AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 5, 1997
REGISTRATION NO. 333-21209
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 2 TO
Form SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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PERARDUA CORPORATION
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
---------------
DELAWARE 62-1667690
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2836
(PRIMARY STANDARD INDUSTRIAL
CLASSIFICATION CODE NUMBER)
---------------
PERARDUA CORPORATION SAMUEL P. SEARS, JR.
10940 WILSHIRE BOULEVARD, SUITE 1600 PERARDUA CORPORATION
LOS ANGELES, CALIFORNIA 90024 16 SOUTH MARKET STREET
(310) 443-4240 PETERSBURG, VIRGINIA 23803
(ADDRESS AND TELEPHONE NUMBER OF (804) 861-0681
PRINCIPAL EXECUTIVE OFFICES) (NAME, ADDRESS AND TELEPHONE NUMBER
OF AGENT FOR SERVICE)
PERARDUA CORPORATION
10940 WILSHIRE BOULEVARD, SUITE 1600
LOS ANGELES, CALIFORNIA 90024
(310) 443-4240
(ADDRESS OF PRINCIPAL PLACE OF BUSINESS
OR INTENDED PRINCIPAL PLACE OF BUSINESS)
---------------
COPIES OF COMMUNICATIONS TO:
J. BENJAMIN ENGLISH, ESQ. WILLIAM M. PRIFTI, ESQ.
LECLAIR RYAN, A PROFESSIONAL CORPORATION LYNNFIELD WOODS OFFICE PARK
707 EAST MAIN STREET, SUITE 1100 220 BROADWAY, SUITE 204
RICHMOND, VIRGINIA 23219 LYNNFIELD, MASSACHUSETTS 01940
(804) 783-2003 (617) 593-4525
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APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable on
or after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [x]
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 statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
SUBJECT TO COMPLETION, DATED JUNE 5, 1997
PROSPECTUS
- ----------
PERARDUA CORPORATION
1,000,000 SHARES OF COMMON STOCK
1,000,000 REDEEMABLE WARRANTS
PerArdua Corporation ("PerArdua" or the "Company") hereby offers (the
"Offering") 1,000,000 shares of the Company's common stock, $.01 par value per
share (the "Common Stock"), and 1,000,000 Redeemable Warrants (the "Redeemable
Warrants"). The Common Stock and the Redeemable Warrants offered hereby are
sometimes hereinafter collectively referred to as the "Securities." Each
Redeemable Warrant entitles the holder to purchase one share of Common Stock at
a price of $6.50 per share beginning ____________, 1998 and ending ___________,
2002, unless the Redeemable Warrants are redeemed by the Company as provided
herein. The Redeemable Warrants are redeemable by the Company at a redemption
rate of $.20 per Redeemable Warrant at any time commencing , 1998 upon 30 days'
prior written notice, provided that the average closing bid price of the
Company's Common Stock equals or exceeds $9.00 per share for a 20 consecutive
trading day period. See "DESCRIPTION OF SECURITIES."
Prior to the Offering, no public market for the Securities existed and no
assurance can be given that any such market will develop after the completion of
the Offering or, that if developed, such market will be sustained. It is
currently anticipated that the initial public offering prices will be $5.00 per
share of Common Stock and $.10 per Redeemable Warrant. For the method of
determining the initial public offering price of the Securities, see "RISK
FACTORS" and "UNDERWRITING." The Company intends to apply for inclusion of the
shares of Common Stock and the Redeemable Warrants on the Nasdaq SmallCap Market
under the symbols "PRDU" and "PRDUW," respectively.
---------------
THESE ARE SPECULATIVE SECURITIES. THE SECURITIES OFFERED HEREBY INVOLVE A
HIGH DEGREE OF RISK AND IMMEDIATE SUBSTANTIAL DILUTION. INVESTORS SHOULD BE ABLE
TO SUSTAIN A COMPLETE LOSS OF THEIR INVESTMENT. SEE "RISK FACTORS"
AND "DILUTION" ON PAGES 6 THROUGH 17 AND 19, RESPECTIVELY.
---------------
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>
================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNTS(1) COMPANY(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share $5.00 $.50 $4.50
- --------------------------------------------------------------------------------
Per Redeemable Warrant $ .10 $.01 $ .09
- --------------------------------------------------------------------------------
Total(3) $5,100,000 $510,000 $4,590,000
================================================================================
</TABLE>
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(1) Does not reflect additional compensation to be received in the form of (a) a
3% non-accountable expense allowance in the amount of $153,000 payable to
Schneider Securities, Inc. ("Schneider") and Lew Lieberbaum & Co., Inc.
(collectively, the "Representatives"), as the co-representatives of the
underwriters (the "Underwriters"), (b) a consulting fee payable to Schneider
in the amount of $3,000 per month for a period of 36 months and (c) warrants
issued to the Representatives to purchase up to 100,000 additional shares of
Common Stock and 100,000 Redeemable Warrants at 160% of the public offering
price of the Securities (the "Representatives' Warrants"). In addition, the
Company has agreed to indemnify the Underwriters against certain civil
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "UNDERWRITING."
(2) Before deducting additional expenses of the Offering payable by the Company,
estimated at $450,000, including the Representatives' non-accountable
expense allowance and the consulting fee payable to the Representatives.
(3) The Company has granted the Underwriters an option to purchase up to an
additional 150,000 shares of Common Stock and/or 150,000 Redeemable Warrants
on the same terms and conditions set forth above, solely to cover
over-allotments, if any. If the over-allotment option is exercised in full,
the total "Price to Public," "Underwriting Discounts" and "Proceeds to
Company" will be $5,865,000, $586,500 and $5,278,500, respectively. See
"UNDERWRITING."
The Securities are being offered on a "firm commitment" basis by the
Underwriters, when, as, and if delivered to and accepted by the Underwriters and
subject to prior sale, withdrawal or cancellation of the Offering without
notice. It is expected that delivery of certificates representing the Securities
will be made at the clearing offices of Schneider Securities, Inc., on or about
_____________, 1997.
SCHNEIDER SECURITIES, INC. LEW LIEBERBAUM & CO., INC.
THE DATE OF THIS PROSPECTUS IS , 1997.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OR
THE REDEEMABLE WARRANTS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN
THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ SMALLCAP
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
PRIOR TO THE OFFERING, THE COMPANY WAS NOT A REPORTING COMPANY UNDER THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"). SUBSEQUENT TO
THE OFFERING, THE COMPANY INTENDS TO FURNISH TO ITS SHAREHOLDERS ANNUAL REPORTS
CONTAINING FINANCIAL STATEMENTS AUDITED BY ITS INDEPENDENT ACCOUNTANTS, AND SUCH
OTHER PERIODIC REPORTS AS IT MAY DETERMINE TO FURNISH OR AS MAY BE REQUIRED BY
LAW.
- ---------------
CALIFORNIA INVESTORS SHOULD NOTE THAT THE DEPARTMENT OF CORPORATIONS REQUIRES
THAT INVESTORS MUST MEET THE FOLLOWING SUITABILITY STANDARDS: (I) AN INVESTOR
MUST HAVE A LIQUID NET WORTH OF NOT LESS THAN $250,000 (A NET WORTH EXCLUSIVE OF
HOME, HOME FURNISHINGS AND AUTOMOBILE) PLUS $65,000 GROSS ANNUAL INCOME OR
$500,000 LIQUID NET WORTH; OR (II) $1,000,000 NET WORTH (INCLUSIVE) OR $200,000
GROSS ANNUAL INCOME.
IN ADDITION, CALIFORNIA INVESTORS SHOULD NOTE THAT THE EXEMPTION PROVIDED BY
SECTION 25104(H) OF THE CALIFORNIA CORPORATION CODE WILL NOT BE AVAILABLE. THIS
MEANS THAT THERE WILL BE NO AFTERMARKET TRADING IN PERARDUA CORPORATION
SECURITIES IN THE STATE OF CALIFORNIA. PERARDUA AND THE UNDERWRITER HAVE AGREED
NOT TO APPLY FOR THE EXEMPTION PROVIDED UNDER SECTION 25101(B) FOR 90 DAYS FROM
THE CLOSING OF THE OFFERING.
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information, including "RISK FACTORS" and the Company's financial
statements and related notes thereto appearing elsewhere in this Prospectus. The
Common Stock and Redeemable Warrants offered hereby involve a high degree of
risk. Investors in the Offering should be able to sustain a complete loss of
their investment. See "RISK FACTORS." This Prospectus contains certain
forward-looking statements that involve risks and uncertainties. See "SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS." The Company's actual results and the
timing of certain events could differ materially from those discussed in or
projected by the forward-looking statements. Factors that could cause or
contribute to such differences include those discussed under "RISK FACTORS."
THE COMPANY
The Company is a development stage pharmaceutical company engaged in the
development of a single anti-viral compound for which the Company has adopted
the trade name "Thiovir(tm)." The initial focus of the Company's development
activities will be to demonstrate the safety and efficacy of Thiovir for
treatment of patients infected with human immunodeficiency virus ("HIV"), the
virus which is the precursor to acquired immunodeficiency syndrome ("AIDS"), and
patients showing active infection of the opportunistic virus cytomegalovirus
("CMV") which causes blindness and other conditions. CMV is a common
opportunistic infection among AIDS patients. The Company believes that Thiovir,
if successfully developed and approved for sale, would constitute a candidate
for inclusion in combination drug therapy for HIV/AIDS treatment and would
provide several benefits over existing treatments for CMV, particularly its
potential ability to replace more toxic intravenous treatment with a less toxic
oral treatment. The only development work on Thiovir to date has been limited to
laboratory and animal studies conducted by the University of Southern California
("USC"), which has licensed to the Company its proprietary rights to Thiovir,
and by other academic and/or research organizations which have no affiliation
with the Company. Therefore, Thiovir is in an early stage of development. See
"BUSINESS -- Targeted Indications for Thiovir" and "-- Research and Development
Status and Activities."
In the United States, the use and sale of Thiovir is subject to the rules
and regulations of the United States Food and Drug Administration ("FDA"), and
obtaining the necessary FDA approval will require substantial preclinical tests
and clinical trials. The Company expects to commence clinical trials for Thiovir
in 1997. The Company believes that Thiovir may meet the criteria established by
the FDA for accelerated approval. As a result, the Company may be able to
commercialize Thiovir in a shorter time period than has historically been
applicable for a drug that does not meet the criteria for accelerated approval.
See "BUSINESS -- Government Regulation."
Initially, the Company intends to maintain a limited corporate
infrastructure devoted almost exclusively to the development and
commercialization of Thiovir. Accordingly, the Company will engage contract
research organizations ("CROs") to conduct preclinical tests and clinical trials
on Thiovir. The Company will also contract with other companies to manufacture
the drug. The Company intends to rely upon part-time consultants and CROs to
provide expertise in designing appropriate tests and trials and in seeking FDA
and other government approvals. Furthermore, the Company does not believe that
it will be necessary to develop an extensive sales and marketing force to
promote the sale of Thiovir in the United States, if and when it may be sold,
since the market for HIV/AIDS and CMV therapies is concentrated among a
relatively small number of care providers. See "BUSINESS -- Sales and
Marketing," "-- Manufacturing" and "-- Personnel."
In August 1996, the Company acquired an exclusive worldwide license to
proprietary rights to Thiovir held by USC from a limited partnership which
funded the research and development of Thiovir. The Company has generated no
revenues from the sale of products and, as of February 28, 1997, had an
accumulated deficit of $2,227,784. There can be no assurance that the Company
will ever achieve profitable operations. See "BUSINESS -- Relationship With USC"
and "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
On January 9, 1997, the Company reincorporated in the State of Delaware. The
term "Company," when used in this Prospectus, refers to both the Delaware
corporation and its predecessor Missouri corporation, unless the context
requires otherwise. The Company's offices are located at 10940 Wilshire
Boulevard, Suite 1600, Los Angeles, California, and its telephone number is
(310) 443-4240.
3
THE OFFERING
Securities Offered by the Company .......... 1,000,000 shares of Common Stock
and 1,000,000 Redeemable
Warrants. See "DESCRIPTION OF
SECURITIES."
Redeemable Warrants ........................ Each Redeemable Warrant entitles
the holder to purchase one share
of Common Stock at a price of
$6.50 per share beginning
____________, 1998 and ending
____________, 2002, unless the
Redeemable Warrants are redeemed
as provided herein. The
Redeemable Warrants are
redeemable by the Company at a
redemption price of $.20 per
Redeemable Warrant at any time
commencing thirteen months from
the date of this Prospectus on 30
days' prior written notice,
provided that the average closing
bid price of the Common Stock
equals or exceeds $9.00 per share
for 20 consecutive trading days
ending within 10 days prior to
the notice of redemption. See
"DESCRIPTION OF SECURITIES."
Shares of Common Stock Outstanding
before Offering ............................ 2,643,440 shares
Shares of Common Stock to be Outstanding
after Offering ............................. 3,643,440 shares
Use of Proceeds ............................ The net proceeds of this Offering
will be used for further research
and development and working
capital. See "USE OF PROCEEDS."
Risk Factors ............................... Investment in the Securities
involves a high degree of risk
and immediate dilution. See "RISK
FACTORS" and "DILUTION."
Proposed Nasdaq SmallCap
Market Symbols(1) .......................... Common Stock -- "PRDU"
Redeemable Warrants -- "PRDUW"
- --------------
(1) No assurance can be given that an active trading market for the Securities
will develop or be maintained. See "RISK FACTORS -- No Prior Market for
Common Stock and the Redeemable Warrants."
Except as otherwise indicated, all share and per share data in this
Prospectus (i) assume no exercise of the Redeemable Warrants, (ii) give no
effect to the 300,000 shares of Common Stock issuable upon exercise of the
Underwriters' over-allotment option, including 150,000 shares of Common Stock
underlying the Redeemable Warrants subject to such option; (iii) give no effect
to 100,000 shares of Common Stock issuable upon exercise of the Representatives'
Warrants; (iv) give no effect to the 100,000 shares of Common Stock issuable
upon the exercise of the Redeemable Warrants underlying the Representatives'
Warrants; (v) assume no exercise of stock options to purchase up to 500,000
shares of Common Stock which may be issued pursuant to the Company's Stock
Incentive Plan, of which, as of the date of this Prospectus, the Company has
granted options to purchase 10,000 shares of Common Stock at an exercise price
of $7.50 per share and committed to grant to three outside directors and two
officers options to purchase an aggregate of 230,000 shares of Common Stock at
an exercise price to be determined, but not less than $5.00 per share; and (vi)
assume no exercise of the Company's outstanding warrants to purchase shares of
Common Stock, of which 700,000 warrants have been issued as of the date of this
Prospectus at an exercise price of $10.00 per share which may be paid in cash
or, in the event the fair market value of the Common Stock exceeds the warrant
exercise price, by a reduction in the number of shares of Common Stock issuable
upon exercise of any warrant determined in accordance with a formula (the
"Outstanding Warrants"). See "CAPITALIZATION" and "MANAGEMENT -- Executive
Compensation and Other Information -- Stock Incentive Plan."
4
SUMMARY FINANCIAL INFORMATION
The following sets forth certain historical financial information of the
Company:
STATEMENT OF ACTIVITIES DATA:
<TABLE>
<CAPTION>
PERIOD FROM JULY 5, 1996, THREE MONTHS
DATE OF INCEPTION, TO ENDED
NOVEMBER 30, 1996 FEBRUARY 28, 1997
----------------- -----------------
Revenue:
<S> <C> <C>
Interest income $ 1,858 $ 2,475
--------------- ---------------
Costs and Expense:
Research and development 2,058,980 73,249
General and administrative 33,568 66,320
--------------- ---------------
2,092,548 139,569
--------------- ---------------
Net loss (2,090,690) (137,094)
================== ================
Net loss per common share(1) $ (.81) $ (.05)
================== ================
Shares used in computing net loss
per common share(1) 2,593,440 2,593,996
================== =================
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
FEBRUARY 28, 1997
------------------------------
ACTUAL AS ADJUSTED(2)
--------------- ---------------
<S> <C> <C>
Cash and cash equivalents $ 213,029 $ 4,353,029
Working capital 431,362 4,571,362
Total assets 502,625 4,642,625
Deficit accumulated during the development stage (2,227,784) (2,227,784)
Total stockholders' equity 443,393 4,583,393
</TABLE>
- --------------
(1) See notes 1 and 4 of Notes to Financial Statements for information
concerning the computation of net loss per share of Common Stock and shares
of Common Stock used in computing net loss per common share.
(2) As adjusted to reflect the sale of the Common Stock and the Redeemable
Warrants offered hereby and the application of the estimated net proceeds
therefrom. See "USE OF PROCEEDS."
5
RISK FACTORS
The Securities offered pursuant to this Prospectus are speculative and
involve a high degree of risk, and an investment in the Securities should be
considered only by investors who are capable of affording an entire loss of the
amount invested. Prospective investors should carefully consider, along with the
other information contained in this Prospectus, the following considerations and
risks in evaluating an investment in the Company.
DEVELOPMENT STAGE COMPANY
The Company commenced development stage activities in July 1996 and
accordingly has only a limited operating history upon which an evaluation of the
Company's business and prospects can be based. The Company has generated no
revenue to date, except for interest income, and does not expect to generate any
substantial revenues in the near future. The Company's ability to generate
revenues and profits will depend on its ability to successfully develop clinical
applications and obtain regulatory approvals for the anti-viral drug Thiovir and
to protect its proprietary rights in Thiovir. The Company must also develop the
capacity or arrangements with third parties to manufacture, distribute and
market Thiovir. There can be no assurance that the Company will be successful in
doing so. See "BUSINESS -- Overview."
UNCERTAINTY OF PRODUCT DEVELOPMENT
Thiovir is in an early development stage and requires significant,
time-consuming and costly development, testing and regulatory clearance.
