<PAGE> 1
As filed with the Securities and Exchange Commission on June 6, 1997
Registration No. 333-22817
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
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>
------------------------
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>
------------------------
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. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
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<S> <C> <C> <C> <C>
Proposed Maximum Proposed Maximum
Title of each Class of Amount to be Offering Aggregate Amount of
Securities to be Registered Registered(1) Price Per Share(2) Offering Price(2) Registration Fee
<CAPTION>
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<S> <C> <C> <C> <C>
Common Stock, $.01 par value per share... 2,823,250 shares $12.00 $33,879,000 $10,267(3)
==================================================================================================================
</TABLE>
(1) Includes 368,250 shares which the Underwriters have the option to purchase
from the Company to cover over-allotments, if any. See "Underwriting."
(2) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(a) under the Securities Act of 1933.
(3) Of this amount, $9,758 was previously paid upon the initial filing of this
registration statement on March 5, 1997 and $250 is credited to the
Company's account with the Commission for a fee paid previously, but not
applied, under the Securities Exchange Act of 1934, as amended.
------------------------
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 JUNE 6, 1997
PROSPECTUS
2,455,000 SHARES
[TRANSCEND THERAPEUTICS LOGO]
COMMON STOCK
All of the 2,455,000 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
$10.00 and $12.00 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."
Boehringer Ingelheim International GmbH, the Company's corporate partner
for its Procysteine development program, has expressed its intention to purchase
$5.0 million of Common Stock in the Offering at the initial public offering
price. 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 $1,000,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
368,250 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 of Common Stock will be
made by EVEREN Clearing Corp. through the facilities of the Depository Trust
Company, New York, New York, on or about , 1997.
---------------------------
EVEREN Securities, Inc. Principal Financial Securities, Inc.
, 1997
<PAGE> 3
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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
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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 critical care market, with its initial compounds
focusing on the treatment of diseases associated with oxidative stress and
resultant tissue damage. 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 began a Phase III clinical program to determine the safety and efficacy
of Procysteine in the treatment of ARDS. 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.") for
the treatment and prevention of ARDS and the related condition, multiple organ
dysfunction ("MOD"). BI has agreed to pay Transcend up to $46.0 million
(consisting of a $5.0 million license fee paid in March 1997, a $5.0 million
equity investment 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.
The Company's strategy is to exploit the potential of the
glutathione-repleting agents currently in its portfolio, with a particular 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.
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
- -------------------------------------------------------------------------------
3
<PAGE> 5
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 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 paid the Company an
upfront license fee of $5.0 million and has agreed to purchase $5.0 million of
equity securities of the Company in a private placement. BI has expressed its
intention to fulfill this obligation by purchasing $5.0 million of Common Stock
in the Offering at the initial public offering price (454,545 shares of Common
Stock assuming an initial public offering price of $11.00 per share). 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.
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 evaluate the results of these
trials to determine whether to conduct further Phase II clinical trials for
either or both of these indications. If such studies are conducted and yield
positive results, the Company would seek to outlicense its rights to oral
Procysteine for these indications.
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.
4
<PAGE> 6
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THE OFFERING
<TABLE>
<S> <C>
Common Stock offered.................................... 2,455,000 shares
Common Stock to be outstanding after the Offering....... 6,334,885 shares(1)
Use of proceeds......................................... To fund clinical trials and research and
development programs, to acquire and/or
license technology rights or compounds
and for other general corporate
purposes.
Proposed Nasdaq National Market symbol.................. TSND
</TABLE>
- ---------------
(1) Based on shares outstanding as of March 31, 1997. Includes an aggregate of
2,995,547 shares of Common Stock issuable upon the automatic conversion of
outstanding shares of Series A, Series B and Series C Convertible Preferred
Stock upon the closing of the Offering, assuming an initial public offering
price of $11.00 per share. If the initial public offering price is less than
$11.00 per share, additional shares of Common Stock will be issued upon the
conversion of shares of Series C Convertible Preferred Stock. See
"Description of Capital Stock -- Series Convertible Preferred Stock." Also
includes an aggregate of $1,039,000 of Common Stock, to be issued upon the
closing of the Offering at the initial public offering price in exchange for
all of the Company's outstanding Nonconvertible Redeemable Preferred Stock
(94,455 shares of Common Stock assuming an initial public offering price of
$11.00 per share). Excludes (i) 362,152 shares of Common Stock issuable upon
exercise of outstanding options as of March 31, 1997 at a weighted average
exercise price of $1.20 per share; (ii) 375,965 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 March 31, 1997; (iii)
5,000 shares of Common Stock reserved for issuance upon exercise of a
warrant outstanding as of March 31, 1997 at an exercise price of $5.00 per
share; and (iv) $519,500 of Common Stock reserved for issuance upon the
exercise of warrants to purchase such stock at the initial public offering
price (47,227 shares of Common Stock assuming an initial public offering
price of $11.00 per share). See "Management -- Amended and Restated 1994
Equity Incentive Plan," "Business -- Boehringer Ingelheim," "Certain
Transactions" and "Description of Capital Stock."
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5
<PAGE> 7
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SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------------------- -----------------
1993 1994 1995 1996 1996 1997
------ ------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue........................................ $6,095(1) $ -- $ -- $ -- $ -- $5,000(2)
Total operating expenses....................... 6,123 3,742 4,384 3,802 874 1,472
------ ------- ------- ------- ------- ------
Income (loss) from operations.................. (28) (3,742) (4,384) (3,802) (874) 3,528
Other income (expense)......................... -- 139 (66) (325) (138) 25
------ ------- ------- ------- ------- ------
Net income (loss).............................. $ (28) $(3,603) $(4,450) $(4,127) (1,012) 3,553
====== ======= ======= ======= ======= ======
Net income (loss) to common stockholders....... $ (28) $(4,714) $(5,931) $(9,207) $(1,382) $3,523
====== ======= ======= ======= ======= ======
Pro forma net income (loss) per common
share(3)..................................... $ (2.31) $ .88
======= ======
Pro forma weighted average common shares
outstanding(3)............................... 3,981 3,981
======= ======
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1997
-------------------------------------------
PRO FORMA
ACTUAL PRO FORMA(4) AS ADJUSTED(5)
-------- ------------ -----------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents..................................... $ 5,496 $ 5,496 $ 29,943
Working capital............................................... 4,354 4,354 29,302
Total assets.................................................. 6,797 6,797 30,411
Redeemable preferred stock.................................... 891(6) 891 --
Deficit accumulated during the development stage.............. (16,196) (16,196) (16,344)
Total stockholders' equity (deficit).......................... (15,460) 4,716 29,722
</TABLE>
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(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) Reflects a one-time license fee of $5.0 million received in connection with
the signing of the BI Agreement. See "Business -- Boehringer Ingelheim."
(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 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
2,995,547 shares of Common Stock (assuming an initial public offering price
of $11.00 per share). See "Certain Transactions" and "Description of Capital
Stock -- Series Convertible Preferred Stock."
(5) As adjusted to give effect to (i) the sale of 2,455,000 shares of Common
Stock offered hereby, at an assumed initial public offering price of $11.00
per share (after deducting estimated underwriting discounts and commissions
and estimated expenses of the Offering) and the receipt of the estimated net
proceeds therefrom; and (ii) the issuance, upon the closing of the Offering,
of an aggregate of $1,039,000 of Common Stock at the initial public offering
price in exchange for all of the Company's outstanding Nonconvertible
Redeemable Preferred Stock (94,455 shares of Common Stock assuming an
initial public offering price of $11.00 per share.) See "Use of Proceeds,"
"Capitalization" 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 -- Series Convertible Preferred 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 2,995,547 shares of
Common Stock upon the closing of the Offering (assuming an initial public
offering price of $11.00 per share); (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."
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6
<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. The Company has begun a Phase III
clinical program (the "Phase III Clinical Program") to determine the safety and
efficacy of Procysteine for use in the treatment of acute respiratory distress
syndrome ("ARDS"). The Phase III Clinical Program consists of the Company's
ongoing Phase III clinical trial and a planned second Phase III clinical trial
in the United States and other countries which the Company expects to commence
by the end of 1997. There can be no assurance that the Phase III Clinical
Program, or any other such testing, 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
7
<PAGE> 9
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 ("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 retained
certain rights with respect to the marketing and sales of Procysteine i.v. in
the United States. 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, in March 1997, BI paid the Company an upfront
license fee of $5.0 million (the "BI License Fee") and has agreed to purchase
$5.0 million of equity securities of the Company in a private placement. BI has
expressed its intention to fulfill this obligation by purchasing $5.0 million of
Common Stock in the Offering at the initial public offering price (454,545
shares of Common Stock assuming an initial public offering price of $11.00 per
share). 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. 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
required MOD clinical trials 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 the first Phase III clinical trial of Procysteine i.v. for the
treatment of ARDS, or (ii) within 30 days after notice that the Company intends,
without the consent
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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 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 more extensive clinical testing, including
the Company's Phase III Clinical Program. There can be no assurance that
additional clinical trials, including the Phase III Clinical Program, 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 being administered in
the Phase III Clinical Program is higher than that administered in the earlier
human clinical trials. There can be no assurance that administration of
Procysteine at this dosage level, 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, the
existence of competitive clinical trials and the availability of other approved
therapies. The protocol for the Company's first 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
Program 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 monitoring
and analyzing the Phase III Clinical Program, 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 the Phase III Clinical Program is 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. No revenues
have been generated from product sales, and product sales revenues are not
anticipated for a number of years, if at all. The Company had a deficit
accumulated during the development stage of approximately $16.2 million as of
March 31, 1997. 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
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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.
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 Safety Monitoring
Board ("SMB") 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
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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 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 $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, under the BI Agreement, the Company has agreed 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'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, costs and results of preclinical development and clinical testing,
including the Company's Phase III Clinical Program, 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
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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 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 completion of its Phase III Clinical Program 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") completed
patient accrual in May 1997 for a Phase III study of 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
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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 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 believes that it has sufficient supplies to complete
its Phase III Clinical Program, it does not believe that the supplier's existing
issues with the FDA will affect the completion of the program, 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
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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.
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
("TR-500 Compounds"). In addition, the Company owns a United States patent
application for the use of Procysteine in treating pulmonary disease, including
ARDS. The Company recently received a final Office Action, from the U.S. Patent
and Trademark Office ("USPTO"), rejecting the claims of this patent application
as being obvious over a combination of prior art references. Final Office
Actions commonly are issued by the USPTO. While receipt of a final Office Action
may impose certain procedural limitations on an applicant's subsequent
submissions in a particular case, it does not signal the end of the prosecution
process. The Company intends to respond vigorously to the final Office Action,
by the presentation of additional arguments and facts in support of its position
that the patent application contains patentable subject matter. There can be no
assurance, however, that this patent application ultimately will issue as a
patent in the United States, or, if it issues, as to the breadth of the claims.
A corresponding European patent has issued and has been validated as national
patents in Austria, Belgium, Denmark, France, Germany, Greece, Italy,
Luxembourg, Monaco, the Netherlands, Portugal, Spain, Sweden, Switzerland and
the United Kingdom, all of which 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 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.
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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 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.
15
<PAGE> 17
MANAGEMENT OF GROWTH; RISK OF ACQUIRING NEW TECHNOLOGIES. One of the
Company's strategies 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 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 and licensing 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. 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
16
<PAGE> 18
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.
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 $15.0 million of the net proceeds of the Offering (in addition to
the BI License Fee) to fund its Phase III Clinical Program. 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
or compounds, and for other general corporate purposes. As such, the Company's
management will retain broad discretion as to the allocation of the balance 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. Of the 6,334,885 shares
outstanding after the Offering, the 2,455,000 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 amended (the "Securities Act"), or
are subject to lock-up
17
<PAGE> 19
agreements as described below. The remaining 3,879,885 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 all of its
executive officers and directors, who collectively hold 3,765,801 of such
restricted securities (excluding BI), have agreed not to offer, sell or
otherwise dispose of any of their restricted securities for a period of 270 days
from the date of this Prospectus (the "Lock-Up Period") without the prior
written consent of EVEREN Securities, Inc. ("EVEREN Securities"). In addition,
BI has agreed not to offer, sell or otherwise dispose of any shares of Common
Stock acquired by BI (the "BI Shares") for a period of 360 days from the date of
this Prospectus (the "BI Lock-Up Period") without the prior written consent of
EVEREN Securities. The Company has also agreed that it will not offer, sell or
otherwise dispose of Common Stock for a period of 270 days from the date of this
Prospectus without the prior written consent of EVEREN Securities, other than
pursuant to existing stock option plans or upon exercise of currently
outstanding warrants. Upon termination of the Lock-Up Period, approximately
3,671,347 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 BI
Shares issued in the Offering will be eligible for immediate sale in the public
market without limitation. In addition, of the restricted securities not subject
to lock-up agreements, approximately 74,741 shares will be eligible for sale
without limitation under Rule 144(k) and 39,342 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. EVEREN
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 3,771,801 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 362,152 shares of Common Stock reserved
for issuance upon exercise of outstanding options and an aggregate of 375,965
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 (45.3 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, changes in third-party reimbursement,
changes in the Company's relationships with BI or with future
18
<PAGE> 20
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
$6.37 per share. To the extent outstanding options and warrants to purchase
Common Stock are exercised, there will be a further dilution of $.12 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 2,455,000 shares of Common Stock
offered hereby at an assumed initial public offering price of $11.00 per share
are estimated to be $24.1 million ($27.9 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 expects to use up to $15.0 million of the net proceeds of the
Offering, in addition to the BI License Fee, to fund additional costs associated
with its Phase III Clinical Program. The Company intends to use the balance of
the net proceeds of the Offering for other research and development, including
development of Procysteine i.v. for use in the prevention of ARDS and/or MOD,
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 or compounds, although the Company has no agreements or commitments for
any such acquisitions. See "Risk Factors -- Need for Substantial Additional
Funds."
In March 1997, the Company received the upfront $5.0 million BI License Fee
from BI in connection with the BI Agreement. In addition, BI has agreed to
purchase $5.0 million of equity securities of the Company in a private
placement. BI has expressed its intention to fulfill this obligation by
purchasing $5.0 million of Common Stock in the Offering at the initial public
offering price (454,545 shares of Common Stock assuming an initial public
offering price of $11.00 per share). 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 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, including the cost of its Phase III
Clinical Program, will be accurate. 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 March 31, 1997 (i) the actual
capitalization of the Company; (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 2,455,000 shares of Common Stock offered
hereby at an assumed initial public offering price of $11.00 per share, after
deducting estimated underwriting discounts and commissions and estimated
expenses of the Offering and the receipt of the estimated net proceeds
therefrom. 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>
MARCH 31, 1997
--------------------------------------------
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;
1,039,000 shares authorized, issued and outstanding (actual and
pro forma); no shares authorized, issued and outstanding (pro
forma as adjusted)............................................. 891 891 --
Stockholders' equity (deficit):
Common Stock, $.01 par value; 25,000,000 shares authorized,
789,883 shares issued and outstanding (actual); 25,000,000
authorized, 3,785,430 shares issued and outstanding (pro
forma); 25,000,000 shares authorized, 6,334,885 shares issued
and outstanding (pro forma as adjusted)(4)..................... 8 38 63
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....................................... 1,640 21,786 46,915
Deferred compensation(5)......................................... (912) (912) (912)
Deficit accumulated during the development stage................. (16,196) (16,196) (16,344)
-------- -------- --------
Total stockholders' equity (deficit)........................... (15,460) 4,716 29,722
-------- -------- --------
Total capitalization......................................... $ 5,607 $ 5,607 $ 29,722
======== ======== ========
</TABLE>
- ---------------
(1) Presented on a pro forma basis to give effect to (i) 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 2,995,547 shares of Common Stock (assuming an initial public
offering price of $11.00 per share). See "Certain Transactions" and
"Description of Capital Stock."
(2) As adjusted to give effect to (i) the sale of 2,455,000 shares of Common
Stock offered hereby, at an assumed initial public offering price of $11.00
per share (after deducting estimated underwriting discounts and commissions
and estimated expenses of the Offering) and the receipt of the estimated net
proceeds therefrom; and (ii) the issuance, upon the closing of the Offering,
of an aggregate of $1,039,000 of Common Stock at the initial public offering
price in exchange for all of the Company's outstanding Nonconvertible
Redeemable Preferred Stock (94,455 shares of Common Stock assuming an
initial public offering price of $11.00 per share). See "Use of Proceeds"
and "Certain Transactions."
