASIS OF PRESENTATION
COMPANY
Transcend Therapeutics, Inc. (the "Company") was incorporated on December
23, 1992, and began operations in January 1993. The Company is a
development-stage enterprise, as defined in Statement of Financial Accounting
Standards No. 7, and is devoting its efforts to develop novel pharmaceuticals
for the treatment of diseases caused by oxidative stress and resultant tissue
damage, with a particular therapeutic focus on critical care. In 1997, the
Company plans to begin a pivotal Phase III clinical trial of its lead product
candidate, Procysteine(R) , to determine its safety and efficacy in the
treatment of acute respiratory distress syndrome ("ARDS").
GOING CONCERN
The financial statements have been prepared on a going-concern basis. For
the current year ended, the Company recorded a net loss of $4,126,930, as funds
were primarily expended by the Company on the ongoing Procysteine(R) clinical
development program for the treatment of ARDS. At December 31, 1996, the Company
had a net capital deficiency and has not and will not achieve sufficient revenue
to support future operations without additional financing. Management believes
that to continue as a going concern, the Company will require additional funding
to complete both its clinical development program and, ultimately, the marketing
of its products.
Management is proceeding with plans to secure new funds for the ongoing
clinical development of Procysteine(R) through: (1) funding provided by a
worldwide collaboration with a pharmaceutical marketing partner for intravenous
Procysteine(R); and (2) a $1 million private financing by existing corporate and
venture capital shareholders of the Company; and (3) an initial public offering
of the Company's Common Stock in 1997. The 1996 financial statements do not
include any adjustments for the planned new fundraising.
RECAPITALIZATION
In August 1996, the Company's Board of Directors approved a one-for-five
reverse stock split of its Common Stock. There was a delay in filing the
necessary amendments to the Company's charter and the split was not effective
until February 1997. All common share and per share amounts have been adjusted
retroactively to reflect the stock split.
On April 5, 1994, the Company completed a recapitalization in which
25,000,000 shares of common stock, 8,125,000 shares of Series A Redeemable
Convertible Preferred Stock, 9,000 shares of Redeemable Nonconvertible Preferred
Stock and 1,625,000 warrants to purchase 1,625,000 shares of Series A Redeemable
Convertible Preferred Stock were authorized. All previously issued and
outstanding shares of common stock were exchanged and reissued for 44,109 shares
of common stock, effected in the form of a stock dividend. The accompanying
financial statements reflect the recapitalization and, accordingly, all
financial statements have been restated on a retroactive basis for all periods
presented.
CONTRACT RESEARCH FEE
During the year ended December 31, 1993, the Company received a one-time
contract research fee of $6,095,400 from Clintec Nutrition Company ("Clintec"),
a joint venture of Baxter Healthcare Corporation ("Baxter") and Nestle SA
("Nestle"), for various research and development services. Upon the closing of
the first venture capital financing of $6,500,000 on April 5, 1994, the Company
F-7
<PAGE> 68
TRANSCEND THERAPEUTICS, INC.
(A Company in the Development Stage)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
acquired Procysteine(R) and related technologies from Clintec in exchange for
680,000 shares of Common Stock and 9,000 shares of Redeemable Nonconvertible
Preferred Stock (see Note 6).
2. SIGNIFICANT ACCOUNTING POLICIES
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 AND CASH EQUIVALENTS
The Company considers all investments with an original maturity of three
months or less on their acquisition date to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and are depreciated using the
straight-line method over the estimated useful lives of the related assets. The
cost and accumulated depreciation of property and equipment at December 31 are
as follows:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Furniture and equipment.................................. $75,651 $69,020
Less accumulated depreciation............................ 29,543 16,314
-------- --------
Furniture and equipment, net............................. $46,108 $52,706
======== ========
</TABLE>
INTANGIBLE ASSETS
Acquired patents and licenses are recorded at cost and amortized using the
straight-line method over the estimated useful lives of the related assets,
subject to the maximum legal life of the patents and/or licenses. The costs of
internally generated patents or patent applications are expensed in the period
incurred as research and development expenses.
FAIR VALUE OF FINANCIAL INSTRUMENTS
In 1996, the Company adopted SFAS No. 107, "Disclosures about the Fair
Value of Financial Instruments," which requires the disclosure of the fair value
of financial instruments. At December 31, 1996, the Company's financial
instruments consist of cash and cash equivalents, accounts payable and accrued
expenses, and mandatorily redeemable preferred stock. Fair value of issued
equity instruments is based upon negotiated prices and includes cash and the
fair value of other consideration received.
MANDATORY REDEEMABLE PREFERRED STOCK
Mandatorily redeemable preferred stock is recorded upon issuance at fair
value, net of issuance costs, and periodically accreted to redemption value
using the interest method.
F-8
<PAGE> 69
TRANSCEND THERAPEUTICS, INC.
(A Company in the Development Stage)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
REVENUE RECOGNITION
Research and development contract revenue is recognized as earned and
represents, in 1993, reimbursement of the Company's expenditures pursuant to the
terms of an agreement with Clintec Nutrition Company whereby the Company was
reimbursed $6,095,000 for expenditures it incurred.
STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No.
25 "Accounting for Stock Issued to Employees" (APB 25) in accounting for its
stock-based compensation plans, rather than the alternative fair value
accounting method provided for under Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" (FAS 123). Under APB 25, when
the exercise price of options granted to employees and outside directors under
these plans equals the market price of the underlying stock on the date of
grant, no compensation expense is required.
As required by FAS 123, the Company accounts for stock based compensation
issued to non-employee suppliers of goods and services utilizing the fair value
method provided for under FAS 123.
PRO FORMA NET LOSS PER COMMON SHARE (UNAUDITED)
Pro forma net loss per common share is computed using the weighted average
number of common shares, convertible preferred shares assuming conversion at
date of issuance and dilutive equivalent shares from stock options and warrants
using the treasury stock method. Pursuant to the Securities and Exchange
Commission Staff Accounting Bulletin No. 83, shares and equivalent shares issued
by the Company at prices below the assumed public offering price during the
twelve-month period prior to the proposed offering have been included in the
calculation as if they were outstanding for all periods presented (using the
treasury stock method and using the assumed midpoint of the initial public
offering price range.) Historical loss per share has not been presented since
such amounts are not deemed meaningful.
The accretion of Redeemable Nonconvertible Preferred Stock is added to the
Company's net loss in order to arrive at net loss available to common
stockholders in the calculation of net loss per common share.
DEFERRED OFFERING COSTS
The Company defers specific incremental costs directly attributable to its
public offering incurred prior to the offering, which will be charged, against
equity at the completion of the offering.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board (FAS) issued
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of" (FAS 121), which requires impairment losses
to be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be generated
by those assets are less than the assets' carrying amount. FAS 121 also
addresses the accounting for long-lived assets that are expected to be disposed
of. The Company adopted FAS 121 in the first quarter of 1996. The adoption of
this Statement had no impact on the financial position or results of operations
of the Company as no indicators of impairment currently exist.
F-9
<PAGE> 70
TRANSCEND THERAPEUTICS, INC.
(A Company in the Development Stage)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. ACCRUED LIABILITIES
Included in accounts payable and accrued expenses were the following
accrued expenses at December 31:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Accrued vacation....................................... $ 53,000 $ 33,000
Accrued clinical costs................................. 58,000 177,000
Accrued other.......................................... 64,000 98,000
Accrued offering costs................................. 105,000
Accrued patent costs................................... 20,000
-------- --------
Total accrued expenses....................... $300,000 $308,000
======== ========
</TABLE>
4. SENIOR SECURED CONVERTIBLE NOTES
On September 13, 1995, the Company sold Series A Notes in the aggregate
principal amount of $2,000,000 to certain institutional investors. Subsequently,
on May 29, 1996, the Company issued Series B Convertible Notes in the aggregate
principal amount of $1,000,000 to certain institutional investors. The Series A
Notes were convertible into shares of Series A Preferred Stock at one share per
$5.00 of principal outstanding. The Series B Notes were convertible into shares
of Series B Preferred stock at one share per $7.50 of principal outstanding.
Prior to conversion, each note was to mature on January 15, 1997, bearing
interest of 30% per annum, payable every four months beginning January 13, 1996.
Interest payments were made in the form of Series A and B Convertible Preferred
Stock. All principal and accrued interest were converted into shares of Series A
and B Convertible Preferred Stock upon the closing of the issuance of the Series
C Convertible Preferred Stock as described in Note 6.
5. INCOME TAXES
The Company accounts for income taxes using the liability method, whereby
tax rates are applied to cumulative temporary differences based on when and how
they are expected to affect the tax return. Deferred tax assets and liabilities
are adjusted for tax rate changes.
At December 31, 1996, the Company has available net operating tax loss
carry-forwards, for both federal and Massachusetts tax purposes, of
approximately $11,900,000. These losses are available to offset future income of
the company and will expire for both federal and Massachusetts tax purposes
through the year 2011 and 2001, respectively. The utilization of these tax
losses and tax credit carry-forwards may be subject to limitation as a result of
any past or potential ownership changes as defined by Sections 382 and 383 of
the Internal Revenue Code.
In addition, the Company has approximately $400,000 and $375,000,
respectively, of federal and state research and development tax credit
carry-forwards. These credits are available, subject to limitations, to offset
future tax liabilities of the Company and will expire through 2011.
F-10
<PAGE> 71
TRANSCEND THERAPEUTICS, INC.
(A Company in the Development Stage)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes reflect the net tax effect of temporary differences
between carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Due to the Company's net
loss position, a valuation allowance for 100% of its deferred tax assets has
been established. The Company has the following deferred tax assets as of
December 31:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................ $ 4,760,000 $ 3,213,346
Vacation accrual................................ 20,000 7,685
R&D tax credit.................................. 775,000 650,000
----------- -----------
Total deferred tax assets......................... 5,555,000 3,871,031
Valuation allowance............................... (5,555,000) (3,871,031)
----------- -----------
Deferred income taxes, net........................ $ -0- $ -0-
=========== ===========
</TABLE>
The net increase during 1995 and 1996 in the total valuation allowance was
$1,683,969 and $1,775,463, respectively, as a result of the unbenefitted net
loss in the respective years.
6. STOCKHOLDERS' EQUITY
COMMON STOCK
On April 5, 1994, the Company acquired a direct license from Cornell
Research Foundation ("Cornell") to the Procysteine(R) and related technologies
for the issue of 35,025 shares of Common Stock. In accordance with the same
agreement, the Company issued 680,000 shares of Common Stock to Clintec as part
consideration for the acquisition of the Procysteine(R) and related
technologies. The technology has been recorded at the Common Stock's fair value
of $.50 per share at the time of the transaction.
In relation to the acquisition of Covered Technology from Clintec, Clintec
agreed on April 5, 1994 to forgive and forever discharge the Company from any
obligation to repay an outstanding loan of $304,446 due to Clintec. The Company
recorded this amount as a contribution to capital during 1994.
The Company has reserved 2,977,485 shares of Common Stock for issuance upon
conversion of the Series A, B and C Redeemable Convertible Preferred Stock and
Common Stock Warrants, and 370,324 shares of Common Stock for issuance upon
exercise of stock options granted under the 1994 Equity Incentive Plan.
COMMON STOCK WARRANTS
On October 28, 1994, as additional consideration for the execution of the
lease on the office space, the Company issued Common Stock Warrants to purchase
5,000 shares of Common Stock, exercisable through October 28, 1999, at $5.00 per
share to the lessor.
SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK
During 1994, the Company sold 6,500,000 shares of Series A Redeemable
Convertible Preferred Stock ("Series A Stock") for $6,500,000. The Series A
Stock is convertible into shares of Common Stock, at a conversion price of $5.00
per share, and has a liquidation preference over the Nonconvertible Preferred
Stock and the Common Stock of up to $1.00 per share plus any accrued, but
unpaid, dividends. In addition, the Series A Stock will participate on an
as-converted basis with Common Stock in any dividends declared and in remaining
assets in liquidation. The Series A Stock is redeemable, at
F-11
<PAGE> 72
TRANSCEND THERAPEUTICS, INC.
(A Company in the Development Stage)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
the option of the holder, in certain circumstances. The holders of Series A
stock are entitled to vote at a meeting of the shareholders on an as-converted
basis.
SERIES B AND C REDEEMABLE CONVERTIBLE PREFERRED STOCK
On September 3, 1996, the Company sold an aggregate of 851,064 shares of
its Series C Convertible Preferred Stock to a group of investors for $2.0
million. As part of the same transaction, the sole holder (Clintec) of 9,000
shares of the Company's Redeemable Nonconvertible Preferred Stock exchanged such
shares for 3,404,255 shares of Series C Convertible Preferred Stock. The Series
C Stock is convertible into shares of Common Stock, at a conversion price of
$11.75 per share. In addition, $3.1 million in aggregate principal amount of,
and interest on, the Series A Notes and Series B Notes were converted into an
aggregate of 2,098,631 shares of Series A Convertible Preferred Stock and
690,775 shares of Series B Convertible Preferred Stock. The notes were scheduled
to mature on January 15, 1997, bearing interest of 30% per annum (see Note 4).
The holders of Series B and C Redeemable Convertible Preferred Stock are
entitled to receive dividends and to vote at each meeting of the stockholders at
a rate equal to the amount they would have received as if the shares were
converted into comparable shares of common stock.
The Series B and C Preferred Stock are convertible into common stock of the
Company at conversion prices of $7.50 and $11.75, respectively, subject to
adjustment should the Company have a stock split or stock dividend or issue
additional securities that are convertible into shares of Common Stock at
conversion prices of less than $7.50 and $11.75, respectively.
The Series B and C Preferred Stock are redeemable, at the option of the
holder, in certain circumstances and have a liquidation preference over Common
Stock holders of up to $1.50 and $2.35 per share, respectively, plus any
accrued, but unpaid dividends. The Series A, B and C Preferred Stock share
ratably in any liquidation and on an as converted basis with common stock in
remaining assets.
In addition, the Company may require all of the outstanding shares of
Preferred Stock to be converted into shares of common stock upon consummation of
a public offering for the sale of the Company's common stock at a price at the
then current conversion price, in an offering not less than $10,000,000 in
proceeds.
SERIES A REDEEMABLE CONVERTIBLE PREFERRED WARRANT SHARES
In conjunction with the issuance of the Series A Redeemable Convertible
Preferred Stock, the Company sold 1,625,000 warrants to purchase Series A
Redeemable Convertible Preferred Stock at a price per share equal to the lesser
of (i) the per share purchase price of the securities issued in the next
financing round or (ii) $5.00. During 1995, 250,000 warrant shares were canceled
by the Company in accordance with the terms and conditions stipulated in the
April 4, 1994 Series A Preferred Stock Purchase Warrants agreement, as a result
of not participating in the private placement offering in September 1995 (see
Note 4).
In connection with the issuance of the Series C Convertible Preferred
Stock, the holders of the Series A Preferred Stock Warrants (Series A Warrants)
elected to surrender the Series A Warrants and receive Series A Convertible
Preferred Stock equivalent to the difference between the deemed fair market
value of the Series C Preferred Stock ($2.35/share) and the exercise price of
the Series A Warrants ($1.00/share) multiplied by the outstanding Series A
Warrants (1,375,000). The resulting aggregate fair market value of the Series A
Preferred Stock received converted into 789,983 of Series A Convertible
Preferred Stock and were issued upon the net exercise of such warrants.
F-12
<PAGE> 73
TRANSCEND THERAPEUTICS, INC.
(A Company in the Development Stage)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
REDEEMABLE NONCONVERTIBLE PREFERRED STOCK
The Company had issued 9,000 shares of Redeemable Nonconvertible Preferred
Stock to Clintec as part consideration for the acquisition of the Procysteine(R)
and related technologies at its fair value of approximately $500,000 on April 5,
1994. The Redeemable Nonconvertible Preferred Stock was redeemable, upon certain
conditions at the option of the holder, at a price of $1,000 per share plus any
unpaid dividends which accrued at a rate of $70 per share per annum. The
Redeemable Nonconvertible Preferred Stock had a liquidation preference over
Common Stock of $1,000 per share, plus any accrued, but unpaid, dividends. As
part of the September 3, 1996 financing transaction, the holders exchanged the
nonconvertible preferred stock for 3,404,255 of Series C Preferred Stock valued
at $8 million by the Company. The Company recorded the difference of
approximately $4 million between the carrying value of the Redeemable
Nonconvertible Preferred Stock and the value of the Series C Preferred Stock
issued in exchange thereof as a charge to accumulated deficit and an adjustment
to net loss to common stockholders in 1996.
7. STOCK OPTION PLAN
The Company has elected to follow the Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," requires the use
of option valuation models that were not developed for use in valuing employee
stock options.
The Company has a 1994 Equity Incentive Plan (the Plan), as amended on
August 21, 1996, which authorizes the Board of Directors to grant stock options
to purchase up to an aggregate of 375,890 shares of Common Stock. Stock options
granted under the Plan may qualify as "incentive stock options" under Section
422 of the Internal Revenue Code. The price at which shares may be purchased
with an option shall be specified by the Board at the date the option is
granted, but in the case of an incentive stock option, shall not be less than
fair market value on the date of grant. The duration of any option shall be
specified by the Board, but no option designated as an "incentive stock option"
may be exercised beyond ten years from the date of grant. Options granted under
the Plan vest ratably over two to four years beginning after one year of
service.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for employees and members of the Board of Directors: risk free
interest rates of 5% to 7%; volatility factors of the expected market price of
the Company's common stock of .01, and a weighted-average expected life of the
option of 3 to 6 years. At this time management does not expect to pay any
dividends to shareholders during the vesting period of the options, and
therefore, has excluded such assumption from determining fair value of the
options.
The Black-Scholes option valuation 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 changes in the subjective input assumptions can materially
effect 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.
Proforma information regarding net income is required by Statement 123, and
has been determined as if the Company has accounted for employee stock options
under the fair value method of that Statement. Proforma net loss for 1996 and
1995 was $(4,180,878) and $(4,451,993), respectively. The proforma net loss per
common share for 1996 was ($2.36). For purposes of pro forma disclosures, the
F-13
<PAGE> 74
TRANSCEND THERAPEUTICS, INC.
(A Company in the Development Stage)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
estimated fair value of the options is amortized to expense over the option'
vesting period, and is net of the amount recorded for deferred compensation
expense by the Company.
During the twelve months ended December 31, 1996, the Company issued stock
options to purchase shares of Common Stock at exercise prices ranging from $.50
to $2.50 per share. The Company recorded an increase to additional
paid-in-capital and a corresponding charge to deferred compensation in the
amount of $1,091,500 to recognize the aggregate difference between the deemed
fair market value for accounting purposes of the stock options at the date of
grant and the option exercise price. The deferred compensation is being
amortized over the option vesting period. Compensation expense of $113,698 was
recorded in the twelve months ended December 31, 1996.