Although the Company anticipates that the development and commercialization of
Thiovir, if successful, will occur more rapidly than is typical for a new
pharmaceutical product, this process typically takes several years at a minimum
and can require substantially more time. The successful development of any new
drug is highly uncertain and subject to a number of significant risks. These
risks include, among others, the possibility that Thiovir will be found to be
ineffective or unacceptably toxic, to have unacceptable side effects, or
otherwise fail to receive necessary regulatory clearances, that Thiovir will not
achieve broad market acceptance, that third parties will market equivalent or
superior products, or that third parties will hold proprietary rights that will
preclude the Company from marketing Thiovir. There can be, therefore, no
assurance that the Company's development activities will demonstrate the
efficacy and safety of Thiovir as a therapeutic drug, or, even if demonstrated,
that there will be sufficient advantages to the use of Thiovir over other drugs
or treatments so as to render Thiovir commercially viable. See "BUSINESS --
Targeted Indications for Thiovir" and " -- Government Regulation."
UNCERTAINTY OF MARKET DEMAND FOR THIOVIR
There is a considerable degree of uncertainty as to the potential market
demand for Thiovir, particularly as a CMV drug.
The Company is not aware of published data which indicate the extent to
which new cases of active CMV infection have been reduced as a result of the
recent success of combination drug therapy among HIV patients. The Company
believes, however, and anecdotal reports confirm, that to the extent that
combination drug therapy, or any other therapy, is effective in treating HIV
patients, the number of new patients with active CMV infection has been and will
be proportionately reduced. Consequently, the demand for CMV drugs may be
significantly diminished at the time, if ever, the Company is able to market
Thiovir. See "BUSINESS -- Potential Market for Thiovir."
The ability of the HIV and CMV viruses to develop resistance to drugs has
reduced or eliminated the effectiveness of a number of existing drugs. Even if
Thiovir should initially prove effective, its effectiveness and acceptance in
the marketplace may be reduced by the development of resistant strains of the
HIV and CMV viruses.
COMPANY'S ABILITY TO CONTINUE AS A GOING CONCERN
The report of the Company's Independent Auditors contains an emphasis
paragraph as to matters that raise substantial doubt about the Company's ability
to continue as a going
6
concern, and management's inability to provide any assurance that the Company
will obtain sufficient financing to continue as a going concern. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS," the Company's Financial Statements and Notes, and the Independent
Auditor's Report included elsewhere herein.
RELIANCE ON A SINGLE TECHNOLOGY; LIMITED SCOPE OF OPERATIONS
The Company currently intends to focus its business exclusively on the
development and commercialization of the experimental drug Thiovir. In the event
the Company is not successful in developing and commercializing Thiovir,
investors are likely to realize a loss of all amounts invested in the Company.
ACCUMULATED DEFICIT; UNCERTAINTY OF FUTURE PROFITABILITY
The Company has incurred losses since its inception. As of February 28,
1997, the Company's accumulated deficit was $2,227,784. Losses have resulted
principally from costs incurred in the acquisition and development of Thiovir
and general and administrative costs. These costs have exceeded the Company's
revenues, which to date have been generated solely from interest income. The
Company has not generated any revenue to date from the sale of drugs and does
not expect to do so until Thiovir has been approved for sale. The Company
expects to incur significant additional operating losses which will increase as
the Company's drug development efforts expand. The Company's ability to achieve
profitability will depend upon its ability to develop and obtain regulatory
approval for Thiovir and to develop the capacity (or establish relationships
with third parties) to manufacture, market and sell Thiovir. There can be no
assurance that the Company will ever generate significant revenues or achieve
profitable operations. See "BUSINESS -- Government Regulation," "-- Sales and
Marketing," and "-- Manufacturing."
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING
The Company's drug development program requires substantial capital
expenditures, including expenditures for preclinical testing and clinical trials
of Thiovir. The Company's future capital requirements will depend on many
factors, including the scope and results of preclinical testing and clinical
trials, the cost, timing and outcome of regulatory reviews, administrative and
legal expenses (including potential expenses of defending and enforcing the
Company's proprietary patent rights to Thiovir), the establishment of capacity
for sales and marketing functions, the establishment of relationships with third
parties for manufacturing and sales and marketing functions and other factors.
The Company expects that its capital requirements will increase significantly in
the future. See "BUSINESS -- Government Regulation," "-- Sales and Marketing"
and "-- Manufacturing."
The Company has incurred negative cash flow from development stage
activities since inception and does not expect to generate positive cash flow to
fund its operations for at least the next several years. As a result, the
Company believes that substantial additional equity or debt financing may be
required to fund its operations. There can be no assurance that the Company will
be able to consummate any such financing at all or on favorable terms or that
such financings will be adequate to meet the Company's capital requirements. Any
additional equity financing could result in substantial dilution to the
Company's stockholders, and debt financing, if available, may involve
restrictive covenants which preclude the Company from making distributions to
stockholders and taking other actions beneficial to stockholders. If adequate
funds are not available, the Company may be required to delay or reduce the
scope of its drug development program or attempt to continue development by
entering into arrangements with collaborative partners or others that may
require the Company to relinquish some or all of its rights to Thiovir. The
Company's inability to fund its capital requirements would have a material
adverse effect on the Company. See "USE OF PROCEEDS" and "DILUTION."
EXTENSIVE GOVERNMENT REGULATION; NO ASSURANCE OF REGULATORY APPROVAL
Human pharmaceutical products are subject to rigorous preclinical testing
and clinical trials and other approval procedures mandated by the FDA and
foreign regulatory authorities. Various federal and foreign statutes and
regulations also govern or influence the manufacturing, safety, labeling,
storage,
7
record keeping and marketing of pharmaceutical products. The process of
obtaining these approvals and the subsequent compliance with appropriate United
States and foreign statutes and regulations are time-consuming and require the
expenditure of substantial resources. In addition, these requirements and
processes vary widely from country to country. Among the uncertainties and risks
of the FDA approval process are the following: the possibility that studies and
clinical trials shall fail to prove the safety and efficacy of the drug, or that
any demonstrated efficacy will be so limited as to significantly reduce or
altogether eliminate the acceptability of the drug in the market place; the
possibility that the costs of development, which can far exceed the best of
estimates, may render commercialization of the drug marginally profitable or
altogether unprofitable; and the possibility that the amount of time required
for FDA approval of a drug may extend for years beyond that which is originally
estimated. In addition, the FDA or similar foreign regulatory authorities may
require additional clinical trials, which could result in increased costs and
significant development delays. Delays or rejections may also be encountered
based upon changes in FDA policy and the establishment of additional regulations
during the period of product development and FDA review. Similar delays or
rejections may be encountered in other countries. Thiovir may not qualify for
accelerated development and/or approval under FDA regulations and, even if
Thiovir does so qualify, it may not be approved for marketing sooner than would
be historically expected or at all.
There can be no assurance that even after substantial time and expenditures,
Thiovir will receive FDA approval on a timely basis or at all. If the Company is
unable to demonstrate the safety and efficacy of Thiovir to the satisfaction of
the FDA, the Company will be unable to commercialize Thiovir. Even if regulatory
approval of Thiovir is obtained, the approval may entail limitations on the
indicated uses for which Thiovir may be marketed. A marketed product, its
manufacturer and the manufacturer's facilities are subject to continual review
and periodic inspections, and subsequent 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. The failure to comply with applicable regulatory requirements can, among
other things, result in fines, suspension of regulatory approvals, refusal to
approve pending applications, refusal to permit exports from the United States,
product recalls, seizure of products, operating restrictions and criminal
prosecutions.
The effect of government regulation may be to delay the marketing of Thiovir
for a considerable period of time, to impose costly requirements on the
Company's activities or to provide a competitive advantage to the companies that
compete with the Company. Adverse clinical results by others could have a
negative impact on the regulatory process and timing with respect to the
development and approval of Thiovir. The Company is also subject to various
federal, state and local laws and regulations relating to safe working
conditions, laboratory and manufacturing practices, the experimental use of
animals and the use and disposal of hazardous or potentially hazardous
substances, including radioactive compounds and infectious disease agents, used
in connection with its development work. The extent and character of potentially
adverse governmental regulation that may arise from future legislation or
administrative action cannot be predicted. See "BUSINESS -- Government
Regulation."
UNCERTAINTIES RELATED TO CLINICAL TRIALS
Before obtaining required regulatory approvals for the commercial sale of
Thiovir, the Company must demonstrate through preclinical testing and clinical
trials that Thiovir is safe and effective for use in each target indication. The
results from preclinical testing and early clinical trials may not be predictive
of results that will be obtained in pivotal clinical trials. There can be no
assurance that the Company's clinical trials will demonstrate sufficient safety
and effectiveness to obtain required regulatory approvals or will result in a
marketable product. A number of companies in the pharmaceutical industry have
suffered significant setbacks in advanced clinical trials, even after promising
results in earlier trials. Similar setbacks in the Company's clinical trials
could interrupt, delay or halt clinical trials and could ultimately prevent its
approval by the FDA or foreign regulatory authorities for any and all targeted
indications. The Company or the FDA may suspend or terminate clinical trials at
anytime if it is believed that the trial participants are being exposed to
unacceptable health risks. There can be no assurance that clinical trials will
demonstrate that Thiovir is safe and effective.
8
There can be no assurance that if clinical trials are successfully
completed, the Company will be able to submit a New Drug Application ("NDA") in
a timely manner or that any such application will be approved by the FDA. Any
failure of the Company to complete successfully its clinical trials and obtain
approvals of corresponding NDAs would preclude the Company from commercializing
Thiovir in the United States. See "BUSINESS -- Government Regulation."
INTENSE COMPETITION
The Company is engaged in a segment of the pharmaceutical industry that is
highly competitive and rapidly changing. If successfully developed and approved,
Thiovir will compete with several existing HIV/AIDS and CMV therapies. In
addition, other companies are pursuing the development of pharmaceuticals that
target HIV/AIDS and/or CMV. The Company anticipates that it will face intense
and increasing competition in the future as new products enter the market and
advanced technologies become available. There can be no assurance that existing
products or new products developed by the Company's competitors will not be more
effective, or more effectively marketed and sold, than Thiovir. Competitive
products may render Thiovir obsolete or noncompetitive prior to the Company's
recovery of development or commercialization expenses. The Company's competitors
have significantly greater financial, technical and human resources than the
Company and may be better equipped to develop, manufacture and market products.
In addition, many of these companies have extensive experience in preclinical
testing and clinical trials, obtaining FDA and other regulatory approvals and
manufacturing and marketing pharmaceutical products. Many of these competitors
also have products that have been approved or are in late-stage development and
operate large, well-funded research and development programs. Smaller companies
may also prove to be significant competitors, particularly through collaborative
arrangements with large pharmaceutical and biotechnology companies. Furthermore,
academic institutions, government agencies and other public and private research
organizations are becoming increasingly aware of the commercial value of their
inventions and are actively seeking to commercialize the technology they have
developed. Accordingly, the Company's competitors may succeed in commercializing
products more rapidly or effectively than the Company, which would have a
material adverse effect on the Company. See "BUSINESS -- Potential Market for
Thiovir."
The ability of the HIV and CMV viruses to develop resistance to drugs has
reduced or eliminated the effectiveness of a number of existing drugs. Even if
Thiovir should initially prove effective, its effectiveness and acceptance in
the marketplace may be reduced by the development of resistant strains of the
HIV and CMV viruses.
UNCERTAINTY OF PATENTS; DEPENDENCE ON PATENTS, LICENSES AND PROPRIETARY RIGHTS
The Company's success will depend in large part on the ability of the
Company and its licensors to obtain patent protection with respect to Thiovir,
defend patents once obtained, maintain trade secrets and operate without
infringing upon the patents and proprietary rights of others and obtain
appropriate licenses to patents or proprietary rights held by third parties if
infringement would otherwise occur, both in the United States and in foreign
countries. The Company has no patents in its own name or patent applications of
its own pending, but has obtained a license to patents and other proprietary
rights from USC with respect to Thiovir. See "BUSINESS -- Relationship With
USC."
The patent positions of pharmaceutical companies, including those of the
Company, are uncertain and involve complex legal and factual questions for which
important legal principles are unresolved. There can be no assurance that the
Company or its licensor have or will develop or obtain the rights to products or
processes that are patentable, that patents will issue from any of the pending
applications or that claims allowed will be sufficient to protect the technology
licensed to the Company. In addition, no assurance can be given that any patents
issued to or licensed by the Company will not be challenged, invalidated,
infringed or circumvented, or that the rights granted thereunder will provide
competitive advantages to the Company.
Initial research indicates that Thiovir may partially metabolize into
another drug, the use of which in the treatment of HIV and related infections is
subject to patents held by a third party, all of which are scheduled to expire
in or before 2000. The Company believes that the use of Thiovir in treatment of
HIV and CMV likely would not infringe on any known third party patent rights, or
that if infringement were to occur, it would not be likely to have a material
adverse effect on the Company. See "BUSINESS -- Patents."
9
There can be no assurance that the Company is aware of all patents or patent
applications that may materially affect the Company's ability to make, use or
sell Thiovir. United States patent applications are confidential while pending
in the United States Patent and Trademark Office (the "PTO"), and patent
applications filed in foreign countries are often first published six months or
more after filing. Any conflicts resulting from third party patent applications
and patents could significantly reduce the coverage of the patents or patent
applications licensed to the Company and limit the ability of the Company or its
licensors to obtain meaningful patent protection. If patents are issued to other
companies that contain competitive or conflicting claims, the Company may be
required to obtain licenses to these patents or to develop or obtain alternative
technology. There can be no assurance that the Company will be able to obtain
any such license on acceptable terms or at all. If such licenses are not
obtained, the Company could be delayed in or prevented from pursuing the
development or commercialization of Thiovir.
Litigation which could result in substantial cost to the Company may also be
necessary to enforce any patents to which the Company has rights, or to
determine the scope, validity and unenforceability of other parties' proprietary
rights which may affect the Company's rights to Thiovir. United States patents
carry a presumption of validity and generally can be invalidated only through
clear and convincing evidence. The Company's licensors may also have to
participate in interference proceedings declared by the PTO to determine the
priority of an invention, which could result in substantial cost to the Company.
There can be no assurance that the Company's licensed patents would be held
valid by a court or administrative body or that an alleged infringer would be
found to be infringing. The mere uncertainty resulting from the institution and
continuation of any technology-related litigation or interference proceeding
could have a material adverse effect on the Company pending resolution of the
disputed matters.
The Company may also rely on unpatented trade secrets and know-how to
maintain its competitive position, which it seeks to protect, in part, by
confidentiality agreements with employees, consultants and others. There can be
no assurance that these agreements will not be breached or terminated, that the
Company will have adequate remedies for any breach, or that the Company's trade
secrets will not otherwise become known or be independently discovered by
competitors. See "BUSINESS -- Patents."
DEPENDENCE ON AND NEED TO HIRE PERSONNEL
The Company is dependent on its senior management and scientific staff,
which currently consists of Dr. Francis E. O'Donnell, Jr., Chairman and Chief
Executive Officer, Nicholas Jon Virca, President and Chief Operating Officer,
Mary Anthony Gray, Executive Vice President, and Dr. Charles E. McKenna. Dr.
McKenna, who is the inventor of the patents licensed to the Company of the core
technology for Thiovir and who has directed the research on Thiovir at USC to
date, is a consultant to the Company and only devotes a limited portion of his
time to the Company's business. The services of Dr. O'Donnell, Mr. Virca, Ms.
Gray, and Dr. McKenna are important to the Company and the loss of any of their
services may adversely affect the Company. Dr. O'Donnell is serving as Chief
Executive Officer of the Company on an interim basis.
To develop and commercialize Thiovir, the Company must hire and retain a
number of additional highly qualified and experienced management and scientific
personnel, consultants and advisors. The Company's ability to attract and retain
qualified personnel is critical to the Company's success. Competition for
qualified individuals is intense, and the Company faces competition from
numerous pharmaceutical and biotechnology companies, universities and other
research institutions. There can be no assurance that the Company will be able
to attract and retain such individuals on acceptable terms or at all, and the
failure to do so would have a material adverse effect on the Company. See
"MANAGEMENT -- Executive Officers and Directors."
BROAD DISCRETION IN USE OF PROCEEDS
The net proceeds of the Offering will be added to the Company's working
capital and will be available for general corporate purposes, including the
Company's drug development program. As of the date of this Prospectus, the
Company cannot specify with certainty the particular uses for the net proceeds
to be added to its working capital. Accordingly, management will have broad
discretion in the application of the net proceeds. See "USE OF PROCEEDS."
10
RISKS RELATED TO LICENSE AGREEMENT
The agreement pursuant to which the Company has licensed the core technology
for Thiovir permits the Company's licensor, USC, to terminate the agreement
under certain circumstances, such as the failure by the Company to use its
reasonable best efforts to commercialize Thiovir or the occurrence of any other
uncured material breach by the Company. The termination of this agreement would
have a material adverse effect on the Company. The license agreement provides
that the licensor is primarily responsible for obtaining patent protection for
the technology licensed to the Company, and the Company is required to reimburse
it for the costs it incurs in performing these activities. The Company believes
that these costs will be substantial. The license agreement also requires the
Company to pay minimum royalties which start at $12,500 in 1998 and increase to
$125,000 in 2001 and each year thereafter. Any inability or failure of the
Company to pay these costs could result in the termination of the license
agreement. In addition, the license agreement reserves for the licensor the
right to approve sublicenses granted under the license agreement. Although such
approval may not be unreasonably withheld, the need for such approval may
inhibit the Company's development of strategic relationships necessary for the
commercialization of Thiovir. See "BUSINESS -- Research and Development Status
and Activities" and " -- Relationship with USC."