(4) Excludes (i) 362,152 shares of Common Stock issuable upon exercise of
outstanding options as of March 31, 1997 at a weighted average exercise
price of $1.20 per share; (ii) 375,965 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 March 31, 1997; (iii) 5,000
shares of Common Stock reserved for issuance upon exercise of a warrant
outstanding as of March 31, 1997 at an exercise price of $5.00 per share;
and (iv) $519,500 of Common Stock reserved for issuance upon the exercise of
warrants to purchase such stock at the initial public offering price (47,227
shares of Common Stock assuming an initial public offering price of $11.00
per share). See "Management -- Amended and Restated 1994 Equity Incentive
Plan," "Certain Transactions" and "Description of Capital Stock."
(5) 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 March 31, 1997
was $3.5 million or $.93 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 March 31, 1997, assuming 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 2,995,547 shares of Common Stock (assuming an initial public offering price
of $11.00 per share). Without taking into account any other changes in pro forma
net tangible book value other than to give effect to (i) the sale of the
2,455,000 shares of Common Stock in the Offering (at an assumed initial public
offering price of $11.00 per share) and the receipt of the estimated net
proceeds therefrom, and (ii) the issuance, upon the closing of the Offering, of
an aggregate of $1,039,000 of Common Stock at the initial public offering price
in exchange for all of the Company's outstanding Nonconvertible Redeemable
Preferred Stock (94,455 shares of Common Stock assuming an initial public
offering price of $11.00 per share), the pro forma net tangible book value of
the Company as of March 31, 1997 would have been approximately $29.3 million or
$4.63 per share. This represents an immediate increase in pro forma net tangible
book value of $3.70 per share to existing stockholders and an immediate dilution
in pro forma net tangible book value of $6.37 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................... $11.00
Pro forma net tangible book value per share as of March 31,
1997 ........................................................ $ .93
Increase per share attributable to new investors................ 3.70
-----
Pro forma net tangible book value per share after the Offering.... 4.63
------
Dilution per share to new investors............................... $ 6.37
======
</TABLE>
The following table sets forth, on a pro forma basis as of March 31, 1997,
the differences between existing stockholders and new investors 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 $11.00 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........... 3,879,885 61% $13,287,000 33% $ 3.42
New investors................... 2,455,000 39 27,005,000 67 11.00
--------- ---- ----------- ---
Total...................... 6,334,885 100% $40,292,000 100%
========= ==== =========== ===
</TABLE>
The foregoing tables assume no exercise of any outstanding stock options or
warrants subsequent to March 31, 1997. As of March 31, 1997, there were (i)
362,152 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) $519,500 of Common Stock reserved for
issuance upon the exercise of warrants to purchase such stock at the initial
public offering price (47,227 shares of Common Stock assuming an initial public
offering price of $11.00 per share). To the extent that these options or
warrants are exercised, there will be a further dilution of $.12 per share to
new investors. See "Management -- Amended and Restated 1994 Equity Incentive
Plan," "Certain Transactions" and "Description of Capital Stock." In addition,
if the initial public offering price is less than $11.00 per share, additional
shares of Common Stock will be issued upon the exchange of shares of
Nonconvertible Redeemable Preferred Stock for shares of Common Stock at the
initial public offering price, the exercise of outstanding warrants to purchase
shares of Common Stock at the initial public offering price and the conversion
of shares of Series C Convertible Preferred Stock at the closing of the
Offering, resulting in further dilution to new investors. See "Certain
Transactions" and "Description of Capital Stock -- Series Convertible Preferred
Stock."
22
<PAGE> 24
SELECTED FINANCIAL DATA
The following selected financial data are derived from the audited and
unaudited 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>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------- ------------------
1993 1994 1995 1996 1996 1997
------ ------- ------- -------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue............................................. $6,095(1) $ -- $ -- $ -- $ -- $5,000(2)
Operating expenses:
Research and development.......................... 4,498 2,627 2,739 1,968 479 501
General administration............................ 1,625 1,115 1,645 1,834 395 971
------ ------- ------- -------- ------- ------
Total operating expenses........................ 6,123 3,742 4,384 3,802 874 1,472
------ ------- ------- -------- ------- ------
Income (loss) from operations....................... (28) (3,742) (4,384) (3,802) (874) 3,528
Other income (expense).............................. -- 139 (66) (325) (138) 25
------ ------- ------- -------- ------- ------
Net income (loss)................................... (28) (3,603) (4,450) (4,127) (1,012) 3,553
Accretion of Nonconvertible Redeemable Preferred
Stock............................................. -- (1,111) (1,481) (5,080)(3) (370) (30)
------ ------- ------- -------- ------- ------
Net income (loss) to common stockholders............ $ (28) $(4,714) $(5,931) $ (9,207) $(1,382) $3,523
====== ======= ======= ======== ======= ======
Pro forma net income (loss) per common share(4)..... $ (2.31) $ .88
======== ======
Pro forma weighted average common shares
outstanding(4).................................... 3,981 3,981
======== ======
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1997
----------------------------------
DECEMBER 31, PRO
---------------------------------------- PRO FORMA AS
1993 1994 1995 1996 ACTUAL FORMA(5) ADJUSTED(6)
------ ------- ------- -------- ------- ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents......... $ 66 $ 3,461 $ 1,276 $ 640 $ 5,496 $ 5,496 $ 29,943
Working capital (deficit)......... (63) 3,136 733 96 4,354 4,354 29,302
Total assets...................... 107 4,257 1,866 1,566 6,797 6,797 30,411
Senior secured convertible
notes........................... -- -- 2,000 -- -- -- --
Redeemable preferred stock........ -- 8,100 9,581 20,176 891(7) 891 --
Deficit accumulated during the
development stage............... (28) (3,631) (8,081) (19,719) (16,196) (16,196) (16,344)
Total stockholders' equity
(deficit)....................... (28) (4,368) (10,297) (19,235) (15,460) 4,716 29,722
</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) Reflects a one-time license fee of $5.0 million received in connection with
the signing of the BI Agreement. See "Business -- Boehringer Ingelheim."
(3) 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."
(4) See Note 2 of Notes to Financial Statements for information concerning the
computation of pro forma net loss per common share.
(5) Presented on a pro forma basis to give effect to 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
2,995,547 shares of Common Stock (assuming an initial public offering price
of $11.00). See "Certain Transactions" and "Description of Capital Stock --
Series Convetible Preferred Stock."
(6) As adjusted to give effect to (i) the sale of 2,455,000 shares of Common
Stock offered hereby, at an assumed initial public offering price of $11.00
per share (after deducting estimated underwriting discounts and commissions
and estimated expenses of the Offering) and the receipt of the estimated net
proceeds therefrom and (ii) the issuance, upon the closing of the Offering,
of an aggregate of $1,039,000 of Common Stock at the initial public offering
price in exchange for all of the Company's outstanding Nonconvertible
Redeemable Preferred Stock (94,455 shares of Common Stock assuming an
initial public offering price of $11.00 per share). See "Use of Proceeds,"
"Capitalization", "Certain Transactions" and "Description of Capital Stock."
(7) 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 critical care market,
with its initial compounds focusing on the treatment of diseases associated with
oxidative stress and resulting tissue damage. 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 March 1997, BI made an upfront license fee payment to the
Company of $5.0 million. In addition, BI has agreed to purchase $5.0 million of
equity securities of the Company in a private placement. BI has expressed its
intention to fulfill this obligation by purchasing $5.0 million of Common Stock
in the Offering at the initial public offering price (454,545 shares of Common
Stock assuming an initial public offering price of $11.00 per share).
The Company has accumulated net losses of $16.2 million through March 31,
1997. 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
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
The Company earned revenues of $5.0 million, consisting of a
non-refundable, non-creditable licensing fee received under the BI Agreement in
the three-month period ended March 31, 1997 and no revenues in the three-month
period ended March 31, 1996.
The Company's total operating expenses for the three months ended March 31,
1997 and 1996 were $1.5 million and $1.0 million, respectively. Research and
development expenses for each of the three-month periods ended March 31, 1997
and 1996 were approximately $500,000. General and administrative expenses for
the three-month periods ended March 31, 1997 and 1996 were approximately
$970,000 and $400,000, respectively. General and administrative expenses
increased for the three months ended March 31, 1997 due to higher compensation
expenses and professional fees related to the BI Agreement, which was signed in
February 1997.
Other income (expense) for the three-month periods ended March 31, 1997 and
1996 consists of income and interest expense. Interest income for the
three-month periods ended March 31, 1997 and 1996 was $25,000 and $12,000,
respectively. The increase in interest income was due primarily to high cash
balances. The Company incurred interest expense of $150,000 in the three-month
period ended March 31, 1996 on outstanding senior secured convertible term
notes, payable in shares of Series A and Series B Convertible Preferred Stock.
There were no senior secured convertible notes outstanding in the three months
ended March 31, 1997.
The Company earned a net profit of $3.6 million for the three months ended
March 31, 1997, as compared to a net loss of $1.0 million for the three months
ended March 31, 1996.
24
<PAGE> 26
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.
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
$13.6 million 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.
25
<PAGE> 27
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. In addition, BI has agreed to purchase $5.0
million of equity securities of the Company in a private placement. BI has
expressed its intention to fulfill this obligation by purchasing $5.0 million of
Common Stock in the Offering at the initial public offering price. 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.
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 (31,482 shares of
Common Stock assuming an initial public offering price of $11.00 per share),
resulting in proceeds to the Company of approximately $1.0 million. In May 1997,
the Company agreed to issue additional warrants to the holders of its
Nonconvertible Redeemable Preferred Stock to purchase $173,200 of Common Stock,
exercisable at the initial public offering price (15,745 shares of Common Stock
assuming an initial public offering price of $11.00 per share), and the holders
of such stock agreed to exchange their shares of Nonconvertible Redeemable
Preferred Stock for an aggregate of $1,039,000 of Common Stock upon the closing
of the Offering at the initial public offering price (94,455 shares of Common
Stock assuming an initial public offering price of $11.00 per share).
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 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, costs and results of preclinical and
clinical testing, including the Phase III Clinical Program, 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
26
<PAGE> 28
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.
27
<PAGE> 29
BUSINESS
The Company develops novel pharmaceuticals for the critical care market,
with its initial compounds focusing on the treatment of diseases associated with
oxidative stress and resultant tissue damage. 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 began its Phase III Clinical Program to
determine the safety and efficacy of Procysteine for the treatment of ARDS. In
addition, by the end of 1997, the Company expects to begin a second Phase III
clinical trial of Procysteine i.v. for the treatment of ARDS in the United
States and other countries. 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. for the treatment and
prevention of ARDS and MOD. 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 paid
the Company an upfront license fee of $5.0 million and has agreed to purchase
$5.0 million of equity securities of the Company in a private placement. BI has
expressed its intention to fulfill this obligation by purchasing $5.0 million of
Common Stock in the Offering at the initial public offering price (454,545
shares of Common Stock assuming an initial public offering price of $11.00 per
share). 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.
BUSINESS STRATEGY
Transcend's strategy is to develop and commercialize novel pharmaceuticals
for the critical care market, with its initial compounds focusing on the
treatment of diseases associated with oxidative stress and resultant tissue
damage. 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
28
<PAGE> 30
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 businesses. Transcend believes its scientific and development expertise
provides the Company with an ability to recognize opportunities for commercial
development at an early stage.
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.
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
29
<PAGE> 31
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 increase glutathione levels 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 primary focus of the Company's product development program is to
complete its Phase III Clinical Program for the treatment of ARDS. Depending on
the progress and results of the ARDS program, the Company intends to pursue the
development of Procysteine for the prevention of ARDS and/or MOD. The Company
also intends to conduct a further examination of the results of the Phase
I/Phase II clinical trials of oral Procysteine for the treatment of ALS and
ASCVD in order to determine the advisability of conducting further Phase II
clinical trials as well as to conduct additional early stage preclinical
research for the TR-500 compounds in its portfolio. The Company's product
development programs are described in the table below.
<TABLE>
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
PRODUCT CANDIDATE INDICATION STATUS(1) MARKETING RIGHTS
- ---------------------------------------------------------------------------------------------------------
Procysteine i.v. Treatment of Acute Phase III Boehringer Ingelheim(2)
Respiratory Distress Syndrome
Prevention of Acute Phase II(3)
Respiratory Distress Syndrome
and/or Multiple Organ
Dysfunction
- ---------------------------------------------------------------------------------------------------------
Procysteine (oral) Amyotrophic Lateral Sclerosis Phase I/II Transcend Therapeutics
Atherosclerotic Cardiovascular Phase I/II
Disease
- ---------------------------------------------------------------------------------------------------------
TR-571 Hemolytic Anemias Preclinical Research Transcend Therapeutics
- ---------------------------------------------------------------------------------------------------------
TR-520 Acute Renal Failure 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. "Phase III"
refers to large-scale comparative clinical trials in which the compound is
tested in a wider patient population to obtain evidence of levels of safety
and efficacy required by the FDA and other regulatory authorities.
(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 first Phase II ARDS trial.
Additional trials will be required in order to complete a Phase II program
for the prevention of ARDS and/or MOD. See "Business -- Procysteine -
Intravenous Formulation -- Multiple Organ Dysfunction."
30
<PAGE> 32
PROCYSTEINE - INTRAVENOUS FORMULATION
Treatment of 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 Development. 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.
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<PAGE> 33
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 began its Phase III Clinical Program in May 1997. The first
trial, currently underway, is a randomized, double-blind, placebo-controlled
trial of approximately 350 newly-diagnosed ARDS patients. The protocol includes
an interim analysis to confirm the appropriateness of the sample size. The
results of this analysis could require an increase in the number of patients in
the study. Patients 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 in approximately 18 months. A second
Phase III clinical trial is expected to begin by the end of 1997. The primary
endpoint for both trials 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 Clinical Program, the Company has analyzed its
initial Phase II trial results using the proposed Phase III Clinical Program
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."
Whereas two studies are a customary basis for approval for new drugs, in
life-threatening conditions such as ARDS which lack effective therapy,
regulatory agencies have become willing to consider approval based upon just a
single trial. Consequently, if the results of the first Phase III trial are
sufficiently conclusive, the Company intends to submit an NDA upon completion of
the first trial. If the results of the first Phase III trial alone are not
sufficiently conclusive, the filing of the NDA with data from both Phase III
trials would be submitted upon completion of the Phase III Program. In the event
that the results of the first trial are sufficiently conclusive for an NDA
filing, the second trial may be discontinued.
There can be no assurance that the Company's Phase III Clinical Program
will be completed on a timely basis or at all, that the program will demonstrate
the safety and efficacy of Procysteine to the extent necessary to obtain
regulatory approvals, that, even if the Phase III Clinical Program is
successful, the FDA will approve Procysteine for the treatment of ARDS based on
the Phase III Clinical Program 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 this
dosage level 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."
Prevention of ARDS and MOD
Patients at risk of developing ARDS are also at risk of developing
dysfunction of other organs. 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
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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.
Currently, there are no commercially available drugs to prevent ARDS or
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 ARDS
and/or MOD 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 including 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 ARDS and/or MOD. The Company's
Phase III Clinical Program for ARDS is also expected to provide data on the
potential of Procysteine to prevent progression to 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 trials for the treatment or prevention of other
organ dysfunction and as a result, additional research will be necessary to
define an appropriate endpoint. Further, since not all patients in a prevention
trial develop ARDS and/or MOD, a trial for the prevention of ARDS and/or 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 the prevention of ARDS and/or MOD, the Company will be
required to raise substantial additional funds to pursue further research and
development. If the Company undertakes such an ARDS/MOD prevention program,
there can be no assurance that the results of earlier studies on the use of
Procysteine for the prevention of ARDS and/or 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. During 1997, the
Company plans to evaluate the results of these trials to determine whether to
initiate expanded Phase II clinical trials for either or both of these
indications. If such studies are conducted and yield positive results, the
Company would seek to outlicense its rights to oral Procysteine for ALS and/or
ASCVD.