A summary of the Company's Stock option transactions are summarized as
follows:
<TABLE>
<CAPTION>
OPTION
OPTIONS PRICE
OUTSTANDING PER SHARE
----------- -----------
<S> <C> <C>
Balances at December 31, 1994.............................. 203,838 $.50
Options granted.......................................... 96,600 .50
Options exercised........................................ (11,197) .50
Options forfeited........................................ (26,786) .50
-------
Balances at December 31, 1995.............................. 262,455
Options granted.......................................... 4,600 .50 - 1.50
Options granted.......................................... 126,400 2.50
Options exercised........................................ (16,075) .50
Options forfeited........................................ (7,056) .50
-------
Balances at December 31, 1996.............................. 370,324 .50 - 2.50
=======
Options exercisable at December 31, 1996................... 205,088 $.50 - 2.50
=======
</TABLE>
The weighted average grant-date fair value of options granted during the
year and exercise price was $2.46 and $.50, respectively. The weighted average
price and remaining life of the outstanding options as of December 31, 1996 is
$1.20 and 33 months, respectively. The Compensation Committee of the Board of
Directors of the Company voted on July 25, 1996 to accelerate the vesting
employee stock options granted prior to 1996 up to 24 months pursuant to a
formula based on period of employment upon the closing of an Initial Public
Offering "IPO" of the Company's Common Stock. The weighted average remaining
life does not reflect any adjustment to the options exerciseable by employees
upon an IPO.
8. LEASE OBLIGATIONS
The Company leases office space under a five-year operating lease, with the
option to extend for an additional five years, subject to certain rights of
first refusal held by other parties, which commenced in December 1994. The
Company also leases certain office equipment. Future minimum lease payments
under noncancelable lease agreements are as follows:
<TABLE>
<S> <C>
1997...................................................... $261,826
1998...................................................... 213,528
1999...................................................... 199,851
2000...................................................... 6,348
2001...................................................... 778
</TABLE>
Rent expense amounted to $199,381, $185,532 and $68,599 for the years ended
December 31, 1996, 1995 and 1994, respectively.
F-14
<PAGE> 75
TRANSCEND THERAPEUTICS, INC.
(A Company in the Development Stage)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES
The Company is committed to pay minimum royalties to Cornell Research
Foundation under patent licenses of $60,000 per annum through 2000, net of
certain patent costs. In addition, the Company has an ongoing research agreement
with Cornell Medical College with $133,000 due on July 1996.
10. DEFINED CONTRIBUTION PLAN
During 1995, the Company began a defined contribution 401(k) plan which
covers substantially all employees. The plan permits participants to make
contributions from 1% to 15% of their compensation (as defined). In addition,
the Company may contribute to the plan at its discretion. The Company made no
contributions in 1996 or 1995.
11. RELATED-PARTY TRANSACTIONS
During 1995, Baxter provided various services to the Company and billed
$50,526 for the cost of those services. These services included clinical
inventory storage and recordkeeping, stability operations, particle analysis,
formulation development, quality management and laboratory services. These
arrangements were terminated during 1995 and transferred to other vendors.
During 1995, the Company repaid a note payable due to Clintec in the amount
of $170,000 for fees paid by Clintec on behalf of the Company for delivery of a
clinical data base.
On October 4, 1995, the Company reached a settlement with Cornell over a
dispute related to the abandonment by Cornell of a patent application in Japan.
The settlement provided for the cancellation of 7,025 shares of common stock
(see Note 6), change of patent attorneys and reimbursement of various costs
incurred by the Company.
During 1996, the Company paid $532,601 of interest due on the Series A and
Series B Notes, in the form of shares of Series A and Series B Preferred Stock,
to certain investors of the Company (see Note 6).
F-15
<PAGE> 76
- ------------------------------------------------------
------------------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON IS AUTHORIZED IN
CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED HEREIN AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE COMMON STOCK OFFERED
HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE
HEREOF.
------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................ 3
Risk Factors.............................. 7
Use of Proceeds........................... 20
Dividend Policy........................... 20
Capitalization............................ 21
Dilution.................................. 22
Selected Financial Data................... 23
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 24
Business.................................. 27
Management................................ 41
Certain Transactions...................... 47
Principal Stockholders.................... 50
Description of Capital Stock.............. 52
Shares Eligible for Future Sale........... 55
Underwriting.............................. 57
Legal Matters............................. 58
Experts................................... 58
Additional Information.................... 59
Index to Financial Statements............. F-1
------------------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF
THIS PROSPECTUS), ALL DEALERS EFFECTING
TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND
WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
================================================
</TABLE>
======================================================
2,000,000 SHARES
[TRANSCEND THERAPEUTICS LOGO]
COMMON STOCK
------------------------------
PROSPECTUS
------------------------------
Vector Securities International, Inc.
EVEREN Securities, Inc.
, 1997
======================================================
<PAGE> 77
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered, other than the
underwriting discounts and commissions. All amounts shown are estimates except
for the Securities and Exchange Commission registration fee and the NASD filing
fee.
<TABLE>
<CAPTION>
ITEM AMOUNT
------------------------------------------------------------------------- --------
<S> <C>
SEC Registration Fee..................................................... $ 20,862*
NASD Filing Fee.......................................................... 7,440*
Nasdaq National Market Listing Fee....................................... 35,260
Transfer Agent and Registrar Fees........................................ 5,000
Accounting Fees and Expenses............................................. 225,000
Legal Fees and Expenses.................................................. 350,000
Printing, Engraving and Mailing Expenses................................. 170,000
Miscellaneous............................................................ 10,438
--------
Total............................................................... $824,000
========
</TABLE>
- ---------------
* Includes fee from prior filing
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article VIII of the Registrant's Restated Certificate of Incorporation (the
"Restated Certificate of Incorporation") provides that no director of the
Registrant shall be personally liable for any monetary damages for any breach of
fiduciary duty as a director, except to the extent that a Delaware General
Corporation Law prohibits the elimination or limitation of liability of
directors for breach of fiduciary duty.
Article IX of the Registrant's Restated Certificate of Incorporation
provides that a director or officer of the Registrant (a) shall be indemnified
by the Registrant against all expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement incurred in connection with any litigation
or other legal proceeding (other than an action by or in the right of the
Registrant) brought against him by virtue of his position as a director or
officer of the Registrant if he acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of the
Registrant, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful and (b) shall be
indemnified by the Registrant against all expenses (including attorneys' fees)
and amounts paid in settlement incurred in connection with any action by or in
the right of the Registrant brought against him by virtue of his position as a
director or officer of the Registrant if he acted in good faith and in a manner
he reasonably believed to be in, or not opposed to, the best interests of the
Registrant, except that no indemnification shall be made with respect to any
matter as to which such person shall have been adjudged to be liable to the
Registrant, unless a court determines that, despite such adjudication but in
view of all of the circumstances, he is entitled to indemnification of such
expenses. Notwithstanding the foregoing, to the extent that a director or
officer has been successful, on the merits or otherwise, including, without
limitation, the dismissal of an action without prejudice, he is required to be
indemnified by the Registrant against all expenses (including attorneys' fees)
incurred in connection therewith. Expenses shall be advanced to a director or
officer at his request, provided that he undertakes to repay the amount advanced
if it is ultimately determined that he is not entitled to indemnification for
such expenses.
Article VIII of the Registrant's Restated Certificate of Incorporation
further provides that the indemnification provided therein is not exclusive, and
provides that in the event that the Delaware
II-1
<PAGE> 78
General Corporation Law is amended to expand the indemnification permitted to
directors or officers the Registrant must indemnify those persons to the fullest
extent permitted by such law as so amended.
Section 145 of the Delaware General Corporation Law provides that a
corporation has the power to indemnify a director, officer, employee or agent of
the corporation and certain other persons serving at the request of the
corporation in related capacities against amounts paid and expenses incurred in
connection with an action or proceeding to which he is or is threatened to be
made a party by reason of such position, if such person shall have acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and, in any criminal proceeding, if such person
had no reasonable cause to believe his conduct was unlawful; provided that, in
the case of actions brought by or in the right of the corporation, no
indemnification shall be made with respect to any matter as to which such person
shall have been adjudged to be liable to the corporation unless and only to the
extent that the adjudicating court determines that such indemnification is
proper under the circumstances.
The Company also currently has in place standard director and officer
liability insurance which, subject to customary exclusions and specified limits,
insures its directors and officers against certain losses and expenses suffered
or incurred by such persons as a result of serving in such capacity.
Under Section of the Underwriting Agreement, the Underwriters are
obligated, under certain circumstances, to indemnify directors and officers of
the Registrant against certain liabilities, including liabilities under the
Securities Act. Reference is made to the form of Underwriting Agreement filed as
Exhibit 1 hereto.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Set forth in chronological order below is information regarding the number
of shares of Common and Preferred Stock issued, and the number of options
granted and warrants issued, by the Registrant since its incorporation. Further
included is the consideration, if any, received by the Registrant for such
shares and options, and information relating to the section of the Securities
Act of 1933, as amended (the "Securities Act"), or rule of the Securities and
Exchange Commission under which exemption from registration was claimed. Awards
of options did not involve any sale under the Securities Act and none of these
securities was registered under the Securities Act.
1. In December 1992, the Registrant sold an aggregate of 100 shares of its
Common Stock for $.01 per share to Dr. Gary Pace and Dr. Dennis Goldberg,
founders of the Registrant.
2. In April 1994, the previously issued and outstanding shares of Common
Stock of the Registrant issued to Dr. Pace and Dr. Goldberg were exchanged for
an aggregate of 44,109 shares of its Common Stock effected in the form of a
stock dividend.
3. In April 1994, the Registrant issued 680,000 shares of its Common Stock
and 9,000 shares of its Nonconvertible Redeemable Preferred Stock to Clintec
Nutrition Company upon receipt from Clintec of its rights in Procysteine and
related pharmaceutical technologies.
4. In April 1994, as part of a license agreement with Cornell Research
Foundation ("Cornell"), the Registrant issued 35,025 shares of its Common Stock
to Cornell. On October 4, 1995, Cornell agreed to return 7,025 such shares for
cancellation in settlement of a dispute related to the abandonment by Cornell of
a patent application in Japan licensed to the Registrant under the license
agreement.
5. In April 1994, the Registrant sold an aggregate of 6,500,000 shares of
its Series A Convertible Preferred Stock to a group of investors at a purchase
price of $1.00 per share for an aggregate of $6.5 million. As part of the same
transaction, the investors also purchased from the Registrant warrants to
purchase an aggregate of 1,625,000 shares of Series A Preferred Stock for $.01
per share of Series A Preferred Stock issuable upon the exercise of such
warrants. The exercise price of the warrants was $1.00 per share.
II-2
<PAGE> 79
6. In October 1994, in connection with the Registrant's lease of office
space from the Massachusetts Institute of Technology ("MIT"), the Registrant
issued to MIT 5,000 shares of its Common Stock at an exercise price of $5.00 per
share.
7. In September 1995, the Registrant sold $2.0 million aggregate principal
amount of its Senior Secured Convertible Notes ("Series A Notes") to a group of
investors. Interest accrued on the Series A Notes at the rate of 30 percent per
annum and was payable in, and the principal amount of such notes was convertible
into, shares of Series A Convertible Preferred Stock (at one share per $1.00 of
such interest or principal).
8. In January 1994, the Registrant sold an aggregate of 130,000 shares of
Series A Preferred Stock to Jerry Jackson and Frank Douglas, directors of the
Registrant, and one former director of the Registrant, for an aggregate purchase
price of $130,000 at $1.00 per share.
9. In January 1996, the Registrant issued an aggregate of 198,903 shares of
Series A Convertible Preferred Stock to a group of investors as interest due and
payable on Series A Notes held by such investors.
10. In May 1996, the Registrant issued an aggregate of 198,903 shares of
Series A Preferred Stock to a group of investors as interest due and payable on
Series A Notes held by such investors.
11. In May 1996, the Registrant issued $1.0 million in aggregate principal
amount of notes ("Series B Notes") to the holders of Series A Notes. Interest
accrued on the Series B Notes at the rate of 30 percent per annum and was
payable in, and the principal amount of such notes was convertible into, shares
of Series B Convertible Preferred Stock (at one share per $1.50 of such interest
or principal).
12. In September 1996, the Registrant sold an aggregate of 851,064 shares
of its Series C Convertible Preferred Stock to a group of investors at a
purchase price of $2.35 per share for an aggregate of $2.0 million. As part of
the same transaction, (a) the sole holder of 9,000 shares of the Registrant's
Nonconvertible Redeemable Preferred Stock exchanged such shares for 3,404,255
shares of the Series C Convertible Preferred Stock, (b) holders of warrants to
purchase shares of Series A Convertible Preferred Stock were issued an aggregate
of 789,893 shares of Series A Convertible Preferred Stock pursuant to a net
exercise of such warrants, and (c) $3.1 million in aggregate principal amount
of, and interest on, the Series A Notes and Series B Notes were converted into
an aggregate of 2,098,631 shares of Series A Convertible Preferred Stock and
690,775 shares of Series B Convertible Preferred Stock.
13. In February 1997, the Registrant agreed to sell to a corporate partner
(i) $5.0 million of Common Stock on or prior to the closing of the Offering at
the initial public offering price. Assuming an initial public offering price of
$13.00 per share, the Registrant will issue 384,615 shares of Common Stock on
the closing of this sale.
14. In March 1997, the Registrant sold an aggregate of 1,039,000 shares of
Nonconvertible Redeemable Preferred Stock and warrants to purchase $346,300 of
Common Stock, exercisable at the initial public offering price (26,639 shares of
Common Stock, assuming an initial public offering price of $13.00 per share), to
a group of investors, resulting in proceeds to the Company of approximately $1.0
million. Such warrants are exercisable upon issuance and expire five years from
the date of issuance.
15. From April 1994 through December 31, 1996, the Registrant granted
options to purchase 433,936 shares of Common Stock at exercise prices ranging
from $.50 to $2.50.
No underwriters were engaged in connection with any of the foregoing sales
of securities. The issuance of shares of capital stock and securities in the
transactions described in paragraphs (1) through (14) above were offered and
sold in reliance upon the exemption from registration under Section 4(2) of the
Securities Act and/or Regulation D promulgated under the Securities Act, for
sales by an issuer not involving any public offering. The issuances of
securities in the transaction described in paragraph 13 above are deemed to be
exempt from registration under the Securities Act by virtue of
II-3
<PAGE> 80
Rule 701 promulgated thereunder in that they were offered and sold pursuant to
written compensatory benefits plans or pursuant to written contract relating to
compensation.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -------------------------------------------------------------------------------
<C> <S>
1* Form of Underwriting Agreement.
3.1 Restated Certificate of Incorporation of the Registrant, as amended.
3.2 Form of Second Amended and Restated Certificate of Incorporation of the
Registrant (to be filed prior to the consummation of the public offering).
3.3 Amended and Restated By-Laws of the Registrant.
4.1* Specimen certificate for shares of Common Stock, $.01 par value per share, of
the Registrant.
4.2 Second Amended and Restated Registration Rights Agreement dated August 21, 1996
among the Registrant and The Venture Capital Fund of New England III, L.P.,
Advent International Investors II Limited Partnership, Advent Performance
Materials Limited Partnership, Global Private Equity II Limited Partnership,
Rovent II Limited Partnership, Paal C. Gisholt, Charles Hsu, Sprout Capital VI,
L.P., DLJ Capital Corporation, Baxter Healthcare Corporation, Clinical
Nutrition Holdings, Inc., Clintec Nutrition Company, the Massachusetts
Institute of Technology, Jerry T. Jackson, Frank L. Douglas and Richard B. Egen
(collectively, the "Holders") (the "Registration Rights Agreement").
4.3 Amendment No. 1 to the Registration Rights Agreement dated March 3, 1997 by and
among the Registrant and the Holders.
4.4 Form of Third Amended and Restrated Registration Rights Agreement among the
Company, the Holders, Boehringer Ingelheim International GmbH ("BI"), Hector
Gomez and John Whalen (to be signed on or prior to the consummation of the
public offering).
5* Opinion of Hale and Dorr LLP with respect to the validity of the securities
being offered.
10.1* Amended and Restated 1994 Equity Incentive Plan.
+10.2 Contribution Agreement dated April 5, 1994 by and between the Registrant and
Clintec Nutrition Company.
10.3 Non-solicitation Agreement dated April 5, 1994 between the Registrant and
Baxter Healthcare Corporation.
+10.4 License Agreement dated April 5, 1994 between the Registrant and Clintec
Nutrition Company.
+10.5 Amended and Restated Exclusive License Agreement CRF D-416 and D-052, D-913,
D-1069, D-1239, D-1258, D-1403, D-1426, dated August 12, 1996 between the
Registrant and Cornell Research Foundation, Inc.
10.6 Common Stock Purchase Warrant dated October 28, 1994 for 5,000 shares of Common
Stock issued to the Massachusetts Institute of Technology.
10.7 Lease dated October 28, 1994 between the Registrant and the Massachusetts
Institute of Technology.
10.8 Employment Agreement dated November 28, 1994 between the Registrant and Hector
J. Gomez.
10.9 Letter Agreement dated October 4, 1995 between the Registrant and Cornell
Research Foundation, Inc.
+10.10 Development and License Agreement dated February 28, 1997 between the
Registrant and BI.
</TABLE>
II-4
<PAGE> 81
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -------------------------------------------------------------------------------
<C> <S>
10.11 Stock Purchase Agreement dated February 28, 1997 between the Registrant and BI.
10.12 Non-Convertible Preferred Stock and Warrant Purchase Agreement dated March 3,
1997 among the Company and the Purchasers (as defined therein)
11* Statement regarding Computation of Pro Forma Loss Per Common Share
23.1* Consent of Hale and Dorr LLP (included in Exhibit 5).
23.2* Consent of Pennie & Edmonds LLP.
23.3* Consent of Ernst & Young LLP.
24 Powers of Attorney.
27 Financial Data Schedule
</TABLE>
- ---------------
Except as noted, all exhibits have been previously filed.
* Filed herewith.
+ Confidential treatment requested as to certain portions, which portions
are omitted and filed separately with the Commission.
(B) FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted because they are not required or because
the required information is given in the Financial Statements or Notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 82
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No.2 to Form S-1 Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Cambridge, Commonwealth of Massachusetts, on this
10th day of April, 1997.
TRANSCEND THERAPEUTICS, INC.
By: /s/ HECTOR J. GOMEZ
------------------------------------
Hector J. Gomez, M.D., Ph.D.,
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 2 to Form S-1 Registration Statement has been signed below by
the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ --------------------------------- ---------------
<C> <S> <C>
/s/ HECTOR J. GOMEZ President, Chief Executive April 10, 1997
- ------------------------------------------ Officer and Director (Principal
Hector J. Gomez, M.D., Ph.D. Executive Officer)
/s/ B. NICHOLAS HARVEY Vice President, Finance and Chief April 10, 1997
- ------------------------------------------ Financial Officer (Principal
B. Nicholas Harvey Financial and Accounting Officer)
* Chairman of the Board of April 10, 1997
- ------------------------------------------ Directors
Jerry T. Jackson
* Director April 10, 1997
- ------------------------------------------
Philippe Chambon, M.D., Ph.D.
* Director April 10, 1997
- ------------------------------------------
Frank L. Douglas, M.D., Ph.D.
* Director April 10, 1997
- ------------------------------------------
Richard W. Hunt
* Director April 10, 1997
- ------------------------------------------
William C. Mills III
* Director April 10, 1997
- ------------------------------------------
Gerard M. Moufflet
</TABLE>
*By: /s/ HECTOR J. GOMEZ
------------------------------
Hector J. Gomez
Attorney-in-fact
II-6
<PAGE> 83
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGES
-------- -------------------------------------------------------------------- ------------
<S> <C> <C>
1* Form of Underwriting Agreement. ....................................
3.1 Restated Certificate of Incorporation of the Registrant, as
amended. ...........................................................