LACK OF MANUFACTURING CAPABILITIES
The Company does not have any manufacturing capacity and currently plans to
seek to establish relationships with third party manufacturers for the
manufacture of clinical trial material and the commercial production of Thiovir,
if any. There can be no assurance that the Company will be able to establish
relationships with third party manufacturers on commercially acceptable terms or
that third party manufacturers will be able to manufacture Thiovir on a
cost-effective basis in commercial quantities under good manufacturing practices
("GMPs") mandated by the FDA. The Company's dependence upon third parties for
the manufacture of its products may adversely affect the Company's profit
margins and its ability to develop and commercialize Thiovir on a timely and
competitive basis. Further, there can be no assurance that manufacturing or
quality control problems will not arise in connection with the manufacture of
the Company's products or that third party manufacturers will be able to
maintain the necessary governmental licenses and approvals to continue
manufacturing the Company's products. Any failure to establish relationships
with third parties for its manufacturing requirements on commercially acceptable
terms would have a material adverse effect on the Company. See "BUSINESS --
Manufacturing."
LACK OF SALES AND MARKETING CAPABILITIES
The Company currently has no marketing or sales personnel. The Company will
have to develop a sales force or rely on marketing partners or other
arrangements with third parties for the marketing, distribution and sale of
Thiovir. There can be no assurance that the Company will be able to establish
marketing, distribution or sales capabilities or make arrangements with third
parties to perform those activities on terms satisfactory to the Company, or
that any internal capabilities or third party arrangements will be
cost-effective.
In addition, any third parties with which the Company establishes marketing,
distribution or sales arrangements may have significant control over important
aspects of the commercialization of Thiovir, including market identification,
marketing methods, pricing, composition of sales force and promotional
activities. There can be no assurance that the Company will be able to control
the amount and timing of resources that any third party may devote to the
Company's products or prevent any third party from pursuing alternative
technologies or products that could result in the development of products that
compete with Thiovir and the withdrawal of support for Thiovir. See "BUSINESS --
Sales and Marketing."
DEPENDENCE ON THIRD PARTIES FOR DEVELOPMENT AND MANUFACTURING
The Company intends to engage consultants and independent contract research
organizations ("CROs") to design and conduct clinical trials in connection with
the development of Thiovir. The Company will also engage a third party to
manufacture Thiovir. As a result, these important aspects of the Company's
business will be outside the direct control of the Company. In addition, there
can be no assurance that such third parties will perform all of their
obligations under arrangements with the Company. See "BUSINESS -- Government
Regulation," "-- Research and Development Status and Activities," and "--
Manufacturing."
11
NO ASSURANCE OF MARKET ACCEPTANCE
The Company's success will depend in substantial part on the extent to which
Thiovir achieves market acceptance. The degree of market acceptance will depend
upon a number of factors, including the receipt and scope of regulatory
approvals, the establishment and demonstration in the medical community of the
safety and efficacy of Thiovir and its potential advantages over existing
treatment methods, and reimbursement policies of government and third party
payors. There can no be assurance that physicians, patients, payors or the
medical community in general will accept or utilize Thiovir.
UNCERTAINTY OF HEALTH CARE REFORM MEASURES AND THIRD PARTY REIMBURSEMENT
The business and financial condition of pharmaceutical companies will
continue to be affected by the efforts of governments and third party payors to
contain or reduce the cost of health care. A number of legislative and
regulatory proposals aimed at changing the health care system have been proposed
in recent years. In addition, an emphasis on managed care in the United States
has increased and will continue to increase the pressure on pharmaceutical
pricing. While the Company cannot predict whether legislative or regulatory
proposals will be adopted or the effect those proposals or managed care efforts
may have on its business, the announcement and/or adoption of such proposals or
efforts could have a material adverse effect on the Company. In the United
States and elsewhere, sales of prescription pharmaceuticals are dependent in
part on the availability of reimbursement to the consumer from third party
payors, such as government and private insurance plans that mandate
predetermined discounts from list prices. Third party payors are increasingly
challenging the prices charged for medical products and services. If the Company
succeeds in bringing Thiovir to the market, there can be no assurance that it
will be considered cost effective or that reimbursement to the consumer will be
available or will be sufficient to allow the Company to sell its products on a
competitive basis. See "BUSINESS -- Health Care Reform Measures and Third Party
Reimbursement."
ABSENCE OF PRODUCT LIABILITY INSURANCE; INSURANCE RISKS
The Company's business will expose it to potential product liability risks
that are inherent in the testing, manufacturing and marketing of pharmaceutical
products. There can be no assurance that product liability claims will not be
asserted against the Company. The Company does not currently have any product
liability insurance. The Company intends to obtain limited product liability
insurance for its clinical trials when they begin in the United States and to
expand its insurance coverage if and when the Company begins marketing
commercial products. However, there can no be assurance that the Company will be
able to obtain product liability insurance on commercially acceptable terms or
that the Company will be able to maintain such insurance at a reasonable cost or
in sufficient amounts to protect the Company against potential losses. A
successful product liability claim or series of claims brought against the
Company could have a material adverse effect on the Company.
HAZARDOUS MATERIALS
In the event the Company should establish its own laboratory facility to
further its drug development program, such activities will necessarily involve
the use of hazardous materials, chemicals and viruses. Although the Company will
develop procedures for the handling and disposing of such materials to comply
with the standards prescribed by state and federal regulations, the risk of
accidental contamination or injury from these materials cannot be completely
eliminated. In the event of such an accident, the Company could be held liable
for any damages or fines that result and any such liability could exceed the
resources of the Company.
CONCENTRATION OF STOCK OWNERSHIP; CONTROL OF MANAGEMENT AND EXISTING
STOCKHOLDERS
Upon completion of the Offering, the Company's directors, executive
officers, other key personnel and their respective affiliates will beneficially
own approximately 21.3% of the outstanding Common Stock (approximately 20.4% if
the Underwriters' over-allotment option is exercised in
12
full). As a result, these stockholders will be able to exercise significant
influence over all matters requiring stockholder approval, including the
election of directors and approval of significant corporate transactions. Such
concentration of ownership may also have the effect of delaying or preventing a
change in control of the Company that may be favored by other stockholders. See
"PRINCIPAL STOCKHOLDERS" and "DESCRIPTION OF SECURITIES -- Delaware Law and
Certain Certificate of Incorporation and Bylaw Provisions."
RELATED PARTY TRANSACTIONS
The Company has entered into certain transactions with parties who were
stockholders of the Company at the time of the transactions. A summary of the
terms and conditions of these transactions may be found under the heading
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS." These transactions involve
inherent conflicts between the interest of the Company and the interests of the
other parties to the transactions.
SUBSTANTIAL SHARES OF COMMON STOCK RESERVED FOR THE EXERCISE OF OPTIONS
AND WARRANTS; OBLIGATIONS PURSUANT TO REGISTRATION RIGHTS
The Company has reserved 500,000 shares of Common Stock for issuance upon
the exercise of options granted or available for grant to employees, officers,
directors, advisors and consultants pursuant to the Company's Stock Incentive
Plan (the "Incentive Plan"), as well as an aggregate of 1,900,000 shares of
Common Stock for issuance upon exercise of the (i) Redeemable Warrants, (ii)
Representatives' Warrants and (iii) Outstanding Warrants. These options and
warrants may adversely affect the Company's ability to obtain financing in the
future. The holders of such options and warrants can be expected to exercise
them at a time when the Company would otherwise be able to obtain additional
equity capital on terms more favorable to the Company. See "UNDERWRITING" and
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
The Company has agreed that, under certain circumstances, it will register
under federal and state securities laws the securities underlying the
Representatives' Warrants. In addition, certain shares of Common Stock
previously issued by the Company are subject to registration rights granted by
the Company in connection with the private placement of such securities.
Exercise of these registration rights could involve substantial expense to the
Company at a time when it could not afford such expenditures and may adversely
affect the terms upon which the Company may obtain additional financing. See
"DESCRIPTION OF SECURITIES -- Common Stock."
POTENTIAL ADVERSE MARKET IMPACT OF SHARES ELIGIBLE FOR FUTURE SALES;
REGISTRATION RIGHTS
Sales of a substantial number of shares of Common Stock in the public market
following the Offering could adversely affect the market price of the Common
Stock. Holders of approximately 2,343,440 shares of Common Stock (including the
shares issuable upon the exercise of the Outstanding Warrants) are entitled to
include, subject to certain limitations, such shares in certain registration
statements which the Company may use to register additional shares of Common
Stock. In addition, 2,643,440 shares will be eligible for resale, subject to
applicable holding periods, in the public market under Rule 144 or Rule 701
under the Securities Act, beginning 90 days after the date of this Prospectus.
1,950,000 shares held by the directors, officers and certain other stockholders
of the Company are subject to agreements which restrict their sale for 12 months
after the date of this Prospectus without the prior written consent of the
Representatives. See "UNDERWRITING." The Company intends to file a registration
statement under the Act to register 500,000 shares of Common Stock reserved for
issuance under the Incentive Plan. The Company is unable to estimate the number
of shares which may actually be sold under Rule 144 or Rule 701 or pursuant to
registration rights, since this will depend upon the market price for the Common
Stock, the individual circumstances of the sellers and other factors. Any such
sales may have an adverse effect on the Company's ability to raise needed
capital through an offering of its equity or convertible debt securities and may
adversely affect the prevailing market price of the Common Stock. See
"DESCRIPTION OF SECURITIES -- Common Stock."
13
POTENTIAL ADVERSE EFFECT OF REDEMPTION OF REDEEMABLE WARRANTS; REQUIREMENT FOR
QUALIFICATION OF SHARES AND CURRENT PROSPECTUS TO EXERCISE REDEEMABLE WARRANTS
The Redeemable Warrants may be redeemed by the Company at any time after
thirteen months from the date hereof at a price of $.20 per Warrant upon 30
days' prior written notice, provided that the closing trading price of the
Common Stock for the 20 consecutive trading day period ending ten days prior to
the giving of notice of redemption, equals or exceeds $9.00 per share. Notice of
redemption of the Redeemable Warrants could force the holders to exercise the
Redeemable Warrants at a time when it might be disadvantageous for the holders
to do so or to sell the Redeemable Warrants at their then current market price
when the holders might otherwise wish to hold the Warrants for possible
appreciation. Alternatively, the holders may accept the redemption price, which
is likely to be substantially less than the market value of the Redeemable
Warrants at the time of redemption. Any holders who do not exercise their
Redeemable Warrants prior to their redemption, will forfeit the right to
purchase the shares of Common Stock underlying the Redeemable Warrants. Holders
of the Redeemable Warrants will have the right to exercise them to purchase
shares of Common Stock only if a current prospectus relating to such shares is
then in effect and only if the shares are qualified for sale under the
securities laws of the state or states in which the holder resides. Although the
Company intends to seek to qualify the shares of Common Stock underlying the
Redeemable Warrants for sale in those states in which they are to be offered, no
assurance can be given that such qualification will occur. The Redeemable
Warrants may be deprived of any value if a current prospectus covering the
shares issuable upon the exercise thereof is not filed and kept effective or if
such underlying shares are not, or cannot be, qualified in the applicable
states. While the Company may legally be permitted to give notice to redeem the
Redeemable Warrants at a time when a current prospectus is not available,
thereby leaving the Redeemable Warrant holders no opportunity to exercise their
Redeemable Warrants prior to redemption, the Company does not intend to redeem
the Redeemable Warrants unless a current prospectus is available at the time of
redemption. See "DESCRIPTION OF SECURITIES -- Redeemable Warrants."
REPRESENTATIVES' WARRANTS AND ONGOING RELATIONSHIP WITH SCHNEIDER
In connection with the Offering, the Company will sell to the
Representatives the Representatives' Warrants to purchase up to 100,000 shares
of Common Stock and 100,000 Redeemable Warrants for a nominal amount. The
Representatives' Warrants will be exercisable commencing on the date that is one
year from the effective date of this Prospectus and will continue to be
exercisable up to the date that is five years from the date hereof at an
exercise price equaling 160% of the public offering price of the Common Stock
and the Redeemable Warrants, respectively. During the term of the
Representatives' Warrants, the holders thereof will be given the opportunity to
profit from a rise in the market price of the Common Stock or Redeemable
Warrants with a resulting dilution in the interest of the Company's other
stockholders. The terms on which the Company could obtain additional capital
during the life of the Representatives' Warrants may be adversely affected
because the holders of the Representatives' Warrants might be expected to
exercise them if the Company were able to obtain any needed additional capital
in a new offering of securities at a price greater than the exercise price of
the Representatives' Warrants. The Company has also entered into a consulting
agreement with Schneider under which Schneider will provide certain financial
consulting services to the Company for a period of 36 months at a total cost of
$108,000, all of which will be prepaid upon completion of the Offering. See
"DESCRIPTION OF SECURITIES -- Representatives' Warrants."
Upon the exercise of the Redeemable Warrants more than one year after the
date of this Prospectus, and to the extent not inconsistent with the guidelines
of the National Association of Securities Dealers, Inc., and the rules and
regulations promulgated by the Securities and Exchange Commission (the
"Commission"), the Company has agreed to pay the Representatives a commission
equal to five percent of the exercise price of the Redeemable Warrants. However,
no compensation will be paid to the Representatives in connection with the
exercise of the Redeemable Warrants if (a) the market price of the underlying
shares of Common Stock is lower than the exercise price, (b) the Redeemable
Warrants are exercised in an unsolicited transaction, or (c) the Redeemable
Warrants
14
subject to the Representatives' Warrant are exercised. In addition, in
connection with any solicitation by the Representatives after the date of this
Prospectus of Redeemable Warrant exercises, unless granted an exemption by the
Commission from Regulation M promulgated under the Exchange Act, the
Representatives and any other soliciting broker-dealer will be prohibited from
engaging in any market making activities with respect to the Company's
securities for the period commencing either one or five business days prior to
any solicitation of the exercise of Redeemable Warrants until the later of (i)
the termination of such solicitation activity or (ii) the termination (by waiver
or otherwise) of any right which the Representatives or any other soliciting
broker-dealer may have to receive a fee for the exercise of Redeemable Warrants
following such solicitation. As a result, the Representatives or any other
soliciting broker-dealer may be unable to provide a market for the Company's
securities, should it desire to do so, during certain periods while the
Redeemable Warrants are exercisable. See "UNDERWRITING."
NO PRIOR MARKET FOR COMMON STOCK AND THE REDEEMABLE WARRANTS
Prior to the Offering, there has been no public market for the Common Stock
or the Redeemable Warrants, and there can be no assurance that an active trading
market will develop or be sustained after the Offering or that investors will be
able to sell the Common Stock or the Redeemable Warrants should they desire to
do so. The initial public offering price was determined by negotiations between
the Company and the Representatives and may bear no relationship to the price at
which the Common Stock or the Redeemable Warrants will trade upon completion of
the Offering. See "UNDERWRITING."
VOLATILITY OF STOCK PRICE
The market price of the Common Stock and the Redeemable Warrants is likely
to be highly volatile and could be subject to wide fluctuations in response to
factors concerning the Company or its competitors such as announcements of the
results of clinical trials, developments with respect to patents or proprietary
rights, announcements of technological innovations, new products or new
contracts, actual or anticipated variations in operating results due to a number
of factors including, among others, the level of development expenses, changes
in financial estimates by securities analysts, conditions and trends in the
pharmaceutical and other industries, adoption of new accounting standards
affecting the industry, general market conditions and other factors. The
Company's operating results may also be below the expectations of market
analysts and investors, which would likely have a material adverse effect on the
prevailing market price of the Common Stock or the Redeemable Warrants.
Further, the stock market has experienced extreme price and volume
fluctuations that have particularly affected the market prices of equity
securities of many pharmaceutical companies. These price fluctuations often have
been unrelated or disproportionate to the operating performance of such
companies. Market fluctuations, as well as general economic, political and
market conditions such as recessions or international currency fluctuations, may
adversely affect the market price of the Common Stock or the Redeemable
Warrants. In the past, following periods of volatility in the market price of
the securities of companies in the pharmaceutical industry, securities class
action litigation has often been instituted against those companies. Such
litigation, if instituted against the Company, could result in substantial costs
and a diversion of management attention and resources, which would have a
material adverse effect on the Company. The realization of any of the risks
described in these "RISK FACTORS" could have a dramatic and adverse impact on
the market price of the Common Stock or the Redeemable Warrants.
IMMEDIATE AND SUBSTANTIAL DILUTION -- POTENTIALLY 80%
Purchasers of the Common Stock in the Offering will suffer immediate and
substantial dilution of $3.90 per share in the net tangible book value of the
Common Stock from the initial public offering price. To the extent that
outstanding options and warrants to purchase the Company's Common Stock are
exercised, there will be further dilution. See "DILUTION."
15
NO DIVIDENDS
The Company has never declared or paid any cash dividends on its capital
stock. The Company currently does not intend to pay any cash dividends in the
foreseeable future and intends to retain its earnings, if any, for the operation
of its business. See "DIVIDEND POLICY."
ARBITRARY DETERMINATION OF OFFERING PRICE
The offering price of the shares of Common Stock and Redeemable Warrants
will be determined through negotiations between the Company and the
Representatives. Among the factors to be considered in determining the price are
prevailing market conditions, the general economic environment, estimates of the
prospects of the Company, the background and capital contributions of management
and current conditions in the securities market and the Company's industry.
There is, however, no relationship between the offering price of the shares of
Common Stock and Redeemable Warrants and the Company's assets, book value,
historical earnings or any other objective criteria of value. See
"UNDERWRITING."