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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 in such patients 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. Based on this result, the Company may 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."
Atherosclerotic Cardiovascular Disease
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. Based on this result, the
Company may conduct a similar Phase I/II trial using multiple doses of
Procysteine. 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 TR-571 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. In addition, the
Company believes, based on preclinical studies, that TR-520 may have potential
therapeutic application in the treatment of acute renal failure, where low
glutathione levels play a role in kidney tissue damage. During 1997, the Company
plans to select one or more of these compounds for further preclinical
development.
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
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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. 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 required MOD
clinical trials 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 paid the Company an upfront license fee of $5.0 million and has
agreed to purchase $5.0 million of equity securities of the Company in a private
placement. BI has expressed its intention to fulfill this obligation by
purchasing $5.0 million of Common Stock in the Offering at the initial public
offering price (454,545 shares of Common Stock assuming an initial public
offering price of $11.00 per share). 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. 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 the first Phase III clinical trial 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. 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."
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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 believes it has produced sufficient Procysteine for use
in its Phase III Clinical Program.
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 believes that it has
sufficient supplies to complete the Phase III Clinical Program, it does not
believe that the supplier's existing issues with the FDA will affect the
completion of the program, 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
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."
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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
March 31, 1997, 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
United States patent application for the use of Procysteine in treating
pulmonary disease, including ARDS. The Company recently received a final Office
Action, from the USPTO, rejecting the claims of this patent application as being
obvious over a combination of prior art references. Final Office Actions
commonly are issued by the USPTO. While receipt of a final Office Action may
impose certain procedural limitations on an applicant's subsequent submissions
in a particular case, it does not signal the end of the prosecution process. The
Company intends to respond vigorously to the final Office Action, by the
presentation of additional arguments and facts in support of its position that
the patent application contains patentable subject matter. There can be no
assurance, however, that this patent application ultimately will issue as a
patent in the United States, or, if it issues, as to the breadth of the claims.
A corresponding European patent has issued and has been validated as national
patents in Austria, Belgium, Denmark, France, Germany, Greece, Italy,
Luxembourg, Monaco, the Netherlands, Portugal, Spain, Sweden, Switzerland, and
the United Kingdom, all of which 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 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.
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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 Healthcare
Corporation ("Baxter"). In 1989, Baxter and Nestle Clinical Nutrition, Inc.
("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.
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
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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, in exchange for 680,000 shares of
Common Stock and 9,000 shares of Nonconvertible Redeemable Preferred Stock, the
Company acquired from Clintec various clinical supplies, data, records,
contractual and intellectual property rights related to pharmaceutical
applications of the Covered Technology. In connection with 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. 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.
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 completed patient accrual in May 1997 for a Phase III
trial of 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."
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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
Institutional Review Board ("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 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 SMB 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.
40
<PAGE> 42
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 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 May 15, 1997, the Company employed 13 people, two 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
41
<PAGE> 43
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.
42
<PAGE> 44
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).................. 56 Chairman of the Board
Philippe Chambon, M.D., Ph.D.(1)..... 39 Director
Frank L. Douglas, M.D., Ph.D.(2)..... 54 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.
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<PAGE> 45
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 has been Chief Research Officer for Hoechst Marion
Roussel, A.G. since May 1997 and was Global Head of Research for Hoescht from
1995 to 1997. 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, Corporate Development 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.
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<PAGE> 46
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 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
45
<PAGE> 47
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.
46
<PAGE> 48
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 $612,982/$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.
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<PAGE> 49
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 amended and restated by the Board of Directors and the
stockholders in February 1997. 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. As of
March 31, 1997, a total of 362,152 shares of Common Stock were reserved for
issuance upon exercise of outstanding options granted under the 1994 Equity
Incentive Plan, and an additional 375,965 shares of Common Stock were 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 March 31, 1997, 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.
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<PAGE> 50
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, Corporate
Development of Baxter International Inc., the sole owner of Baxter.
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
3,494,500 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 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 873,625 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 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 501,869 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, Clintec 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> 51
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 $1,270,728 to entities affiliated
with Advent, $363,636 to entities affiliated with Sprout and $363,636 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. At the closing of the
September 1996 Financing, the Company issued 98,631 shares of Series A
Convertible Preferred Stock in full payment of accrued and unpaid interest
through such date (including 62,666 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 1,270,728 shares to
entities affiliated with Advent; 363,636 shares to entities affiliated with
Sprout; and 363,636 shares to VCFNE).
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 $635,364 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 3, 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 15,318 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 423,576 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; 42,983 shares to VCFNE; and 19,342 shares to
Sprout Group) at a price of $2.35 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 BI Agreement, BI agreed to purchase $5.0 million of equity
securities of the Company in a private placement. BI has expressed its intention
to fulfill this obligation by purchasing $5.0 million of Common Stock in the
Offering at the initial public offering price (454,545 shares of Common Stock
assuming an initial public offering price of $11.00 per
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<PAGE> 52
share). The Company expects to grant BI certain registration rights with respect
to the BI Shares. 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 (31,482 shares of Common Stock assuming an initial public offering price
of $11.00 per share), to certain institutional investors, including 433,697
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. In May 1997, the Company agreed to issue warrants to purchase an
additional $173,200 of Common Stock to such investors (together with the shares
issuable upon exercise of the warrants issued in March 1997, the "Bridge Warrant
Shares"), exercisable at the initial public offering price (15,745 shares of
Common Stock assuming an initial public offering price of $11.00 per share).
Concurrently, the holders of such stock agreed to exchange their shares of
Nonconvertible Redeemable Preferred Stock for an aggregate of $1,039,000 of
Common Stock upon the closing of the Offering at the initial public offering
price (94,455 shares of Common Stock assuming an initial public offering price
of $11.00 per share).
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<PAGE> 53
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock of the Company as of March 31, 1997, 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)........................................... 1,294,277 32.4% 20.1%
101 Federal Street
Boston, MA 02110
Baxter Healthcare Corporation(5).......................... 964,279 24.2 15.0
One Baxter Parkway
Deerfield, IL 60015
Nestle Clinical Nutrition, Inc. .......................... 789,650 19.9 12.3
900 North Brand Boulevard
Glendale, CA 91203
Clintec International, Inc. .............................. 689,650 17.4 10.7
One Baxter Parkway
Deerfield, IL 60015
Boehringer Ingelheim International GmbH................... 454,545 -- 7.1
D-55216 Ingelheim am Rhein
Germany(6)
The Venture Capital Fund of New England III, L.P. ........ 367,163 9.2 5.7
160 Federal Street, 23rd Floor
Boston, MA 02110 (7)
DLJ Capital Corporation(8)................................ 360,186 9.1 5.6
277 Park Avenue
New York, NY 10172
DIRECTORS
Jerry T. Jackson(9)....................................... 26,824 * *
Philippe Chambon, M.D., Ph.D.(8).......................... 360,186 9.1 5.6
Frank L. Douglas, M.D., Ph.D.(10)......................... 16,668 * *
Richard W. Hunt(11)....................................... 964,279 24.2 15.0
William C. Mills III(12).................................. 367,163 9.2 5.7
Gerard M. Moufflet(4)..................................... 1,294,277 32.4 20.1
NAMED EXECUTIVE OFFICERS
Hector J. Gomez, M.D., Ph.D.(13).......................... 79,980 2.0 1.2
John J. Whalen, M.D.(14).................................. 19,556 * *
B. Nicholas Harvey(15).................................... 31,661 * *
All directors and executive officers as a group
(nine persons)(16)..................................... 3,160,954 76.0 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 or
warrants held by such person that are currently
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<PAGE> 54
exercisable or that become exercisable within 60 days after March 31, 1997,
and any reference in these footnotes to shares subject to stock options or
warrants held by the person in question refers only to such shares.
(3) The number of shares deemed outstanding for purposes of calculating these
percentages is comprised of the 3,879,885 shares outstanding as of March
31, 1997, which gives effect to the conversion into shares of Common Stock
of all outstanding shares of Series A, Series B and Series C Preferred
Stock, and (ii) the exchange of all of the Company's outstanding
Nonconvertible Redeemable Preferred Stock for an aggregate of $1,039,000 of
Common Stock at the initial public offering price (94,455 shares of Common
Stock assuming an initial public offering price of $11.00 per share).
Shares held by the person in question include shares subject to stock
options and warrants exercisable within 60 days after March 31, 1997. If
the initial public offering price is less than $11.75 per share, additional
shares of Common Stock will be issued upon conversion of shares of Series C
Convertible Preferred Stock. See "Description of Capital Stock -- Series
Convertible Preferred Stock."
(4) Represents 822,812 shares held by Global Private Equity II Limited
Partnership, 331,421 shares held by Rovent II Limited Partnership, 136,340
shares held by Advent Performance Materials Limited Partnership and 3,704
shares held by Advent International Investors II Limited Partnership (the
"Advent Group"). Includes an aggregate of 19,714 Bridge Warrant Shares. 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 689,650 shares held by Clintec International, Inc., a wholly owned
subsidiary of Baxter and 14,503 Bridge Warrant Shares.
(6) Consists of $5.0 million of equity securities of the Company which, under
the BI Equity Investment, BI has agreed to purchase in a private placement.
BI has expressed its intention to fulfill this obligation by purchasing
Common Stock in the Offering at the initial public offering price (assumes
an initial public offering price of $11.00 per share).
(7) Includes 4,571 Bridge Warrant Shares.
(8) Represents 310,945 shares held by Sprout Capital VI, L.P. (including 3,335
Bridge Warrant Shares) and 49,241 shares held by DLJ Capital Corporation
(including 528 Bridge Warrant Shares), 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.
(9) Includes 10,006 shares subject to stock options and 2,273 Bridge Warrant
Shares held by Mr. Jackson.
(10) Includes 6,668 shares subject to stock options held by Dr. Douglas.
(11) Represents 689,650 shares held by Clintec International, Inc. and 274,629
shares held by Baxter. Mr. Hunt is Vice President, Corporate Development of
Baxter International, Inc. and shares voting power with respect to shares
held by Clintec's sole stockholder, Baxter.
(12) Represents 367,163 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.
(13) Includes 72,998 shares subject to stock options and 1,727 Bridge Warrant
Shares held by Dr. Gomez.
(14) Includes 17,920 shares subject to stock options and 545 Bridge Warrant
Shares held by Dr. Whalen.
(15) Represents 31,661 shares subject to stock options held by Mr. Harvey.
(16) Includes 139,253 shares subject to stock options and an aggregate of 47,196
Bridge Warrant Shares.
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<PAGE> 55
DESCRIPTION OF CAPITAL STOCK
The Company's current Restated Certificate of Incorporation (the
"Certificate of Incorporation"), authorizes 46,285,319 shares of capital stock,
consisting of 25,000,000 shares of Common Stock, $.01 par value, and 21,285,319
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 March 31, 1997, assuming the conversion all outstanding shares of
Preferred Stock into Common Stock, there were 3,785,430 shares of Common Stock
issued and outstanding held of record by 22 stockholders and 362,152 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, 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."
Assuming an initial public offering price of $11.00 per share, because of the
one-for-five reverse stock split effected in February 1997, each share of Series
A and Series B Preferred Stock will automatically convert into one-fifth of a
share of Common Stock upon closing of the Offering.
Under the terms of the Company's Convertible Preferred Stock, if the
Company issues shares of Common Stock at less than the Conversion Price of any
series of its Convertible Preferred Stock (as defined in the terms of such
series), the number of shares of Common Stock issuable upon conversion of shares
of such series will adjust in accordance with a weighted average antidilution
formula. The Conversion Price of the Company's Series C Preferred Stock is
$11.75 per share. Accordingly, an initial public offering price of less than
$11.75 will cause an adjustment in the number of shares issuable upon the
automatic conversion of Series C Preferred Stock at the closing of the Offering.
At an initial public offering price of $11.00 per share, an aggregate of
6,334,885 shares of Common Stock will be outstanding after the Offering (23,062
shares more than if there were no antidilution adjustment in the Conversion
Price of the Series C Preferred Stock). Initial public offering prices of
$10.00, $9.00 and $8.00 per share would cause an additional 55,554, 90,556 and
128,368 shares, respectively, to be outstanding after the Offering.
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<PAGE> 56
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 are expected
to be exchanged upon the closing of the Offering for an aggregate of $1,039,000
of Common Stock at the initial public offering price (94,455 shares of Common
Stock assuming an initial public offering price of $11.00 per share). 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 March 1997, upon the issuance of shares of Nonconvertible Preferred
Stock, the Company also issued warrants to purchase $346,300 of Bridge Warrant
Shares, exercisable at the initial public offering price (31,482 shares of
Common Stock assuming an initial public offering price of $11.00 per share). In
May 1997, the Company agreed to issue additional warrants to the holders of its
Nonconvertible Preferred Stock to purchase $173,200 of Bridge Warrant Shares,
exercisable at the initial public offering price (15,745 shares of Common Stock
assuming an initial public offering price of $11.00 per share), and the holders
of such stock agreed to exchange their shares of Nonconvertible Preferred Stock
for an aggregate of $1,039,000 of Common Stock upon the closing of the Offering
at the initial public offering price (94,455 shares of Common Stock assuming an
initial public offering price of $11.00 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 3,771,801 shares of Common
Stock (the "Registrable Shares") pursuant to the terms of an agreement among the
Company and the Rightsholders (the "Registration Rights Agreement"). Such number
of shares includes shares of Common Stock to be issued in exchange for the
Company's outstanding Nonconvertible Redeemable Preferred Stock and the Bridge
Warrant Shares, with respect to all of which the Company expects to grant the
same or comparable registration rights. 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 (on an as-converted
basis) 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, on 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
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<PAGE> 57
(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 ("Incidental
Rights"). 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
expects to grant such Incidental Rights with respect to any BI Shares issued in
the Offering. 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. 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 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
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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.
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 6,334,885 shares of
Common Stock (6,703,135 shares if the Underwriters' over-allotment option is
exercised in full). Of these shares, the 2,455,000 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, or are subject to certain lock-up
agreements as described below.
The remaining 3,879,885 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, certain of the Company's stockholders and
all of its executive officers and directors, who collectively hold 3,765,801 of
such Restricted Shares (excluding BI), have agreed not to offer, sell, or
otherwise dispose of any of their Restricted Shares for a period of 270 days
from the date of this Prospectus (the "Lock-Up Period"), without the prior
written consent of EVEREN Securities. In addition, BI has agreed not to offer,
sell or otherwise dispose of any shares of Common Stock received under the BI
Equity Investment for a period of 360 days from the date of this Prospectus
without the prior written consent of EVEREN 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 EVEREN
Securities. Upon termination of the Lock-Up Period, approximately 3,671,347
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 BI Shares will be
eligible for immediate sale in the public market without limitation. In
addition, of the Restricted Shares not
57
<PAGE> 59
subject to lock-up agreements, approximately 74,741 shares will be eligible for
immediate sale, without limitation under Rule 144(k), and approximately 39,342
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 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 63,349 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 March 31, 1997, options to purchase a total of 362,152 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 72,377 shares will be available
for sale in the public market 90 days after the date of this Prospectus pursuant
to Rule 701. As of March 31, 1997, 375,965 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 738,117 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."
58
<PAGE> 60
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
underwriters (the "Underwriters") named below, for whom EVEREN Securities and
Principal Financial 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>
EVEREN Securities, Inc. .........................................
Principal Financial Securities, Inc .............................
---------
Total....................................................... 2,455,000
=========
</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 368,250 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.
59
<PAGE> 61
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 EVEREN Securities, offer, sell 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 270 days from the date of this Prospectus. BI has agreed that it will
not, without the prior written consent of EVEREN 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 EVEREN 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 270 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.
LEGAL MATTERS
Hale and Dorr LLP, Boston, Massachusetts will pass upon the validity of the
shares of Common Stock offered by the Company hereby. 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 (not separately presented herein) 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, 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.
60
<PAGE> 62
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.
61
<PAGE> 63
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> 64
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 (not separately presented herein) . 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 (not separately presented herein) 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> 65
TRANSCEND THERAPEUTICS, INC.