3.2 Form of Second Amended and Restated Certificate of Incorporation of
the Registrant (to be filed prior to the consummation of the public
offering). .........................................................
3.3 Amended and Restated By-Laws of the Registrant. ....................
4.1* Specimen certificate for shares of Common Stock, $.01 par value per
share, of the Registrant. ..........................................
4.2 Second Amended and Restated Registration Rights Agreement dated
August 21, 1996 among the Registrant and The Venture Capital Fund of
New England III, L.P., Advent International Investors II Limited
Partnership, Advent Performance Materials Limited Partnership,
Global Private Equity II Limited Partnership, Rovent II Limited
Partnership, Paal C. Gisholt, Charles Hsu, Sprout Capital VI, L.P.,
DLJ Capital Corporation, Baxter Healthcare Corporation, Clinical
Nutrition Holdings, Inc., Clintec Nutrition Company, the
Massachusetts Institute of Technology, Jerry T. Jackson, Frank L.
Douglas and Richard B. Egen (collectively, the "Holders") (the
"Registration Rights Agreement"). ..................................
4.3 Amendment No. 1 to the Registration Rights Agreement dated March 3,
1997 by and among the Registrant and the Holders. ..................
4.4 Form of Third Amended and Restrated Registration Rights Agreement
among the Company, the Holders, Boehringer Ingelheim International
GmbH ("BI"), Hector Gomez and John Whalen (to be signed on or prior
to the consummation of the public offering). .......................
5* Opinion of Hale and Dorr LLP with respect to the validity of the
securities being offered. ..........................................
10.1* Amended and Restated 1994 Equity Incentive Plan. ...................
+10.2 Contribution Agreement dated April 5, 1994 by and between the
Registrant and Clintec Nutrition Company. ..........................
10.3 Non-solicitation Agreement dated April 5, 1994 between the
Registrant and Baxter Healthcare Corporation. ......................
+10.4 License Agreement dated April 5, 1994 between the Registrant and
Clintec Nutrition Company. .........................................
+10.5 Amended and Restated Exclusive License Agreement CRF D-416 and
D-052, D-913, D-1069, D-1239, D-1258, D-1403, D-1426, dated August
12, 1996 between the Registrant and Cornell Research Foundation,
Inc. ...............................................................
10.6 Common Stock Purchase Warrant dated October 28, 1994 for 5,000
shares of Common Stock issued to the Massachusetts Institute of
Technology. ........................................................
10.7 Lease dated October 28, 1994 between the Registrant and the
Massachusetts Institute of Technology. .............................
10.8 Employment Agreement dated November 28, 1994 between the Registrant
and Hector J. Gomez. ...............................................
10.9 Letter Agreement dated October 4, 1995 between the Registrant and
Cornell Research Foundation, Inc. ..................................
+10.10 Development and License Agreement dated February 28, 1997 between
the Registrant and BI. .............................................
10.11 Stock Purchase Agreement dated February 28, 1997 between the
Registrant and BI. .................................................
</TABLE>
<PAGE> 84
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGES
-------- -------------------------------------------------------------------- ------------
<S> <C> <C>
10.12 Non-Convertible Preferred Stock and Warrant Purchase Agreement dated
March 3, 1997 among the Company and the Purchasers (as defined
therein)............................................................
11* Statement regarding Computation of Pro Forma Loss Per Common
Share ..............................................................
23.1* Consent of Hale and Dorr LLP (included in Exhibit 5). ..............
23.2* Consent of Pennie & Edmonds LLP ....................................
23.3* Consent of Ernst & Young LLP. ......................................
24 Powers of Attorney .................................................
27 Financial Data Schedule ............................................
</TABLE>
- ---------------
Except as noted, all exhibits have been previously filed.
* Filed herewith.
+ Confidential treatment requested as to certain portions, which portions
are omitted and filed separately with the Commission.
<PAGE> 1
2,000,000 Shares
TRANSCEND THERAPEUTICS, INC.
Common Stock
UNDERWRITING AGREEMENT
April __, 1997
VECTOR SECURITIES INTERNATIONAL, INC.
EVEREN SECURITIES, INC.
As Representatives of the Several Underwriters
c/o VECTOR SECURITIES INTERNATIONAL, INC.
1751 Lake Cook Road, Suite 350
Deerfield, Illinois 60015
Dear Sirs:
Transcend Therapeutics, Inc., a Delaware corporation (the
"Company"), proposes to issue and sell an aggregate of 2,000,000 shares of its
common stock, par value $0.01 per share (the "Initial Securities"), to the
several Underwriters named in Schedule I hereto (the "Underwriters") for whom
Vector Securities International, Inc. ("Vector"), and EVEREN Securities, Inc.
are acting as representatives (collectively, the "Representatives"). In
addition, solely for the purpose of covering over-allotments, the Company
proposes to grant to the several Underwriters, upon the terms and conditions set
forth in Section 2 hereof, an option to purchase up to an additional 300,000
shares of Common Stock of the Company (the "Option Securities"). The Initial
Securities and the Option Securities are hereinafter collectively referred to as
the "Securities." The Company's common stock, par value $0.01 per share,
including the Securities, is hereinafter referred to as the "Common Stock." The
Company wishes to confirm as follows its agreements with you and the other
Underwriters on whose behalf you are acting in connection with the several
purchases by the Underwriters of the Securities:
<PAGE> 2
1. REGISTRATION STATEMENT AND PROSPECTUS. The Company
has prepared and filed with the Securities and Exchange Commission
(the "Commission") a registration statement on Form S-1 (No. 333-22817) covering
the registration of the Securities under the Securities Act of 1933, as amended
(the "1933 Act"), including the related preliminary prospectus, or prospectuses,
and either (A) has prepared and filed, prior to the effective date of such
registration statement, an amendment to such registration statement, including a
final prospectus or (B) if the Company has elected to rely upon Rule 430A ("Rule
430A") of the rules and regulations of the Commission under the 1933 Act (the
"1933 Act Regulations"), will prepare and file a prospectus, in accordance with
the provisions of Rule 430A and Rule 424(b) ("Rule 424(b)") of the 1933 Act
Regulations, promptly after execution and delivery of this Agreement.
Additionally, if the Company has elected to rely upon Rule 434 ("Rule 434") of
the 1933 Act Regulations, the Company will prepare and file a term sheet (a
"Term Sheet") in accordance with the provisions of Rule 434 and Rule 424(b),
promptly after execution and delivery of this Agreement. The information, if
any, included in such prospectus or in such Term Sheet, that was omitted from
such registration statement at the time it became effective but that is deemed
to be part of such registration statement at the time it becomes effective (a)
pursuant to paragraph (b) of Rule 430A, is referred to herein as the "Rule 430A
Information," or (b) pursuant to paragraph (d) of Rule 434, is referred to
herein as the "Rule 434 Information." Each prospectus used before the time such
registration statement became effective, and any prospectus that omitted, as
applicable, the Rule 430A Information or the Rule 434 Information that was used
after effectiveness and prior to the execution and delivery of this Agreement is
herein called a "preliminary prospectus." Such registration statement, including
the exhibits and schedules thereto, at the time it became effective and
including, if applicable, the Rule 430A Information or the Rule 434 Information,
is herein called the "Registration Statement." Any registration statement filed
pursuant to Rule 462(b) of the 1933 Act Regulations is herein referred to as the
"Rule 462(b) Registration Statement," and after such filing the term
Registration Statement shall include the Rule 462(b) Registration Statement. The
final prospectus in the form first furnished to the Underwriters for use in
connection with the offering of the Securities is herein referred to as the
"Prospectus." If Rule 434 is relied upon, the term "Prospectus" shall refer to
the preliminary prospectus last furnished to the Underwriters in connection
2
<PAGE> 3
with the offering of the Securities, together with the Term Sheet, and all
references to the date of the Prospectus shall mean the date of the Term Sheet.
For purposes of this Agreement, all references to the Registration Statement,
any preliminary prospectus, the Prospectus or any Term Sheet or any amendment or
supplement to any of the foregoing shall be deemed to include the copy, if any,
filed with the Commission pursuant to its Electronic Data Gathering, Analysis
and Retrieval system ("EDGAR").
2. AGREEMENTS TO SELL AND PURCHASE. Upon the basis of the
representations, warranties and agreements contained herein and subject to all
the terms and conditions set forth herein, the Company hereby agrees to issue
and sell to each Underwriter and each Underwriter agrees, severally and not
jointly, to purchase from the Company, at a purchase price of $[ ] per share
(the "purchase price per share"), the number of Initial Securities set forth in
Schedule I opposite the name of such Underwriter under the column "Number of
Initial Securities to be Purchased from the Company" (or such number of Initial
Securities increased as set forth in Section 10 hereof).
Upon the basis of the representations, warranties and
agreements contained herein and subject to all the terms and conditions set
forth herein, the Company hereby grants an option (the "over-allotment option")
to the Underwriters to purchase from the Company, at the purchase price per
share, up to an aggregate of 300,000 Option Securities. Option Securities may be
purchased solely for the purpose of covering over-allotments made in connection
with the offering of the Securities. Such option shall expire at 5:00 P.M.,
Chicago time, on the 30th day after the date of this Agreement (or, if such 30th
day shall be a Saturday or Sunday or a holiday, on the next business day
thereafter when the New York Stock Exchange is open for trading). Such
over-allotment option may be exercised at any time or from time to time until
its expiration. Upon any exercise of the over-allotment option, each
Underwriter, severally and not jointly, agrees to purchase from the Company that
proportion of the total number of Option Securities as is equal to the
percentage of Initial Securities that such Underwriter is purchasing from the
Company (or such number of Initial Securities increased as set forth in Section
10 hereof), subject to such adjustments as you may determine to avoid fractional
shares.
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<PAGE> 4
3. TERMS OF PUBLIC OFFERING. The Company has been advised by
you that the Underwriters propose to make a public offering of the Securities as
soon after the Registration Statement and this Agreement have become effective
as in your judgment is advisable and initially to offer the Securities upon the
terms set forth in the Prospectus.
4. DELIVERY OF THE SECURITIES AND PAYMENT THEREFOR. Delivery
to the Underwriters of and payment for the Initial Securities shall be made at
the office of Skadden, Arps, Slate, Meagher & Flom (Illinois), 333 West Wacker
Drive, Suite 2100, Chicago, Illinois 60606, at 9:00 A.M., Chicago time, on the
third (fourth, if the pricing occurs after 4:30 p.m. (Eastern Time) on any given
day) business day after the date hereof (unless postponed in accordance with the
provisions of Section 10 hereof) (the "Closing Date"). The place of closing for
the Initial Securities and the Closing Date may be varied by agreement among you
and the Company.
Delivery to the Underwriters of and payment for any Option
Securities to be purchased by the Underwriters shall be made at the
aforementioned office of Skadden, Arps, Slate, Meagher & Flom (Illinois) at such
time on such date (an "Option Closing Date"), which may be the same as the
Closing Date but shall in no event be earlier than the Closing Date nor earlier
than two nor later than ten business days after the giving of the notice
hereinafter referred to, as shall be specified in a written notice from you on
behalf of the Underwriters to the Company of the Underwriters' determination to
purchase a number, specified in such notice, of Option Securities. The place of
closing for any Option Securities and the Option Closing Date for such Option
Securities may be varied by agreement between you and the Company.
Certificates for the Initial Securities and for any Option
Securities to be purchased hereunder shall be registered in such names and in
such denominations as you shall request by written notice (it being understood
that a facsimile transmission shall be deemed written notice) prior to 9:30
A.M., Chicago time, on the second business day preceding the Closing Date or any
Option Closing Date, as the case may be. Such certificates shall be made
available to you in Chicago, Illinois or New York, New York, as requested by you
in the aforesaid notice, for inspection and packaging not later than 9:30 A.M.,
Chicago time, on the business
4
<PAGE> 5
day next preceding the Closing Date or an Option Closing Date, as the case may
be. The certificates evidencing the Initial Securities and any Option Securities
to be purchased hereunder shall be delivered to you on the Closing Date or the
Option Closing Date, as the case may be, against payment of the purchase price
therefor by certified or official bank check or checks payable in New York
Clearing House (next day) funds to the order of the Company. It is understood
that each Underwriter has authorized you, for its account, to accept delivery
of, acknowledge receipt of, and make payment of the purchase price for, the
Initial Securities and the Option Securities, if any, which it has agreed to
purchase. Vector, individually and not as representative of the Underwriters,
may (but shall not be obligated to) make payment of the purchase price for the
Initial Securities or the Option Securities, if any, to be purchased by any
Underwriter whose check has not been received by the Closing Date or the Option
Closing Date, as the case may be, but such payment shall not relieve such
Underwriter from its obligations hereunder.
5. AGREEMENTS OF THE COMPANY. The Company covenants and
agrees with the several Underwriters as follows:
a. The Company will notify the
Underwriters immediately, and confirm the notice in writing, (i) of the
effectiveness of the Registration Statement and any amendment thereto, (ii) of
the receipt of any comments from the Commission, (iii) of any request by the
Commission for any amendment to the Registration Statement or any amendment or
supplement to the Prospectus or for additional information, (iv) of the issuance
by the Commission of any stop order suspending the effectiveness of the
Registration Statement or the suspension of qualification of the Securities for
offering or sale in any jurisdiction or the initiation of any proceedings for
such purpose and (v) during the period when the Prospectus is required to be
delivered under the 1933 Act or Securities Exchange Act of 1934, as amended (the
"1934 Act"), of any change, or any event or occurrence which could result in
such a change, in the Company's condition, financial or otherwise, or the
earnings, business affairs or business prospects of the Company or the happening
of any event, including the filing of any information, documents or reports
pursuant to the 1934 Act, that makes any statement of a material fact made in
the Registration Statement or the Prospectus (as then amended or supplemented)
untrue or which requires the making of any additions to or changes
5
<PAGE> 6
in the Registration Statement or the Prospectus in order to state a material
fact required by the 1933 Act or the 1933 Act Regulations to be stated therein
or necessary in order to make the statements therein not misleading, or of the
necessity to amend or supplement the Prospectus to comply with the 1933 Act, the
1933 Act Regulations or any other law. The Company shall use its best efforts to
prevent the issuance of any stop order or order suspending the qualification or
exemption of the Securities under any state securities or Blue Sky laws, and, if
at any time the Commission shall issue any stop order suspending the
effectiveness of the Registration Statement, or any state securities commission
or other regulatory authority shall issue an order suspending the qualification
or exemption of the Securities under any state securities or Blue Sky laws, the
Company shall use every reasonable effort to obtain the withdrawal or lifting of
such order at the earliest possible time.
b. The Company will give the
Underwriters notice of its intention to prepare or file any amendment to the
Registration Statement (including any post-effective amendment), any Rule 462(b)
Registration Statement, any Term Sheet or any amendment or supplement to the
Prospectus (including any revised prospectus or Term Sheet and preliminary
prospectus which the Company proposes for use by the Underwriters in connection
with the offering of the Securities which differs from the prospectus on file at
the Commission at the time the Registration Statement becomes effective, whether
or not such revised prospectus or Term Sheet and preliminary prospectus is
required to be filed pursuant to Rule 424(b)), whether pursuant to the 1933 Act,
the 1934 Act or otherwise, will furnish the Underwriters with copies of any Rule
462(b) Registration Statement, Term Sheet, amendment or supplement a reasonable
amount of time prior to such proposed filing or use, as the case may be, and
will not file any such Rule 462(b) Registration Statement, Term Sheet, amendment
or supplement or use any such prospectus to which the Underwriters or counsel
for the Underwriters shall object.
c. The Company has furnished or will
deliver to the Underwriters and their counsel, without charge, as many signed
and conformed copies of the Registration Statement as originally filed and of
each amendment thereto (including exhibits filed therewith or incorporated by
reference therein) as the Underwriters may reasonably request. If applicable,
the copies of
6
<PAGE> 7
the Registration Statement and each amendment thereto furnished to the
Underwriters will be identical to the electronically transmitted copies thereof
filed with the Commission pursuant to EDGAR, except to the extent permitted by
Regulation S-T.
d. The Company will furnish to each
Underwriter, without charge, from time to time during the period when the
Prospectus is required to be delivered under the 1933 Act or the 1934 Act, such
number of copies of the Prospectus (as amended or supplemented) as such
Underwriter may reasonably request for the purposes contemplated by the 1933
Act, the 1934 Act, the 1933 Act Regulations or the rules and regulations of the
Commission under the 1934 Act (the "1934 Act Regulations"). If applicable, the
Prospectus and any amendments or supplements thereto furnished to the
Underwriters will be identical to the electronically transmitted copies thereof
filed with the Commission pursuant to EDGAR, except to the extent permitted by
Regulation S-T.
e. The Company will comply with the
1933 Act and the 1933 Act Regulations so as to permit the completion of the
distribution of the Securities as contemplated in this Agreement and in the
Prospectus. If at any time when a prospectus is required by the 1933 Act, the
1934 Act, the 1933 Act Regulations or the 1934 Act Regulations to be delivered
in connection with sales of the Securities, any event shall occur or condition
shall exist as a result of which it is necessary, in the opinion of counsel for
the Underwriters or for the Company, to amend the Registration Statement or
amend or supplement the Prospectus in order that the Prospectus will not include
any untrue statements of a material fact or omit to state a material fact
necessary in order to make the statements therein not misleading in the light of
the circumstances existing at the time it is delivered to a purchaser, or if it
shall be necessary, in the opinion of such counsel, at any such time to amend
the Registration Statement or amend or supplement the Prospectus in order to
comply with the requirements of the 1933 Act or the 1933 Act Regulations, the
Company will promptly prepare and file with the Commission, subject to Section
5(b), such amendment or supplement as may be necessary to correct such statement
or omission or to make the Registration Statement or the Prospectus comply with
such requirements and the Company will furnish to the Underwriters such number
of copies of such amendment or supplement as the Underwriters may reasonably
request.