ANTI-TAKEOVER EFFECTS OF CERTIFICATE OF INCORPORATION, BYLAWS AND DELAWARE LAW
The Company's Certificate of Incorporation authorizes the Company's Board of
Directors (the "Board") to issue shares of undesignated preferred stock without
stockholder approval on such terms as the Board may determine. 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 preferred stock that may be issued in the
future. Moreover, the issuance of preferred stock may make it more difficult for
a third party to acquire, or may discourage a third party from acquiring, a
majority of the voting stock of the Company, which could make more difficult a
merger or tender offer involving the Company, even if such events could be
beneficial to the interest of the stockholders. The Board's ability to issue
preferred stock could limit the price that certain investors might be willing to
pay in the future for the Common Stock. See "DESCRIPTION OF SECURITIES --
Preferred Stock" and "-- Delaware Law and Certain Certificate of Incorporation
and Bylaw Provisions."
LIMITATION ON OFFICERS' AND DIRECTORS' LIABILITIES UNDER DELAWARE LAW
Pursuant to the Company's Certificate of Incorporation, as authorized under
applicable Delaware law, directors of the Company are not liable for monetary
damages for breach of fiduciary duty, except in connection with a breach of the
duty of loyalty, for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, for dividend payments or
stock repurchases illegal under Delaware law or for any transaction in which a
director has derived an improper personal benefit. The Company's Certificate of
Incorporation provides that the Company must indemnify its officers and
directors to the fullest extent permitted by Delaware law for all expenses
incurred in the settlement of any actions against such persons in connection
with their having served as officers or directors of the Company. Upon
completion of the Offering, the Company also intends to enter into
indemnification agreements with its directors which will require the Company to
provide certain additional indemnification and contribution to its directors,
subject to certain limitations. See "MANAGEMENT -- Limitation on Officers' and
Directors' Liabilities."
MAINTENANCE REQUIREMENTS FOR NASDAQ SMALLCAP SECURITIES
It is anticipated that the Common Stock and the Redeemable Warrants will be
approved for listing on the Nasdaq SmallCap Market. An issuer seeking continued
inclusion of its securities on the SmallCap Market is required to meet certain
criteria including (i) total assets of at least $2,000,000; (ii) capital and
surplus of at least $1,000,000; and (iii) a minimum bid price of $1.00 per share
unless the market value of its public float is at least $1,000,000 and it has at
least $2,000,000 in capital and surplus. Upon completion of the Offering, the
Company anticipates that it will satisfy the criteria for continued inclusion of
its securities on the Nasdaq SmallCap Market. However, there can be no assurance
that the Company will continue to satisfy such criteria and for how long. See
"PROSPECTUS SUMMARY -- Summary Financial Information" and "CAPITALIZATION." The
Nasdaq SmallCap Market has recently proposed changes to its listing
requirements. If the Company became
16
unable to meet such criteria of the SmallCap Market and was suspended therefrom,
the Company's securities could be subject to a rule that imposes additional
sales practice requirements on certain broker/dealers who sell such securities
to persons other than established customers and accredited investors.
Consequently, an investor would likely find it more difficult to dispose of, or
to obtain accurate quotations as to the value of, the Securities.
REQUIRED DISCLOSURE CONCERNING TRADING OF PENNY STOCKS OR LOW-PRICED SECURITIES
The Commission has adopted regulations that define a "penny stock" to be any
equity security that has a market price (as defined therein) of less than $5.00
per share, subject to certain exceptions. For any transaction involving a penny
stock, unless exempt, the rules require the delivery, prior to the transaction,
of a disclosure schedule prepared by the Commission relating to the penny stock
market. The broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered representative, current quotations for the
securities and, if the broker-dealer is the sole market-maker of the penny
stock, the broker-dealer must disclose this fact and the broker-dealer's
presumed control over the market. Finally, monthly statements must be sent
disclosing recent price information for the penny stock held in the account and
information on the limited market in penny stocks.
While many securities listed on the Nasdaq SmallCap Market would be covered
by the definition of penny stock, transactions in such a security would be
exempt from all but the sole market-maker provision for (i) issuers who have
$2,000,000 in tangible assets ($5,000,000 if the issuer has not been in
continuous operation for three years), (ii) transactions in which the customer
is an institutional accredited investor, and (iii) transactions that are not
recommended by the broker-dealer. In addition, transactions in a SmallCap
security directly with a Nasdaq market-maker for such securities would be
subject only to the sole market-maker disclosure, and the disclosure with
respect to commissions to be paid to the broker-dealer and the registered
representative. Finally, all SmallCap securities would be exempt if The Nasdaq
Stock Market, Inc., the operator of the Nasdaq SmallCap Market, raised its
requirements for continued listing so that any issuer with less than $2,000,000
in net tangible assets or stockholders' equity would be subject to delisting.
These criteria are more stringent than the current maintenance requirements.
Consequently, these rules may restrict the ability of broker-dealers to sell the
Company's securities and may affect the ability of purchasers to sell the
Company's securities in the secondary market.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Statements herein regarding the time period during which the proceeds from
the Offering will fund the Company's operations and the dates on which the
Company anticipates commencing clinical trials with respect to Thiovir
constitute forward-looking statements under the federal securities laws. Such
statements are subject to certain risks and uncertainties that could cause the
rate at which the Company incurs expenses and the actual timing of clinical
trials to differ materially from those projected. With respect to such dates,
the Company's management team has made certain assumptions regarding, among
other things, the successful and timely completion of preclinical tests, the
approval of an Investigational New Drug Exemption Application ("IND") for
Thiovir by the FDA, the availability of adequate clinical supplies, the absence
of delays in patient enrollment, the availability of the capital resources
necessary to complete the preclinical tests and conduct the clinical trials, the
nature, scope, and number of the preclinical tests and clinical trials required
for FDA approval and the cost of completing these tests and trials. The
Company's ability to proceed with its drug development program in accordance
with the dates anticipated is subject to certain risks, as discussed under the
caption "RISK FACTORS" contained herein, and the Company's ability to estimate
the time period for which the proceeds of the Offering will fund the Company's
operations is subject to substantial uncertainty due to the factors outlined
under the caption "USE OF PROCEEDS" contained herein. Undue reliance should not
be placed on the dates and time periods referenced herein. These estimates are
based on the current expectations of the Company's management team, which may
change in the future due to a large number of potential events, including
unanticipated future developments.
17
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Securities offered
hereby are estimated to be approximately $4,140,000 (approximately $4,805,550 if
the Underwriters' over-allotment option is exercised in full), after deducting
$510,000 for underwriting discounts (approximately $586,500 if the Underwriters'
over-allotment option is exercised in full) and approximately $450,000 for other
estimated offering expenses (approximately $472,950 if the Underwriters'
over-allotment option is exercised in full), including the Representatives'
non-accountable expense allowance and the consulting fee payable to the
Representatives, and assuming no exercise of the Redeemable Warrants offered
hereby.
The Company intends to use the net proceeds from the Offering, including any
interest thereon, to finance research and development activities with respect to
Thiovir, primarily for preclinical tests and clinical trials designed to satisfy
FDA standards for safety and efficacy, and to provide working capital. Due to
the nature of the drug development and approval process, the Company is unable
to accurately indicate the exact amount of proceeds allocable to each of the
Company's activities. The amounts actually expended for each activity may vary
significantly depending upon numerous factors, including the progress of
development activities, the scope and results of preclinical testing and
clinical trials, the cost, timing and outcome of regulatory agency reviews,
administrative and legal expenses, costs of developing a patent position, the
acquisition of technology that may enhance and/or be compatible with the
Company's then existing technology, the establishment of relationships with
consultants and with third parties for manufacturing and sales and marketing
functions, and on other factors. Commencing in 1998, the Company will also be
required to make minimum royalty payments in accordance with the license
agreement under which it licenses rights to the drug Thiovir, in the following
amounts: $12,500 in 1998, $25,000 in 1999, $50,000 in 2000 and $125,000 per year
thereafter.
Notwithstanding the foregoing, however, the information below constitutes
the Company's best estimate as to the use of the proceeds generated from the
Offering:
<TABLE>
<CAPTION>
ACTIVITY % OF PROCEEDS
--------- --------------
<S> <C>
Testing and Clinical Trials .................................. 50
CROs and Consultants ......................................... 20
General Working Capital ...................................... 30
</TABLE>
Any net proceeds received from the exercise of the Underwriters'
over-allotment option will be used to supplement general working capital.
The Company believes that the estimated net proceeds of the Offering,
together with its existing cash and short-term investments, will be adequate to
satisfy its anticipated capital requirements at least through December 31, 1998.
See "RISK FACTORS -- Future Capital Needs; Uncertainty of Additional Funding"
and "SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS." Pending such uses, the
Company intends to invest proceeds primarily in short-term, investment grade
obligations.
DIVIDEND POLICY
The Company has not declared or paid any dividends on its capital stock. The
Company currently intends to retain all future earnings, if any, to finance
growth and development of its business and, therefore, does not expect to
declare or pay any cash dividends in the foreseeable future. The declaration of
dividends is within the discretion of the Company's Board. See "RISK FACTORS --
No Dividends."
18
DILUTION
At February 28, 1997, the net tangible book value of the Company was
$220,814, or approximately $.08 per share. "Net tangible book value" per share
of Common Stock represents the amount of the Company's total tangible assets,
less the amount of its total liabilities, divided by the number of shares of
Common Stock outstanding. Dilution represents the difference between the amount
per share of Common Stock paid by the new investors purchasing in the Offering
and the pro forma net tangible book value per share of Common Stock after the
Offering. After giving effect to the sale by the Company of the 1,000,000 shares
of Common Stock offered hereby at $5.10(1) per share and the payment of the
estimated expenses related to the Offering of $450,000, the pro forma net
tangible book value of the Company at February, 28 1997 would have been
$4,360,214, or $1.20 per share of Common Stock. This represents an immediate
increase in net tangible book value of $1.12 per share of Common Stock to
existing stockholders and an immediate dilution of $3.90 per share of Common
Stock to new investors purchasing Common Stock in the Offering, as illustrated
in the following table:
<TABLE>
<CAPTION>
<S> <C> <C>
Price per share in the Offering(1) $ 5.10
Net tangible book value per share before the Offering .08
Increase per share attributable to new investors 1.12
----------
Pro forma net tangible book value per share after the Offering 1.20
-------
Dilution to new investors $ 3.90
==========
</TABLE>
- ----------
(1) Includes the purchase price of $.10 per Redeemable Warrant.
In the event that the Underwriters exercise the over-allotment option in
full, the pro forma net tangible book value per share of Common Stock after the
Offering (less underwriting commissions and discounts and estimated expenses of
the Offering) would be approximately $1.33 per share, representing an immediate
increase in net tangible book value of approximately $1.25 per share to current
stockholders and an immediate dilution of approximately $3.77 per share to new
investors.
The following table sets forth (i) the number of shares of Common Stock
purchased from the Company by the existing stockholders and the total
consideration paid and the average price per share paid for such shares by the
existing stockholders and (ii) the number of shares of Common Stock to be sold
by the Company in the Offering, the total consideration to be paid and the
average price per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------- ---------------- AVERAGE PRICE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE
---------- ---------- -------- ------------ ----------
<S> <C> <C> <C> <C> <C>
New Investors 1,000,000 27.4% $5,000,000(2) 80.5% $5.00
Existing Stockholders 2,643,440 72.6% $1,210,654 19.5% $0.46(3)(4)
------------ ----------- ----------- -----------
Total 3,643,440 100.0% $6,210,654 100.0%
============ =========== =========== ===========
</TABLE>
- ---------------
(2) Prior to the deduction of expenses relating to the Offering.
(3) Excludes $1,519,050, representing the excess of the fair value of 950,000
shares issued (in August 1996) over cash received of $950, recorded as
research and development expense. See Note 5 of Notes to the Financial
Statements hereto.
(4) Includes 1,950,000 shares of Common Stock previously sold for an average of
$.05 per share and 693,440 shares of Common Stock previously sold for $1.60
per share.
The foregoing table excludes shares of Common Stock issuable pursuant to the
exercise of the Outstanding Warrants, none of which are currently exercisable.
As of April 24, 1997, warrants to purchase an aggregate of 700,000 shares of
Common Stock at a price of $10.00 per share were outstanding. None of these
warrants are currently exercisable. The table also excludes shares of Common
Stock issuable upon the exercise of up to 500,000 stock options which may be
issued under the Company's Incentive Plan. As of April 24, 1997, the Company had
issued options to purchase an aggregate of 10,000 shares of Common Stock
pursuant to the Incentive Plan and had made commitments to three outside
directors and two officers to issue options to purchase an aggregate of 230,000
shares of Common Stock at exercise prices to be determined, but in any case not
less than $5.00 per share. See "MANAGEMENT -- Executive Compensation and Other
Information."
19
CAPITALIZATION
The following table sets forth the actual capitalization of the Company at
February 28, 1997, and the capitalization of the Company as adjusted to reflect
the sale by the Company of the Securities offered hereby and the initial
application of the estimated proceeds thereof. See "USE OF PROCEEDS." This table
should be read in conjunction with the Company's Financial Statements and the
Notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
FEBRUARY 28, 1997
-------------------
ACTUAL AS ADJUSTED
------------ -----------
Stockholders' equity:
<S> <C> <C>
Preferred stock -- $0.01 par value; 1,000,000 shares
authorized, actual and as adjusted -- 0 shares issued
and outstanding $ -- $ --
Common Stock -- $0.01 par value; 25,000,000 shares
authorized, actual shares issued and outstanding
2,643,440 and as adjusted 3,643,440 26,434 36,434
Additional paid-in capital 2,644,743 6,774,743
Deficit accumulated during the development stage (2,227,784) (2,227,784)
------------ -----------
Total stockholders' equity 443,393 4,583,393
------------ -----------
Total capitalization $ 443,393 $ 4,583,393
============= ============
</TABLE>
20
SELECTED FINANCIAL DATA
The following selected financial data of the Company as of and for the
period ended November 30, 1996 are derived from the financial statements that
have been audited by McGladrey & Pullen, LLP, independent auditors. The
Company's financial statements for the three months and the cumulative period
ended February 28, 1997 are unaudited. However, in the opinion of the Company,
all adjustments, consisting of normal recurring accruals, necessary for a fair
presentation have been made. Interim results are not indicative of the results
to be expected for a full fiscal year. These data should be read in conjunction
with the Company's Financial Statements and the Notes thereto included elsewhere
in this Prospectus and Management's Discussion and Analysis of Financial
Condition and Results of Operations which follow.
STATEMENT OF ACTIVITIES DATA:
<TABLE>
<CAPTION>
PERIOD FROM JULY 5, 1996, THREE MONTHS PERIOD FROM JULY 5, 1996,
DATE OF INCEPTION, TO ENDED DATE OF INCEPTION, TO
NOVEMBER 30, 1996 FEBRUARY 28, 1997 FEBRUARY 28, 1997
------------------ --------------------- ---------------------
<S> <C> <C> <C>
Revenue:
Interest income $ 1,858 $ 2,475 $ 4,333
---------- --------- ---------
Costs and Expense:
Research and development 2,058,980 73,249 2,132,229
General and administrative 33,568 66,320 99,888
--------- --------- ---------
2,092,548 139,569 2,232,117
--------- --------- ---------
Net loss (2,090,690) (137,094) (2,227,784)
============= ============ ===========
Net loss per common share(1) $ (.81) $ (.05) $ (.86)
============= ============ ===========
Shares used in computing net loss per common
share(1) 2,593,440 2,593,996 2,593,668
============= ============ =============
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
NOVEMBER 30, 1996 FEBRUARY 28, 1997
----------------- -----------------
<S> <C> <C>
Cash and cash equivalents $ 495,421 $ 213,029
Working capital 503,621 431,362
Total assets 532,005 502,625
Deficit accumulated during the development stage (2,090,690) (2,227,784)
Total stockholders' equity 510,487 443,393
</TABLE>
- ------------
(1) See notes 1 and 4 of Notes to Financial Statements for information
concerning the computation of net loss per common share and shares used in
computing net loss per common share.
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following should be read in conjunction with "SELECTED FINANCIAL DATA"
and the Company's Financial Statements and Notes thereto appearing elsewhere in
this Prospectus.
OVERVIEW
The Company is a development stage pharmaceutical company engaged in the
development of a single new antiviral drug candidate called Thiovir. The Company
was incorporated in 1988 but remained a "shell" corporation, i.e. without assets
or liabilities, until July 1996, when it commenced the acquisition of a license
of certain proprietary rights to, and the development of, Thiovir.
The Company is a development stage company, has not derived any revenues
from the sale of products and has relied upon private equity financing for its
capital. As of February 28, 1997, the Company's accumulated deficit was
$2,227,784.
The Company has no operating history upon which an evaluation of the Company
and its prospects can be based. The risks, expenses and difficulties encountered
by companies at an early stage of development must be considered when evaluating
the Company's prospects. There are numerous risks inherent in a development
stage company which is reliant upon the development of a single pharmaceutical
product, including the uncertainties of research and the outcome of preclinical
testing and clinical trials, a lengthy and expensive regulatory approval
process, obtaining and defending a satisfactory patent position, and attracting
and retaining motivated and qualified personnel. See "RISK FACTORS."
The operating expenses of the Company cannot be predicted with certainty and
will depend on several factors, primarily the level of drug development
expenses. Development expenses will depend on the progress and results of the
Company's development, preclinical tests and clinical trials of Thiovir, which
cannot be predicted. Management may be able to control the timing of development
expenses in part by accelerating or decelerating preclinical testing and
clinical trial activities, although attainment of the Company's business
objectives may necessitate pursuit of these activities on an accelerated basis.
RESULTS OF ACTIVITIES
PERIOD FROM INCORPORATION TO JULY 5, 1996, DATE OF INCEPTION
For the period from incorporation (1988) through July 5, 1996, the Company
was inactive, had no capital funds, received no revenues and incurred no
expenses.