(A Company in the Development Stage)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
----------------------------- ------------
1996 1995 1997
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Restricted cash.......................................... $ 4,349,806
Unrestricted cash and cash equivalents................... $ 639,626 $ 1,276,305 1,145,752
Prepaid expenses and other current assets................ 39,579 38,282 23,399
Other assets............................................. 41,328 25,000
------------ ------------ ------------
Total current assets....................................... 720,533 1,314,587 5,543,957
Property and equipment, net................................ 46,108 52,706 42,840
Other assets:
Deferred offering costs.................................. 409,548 833,565
Patents and licenses, net................................ 389,576 443,795 376,021
Other assets............................................. 54,600
------------ ------------ ------------
$ 1,565,765 $ 1,865,688 $ 6,796,383
============ ============ ============
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses.................... $ 624,535 $ 404,329 1,189,859
Interest payable to related party........................ 177,534
------------ ------------ ------------
Total current liabilities.................................. 624,535 581,863 1,189,859
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 9,140,187
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 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 10,000,000
Redeemable Non-convertible Preferred Stock, 9,000 shares
authorized, issued and outstanding, par value $.01..... 3,081,028 891,000
Stockholders' deficit:
Common Stock, par value $0.01, 25,000,000 shares
authorized, 779,381, 763,306 and 789,883 shares issued
and outstanding at December 31, 1996 and 1995 and March
31, 1997, respectively................................. 7,793 7,633 7,898
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 1,640,340
Deferred compensation.................................... (977,802) (912,743)
Accretion of Redeemable Nonconvertible Preferred Stock... (2,591,904) (30,000)
Deficit accumulated during the development stage......... (19,718,959) (8,081,153) (16,166,321)
------------ ------------ ------------
Total stockholders' deficit....................... (19,235,120) (10,297,203) (15,430,826)
------------ ------------ ------------
Total liabilities and stockholders' deficit....... $ 1,565,765 $ 1,865,688 $ 6,796,383
============ ============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE> 66
TRANSCEND THERAPEUTICS, INC.
(A Company in the Development Stage)
STATEMENTS OF OPERATIONS
(in thousands, except per-share amounts)
<TABLE>
<CAPTION>
PERIOD
JANUARY 1, 1993
YEARS ENDED DECEMBER 31 MARCH 31, (COMMENCEMENT
--------------------------- --------------- OF OPERATIONS) TO
1996 1995 1994 1997 1996 MARCH 31, 1997
------- ------- ------- ------ ------ -----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Research and development contract
revenues........................... 5,000 $ -- $ 11,095
Operating expenses:
Research and development........... $ 1,968 $ 2,739 $ 2,627 501 479 12,333
General administration............. 1,834 1,645 1,115 971 395 7,192
------- ------- ------- ----- ------ --------
Total operating expenses............. 3,802 4,384 3,742 1,472 874 19,524
Other income (expense):
Interest income.................... 30 112 139 25 12 305
Interest expense................... (355) (178) -- (150) (532)
------- ------- ------- ----- ------ --------
(325) (66) 139 25 (138) (227)
------- ------- ------- ----- ------ --------
Net income (loss).................... $(4,127) $(4,450) $(3,603) 3,553 (1,012) $ (8,655)
------- ------- ------- ----- ------ ========
Accretion of Redeemable
Nonconvertible Preferred Stock..... (5,080) (1,481) (1,111) (30) (370)
------- ------- ------- ----- ------
Net income (loss) to common
stockholders....................... (9,207) (5,931) (4,714) 3,523 (1,382)
======= ======= ======= ===== ======
Pro forma net income (loss) per
common share....................... $ (2.31) $ .88
======= =====
Pro forma weighted average common
shares outstanding................. 3,981 3,981
======= =====
</TABLE>
See accompanying notes.
F-4
<PAGE> 67
TRANSCEND THERAPEUTICS, INC.
(A Company in the Development Stage)
STATEMENTS OF REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C
CONVERTIBLE PREFERRED CONVERTIBLE PREFERRED CONVERTIBLE PREFERRED
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
---------------------- ---------------------- -----------------------
NUMBER OF NUMBER OF NUMBER OF
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ---------- --------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of Common Stock, December 1992
($.01/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
($1,000/share)................................
Issuance of Common Stock for technology and
payment of expenses ($.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 $ 2,000,000
Conversion of Redeemable Nonconvertible
Preferred Stock to Series C Redeemable
Convertible Preferred Stock in September 1996
($2.35/share).................................. 3,404,255 8,000,000
Conversion of Series A Redeemable Convertible
Warrants to Series A Preferred Stock in
September 1996 ($.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 10,000,000
--------- ---------- -------- ---------- --------- -----------
Exercise of stock options (unaudited)...........
Issuance of Common Stock warrants (unaudited)...
Grant of stock options (unaudited)
Accretion of Redeemable Nonconvertible Preferred
Stock (unaudited)..............................
Amortization of deferred compensation
(unaudited)....................................
Net Income (unaudited)..........................
--------- ---------- -------- ---------- --------- -----------
Balance at March 31, 1997 (unaudited)........... 9,916,330 $9,140,187 690,775 $1,036,163 4,255,319 $10,000,000
========= ========== ======== ========== ========= ===========
See accompanying notes.
<CAPTION>
REDEEMABLE
NONCONVERTIBLE SERIES A PREFERRED
PREFERRED STOCK COMMON STOCK STOCK WARRANTS
------------------------ ------------------ ----------------------
NUMBER OF NUMBER OF NUMBER OF
SHARES AMOUNT SHARES AMOUNT WARRANTS AMOUNT
--------- ----------- --------- ------ ---------- ---------
<S> <<C> <C> <C> <C> <C> <C>
Issuance of Common Stock, December 1992
($.01/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 and
payment of expenses ($.50/share)............... 715,025 7,150
Issuance of Series A Preferred Stock Warrants
($.01/share)................................... 1,625,000 $ 16,250
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 1,625,000 16,250
Cancellation of Cornell's common shares......... (7,025) (70)
Extinguishment of Series A Preferred Warrants... (250,000) (2,500)
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 1,375,000 13,750
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)..................................
Conversion of Redeemable Nonconvertible
Preferred Stock to Series C Redeemable
Convertible Preferred Stock in September 1996
($2.35/share).................................. (9,000) (4,080,762)
Conversion of Series A Redeemable Convertible
Warrants to Series A Preferred Stock in
September 1996 ($.02/share).................... (1,375,000) (13,750)
Exercise of stock options....................... 16,075 160
Grant of stock options..........................
Amortization of deferred compensation expense...
Net loss........................................
------ ----------- ------- ------ ---------- --------
Balance at December 31, 1996.................... -- -- 779,381 7,793 -- --
------ ----------- ------- ------ ---------- --------
Exercise of stock options (unaudited)........... 10,502 105
Issuance of Common Stock warrants (unaudited)... 28,858 861,000
Grant of stock options (unaudited)
Accretion of Redeemable Nonconvertible Preferred
Stock (unaudited).............................. 30,000
Amortization of deferred compensation
(unaudited)....................................
Net Income (unaudited)..........................
------ ----------- ------- ------ ---------- --------
Balance at March 31, 1997 (unaudited)........... 28,858 $ 891,000 789,883 $7,898 -- $ --
====== =========== ======= ====== ========== ========
See accompanying notes.
<CAPTION>
CUMULATIVE
ACCRETION ON DEFICIT
REDEEMABLE ACCUMULATED TREASURY
ADDITIONAL NONCONVERTIBLE DURING STOCK
PAID-IN PREFERRED DEFERRED DEVELOPMENT NUMBER OF ------
CAPITAL STOCK COMPENSATION STAGE SHARES AMOUNT
---------- -------------- ------------ ------------ --------- ------
Issuance of Common Stock, December 1992
($.01/share)................................... $ (436)
Purchase of Treasury Stock...................... 4,959 $ (2)
Net loss........................................ $ (28,274)
---------- ------------ ------- ----
Balance at December 31, 1993.................... (436) (28,274) 4,959 (2)
April 1994:
Issuance of Common Stock from treasury for
services....................................... (4,959) 2
Issuance of Series A Redeemable Convertible
Preferred Stock
($1.00/share).................................
Issuance of Redeemable Nonconvertible Preferred
Stock for technology
($1,000/share)................................
Issuance of Common Stock for technology and
payment of expenses ($.50/share)............... 350,363
Issuance of Series A Preferred Stock Warrants
($.01/share)...................................
Accretion of Redeemable Nonconvertible Preferred
Stock.......................................... $ (1,110,816)
Net loss........................................ (3,602,892)
---------- ------------ ----------- ------------ ------- ----
Balance at December 31, 1994.................... 349,927 (1,110,816) (3,631,166)
Cancellation of Cornell's common shares......... (3,442)
Extinguishment of Series A Preferred Warrants... 2,500
Conversion of options to common shares.......... 5,486
Accretion of Redeemable Nonconvertible Preferred
Stock.......................................... (1,481,088)
Net loss........................................ (4,449,987)
---------- ------------ ----------- ------------ ------- ----
Balance at December 31, 1995.................... 354,471 (2,591,904) (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.......................................... (999,734)
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
($2.35/share).................................. (3,591,638) (7,510,876)
Conversion of Series A Redeemable Convertible
Warrants to Series A Preferred Stock in
September 1996 ($.02/share)....................
Exercise of stock options....................... 7,877
Grant of stock options.......................... 1,091,500 $(1,091,500)
Amortization of deferred compensation expense... 113,698
Net loss........................................ (4,126,930)
---------- ------------ ----------- ------------ ------- ----
Balance at December 31, 1996.................... 1,453,848 -- (977,802) (19,718,959) -- --
---------- ------------ ----------- ------------ ------- ----
Exercise of stock options (unaudited)........... 5,147
Issuance of Common Stock warrants (unaudited)... 178,000
Grant of stock options (unaudited) 3,346 (3,346)
Accretion of Redeemable Nonconvertible Preferred
Stock (unaudited).............................. (30,000)
Amortization of deferred compensation
(unaudited).................................... 68,405
Net Income (unaudited).......................... 3,552,637
---------- ------------ ----------- ------------ ------- ----
Balance at March 31, 1997 (unaudited)........... $1,640,341 $ (30,000) $ (912,743) $(16,166,322) -- $ --
========== ============ =========== ============ ======= ====
See accompanying notes.
</TABLE>
F-5
<PAGE> 68
TRANSCEND THERAPEUTICS, INC.
(A Company in the Development Stage)
STATEMENTS OF CASH FLOWS
(in thousands, except per-share amounts)
<TABLE>
<CAPTION>
PERIOD
JANUARY 1, 1993
DECEMBER 31, MARCH 31, (COMMENCEMENT
--------------------------- ----------------- OF OPERATIONS) TO
1996 1995 1994 1997 1996 MARCH 31, 1997
------- ------- ------- ------- ------- ------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net (loss) gain........................................ $(4,127) $(4,450) $(3,603) $ 3,553 $(1,013) $ (8,655)
------- -------- ------- ------- ------- --------
Adjustments to reconcile net loss to cash provided by
operating activities:
Depreciation......................................... 13 10 8 4 2 38
Amortization......................................... 54 54 41 14 14 163
Issuance of Preferred Stock in lieu of interest
payments........................................... 533 199 533
Amortization of deferred compensation expense........ 114 68 182
Loss on sale of property and equipment............... 5 5
Expenses incurred with related party that were
settled with the issuance of Common Stock.......... 304 304
Change in operating assets and liabilities:
Prepaid expenses and other current assets.......... (1) 162 (193) 16 16 (24)
Other assets....................................... 13 4 (50) 16 (22)
Accounts payable, Deferred Offering costs and
accrued expenses................................. 146 84 233 64 195 614
Interest payable to related party.................. (178) 143 (13) (178)
------- -------- ------- ------- ------- --------
Net cash used in operating activities.................. (3,433) (3,989) (3,273) 3,735 (765) (6,861)
INVESTING ACTIVITIES
Purchase of equipment and improvements................. (7) (29) (18) 0 (5) (87)
Proceeds from sale of equipment........................ 1 1 2
------- -------- ------- ------- ------- --------
Net cash used in investing activities.................. (7) (28) (18) 0 (5) (85)
FINANCING ACTIVITIES
Issuance of Common Stock Warrants......................
Proceeds from issuance of debt......................... 1,000 2,000 170 178 3,348
Payment on note payable to related party............... (170) (170)
Offering costs......................................... (335) 77 (258)
Issuance of Series A Preferred Stock Warrants.......... 16 16
Issuance of Series A Redeemable Convertible Preferred
Stock................................................ 130 6,500 861 130 7,491
Issuance of Series C Redeemable Convertible Preferred
Stock................................................ 2,000 2,000
Issuance of Redeemable Non-Convertible Preferred
Stock................................................
Issuance of Common Stock...............................
Proceeds from exercise of stock options................ 8 2 5 15
Purchase of Treasury Stock............................. (2)
------- -------- ------- ------- ------- --------
Net cash provided by financing activities.............. 2,803 1,832 6,686 1,121 130 12,442
------- -------- ------- ------- ------- --------
Increase (decrease) in cash and cash equivalents......... (637) (2,185) 3,395 4,856 (640) 5,496
Cash and cash-equivalents at beginning of period......... 1,276 3,461 66 640 1,276
------- -------- ------- ------- ------- --------
Cash and cash-equivalents at end of period............... $ 640 $ 1,276 $ 3,461 $ 5,496 $ 636 $ 5,496
======= ======= ======= ======= ======= ========
SUPPLEMENTAL DISCLOSURES FOR NON-CASH ACTIVITIES:
Non-Cash Financing Transactions
Issuance of Redeemable Nonconvertible Preferred Stock for
technology............................................. $ 489
Issuance of Common Stock for technology.................. $ 53
Conversion of Senior Secured Convertible Notes to Series
B Redeemable Convertible Preferred Stock............... $ 1,000
Conversion of Senior Secured Convertible Notes to Series
A Redeemable Convertible Preferred Stock............... $ 2,000
Conversion of Series A Redeemable Convertible Stock
Warrants to Series A Preferred Stock................... $ 14
</TABLE>
See accompanying notes.
F-6
<PAGE> 69
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> 70
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).
INTERIM FINANCIAL STATEMENTS (UNAUDITED)
The balance sheet at March 31, 1997, the statements of operations and
statements of cash flows for the three months ended March 31, 1996 and 1997 and
the period from January 1, 1993 (date of inception) through March 31, 1997, and
the statement of Redeemable Preferred Stock and Stockholders' Deficit for the
three months ended March 31, 1997 are unaudited, but, in the opinion of
management, include all adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation of results for these interim periods. The
results of operations for the three months ended March 31, 1997 are not
necessarily indicative of the results to be expected for the entire year.
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.
RESTRICTED CASH
Pursuant to the Development and License Agreement with Boehringer
Ingelheim, GmbH(BI), the Company is restricted as to the manner in which it can
use proceeds from BI. According to the agreement, the use of all funding under
the BI Agreement must be used exclusively for the ARDS Development Program.
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.
F-8
<PAGE> 71
TRANSCEND THERAPEUTICS, INC.
(A Company in the Development Stage)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-9
<PAGE> 72
TRANSCEND THERAPEUTICS, INC.
(A Company in the Development Stage)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-10
<PAGE> 73
TRANSCEND THERAPEUTICS, INC.
(A Company in the Development Stage)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 amount due for expenses incurred 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
F-11
<PAGE> 74
TRANSCEND THERAPEUTICS, INC.
(A Company in the Development Stage)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 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
F-12
<PAGE> 75
TRANSCEND THERAPEUTICS, INC.
(A Company in the Development Stage)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 775,891 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.
F-13
<PAGE> 76
TRANSCEND THERAPEUTICS, INC.
(A Company in the Development Stage)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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
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.
F-14
<PAGE> 77
TRANSCEND THERAPEUTICS, INC.
(A Company in the Development Stage)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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).
12. SUBSEQUENT EVENTS (UNAUDITED)
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings per Share, which is required to be adopted on December 31,
1997. At that time, the Company will be required to change the method currently
used to compute earnings per share to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive effect of
stock options will be excluded. The impact of this new pronouncement has not
been presented since such amounts are not deemed meaningful.
F-15
<PAGE> 78
TRANSCEND THERAPEUTICS, INC.