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<PAGE> 8
f. During the period of five years
hereafter, the Company will furnish to you (i) as soon as available, a copy of
each report of the Company mailed to stockholders or filed with the Commission
or the Nasdaq National Market ("NNM"), and (ii) from time to time such other
information concerning the Company as you may request.
g. The Company will use its best
efforts, in cooperation with counsel to the Underwriters, to qualify the
Securities for offering and sale under the applicable securities or Blue Sky
laws of such states and other jurisdictions of the United States as the
Underwriters may designate and to maintain such qualifications in effect for a
period of not less than one year from the later of the effective date of the
Registration Statement and any Rule 462(b) Registration Statement; PROVIDED,
HOWEVER, that the Company shall not be obligated to qualify as a foreign
corporation in any jurisdiction in which it is not so qualified. In each
jurisdiction in which the Securities have been so qualified, the Company will
file such statements and reports as may be required by the laws of such
jurisdiction to continue such qualification in effect for a period of not less
than one year from the later of the effective date of the Registration Statement
and any Rule 462(b) Registration Statement.
h. The Company will make generally
available to its security holders as soon as practicable, but not later than 45
days after the close of the period covered thereby, an earnings statement (in
form complying with the provisions of Rule 158 of the 1933 Act Regulations)
covering a twelve-month period beginning not later than the first day of the
Company's fiscal quarter next following the "effective date" (as defined in said
Rule 158) of the Registration Statement.
i. The Company will use the net
proceeds received by it from the sale of the Securities in the manner specified
in the Prospectus under "Use of Proceeds."
j. If, at the time that the
Registration Statement becomes effective, any Rule 430A Information or Rule 434
Information shall have been omitted therefrom, then immediately following the
execution of this Agreement, the Company will prepare, and file or transmit for
filing with the Commission in
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<PAGE> 9
accordance with Rule 430A or Rule 434 and Rule 424(b), copies of a Prospectus or
Term Sheet containing such Rule 430A Information and Rule 434 Information,
respectively, or, if required by Rule 430A, a post-effective amendment to the
Registration Statement (including an amended Prospectus), containing such Rule
430A Information.
k. If the Company elects to rely
upon Rule 462(b), the Company shall both file a Rule 462(b) Registration
Statement with the Commission in compliance with Rule 462(b) and pay the
applicable fees in accordance with Rule 111 of the 1933 Act Regulations by the
earlier of (i) 10:00 P.M. Eastern Time on the date hereof and (ii) the time
confirmations are sent or given, as specified by Rule 462(b)(2).
l. The Company, during the period
when the Prospectus is required to be delivered under the 1933 Act or the 1934
Act, will file all documents required to be filed with the Commission pursuant
to Section 13, 14 or 15 of the 1934 Act within the time periods required by the
1934 Act and the 1934 Act Regulations.
m. During a period of 180 days from
the date of the Prospectus, the Company will not, without the prior written
consent of Vector, (i) offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of, directly or
indirectly, any share of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock or file any registration statement
under the 1933 Act with respect to any of the foregoing or (ii) enter into any
swap or any other agreement or any transaction that transfers, in whole or in
part, directly or indirectly, the economic consequence of ownership of the
Common Stock, whether any such swap or transaction described in clause (i) or
(ii) above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise. The foregoing sentence shall not apply to (A)
the Securities to be sold hereunder, (B) any shares of Common Stock issued by
the Company upon the exercise of an option or warrant or the conversion of any
security outstanding on the date hereof and referred to in the Prospectus, (C)
any shares of Common Stock issued or options to purchase Common Stock granted
pursuant to existing employee benefit plans of the Company
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<PAGE> 10
referred to in the Prospectus or (D) any shares of Common Stock issued pursuant
to any non-employee director stock plan.
n. The Company has furnished or
will furnish to you "lock-up" letters, in form and substance satisfactory to
you, signed by Boehringer Ingelheim International GmbH ("BI") and each of the
Company's current officers and directors and each of its stockholders designated
by you.
o. The Company will supply the
Underwriters with copies of all correspondence to and from, and all documents
issued to and by, the Commission in connection with the registration of the
Securities under the 1933 Act.
p. Prior to the Closing Date, the
Company shall furnish to the Underwriters, as soon as they have been prepared,
copies of any unaudited interim financial statements of the Company for any
periods subsequent to the periods covered by the financial statements appearing
in the Registration Statement and the Prospectus.
q. Prior to the Closing Date, the
Company will issue no press release or other communications directly or
indirectly and hold no press conference with respect to the Company, the
condition, financial or otherwise, or the earnings, business affairs or business
prospects of the Company, or the offering of the Securities, without the prior
written consent of the Representatives unless in the judgment of the Company and
its counsel, and after notification to the Representatives, such press release
or communication is required by law.
r. The Company has not taken, nor
will it take, directly or indirectly, any action designed to, or that might
reasonably be expected to, cause or result in stabilization or manipulation of
the price of the Common Stock to facilitate the sale or resale of the
Securities.
s. The Company will use its best
efforts to have the Securities approved for listing on NNM.
6. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The
Company represents and warrants to each Underwriter that:
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<PAGE> 11
a. When the Registration Statement,
any Rule 462(b) Registration Statement and any post-effective amendment thereto
becomes effective, at the date of the Prospectus, if different, and at the
Closing Date and the Option Closing Date, as the case may be, the Registration
Statement, the Rule 462(b) Registration Statement and any amendments and
supplements thereto complied or will comply in all material respects with the
requirements of the 1933 Act and the 1933 Act Regulations and did not and will
not contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading. The Prospectus and any supplements or amendments thereto will
not at the date of the Prospectus, at the date of any such supplements or
amendments, or at the Closing Date or the Option Closing Date, if any, include
an untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. If Rule 434 is used,
the Company will comply with the requirements of Rule 434 and the Prospectus
shall not be "materially different," as such term is used in Rule 434, from the
Prospectus included in the Registration Statement at the time it became
effective. The representations and warranties in this subsection shall not apply
to statements in or omissions from the Registration Statement or Prospectus
relating to any Underwriter made in reliance upon and in conformity with
information furnished to the Company in writing by any Underwriter, through
Vector expressly for use in the Registration Statement or Prospectus. The
Company has not distributed any offering materials in connection with the
offering or sale of the Securities other than the Registration Statement, the
preliminary prospectus, the Prospectus, the Term Sheet, if applicable, or any
other materials, if any, permitted by the 1933 Act or the 1933 Act Regulations.
b. Each preliminary prospectus and
the prospectus filed as part of the Registration Statement as originally filed
or as part of any amendment thereto, or filed pursuant to Rule 424 under the
1933 Act, complied when so filed in all material respects with the 1933 Act
Regulations and, if applicable, each preliminary prospectus and the Prospectus
delivered to the Underwriters for use in connection with this offering was
identical to the electronically transmitted copies thereof filed with the
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<PAGE> 12
Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T.
c. The accountants who certified
the financial statements and supporting schedules included in the Registration
Statement are independent public accountants as required by the 1933 Act and the
1933 Act Regulations.
d. The financial statements
included in the Registration Statement and the Prospectus present fairly the
financial position of the Company as of the dates indicated and the results of
its operations for the periods specified; except as otherwise stated in the
Registration Statement, said financial statements have been prepared in
conformity with generally accepted accounting principles applied on a consistent
basis; and the supporting schedules included in the Registration Statement
present fairly the information required to be stated therein. The financial
information and statistical data set forth in the Prospectus are prepared on an
accounting basis consistent with such financial statements.
e. Since the respective dates as of
which information is given in the Registration Statement and the Prospectus,
except as otherwise stated therein, (i) there has been no material adverse
change or, to the knowledge of the Company, any development involving a
prospective material adverse change in or affecting the condition, financial or
otherwise, or in the earnings, business affairs or business prospects of the
Company, whether or not arising in the ordinary course of business, (ii) there
have been no transactions entered into by the Company, other than those in the
ordinary course of business, which are material with respect to the Company, and
(iii) there has been no dividend or distribution of any kind declared, paid or
made by the Company on any class of its capital stock. The Company has no
material contingent obligations which are not disclosed in the Registration
Statement.
f. The Company has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of the State of Delaware with corporate power and authority to own, lease
and operate its properties and to conduct its business as described in the
Prospectus and to enter into and perform its obligations under this Agreement;
and the Company is duly qualified
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<PAGE> 13
as a foreign corporation to transact business and is in good standing in each
jurisdiction in which such qualification is required, whether by reason of the
ownership or leasing of property or the conduct of business, except where the
failure to so qualify would not, singly or in the aggregate, have a material
adverse effect on the condition, financial or otherwise, or the earnings,
business affairs or business prospects of the Company.
g. The Company does not own,
directly or indirectly, any shares of stock or any other equity or long-term
debt securities of any corporation or have any equity interest in any firm,
partnership, joint venture, association or other entity.
h. Each of (i) this Agreement, (ii)
the Development and License Agreement, dated as of February 28, 1997 (the
"Development and License Agreement"), by and between the Company and BI, and
(iii) the Stock Purchase Agreement, dated as of February 28, 1997 (the "Stock
Purchase Agreement" and, together with the Development and License Agreement,
the "BI Agreements"), by and between the Company and BI has been duly executed
and delivered by the Company and constitutes a valid and binding obligation of
the Company, enforceable against the Company in accordance with its terms,
except as may be limited by bankruptcy, insolvency, reorganization, moratorium
or other similar laws relating to or affecting creditors' rights generally or by
general principles of equity and except as rights to indemnity and contribution
hereunder may be limited by Federal or state securities laws or the public
policy underlying such laws.
i. The authorized, issued and
outstanding capital stock of the Company is as set forth in the Prospectus under
"Capitalization" (except for subsequent issuances, if any, pursuant to this
Agreement or pursuant to reservations, agreements, employee or director benefit
plans or the exercise of convertible securities referred to in the Prospectus);
the shares of issued and outstanding capital stock of the Company have been duly
authorized and validly issued and are fully paid and non-assessable and have not
been issued in violation of or are not otherwise subject to any preemptive or
other similar rights; the Securities have been duly authorized for issuance and
sale to the Underwriters pursuant to this Agreement and the Common Stock to be
issued pursuant to the BI Agreements (the "BI Securities") have been duly
authorized for issuance and sale to BI pursuant to the BI Agreements, and, the
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<PAGE> 14
Securities when issued and delivered by the Company pursuant to this Agreement
and the BI Securities when issued and delivered by the Company pursuant to the
BI Agreements against payment of the consideration set forth herein and therein,
will be validly issued and fully paid and non-assessable; the certificates
evidencing the Securities and the BI Securities are in due and proper form under
Delaware law; the authorized capital stock of the Company, including the
Securities and the BI Securities, conforms to all statements relating thereto
contained in the Prospectus; and the issuance of the Securities and the BI
Securities is not subject to preemptive or other similar rights. There are no
outstanding subscriptions, options, warrants, convertible or exchangeable
securities or other rights granted to or by the Company to purchase shares of
Common Stock or other securities of the Company and there are no commitments,
plans or arrangements to issue any shares of Common Stock or any security
convertible into or exchangeable for Common Stock, in each case other than as
described in the Prospectus.
j. Except as disclosed in the
Registration Statement and except as would not, singly or in the aggregate,
reasonably be expected to have a material adverse effect on the condition,
financial or otherwise, or the earnings, business affairs or business prospects
of the Company, (A) the Company is in compliance with all applicable
Environmental Laws, (B) the Company has all permits, authorizations and
approvals required under any applicable Environmental Laws and are each in
compliance with the requirements of such permits authorizations and approvals,
(C) there are no pending or, to the best knowledge of the Company, threatened
Environmental Claims against the Company and (D) under applicable law, there are
no circumstances with respect to any property or operations of the Company that
are reasonably likely to form the basis of an Environmental Claim against the
Company.
For purposes of this Agreement, the following terms shall have
the following meanings: "Environmental Law" means any United States (or other
applicable jurisdiction's) Federal, state, local or municipal statute, law,
rule, regulation, ordinance, code, policy or rule of common law and any judicial
or administrative interpretation thereof, including any judicial or
administrative order, consent decree or judgement, relating to the environment,
health, safety or any chemical, material or substance, exposure to which is
prohibited, limited or regulated by any governmental
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<PAGE> 15
authority. "Environmental Claims" means any and all administrative, regulatory
or judicial actions, suits, demands, demand letters, claims, liens, notices of
noncompliance or violation, investigations or proceedings relating in any way to
any Environmental Law.
k. The Company is not (i) in
violation of its charter or bylaws or (ii) in default in the performance or
observance of any obligation, agreement, covenant or condition contained in any
contract, indenture, mortgage, loan agreement, deed, trust, note, lease,
sublease, voting agreement, voting trust, or other instrument or agreement to
which the Company is a party or by which it may be bound, or to which any of the
property or assets of the Company is subject; except in the case of clause (ii)
above, as would not, singly or in the aggregate, have a material adverse effect
on the condition, financial or otherwise, or in the earnings, business affairs
or business prospects of the Company. The execution, delivery and performance of
each of this Agreement and the BI Agreements and the consummation of the
transactions contemplated herein and therein and compliance by the Company with
its obligations hereunder and thereunder have been duly authorized by all
necessary corporate action and will not conflict with or constitute a breach of,
or default under, or result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Company pursuant to, any
contract, indenture, mortgage, loan agreement, deed, trust, note, lease,
sublease, voting agreement, voting trust or other instrument or agreement to
which the Company is a party or by which it may be bound, or to which any of the
property or assets of the Company is subject, nor will such action result in any
violation of the provisions of the charter or bylaws of the Company or any
applicable statute, law, rule, regulation, ordinance, decision, directive or
order.
l. No labor dispute with the
employees of the Company exists or, to the best knowledge of the Company, is
imminent; and the Company is not aware of any existing or imminent labor
disturbance by the employees of any of its principal suppliers, manufacturers or
contractors which might, singly or in the aggregate, be expected to result in
any material adverse change in the condition, financial or otherwise, or in the
earnings, business affairs or business prospects of the Company.
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<PAGE> 16
m. There is no action, suit or
proceeding before or by any court or governmental agency or body, domestic or
foreign, now pending, or, to the knowledge of the Company, threatened, against
or affecting the Company, which is required to be disclosed in the Registration
Statement (other than as disclosed therein), or which, singly or in the
aggregate, might result in any material adverse change in the condition,
financial or otherwise, or in the earnings, business affairs or business
prospects of the Company, or which, singly or in the aggregate, might materially
and adversely affect the properties or assets thereof or which might materially
and adversely affect the consummation of this Agreement or the BI Agreements;
all pending legal or governmental proceedings to which the Company is a party or
of which any of its property or assets is the subject which are not described in
the Registration Statement, including ordinary routine litigation incidental to
the business, are, considered in the aggregate, not material; and there are no
contracts or documents of the Company which are required to be filed as exhibits
to the Registration Statement by the 1933 Act or by the 1933 Act Regulations
which have not been so filed.
n. The Company owns or is licensed
to use all patents, patent applications, inventions, trademarks, trade names,
applications for registration of trademarks, service marks, service mark
applications, copyrights, know-how, manufacturing processes, formulae, trade
secrets, licenses and rights in any thereof and any other intangible property
and assets (herein called the "Proprietary Rights") which are material to the
business of the Company as now conducted and as proposed to be conducted, in
each case as described in the Prospectus. The Company takes security measures
adequate to assert trade secret protection in its non- patented technology. The
description of the Proprietary Rights is correct in all material respects and
fairly and correctly describes the Company's rights with respect thereto. Except
as specifically identified and described in the Prospectus, the Company does not
have any knowledge of, and the Company has not given or received any notice of,
any pending conflicts with or infringement of the rights of others with respect
to any Proprietary Rights or with respect to any license of Proprietary Rights.
Except as specifically identified and described in the Prospectus, no action,
suit, arbitration, or legal, administrative or other proceeding, or
investigation is pending, or, to the best knowledge of the Company, threatened,
which involves any Proprietary Rights. The Company is not subject to any
judgment, order, writ, injunction or decree of
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<PAGE> 17
any court or any Federal, state, local, foreign or other governmental
department, commission, board, bureau, agency or instrumentality, domestic or
foreign, or any arbitrator, nor has it entered into or is a party to any
contract which restricts or impairs the use of any such Proprietary Rights in a
manner which would have a material adverse effect on the use of any of the
Proprietary Rights. To the best knowledge of the Company, no Proprietary Rights
used by the Company, and no services or products sold by the Company, conflict
with or infringe upon any proprietary rights available to any third party. The
Company has not received written notice of any pending conflict with or
infringement upon such third-party proprietary rights. The Company has not
entered into any consent, indemnification, forbearance to sue or settlement
agreement with respect to Proprietary Rights other than in the ordinary course
of business. To the best knowledge of the Company, no claims have been asserted
by any person with respect to the validity of the Company's ownership or right
to use the Proprietary Rights and, to the best knowledge of the Company, there
is no reasonable basis for any such claim to be successful. The Proprietary
Rights are valid and enforceable and no registration relating thereto has
lapsed, expired or been abandoned or cancelled or is the subject of cancellation
or other adversarial proceedings, and all applications therefore are pending and
are in good standing. The Company has complied, in all material respects, with
its respective contractual obligations relating to the protection of the
Proprietary Rights used pursuant to licenses. To the best knowledge of the
Company, no person is infringing on or violating the Proprietary Rights owned or
used by the Company.
o. No registration, authorization,
approval, qualification or consent of any court or governmental authority or
agency is necessary in connection with the offering, issuance or sale of the
Securities hereunder, except such as may be required under the 1933 Act or the
1933 Act Regulations or state securities or Blue Sky laws (or such as may be
required by the National Association of Securities Dealers, Inc. ("NASD")).
p. The Company possesses and is
operating in compliance with all material licenses, certificates, consents,
authorities, approvals and permits (collectively, "permits") from all state,
Federal, foreign and other regulatory agencies or bodies necessary to conduct
the business now operated by it, and the Company has not received any notice of
proceedings relating to the
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<PAGE> 18
revocation or modification of any such permit or any circumstance which would
lead it to believe that such proceedings are reasonably likely.
q. Except as described in the
Prospectus, there are no persons with registration or other similar rights to
have any securities registered pursuant to the Registration Statement or
otherwise registered by the Company under the 1933 Act.
r. No order preventing or
suspending the use of any preliminary prospectus has been issued and no
proceedings for that purpose are pending, threatened, or, to the knowledge of
the Company, threatened or contemplated by the Commission; and to the best
knowledge of the Company, no order suspending the offering of the Securities in
any jurisdiction designated by the Underwriters pursuant to Section 5(g) of this
Agreement has been issued and, to the best knowledge of the Company, no
proceedings for that purpose have been instituted or threatened or are
contemplated.
s. The Company has good and
marketable title to its properties, including but not limited to Proprietary
Rights, free and clear of all material security interests, mortgages, pledges,
liens, charges, encumbrances, claims and equities of record. The properties of
the Company are, in the aggregate, in good repair (reasonable wear and tear
excepted), and suitable for their respective uses. Any real properties held
under lease by the Company are held by it under valid, subsisting and
enforceable leases with such exceptions as are not material and do not
materially interfere with the conduct of the business of the Company.
t. The Company maintains a system
of internal accounting controls sufficient to provide reasonable assurances that
(i) transactions are executed in accordance with management's general or
specific authorization, (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets, (iii) access to
assets is permitted only in accordance with management's general or specific
authorization, and (iv) the recorded accountability for
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<PAGE> 19
assets is compared with the existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
u. The Company has conducted and is
conducting its business in compliance with all applicable Federal, state, local
and foreign statutes, laws, rules, regulations, ordinances, codes, decisions,
decrees, directives and orders, except where the failure to do so would not,
singly or in the aggregate, have a material adverse effect on the condition,
financial or otherwise, or on the earnings, business affairs or business
prospects of the Company.
v. To the best of the Company's
knowledge, neither the Company nor any employee or agent of the Company has made
any payment of funds of the Company or received or retained any funds in
violation of any law, rule or regulation, which payment, receipt or retention of
funds is of a character required to be disclosed in the Prospectus.
w. The Company is not now, and
after sale of the Securities to be sold by it hereunder and application of the
net proceeds from such sale as described in the Prospectus under the caption
"Use of Proceeds" will not be, an "investment company" within the meaning of the
Investment Company Act of 1940, as amended.
x. All offers and sales of capital
stock of the Company, including in connection with the issuance and sale of the
BI Securities, were at all relevant times duly registered or exempt from the
registration requirements of the 1933 Act and were duly registered or subject to
an available exemption from the registration requirements of the applicable
state securities or Blue Sky laws.
y. The Common Stock is registered
pursuant to Section 12(g) of the 1934 Act. The Securities have been duly
authorized for quotation on NNM. The Company has taken no action designed to, or
likely to have the effect of, terminating the registration of the Common Stock
under the 1934 Act or delisting the Common Stock from NNM, nor has the Company
received any notification that the Commission or NNM is contemplating
terminating such registration or listing.