PERIOD FROM JULY 5, 1996, DATE OF INCEPTION, TO NOVEMBER 30, 1996
The Company had interest income of $1,858 in the period ended November 30,
1996.
In August 1996, the Company purchased an option to acquire a license of
certain rights to the drug Thiovir. For the option, the Company paid $100,000 in
cash and issued to the grantor of the option 200,000 shares of Common Stock and
warrants to purchase an additional 200,000 shares of Common Stock. The
recipients of the shares of Common Stock and the warrants paid the Company a
total of $200 for these securities. Also in 1996, the Company issued an
additional 750,000 shares of Common Stock to Charles E. McKenna, Ph.D. (320,000
shares), Mary Anthony Gray (110,000 shares) and Thomas D. Wolfe (320,000
shares), for aggregate cash consideration of $750. Management estimated the fair
value of the 950,000 shares at $1.60 per share for a total of $1,520,000, based
upon the offering price of the Company's Common Stock in a private placement
offering commenced on August 20, 1996. In September 1996, the Company exercised
its option to acquire the license of rights to Thiovir and paid an additional
$440,000 in cash therefor. The Company charged the difference between the
estimated aggregate value and the aggregate cash purchase price of the 950,000
shares, or $1,519,050, and the cash consideration paid of approximately $540,000
for the licensing rights, as research and development expense. See "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS."
22
General and administrative expenses totaled $33,568, primarily consisting of
compensation, travel and office expense.
The Company incurred a net loss of $2,090,690 for the period ended November
30, 1996.
THREE MONTHS ENDED FEBRUARY 28, 1997
The Company had interest income of $2,475 in the quarter ended February 28,
1997.
Research and development expense for the quarter was $73,249, reflecting a
research grant to USC pursuant to a new research agreement which continues until
at least September 30, 1997. See "BUSINESS -- Research Agreement with USC."
General and administrative expenses for the quarter were $66,320, the
largest components of which were personnel compensation of $17,538 and legal and
consulting expenses of $21,800. The level of general and administrative expenses
for the quarter was higher than prior periods because of increased
administrative and management activity in the planning and preparation for
additional tests and clinical trials for Thiovir.
The Company incurred a net loss of $137,094 for the quarter ended February
28, 1997, resulting in an accumulated deficit of $2,227,784 during this
development stage of the Company.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its activities since July 5, 1996 primarily from
the net proceeds of private placements of Common Stock. As of February 28, 1997,
the Company had received aggregate cash proceeds of $1,210,654. In July 1996,
three stockholders of the Company contributed a total of $100,200 to the equity
capital of the Company. In October 1996, the Company paid cash of $539,930 and,
in August 1996, issued shares of its Common Stock with a value, net of cash
consideration received for the shares, of $1,519,050 in consideration for a
license of certain rights to Thiovir. In October 1996, the Company completed a
private placement of 665,000 shares at $1.60 per share for net proceeds of
$1,015,473, of which $34,496 was receivable at November 30, 1996 and paid in the
quarter ended February 28, 1997. An additional $45,504 was received in the
quarter ended February 28, 1997 from the sale of shares of Common Stock to a
single investor at $1.60 per share. At February 28, 1997, the Company's
liquidity consisted of total cash and cash equivalents of $213,029.
The Company expects that its capital requirements will increase
substantially in future periods as the Company funds its drug development
program. The Company's future capital requirements will depend on many factors,
including the progress of the Company's drug development program, the scope and
results of preclinical testing and clinical trials, the cost, timing and outcome
of regulatory reviews, costs of patent prosecution, administrative and legal
expenses, the establishment of capacity for sales and marketing functions, the
establishment of relationships with third parties for manufacturing and sales
and marketing functions, and other factors. Commencing in 1998, the Company will
also be required to make minimum royalty payments in accordance with the license
agreement under which it licenses rights to the drug Thiovir in the following
amounts: $12,500 in 1998, $25,000 in 1999, $50,000 in 2000 and $125,000 per year
thereafter.
The Company believes that the net proceeds of the Offering together with its
existing cash and short-term investments will be adequate to satisfy its
anticipated capital requirements through at least December 31, 1998. The Company
expects that it may be required to raise substantial additional funds through
equity or debt financings, collaborative arrangements with corporate partners or
from other sources. There can be no assurance that additional funding will be
available on favorable terms from any of these sources or at all. See "RISK
FACTORS -- Future Capital Needs; Uncertainty of Additional Funding" and "SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS."
For a discussion of the Company's plan of operation, see "USE OF PROCEEDS."
23
BUSINESS
OVERVIEW
The Company is a development stage pharmaceutical company engaged in the
development of thiophosphonoformic acid ("TPFA"), an anti-viral compound, for
which the Company has adopted the trade name "Thiovir(tm)." The initial focus of
the Company's development activities will be to demonstrate the safety and
efficacy of Thiovir for treatment of patients infected with HIV and patients
showing active infection of CMV, which causes blindness and other conditions.
CMV is a common opportunistic infection among AIDS patients. The Company
believes that Thiovir, if successfully developed and approved for sale, would
constitute a candidate for inclusion in combination drug therapy for HIV/AIDS
treatment and would provide several benefits over existing treatments for CMV,
particularly its potential ability to replace more toxic intravenous treatment
with a less toxic oral treatment. The only development work on Thiovir to date
has been limited to laboratory and animal studies conducted by USC, which has
licensed to the Company its proprietary rights to Thiovir, and by other academic
and/or research organizations which have no affiliation with the Company.
Therefore, Thiovir is in an early stage of development.
In the United States, the use and sale of Thiovir is subject to the rules
and regulations of the FDA, and obtaining the necessary FDA approval will
require substantial preclinical tests and clinical trials. The Company expects
to commence clinical trials for Thiovir in 1997. The Company believes that
Thiovir may meet the criteria established by the FDA for accelerated approval.
As a result, the Company may be able to commercialize Thiovir in a shorter time
period than has historically been applicable for a drug that does not meet the
criteria for accelerated approval. See "BUSINESS -- Government Regulation."
Initially, the Company intends to maintain a limited corporate
infrastructure devoted almost exclusively to the development and
commercialization of Thiovir. Accordingly, the Company will engage CROs to
conduct preclinical tests and clinical trials on Thiovir. The Company will also
contract with other companies to manufacture the drug. The Company intends to
rely upon part-time consultants and CROs to provide expertise in designing
appropriate tests and trials and in seeking FDA and other government approval.
Furthermore, the Company does not believe that it will be necessary to develop
an extensive sales and marketing force to promote the sale of Thiovir in the
United States, if and when it may be sold, since the market for HIV/AIDS and CMV
therapies is concentrated among a relatively small number of care providers.
In August 1996, the Company acquired an exclusive worldwide license to
proprietary rights to Thiovir held by USC from a limited partnership which
funded the research and development of Thiovir. The Company has generated no
revenues from the sale of products and, as of February 28, 1997, has an
accumulated deficit of $2,227,784. There can be no assurance that the Company
will ever achieve profitable operations.
The Company's executive offices are located at 10940 Wilshire Boulevard,
Suite 1600, Los Angeles, California, pursuant to a short-term lease. The Company
expects to relocate its offices, most likely in the Southern California region,
as it hires additional employees to staff increased operational activity. The
Company is a Delaware corporation and is the successor by merger to a Missouri
corporation which was originally formed in 1988, but remained a "shell"
corporation with no operations, assets or liabilities until its acquisition of
license rights to TPFA.
TARGETED INDICATIONS FOR THIOVIR
HIV/AIDS. HIV is the viral infection which causes AIDS. HIV replicates in
the body, resulting in an increasing amount of the virus referred to as an
increase in the "viral load." AIDS occurs when the HIV viral load reaches a
sufficiently high level to significantly compromise the immune system and/or
when certain opportunistic infections (such as CMV) occur. The treatment of AIDS
has increasingly focused on inhibiting two enzymes, known as "protease" and
"reverse transcriptase"
24
("RT"), the activity of which are necessary to the process of HIV replication.
Initially, AIDS was treated with a single drug (referred to as "monotherapy"),
such as AZT, which is a nucleoside RT inhibitor. Experience has shown that
monotherapy results in the rapid emergence of a mutated form of the virus which
is resistant to the drug. More recently, the treatment of HIV/AIDS has focused
on the use of combinations of protease and RT inhibitors (referred to as
"combination therapy") which has significantly reduced the viral load in many
cases.
The long-term efficacy of the drugs now being used to reduce HIV viral load
is an unresolved issue. Resistance to one or more drugs being used in
combination drug therapy has been increasingly recognized in some patients due
to HIV's ability to mutate. Patient compliance has also been recognized as a
problem with combination drug therapy because the treatment regimen is complex
and demanding and often results in serious, unwanted side effects. According to
published reports, the recently-introduced combination drug therapies have been
least effective among patients who had previously been subjected to a regimen of
AZT or other nucleoside RT inhibitors. Consequently, the search for new drugs,
and for new combinations of drugs for the treatment of HIV/AIDS, continues at an
intense level of activity.
Thiovir is a non-nucleoside RT inhibitor that has inhibited the replication
of HIV in laboratory tests. Thiovir is at least partially metabolized into
foscarnet in vitro in cells and in dogs and cats. Therefore, the Company
believes that Thiovir may likewise be partially converted to the active
ingredient in foscarnet in human patients. Although foscarnet has not been
widely used to treat HIV/AIDS because of the need for central intravenous
administration, it has been recognized to inhibit HIV replication in some human
patients. Consequently, the Company believes that the potential exists for
Thiovir to be an attractive candidate for inclusion in combination drug therapy
for HIV/AIDS for the following reasons:
* The resistance to combination drug therapies exhibited among patients who
had previously undergone therapy with a nucleoside RT inhibitor may not be
exhibited when the nucleoside RT inhibitor is replaced with a
non-nucleoside RT inhibitor.
* If Thiovir were to prove effective in treating both HIV/AIDS and CMV,
physicians may include Thiovir in a combination drug therapy for its
double effect of treating HIV/AIDS and, on a prophylactic basis, CMV.
CMV. CMV is a virus which resides in most human beings. It is an
opportunistic virus that may become active when the human immune system is
weakened. Consequently, AIDS patients are at considerable risk of active CMV
infection. The primary manifestation of active CMV infection, estimated at 85%
of all manifestations, is in the retina of the eye (CMV retinitis). Other CMV
manifestations include gastrointestinal infection (symptoms include ulcers and
chronic diarrhea) and neurologic infection (encephalitis and other
complications). If untreated, CMV retinitis causes blindness. Treatment controls
but does not eliminate CMV, so ongoing therapy is generally necessary.
Until recently, physicians typically treated CMV retinitis with two drugs,
foscarnet and ganciclovir. In June 1996, the FDA approved a third drug,
cidofovir, for treatment of CMV retinitis. The Company is aware of several other
drugs which are under development for the treatment of CMV retinitis. Foscarnet,
which exhibits renal toxicity, is generally administered intravenously on a
daily basis by means of a surgically- implanted central intravenous line because
it is not absorbed by the intestine. This precludes oral administration. Central
intravenous drug therapy is substantially more burdensome and costly than oral
drug therapy. Ganciclovir is available in oral and intravenous forms and is also
administered by a device surgically implanted in the eye for sustained release.
Oral administration, however, is typically used only after an induction period
of central intravenous administration. The use of an eye implant alone, without
simultaneous systemic therapy, often results in the development of CMV retinitis
in the other eye and/or manifestations of active CMV infection in the internal
organs. CMV has developed resistance to ganciclovir in some patients. In
addition, ganciclovir has exhibited bone marrow toxicity in some cases, as does
the often-used HIV/AIDS drug AZT. Consequently, simultaneous use of ganciclovir
and AZT has been reported to cause profound bone marrow suppression, resulting
in the inability to fight infection. Patients who use ganciclovir may require
administration of immune cell enhancement drugs in order to counteract the
adverse effects of ganciclovir. Cidofovir is administered intravenously and,
like foscarnet (and Thiovir), exhibits renal toxicity.
25
There is substantial ongoing research into and clinical trials of new
treatment methods using existing drugs, including intravitreal injection and
administration of various combinations of these drugs. The Company is also aware
of several other drugs which are under development for the treatment of CMV
retinitis.
The Company believes that, with the exception of oral ganciclovir, none of
the drugs described above are currently administered prophylactically prior to
manifestation of CMV retinitis.
The molecular structure of Thiovir is identical to that of foscarnet except
that a single oxygen atom in foscarnet is replaced with a sulfur atom in
Thiovir. To date, laboratory in vitro tests conducted by independent
laboratories on human cell cultures indicate that at certain concentrations
Thiovir is similar to foscarnet in inhibiting CMV replication. The potential
exists, therefore, that the application of Thiovir will result in a "double
hit," i.e., the portion of Thiovir that transforms to foscarnet and the portion
that retains its original chemical structure would both be present in the body
to control the CMV virus.
The Company believes that the potential exists for the following benefits to
the use of Thiovir in the treatment of CMV:
* Thiovir may be administered orally. Initial animal studies suggest that
Thiovir will demonstrate sufficient oral availability to humans. Oral
dosage is substantially less intrusive and burdensome than intravenous
administration.
* While Thiovir exhibits some renal toxicity, preliminary animal studies
suggest that Thiovir may involve a lesser degree of adverse, toxic
consequences than other drugs currently being used.
* Use of Thiovir may be significantly less costly than alternative drugs for
many patients because it avoids intravenous administration and the use of
immune cell enhancement drugs would not be required.
THE DEVELOPMENT OF THIOVIR IS IN AN EARLY STAGE. TO DATE, ONLY LIMITED
LABORATORY AND ANIMAL STUDIES HAVE BEEN CONDUCTED ON THIOVIR. FURTHER TESTS,
INCLUDING HUMAN CLINICAL TRIALS, WILL BE NECESSARY TO DEMONSTRATE THE ORAL
BIO-AVAILABILITY, THE EFFICACY AND THE TOXICITY AND OTHER SAFETY ATTRIBUTES OF
THE USE OF THIOVIR FOR THE TREATMENT OF HIV/AIDS AND CMV. THERE CAN BE NO
ASSURANCE THAT SUCH TESTS WILL ESTABLISH THAT USE OF THIOVIR WILL RESULT IN
THESE BENEFITS. SEE "RISK FACTORS -- UNCERTAINTY OF PRODUCT DEVELOPMENT" AND "
- -- UNCERTAINTIES RELATED TO CLINICAL TRIALS."
RESEARCH AND DEVELOPMENT STATUS AND ACTIVITIES
Research and development with respect to Thiovir has been performed to date
primarily at USC under the direction of Professor Charles E. McKenna. See
"MANAGEMENT -- Executive Officers, Directors and Key Consultants" and "PRINCIPAL
STOCKHOLDERS." In 1994, PerArdua Investors, L.P., a California limited
partnership (the "Limited Partnership"), was formed to fund the development of
Thiovir through research grants extended to USC. The Limited Partnership
obtained certain rights to obtain an exclusive license of the patents and other
intellectual property rights relating to Thiovir developed at USC. The Company
acquired such rights in August 1996. See "BUSINESS -- Relationship with USC" and
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
In vitro studies conducted at USC have demonstated the ability of Thiovir to
inhibit replication of HIV and CMV and indicated preliminarily that Thiovir may
have favorable oral bio-availability as compared to CMV drugs currently in use.
An effective and relatively simple method of synthesizing Thiovir was also
developed at USC. The proprietary rights of which the Company is the exclusive
licensee include a United States patent for the use of Thiovir for the treatment
of HIV, a U.S. patent on a method of synthesis of Thiovir, a pending patent
application, and certain other patent rights. See "BUSINESS -- Patents."
The Company plans to continue the research and development of Thiovir with a
view to obtaining FDA and other government approval for its sale and use in the
treatment of HIV/AIDS and active CMV infection and to investigate additional
potential therapeutic uses.
The Company is currently developing standard operating procedures for the
production of Thiovir pursuant to GMPs which will meet FDA requirements, and is
designing and planning laboratory and animal
26
studies intended to satisfy Phase I requirements of the FDA approval process.
Those studies, similar in some cases to the studies already conducted, will have
the objective of establishing the chemical stability of the product and its
toxicity and tolerance properties. Mutagenicity, immunogenicity and
teratogenicity studies may also be performed if deemed necessary. The Company
expects the completion of these studies and the Phase I process to take one year
or longer. The production of Thiovir under GMP standards and the conduct of the
Phase I studies will be performed on behalf of the Company by CROs who have not
as yet been identified by the Company. The results of the studies performed
during the Phase I process will be submitted to the FDA as part of an IND, which
must be evaluated and found acceptable by the FDA before human clinical trials
may commence. See "BUSINESS -- Government Regulation."
RESEARCH AGREEMENT WITH USC
The Company has recently entered into a new research agreement (the
"Research Agreement") with USC with respect to Thiovir. The primary objectives
of the research to be conducted by USC include the following:
* to acquire initial in vitro data relating to the potential use of Thiovir
with other HIV and/or CMV inhibitor drugs as part of a combination
therapy;
* to conduct additional research into other potential applications of
Thiovir; and
* to transfer to the Company technology related to Thiovir and to continue
patent filings related to Thiovir.
The research at USC will be conducted under the direction of Professor
McKenna and will continue until at least September 30, 1997. The research is
being funded by a grant of approximately $176,000 which has already been paid by
the Company. See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
POTENTIAL MARKET FOR THIOVIR
Market Size. The World Health Organization estimated at the end of 1996 that
there were more than 22 million people infected with HIV worldwide, of whom more
than eight million had developed AIDS. The United States Centers for Disease
Control and Prevention has disclosed that through December 1995 more than
500,000 persons in the United States with AIDS had been reported to it and that
approximately 343,000 of them had died. There are no reliable figures on the
number of AIDS patients in the United States or in the world with active CMV
infection. All HIV/AIDS patients represent the potential market for Thiovir.