(A Company in the Development Stage)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In February 1997, the Company entered into a Development and License
Agreement with BI. In connection with this agreement, BI made a license payment
to the Company of $5.0 million in March 1997. Pursuant to the BI-Agreement, the
Company has agreed to use the funds provided by BI (including the $5.0 million
upfront license fee and the $5.0 million in proceeds from the BI Equity
Investment) exclusively for its ARDS development program and, as such, these
funds have been classified as restricted cash on the Balance Sheet.
Subsequent to December 31, 1996, the Company granted stock options to
employees, outside consultants and Scientific Advisory Board members to purchase
an aggregate of 13,309 shares of Common Stock exercisable at $11.00 per share.
Subsequent to December 31, 1996, the Company issued an aggregate of 10,504
shares of Common Stock upon the exercise of options.
In March 1997, the Company issued 1,039,000 shares of Nonconvertible
Preferred Stock and Warrants to purchase $346,300 of Common Stock exercisable at
the initial public offering price (31,482 shares, assuming an initial public
offering price of $11.00 per share). The Company accounted for the debt issued
and the detachable stock warrants in accordance with APB Opinion 14 which
requires an allocation based upon the fair market value of the debt and rights
as soon as both sell separately on the open market. In May 1997, the Company
agreed to exchange all of the shares of Redeemable Nonconvertible Preferred
Stock for shares of common stock to be issued upon the closing of an initial
public offering at the initial public offering price. Concurrently, the Company
increased the value of the detachable stock warrants by $173,200 to $519,500 of
common stock at the initial public offering price (47,227 shares assuming an
initial public offering price of $11.00). If, by August 1997, the Company has
not completed an initial public offering, the Redeemable Nonconvertible
Preferred Stock can be redeemed for $1,039,000 in cash at the option of the
holders.
In April 1997, the Company entered into a Clinical Development Agreement to
provide the Company with monitoring and data management services in connection
with its first Phase III ARDS clinical trial. The Agreement provides for
payments of approximately $2.0 million during the 18 month period beginning in
April, 1997.
F-16
<PAGE> 79
- ------------------------------------------------------
------------------------------------------------------
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.................................. 28
Management................................ 43
Certain Transactions...................... 49
Principal Stockholders.................... 52
Description of Capital Stock.............. 54
Shares Eligible for Future Sale........... 57
Underwriting.............................. 59
Legal Matters............................. 60
Experts................................... 60
Additional Information.................... 61
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>
======================================================
2,455,000 SHARES
[TRANSCEND THERAPEUTICS LOGO]
COMMON STOCK
------------------------------
PROSPECTUS
------------------------------
EVEREN Securities, Inc.
PRINCIPAL FINANCIAL SECURITIES, INC.
, 1997
======================================================
<PAGE> 80
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................................................... $ 21,371*
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............................... 250,000
Miscellaneous.......................................................... 105,929
----------
Total............................................................. $1,000,000
==========
</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> 81
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 7 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> 82
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 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 (31,482 shares of
Common Stock, assuming an initial public offering price of $11.00 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.
14. In February 1997, the Registrant agreed to sell to a corporate partner
$5.0 million of Common Stock at the initial public offering price (454,545
shares of Common Stock assuming an initial public offering price of $11.00 per
share).
15. In May 1997, the Registrant agreed to issue additional warrants to the
holders of its Nonconvertible Preferred Stock to purchase $173,200 of Common
Stock, exercisable at the initial public offering price (15,745 shares of Common
Stock assuming an initial public offering price of $11.00 per share), and the
holders of such stock agreed to exchange their shares of Nonconvertible
Preferred Stock for an aggregate of $1,039,000 of Common Stock upon the closing
of the Offering at the initial public offering price (94,455) shares of Common
Stock assuming an initial public offering price of $11.00 per share).
16. From April 1994 through March 31, 1997, the Registrant granted options
to purchase 447,244 shares of Common Stock at exercise prices ranging from $.50
to $11.00 per share.
II-3
<PAGE> 83
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 (15) 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 16 above are deemed to be
exempt from registration under the Securities Act by virtue of 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.
10.11 Stock Purchase Agreement dated February 28, 1997 between the Registrant and BI.
</TABLE>
II-4
<PAGE> 84
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -------------------------------------------------------------------------------
<C> <S>
10.12 Non-Convertible Preferred Stock and Warrant Purchase Agreement
("Non-Convertible Stock Purchase Agreement") dated March 3, 1997 among the
Company and the Purchasers (as defined therein)
10.13* Letter Agreement dated June 2, 1997 between the Registrant and BI.
10.14* First Amendment of the Non-Convertible Stock Purchase Agreement dated June 4,
1997.
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> 85
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 3 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
day of June, 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. 3 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 Officer June , 1997
- ------------------------------------------ and Director (Principal Executive
Hector J. Gomez, M.D., Ph.D. Officer)
/s/ B. NICHOLAS HARVEY Vice President, Finance and Chief June , 1997
- ------------------------------------------ Financial Officer (Principal
B. Nicholas Harvey Financial and Accounting Officer)
* Chairman of the Board of Directors June , 1997
- ------------------------------------------
Jerry T. Jackson
* Director June , 1997
- ------------------------------------------
Philippe Chambon, M.D., Ph.D.
* Director June , 1997
- ------------------------------------------
Frank L. Douglas, M.D., Ph.D.
* Director June , 1997
- ------------------------------------------
Richard W. Hunt
* Director June , 1997
- ------------------------------------------
William C. Mills III
* Director June , 1997
- ------------------------------------------
Gerard M. Moufflet
</TABLE>
*By: /s/ HECTOR J. GOMEZ
------------------------------
Hector J. Gomez
Attorney-in-fact
II-6
<PAGE> 86
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> 87
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGES
-------- -------------------------------------------------------------------- ------------
<S> <C> <C>
10.12 Non-Convertible Preferred Stock and Warrant Purchase Agreement ("Non
Convertible Stock Purchase Agreement") dated March 3, 1997 among the
Company and the Purchasers (as defined therein).....................
10.13* Letter Agreement dated June 2, 1997 between the Registrant and
BI..................................................................
10.14* First Amendment of Non-Convertible Stock Purchase Agreement dated
June 4, 1997........................................................
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
2,455,000 Shares
TRANSCEND THERAPEUTICS, INC.
Common Stock
UNDERWRITING AGREEMENT
----------------------
June __, 1997
EVEREN SECURITIES, INC.
PRINCIPAL FINANCIAL SECURITIES, INC.
As Representatives of the Several Underwriters
c/o EVEREN SECURITIES, INC.
77 West Wacker Drive, 31st Floor
Chicago, Illinois 60601
Dear Sirs:
Transcend Therapeutics, Inc., a Delaware corporation (the "Company"),
proposes to issue and sell an aggregate of 2,455,000 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 EVEREN
Securities, Inc. ("EVEREN") and Principal Financial 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 368,250 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:
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 registra-
<PAGE> 2
tion 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 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
2
<PAGE> 3
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.
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
3
<PAGE> 4
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 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. EVEREN, 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
4
<PAGE> 5
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 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
5
<PAGE> 6
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.
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 reasonably request.
6
<PAGE> 7
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
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
7
<PAGE> 8
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 270 days from the date of the Prospectus, the
Company will not, without the prior written consent of EVEREN, (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 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
8
<PAGE> 9
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:
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 EVEREN 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 original-
9
<PAGE> 10
ly 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 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 affecting the Company that would result in 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
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
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<PAGE> 11
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 which, as either may be
amended from time to time, 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 Securities when issued and delivered by the
Company pursuant to this Agreement against payment of the consideration set
forth herein, will be validly issued and fully paid and non-assessable; the
certificates evidencing the Securities are in due and proper form under Delaware
law; the authorized capital stock of the Company, including the Securities,
conforms to all statements relating thereto contained in the Prospectus; and the
issuance of the 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
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<PAGE> 12
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 and (C) there are no pending or, to the
best knowledge of the Company, threatened Environmental Claims 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 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
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<PAGE> 13
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 actual 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.
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 material Proprietary
Rights or with respect to any license of material Proprietary Rights. Except
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<PAGE> 14
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 actual knowledge of the Company, threatened, which involves
any Proprietary Rights. The Company is not subject to any judgment, order, writ,
injunction or decree of 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 an adverse effect on the use of any of the material
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 liens have been filed
against any Proprietary Rights or with respect to any license of Proprietary
Rights and 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 actual 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 revocation or
modification of any such permit or any circumstance
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<PAGE> 15
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, nor
has the Company received notification that the Commission is contemplating such
an order or proceeding; 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, 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 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.
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<PAGE> 16
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, 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 quota ion 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.
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.
ab. 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,
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<PAGE> 17
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.
ac. 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.
ad. 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,
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.
ae. 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
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<PAGE> 18
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
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.
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<PAGE> 19
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 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 EVEREN, 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 EVEREN 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 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
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<PAGE> 20
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 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
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<PAGE> 21
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
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
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<PAGE> 22
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.
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 have been duly authorized for issuance and
sale to the Underwriters pursuant to this Agreement and, when
issued and delivered by the Company pursuant to this Agreement
against payment of the consideration set forth herein, will be
validly issued and fully paid and non-assessable; and, to their
knowledge, the issuance of the Secu-
22
<PAGE> 23
rities is not subject to preemptive or other similar rights.
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
options, warrants or other rights 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 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,"
"Capitalization," "Business--Boehringer Ingelheim,"--Technology
and License Agreements," "Certain Transactions," "Description of
Capital Stock," "Shares Eligible for Future Sale" and "Legal
Matters" 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 constitutes accurate,
fair and complete summaries thereof in all material respects.
L. To their knowledge, (i) there are no contracts,
indentures, mortgages, loan agreements, deeds, trusts, notes,
leases, subleases, voting trusts, voting agreements or other
instruments or
23
<PAGE> 24
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, and (ii) the descriptions or references to Exhibits 1,
3.1, 3.2, 3.3, 4.1, 4.2, 4.3, 4.4, 10.1, 10.2, 10.3, 10.4, 10.5,
10.6, 10.7, 10.8, 10.9, 10.10, 10.11, 10.12, 10.13 and 10.14 are
correct in all material respects and fairly and correctly
presents the information called for with respect thereto.
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, 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 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, nor will such action result in any
violation of the provisions of (1) the charter or bylaws of the
Company or (2) any applicable statute, law, rule, regulation,
ordinance, code or decision or (3) any directive, decision or
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
Registra-
24
<PAGE> 25
tion Statement or otherwise registered by the Company under the
1933 Act.
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 exempt from the registration requirements of the
1933 Act.
Q. 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.
(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
25
<PAGE> 26
stated therein or necessary to make the statements therein, not
misleading.
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 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
26
<PAGE> 27
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.
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.
27
<PAGE> 28
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 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. ss. 1.56(b), has been disclosed, or will be
disclosed, pursuant to 37 C.F.R. [section] 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
Palmer & Dodge LLP, counsel for the Company, in form and substance
satisfactory to counsel for the Underwriters, to the effect that:
A. The Company has an exclusive license to each of the
patent applications and patents listed in Schedule VIII hereto;
and the licenses granting such rights are listed in Schedule IX
hereto, each entry of which lists the numbers of the patent
applications and patents to which it pertains. All of the
licenses listed in Schedule IX hereto are duly executed, are in
effect, are validly binding, and are enforceable in accordance
with their terms;
28
<PAGE> 29
and none of them has been terminated or been the subject of a
termination notice.
(iv) 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.
(v) In giving their opinions required by subsections (b)(i) and
(b)(iv), respectively, of this Section 8, Hale and Dorr LLP and
Skadden, Arps, 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 in all
material respects with all agreements and satisfied all
29
<PAGE> 30
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. BI shall have purchased $5 million of Securities in the Offering at
the initial public offering price and BI shall have made payment of the
consideration 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
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.
30
<PAGE> 31
(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)(v) 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 Palmer & Dodge LLP, 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)(iii) hereof.
(5) 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)(iv) and 8 (b)(v) hereof.
(6) 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 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
31
<PAGE> 32
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 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
32
<PAGE> 33
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
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
33
<PAGE> 34
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.
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. a. 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 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
34
<PAGE> 35
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 EVEREN Securities, Inc., 77 West Wacker Drive,
31st Floor, Chicago, Illinois 60601 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.
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.
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<PAGE> 36
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.
EVEREN SECURITIES, INC.
PRINCIPAL FINANCIAL SECURITIES, INC.
As Representatives of the Several Underwriters
By EVEREN SECURITIES, INC.
By:
---------------------------------------
36
<PAGE> 37
SCHEDULE I
TRANSCEND THERAPEUTICS, INC.
Number of
---------
Initial
-------
Securities
----------
Purchased
---------
from the
--------
Underwriter Company
- ----------- -------
EVEREN Securities, Inc.
Principal Financial
Securities, Inc. . . .
-------
Total
=======
37
<PAGE> 1
Exhibit 4.4
THIRD AMENDED AND RESTATED
REGISTRATION RIGHTS AGREEMENT
This Third Amended and Restated Registration Rights Agreement (the
"Agreement") is made as of this_____day of_____1997 by and among Transcend
Therapeutics, Inc., a Delaware corporation ("Transcend"), 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, Frank L. Douglas,
Jerry T. Jackson, Richard B. Egen, Hector J. Gomez and John J. Whalen
(collectively, the "Purchasers"), Nestle Clinical Nutrition, Inc. (formerly,
Clinical Nutrition Holdings, Inc., "Nestle"), Baxter Healthcare Corporation
("Baxter"), Clintec International, Inc. ("Clintec"), the Massachusetts Institute
of Technology ("MIT") and Boehringer Ingelheim International GmbH, a limited
liability company organized under the laws of the Federal Republic of Germany
("BI"). The Purchasers, Nestle, Baxter, Clintec, MIT and BI are collectively
referred to herein as the "Holders."
RECITALS
--------
WHEREAS, Holders other than BI have certain rights with respect to the
registration under the Securities Act (as defined below) of shares of
Transcend's Common Stock, $.01 par value per share (the "Common Stock"), held by
or issuable to such Holder's, upon the terms and conditions set forth in the
Second Amended and Restated Registration Rights Agreement dated as of August 21,
1996, as amended March 3, 1997, by and among Transcend and such Holders (the
"Second Registration Rights Agreement"); and
WHEREAS, BI has agreed to purchase shares of Transcend's capital stock (the
"BI Purchase") pursuant to the terms of a Stock Purchase Agreement (the "Stock
Purchase Agreement") by and between Transcend and BI; and
WHEREAS, such shares may be shares of Transcend's Common Stock or shares of
Transcend's Series D Convertible Preferred Stock, $.01 par value per share
("Series D Preferred Stock"), the shares actually issued to BI in the BI
Purchase, as determined in accordance with the Stock Purchase Agreement, being
referred to herein as the "Purchased Shares"; and
WHEREAS, pursuant to the First Amendment of Non-Convertible Preferred Stock
and Warrant Purchase Agreement (the "Exchange Agreement") dated as of June 4,
1997 by and among Transcend and the Purchasers (as defined therein), Transcend
intends to issue additional warrants ("Additional 1997 Warrants") to purchase
shares of its Common Stock ("Additional 1997 Warrant Shares"); and
<PAGE> 2
WHEREAS, pursuant to the Exchange Agreement, the Purchasers (as defined
therein) have agreed, under certain circumstances, to waive redemption rights
with respect to their shares of Non-Convertible Preferred Stock, $.01 par value
per share (the "Non-Convertible Preferred Stock"), and to exchange such
Non-Convertible Preferred Stock for shares of Common Stock ("Exchange Shares")
upon the closing of an initial public offering of Transcend's Common Stock (an
"IPO"); and
WHEREAS, the parties wish to provide registration rights with respect to
the Purchased Shares, the Exchange Shares and the Additional 1997 Warrant
Shares; and
WHEREAS, Section 18 of the Second Registration Rights Agreement provides
that such agreement may be amended by Transcend and the Holders of at least 75%
of the Registrable Shares (collectively, the "Amending Holders"); and
WHEREAS, each of the parties hereto desires to set forth in a single
document such registration and certain other rights of the Holders;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Transcend, BI and the Amending
Holders agree as follows:
1. TERMINATION OF SECOND REGISTRATION RIGHTS AGREEMENT. The Second
Registration Rights Agreement is hereby amended and restated in its entirety.