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<PAGE> 20
z. Neither the Company nor, to its
knowledge, any of its officers, directors or affiliates has taken, and at the
Closing Date and at any later Option Closing Date, neither the Company nor, to
its knowledge, any of its officers, directors or affiliates will have taken,
directly or indirectly, any action which has constituted, or might reasonably be
expected to constitute, the stabilization or manipulation of the price of sale
or resale of the Securities.
aa. The Company maintains
insurance of the types and in amounts adequate for its business and consistent
with insurance coverage maintained by similar companies in similar business,
including but not limited to, insurance covering clinical trial liability and
real and personal property owned or leased against theft, damage, destruction,
acts of vandalism and all other risks customarily insured against, all of which
insurance is in full force and effect.
bb. The Company has filed all
material tax returns required to be filed, which returns are true and correct in
all material respects, and the Company is not in default in the payment of any
taxes, including penalties and interest, assessments, fees and other charges,
shown thereon due or otherwise assessed, other than those being contested in
good faith and for which adequate reserves have been provided or those currently
payable without interest which were payable pursuant to said returns or any
assessments with respect thereto.
cc. Except as described in the
Prospectus, to the best of the Company's knowledge, there are no rulemaking or
similar proceedings before The United States Food and Drug Administration or
comparable Federal, state, local or foreign government bodies which involve or
affect the Company, which, if the subject of an action unfavorable to the
Company, could involve a prospective material adverse change in or effect on the
condition, financial or otherwise, or in the earnings, business affairs or
business prospects of the Company.
dd. The Company has not received
any communication (whether written or oral) relating to the termination or
threatened termination or modification or threatened modification of any
material consulting, licensing, marketing, research and development, cooperative
or any similar agreement, including,
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<PAGE> 21
without limitation, the BI Agreements and the technology and license agreements
listed under the sections of the Prospectus entitled, "Business--Boehringer
Ingelheim" and "Business--Technology and License Agreements," respectively. Each
such agreement is in effect substantially as described in such section of the
Prospectus.
ee. To the knowledge of the
Company, if any full-time employee identified in the Prospectus has entered into
any non-competition, non-disclosure, confidentiality or other similar agreement
with any party other than the Company, such employee is neither in violation
thereof nor is expected to be in violation thereof as a result of the business
conducted or expected to be conducted by the Company as described in the
Prospectus or such person's performance of his obligations to the Company; and
the Company has not received written notice that any consultant or scientific
advisor of the Company is in violation of any non-competition, non-disclosure,
confidentiality or similar agreement. The agreements executed by the Company's
employees, consultants and other advisors respecting trade secrets,
confidentiality, or intellectual property rights are valid, binding and
enforceable in accordance with their express terms.
7. INDEMNIFICATION AND CONTRIBUTION.
a. The Company agrees to indemnify
and hold harmless (i) each Underwriter and (ii) each person, if any, who
controls any Underwriter within the meaning of Section 15 of the 1933 Act (any
of the persons referred to in this clause (ii) being hereinafter referred to as
a "controlling person") and (iii) the respective directors, officers, partners
and employees of any of the Underwriters or any controlling person (any person
referred to in clause (i), (ii) or (iii) may hereinafter be referred to as an
"Indemnified Person") to the fullest extent lawful, from and against any and all
losses, claims, damages, liabilities and expenses whatsoever (including, without
limitation, all reasonable costs of pursuing, investigating and defending any
claim, suit or action or any investigation or proceeding by any governmental
agency or body, commenced or threatened, including the reasonable fees and
expenses of counsel to any Indemnified Person), directly or indirectly, caused
by, related to, based upon or arising out of or in connection with any untrue
statement or alleged untrue statement of a material fact contained in the
21
<PAGE> 22
Registration Statement or any amendment thereto, including the Rule 430A
Information and Rule 434 Information, if applicable, or 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 or caused by, related
to, based upon, arising out of or in connection with any untrue statement or
alleged untrue statement of a material fact contained in any preliminary
prospectus or the Prospectus (or any amendment or supplement thereto) or any
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, except insofar as such
losses, claims, damages, liabilities or expenses arise out of or are based upon
any untrue statement or omission or alleged untrue statement or omission which
has been made therein or omitted therefrom in reliance upon and in conformity
with the information relating to such Underwriter furnished in writing to the
Company by or on behalf of any Underwriter through you expressly for use in
connection therewith; PROVIDED, HOWEVER, that the indemnification contained in
this paragraph a. with respect to any preliminary prospectus shall not inure to
the benefit of any Underwriter (or related Indemnified Person) on account of any
such loss, claim, damage, liability or expense arising from the sale of the
Securities by such Underwriter to any person if a copy of the Prospectus shall
not have been delivered or sent to such person within the time required by the
1933 Act or the 1933 Act Regulations, and the untrue statement or alleged untrue
statement or omission or alleged omission of a material fact contained in such
preliminary prospectus was corrected in the Prospectus (or any amendment or
supplement thereto), provided that the Company has delivered the Prospectus to
the several Underwriters in requisite quantity on a timely basis to permit such
delivery or sending.
b. If any action, suit or
proceeding shall be brought against any Indemnified Person in respect of which
indemnity may be sought against the Company, such Indemnified Person shall
promptly notify the parties against whom indemnification is being sought (the
"indemnifying parties"), and such indemnifying parties shall assume the defense
thereof, including the employment of counsel and payment of all fees and
expenses. Such Indemnified Person shall have the right to employ separate
counsel in any such action, suit or proceeding and to participate in the defense
thereof, but the fees and expenses of such counsel
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<PAGE> 23
shall be at the expense of such Indemnified Person unless (i) the indemnifying
parties have agreed in writing to pay such fees and expenses, (ii) the
indemnifying parties have failed to assume the defense and employ counsel or
(iii) the named parties to any such action, suit, investigation or proceeding
(including any impleaded parties) include both such Indemnified Person and the
indemnifying parties and representation of such Indemnified Person and any
indemnifying party by the same counsel would, in the reasonable judgment of the
Indemnified Person, be inappropriate due to actual or potential differing
interests between them (in which case the indemnifying party shall not have the
right to assume the defense of such action, suit or proceeding on behalf of such
Indemnified Person). It is understood, however, that the indemnifying parties
shall, in connection with any one such action, suit or proceeding or separate
but substantially similar or related actions, suits or proceedings in the same
jurisdiction arising out of the same general allegations or circumstances, be
liable for the reasonable fees and expenses of only one separate firm of
attorneys (in addition to any local counsel) at any time for all such
Indemnified Persons not having actual or potential differing interests with you
or among themselves, which firm shall be designated in writing by Vector, and
that all such fees and expenses shall be reimbursed as they are incurred. The
indemnifying parties shall not be liable for any settlement of any such action,
suit or proceeding effected without their written consent, which consent shall
not be unreasonably withheld, but if settled with such written consent, or if
there be a final judgment for the plaintiff in any such action, suit or
proceeding, the indemnifying parties agree to indemnify and hold harmless any
Indemnified Person, to the extent provided in the preceding paragraph, from and
against any loss, claim, damage, liability or expense by reason of such
settlement or judgment.
c. Each Underwriter agrees,
severally and not jointly, to indemnify and hold harmless the Company, its
directors, its officers who sign the Registration Statement, any person who
controls the Company within the meaning of Section 15 of the 1933 Act, to the
same extent as the foregoing indemnity from the Company to each Indemnified
Person, but only with respect to information relating to such Underwriter
furnished in writing by or on behalf of such Underwriter through Vector
expressly for use in the Registration Statement, the Prospectus or any
preliminary prospectus, or any amendment or supplement thereto. If any action,
suit, investigation or proceeding shall be brought against the
23
<PAGE> 24
Company, any of its directors, any such officer or any such controlling person
based on the Registration Statement, the Prospectus or any preliminary
prospectus, or any amendment or supplement thereto, and in respect of which
indemnity may be sought against any Underwriter pursuant to this paragraph (c),
such Underwriter shall have the rights and duties given to the Company by
paragraph (b) above, and the Company, its directors, any such officer and any
such controlling person shall have the rights and duties given to the
Indemnified Persons by paragraph (a) above.
d. If the indemnification provided
for in this Section 7 is unavailable to, or insufficient to hold harmless, an
indemnified party under paragraphs (a) or (c) hereof in respect of any losses,
claims, damages, liabilities or expenses referred to therein, then each
indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages, liabilities or expenses (i) in such proportion
as is appropriate to reflect the relative benefits received by the Company on
the one hand and the Underwriters on the other hand from the offering of the
Securities or (ii) if the allocation provided by clause (i) above is not
permitted by applicable law or judicial determination, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Company on the one hand and the
Underwriters on the other hand, as well as any other relevant equitable
considerations. The relative benefits received by the Company on the one hand
and the Underwriters on the other hand shall be deemed to be in the same
proportion as the total net proceeds from the offering (before deducting
expenses) received by the Company bear to the total underwriting discounts and
commissions received by the Underwriters, in each case as set forth in the table
on the cover page of the Prospectus or, if Rule 434 is used, the corresponding
location on the Term Sheet. The relative fault of the Company on the one hand
and the Underwriters on the other hand shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact relates to
information supplied by the Company on the one hand or by the Underwriters on
the other hand and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The indemnity and contribution obligations of the Company set forth herein shall
be in addition to any liability or
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<PAGE> 25
obligation the Company may otherwise have to any Indemnified Person.
e. The Company and the Underwriters
agree that it would not be just and equitable if contribution pursuant to this
Section 7 were determined by a pro rata allocation (even if the Underwriters
were treated as one entity for such purpose) or by any other method of
allocation that does not take account of the equitable considerations referred
to in the immediately preceding paragraph. The amount paid or payable by an
indemnified party as a result of the losses, claims, damages, liabilities and
expenses referred to in the immediately preceding paragraph shall be deemed to
include, subject to the limitations set forth above, any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
any claim or defending any such action, suit or proceeding. Notwithstanding the
provisions of this Section 7, no Underwriter (or any of its related Indemnified
Persons) shall be required to contribute (whether pursuant to subsection (a) or
(c) or otherwise) any amount in excess of the underwriting discount applicable
to the Securities underwritten by such Underwriter. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933
Act) shall be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation. The Underwriters' obligations to contribute
pursuant to this Section 7 are several in proportion to the respective numbers
of Securities set forth opposite their names in Schedule I hereto (or such
numbers of Securities increased as set forth in Section 10 hereof) and not
joint.
f. No indemnifying party shall,
without the prior written consent of the Indemnified Person, effect any
settlement of any pending or threatened action, suit or proceeding in respect of
which any Indemnified Person is or could have been a party and indemnity could
have been sought hereunder by such Indemnified Person, unless such settlement
includes an unconditional release of such Indemnified Person from all liability
on claims that are the subject matter of such action, suit or proceeding.
g. Any losses, claims, damages,
liabilities or expenses for which an indemnified party is entitled to
indemnification or contribution under this Section 7 shall be paid by the
indemnifying party to the indemnified party as such losses, claims, damages,
liabilities or expenses are incurred. The
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indemnity and contribution agreements contained in this Section 7 and the
representations and warranties of the Company set forth in this Agreement shall
remain operative and in full force and effect, regardless of (i) any
investigation made by or on behalf of any Indemnified Person, the Company, its
directors or officers or any person controlling the Company, (ii) acceptance of
any Securities and payment therefor hereunder and (iii) any termination of this
Agreement.
8. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The several
obligations of the Underwriters to purchase the Initial Securities
hereunder are subject to the following conditions:
a. The Registration Statement,
including any Rule 462(b) Registration Statement, shall have become effective on
the date hereof; no stop order suspending the effectiveness of the Registration
Statement shall have been issued under the 1933 Act or proceedings therefor
initiated or threatened by the Commission. If the Company has elected to rely
upon Rule 430A, Rule 430A Information previously omitted from the effective
Registration Statement pursuant to Rule 430A shall have been transmitted to the
Commission for filing pursuant to Rule 424(b) within the prescribed time period
and the Company shall have provided evidence satisfactory to the Underwriters of
such timely filing, or a post-effective amendment providing such information
shall have been promptly filed and declared effective in accordance with the
requirements of Rule 430A. If the Company has elected to rely upon Rule 434, a
Term Sheet shall have been transmitted to the Commission for filing pursuant to
Rule 424(b) within the prescribed time period.
b. The Underwriters shall have
received:
(i) The favorable opinion, dated as of the
Closing Date, of Hale and Dorr LLP, counsel for the Company,
in form and substance reasonably satisfactory to counsel for
the Underwriters, to the effect that:
A. The Company has been duly incorporated
and is validly existing as a corporation in good
standing under the laws of the State of Delaware.
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B. The Company has corporate power and
authority to own, lease and operate its properties
and to conduct its business as described in the
Registration Statement and the Prospectus and to
enter into and perform its obligations under this
Agreement and the BI Agreements.
C. The Company is duly qualified as a
foreign corporation to transact business and is in
good standing in ___________.
D. The authorized, issued and outstanding
capital stock of the Company is as set forth in the
Prospectus under "Capitalization" (except for
subsequent issuances, if any, pursuant to
reservations, agreements, employee benefit plans or
the exercise of convertible securities referred to
in the Prospectus), and the shares of issued and
outstanding capital stock of the Company, including
the Common Stock, have been duly authorized and
validly issued and are fully paid and non-assessable
and, to their knowledge and information, have not
been issued in violation of or are not otherwise
subject to any preemptive rights or other similar
rights.
E. The Securities and the BI Securities
have been duly authorized for issuance and sale to
the Underwriters and BI pursuant to this Agreement
and the BI Agreements and, when issued and delivered
by the Company pursuant to this Agreement and the BI
Agreements against payment of the consideration set
forth herein and therein, will be validly issued and
fully paid and non-assessable; and, to their
knowledge, the issuance of the Securities and the BI
Securities is not subject to preemptive or other
similar rights.
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<PAGE> 28
F. To their knowledge, except as described
in the Prospectus, there are no outstanding options,
warrants or other rights granted to or by the
Company to purchase shares of Common Stock or other
securities of the Company and there are no written
commitments, plans or arrangements to issue any
shares of Common Stock or other securities.
G. This Agreement and each of the BI
Agreements has been duly authorized, executed and
delivered by the Company.
H. At the time the Registration Statement
became effective and at the Closing Date, the
Registration Statement (other than the financial
statements and supporting schedules included
therein, as to which no opinion need be rendered)
complied as to form in all material respects with
the requirements of the 1933 Act and the 1933 Act
Regulations.
I. The form of certificate used to evidence
each of the Securities and the BI Securities is in
due and proper form and complies with all applicable
statutory requirements.
J. To their knowledge, there are no legal
or governmental proceedings pending or threatened
which individually or in the aggregate are required
to be disclosed in the Registration Statement other
than those disclosed therein.
K. The information in the Prospectus under
"Risk Factors--Shares Eligible for Future Sale;
Registration Rights," "Business--Boehringer
Ingelheim,"--Technology and License Agreements,"
"Certain Transactions," "Description of Capital
Stock" and
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<PAGE> 29
"Shares Eligible for Future Sale" to the extent that
it constitutes matters of law, summaries of legal
matters, documents or proceedings, or legal
conclusions, has been reviewed by them and is
correct in all material respects and fairly and
correctly presents the information with respect
thereto.
L. To their knowledge, there are no
contracts, indentures, mortgages, loan agreements,
deeds, trusts, notes, leases, subleases, voting
trusts, voting agreements or other instruments or
agreements required to be described or referred to
in the Registration Statement or to be filed as
exhibits thereto other than those described or
referred to therein or filed as exhibits thereto,
the descriptions thereof or references thereto are
correct in all material respects and fairly and
correctly presents the information called for with
respect thereto; and to the best of their knowledge
and information, no default exists in the due
performance or observance of any material
obligation, agreement, covenant or condition
contained in any material contract, indenture,
mortgage, loan agreement, deed, trust, note, lease,
sublease, voting trust, voting agreement or other
instrument or agreement of the Company.
M. No authorization, approval, consent or
order of any court or governmental authority or
agency is required on behalf of the Company in
connection with the offering, issuance or sale of
the Securities to the Underwriters or the issuance
and sale of the BI Securities to BI, except, with
respect to the Securities, such as may be required
under the 1933 Act or the 1933 Act Regulations or
state securities or Blue Sky laws or such as may be
required by the NASD; and
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<PAGE> 30
the execution, delivery and performance of this
Agreement and the BI Agreements and the consummation
of the transactions contemplated herein and therein
and the compliance by the Company with its
obligations hereunder and thereunder will not
conflict with or constitute a breach of, or default
under, or result in the creation or imposition of
any lien, charge or encumbrance upon any property or
assets of the Company pursuant to, any contract,
indenture, mortgage, loan agreement, note, deed,
trust, lease, sublease, voting trust, voting
agreement or other instrument or agreement
("instruments") listed on a schedule to be attached
to their opinion (which schedule shall include all
instruments (A) filed as an exhibit to the
Registration Statement or (B) included in a
certificate of an officer of the Company setting
forth any other instruments material to the Company
or any other instrument identified by you or your
counsel) to which the Company is a party or by which
it may be bound, or to which any of the property or
assets of the Company is subject, nor will such
action result in any violation of the provisions of
the charter or bylaws of the Company or any
applicable statute, law, rule, regulation,
ordinance, code, decision or directive or any order
known to them of any court or governmental agency
having jurisdiction over the Company or any of its
properties or assets.
N. Except as described in the Prospectus,
to their knowledge, there are no agreements between
the Company and any persons providing such persons
with registration or other similar rights to have
any securities registered pursuant to the
Registration Statement or otherwise registered by
the Company under the 1933 Act.
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O. The Company is not an "investment
company" or a company "controlled" by an "investment
company" within the meaning of the Investment
Company Act of 1940, as amended.
P. All sales of the Company's capital stock
during the nineteen months immediately prior to the
date hereof were at all relevant times duly
registered or exempt from the registration
requirements of the 1933 Act.
Q. To the best of their knowledge and
information, the Company is in compliance with, and
conducts its business in conformity with, all
applicable laws and regulations relating to the
operation of its business as described in the
Registration Statement, except to the extent that
any failure so to comply or conform would not have a
material adverse effect upon the business or
condition, financial or otherwise, of the Company.
R. The Registration Statement has become
effective under the 1933 Act; any required filing of
the Prospectus, and any supplements thereto or the
Term Sheet, pursuant to Rule 424(b) and if
applicable, Rule 434, has been made in the manner
and within the time period required; and to their
best knowledge and information, no stop order
suspending the effectiveness of the Registration
Statement or any part thereof has been issued and no
proceedings therefor have been instituted or are
pending or contemplated under the 1933 Act.
S. The Company owns or is the exclusive
licensee of the United States and foreign patents
and patent applications listed on Schedule II and is
the non-exclusive
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licensee of the United States and foreign patents
and patent applications listed on Schedule III. All
such patents or licenses are duly executed, validly
binding and enforceable in accordance with their
terms and, to the best of their knowledge and
information, the Company is not in default (declared
or undeclared) of any material provision of any such
licenses.
(ii) The favorable opinion, dated as of the
Closing Date, of Pennie & Edmonds LLP, patent counsel for the
Company, in form and substance satisfactory to counsel for
the Underwriters, to the effect that:
A. The statements in the Prospectus
relating to United States patent matters, under the
captions "Risk Factors--Patents and Proprietary
Rights; Third Party Rights" and "Business--Patents
and Proprietary Rights," insofar as such statements
constitute matters of law, legal conclusions, or
summaries of legal matters or proceedings, are
correct in all material respects and present fairly
the information purported to be shown.