Thiovir, as well as the other known drugs used to treat active CMV
infection, will not "cure" CMV; its use would merely suppress viral replication
and spread of the virus. Consequently, use of Thiovir would be on-going. Because
active CMV infection typically becomes manifest within a patient in the latter
stages of AIDS infection, the use of drug therapy to control CMV, at least until
recently, was inevitably shortened by the death of the patient. Treatment of
AIDS patients using combination drug therapy, however, has recently shown
significant clinical benefits including reduced HIV viral load and increased
patient longevity. There is insufficient published information to determine the
degree to which active CMV infection may have gone into remission in those AIDS
patients who have benefited from combination drug therapy. Anecdotal reports
indicate that active CMV infection is not significantly affected among those
patients.
The Company is not aware of published data which indicate the extent to
which new cases of active CMV infection have been reduced as a result of the
recent success of combination drug therapy among HIV patients. The Company
believes, however, and anecdotal reports confirm, that to the extent that
combination drug therapy, or any other therapy, significantly reduces the viral
load of HIV patients, the number of new patients with active CMV infection has
been and will be proportionately reduced. Consequently, the demand for CMV drugs
may be significantly diminished at the time, if ever, the Company is able to
market Thiovir. See "RISK FACTORS -- Uncertainty of Market Demand for Thiovir."
27
Competition. The segment of the pharmaceutical industry engaged in the
treatment of HIV/AIDS and associated viruses such as CMV is highly competitive
and rapidly changing. If successfully developed and approved as either an CMV or
HIV drug, or for both indications, Thiovir would compete with numerous therapies
now in existence and currently in development.
Regarding CMV, foscarnet is marketed under the name "Foscavir(R)" by Astra
Pharmaceuticals, ganciclovir is marketed under the name "Cytovene(R)" by the
Syntex Division of Hoffman LaRoche and under the name "Vitrasert(tm)" by Chiron
Vision, and cidofovir is marketed under the name "Vistide(R)" by Gilead
Sciences. All four companies possess vastly greater organizations, experience
and resources than the Company. See "RISK FACTORS -- Intense Competition; Risk
of Technological Change." The rights to other drugs known by the Company to be
the subject of testing for FDA approval for treatment of CMV retinitis are held
by Isis Corporation, Gilead Sciences, Bristol Myers-Squibb and Glaxo- Wellcome.
Other drugs that are not known to the Company may be in various stages of
development and testing.
Distributors of HIV/AIDS drugs which have been approved by the FDA include
Glaxo-Wellcome, Agouron Pharmaceuticals, Gilead Sciences, Merck, Abbott
Laboratories, Hoffman LaRoche, Bristol- Myers Squibb and Boehringer-Ingelheim.
These, as well as other companies which can be expected to gain FDA approval for
HIV/AIDS drugs, possess vastly greater organizations, experience and financial
resources than the Company.
The competitive factors which the Company expects to encounter when and if
it obtains government approval for the sale of Thiovir are primarily the
demonstrated efficacy of a product, ease of drug administration, the product's
compatibility with other drugs being administered to HIV/AIDS patients, the
relative degree of a product's adverse side effects, and the cost of using the
drug, which would include associated costs of administration and the cost of
drugs that might be taken to ameliorate adverse side effects.
SALES AND MARKETING
The Company has not yet formulated a specific marketing and sales plan for
Thiovir when and if it obtains government approval for Thiovir. Similarly, the
Company has no marketing or sales personnel. In the United States, the medical
care of a substantial percentage of HIV/AIDS patients is concentrated in a
relatively small number of medical facilities located in urban centers and there
is an extensive flow of information within the medical community that regularly
provides care to HIV/AIDS patients regarding the safety and efficacy of existing
and newly-developed therapies. Moreover, HIV/AIDS patients support groups are
active and themselves constitute a source of information on drug therapies. The
Company intends to provide information to the HIV/AIDS medical community and to
support groups on a continuous basis with respect to its progress, if any, in
further developing Thiovir. The Company does not expect that a large and costly
marketing and advertising program will be necessary to acquaint the marketplace
with Thiovir when and if it obtains FDA approval for its sale and use.
MANUFACTURING
The Company does not have any manufacturing capacity or relationships with
third parties and currently plans to seek to establish a relationship with an
unrelated third party manufacturer for the manufacture of clinical trial
material and, in the event FDA approval is received, the commercial production
of Thiovir. There can be no assurance that the Company will be able to establish
a relationship with a third party manufacturer on commercially acceptable terms
or that a third party manufacturer will be able to manufacture products on a
cost-effective basis in commercial quantities under GMPs mandated by the FDA.
The Company does believe, however, that the relatively simple chemical structure
of Thiovir and the methods of synthesizing Thiovir which have been developed and
licensed to the Company will allow an efficient, reliable and cost-effective
manufacturing process. Nevertheless, the Company's dependence upon third parties
for manufacturing may adversely affect the Company's profit margins and its
ability to develop and commercialize Thiovir on a timely and competitive basis.
Further, there can be no assurance that manufacturing or quality
28
control problems will not arise in connection with the manufacture of Thiovir or
that a third party manufacturer will be able to maintain the necessary
government licenses and approvals to continue manufacturing. Any failure to
establish a relationship with a third party for its manufacturing requirements
on commercially acceptable terms would have a material adverse effect on the
Company. See "RISK FACTORS -- Dependence on Third Parties for Development and
Manufacturing" and "BUSINESS -- Government Regulations."
GOVERNMENT REGULATION
The manufacture and sale of Thiovir are subject to government regulations in
the United States and in certain foreign countries. In the United States, the
Company is subject to the rules and regulations established by the FDA requiring
the presentation of data indicating that the Company's products are safe and
efficacious and are manufactured in accordance with the FDA's GMP regulations.
Safety and effectiveness standards are required in certain other countries. The
Company believes that only a limited number of foreign countries have extensive
regulatory requirements, specifically the countries comprising the European
Union and Japan.
The steps required to be taken before a new prescription drug may be
marketed in the United States include (i) preclinical laboratory and animal
tests, (ii) the submission to the FDA of an IND, which must be evaluated and
found acceptable by the FDA before human clinical trials may commence, (iii)
adequate and well-controlled human clinical trials to establish the safety and
effectiveness of the drug, (iv) the submission of an NDA to the FDA and (v) FDA
approval of the NDA. Prior to obtaining FDA approval of an NDA, the facilities
that will be used to manufacture the drug must undergo a preapproval inspection
to ensure compliance with the FDA's GMP regulations.
Preclinical tests include laboratory evaluation of product chemistry and
animal studies to assess the safety and effectiveness of the product and its
formulation. The results of the preclinical tests are submitted to the FDA as
part of an IND, and unless the FDA objects, the IND will become effective 30
days following its receipt by the FDA. If the FDA has concerns about the
proposed clinical trial, it may delay the trial and require modifications to the
trial protocol prior to permitting the trial to begin. As a result, there can be
no assurance that the FDA will permit a proposed IND to become effective.
Clinical trials involve the administration of the pharmaceutical product to
healthy volunteers or to patients identified as having the condition for which
the pharmaceutical is being tested. The pharmaceutical is administered under the
supervision of a qualified principal investigator. Clinical trials are conducted
in accordance with protocols previously submitted to the FDA as part of the IND
that detail the objectives of the trial, the parameters used to monitor safety
and the efficacy criteria that are being evaluated. Each clinical trial is
conducted under the auspices of an Institutional Review Board ("IRB") at the
institution at which the trial is conducted. There IRB considers, among other
things ethical factors, the safety of the human subjects and the possible
liability risk for the institution.
Clinical trials are typically conducted in three sequential phases that may
overlap. In Phase I, the initial introduction of the pharmaceutical into healthy
human volunteers, the emphasis is on testing for safety (adverse effects),
dosage tolerance, metabolism, distribution, excretion and clinical pharmacology.
Phase II involves trials in a limited patient population to determine the
effectiveness of the pharmaceutical for specific targeted indications, to
determine dosage tolerance and optimal dosage and to identify possible adverse
side effects and safety risks. In serious diseases such as AIDS, patients
suffering from the disease rather than healthy volunteers are used in Phase I
trials. In addition, Phase I trials may be divided between Phase Ia, in which
single doses of the drug are given, and Phase Ib, in which multiple doses are
given. In the latter instance, some efficacy data may be obtained if the
subjects are patients suffering from the disease rather than healthy volunteers,
and these trials are referred to as "Phase Ib/IIa." After a compound has been
shown in Phase II trials to have an acceptable safety profile and probable
effectiveness, Phase III trials are undertaken to evaluate clinical
effectiveness further and to further test for safety within an expanded patient
population at multiple clinical study sites. The FDA reviews both the clinical
trial plans and the results of the trials at each phase and may discontinue the
trials at any time if there are significant safety issues.
The results of the preclinical tests and clinical trials are submitted to
the FDA in the form of an NDA for marketing approval. The testing and approval
process is likely to require substantial time and effort and
29
there can be no assurance that any FDA approval will be granted on a timely
basis or at all. The approval process is affected by a number of factors,
including the severity of the disease, the availability of alternative
treatments and the risks and benefits demonstrated in clinical trials.
Additional animal studies or clinical trials may be requested during the FDA
review process and may delay marketing approval. Upon approval, a drug may be
marketed only for the approved indications in the approved dosage forms. Further
clinical trials would be necessary to gain approval for the use of the product
for any additional indications or dosage forms. The FDA may also require
post-market reporting and may require surveillance programs to monitor the side
effects of the drug, which may result in withdrawal of approval.
Many foreign countries also regulate the clinical testing, manufacturing,
marketing and use of pharmaceutical products. The requirements relating to the
conduct of clinical trials, product approval, manufacturing, marketing, pricing
and reimbursement vary widely from country to country. There can be no assurance
that the Company or any third parties with which the Company may establish
collaborative relationships will be able to attain or maintain compliance with
such requirements.
The FDA has developed several regulatory procedures to accelerate the
clinical testing and approval of drugs intended to treat serious or
life-threatening illnesses under certain circumstances. For example, in 1988,
the FDA issued regulations to expedite the development, evaluation and marketing
of drugs for life-threatening and severely debilitating illnesses, especially
where no alternative therapy exists (the "1988 Regulations"). These procedures
encourage early consultation between the IND sponsors and the FDA in the
preclinical testing and clinical trial phases to determine what evidence will be
necessary for marketing approval and to assist the sponsors in designing
clinical trials. Under this program, the FDA works closely with the IND sponsors
to accelerate and condense Phase II clinical trials, which may, in some cases,
eliminate the need to conduct Phase III trials or limit the scope of Phase III
trials. Under the 1988 Regulations, the FDA may require post-marketing clinical
trials (Phase IV trials) to obtain additional information on the drug's risks,
benefits and optimal use.
In 1992, the FDA issued regulations establishing an accelerated NDA approval
procedure for certain drugs under Subpart H of the agency's NDA approval
regulations ("Subpart H Regulations"). The Subpart H Regulations provide for
accelerated NDA approval for new drugs intended to treat serious or
life-threatening diseases where the drugs provide a meaningful therapeutic
advantage over existing treatment. Under this accelerated approval procedure,
the FDA may approve a drug based on evidence from adequate and well-controlled
studies of the drug's effect on a surrogate endpoint that reasonably suggest
clinical benefits, or on evidence of the drug's effect on a clinical endpoint
other than survival or irreversible morbidity. This approval is conditional on
the favorable completion of trials to establish and define the degree of
clinical benefits to the patient. Such post-marketing clinical trials would
usually be underway when the product obtains this accelerated approval. If,
after approval, a post-marketing clinical study establishes that the drug does
not perform as expected, or if post-marketing restrictions are not adhered to or
are not adequate to ensure the safe use of the drug, or other evidence
demonstrates that the product is not safe and/or effective under its conditions
of use, the FDA may withdraw approval. The Subpart H Regulations can complement
the 1988 Regulations for expediting the development, evaluation and marketing of
drugs. These two procedures for expediting the clinical evaluation and approval
of certain drugs may shorten the drug development process by as much as two to
three years.
The Company believes that Thiovir may be a candidate for accelerated
development and/or approval under the 1988 Regulations and/or the Subpart H
Regulations. There can be no assurance, however, that Thiovir ultimately will be
eligible for development and/or approval under these regulations. In addition,
there can be no assurance that Thiovir will be approved by the FDA for marketing
at all or, if approved for marketing, will be approved for marketing sooner than
would be traditionally expected.
Once the sale of a product is approved, the FDA regulates the manufacturing,
marketing and other activities under the Federal Food, Drug, and Cosmetic Act
and the FDA's implementing regulations. The FDA periodically inspects both
domestic and foreign drug manufacturing facilities to ensure compliance with
applicable GMP regulations and other requirements. In addition, manufacturers in
the United States must register with the FDA and submit a list of every drug in
commercial distribution. Foreign manufacturers are subject only to the drug
listing requirement. The Company does not have or
30
currently intend to develop the facilities to manufacture Thiovir in commercial
quantities, and intends to establish a relationship with a contract manufacturer
for the commercial manufacture of Thiovir. There can be no assurance that the
Company's contract manufacturer will be able to attain or maintain compliance
with GMP regulations. Post-marketing reports are also required to monitor the
product's usage and effects. Product approvals may be withdrawn, or other action
as may be ordered, or sanctions imposed if compliance with regulatory
requirements is not maintained.
The Company expects to seek approval for Thiovir by the European Union
contemporaneously with seeking approval by the FDA. The processes and standards
of the European Union are similar to those of the FDA and are subject to the
same uncertainties regarding the time of completion and expenditure of
resources. The Company has no plans at this time to undertake the approval
process for Thiovir in Japan or any other foreign country. The Company may
decide to market Thiovir, prior to obtaining any FDA approval, in certain
foreign countries that do not require regulatory approval, although the Company
does not now have any plans for doing so.
In addition to the import requirements of foreign countries, a company must
also comply with United States laws governing the export of FDA regulated
products. Pursuant to the FDA Export Reform and Enhancement Act of 1996, a drug
that has not obtained FDA approval may be exported to any country in the world
without FDA authorization if the product both complies with the laws of the
importing country and has obtained valid marketing authorization in one of the
following countries: Australia, Canada, Israel, Japan, New Zealand, Switzerland,
South Africa, the European Union, or a country in the European Union, or a
country in the European Economic Area. The FDA is authorized to add countries to
this list in the future. Among other restrictions, a drug that has not obtained
FDA approval may be exported under the new law only if it is not adulterated,
accords to the specifications of the foreign purchaser, complies with the laws
of the importing country, is labeled for export, is manufactured in substantial
compliance with GMP regulations and is not sold in the United States.
PATENTS
Patent protection for Thiovir is an important part of the Company's business
strategy, and the Company's success depends, in part, on the ability of the
Company and its licensors to obtain patent protection for Thiovir, defend
patents once obtained, use patents to preclude competitors from marketing
Thiovir or substantially equivalent drugs, operate without infringing on the
patents and proprietary rights of third parties and obtain appropriate licenses
to patents or proprietary rights held by third parties if infringement would
otherwise occur. The proprietary rights licensed to the Company include a U.S.
patent relating to a method of synthesizing Thiovir, a U.S. patent for the use
of Thiovir for the treatment of HIV, a pending patent application, and certain
other patent rights.
There can be no assurance that all or any of the Company's patent rights are
enforceable, will not be invalidated, or will have sufficient scope to
effectively prevent others from marketing Thiovir or substantially equivalent
drugs. Furthermore, the commercial marketing of therapeutic drugs is a highly
competitive and litigation-prone field. Even if the Company is successful in
establishing and defending its patent position, the costs and management time
associated with such activities may significantly and adversely affect the
financial condition and business operations of the Company. See "RISK FACTORS --
Uncertainty of Patents; Dependence on Patents, Licenses and Proprietary Rights."
Astra Pharmaceutical ("Astra") owns United States patents on foscarnet and
methods of its use to treat viral infections, which patents are scheduled to
expire in or prior to 2000. Thiovir is at least partially metabolized to
foscarnet in vitro in cells and in dogs and cats. Therefore, the Company
believes that Thiovir may likewise be partially converted to the active
ingredient in foscarnet in human patients. It is unresolved whether metabolic
conversion of a drug into another patented drug constitutes infringement of a
patent protecting the second drug. Based upon review of the limited case law in
this area, the Company believes that its sale of Thiovir should not be held to
infringe the Astra patents on foscarnet for two reasons. First, the oral
delivery of Thiovir would constitute an improved delivery system as compared to
the intravenous delivery of foscarnet in the treatment of a life-threatening
illness.
31
Second, Thiovir is believed to be effective in treating HIV independent of its
possible conversion into the active ingredients in foscarnet. Moreover, even if
the Company's sale of Thiovir were held to constitute infringement of the Astra
patents, although there can be no assurance, the Company believes that the
remedy for infringement available to Astra would likely be limited to requiring
the Company to pay Astra a reasonable royalty on sales of Thiovir, and that
Astra would not succeed in enjoining the Company from selling Thiovir. This
royalty would likely be payable only through the remaining life of the Astra
patents.
The Company is not aware of any United States patent which would be
infringed by the manufacture of Thiovir pursuant to the method of synthesis.
There can be no assurance, however, that the Company is aware of all patents or
patent applications that may materially affect the Company's ability to make,
use or sell Thiovir. United States patent applications are confidential while
pending in the PTO, and patent applications filed in foreign countries are often
first published six months or more after filing. Any conflicts resulting from
third party patent applications and patents could significantly reduce the
coverage of the patents licensed to the Company and limit the ability of the
Company or its licensor to obtain meaningful patent protection. If patents are
issued to other companies that contain competitive or conflicting claims, the
Company may be required to obtain licenses to these patents or to develop or
obtain alternative technology. There can be no assurance that the Company will
be able to obtain any such license on acceptable terms or at all. If such
licenses are not obtained, the Company could be delayed in or prevented from
pursuing the development or commercialization of Thiovir, which would have a
material adverse effect on the Company.