Accordingly, the parties hereto acknowledge and agree that the Second
Registration Rights Agreement is hereby terminated and shall be of no further
force or effect, except as amended and restated hereby.
2. CERTAIN DEFINITIONS. As used in this Agreement, the following terms
shall have the following respective meanings:
"1997 WARRANTS" means warrants to purchase shares of Common Stock at
the public offering price in the IPO, issued pursuant to the Non-Convertible
Preferred Stock and Warrant Purchase Agreement dated March 3, 1997 (the
"Non-Convertible Stock Purchase Agreement") by and among Transcend and the
Purchasers (as defined therein) and the Additional 1997 Warrants.
"1997 WARRANTHOLDERS" means the holders of the 1997 Warrants.
"1997 WARRANT SHARES" means shares of Common Stock issued or issuable
upon exercise of the 1997 Warrants.
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<PAGE> 3
"ADDITIONAL 1997 WARRANTS" has the meaning provided in the
introductory clauses to this Agreement.
"COMMISSION" means the Securities and Exchange Commission, or any
other Federal agency at the time administering the Securities Act.
"COMMON REGISTRABLE SHARES" means (i) the shares of Common Stock held
by Nestle and Clintec as successors to Clintec Nutrition Company pursuant to the
Partnership Distribution Agreement dated September 30, 1996, (ii) the MIT
Warrant Shares, (iii) if shares of Common Stock are issued to BI pursuant to the
BI Purchase, such shares of Common Stock, (iv) the 1997 Warrant Shares, and (v)
any other shares of Common Stock of Transcend issued in respect of such shares
(because of stock splits, stock dividends, reclassifications, recapitalizations,
or similar events).
"COMMON STOCKHOLDER" means each of the 1997 Warrantholders, Nestle,
Clintec, MIT and, if shares of Common Stock are issued to BI in the BI Purchase,
BI and their successors or assigns as permitted by Section 15 hereof.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended,
or any similar United States statute, and the rules and regulations of the
Commission issued under such act, as they each may, from time to time, be in
effect.
"MIT WARRANT" means the warrant dated October 28, 1994 to purchase
5,000 shares of Transcend's Common Stock and held by MIT.
"MIT WARRANT SHARES" means the shares of Common Stock issued or
issuable upon exercise of the MIT Warrant.
"PREFERRED REGISTRABLE SHARES" means:
(i) the shares of Common Stock issued or issuable upon conversion
of Transcend's Series A Convertible Preferred Stock, $.01 par value per share
(the "Series A Preferred Stock"), issued (a) pursuant to the Series A
Convertible Stock and Warrant Purchase Agreement (the "Series A Stock Purchase
Agreement") dated as of April 5, 1994, as amended, by and among Transcend and
the Purchasers (as defined therein), (b) pursuant to the Series A Convertible
Preferred Stock Purchases Agreement dated December 22, 1995 by and among
Transcend and the Purchasers (as defined therein), (c) pursuant to the
Warrantholder Agreement dated of August 21, 1996 by and among Transcend and the
Warrantholders (as defined therein), and (d) as payment of interest on, and upon
conversion of the principal amount of, certain Secured
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<PAGE> 4
Convertible Term Notes due 1997 (the "Notes") (none of which are currently
outstanding);
(ii) the shares of Common Stock issued or issuable upon the
conversion of Transcend's Series B Convertible Preferred Stock, $.01 par value
per share (the "Series B Preferred Stock"), issued as payment of interest on,
and upon conversion of the principal amount of, certain of the Notes;
(iii) the shares of Common Stock issued or issuable upon
conversion of Transcend's Series C Convertible Preferred Stock, $.01 par value
per share (the "Series C Preferred Stock") issued pursuant to the Series C
Convertible Preferred Stock Purchase Agreement dated August 21, 1996 by and
among Transcend and the Purchasers (as defined therein); and
(iv) if shares of Series D Preferred Stock are issued to BI in
the BI Purchase, shares of Common Stock issued or issuable upon conversion of
such Series D Preferred Stock; and
(v) any other shares of Common Stock of Transcend issued in
respect of such shares (because of stock splits, stock dividends,
reclassifications, recapitalizations, or similar events). Wherever reference is
made in this Agreement to a request or consent of holders of a certain
percentage of the Preferred Registrable Shares, or to a number or percentage of
Preferred Registrable Shares held by a Series A Stockholder, a Series B
Stockholder, Series C Stockholder or Series D Stockholder (all as defined
below), such reference shall be intended to refer to shares of Common Stock
issued or issuable upon conversion of the shares of Series A Preferred Stock,
Series B Preferred Stock, Series C Preferred Stock and series D Preferred Stock
even if such conversion has not yet been effected.
"PREFERRED STOCKHOLDER" means all Series A Stockholders, Series B
Stockholders, Series C Stockholders and, if shares of series D Preferred Stock
are issued to BI in the BI Purchase, BI and its successors or assigns.
"REGISTRATION STATEMENT" means a registration statement filed by
Transcend with the Commission for a public offering and sale of securities of
Transcend (other than a registration statement on Form S-8 or Form S-4, or their
successors, or any other form for a limited purpose, or any registration
statement covering only securities proposed to be issued in exchange for
securities or assets of another corporation).
"REGISTRATION EXPENSES" means the expenses described in Section 7.
"REGISTRABLE SHARES" means Common Registrable Shares and Preferred
Registrable Shares.
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<PAGE> 5
"SECURITIES ACT" means the Securities Act of 1933, as amended, or any
similar United States statute, and the rules and regulations of the Commission
issued under such act, as they each may, from time to time, be in effect.
"SERIES A STOCKHOLDER" means a Holder of shares of Series A Preferred
Stock and its successors or assigns as permitted by Section 15 hereof.
"SERIES B STOCKHOLDER" means a Holder of shares of Series B Preferred
Stock and its successors or assigns as permitted by Section 15 hereof.
"SERIES C STOCKHOLDER" means a Holder of shares of Series C Preferred
Stock and its successors or assigns as permitted by Section 15 hereof.
"SERIES D STOCKHOLDER" means, if shares of Series D Preferred Stock
are issued to BI in the BI Purchase, BI and its successors or assigns as
permitted by Section 15 hereof.
"STOCKHOLDERS" means all Preferred Stockholders and Common
Stockholders; "STOCKHOLDER" means any Preferred Stockholder or Common
Stockholder.
3. Sale or Transfer of Shares: Legend.
----------------------------------
3.1. The Registrable Shares shall not be sold or transferred unless
either (i) they first shall have been registered under the Securities Act, or
(ii) Transcend first shall have been furnished with an opinion of legal counsel,
reasonably satisfactory to Transcend, to the effect that such sale or transfer
is exempt from the registration requirements of the Securities Act.
3.2. Each certificate representing the Registrable Shares shall bear a
legend substantially in the following form:
The shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended (the
"Act"), or applicable state securities laws and may not be
transferred or otherwise disposed of unless and until such shares
are registered under the Act and such laws or (1) registration
under applicable state securities is not required and (2) an
opinion of counsel satisfactory to Transcend is furnished to
Transcend, to the effect that such registration under the Act is
not required."
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<PAGE> 6
The foregoing legend shall be removed from the certificates representing
any Registrable Shares at the request of the holder thereof, at such time as
they become registered under the Securities Act or eligible for resale pursuant
to Rule 144(k) under the Securities Act.
4. Required Registrations.
----------------------
4.1. Subject to the last sentence of Section 4.3, within 90 days
following written request from a Preferred Stockholder or Preferred Stockholders
holding not less than thirty-five percent (35%) of the then outstanding
Preferred Registrable Shares, Transcend shall use its best efforts to effect the
registration of such Preferred Registrable Shares on Form S-1 or Form S-2 (or
any successor forms) or other appropriate Registration Statement designated by
such Preferred Stockholder or Stockholders. Subject to the last sentence of
Section 4.3, within 90 days following written request from a Common Stockholder
or Common Stockholders holding not less than thirty-five percent (35%) of the
then outstanding Common Registrable Shares, Transcend shall use its best efforts
to effect the registration of such Common Registrable Shares on Form S-1 or Form
S-2 (or any successor forms) or other appropriate Registration Statement
designated by such Common Stockholder or Stockholders. Any demand registration
pursuant to this Section 4.1 must be underwritten on a firm commitment basis by
an investment banker of recognized national or regional standing in the United
States. The right of other Stockholders to participate in such underwritten
registration shall be conditioned on such Stockholders' participation in such
underwriting upon the same terms and conditions. Upon receipt of any such
request, Transcend shall promptly give written notice of such proposed
registration to all Stockholders. Such Stockholders shall have the right, by
giving written notice to Transcend within 30 days after Transcend provides its
notice, to elect to have included in such registration such of their Registrable
Shares as such Stockholders may request in such notice of election, subject to
the approval of the underwriter managing the offering. Thereupon, Transcend
shall, as expeditiously as possible, use its best efforts to effect the
registration, on Form S-1 or Form S-2 (or any successor form) or such other
appropriate Registration Statement designated by such Stockholder or
Stockholders, of all Registrable Shares which Transcend has been requested to so
register.
4.2. At any time after Transcend becomes eligible to file a
Registration Statement on Form S-3 (or any successor form relating to secondary
offerings), (i) a Preferred Stockholder or Preferred Stockholders holding not
less than thirty-five percent (35 %) of the then outstanding Preferred
Registrable Shares may request Transcend, in writing, to effect registration on
Form S-3 (or such successor form), of Preferred Registrable Shares or (ii) a
Common Stockholder or Common Stockholders holding not less than thirty-five
percent (35 %) of the then outstanding Common Registrable Shares may request
Transcend, in writing, to effect registration on Form S-3
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<PAGE> 7
(or such successor form), of Common Registrable Shares. Upon receipt of either
or both such requests, Transcend shall promptly give written notice of such
proposed registration(s) to all Stockholders. Such Stockholders shall have the
right, by giving written notice to Transcend within thirty days after Transcend
provides its notice, to elect to have included in such registration such of
their Registrable Shares as such Stockholders may request in such notice of
election, subject to the approval of the underwriter managing the offering.
Thereupon, Transcend shall, as expeditiously as possible, use its best efforts
to effect the registration, on Form S-3 (or such successor form), of all
Registrable Shares which Transcend has been requested to so register.
4.3. Transcend shall not be required to effect more than one
registration pursuant to the first sentence or second sentence of Section 4.1 or
more than one registration pursuant to clauses (i) or (ii) of Section 4.2. In
addition, Transcend shall not be required to effect any registration (other than
on Form S-3 or any successor form relating to secondary offerings, if available)
within six months after the effective date of any other Registration Statement
of Transcend.
4.4. A registration pursuant to the first or second sentence of
Section 4.1 shall not count for purposes of the limitation set forth in Section
4.3 (i) unless the offering becomes effective and the requesting Stockholders
are able to sell at least 75% of the Registrable Shares sought to be included in
the Registration or (ii) if Transcend is engaged or has fixed plans within 30
days of the time of the request to engage, in a registered public offering as to
which the Stockholders may include Registerable Shares pursuant to Section 4.5.
In the event of a clause (ii) of this Section 4.4 occurrence, Transcend may at
its option direct that such request be delayed for a period of six months from
the effective date of such offering, any such right to delay a request to be
exercised by Transcend not more than once in any two-year period.
4.5 At any time after the first anniversary of the closing of the BI
Purchase, if Transcend is then eligible to file a Registration Statement on Form
S-3 (or any successor form relating to secondary offerings), within 30 days
following a written request from BI that Transcend effect registration of
Registrable Shares issued in the BI Purchase, Transcend shall file a
registration statement on Form S-3 (or any successor form) and use its best
efforts to effect the registration on Form S-3 (or such successor form) of such
Registrable Shares as promptly thereafter as possible. Upon the effectiveness of
a registration statement filed hereunder, Transcend shall prepare and file with
the Commission such amendments and supplements to such registration statement
and the prospectus used in connection therewith as may be necessary to keep such
registration statement effective and to comply with the provisions of the
Securities Act with the respect to the resale of the Registrable Shares covered
by such registration statement until the second anniversary of the closing of
the BI Purchase.
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<PAGE> 8
4.6 Notwithstanding the foregoing, if BI receives shares of Common
Stock that are, upon issuance, registered under the Securities Act, BI shall
have no rights with respect to required registrations under this Section 4.
5. Incidental Registration.
-----------------------
5.1. Whenever Transcend proposes to file a Registration Statement
(other than pursuant to Section 4.1, 4.2 and 4.5 above), prior to such filing it
shall give written notice to all Stockholders of its intention to do so, and
upon the written request of a Stockholder or Stockholders given within 30 days
after Transcend provides such notice (which request shall state the intended
method of disposition of such Registrable Shares), Transcend shall use its best
efforts to cause all Preferred Registrable Shares which Transcend has been
requested to register by the Preferred Stockholders and all Common Registrable
Shares which Transcend has been requested to register by the Common Stockholders
to be registered under the Securities Act to the extent necessary to permit
their sale or other disposition in accordance with the intended methods of
distribution specified in the request of such Stockholder(s); provided that
Transcend shall have the right to postpone or withdraw any registration effected
pursuant to this Section 5 without obligation to any Stockholder.
5.2. In connection with any offering under Section 4.1 involving an
underwriting, Transcend shall not be required to include any Registrable Shares
in such underwriting unless the holders thereof accept the terms of the
underwriting as agreed upon between Transcend and the underwriters selected by
it, and then only in such quantity as will not, in the opinion of the
underwriters, jeopardize the success of the offering by Transcend. If in the
opinion of the managing underwriter the registration of all, or part of, the
Registrable Shares which the holders have requested to be included would
materially and adversely affect such public offering, then Transcend shall be
required to include in the underwriting only that number of Registrable Shares,
if any, which the managing underwriter believes may be sold without causing such
adverse effect. In the event of such a reduction in the number of shares to be
included in the underwriting, all holders of Registrable Shares who have
requested registration shall participate in the underwriting pro rata based upon
their total ownership of Registrable Shares (or in any other proportion as
agreed upon by such holders) and if any such holder would thus be entitled to
include more shares than such holder requested to be registered, the excess
shall be allocated among such other requesting holders pro rata based on their
ownership of Registrable Shares. No other securities requested to be included in
a registration for the account of anyone other than Transcend or the
Stockholders shall be included in a registration unless all Registrable Shares
requested to be included in such registration are so included.
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<PAGE> 9
6. Registration Procedures.
-----------------------
6.1. If and whenever Transcend is required by the provisions of this
Agreement to use its best efforts to effect the registration of any of the
Registrable Shares under the Securities Act, Transcend shall:
(a) file with the Commission a Registration Statement with
respect to such Registrable Shares and use its best efforts to cause that
Registration Statement to become and remain effective;
(b) as expeditiously as possible prepare and file with the
Commission any amendments and supplements to the Registration Statement and the
prospectus included in the Registration Statement as may be necessary to keep
the Registration Statement effective for a period of not less than 90 days from
the effective date;
(c) as expeditiously as possible furnish to each selling
Stockholder such reasonable numbers of copies of the prospectus, including a
preliminary prospectus, in conformity with the requirements of the Securities
Act, and such other documents as the selling Stockholder may reasonably request
in order to facilitate the public sale or other disposition of the Registrable
Shares owned by the selling Stockholder; and
(d) as expeditiously as possible use its best efforts to register
or qualify the Registrable Shares covered by the Registration Statement under
the securities or Blue Sky laws of such states as the selling Stockholder shall
reasonably request, and do any and all other acts and things that may be
necessary or desirable to enable the selling Stockholder to consummate the
public sale or other disposition in such jurisdictions of the Registrable Shares
owned by the selling Stockholder; PROVIDED, HOWEVER, that Transcend shall not be
required in connection with this paragraph (d) to qualify as a foreign
corporation in any jurisdiction.
6.2. If Transcend has delivered preliminary or final prospectuses to
the selling Stockholder and after having done so the prospectus is amended to
comply with the requirements of the Securities Act, Transcend shall promptly
notify the selling Stockholder and, if requested, the selling Stockholder shall
immediately cease making offers of Registrable Shares and shall return all
prospectuses to Transcend. Transcend shall promptly provide the selling
Stockholder with revised prospectuses and, following receipt of the revised
prospectuses, the selling Stockholder shall be free to resume making offers of
the Registrable Shares.