B. To the best of their knowledge, with
respect to the United States patent applications
that are referred to in the Registration Statement
and listed in Schedules IV and V hereto (herein
called the "Applications"), the sections of the
Registration Statement entitled "Risk
Factors--Patents and Proprietary Rights; Third Party
Rights" and "Business--Patents and Proprietary
Rights," at the time the Registration Statement
became effective, did not contain any untrue
statement of material fact or omit to state a
material fact required to be stated therein or
necessary to make the statements therein, not
misleading.
32
<PAGE> 33
C. To the best of their knowledge, with
respect to the Applications, the sections of the
Prospectus entitled "Risk Factors--Patents and
Proprietary Rights; Third Party Rights" and
"Business--Patents and Proprietary Rights," as of its
date and as of the Closing, do not contain any
untrue statement of material fact or omit to state a
material fact necessary to make the statements
therein, in light of the circumstances in which they
were made, not misleading.
D. With respect to United States patent
matters, nothing has come to their attention which
would lead them to believe that the sections of the
Registration Statement entitled "Risk
Factors--Patents and Proprietary Rights; Third Party
Rights" and "Business--Patents and Proprietary
Rights," at the time the Registration Statement
became effective, contained any untrue statement of
material fact or omitted to state a material fact
required to be stated therein or necessary to make
the statements therein, not misleading.
E. With respect to United States patent
matters, nothing has come to their attention which
would lead them to believe that the sections of the
Prospectus entitled "Risk Factors--Patents and
Proprietary Rights; Third Party Rights" and
"Business--Patents and Proprietary Rights," as of
the Prospectus' date and as of the Closing Date,
contain any untrue statement of material fact of
omit to state a material fact necessary to make the
statements therein, in light of the circumstances in
which they were made, not misleading.
F. The Company is listed in the records of
the appropriate foreign patent offices as the sole
assignee of record of
33
<PAGE> 34
each of the foreign patents that are referred to in
the Registration Statement and listed on Schedule VI
hereto (herein called the "Foreign Patents") and
each of the foreign applications that are referred
to in the Registration Statement and listed on
Schedule VII hereto (herein called the "Foreign
Applications"). To the best of their knowledge,
there are no asserted or unasserted claims of any
persons relating to the scope or ownership of the
Foreign Patents or the Foreign Applications, there
are no liens which have been filed against any of
the Foreign Patents or the Foreign Applications,
there are no material defects of form in the
preparation or filing of the Foreign Applications,
the Foreign Applications are being diligently
prosecuted, and none of the Foreign Applications has
been finally rejected or abandoned.
G. Except as otherwise disclosed in the
Prospectus, nothing has come to their attention that
leads them to believe that the Applications and the
Foreign Applications will not eventuate in issued
patents, or that any patents issued in respect of
any such Applications or Foreign Applications will
not be valid or will not afford the Company
reasonable patent protection relative to the subject
matter thereof.
H. To the best of their knowledge, except
as described in the Prospectus, and with the
exception of proceedings before the United States
Patent and Trademark Office, there are no pending,
or threatened, legal or governmental proceedings
with respect to any of the United States patents
referred to in the Registration Statement and listed
on Schedules II and III hereto (herein called the
"Patents") or the Applications.
34
<PAGE> 35
I. According to the records of the United
States Patent and Trademark Office, which are
current as of [DATE], the Company owns each of the
Patents and the patent applications that are
referred to in the Registration Statement and listed
on Schedule IV hereto.
J. To the best of their knowledge, except
as described in the Prospectus and except for rights
which may be reserved to the United States
government, no third party has any rights to any of
the Patents or Applications.
K. To the best of their knowledge, no
interference has been declared or provoked with
respect to any of the Patents or the Applications.
L. To the best of their knowledge, there is
no presently-pending inventorship challenge with
respect to any of the Patents or the Applications.
M. To the best of their knowledge, without
any searches specifically having been conducted, or
having been required to have been conducted, no
third party is infringing on any of the Patents.
N. To the best of their knowledge, the
Company has not received any notice challenging the
Company's rights to any of the Patents or the
Applications.
O. To the best of their knowledge, the
Company has not received any notice challenging the
validity or enforceability of any of the Patents.
P. While there can be no guarantee that any
particular patent application will
35
<PAGE> 36
issue as a patent, each of the Applications hereto
presently is being properly and diligently
prosecuted in the United States Patent and Trademark
Office.
Q. To the best of their knowledge, for each
Application, all information known to them to be
"material to patentability," as defined in 37 C.F.R.
sec. 1.56(b), has been disclosed, or will be
disclosed, pursuant to 37 C.F.R. sec. 1.97, to the
United States Patent and Trademark Office.
R. To the best of their knowledge, without
any searches specifically having been conducted, or
having been required to have been conducted, for the
purpose of rendering this opinion, while there can
be no guarantee that any particular patent
application will issue as a patent, each of the
Applications discloses patentable subject matter.
S. To the best of their knowledge, except
as otherwise disclosed in the Prospectus, no claim,
which is presently pending, has been asserted
against the Company relating to the potential
infringement of, or conflict with, any Patents,
trademarks, copyrights, trade secrets, or
proprietary rights, of others.
(iii) The favorable opinion, dated as of
the Closing Date, of Skadden, Arps, Slate, Meagher & Flom
(Illinois), counsel for the Underwriters with respect to the
issuance and sale of the Securities, the Registration
Statement and the Prospectus and such other related matters
as the Underwriters shall reasonably request.
(iv) In giving their opinions required by
subsections (b)(i) and (b)(iii), respectively, of this
Section 8, Hale and Dorr LLP and Skadden, Arps,
36
<PAGE> 37
Slate, Meagher & Flom (Illinois) shall each additionally
state that nothing has come to their attention that leads
them to believe that the Registration Statement (except for
financial statements and schedules and other financial
information included therein, as to which counsel need make
no statement), at the time it became effective, contained an
untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to
make the statements therein not misleading or that the
Prospectus (except for financial statements and schedules and
other financial information included therein, as to which
counsel need make no statement), as of its date (unless the
term "Prospectus" refers to a prospectus which has been
provided to the Underwriters by the Company for use in
connection with the offering of the Securities which differs
from the Prospectus on file at the Commission at the time the
Registration Statement becomes effective, in which case at
the time it is first provided to the Underwriters for such
use) or at the Closing Date or the Option Closing Date, as
the case may be, included or includes an untrue statement of
a material fact or omitted or omits to state a material fact
necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not
misleading.
c. (i) There shall not have been,
since the date hereof or since the respective dates as of which information is
given in the Registration Statement and the Prospectus, any material adverse
change or any development involving a prospective material adverse change in or
affecting the condition, financial or otherwise, or in the earnings, business
affairs or business prospects of the Company, whether or not arising in the
ordinary course of business, (ii) the representations and warranties of the
Company in Section 6 hereof shall be true and correct with the same force and
effect as though expressly made at and as of the Closing Date, except to the
extent that any such representation or warranty relates to a specific date,
(iii) the Company shall have complied
37
<PAGE> 38
in all material respects with all agreements and satisfied all conditions on its
part to be performed or satisfied at or prior to the Closing Date, (iv) no stop
order suspending the effectiveness of the Registration Statement has been issued
and no proceedings for that purpose have been initiated or threatened by the
Commission and (v) the Representatives shall have received a certificate, dated
the Closing Date and signed by the President or any Vice President and the chief
financial or accounting officer of the Company to the effect set forth in
clauses (i), (ii), (iii) and (iv) above.
d. Concurrently with, or prior to,
the issuance and sale of the Securities and the Closing hereunder, the Company
shall have issued and sold the BI Securities to BI pursuant to the BI Agreements
and shall have received payment of the consideration set forth therein and as
provided in the Prospectus.
e. At the time of the execution of
this Agreement, the Underwriters shall have received from Ernst & Young LLP a
letter dated such date, in form and substance satisfactory to the Underwriters,
together with signed or reproduced copies of such letter for each of the other
Underwriters containing statements and information of the type ordinarily
included in accountants' "comfort letters" to underwriters with respect to the
financial statements and certain financial information contained in the
Registration Statement and the Prospectus.
f. The Underwriters shall have
received from Ernst & Young LLP a letter, dated as of the Closing Date, to the
effect that they reaffirm the statements made in the letter furnished pursuant
to subsection (e) of this Section, except that the specified date referred to
shall be a date not more than three business days prior to the Closing Date.
g. The Securities shall have been
approved for quotation on NNM.
h. In the event that the
Underwriters exercise their option provided in Section 2 hereof to purchase all
or any portion of the Option Securities, the representations and warranties of
the Company contained herein and the statements in any certificates furnished by
the Company hereunder shall be true
38
<PAGE> 39
and correct as of the Option Closing Date and, at the relevant Option Closing
Date, the Underwriters shall have received:
(1) A certificate, dated
such Option Closing Date, of the President or any Vice
President of the Company and of the chief financial or
accounting officer of the Company confirming that the
certificate delivered at the Closing Date pursuant to Section
8 (c) hereof remains true and correct as of such Option
Closing Date.
(2) The favorable opinion
of Hale and Dorr LLP, counsel for the Company, in form and
substance satisfactory to counsel for the Underwriters, dated
such Option Closing Date, relating to the Option Securities
to be purchased on such Option Closing Date and otherwise to
the same effect as the opinion required by Sections 8 (b)(i)
and 8 (b)(iv) hereof (except such subsections thereof as are
then inapplicable).
(3) The favorable opinion
of Pennie & Edmonds LLP, patent counsel for the Company, in
form and substance satisfactory to counsel for the
Underwriters, dated such Option Closing Date to the same
effect as the opinion required by Section 8 (b)(ii) hereof.
(4) The favorable opinion
of Skadden, Arps, Slate, Meagher & Flom (Illinois), counsel
for the Underwriters, dated such Option Closing Date,
relating to the Option Securities to be purchased on such
Option Closing Date and otherwise to the same effect as the
opinion required by Sections 8 (b)(iii) and 8 (b)(iv) hereof.
(5) A letter from Ernst &
Young LLP in form and substance satisfactory to the
Underwriters and dated such Option Closing Date,
substantially the same in form and substance as the letter
furnished to the
39
<PAGE> 40
Underwriters pursuant to Section 8(e) hereof, except that the
"specified date" in the letter furnished pursuant to this
Section 8(g)(5) shall be a date not more than three business
days prior to such Option Closing Date.
i. At the date of this Agreement,
the Underwriters shall have received lock-up agreements in form and substance
satisfactory to the Underwriters by the persons designated by you.
j. Counsel for the Underwriters
shall have been furnished with such documents and opinions as they may require
for the purpose of enabling them to pass upon the issuance and sale of the
Securities as herein contemplated and related proceedings, or in order to
evidence the accuracy of any of the representations or warranties or the
fulfillment of any of the conditions herein contained; and all proceedings taken
by the Company in connection with the issuance and sale of the Securities as
herein contemplated shall be satisfactory in form and substance to the
Underwriters and counsel for the Underwriters.
k. The NASD shall not have raised
any objection with respect to the fairness and reasonableness of the
underwriting terms and arrangements.
l. Any certificate or document
signed by any officer of the Company and delivered to you, as Representatives of
the Underwriters, or to counsel for the Underwriters, pursuant to this Agreement
shall be deemed a representation and warranty by the Company to each Underwriter
as to the statements made therein.
m. If any condition specified in
this Section 8 shall not have been fulfilled when and as required to be
fulfilled, this Agreement, or, in the case of any condition to the purchase of
Option Securities, on an Option Closing Date which is after the Closing Date,
the obligations of the several Underwriters to purchase the relevant Option
Securities, may be terminated by the Representatives by notice to the Company at
any time at or prior to Closing Date or such an Option Closing Date as the case
may be, and such termination shall be without liability of any party to any
other party except as provided in Section 9 and except
40
<PAGE> 41
that Sections 6 and 7 shall survive any such termination and remain in full
force and effect.
9. EXPENSES. The Company agrees to pay the following costs and
expenses and all other costs and expenses incident to the performance by it of
its obligations hereunder: (i) the preparation, printing or reproduction, and
filing with the Commission of the Registration Statement (including financial
statements and exhibits thereto), each preliminary prospectus, the Prospectus,
and each amendment or supplement to any of them; (ii) the printing (or
reproduction) and delivery (including postage, air freight and charges for
counting and packaging) of such copies of the Registration Statement, each
preliminary prospectus, the Prospectus, and all amendments or supplements to any
of them as may be reasonably requested for use in connection with the offering
and sale of the Securities; (iii) the preparation, printing, authentication,
issuance and delivery of certificates for the Securities, including any stamp
taxes in connection with the original issuance and sale of the Securities; (iv)
the printing (or reproduction) and delivery of this Agreement, the preliminary
and supplemental Blue Sky Memoranda and all other agreements or documents
printed (or reproduced) and delivered in connection with the original issuance
and sale of the Securities; (v) the registration of the Common Stock under the
1934 Act and the quotation of the Securities on NNM; (vi) the registration or
qualification of the Securities for offer and sale under the securities or Blue
Sky laws of the several states as provided in Section 5(g) hereof (including the
reasonable fees, expenses and disbursements of one counsel for the Underwriters
relating to the preparation, printing or reproduction, and delivery of the
preliminary and supplemental Blue Sky Memoranda and such registration and
qualification); (vii) the filing fees and the reasonable fees and expenses of
one counsel for the Underwriters incident to securing any required review by the
NASD; and (viii) the fees and expenses of the Company's accountants and the fees
and expenses of counsel (including local and special counsel) for the Company.
If this Agreement shall terminate or shall be terminated after
execution pursuant to any provisions hereof (otherwise than pursuant to the
second paragraph of Section 10 or pursuant to clauses (ii), (iii), (iv) and (v)
of Section 11 hereof) or if this Agreement shall be terminated by the
Underwriters because of any failure or refusal on the part of the Company to
comply, in any
41
<PAGE> 42
material respect, with the terms or fulfill, in any material respect, any of the
conditions of this Agreement, the Company agrees to reimburse the
Representatives for all reasonable out-of-pocket expenses (including reasonable
fees and expenses of one counsel for the Underwriters) incurred by you in
connection herewith.
10. EFFECTIVE DATE OF AGREEMENT. This Agreement shall become
effective: (i) upon the execution and delivery hereof by or on behalf of the
parties hereto; or (ii) if, at the time this Agreement is executed and
delivered, it is necessary for the Registration Statement or a post-effective
amendment thereto to be declared effective before the offering of the Securities
may commence, when notification of the effectiveness of the Registration
Statement or such post-effective amendment has been released by the Commission.
Until such time as this Agreement shall have become effective, it may be
terminated by the Company, by notifying you, or by you, as Representatives of
the several Underwriters, by notifying the Company.
If one or more of the Underwriters shall fail on the Closing
Date to purchase the Initial Securities which it or they are obligated to
purchase under this Agreement (the "Defaulted Securities"), the Representatives
shall have the right, within 24 hours thereafter, to make arrangements for one
or more of the non-defaulting Underwriters, or any other underwriters, to
purchase all, but not less than all, of the Defaulted Securities in such amounts
as may be agreed upon and upon the terms herein set forth; if, however, the
Representatives shall not have completed such arrangements within such 24-hour
period, then:
a. if the number of Defaulted
Securities does not exceed 10% of the number of Initial Securities, the
non-defaulting Underwriters shall be obligated to purchase the full amount
thereof in the proportions that their respective underwriting obligations
hereunder bear to the underwriting obligations of all non-defaulting
Underwriters, or
b. if the number of Defaulted
Securities exceeds 10% of the number of Initial Securities, this Agreement shall
terminate without liability on the part of any non-defaulting Underwriter.
42
<PAGE> 43
No action taken pursuant to this Section shall relieve any
defaulting Underwriter from liability in respect of its default.
In the event of any such default which does not result in a
termination of this Agreement, either the Representatives or the Company shall
have the right to postpone the Closing Date for a period not exceeding seven
days in order to effect any required changes in the Registration Statement or
Prospectus or in any other documents or arrangements. As used herein, the term
"Underwriter" includes any person substituted for an Underwriter under this
Section 10.
Any notice under this Section 10 may be given by telegram,
telecopy or telephone but shall be subsequently confirmed by letter.
11. TERMINATION OF AGREEMENT. The Underwriters may terminate
this Agreement, by written notice to the Company, at any time at or prior to the
Closing Date or Option Closing Date, as the case may be, (i) if there has been,
since the date of this Agreement or since the respective dates as of which
information is given in the Registration Statement, any material adverse change
or any development involving a prospective material adverse change in or
affecting the condition, financial or otherwise, or in the earnings, business
affairs or business prospects of the Company, whether or not arising in the
ordinary course of business, (ii) if there has occurred any change in the
financial markets in the United States or elsewhere or any outbreak of
hostilities or escalation thereof or other calamity or crisis the effect of
which is such as to make it, in your judgement, impracticable or inadvisable to
market the Securities or to enforce contracts for the sale of the Securities,
(iii) if trading in the Common Stock has been suspended by the Commission, or if
trading generally on the American Stock Exchange, the New York Stock Exchange or
in the over-the-counter markets has been suspended, or minimum or maximum prices
for trading have been fixed, or maximum ranges for prices for securities have
been required, by such exchange or markets or by order of the Commission or any
other governmental authority, or if a banking moratorium has been declared by
either Federal, New York or Illinois authorities, (iv) the enactment,
publication, decree or other promulgation of any Federal or state statute,
regulation, rule or order of any court or other governmental
43
<PAGE> 44
authority which in your judgement materially and adversely affects or may
materially or adversely affect the business or operations of the Company or (v)
the taking of any action by any Federal, state or local government or agency in
respect of its monetary or fiscal affairs which in your judgement has a material
adverse effect on the securities markets in the United States, and would in your
judgement make it impracticable or inadvisable to market the Securities or to
enforce any contract for the sale thereof. Notice of such termination may be
given by telegram, telecopy or telephone and shall be subsequently confirmed by
letter.
b. If this Agreement is terminated
pursuant to this Section 11, such termination shall be without liability of any
party to any other party except as provided in Section 9 and provided further
that Sections 6 and 7 shall survive such termination and remain in full force
and effect.
12. INFORMATION FURNISHED BY THE UNDERWRITERS. The statements
set forth in the last paragraph on the cover page, the stabilization legend on
the inside front cover page, and the statements under the caption "Underwriting"
in any preliminary prospectus and in the Prospectus constitute the only
information furnished by or on behalf of the Underwriters through you as such
information is referred to in Sections 5(a) and 7 hereof.
13. MISCELLANEOUS. Except as otherwise provided in Sections 5,
10 and 11 hereof, notice given pursuant to any provision of this Agreement shall
be in writing and shall be delivered (i) if to the Company at the office of the
Company at, 340 Memorial Drive, 3rd Floor West, Cambridge, Massachusetts 02139,
Attention: Chief Executive Officer; or (ii) if to you, as Representatives of the
several Underwriters, care of Vector Securities International, Inc., 1751 Lake
Cook Road, Suite 350, Deerfield, Illinois 60015, Attention: Syndicate
Department.
14. APPLICABLE LAW; COUNTERPARTS. This Agreement shall be
governed by and construed in accordance with the laws of the State of Illinois
applicable to contracts made and to be performed within the State of Illinois.