RELATIONSHIP WITH USC
The Company holds an exclusive worldwide license from USC (the "USC License
Agreement") to practice the inventions covered by specified patents related to
TPFA in order to manufacture and sell products for the treatment of viral
infections ("Products"). The Company's exclusive licensing rights are subject
to: (i) nonexclusive rights that may be held by the United States government as
a result of any funding of research related to the inventions, as prescribed by
federal law; and (ii) USC's reserved but non-transferable right to conduct
research relating to the Products. In addition, all sub-licenses granted under
the license must be approved in advance and in writing by USC, but the license
provides that such approval shall not be unreasonably withheld. The Company will
be obligated to pay to USC royalties equal to 1% of any sales of the Products
and 50% of any royalties earned by the Company from any sublicensees. Minimum
annual royalties are payable, starting at $12,500 in 1998 and increasing to
$125,000 in 2001 and each year thereafter.
USC is obligated under the USC License Agreement to file, prosecute and
maintain certain United States patents and, if required by the Company, to file,
prosecute and maintain foreign patents. The Company is obligated to reimburse
USC for the legal expense of patent prosecution, plus a 15% administrative fee.
USC has no obligation to defend any of the patents while the Company has the
right to do so at its own expense (with certain rights to offset a portion of
royalties otherwise owing to USC). The Company has a first right to bring legal
action to enforce the patents, and USC may bring such action if the Company
elects not to exercise its right. The USC License Agreement also extends to the
Company a right-of-first-refusal to obtain an option and license for any
substantial improvements to the subject technology developed by Dr. McKenna on
the same terms and conditions as the USC License Agreement.
In January 1997, the Company entered into a new research agreement with USC
providing for the grant by the Company of $176,000 to fund further research on
Thiovir through September 30, 1997. See "BUSINESS -- Research and Development
Status and Activities."
OTHER PRODUCTS
The Company has no current plans or strategies for developing or acquiring
products other than Thiovir. The Company intends, however, to investigate
potential therapeutic applications of Thiovir other than the treatment of
HIV/AIDS and CMV, some of which have been suggested by in vitro studies. The
Company may explore possibilities of developing or acquiring medical products,
the
32
development and/or marketing of which would be compatible with the activities of
the Company with respect to Thiovir. There can be no assurance that the Company
will be successful in such endeavors.
HEALTH CARE REFORM MEASURES AND THIRD PARTY REIMBURSEMENT
The business and financial condition of pharmaceutical companies will
continue to be affected by the efforts of governments and third party payors to
contain or reduce the cost of health care through various means. A number of
legislative and regulatory proposals aimed at changing the health care system
have been proposed in recent years. In addition, an increasing emphasis on
managed care in the United States has and will continue to increase the pressure
on pharmaceutical pricing. While the Company cannot predict whether legislative
or regulatory proposals will be adopted or the effect such proposals or managed
care efforts may have on its business, the announcement and/or adoption of such
proposals or efforts could have a material adverse effect on the Company. In the
United States and elsewhere, sales of prescription pharmaceuticals are dependent
in part on the availability of reimbursement to the consumer from third party
payors, such as government and private insurance plans that mandate
predetermined discounts from list prices. Third party payors are increasingly
challenging the prices charged for medical products and services. If the Company
succeeds in bringing Thiovir to the market, there can be no assurance that it
will be considered cost effective or that reimbursement to the consumer will be
available or will be sufficient to allow the Company to sell Thiovir on a
competitive and profitable basis. See "RISK FACTORS -- Uncertainty of Health
Care Reform Measures and Third Party Reimbursement."
PERSONNEL
The Company currently has two employees. The Company intends to utilize from
time to time the services of consultants and independent contractors to provide
key functions that might otherwise be provided by Company-employed personnel.
The Company's future success will depend in large part upon its ability to
attract and retain highly qualified employees, consultants and independent
contractors. See "RISK FACTORS -- Dependence on and Need to Hire Personnel."
LEGAL PROCEEDINGS
The Company is not involved in any litigation.
33
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY CONSULTANTS
The executive officers, directors and key consultants of the Company and
their ages, as of April 1, 1997, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Francis E. O'Donnell, Jr., M.D. ........... 47 Chairman of the Board, Chief Executive
Officer, Director and Founder
Nicholas Jon Virca ........................ 50 President and Chief Operating Officer
Samuel P. Sears, Jr. ...................... 53 Treasurer, Secretary and Director
Mary Anthony Gray ......................... 49 Executive Vice-President
Emanuela I. Charlton, Ph.D.(1)(2) ......... 63 Director and Consultant
Thomas Quinn (1)(2) ....................... 47 Director
W. Howard Lewin, M.D. (1)(2) .............. 76 Director
Charles E. McKenna, Ph.D. ................. 52 Consultant
Thomas D. Wolfe ........................... 48 Consultant
</TABLE>
- ------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
Each of the executive officers (other than Mr. Virca) and directors (other
than Dr. Lewin) assumed their responsibilities with the Company in 1996 at the
time of the Company's acquisition of a license of certain rights to Thiovir. Mr.
Virca became the Company's President and Chief Operating Officer in March 1997.
Dr. Lewin became a director in December 1996.
Each director elected by the holders of the Company's Common Stock or
appointed by the Board of Directors to fill a vacancy on the Board shall serve
until the next annual meeting and until his or her successor has been duly
elected or appointed to the Board by the Board and qualified, and is subject to
removal with or without cause by vote of a majority of the outstanding shares of
Common Stock. See "DESCRIPTION OF SECURITIES -- Delaware Law and Certain
Certificate of Incorporation and Bylaw Provisions." Officers are elected by, and
serve at the discretion of, the Board. No director, executive officer, or
significant employee or consultant is related by blood, marriage or adoption to
any other director, executive officer, or significant employee or consultant.
The following is a brief summary of the background of each director,
executive officer and key consultant of the Company:
FRANCIS E. O'DONNELL, JR., M.D., Chairman of the Board, Chief Executive
Officer, Director and Founder. Since 1994, Dr. O'Donnell has been the Medical
Director of the O'Donnell Eye Institute and a Clinical Professor, Department of
Ophthalmology, at the St. Louis University School of Medicine. Dr. O'Donnell
also serves as Chairman of the Board of LaserSight, Inc., a publicly traded
corporation which manufactures medical laser equipment and provides managed
medical care services. Dr. O'Donnell is a graduate of St. Louis University and
Johns Hopkins University School of Medicine and is a practicing ophthalmologist.
NICHOLAS JON VIRCA, President and Chief Operating Officer. Mr. Virca began
his employment with the Company in March 1997. From 1991 to 1997, he served as
Vice President of Operations and Co-Founder of Diametrix Detectors, Inc.
("Diametrix"), a privately held immunosensor company focused on the airborne
vapor detection of narcotics. From 1991 to 1994, Mr. Virca also served as Vice
34
President, Business Operations of IRT Corporation ("IRT"), a publicly traded
company that specialized in x-ray inspection and imaging systems for industrial
and security applications. From 1994 to 1997, Mr. Virca served as Business Unit
Manager, Security Products for Nicolet Imaging Systems, a company that purchased
substantially all of IRT's assets in 1994. Mr. Virca received a B.A. degree in
biology from Youngstown State University. Mr. Virca currently serves as a
director of Diametrix. Mr. Virca's prior experience includes key marketing and
general management positions with Fisher Scientific, Damon Biotech, Promega
Corp., the Ortho Division of Johnson & Johnson and the Ross Division of Abbott
Laboratories.
SAMUEL P. SEARS, JR., Treasurer, Secretary and Director. Since 1994, Mr.
Sears has been employed as the Chief Executive Officer and a director of Star
Tobacco Corporation, a privately-owned manufacturer of tobacco products. From
1993 to 1994, he served as "of Counsel" to the New York law firm of LeBoeuf,
Lamb, Greene & MacRae. Prior to 1993, Mr. Sears was the Managing Partner of the
Boston law firm of Burns & Levinson for over twelve years. He is also a director
of Eye Technology, Inc., a publicly-owned corporation which manufactures
intraocular lenses used in cataract surgery. Mr. Sears is a graduate of Harvard
College and Boston College Law School.
MARY ANTHONY GRAY, Executive Vice President. Since 1991, Ms. Gray has served
as a biomedical technology transfer advisor to the University of Southern
California. Since 1986, she has also been a partner of BioStrategies
International, a technology consulting firm. Ms. Gray's prior experience
includes business development and sales positions with the following companies:
Damon Biotech, Inc., Ortho Diagnostics Division of Johnson & Johnson and the
J.T. Baker Instruments Division of Richardson-Merrill Pharmaceuticals. Ms. Gray
holds B.S. and M.S. degrees from the University of Missouri.
EMANUELA I. CHARLTON, PH.D., Director and Consultant. Since 1994, Dr.
Charlton has served as the Director of Regulatory Affairs of LaserSight
Technologies, Inc., a manufacturer of excimer and solid state lasers for
ophthalmic purposes. In addition, since 1991, Dr. Charlton has served as a
director of its parent company, LaserSight, Inc., a publicly traded corporation.
Since 1985, she has been the President of North American Health Resources, Inc.,
a medical affairs consulting firm which she founded. Dr. Charlton has held
positions, primarily in the fields of medical regulatory affairs and medical
research, with the following companies: High Stoy Technological Corporation,
Baxter-Travenol, Inc., Searle Laboratories, Abbott Laboratories and Pfizer
Laboratories. She holds B.A. and M.S. degrees from New York University and a
Ph.D. degree from The Union Institute Graduate School.
THOMAS QUINN, Director. Since 1995, Mr. Quinn has served as Vice President
of Development of Olsten Kimberly Quality Care, a managed health care company.
From 1992 to 1995, Mr. Quinn was Vice President, Marketing and Sales, of
Integrated Health Services, Inc., a managed health care company. From 1989 to
1992, he served as President of Infu Tech, Inc., a national home infusion
therapy company. Mr. Quinn currently serves as a director of LaserSight, Inc., a
publicly-owned corporation. Mr. Quinn holds a B.S. degree from the University of
Pittsburgh.
W. HOWARD LEWIN, M.D., Director. Since 1960, Dr. Lewin has been the
President and Medical Director of Lewin & Milster Ophthalmology, Inc., a private
medical practice. In addition, since 1975, Dr. Lewin has been employed as a
Clinical Professor of Ophthalmology at the St. Louis University School of
Medicine. Dr. Lewin received a B.A. degree from Central College, Fayette,
Missouri and an M.D. degree from the St. Louis University School of Medicine.
CHARLES E. MCKENNA, PH.D., Consultant. Since 1989, Dr. McKenna has been a
Professor of Chemistry at USC. Dr. McKenna is the inventor of the two patents of
which the Company is the exclusive licensee, and he has directed the research of
TPFA conducted at USC pursuant to research grants formerly provided by PerArdua
Investors, L.P., the partnership from which the Company obtained the licenses
related to Thiovir. Dr. McKenna will serve as consultant to the Company for a
period of time ending three years after the date of the Offering or until June
30, 2000, whichever first occurs. Dr. McKenna received a B.A. degree from
Oakland University and a Ph.D. in Chemistry from the University of California at
San Diego.
35
THOMAS D. WOLFE, Consultant. Since 1993, Mr. Wolfe has been the Chief
Executive Officer of Palmyra Group, Inc., a company providing chemical
engineering process consulting services and related software services. From 1991
to 1993, he was a managing director of HPD, Incorporated, a retailer of
evaporization and crystallization systems. Mr. Wolfe was a founder of PerArdua
Investors, L.P. The Company expects to engage the services of Mr. Wolfe from
time to time to consult on manufacturing, marketing and other matters. Mr. Wolfe
received a B.A. degree in Chemistry from the University of California at San
Diego.
Dr. O'Donnell and Mr. Sears expect to devote approximately 25% of their
business time to the affairs of the Company. Ms. Gray expects to devote
approximately 80% of her business time to the affairs of the Company. Mr. Virca
will be a full-time employee of the Company.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board has established an Audit Committee and a Compensation Committee,
each composed of at least two independent directors. Currently, the Company's
three outside directors, Mr. Quinn, Dr. Lewin and Dr. Charlton, serve on both
committees. The Audit Committee will recommend the annual appointment of
auditors, with whom the Audit Committee will review the scope of audit and
non-audit assignments and related fees, accounting principles used by the
Company in financial reporting, internal auditing procedures and the adequacy of
the internal control procedures of the Company. The Compensation Committee will
establish salaries, bonuses and other compensation for the Company's executive
officers and administer the Company's Incentive Plan and other employee benefit
plans.
EXECUTIVE COMPENSATION AND OTHER INFORMATION
Summary of Cash and Certain Other Compensation. No executive officer of the
Company earned or received in excess of $100,000 for any fiscal year ended on or
prior to November 30, 1996. Dr. O'Donnell has not received any compensation from
the Company in any fiscal year. As a group, the Company's executive officers
(three individuals, only one of whom received or earned any compensation) earned
and received $11,230 during the fiscal year ended November 30, 1996, and no
compensation during any prior period.
Stock Option Grants. On August 20, 1996 the Company issued options to
purchase 10,000 shares of the Company's Common Stock to Mary Anthony Gray
pursuant to the Incentive Plan. The options granted have an exercise price of
$7.50 per share. The options granted to Ms. Gray vest on September 3, 1997 and
expire on September 2, 2001. The options were the only options granted by the
Company in the 1996 fiscal year.
Director Compensation. The Company's directors have not been compensated for
the services they provide to the Company. Upon the completion of the Offering,
the Company plans to issue options to acquire 10,000 shares of Common Stock
pursuant to the Incentive Plan to each of Dr. Charlton, Dr. Lewin and Mr. Quinn
at an exercise price to be determined, but not less than $5.00 per share. The
Company's directors receive reimbursement for any out-of-pocket expenses
incurred in attending meetings of the Company's Board.
Employment Contracts and Termination of Employment and Change-in-Control
Arrangements. On February 12, 1997, the Company entered into an employment
agreement with Nicholas Jon Virca pursuant to which Mr. Virca will serve as the
Company's President and Chief Operating Officer. Mr. Virca's employment
agreement expires on February 29, 2000, unless earlier terminated in accordance
with the terms thereof. Mr. Virca will receive a salary equal to $10,000 per
month. In addition, upon the completion of the Offering, the Company will grant
to Mr. Virca options to purchase 100,000 shares of the Company's Common Stock
pursuant to the Incentive Plan. The options will vest over a two year period and
will have an exercise price to be determined, but in no case less than $5.00 per
share. Upon a change in control of the Company (as defined in the agreement),
the employment agreement provides Mr. Virca the right to receive a lump sum
severance payment upon termination of employment equal to (i) the lesser of six
month's salary or the amount of salary then remaining payable for the duration
of the agreement's term plus (ii) an amount equal to the most recent monthly
payment made by the Company for Mr. Virca's health and life insurance (including
family coverage) multiplied by the lesser of six or the number of months
remaining in the term of the agreement.
36
The Company has entered into an employment agreement with Ms. Gray which
provides for monthly compensation of $7,000. This agreement will terminate on
February 29, 2000, unless either party terminates such agreement in accordance
with the terms thereof. In addition, upon the completion of the Offering, the
Company will grant to Ms. Gray options to purchase 100,000 shares of the
Company's Common Stock pursuant to the Incentive Plan. The options will vest
over a three year period and will have an exercise price to be determined, but
in no case less than $5.00 per share.
As of the date hereof, the Company has not entered into any other employment
contracts or any compensatory plans or arrangements relating to the resignation,
retirement or other termination of any of the Company's executive officers.
Similarly, as of the date of this Prospectus, the Company has not entered into
any other plan or agreement pursuant to which an executive officer of the
Company will receive any funds upon a change in control of the Company or a
change in his or her responsibilities following a change-in-control.
The Company has entered into a consulting agreement (the "McKenna
Agreement") with Charles E. McKenna, Ph.D. which continues until September 30,
1999. The McKenna Agreement provides that Dr. McKenna, who is a Professor of
Chemistry at USC and who is the inventor of the two issued patents to which the
Company holds an exclusive license from USC, will provide consulting services to
the Company upon matters which relate to the field of chemistry and to the
development of Thiovir, subject to his obligations to USC. The Company is
obligated to pay Dr. McKenna a retainer of $5,000 for the period October 1, 1996
through March 31, 1997, $5,000 for the period April 1, 1997 through September
30, 1997, $12,500 for the period October 1, 1997 through September 30, 1998 and
$15,000 for the period October 1, 1998 through September 30, 1999. In addition,
the Company will pay a fee to Dr. McKenna for actual services rendered at the
rate of $1,000 per day or $600 per half day and will reimburse him for
out-of-pocket expenditures incurred in the performance of his services to the
Company. The McKenna Agreement contains (i) certain restrictive covenants
limiting Dr. McKenna's right to engage in the development or commercialization
of drugs that might compete with Thiovir, (ii) confidentiality provisions, and
(iii) provisions relating to the assignment to the Company of certain
inventions, improvements and modifications made by him during the term of the
McKenna Agreement. The rights and obligations of the Company and Dr. McKenna
under the McKenna Agreement are subject to Dr. McKenna's obligations to USC,
which include assignment of all rights to intellectual property he develops in
his area of expertise and restrictions on the amount of time he devotes to
consulting activities. Dr. McKenna is also the principal investigator in the
ongoing research concerning Thiovir being conducted under the Company's
sponsored research agreement with USC. See "BUSINESS -- Relationship with USC"
and "CERTAIN TRANSACTIONS."