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<PAGE> 10
7. ALLOCATION OF EXPENSES. Transcend shall pay the Registration Expenses
(as defined below) for (i) the first demand registration on Form S-1 or Form S-2
(or any successor forms) or Form S-3 (or any successor form) requested by any of
the Preferred Stockholders (or Stockholders holding the requisite percentage of
Preferred Registrable Shares) pursuant to Section 4.1 or 4.2 hereof, (ii) the
first demand registration on Forms S-1 or S-2 (or any successor forms) or Form
S-3 (or any successor form) requested by any of the Common Stockholders pursuant
to Section 4.1 or 4.2 hereof, and (iii) one registration on Form S-3 requested
by BI pursuant to Section 4.5 hereof. If a registration on a Registration
Statement other than Form S-3 (or any successor form) requested by the
Stockholders pursuant to Section 4.1 is withdrawn at the request of the
Stockholders requesting it (other than as a result of information concerning the
business or financial condition of Transcend that is made known to the
Stockholders after the date on which such registration was requested) and if the
requesting Stockholders holding a majority of the Registrable Shares requested
to be included in such registration elect not to have such registration counted
as a registration requested under Section 4.1, the requesting Stockholders shall
pay the Registration Expenses of such registration pro rata in accordance with
the number of their Registrable Shares which were to have been included in such
registration. For purposes of this Section, the term "Registration Expenses"
shall mean all expenses incurred by Transcend in complying with Sections 4 and 5
of this Agreement, including, without limitation, all registration and filing
fees, exchange listing fees, printing expenses, fees and disbursements of
counsel for Transcend and one counsel for the selling Stockholders,
out-of-pocket expenses of Transcend and the underwriters, state Blue Sky fees
and expenses, if any, and the expense of any special audits incident to or
required by any such registration, but excluding underwriting discount and
selling commissions and fees of more than one counsel for the selling
Stockholders. Such underwriting discounts and selling commissions shall be borne
pro rata by the selling Stockholders in accordance with the number of their
Registrable Shares included in such registration.
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<PAGE> 11
8. Indemnification.
---------------
8.1. In the event of any registration of any of the Registrable Shares
under the Securities Act pursuant to this Agreement, then to the extent
permitted by law Transcend shall indemnify and hold harmless the seller of such
Registrable Shares, each underwriter of such Registrable Shares and each other
person, if any, who controls such seller or underwriter within the meaning of
the Securities Act or the Exchange Act against any losses, claims, damages or
liabilities, joint or several, to which such seller, underwriter or controlling
person may become subject under the Securities Act, the Exchange Act, state
securities laws or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
any Registration Statement under which such Registrable Shares were registered
under the Securities Act, any preliminary prospectus or final prospectus
contained in the Registration Statement, or any amendment or supplement to such
Registration Statement, or arise out of or are based upon the omission or
alleged omission to state a material fact required to be stated therein or
necessary to make the statements therein not misleading; and Transcend shall
reimburse such seller, underwriter and each such controlling person for any
legal or any other expenses reasonably incurred by such seller, underwriter or
controlling person in connection with investigating or defending any such loss,
claim, damage, liability or action; PROVIDED, HOWEVER, that Transcend shall not
be liable in any such case to the extent that any such loss, claim, damage or
liability arises out of or is based upon any untrue statement or omission made
in such Registration Statement, preliminary prospectus or prospectus, or any
such amendment or supplement, in reliance upon and in conformity with
information furnished to Transcend, in writing, by or on behalf of such seller,
underwriter or controlling person specifically for use in the preparation
thereof.
8.2. In the event of any registration of any of the Registrable Shares
under the Securities Act pursuant to this Agreement, then to the extent
permitted by law, each seller of Registrable Shares severally and not jointly,
shall indemnify and hold harmless Transcend, each of its directors and officers
and each underwriter (if any) and each person, if any, who controls Transcend or
any such underwriter within the meaning of the Securities Act or the Exchange
Act, against any losses, claims, damages or liabilities joint or several, to
which Transcend, such directors and officers, underwriter or controlling person
may become subject under the Securities Act, Exchange Act, state securities laws
or otherwise, insofar as such losses, claims, damages or liabilities (or actions
in respect thereof) arise out of or are based upon any untrue statement or
alleged untrue statement of a material fact contained in any Registration
Statement under which such Registrable Shares were registered under the
Securities Act, any preliminary prospectus or final prospectus contained in the
Registration Statement, or any amendment or supplement to the Registration
Statement, or arise out
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<PAGE> 12
of or are based upon any omission or alleged omission to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading, if the statement or omission was made solely in reliance upon and in
conformity with information furnished in writing to Transcend by or on behalf of
such seller, specifically for use in connection with the preparation of such
Registration Statement, prospectus, amendment or supplement; PROVIDED, HOWEVER,
that the obligations of such Stockholder hereunder shall be limited to an amount
equal to the proceeds to each Stockholder of Registrable Shares sold as
contemplated herein.
8.3. Indemnification of an underwriter pursuant to this Section 8
shall not be interpreted as providing relief of such underwriter from any or all
of its due diligence obligations. Further, an underwriter shall not be entitled
to indemnification pursuant to this subsection in the event that it fails to
deliver to any selling Stockholder any preliminary or final or revised
prospectus, as required by the Rules and Regulations of the Commission. Finally,
no indemnification shall be provided pursuant to this subsection in the event
that any error in a preliminary prospectus of Transcend is subsequently
corrected in the final prospectus of Transcend for a particular offering, and
such final prospectus is delivered to all purchasers in the offering prior to
the date of purchase of the securities.
8.4. Each party entitled to indemnification under this Section 8 (the
"Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom; PROVIDED, that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not be unreasonably
withheld); and, PROVIDED, FURTHER, that the failure of any Indemnified Party to
give notice as provided herein shall not relieve the Indemnifying Party of its
obligations under this Section 8. The Indemnified Party may participate in such
defense at such party's expense; PROVIDED, HOWEVER, that the Indemnifying Party
shall pay such expense if representation of such Indemnified Party by the
counsel retained by the Indemnifying Party would be inappropriate due to actual
or potential differing interests between the Indemnified Party and any other
party represented by such counsel in such proceeding. No Indemnifying Party, in
the defense of any such claim or litigation shall, except with the consent of
each Indemnified Party, consent to entry of any judgment or enter into any
settlement that does not include as an unconditional term thereof the giving by
the claimant or plaintiff to such Indemnified Party of a release from all
liability in respect of such claim or litigation, and no Indemnified Party shall
consent to entry of any judgment or settle such claim or litigation without the
prior written consent of the Indemnifying Party.
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<PAGE> 13
8.5. CONTRIBUTION. If the indemnification provided for in Sections 8.1
through 8.4 is held by a court of competent jurisdiction to be unavailable to an
Indemnified Party with respect to any losses, claims, damages or liabilities
referred to herein, the Indemnifying Party, in lieu of indemnifying such
Indemnified Party thereunder, shall to the extent permitted by applicable law
contribute to the amount paid or payable by such Indemnified Party as a result
of such loss, claim, damage or liability in such proportion as is appropriate to
reflect the relative fault of the Indemnifying Party on the one hand and of the
Indemnified Party on the other in connection with the violation(s) that resulted
in such loss, claim, damage or liability, as well as any other relevant
equitable considerations. The relative fault of the Indemnifying Party and of
the Indemnified Party shall be determined by a court of law by reference to,
among other things, whether the untrue or alleged untrue statement of material
fact or the omission to state a material fact relates to information supplied by
the Indemnifying Party or by the Indemnified Party and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission.
8.6. INDEMNIFICATION WITH RESPECT TO UNDERWRITTEN OFFERING. In the
event that Registrable Shares are sold pursuant to a Registration Statement in
an underwritten offering pursuant to Subsection 4.1, Transcend agrees to enter
into an underwriting agreement containing customary representations and
warranties with respect to the business and operations of an issuer of the
securities being registered and customary covenants and agreements to be
performed by such issuer, including without limitation customary provisions with
respect to indemnification by Transcend of the underwriters of such offering.
9. INFORMATION BY HOLDER. Each holder of Registrable Shares included in any
registration shall furnish to Transcend such information regarding such holder
and the distribution proposed by such holder as Transcend may request in writing
and as shall be required in connection with any registration, qualification or
compliance referred to in this Agreement.
10. RULE 144 REQUIREMENTS. With a view to making available to the
Stockholders the benefits of Rule 144 promulgated under the Securities Act and
any other rule or regulation of the Commission that may at any time permit a
Stockholder to sell securities of Transcend to the public without registration,
Transcend agrees to use its best efforts to:
(a) make and keep public information available, as those terms
are understood and defined in Rule 144 under the Securities Act (at any time
after it has become subject to the reporting requirements of the Exchange Act);
13
<PAGE> 14
(b) file with the Commission in a timely manner all reports and
other documents required of Transcend under the Securities Act and the Exchange
Act (at any time after it has become subject to such reporting requirements);
and
(c) furnish to any holder of Registrable Shares upon request a
written statement by Transcend as to its compliance with the reporting
requirements of said Rule 144 (at any time after 90 days after the closing of
the first sale of securities by Transcend pursuant to a Registration Statement),
and of the Securities Act and the Exchange Act (at any time after it has become
subject to such reporting requirements), a copy of the most recent annual or
quarterly report of Transcend, and such other reports and documents of Transcend
as such holder may reasonably request to avail itself of any similar rule or
regulation of the Commission allowing it to sell any such securities without
registration.
11. SELECTION OF UNDERWRITER. In the case of any registration effected
pursuant to Sections 4.1 or 4.2, the requesting Stockholders shall have the
right to designate the managing underwriter, subject to the approval of
Transcend, which approval shall not be unreasonably withheld or delayed.
12. RESTRICTIONS ON OTHER AGREEMENTS. Transcend will not enter into any
agreement with any party which by its terms grants any right relating to the
registration of its Common Stock superior to or on a parity with the rights
granted to the Purchasers, Clintec, MIT and BI pursuant to this Agreement.
13. MERGERS, ETC. Transcend shall not, directly or indirectly, enter into
any merger, consolidation or reorganization in which Transcend shall not be
surviving corporation unless the proposed surviving corporation shall, prior to
such merger, consolidation or reorganization, agree in writing to assume the
obligations of Transcend under this Agreement, and for that purpose references
hereunder to "Registrable Shares" shall be deemed to be references to the
securities which the Stockholders would be entitled to receive in exchange for
Registrable Shares under any such merger, consolidation or reorganization;
PROVIDED, HOWEVER, that the provisions of this Section 13 shall not apply in the
event of any merger, consolidation or reorganization in which Transcend is not
the surviving corporation if all Stockholders are entitled to receive in
exchange for their Registrable Shares consideration consisting solely of (i)
cash, (ii) securities of the acquiring corporation which may be immediately sold
to the public without registration under the Securities Act, or (iii) securities
of the acquiring corporation which the acquiring corporation has agreed to
register within 90 days of completion of the transaction for resale to the
public pursuant to the Securities Act.
14. Termination. All of Transcend's obligations to register Registerable
Shares under this Agreement shall terminate on September 30, 2005.
14
<PAGE> 15
15. Transfer of Rights.
------------------
15.1. The rights granted to a Stockholder under this Agreement may be
transferred by such Stockholder to another person or entity that is then a
Stockholder, or to any person or entity acquiring at least 50,000 Registrable
Shares (after giving effect to the one-for-five reverse stock split of
Transcend's Common Stock effected February 7, 1997, as adjusted for subsequent
stock splits, stock dividends, recapitalization or similar events).
15.2. Any transferee (other than a Purchaser, Nestle, Clintec or BI)
to whom rights under this Agreement are transferred shall, as a condition to
such transfer, deliver to Transcend a written instrument by which such
transferee identifies itself, gives Transcend notice of the transfer of such
rights, indicates the Registrable Shares owned by it and agrees to be bound by
the obligations imposed upon Stockholders under this Agreement.
15.3. A transferee to whom rights are transferred pursuant to this
Section 6 may not again transfer such rights to any other person or entity,
other than as provided in paragraphs (a) or (b) above.
15.4. Notwithstanding anything to the contrary herein, any Stockholder
which is a partnership or corporation may transfer rights granted to such
Stockholder under this Agreement to any partner or stockholder thereof to whom
Registrable Shares are transferred and who delivers to Transcend a written
instrument in accordance with paragraph (b) above which contains a
representation that the transfer is exempt from registration under the
Securities Act. In the event of such transfer, such partner or stockholder shall
be deemed a Stockholder for purposes of this Agreement and may again transfer
such rights to any other person or entity which acquires Registrable Shares from
such partner or stockholder, in accordance with, and subject to, the provisions
of paragraphs (a), (b)and (c) above.
16. General
-------
16.1. NOTICES. All notices, requests, consents, and other
communications under this Agreement shall be in writing and shall be delivered
by hand or mailed by first class certified or registered mail, return receipt
requested, postage prepaid:
If to Transcend at:
15
<PAGE> 16
Transcend Therapeutics, Inc.
640 Memorial Drive, 3W
Cambridge, MA 02139
Attention: President
Facsimile: (617) 374-1200
With a copy to:
Hale and Dorr LLP
60 State Street
Boston, MA 02109
Attention: Steven D. Singer, Esq.
Facsimile: (617) 526-5000
or at such other address or addresses as may have been furnished in writing by
Transcend to the Holders.
If to the following Purchasers:
The Venture Capital Fund of New England
160 Federal Street, 23rd Floor
Boston, MA 02110
Attention: William C. Mills, III
Facsimile: (617) 439-4652
Advent International Investors II Limited Partnership,
Advent Performance Materials Limited Partnership,
Global Private Equity Fund Limited Partnership,
Rovent II Limited Partnership, Paal C. Gisholt and Charles Hsu
c/o Advent International Corporation
101 Federal Street
Boston, MA 02110
Attention: Gerard M. Moufflet
Facsimile: (617) 951-0566
Sprout Capital VI, L.P.
c/o The Sprout Group
3000 Sand Hill Road
Building 4, Suite 270
Menlo Park, CA 94025-7114
Attention: Philippe Chambon
Facsimile: (415) 854-8779
16
<PAGE> 17
DLJ Capital Corporation
c/o The Sprout Group
3000 Sand Hill Road
Building 4, Suite 270
Menlo Park, CA 94025-7114
Attention: Philippe Chambon
Facsimile: (415) 854-8779
with a copy to:
Palmer & Dodge LLP
One Beacon Street
Boston, MA 02108
Attention: Michael Lytton, Esq.
Facsimile: (617) 227-4420
or at such other address or addresses as may be been furnished to Transcend in
writing by the above Purchasers.
If to the following Purchasers or Clintec:
Baxter Healthcare Corporation
One Baxter Parkway
Deerfield, IL 60015
Attention: John F. Gaither, Jr.
Facsimile: (847) 948-4511
Clintec International, Inc.
One Baxter Parkway
Deerfield, IL 60015
Attention: Richard W. Hunt
Facsimile: (847) 948-2025
Nestle Clinical Nutrition, Inc.
800 North Brand Blvd.
Glendale, CA 91203
Attention: Robert H. Sanders
Facsimile: (818) 549-5840
17
<PAGE> 18
with a copy to:
Bell, Boyd & Lloyd
Three First National Plaza
70 West Madison Street
Chicago, Illinois 50502
Attention: John Bittner, Esq.
Facsimile: (312) 372-2098
If to MIT:
Massachusetts Institute of Technology
238 Main Street, Suite 200
Cambridge, MA 02142
Attention:Joseph T. Maguire, Associate Director of Real Estate
with a copy to:
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo
One Financial Center
Boston, MA 02111
If to BI:
Boehringer Ingelheim International GmbH
D-55216 Ingelheim am Rhein
Germany
Attention: Corporate Licensing
Facsimile: 011 49 61 32 77 35 83
with a copy to:
Boehringer Ingelheim International GmbH
D-55216 Ingelheim am Rhein
Germany
Attention: Head of Legal Department
Facsimile: 011 49 61 32 77 35 83
If to Jerry T. Jackson:
Jerry T. Jackson
24 Arroyo Hondo Vistas
18
<PAGE> 19
124 Circle Loop Road Gate 1825
Santa Fe, NM 87505
with a copy to:
Jerry T. Jackson
3121 E. Crest Shadows Drive
Tuscon, AZ 85718
If to Frank L. Douglas:
Frank L. Douglas
Hoescht Marion Roussel
Executive Vice President, Global Research
Hoescht Aktiengesellschaft
HMR Research
Building K
D-65926 Frankfurt/Main
Germany
Facsimile: 011-49-69-305-81664
If to Richard B. Egen:
Richard B. Egen
1216 Chestnut Avenue
Whelmed, IL 60091
If to Hector J. Gomez:
Hector J. Gomez
c/o Transcend Therapeutics, Inc.