This Agreement may be signed in various counterparts which together constitute
one and the same instrument. If signed in counterparts, this Agreement shall not
become effective unless at least one counterpart hereof shall have been executed
and delivered on behalf of each party hereto.
44
<PAGE> 45
15. SUCCESSORS. This Agreement has been and is made solely for
the benefit of the several Underwriters, the Company, its directors and
officers, the other persons referred to in Section 7 hereof and their respective
successors and assigns, to the extent provided herein, and no other person shall
acquire or have any right under or by virtue of this Agreement. Neither the term
"successor" nor the term "successors and assigns" as used in this Agreement
shall include a purchaser from any Underwriter of any of the Securities in his
status as such purchaser.
45
<PAGE> 46
Please confirm that the foregoing correctly sets forth the
agreement among the Company and the several Underwriters.
Very truly yours,
TRANSCEND THERAPEUTICS, INC.
By:
-------------------------------
President and Chief
Executive Officer
Confirmed as of the date first
above mentioned on behalf of
themselves and the other several
Underwriters named in Schedule I
hereto.
VECTOR SECURITIES INTERNATIONAL, INC.
EVEREN SECURITIES, INC.
As Representatives of the Several Underwriters
By VECTOR SECURITIES INTERNATIONAL, INC.
By:
-----------------------------
Vice President
46
<PAGE> 47
SCHEDULE I
TRANSCEND THERAPEUTICS, INC.
Number of
---------
Initial
-------
Securities
----------
Purchased
---------
from the
--------
Underwriter Company
----------- -------
Vector Securities
International, Inc. . .
EVEREN Securities, Inc. .
Total
----------
47
<PAGE> 1
EXHIBIT 4.1
[Logo]
Transcend
Therapeutics, Inc.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
NUMBER SHARES
TTI
COMMON STOCK
COMMON STOCK
CUSIP 89353T 10 2
SEE REVERSE FOR CERTAIN DEFINITIONS
This Certifies that
is the owner of
FULLY PAID AND NONASSESSABLE SHARES, PAR VALUE $.01 PER SHARE,
OF THE COMMON STOCK OF
Transcend Therapeutics, Inc. transferable upon the books of the Corporation in
person or by attorney upon surrender of this Certificate properly endorsed or
assigned. This Certificate and the shares represented hereby are subject to the
laws of the State of Delaware and to the provisions of the Second Amended and
Restated Certificate of Incorporation and the Amended and Restated By-Laws of
the Corporation as from time to time amended. This Certificate is not valid
unless countersigned and registered by the Transfer Agent and Registrar.
Witness the facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers.
Dated:
VICE PRESIDENT/FINANCE AND SECRETARY PRESIDENT AND CHIEF EXECUTIVE OFFICER
/s/ B. Nicholas Harvey /s/ Hector J. Gomez
[facsimile signature] [facsimile signature]
COUNTERSIGNED AND REGISTERED,
CHASEMELLON SHAREHOLDER SERVICES, L.L.C.
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
[Corporate Seal]
<PAGE> 2
<TABLE>
<CAPTION>
TRANSCEND THERAPEUTICS, INC.
The Corporation is authorized to issue more than one class of stock. A statement of the powers, designations, preferences
and relative participating, optional or other special rights of each class and series of stock and the qualifications,
limitations or restrictions thereon will be provided without charge to each stockholder upon request to the Corporation.
The following abbreviations, when used in the inscription on the face of this Certificate, shall be construed as though
they were written out in full according to applicable laws or regulations:
<S> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT -- _________________ Custodian _____________________
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right of
survivorship and not as tenants under Uniform Gifts to Minors
in common
Act______________________________________________
(State)
Additional abbreviations may also be used though not in the above list.
ASSIGNMENT
For value received, ____________________________________hereby sell, assign, and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
______________________________________
_______________________________________________________________________________________________________________________
_______________________________________________________________________________________________________________________
_______________________________________________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING POSTAL ZIP CODE OF ASSIGNEE)
_______________________________________________________________________________________________________________________
_________________________________________________________________________________________________________________Shares
of the common stock represented by the within Certificate, and do hereby irrevocably constitute and appoint
_______________________________________________________________________________________________________________Attorney
to transfer the said stock on the books of the within-named Corporation with full power of substitution in the premises.
Dated,_______________________________________ _____________________________________________________
NOTICE: The signature to this assignment must
correspond with the name as written upon the face of
the Certificate in every particular, without alteration
or enlargement, or any change whatever.
SIGNATURE(S) GUARANTEED: ______________________________________________________________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE INSTITUTION (BANKS, STOCKBROKERS, SAVINGS
AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE
MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
</TABLE>
<PAGE> 1
Exhibit 5
HALE AND DORR LLP
Counsellors at Law
60 State Street, Boston, Massachusetts 02109
617-526-6000 - fax 617-526-5000
April __, 1997
Transcend Therapeutics, Inc.
640 Memorial Drive
Cambridge, MA 02139
Re: Registration Statement on Form S-1
----------------------------------
Ladies and Gentlemen:
This opinion is furnished to you in connection with a Registration
Statement on Form S-1 (File No. 333-22817) (the "Registration Statement") filed
with the Securities and Exchange Commission (the "Commission") under the
Securities Act of 1933, as amended, for the registration of 2,300,000 shares of
Common Stock, $.01 par value per share (the "Shares"), of Transcend
Therapeutics, Inc., a Delaware corporation (the "Company"), including 300,000
Shares issuable upon exercise of an overallotment option granted by the
Company.
The Shares are to be sold by the Company pursuant to an underwriting
agreement (the "Underwriting Agreement") to be entered into by and among the
Company and Vector Securities International, Inc. and Everen Securties, Inc.,
as representatives of the several underwriters named in the Underwriting
Agreement (the "Representatives").
We have acted as counsel for the Company in connection with the issue and
sale by the Company of the Shares. We have examined signed copies of the
Registration Statement and all exhibits thereto, all as filed with the
Commission. We have also examined and relied upon the original or copies of
minutes of meetings of the stockholders and the Board of Directors of the
Company, stock record books of the Company, a copy of the By-Laws of the
Company, a copy of the Restated Certificate of Incorporation of the Company, as
amended, and such other documents as we have deemed necessary for purposes of
rendering the opinions hereinafter set forth.
In our examination of the foregoing documents, we have assumed the
genuineness of all signatures and the authenticity of all documents submitted to
us as
WASHINGTON, DC BOSTON, MA LONDON, UK*
- --------------------------------------------------------------------------------
HALE AND DORR LLP IS A PARTNERSHIP INCLUDING PROFESSIONAL CORPORATIONS
* BROBECK HALE AND DORR INTERNATIONAL (AN INDEPENDENT JOINT VENTURE LAW FIRM)
<PAGE> 2
Transcend Therapeutics, Inc.
April __, 1997
Page 2
originals, the conformity to original documents of all documents submitted to us
as copies, the authenticity of the originals of such latter documents and the
legal competence of all signatories to such documents.
We assume that the appropriate action will be taken, prior to the offer and
sale of the Shares in accordance with the Underwriting Agreement, to register
and qualify the Shares for sale under all applicable state securities or "blue
sky" laws.
We express no opinion herein as to the laws of any state or jurisdiction
other than the state law of the Commonwealth of Massachusetts, the Delaware
General Corporation Law statute and the federal laws of the United States of
America.
Based upon and subject to the foregoing, we are of the opinion that the
Shares have been duly authorized and, when issued and sold by the Company
pursuant to the Underwriting Agreement, such Shares will be validly issued,
fully paid and nonassessable.
We hereby consent to the filing of this opinion as part of the Registration
Statement and to the use of our name therein and in the related Prospectus under
the caption "Legal Matters."
It is understood that this opinion is to be used only in connection with
the offer and sale of the Shares while the Registration Statement is in effect.
This opinion is based upon currently existing statutes, rules, regulations
and judicial decisions, and we disclaim any obligation to advise you of any
change in any of these sources of law or subsequent legal or factual
developments which might affect any matters or opinions set forth herein.
Please note that we are opining only as to the matters expressly set forth
herein, and no opinion should be inferred as to any other matters.
We hereby consent to the filing of this opinion with the Commission as an
exhibit to the Registration Statement in accordance with the requirements of
Item 601(b)(5) of Regulation S-K under the Securities Act and to the use of our
name therein and in the related Prospectus under the caption "Legal Matters."
In giving such consent, we do not hereby admit that we are in the category of
persons whose consent is required under Section 7 of the Securities Act or
the rules and regulations of the Commission.
Very truly yours,
HALE AND DORR LLP
WASHINGTON, DC BOSTON, MA LONDON, UK*
- --------------------------------------------------------------------------------
HALE AND DORR LLP IS A PARTNERSHIP INCLUDING PROFESSIONAL CORPORATIONS
*BROBECK HALE AND DORR INTERNATIONAL (AN INDEPENDENT JOINT VENTURE LAW FIRM)
<PAGE> 1
EXHIBIT 10.1
TRANSCEND THERAPEUTICS, INC.
AMENDED AND RESTATED 1994 EQUITY INCENTIVE PLAN
1. Purpose.
-------
The purpose of this plan (the "Plan") is to secure for Transcend
Therapeutics, Inc. (the "Company") and its shareholders the benefits arising
from capital stock ownership by employees, officers and directors of, and
consultants or advisors to, the Company and its parent and subsidiary
corporations who are expected to contribute to the Company's future growth and
success. Except where the context otherwise requires, the term "Company" shall
include the parent and all present and future subsidiaries of the Company as
defined in Sections 424(e) and 424(f) of the Internal Revenue Code of 1986, as
amended or replaced from time to time (the "Code").
2. Type of Options and Awards; Administration.
------------------------------------------
(a) TYPES OF OPTIONS AND AWARDS. Options granted pursuant to the Plan
shall be authorized by action of the Board of Directors of the Company (or a
Committee designated by the Board of Directors) and may be either incentive
stock options ("Incentive Stock Options") meeting the requirements of Section
422 of the Code or non-statutory options which are not intended to meet the
requirements of Section 422 of the Code. Awards granted pursuant to the Plan
shall be authorized by action of the Board of Directors of the Company (or a
Committee designated by the Board of Directors) and shall meet the requirements
of Section 13 of the Plan.
(b) ADMINISTRATION. The Plan will be administered by the Board of
Directors of the Company, whose construction and interpretation of the terms and
provisions of the Plan shall be final and conclusive. The Board of Directors may
in its sole discretion (i) grant options to purchase shares of the Company's
Common Stock (as defined in Section 4 of the Plan), and issue shares upon
exercise of such options as provided in the Plan and (ii) make awards for the
purchase of shares of Common Stock pursuant to Section 13 of the Plan. The Board
shall have authority, subject to the express provisions of the Plan, to construe
the respective option agreements, awards and the Plan, to prescribe, amend and
rescind rules and regulations relating to the Plan, to determine the terms and
provisions of the respective option agreements and awards, which need not be
identical, and to make all other determinations in the judgment of the Board of
Directors necessary or desirable for the administration of the Plan. The Board
of
<PAGE> 2
Directors may correct any defect or supply any omission or reconcile any
inconsistency in the Plan or in any option agreement or award in the manner and
to the extent it shall deem expedient to carry the Plan into effect and it shall
be the sole and final judge of such expediency. No director or person acting
pursuant to authority delegated by the Board of Directors shall be liable for
any action or determination made in good faith. The Board of Directors may, to
the full extent permitted by or consistent with applicable laws or regulations
(including, without limitation, applicable state law and Rule 16b-3 promulgated
under the Securities Exchange Act of 1934 (the "Exchange Act"), or any successor
rule ("Rule 16b-3")), delegate any or all of its powers under the Plan to a
committee (the "Committee") appointed by the Board of Directors, and if the
Committee is so appointed all references to the Board of Directors in the Plan
shall mean and relate to such Committee to the extent authority is so delegated
to such Committee.
(c) APPLICABILITY OF RULE 16b-3. Those provisions of the Plan which make
express reference to Rule 16b-3 shall apply only to such persons as are required
to file reports under Section 16(a) of the Exchange Act (a "Reporting Person").
3. Eligibility.
-----------
(a) GENERAL. Options and awards may be granted or made to persons who are,
at the time of grant, employees, officers or directors of, or consultants or
advisors to, the Company; PROVIDED, that the class of individuals to whom
Incentive Stock Options may be granted shall be limited to all employees of the
Company. A person who has been granted an option or award may, if he or she is
otherwise eligible, be granted additional options or awards if the Board of
Directors shall so determine. Subject to adjustment as provided in Section 16
below, the maximum number of shares with respect to which options or restricted
stock awards may be granted to any person under the Plan shall not exceed ____
shares of Common Stock during any calendar year during the term of the Plan.
For the purpose of calculating such maximum number, (a) an option or award
shall continue to be treated as outstanding notwithstanding its repricing,
cancellation or expiration and (b) the repricing of an outstanding option or
award or the issuance of a new option or award in substitution for a cancelled
option or award shall be deemed to constitute the grant of a new additional
option or award, as the case may be, separate from the original grant that
is repriced or cancelled.
(b) GRANT OF OPTIONS TO DIRECTORS AND OFFICERS. The selection of a
director or an officer (as the terms "director" and "officer" are defined for
purposes of Rule 16b-3) as a participant, the timing of the option grant or
award, the exercise price of the option or the sale price of the award and the
number of shares for which an option or award may be granted to such director or
officer shall be determined either (i) by the Board of Directors, of which all
members shall be "disinterested persons" (as hereinafter defined),
2
<PAGE> 3
or (ii) by a committee of two or more directors having full authority to act in
the matter, of which all members shall be "disinterested persons." For the
purposes of the Plan, a director shall be deemed to be "disinterested" only if
such person qualifies as a "disinterested person" within the meaning of Rule
16b-3, as such term is interpreted from time to time.
4. Stock Subject to Plan.
---------------------
Subject to adjustment as provided in Section 16 below, the total number of
shares which may be issued and sold under the Plan is 775,891 shares of Common
Stock, $.01 par value per share ("Common Stock") (reflecting the one-for-five
reverse stock split of the Common Stock effected on February 7, 1997). If an
option granted under the Plan shall expire or terminate for any reason without
having been exercised in full, the unpurchased shares subject to such option
shall again be available for subsequent option grants or awards under the Plan.
5. Forms of Option Agreements.
--------------------------
As a condition to the grant of an option under the Plan, each recipient of
an option shall execute an option agreement in such form not inconsistent with
the Plan as may be approved by the Board of Directors. Such option agreements
may differ among recipients.
6. Purchase Price Upon Exercise of Options.
---------------------------------------
(a) GENERAL. The purchase price per share of Common Stock deliverable upon
the exercise of an option shall be determined by the Board of Directors,
PROVIDED, HOWEVER, that in the case of an Incentive Stock Option, the exercise
price shall not be less than 100% of the fair market value of such stock, as
determined by the Board of Directors, at the time of grant of such option, or
less than 110% of such fair market value in the case of options described in
Section 11(b).
(b) PAYMENT OF PURCHASE PRICE. Options granted under the Plan may provide
for the payment of the exercise price by delivery of cash or a check to the
order of the Company in an amount equal to the exercise price of such options,
or, to the extent provided in the applicable option agreement, (i) by delivery
to the Company of shares of Common Stock of the Company already owned by the
optionee having a fair market value equal in amount to the exercise price of the
options being exercised, (ii) by any other means (including without limitation
by delivery of a promissory note of the optionee payable on such terms as are
specified by the Board of Directors) which the Board of Directors determines are
consistent with the purpose of the Plan and with applicable laws and regulations
(including, without limitation, the provisions of Rule 16b-3 and Regulation T
promulgated by the Federal Reserve Board) or (iii) by any combination of such
methods of payment. The fair market value of any shares of the
3
<PAGE> 4
Company's Common Stock or other non-cash consideration which may be delivered
upon exercise of an option shall be determined in such manner as may be
prescribed by the Board of Directors.
7. Option Period.
-------------
Each option and all rights thereunder shall expire on such date as shall be
set forth in the applicable option agreement, except that such date, in the case
of an Incentive Stock Option, shall in no case be later than ten years after the
date on which the option is granted.
8. Exercise of Options.
-------------------
Each option granted under the Plan shall be exercisable either in full or
in installments at such time or times and during such period as shall be set
forth in the agreement evidencing such option, subject to the provisions of the
Plan.
9. Nontransferability of Options.
-----------------------------
Incentive Stock Options, and all options granted to Reporting Persons,
shall not be assignable or transferable by the person to whom it is granted,
either voluntarily or by operation of law, except by will or the laws of descent
and distribution, and, during the life of the optionee, shall be exercisable
only by the optionee; provided, however, that non-statutory options granted to
Reporting Persons may be transferred pursuant to a qualified domestic relations
order (as defined in Rule 16b-3).
10. Effect of Termination of Employment or Other Relationship.
---------------------------------------------------------
The Board of Directors shall determine the period of time during which an
optionee may exercise an option following (i) the termination of the optionee's
employment or other relationship with the Company or (ii) the death or
disability of the optionee. Such periods shall be set forth in the agreement
evidencing such option.
11. Incentive Stock Options.
-----------------------
Options granted under the Plan which are intended to be Incentive Stock
Options shall be subject to the following additional terms and conditions:
(a) EXPRESS DESIGNATION. All Incentive Stock Options granted under the
Plan shall, at the time of grant, be specifically designated as such in the
option agreement covering such Incentive Stock Options.
(b) 10% SHAREHOLDER. If any employee to whom an Incentive Stock Option is
to be granted under the Plan is, at the time of the grant of such option, the
owner of
4
<PAGE> 5
stock possessing more than 10% of the total combined voting power of all classes
of stock of the Company (after taking into account the attribution of stock
ownership rules of Section 424(d) of the Code), then the following special
provisions shall be applicable to the Incentive Stock Option granted to such
individual:
(i) The purchase price per share of the Common Stock subject to such
Incentive Stock Option shall not be less than 110% of the fair market value
of one share of Common Stock at the time of grant; and
(ii) The option exercise period shall not exceed five years from the
date of grant.
(c) DOLLAR LIMITATION. For so long as the Code shall so provide, options
granted to any employee under the Plan (and any other incentive stock option
plans of the Company) which are intended to constitute Incentive Stock Options
shall not constitute Incentive Stock Options to the extent that such options, in
the aggregate, become exercisable for the first time in any one calendar year
for shares of Common Stock with an aggregate fair market value (determined as of
the respective date or dates of grant) of more than $100,000.
(d) TERMINATION OF EMPLOYMENT, DEATH OR DISABILITY. No Incentive Stock
Option may be exercised unless, at the time of such exercise, the optionee is,
and has been continuously since the date of grant of his or her option, employed
by the Company, except that:
(i) an Incentive Stock Option may be exercised within the period of
three months after the date the optionee ceases to be an employee of the
Company (or within such lesser period as may be specified in the applicable
option agreement), PROVIDED, that the agreement with respect to such option
may designate a longer exercise period and that the exercise after such
three-month period shall be treated as the exercise of a non-statutory
option under the Plan;
(ii) if the optionee dies while in the employ of the Company, or
within three months after the optionee ceases to be such an employee, the
Incentive Stock Option may be exercised, by the person to whom it is
transferred by will or the laws of descent and distribution, within the
period of one year after the date of death (or within such lesser period as
may be specified in the applicable option agreement); and
(iii) if the optionee becomes disabled (within the meaning of Section
22(e)(3) of the Code or any successor provision thereto) while in the
employ of the Company, the Incentive Stock Option may be exercised within
the period of one year after the date the optionee ceases to be such an
employee
5
<PAGE> 6
because of such disability (or within such lesser period as may be
specified in the applicable option agreement).
For all purposes of the Plan and any option or award granted hereunder,
"employment" shall be defined in accordance with the provisions of Section
1.421-7(h) of the Income Tax Regulations (or any successor regulations).
Notwithstanding the foregoing provisions, no stock option may be exercised after
its expiration date.
12. Additional Provisions.
---------------------
(a) ADDITIONAL OPTION PROVISIONS. The Board of Directors may, in its sole
discretion, include additional provisions in any option granted under the Plan,
including without limitation restrictions on transfer, repurchase rights,
commitments to pay cash bonuses, to make, arrange for or guaranty loans or to
transfer other property to optionees upon exercise of options, or such other
provisions as shall be determined by the Board of Directors; PROVIDED THAT such
additional provisions shall not be inconsistent with any other term or condition
of the Plan.
(b) ACCELERATION, EXTENSION, ETC. The Board of Directors may, in its sole
discretion, (i) accelerate the date or dates on which all or any particular
option or options granted under the Plan may be exercised or (ii) extend the
dates during which all or any particular option or options granted under the
Plan may be exercised; provided, however, that no such extension shall be
permitted if it would cause the Plan to fail to comply with Section 422 of the
Code or with Rule 16b-3.
13. Awards.
------
A restricted stock award (an "award") shall consist of the sale and
issuance by the Company of shares of Common Stock, and the purchase by the
recipient of such shares, subject to the terms, conditions and restrictions
described in the document evidencing the award and in this Section 13 and
elsewhere in the Plan.
(a) EXECUTION OF RESTRICTED STOCK AWARD AGREEMENT. As a condition to an
award under the Plan, each recipient of an award shall execute an agreement in
such form, which may differ among recipients, as shall be specified by the Board
of Directors at the time of such award.
(b) PRICE. The Board of Directors shall determine the price at which
shares of Common Stock shall be sold to recipients of awards under the Plan. The
Board of Directors may, in its discretion, issue shares pursuant to awards
without the payment of any cash purchase price by the recipients or issue shares
pursuant to awards at a purchase price below the then fair market value of the
Common Stock. If a purchase price is required to be paid, it shall be paid in
cash or by check payable to the order of the Company at the time that the award
is accepted by the recipient, or by such other
6
<PAGE> 7
means as may be approved by the Board of Directors.
(c) NUMBER OF SHARES. The award shall specify the number of shares of
Common Stock granted thereunder.
(d) RESTRICTIONS ON TRANSFER. In addition to such other terms, conditions
and restrictions upon awards as shall be imposed by the Board of Directors, all
shares issued pursuant to an award shall be subject to the following
restrictions:
(1) All shares of Common Stock subject to an award (including any
shares issued pursuant to paragraph (e) of this Section) shall be subject
to certain restrictions on disposition and obligations of resale to the
Company as provided in subparagraph (2) below for the period specified in
the document evidencing the award, and shall not be sold, assigned,
transferred, pledged, hypothecated or otherwise disposed of until such
restrictions lapse. The period during which such restrictions are
applicable is referred to as the "Restricted Period."
(2) In the event that a recipient's employment with the Company (or
consultancy or advisory relationship, as the case may be) is terminated
within the Restricted Period, whether such termination is voluntary or
involuntary, with or without cause, or because of the death or disability
of the recipient, the Company shall have the right and option for a period
of three months following such termination to buy for cash that number of
the shares of Common Stock purchased under the award as to which the
restrictions on transfer and the forfeiture provisions contained in the
award have not then lapsed, at a price equal to the price per share
originally paid by the recipient. If such termination occurs within the
last three months of the applicable restrictions, the restrictions and
repurchase rights of the Company shall continue to apply until the
expiration of the Company's three month option period.
(3) Notwithstanding subparagraphs (1) and (2) above, the Board of
Directors may, in its discretion, either at the time that an award is made
or at any time thereafter, waive its right to repurchase shares of Common
Stock upon the occurrence of any of the events described in this paragraph
(d) or remove or modify any part or all of the restrictions. In addition,
the Board of Directors may, in its discretion, impose upon the recipient of
an award at the time of such award such other restrictions on any shares of
Common Stock issued pursuant to such award as the Board of Directors may
deem advisable.
(e) ADDITIONAL SHARES. Any shares received by a recipient of an award as a
stock dividend on, or as a result of stock splits, combinations, exchanges of
shares, reorganizations, mergers, consolidations or otherwise with respect to,
shares of Common Stock received pursuant to such award shall have the same
status and shall
7
<PAGE> 8
bear the same restrictions, all on a proportionate basis, as the shares
initially purchased pursuant to such award.
(f) TRANSFERS IN BREACH OF AWARD. If any transfer of shares purchased
pursuant to an award is made or attempted contrary to the terms of the Plan and
of such award, the Board of Directors shall have the right to purchase for the
account of the Company those shares from the owner thereof or his or her
transferee at any time before or after the transfer at the price paid for such
shares by the person to whom they were awarded under the Plan. In addition to
any other legal or equitable remedies which it may have, the Company may enforce
its rights by specific performance to the extent permitted by law. The Company
may refuse for any purpose to recognize as a shareholder of the Company any
transferee who receives any shares contrary to the provisions of the Plan and
the applicable award or any recipient of an award who breaches his or her
obligation to resell shares as required by the provisions of the Plan and the
applicable award, and the Company may retain and/or recover all dividends on
such shares which were paid or payable subsequent to the date on which the
prohibited transfer or breach was made or attempted.
(g) ADDITIONAL AWARD PROVISIONS. The Board of Directors may, in its sole
discretion, include additional provisions in any award granted under the Plan,
including without limitation commitments to pay cash bonuses, make, arrange for
or guarantee loans or transfer other property to recipients upon the grant of
awards, or such other provisions as shall be determined by the Board of
Directors.
14. General Restrictions.
--------------------
(a) INVESTMENT REPRESENTATIONS. The Company may require any person to whom
an option or award is granted, as a condition of exercising such option or
purchasing the shares subject to the award, to give written assurances in
substance and form satisfactory to the Company to the effect that such person is
acquiring the Common Stock subject to the option or award for his or her own
account for investment and not with any present intention of selling or
otherwise distributing the same, and to such other effects as the Company deems
necessary or appropriate in order to comply with federal and applicable state
securities laws.
(b) COMPLIANCE WITH SECURITIES LAWS. Each option and award shall be
subject to the requirement that if, at any time, counsel to the Company shall
determine that the listing, registration or qualification of the shares subject
to such option or award upon any securities exchange or under any state or
federal law, or the consent or approval of any governmental or regulatory body,
or that the disclosure of non-public information or the satisfaction of any
other condition is necessary as a condition of, or in connection with, the
issuance or purchase of shares thereunder, such option or award may not be
exercised, in whole or in part, unless such listing, registration,
qualification, consent or approval, or satisfaction of such condition shall have
been effected or obtained on
8
<PAGE> 9
conditions acceptable to the Board of Directors. Nothing herein shall be deemed
to require the Company to apply for or to obtain such listing, registration or
qualification, or to satisfy such condition.
15. Rights as a Shareholder.
-----------------------
The holder of an option or recipient of an award shall have no rights as a
shareholder with respect to any shares covered by the option or award
(including, without limitation, any rights to receive dividends or non-cash
distributions with respect to such shares) until the date of issue of a stock
certificate to him or her for such shares. No adjustment shall be made for
dividends or other rights for which the record date is prior to the date such
stock certificate is issued.
16. Adjustment Provisions for Recapitalizations and Related Transactions.
--------------------------------------------------------------------
(a) GENERAL. If, through or as a result of any merger, consolidation, sale
of all or substantially all of the assets of the Company, reorganization,
recapitalization, reclassification, stock dividend, stock split, reverse stock
split or other similar transaction, (i) the outstanding shares of Common Stock
are increased or decreased or are exchanged for a different number or kind of
shares or other securities of the Company, or (ii) additional shares or new or
different shares or other securities of the Company or other non-cash assets are
distributed with respect to such shares of Common Stock or other securities, an
appropriate and proportionate adjustment shall be made in (x) the maximum number
and kind of shares reserved for issuance under the Plan, (y) the number and kind
of shares or other securities subject to then outstanding options under the
Plan, and (z) the price for each share subject to any then outstanding options
under the Plan or repurchase rights of the Company, without changing the
aggregate purchase price as to which such options remain exercisable, provided
that no adjustment shall be made pursuant to this Section 16 if such adjustment
would cause the Plan to fail to comply with Section 422 of the Code or with Rule
16b-3.
(b) BOARD AUTHORITY TO MAKE ADJUSTMENTS. Any adjustments under this
Section 16 will be made by the Board of Directors, whose determination as to
what adjustments, if any, will be made and the extent thereof will be final,
binding and conclusive. No fractional shares will be issued under the Plan on
account of any such adjustments.
17. Merger, Consolidation, Asset Sale, Liquidation, etc.
---------------------------------------------------
(a) GENERAL. In the event of a consolidation or merger in which
outstanding shares of Common Stock are exchanged for securities, cash or other
property of any other corporation or business entity or in the event of a
liquidation of the Company or sale of all or substantially all of the assets of
the Company, the Board of Directors of the
9
<PAGE> 10
Company, or the board of directors of any corporation assuming the obligations
of the Company, may, in its discretion, take any one or more of the following
actions, as to outstanding options and awards: (i) provide that such options
shall be assumed, or equivalent options shall be substituted, by the acquiring
or succeeding corporation (or an affiliate thereof), PROVIDED that any such
options substituted for Incentive Stock Options shall meet the requirements of
Section 424(a) of the Code, (ii) upon written notice to the optionees, provide
that all unexercised options will terminate immediately prior to the
consummation of such transaction unless exercised by the optionee within a
specified period following the date of such notice, (iii) in the event of a
merger under the terms of which holders of the Common Stock of the Company will
receive upon consummation thereof a cash payment for each share surrendered in
the merger (the "Merger Price"), make or provide for a cash payment to the
optionees equal to the difference between (A) the Merger Price times the number
of shares of Common Stock subject to such outstanding options (to the extent
then exercisable at prices not in excess of the Merger Price) and (B) the
aggregate exercise price of all such outstanding options in exchange for the
termination of such options, and (iv) provide that all or any outstanding
options shall become exercisable in full, any restrictions on exercising
outstanding options issued pursuant to the Plan prior to any given date shall
terminate and any restrictions on and rights of the Company to repurchase shares
covered by outstanding awards issued pursuant to the Plan shall terminate.
(b) SUBSTITUTE OPTIONS. The Company may grant options under the Plan in
substitution for options held by employees of another corporation who become
employees of the Company, or a subsidiary of the Company, as the result of a
merger or consolidation of the employing corporation with the Company or a
subsidiary of the Company, or as a result of the acquisition by the Company, or
one of its subsidiaries, of property or stock of the employing corporation. The
Company may direct that substitute options be granted on such terms and
conditions as the Board of Directors considers appropriate in the circumstances.
18. No Special Employment Rights.
----------------------------
Nothing contained in the Plan or in any option or award shall confer upon
any recipient of an award or optionee any right with respect to the continuation
of his or her employment by the Company or interfere in any way with the right
of the Company at any time to terminate such employment or to increase or
decrease the compensation of the optionee.
19. Other Employee Benefits.
-----------------------
Except as to plans which by their terms include such amounts as
compensation, neither the amount of any compensation deemed to be received by an
employee as a result of the exercise of an option or the sale of shares received
upon such exercise nor the value of an award granted to an employee will
constitute compensation with
10
<PAGE> 11
respect to which any other employee benefits of such employee are determined,
including, without limitation, benefits under any bonus, pension,
profit-sharing, life insurance or salary continuation plan, except as otherwise
specifically determined by the Board of Directors.
20. Amendment of the Plan.
---------------------
(a) The Board of Directors may at any time, and from time to time, modify
or amend the Plan in any respect, except that if at any time the approval of the
shareholders of the Company is required as to such modification or amendment
under Section 422 of the Code or any successor provision with respect to
Incentive Stock Options or under Rule 16b-3 with respect to options held by or
awards made to Reporting Persons, the Board of Directors may not effect such
modification or amendment without such approval.
(b) The termination or any modification or amendment of the Plan shall
not, without the consent of an optionee or recipient of an award, affect his or
her rights under an option or award previously granted to him or her. With the
consent of the optionee or recipient of the award affected, the Board of
Directors may amend outstanding option agreements or awards in a manner not
inconsistent with the Plan. The Board of Directors shall have the right to amend
or modify (i) the terms and provisions of the Plan and of any outstanding
Incentive Stock Options granted under the Plan to the extent necessary to
qualify any or all such options for such favorable federal income tax treatment
(including deferral of taxation upon exercise) as may be afforded incentive
stock options under Section 422 of the Code and (ii) the terms and provisions of
the Plan and of any outstanding option or award to the extent necessary to
ensure the qualification of the Plan under Rule 16b-3 or any successor rule.
21. Withholding.
-----------
(a) The Company shall have the right to deduct from payments of any kind
otherwise due to the optionee or recipient of an award any federal, state or
local taxes of any kind required by law to be withheld with respect to any
shares issued upon exercise of options under the Plan or the purchase of shares
subject to the award. Subject to the prior approval of the Company, which may be
withheld by the Company in its sole discretion, the optionee or recipient of an
award may elect to satisfy such obligations, in whole or in part, (i) by causing
the Company to withhold shares of Common Stock otherwise issuable pursuant to
the exercise of an option or the purchase of shares subject to an award or (ii)
by delivering to the Company shares of Common Stock already owned by the
optionee or award recipient. The shares so delivered or withheld shall have a
fair market value equal to such withholding obligation. The fair market value of
the shares used to satisfy such withholding obligation shall be determined by
the Company as of the date that the amount of tax to be withheld is to be
11
<PAGE> 12
determined. An optionee or award recipient who has made an election pursuant to
this Section 21(a) may only satisfy his or her withholding obligation with
shares of Common Stock which are not subject to any repurchase, forfeiture,
unfulfilled vesting or other similar requirements.
(b) Notwithstanding the foregoing, in the case of a Reporting Person, no
election to use shares for the payment of withholding taxes shall be effective
unless made in compliance with any applicable requirements of Rule 16b-3.
(c) If the recipient of an award under the Plan elects, in accordance with
Section 83(b) of the Code, to recognize ordinary income in the year of
acquisition of any shares awarded under the Plan, the Company will require at
the time of such election an additional payment for withholding tax purposes
based on the difference, if any, between the purchase price of such shares and
the fair market value of such shares as of the date immediately preceding the
date of the award.
22. Cancellation and New Grant of Options, Etc.
------------------------------------------
The Board of Directors shall have the authority to effect, at any time and
from time to time, with the consent of the affected optionees, (i) the
cancellation of any or all outstanding options under the Plan and the grant in
substitution therefor of new options under the Plan covering the same or
different numbers of shares of Common Stock and having an option exercise price
per share which may be lower or higher than the exercise price per share of the
cancelled options or (ii) the amendment of the terms of any and all outstanding
options under the Plan to provide an option exercise price per share which is
higher or lower than the then-current exercise price per share of such
outstanding options.
23. Effective Date and Duration of the Plan.
---------------------------------------
(a) EFFECTIVE DATE. The Plan shall become effective when adopted by the
Board of Directors, but no Incentive Stock Option granted under the Plan shall
become exercisable unless and until the Plan shall have been approved by the
Company's shareholders. If such shareholder approval is not obtained within
twelve months after the date of the Board's adoption of the Plan, no options
previously granted under the Plan shall be deemed to be Incentive Stock Options
and no Incentive Stock Options shall be granted thereafter. Amendments to the
Plan not requiring shareholder approval shall become effective when adopted by
the Board of Directors; amendments requiring shareholder approval (as provided
in Section 20) shall become effective when adopted by the Board of Directors,
but no Incentive Stock Option issued after the date of such amendment shall
become exercisable (to the extent that such amendment to the Plan was required
to enable the Company to grant such Incentive Stock Option to a particular
optionee) unless and until such amendment shall have been approved by the
Company's shareholders. If such shareholder approval is not obtained within
twelve
12
<PAGE> 13
months of the Board's adoption of such amendment, any Incentive Stock Options
granted on or after the date of such amendment shall terminate to the extent
that such amendment to the Plan was required to enable the Company to grant such
option to a particular optionee. Subject to this limitation, options and awards
may be granted under the Plan at any time after the effective date and before
the date fixed for termination of the Plan.
(b) TERMINATION. Unless sooner terminated in accordance with Section 17,
the Plan shall terminate, with respect to Incentive Stock Options, upon the
earlier of (i) the close of business on the day next preceding the tenth
anniversary of the date of its adoption by the Board of Directors, or (ii) the
date on which all shares available for issuance under the Plan shall have been
issued pursuant to the exercise or cancellation of options or the final vesting
of awards granted under the Plan. Unless sooner terminated in accordance with
Section 17, the Plan shall terminate with respect to options which are not
Incentive Stock Options and awards on the date specified in (ii) above. If the
date of termination is determined under (i) above, then options outstanding on
such date shall continue to have force and effect in accordance with the
provisions of the instruments evidencing such options.
24. Provision for Foreign Participants.
----------------------------------
The Board of Directors may, without amending the Plan, modify awards or
options granted to participants who are foreign nationals or employed outside
the United States to recognize differences in laws, rules, regulations or
customs of such foreign jurisdictions with respect to tax, securities, currency,
employee benefit or other matters.
13
<PAGE> 1
EXHIBIT 11
TRANSCEND THERAPEUTICS, INC.
<TABLE>
STATEMENT RE COMPUTATION OF PRO FORMA LOSS PER COMMON SHARE
<CAPTION>
1996 1995 1994
------------------------------------------
<S> <C> <C> <C>
Pro Forma common stock outstanding
beginning of year 763,306 759,134 44,109
Issuance of cheap stock 1,858,459 1,858,459 1,858,459
Weighted average common stock issued
during period 4,172 715,025
Weighted average common stock issued
from conversion of preferred stock
to common stock, net 1,300,000 1,300,000 1,300,000
------------------------------------------
Weighted average common shares
outstanding 3,921,765 3,921,765 3,917,593
==========================================
Net Loss $(4,126,930) $(4,449,987) $(3,602,892)
Accretion of Redeemable
Nonconvertible Preferred
Stock (5,080,496) (1,481,088) (1,110,816)
------------------------------------------
Net Loss to Common Stockholders $(9,207,426) $(5,931,075) $(4,713,708)
==========================================
Pro Forma Net Loss Per Common Share $(2.35)
======
</TABLE>
<PAGE> 1
EXHIBIT 23.2
CONSENT OF COUNSEL
The undersigned hereby consents to the use of our name and the statement
with respect to us appearing under the heading "Experts" in Amendment No. 2 to
the Registration Statement on Form S-1 of Transcend Therapeutics, Inc.
/s/ PENNIE & EDMONDS LLP
--------------------------------------
PENNIE & EDMONDS LLP
New York, New York
April 10, 1997
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated January 10, 1997 (which contains an explanatory
paragraph with respect to the Company's ability to continue as a going concern)
in Amendment No. 2 to the Registration Statement (Form S-1) and related
Prospectus of Transcend Therapeutics, Inc. for the registration of 2,300,000
shares of its common stock.
Ernst & Young LLP
Boston, Massachusetts
April 10, 1997