640 Memorial Drive
Cambridge, MA 02139
If to John J. Whalen:
John J. Whalen
c/o Transcend Therapeutics, Inc.
640 Memorial Drive
Cambridge, MA 02139
or at such other address or addresses as may be been furnished to Transcend in
writing by the above Holder.
19
<PAGE> 20
Any such notice provided in accordance with this Section 6 shall be deemed given
when so delivered personally, telegraphed, telexed, sent by facsimile
transmission, or, if mailed, two days after the date of deposit in the United
States mails.
17. ENTIRE AGREEMENT. This Agreement embodies the entire agreement and
understanding between the parties hereto with respect to the subject matter
hereof and supersedes all prior agreements and understandings relating to such
subject matter.
18. AMENDMENTS AND WAIVERS. Any term of this Agreement may be amended and
the observance of any term of this Agreement may be waived (either generally or
in a particular instance and either retroactively or prospectively), with the
written consent of Transcend and the holders of at least 75% of the Registrable
Shares; PROVIDED, that this Agreement may be amended with the consent of the
holders of less than all Registrable Shares only in a manner which affects all
Registrable Shares in the same fashion. No waivers of or exceptions to any term,
condition or provision of this Agreement, in any one or more instances, shall be
deemed to be, or construed as, a further or continuing waiver of any such term,
condition or provision.
19. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of which
shall be one and the same document.
20. SEVERABILITY. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement.
21. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Massachusetts, without regard to
the conflicts of law rules of the Commonwealth of Massachusetts.
[Remainder of page intentionally left blank]
20
<PAGE> 21
IN WITNESS WHEREOF, this Agreement has been executed as of the date
first above written.
TRANSCEND THERAPEUTICS, INC.
By:
---------------------------------
Name: Hector J. Gomez, M.D., Ph.D.
Title: President
BOEHRINGER INGELHEIM INTERNATIONAL GmbH
By:
-----------------------------------
Name:
---------------------------
Title:
--------------------------------
THE VENTURE CAPITAL FUND OF NEW ENGLAND III, L.P.
By: F H & Co. III, L.P.
General Partner
By:
---------------------------------
William C. Mills, III
General Partner
SPROUT CAPITAL VI, L.P.
By: DLJ Capital Corporation,
Managing General Partner
By:
---------------------------------
Name: Philippe Chambon
Title: Vice President
21
<PAGE> 22
DLJ CAPITAL CORPORATION
By:
---------------------------------
Name: Philippe Chambon
Title: Vice President
ADVENT INTERNATIONAL INVESTORS II LIMITED PARTNERSHIP
By: Advent International Corporation, General Partner
By:
---------------------------------
Name: Gerard M. Moufflet
Title: Senior Vice President
ADVENT PERFORMANCE MATERIALS LIMITED PARTNERSHIP
By: Advent International Limited Partnership, General Partner
By: Advent International Corporation, General Partner
By:
---------------------------------
Name: Gerard M. Moufflet
Title: Senior Vice President
GLOBAL PRIVATE EQUITY II LIMITED PARTNERSHIP
By: Advent International Limited Partnership, General Partner
By: Advent International Corporation, General Partner
By:
---------------------------------
Name: Gerard M. Moufflet
Title: Senior Vice President
22
<PAGE> 23
ROVENT II LIMITED PARTNERSHIP
By: Advent International Limited Partnership, General Partner
By: Advent International Corporation, General Partner
By:
---------------------------------
Name: Gerard M. Moufflet
Title: Senior Vice President
BAXTER HEALTHCARE CORPORATION
By:
---------------------------------
Name: John F. Gaither, Jr.
Title: Vice President
NESTLE CLINICAL NUTRITION, INC.
By:
---------------------------------
Name: Robert H. Sanders
Title: Vice President
CLINTEC INTERNATIONAL, INC.
By:
---------------------------------
Name: Richard W. Hunt
Title: Chief Financial Officer
PAAL C. GISHOLT
By:
---------------------------------
Gerard M. Moufflet
as attorney-in-fact for Paal C. Gisholt
23
<PAGE> 24
CHARLES HSU
By:
---------------------------------
Gerard M. Moufflet
as attorney-in-fact for Charles Hsu
MASSACHUSETTS INSTITUTE OF TECHNOLOGY
By:
---------------------------------
Name:
Title:
---------------------------------
Jerry T. Jackson
---------------------------------
Richard B. Egen
---------------------------------
Hector J. Gomez
---------------------------------
John J. Whalen
---------------------------------
Frank L. Douglas
24
<PAGE> 1
Exhibit 10.13
Transcend Therapeutics, Inc.
640 Memorial Drive
Cambridge, MA 02139
May , 1997
Boehringer Ingelheim International GmbH
D-55216 Ingelheim am Rhein
Germany
Gentlemen:
Reference is made to the Development and License Agreement dated as of
February 28, 1997 (the "Development Agreement") between Transcend Therapeutics,
Inc. ("Transcend") and Boehringer Ingelheim International GmbH ("Boehringer")
and the Stock Purchase Agreement dated as of February 28, 1997 (the "Stock
Purchase Agreement") between Transcend and Boehringer.
The parties have agreed as follows:
1. STOCK PURCHASE AGREEMENT
(a) The date, April 15, 1997, in Section 1.1 of the Stock
Purchase Agreement is hereby replaced with the date, June 30, 1997.
(b) The date, May 15, 1997, in the first sentence of Section
2.5 of the Stock Purchase Agreement is hereby replaced with the date, July 30,
1997.
(c) If requested by Boehringer, Transcend agrees to use best
efforts to cause the underwriters of the IPO (as defined in the Stock Purchase
Agreement) to sell $5.0 million of Common Stock issued in the IPO to Boehringer
at the initial public offering price per share in satisfaction of Boehringer's
obligation to purchase equity securities of Transcend under the Stock Purchase
Agreement.
2. DEVELOPMENT AGREEMENT
(a) The date, May 31, 1997, in Section 4.1.2 of the
Development Agreement is hereby replaced with the date September 30, 1997.
<PAGE> 2
Except as set forth above, the terms of the Stock Purchase Agreement
and the Development Agreement remain in full force and effect, and each of the
undersigned acknowledges and confirms its continuing obligations under each of
the Stock Purchase Agreement and the Development Agreement as amended hereby.
Please confirm your agreement with the above by signing below as
indicated.
Very truly your,
TRANSCEND THERAPEUTICS, INC.
By: /s/ Hector J. Gomez
-------------------------------------
Hector J. Gomez, M.D., Ph.D.
President and Chief Executive Officer
BOEHRINGER INGELHEIM
INTERNATIONAL GmbH
By: /s/ [not legible] By: /s/ Hans Muller
------------------------------- --------------------------------------
Name: Name:
----------------------------- ------------------------------------
Corporate Licensing Legal Department
2
<PAGE> 1
Exhibit 10.14
FIRST AMENDMENT OF
NON-CONVERTIBLE PREFERRED STOCK AND WARRANT
PURCHASE AGREEMENT
This First Amendment of Non-Convertible Preferred Stock and Warrant
Purchase Agreement (the "Amendment") dated as of May , 1997 amends the
NonConvertible Preferred Stock and Warrant Purchase Agreement dated as of March
3, 1997 (the "March Agreement") by and among Transcend Therapeutics, Inc., a
Delaware corporation ("Transcend"), and the Purchasers. Capitalized terms used
herein but not defined herein shall have the meanings ascribed to them in the
March Agreement.
In consideration of the mutual promises and covenants contained in this
Amendment, and intending to be legally bound by the terms and conditions hereof,
the parties hereto hereby agree as follows:
1. EXCHANGE OF NON-CONVERTIBLE PREFERRED STOCK. Upon the closing of an
initial public offering (the "IPO Closing Date") of the Common Stock, $.01 par
value per share (the "Common Stock"), of Transcend pursuant to a registration
statement filed under the Securities Act of 1933, as amended (the "Act"),
covering the offer and sale of Common Stock to the public in a firm commitment
underwriting (the "IPO") on or before the six-month anniversary of the date of
execution of the March Agreement, each of the Purchasers agrees to surrender for
cancellation all shares of Non-Convertible Preferred Stock held by such
Purchaser, and Transcend agrees to issue, promptly following receipt thereof in
exchange therefor, such number of shares of Transcend's Common Stock (the
"Exchange Shares") as shall equal the number of shares of Non-Convertible
Preferred Stock held by such Purchaser divided by the initial public offering
price (the "IPO Price") of the Common Stock in the IPO, less any resulting
fractional share, plus a check in the amount of such resulting fractional share,
if any, times the IPO Price. From and after the IPO Closing Date, without
further action on the part of Transcend or any Purchaser, all outstanding shares
of Non-Convertible Preferred Stock shall no longer be deemed to be outstanding
and all rights with respect to such shares, including without limitation
redemption rights with respect to such shares, shall immediately cease and
terminate, except the right of the holders thereof, upon surrender of such
shares to the Company, to receive the Exchange Shares as provided hereunder.
2. EXCHANGE OF THE WARRANTS. Upon the surrender for cancellation by
each of the Purchasers of the warrant issued to such Purchaser pursuant to and
upon the closing of the March Agreement (the "March Warrant"), Transcend agrees
to issue to each such Purchaser, in exchange therefor, a new warrant,
substantially in the form of the March Warrant (each, an "Exchange Warrant"), to
purchase such number of shares of Common Stock as shall equal the amount set
forth opposite such Purchaser's name in EXHIBIT A hereto divided by the exercise
price provided for in the March Warrant.
<PAGE> 2
IN WITNESS WHEREOF, Transcend and the Purchasers have executed and
delivered this Amendment as of the date first above written.
TRANSCEND THERAPEUTICS, INC.
By: /s/ Hector J. Gomez
-------------------------------------------------
Name: Hector J. Gomez, M.D., Ph.D.
Title: President
ADVENT INTERNATIONAL INVESTORS II
LIMITED PARTNERSHIP
By: Advent International Corporation,
General Partner
By: /s/ Gerard M. Moufflet
----------------------------------------
Name: Gerard M. Moufflet
Title: Senior Vice President
ADVENT PERFORMANCE MATERIALS LIMITED
PARTNERSHIP
By: Advent International Limited
Partnership, General Partner
By: Advent International Corporation,
General Partner
By: /s/ Gerard M. Moufflet
----------------------------------------
Name: Gerard M. Moufflet
Title: Senior Vice President
2
<PAGE> 3
GLOBAL PRIVATE EQUITY II LIMITED
PARTNERSHIP
By: Advent International Limited
Partnership, General Partner
By: Advent International Corporation,
General Partner
By: /s/ Gerard M. Moufflet
----------------------------------------
Name: Gerard M. Moufflet
Title: Senior Vice President
ROVENT II LIMITED PARTNERSHIP
By: Advent International Limited
Partnership, General Partner
By: Advent International Corporation,
General Partner
By: /s/ Gerard M. Moufflet
----------------------------------------
Name: Gerard M. Moufflet
Title: Senior Vice President
3
<PAGE> 4
PAAL C. GISHOLT
By: /s/ Gerard M. Moufflet
----------------------------------------
Gerard M. Moufflet as attorney-
in-fact for PAAL C. GISHOLT
CHARLES HSU
By: /s/ Gerard M. Moufflet
----------------------------------------
Gerard M. Moufflet as attorney-
in-fact for CHARLES HSU
BAXTER HEALTHCARE CORPORATION
By: /s/ John Gaither
----------------------------------------
Name: John Gaither
Title:
THE VENTURE CAPITAL FUND OF NEW
ENGLAND III, L.P.
By: FH & Co. III, L.P.
General Partner
By: /s/ William C. Mills III
----------------------------------------
Name: William C. Mills III
Title: General Partner
SPROUT CAPITAL VI, L.P.
By: /s/ Philippe Chambon
----------------------------------------
Name: Dr. Philippe Chambon
Title: Attorney-in-fact
4
<PAGE> 5
DLJ CAPITAL CORPORATION
By: /s/ Philippe Chambon
----------------------------------------
Name: Dr. Philippe Chambon
Title: Attorney-in-fact
/s/ Hector J. Gomez
-----------------------------------------------------
Hector J. Gomez, M.D.
/s/ John J. Whalen
-----------------------------------------------------
John J. Whalen, M.D.
/s/ Jerry T. Jackson
-----------------------------------------------------
Jerry T. Jackson
5
<PAGE> 6
<TABLE>
Exhibit A
---------
<CAPTION>
Aggregate
Exercise Price
of Exchange
Exchange Warrantholder Name Warrant
- ------------------------------------------------------ ---------------
<S> <C>
Advent International Investors II Limited $ 621.00
Partnership
c/o Advent International Corporation
101 Federal Street
Boston, MA 02110
Advent Performance Materials Limited Partnership $ 59,726.50
c/o Advent International
Corporation
101 Federal Street
Boston, MA 02110
Global Private Equity II Limited $111,511.50
Partnership
c/o Advent International
Corporation
101 Federal Street
Boston, MA 02110
Rovent II Limited Partnership $ 44,989.50
c/o Advent International Corporation
101 Federal Street
Boston, MA 02110
Paal C. Gisholt $ 154.50
c/o Advent International Corporation
101 Federal Street
Boston, MA 02110
Charles Hsu $ 186.00
c/o Advent International
Corporation
101 Federal Street
Boston, MA 02110
</TABLE>
A-1
<PAGE> 7
<TABLE>
<CAPTION>
Aggregate
Exercise Price
of Exchange
Exchange Warrantholder Name Warrant
- ------------------------------------------------------ ---------------
<S> <C>
Baxter Healthcare Corporation $159,534.00
One Baxter Parkway
Deerfield, IL 60015
The Venture Capital Fund $ 50,277.00
of New England III, L.P.
160 State Street, 23rd Floor
Boston, MA 02110
Sprout Capital VI, L.P. $ 36,690.00
140 Broadway
New York, NY 10005-1295
DLJ Capital Corporation $ 5,810.00
140 Broadway
New York, NY 10005-1295
Hector J. Gomez, M.D. $ 19,000.00
c/o Transcend Therapeutics, Inc.
640 Memorial Drive
Cambridge, MA 02139
John J. Whalen, M.D. $ 6,000.00
c/o Transcend Therapeutics, Inc.
640 Memorial Drive
Cambridge, MA 02139
Jerry T. Jackson $ 25,000.00
3121 East Crest Shadows Lane
Tucson, AZ 85718
- ------------------------------------------------------------------------------
Total: $519,500.00
===========
</TABLE>
A-2
<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. 3 to
the Registration Statement on Form S-1 of Transcend Therapeutics, Inc.
/s/ PENNIE & EDMONDS LLP
--------------------------------------
PENNIE & EDMONDS LLP
New York, New York
June 5, 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. 3 to the Registration Statement (Form S-1) and related
Prospectus of Transcend Therapeutics, Inc. for the registration of 2,823,250
shares of its common stock.
/s/ ERNST & YOUNG LLP
--------------------------------------
Ernst & Young LLP
Boston, Massachusetts
June 3, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 5,495,558
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,543,957
<PP&E> 42,840
<DEPRECIATION> 0
<TOTAL-ASSETS> 6,796,383
<CURRENT-LIABILITIES> 1,189,859
<BONDS> 0
21,067,350
0
<COMMON> 7,898
<OTHER-SE> (15,468,724)
<TOTAL-LIABILITY-AND-EQUITY> 6,796,383
<SALES> 5,000,000
<TOTAL-REVENUES> 5,000,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,472,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,553,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 3,553,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,553,000
<EPS-PRIMARY> .88
<EPS-DILUTED> .88
</TABLE>