INCENTIVE PLAN
On July 5, 1996, the Board adopted and the stockholders of the Company
approved the Company's Incentive Plan. The Incentive Plan provides for the
granting to employees, officers, directors, consultants and certain
non-employees of the Company of (i) options to purchase shares of Common Stock
and (ii) stock appreciation rights ("SARs"). The maximum number of shares of
Common Stock that may be issued pursuant to options and SARs under the Incentive
Plan is 500,000, subject to adjustment in the event of a stock split, stock
dividend or other change in the Common Stock or the capital structure of the
Company. The Incentive Plan will be administered by the Compensation Committee
of the Board of Directors. Subject to the provisions of the Incentive Plan, the
Compensation Committee will be authorized to determine who may participate in
the Incentive Plan, the number and type of awards to each participant, the
schedule on which each award will become exercisable and the terms, conditions
and limitations applicable to each award. The Compensation Committee will have
the exclusive power to interpret the Incentive Plan and to adopt such rules and
regulations as it may deem necessary or appropriate for purposes of
administering the plan. Subject to certain limitations, the Board of Directors
will be authorized to amend, modify or terminate the Incentive Plan to meet any
changes in legal requirements or for any other purpose permitted by law.
Options. Options granted under the Incentive Plan may be either "incentive
stock options" within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended, or non-qualified options. Incentive stock options may be
granted only to employees of the Company (including directors who are
employees), while non-qualified options may be granted to non-employee
directors, employees, consultants, advisors and other independent contractors
providing services to the Company. The per share exercise
37
price of the Common Stock subject to an option granted pursuant to the Incentive
Plan is determined by the Compensation Committee at the time the option is
granted. In the case of incentive stock options, the exercise price must not be
less than 100% of the fair market value of the shares covered thereby at the
time the incentive stock option is granted (but in no event less than par
value). "Fair market value" shall be determined by the Board, or by its
designated committee, in good faith and using any reasonable method. No person
who owns, directly or indirectly, at the time of the granting of an incentive
stock option to him, 10% or more of the total combined voting power of all
classes of Common Stock (a "10% Stockholder"), shall be eligible to receive an
incentive stock option under the Incentive Plan unless the option price is at
least 110% of the fair market value of the Common Stock subject to the option,
determined on the date of grant. Non-qualified options are not subject to this
limitation.
No incentive stock option may be transferred by an optionee other than by
will or the laws of descent and distribution, and during the lifetime of an
optionee, the option will be exercisable only by the optionee. In the event of
termination of employment, other than by death or permanent, total disability,
the optionee will have three months after such termination to exercise the
option to the extent it was exercisable on the date of such termination. Upon
termination of employment of an optionee by reason of death or permanent
disability, an option remains exercisable for one year thereafter to the extent
it was exercisable on the date of such termination. No similar limitation
applies to non-qualified options.
Incentive stock options granted under the Incentive Plan cannot be exercised
more than 10 years from the date of grant, except that incentive stock options
issued to a 10% Stockholder are limited to five year terms. All options granted
under the Incentive Plan may provide for the payment of the exercise price in
cash, by cash equivalent acceptable to the Company, or by delivery to the
Company of shares of Common Stock already owned by the optionee having a fair
market value equal to the exercise price of the options being exercised, or by a
combination of such methods of payment. Therefore, a participant may be able to
tender shares of Common Stock to purchase additional shares of Common Stock and
may, theoretically, exercise all of his or her stock options with no additional
investment other than his or her original shares. Any unexercised options that
expire or terminate become available once again for issuance.
Stock Appreciation Rights. Under the Incentive Plan, the Compensation
Committee also may grant SARs either in tandem with an option or alone. SARs
granted in tandem with a stock option may be granted at the same time as the
stock option or at a later time. A SAR entitles the participant to receive from
the Company an amount payable in cash, in shares of Common Stock or in a
combination of cash and Common Stock equal to the positive difference between
the fair market value of a share of Common Stock on the date of exercise and the
grant price.
Tax Consequences. No income is recognized by a participant at the time an
option is granted. If the option is an incentive stock option, no income will be
recognized upon the participant's exercise of the option. Income is recognized
by a participant when he or she disposes of shares acquired under an incentive
stock option. The exercise of a nonqualified stock option generally is a taxable
event that requires the participant to recognize, as ordinary income, the
difference between the shares' fair market value and the option price. No income
is recognized upon the grant of an SAR. The exercise of an SAR generally is a
taxable event. The participant generally must recognize income equal to any cash
that is paid and the fair market value of Common Stock that is received in
settlement of an SAR. The Company will be entitled to claim a federal income tax
deduction on account of the exercise of a nonqualified option or SAR. The amount
of the deduction is equal to the ordinary income recognized by the participant.
The Company will not be entitled to a federal income tax deduction on account of
the grant or the exercise of an incentive stock option. The Company may claim a
federal income tax deduction on account of certain dispositions of stock issued
upon the exercise of an incentive stock option.
Change in Control Provisions. In the event of a "change in control"
transaction, the Company's Compensation Committee may take any one or more of
the following actions either at the time an option or SAR is granted or at any
time thereafter: (i) provide for the acceleration of any time periods relating
to the exercise of any option or SAR so that such option or SAR may be exercised
in full on or before a date initially fixed by the Compensation Committee; (ii)
provide for the purchase or settlement of any option or SAR by the Company for
an amount of cash equal to the amount which could have been obtained upon the
38
exercise of such option or SAR or realization of such participant's rights had
such option or SAR been currently exercisable or payable; (iii) make such
adjustment to any option or SAR then outstanding as the Compensation Committee
deems appropriate to reflect such "change in control" transaction; or (iv) cause
any option or SAR then outstanding to be assumed, or new rights substituted
therefor, by the acquiring or surviving corporation in such "change in control"
transaction. In relation to the Incentive Plan, a "change in control"
transaction is defined to constitute any of the following: (i) a merger or
consolidation in which holders of outstanding voting stock of the Company would
receive less than 50% of the voting stock of the surviving or resulting
corporation; (ii) adoption by the Company of a plan of liquidation or approval
of the dissolution of the Company; (iii) the sale or transfer of substantially
all of the assets of the Company; or (iv) a tender offer or exchange offer for
shares of Common Stock of the Company other than any such offer made by the
Company or any corporation affiliated with the Company.
LIMITATION ON OFFICERS' AND DIRECTORS' LIABILITIES
Pursuant to the Company's Certificate of Incorporation and the Delaware
General Corporation Law, directors of the Company are not liable to the Company
or its stockholders for monetary damages for breach of fiduciary duty, except
for liability in connection with a breach of the duty of loyalty, for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, for dividend payments or stock repurchases or redemptions in
violation of Delaware law, or for any transaction in which a director has
derived an improper personal benefit.
The Company's Certificate of Incorporation includes provisions to indemnify
its officers and directors and other persons against expenses, judgments, fines
and amounts paid in settlement in connection with threatened, pending or
completed suits or proceedings against such persons by reason of serving or
having served as officers, directors or in other capacities, except in relation
to matters with respect to which such persons shall be determined not to have
acted in good faith, lawfully or in the best interests of the Company. Except in
the event indemnification is ordered by a court, the Company's Certificate of
Incorporation provides for indemnification only to the extent that the Company
determines that such person acted in good faith and in a manner not opposed to
the best interests of the Company. Upon completion of the Offering, the Company
also intends to enter into indemnification agreements with its directors which
will require the Company to provide certain additional indemnification and
contribution to its directors, subject to certain limitations.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that in the opinion of the Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
Currently, there is no pending litigation or proceeding involving a director
or officer of the Company as to which indemnification is being sought, nor is
the Company aware of any threatened litigation that may result in claims for
indemnification by any officer or director.
39
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of the date of this Prospectus and as adjusted
to reflect the sale of the Common Stock offered hereby of (i) each person who is
known by the Company to own of record or beneficially more than five percent
(5%) of the Common Stock, (ii) each director and executive officer of the
Company and (iii) all directors and executive officers of the Company as a
group. Unless otherwise indicated, each of the persons or entities listed below
has sole voting and investment power with respect to all shares shown
beneficially owned by them, except to the extent such power is shared by a
spouse under applicable law.
<TABLE>
<CAPTION>
PERCENT OF SHARES
OUTSTANDING
-----------
NUMBER OF BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES(1) OFFERING(1) OFFERING(1)
- ------------------------------------ --------- ----------- -----------
<S> <C> <C> <C>
Francis E. O'Donnell, Jr., M.D.(2)(3)(4) 280,000 10.6% 7.7%
Nicholas Jon Virca(2) 0 * *
Samuel P. Sears, Jr.(2)(4) 50,000 1.9 1.4
Thomas L. DePetrillo(4)(5) 387,500 14.7 10.6
Mary Anthony Gray(2) 110,000 4.2 3.0
Charles E. McKenna, Ph.D.(6) 320,000 12.1 8.8
Thomas D. Wolfe(7) 328,930 12.4 9.0
W. Howard Lewin M.D.(8) 5,000 * *
Thomas Quinn(9) 5,000 * *
Emanuela I. Charlton, Ph.D.(10) 5,000 * *
MFC Merchant Bank, S.A.(11) 276,800 10.5 7.6
Yuan Lin(12) 200,000 7.6 5.5
All Directors and Officers as a Group (7 persons) 455,000 17.2 12.5
</TABLE>
* Less than 1%.
(1) Pursuant to the SEC rules, shares of Common Stock which an individual or
group has the right to acquire within 60 days pursuant to the exercise of
warrants or options are deemed to be outstanding for the purpose of
computing the percentage ownership of such individual or group, but are not
deemed to be outstanding for the purpose of computing the percentage
ownership of any other person in the table.
(2) The beneficial owner's address is c/o PerArdua Corporation, 10940 Wilshire
Boulevard, Suite 1600, Los Angeles, California 90024.
(3) Of such shares, 205,000 shares are held by Kathleen O'Donnell as trustee of
the Irrevocable Trust #4 f/b/o Francis E. O'Donnell, Jr. In addition, 75,000
shares are held by Kathleen O'Donnell as trustee of the Francis E. O'Donnell
Descendants Trust. Dr. O'Donnell disclaims beneficial ownership of such
shares.
(4) All of such shares were originally issued to the beneficial owner or a prior
owner of such shares when the Company's Missouri predecessor corporation was
formed in 1988 under the name Home Test, Inc. These shares now reflect
ownership in the current Delaware corporation into which the Missouri
corporation was merged.
40
(5) Includes 50,000 shares of Common Stock held by Mr. DePetrillo's spouse. Mr.
DePetrillo disclaims beneficial ownership of such shares. Mr. DePetrillo was
a founder of Home Test, Inc. Mr. DePetrillo advised the Company in its
acquisition of rights to the drug Thiovir, but is no longer active in the
business of the Company. Mr. DePetrillo's address is 65 Peaked Rock Road,
Narragansett, Rhode Island 02882.
(6) Dr. McKenna's address is 16625 Pequeno Place, Pacific Palisades, California
90272.
(7) Mr. Wolfe's address is 16288 Gleko Road, Rough and Ready, California 95975.
(8) Dr. Lewin's address is #8 Ridgecreek, St. Louis, Missouri 63141.
(9) Mr. Quinn's address is Nine Corland Trails, Mahwah, New Jersey 07430.
(10) Dr. Charlton's address is 619 Long Lake Drive, Oviedo, Florida 32765.
(11) The address of MFC Merchant Bank, S.A. is 13, route de Florissant, 1206
Geneva, Switzerland.
(12) Ms. Lin's address is 730 Willow Run Lane, Winter Springs, Florida 32708.
The table above does not contain Outstanding Warrants issued to the
individuals referenced therein, which will become exercisable at a price of
$10.00 per share when the Company receives FDA approval for the sale of Thiovir.
In the event the fair market value of the Common Stock exceeds the exercise
price of an Outstanding Warrant at the time of exercise, the holder may elect to
pay the exercise price by surrendering a portion of the shares of Common Stock
for which the Outstanding Warrant is exercisable determined in accordance with a
formula in lieu of paying the exercise price in cash. These Outstanding Warrants
have been issued as follows:
<TABLE>
<CAPTION>
NAME NUMBER OF OUTSTANDING WARRANTS
---- ------------------------------
<S> <C>
Francis E. O'Donnell, Jr., M.D. 150,000
Thomas L. DePetrillo 200,000
Thomas D. Wolfe 8,930
</TABLE>
41
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In August 1996, the Company issued to three of the then stockholders (one of
whom has no current ownership interest) of the Company for no consideration,
warrants to purchase an aggregate of 500,000 shares of Common Stock exercisable
at a price of $10.00 per share when the Company receives FDA approval for the
sale of Thiovir. The two current holders of these warrants that are stockholders
of the Company are Francis E. O'Donnell, Jr., M.D., who is Chairman of the
Board, Chief Executive Officer, Director and Founder of the Company (warrants to
purchase 150,000 shares of Common Stock); and Thomas L. DePetrillo, who was a
founder of Home Test, Inc., the Company's predecessor corporation, and advised
the Company in its acquisition of rights to the drug Thiovir, but is no longer
active in the business of the Company (warrants to purchase 200,000 shares of
Common Stock). See "MANAGEMENT" and "PRINCIPAL STOCKHOLDERS."
Pursuant to an Option and Asset Purchase Agreement, dated July 8, 1996 (the
"Acquisition Agreement"), the Company acquired certain rights of PerArdua
Investors, L.P., a California limited partnership (the "Limited Partnership").
Prior to such acquisition, the Limited Partnership was unaffiliated with the
Company and had been formed and operated for the purpose of conducting research
and development on Thiovir, primarily through research grants to USC. The
Company acquired an assignment of the Limited Partnership's rights and
obligations under an Option and License Agreement by and between the Limited
Partnership and USC. See "BUSINESS -- Relationship with USC." The Acquisition
Agreement granted to the Company, in consideration of $100,000, an option, which
was exercised, to acquire the rights for $350,000 plus reimbursement for
specified liabilities which totaled $90,000, for a total purchase price of
$440,000. Simultaneously with the closing of the acquisition of the rights
pursuant to the Acquisition Agreement, the Company entered into a Stockholders'
Agreement (the "Stockholders' Agreement") with all of its then stockholders, the
limited partners of the Limited Partnership (the "Limited Partners"), USC,
Charles E. McKenna, Ph.D., Mary Anthony Gray, and Thomas D. Wolfe, the latter of
whom was also a Limited Partner. See "MANAGEMENT" and "PRINCIPAL STOCKHOLDERS."
Under the terms of the Stockholders' Agreement, the Limited Partners were
granted the right to acquire a total of 192,000 shares of Common Stock and
192,000 Outstanding Warrants for total consideration of $192.00; USC was granted
the right to acquire 8,000 shares of Common Stock and 8,000 Outstanding Warrants
for total consideration of $8.00; and Dr. McKenna, Ms. Gray and Mr. Wolfe were
granted the right to acquire 320,000, 110,000 and 320,000 shares of Common
Stock, respectively, for total consideration of $320.00, $110.00, and $320.00,
respectively. All such rights to acquire shares of Common Stock and Outstanding
Warrants were exercised. All persons to whom shares of Common Stock and
Outstanding Warrants were issued upon the exercise of such rights are entitled
to certain registration rights with respect to the Common Stock issued and
issuable upon exercise of the Outstanding Warrants. See "DESCRIPTION OF
SECURITIES" -- Common Stock." Mr. Wolfe received, as a Limited Partner, 8,930
shares of Common Stock and 8,930 Oustanding Warrants in addition to the 320,000
shares of Common Stock he acquired directly from the Company. Dr. McKenna and
Mr. Wolfe are consultants to the Company, and Ms. Gray is an executive officer
of the Company. See "MANAGEMENT" and "PRINCIPAL STOCKHOLDERS."
In January 1997, the Company entered into a Research Agreement with USC
providing for the grant by the Company to USC of $176,000 for continued research
and development of Thiovir. See "BUSINESS -- Relationship with USC." Dr. McKenna
is the principal investigator under the research grant and, as such, it is
expected that he will receive salary and other benefits, estimated at less than
$25,000, funded by the Company's research grant. See "MANAGEMENT" and "PRINCIPAL
STOCKHOLDERS." In addition, the Company has entered into a consulting agreement
with Dr. McKenna. Pursuant to this agreement, Dr. McKenna will provide
consulting services related to the development of Thiovir for a term ending
September 30, 1999. The Company will pay Dr. McKenna a semi-annual retainer and
an hourly fee in consideration of such services. See "MANAGEMENT -- Executive
Compensation and Other Information."
Samuel P. Sears, Jr., a director and executive officer of the Company,
received, in June 1996, 50,000 shares of Common Stock from certain other
stockholders of the Company without paying any monetary consideration therefor
as an inducement for Mr. Sears to become involved with the management of the
Company. See "MANAGEMENT" and "PRINCIPAL STOCKHOLDERS."
42
Each of Emanuela I. Charlton, Ph.D., Thomas Quinn and W. Howard Lewin, M.D.,
directors of the Company, received 5,000 shares of the Company's Common Stock
from certain stockholders of the Company without paying any monetary
consideration therefor as an inducement to join the Company's Board. In
addition, the Board intends to grant to each of Drs. Charlton and Lewin and Mr.
Quinn, as of the date of completion of the Offering, options to acquire 10,000
shares of Common Stock of the Company at an exercise price to be determined, but
in no case less than $5.00 per share, pursuant to the terms of the Company's
Incentive Plan.
The Company believes that all of the transactions noted above were made on
terms no less favorable to the Company than could have been obtained from
unaffiliated third parties.
All future transactions between the Company and its officers, directors,
principal stockholders and their respective affiliates will be approved in
accordance with the Delaware General Corporation Law by a majority of the Board,
including a majority of the independent and disinterested directors of the
Board, and will be on terms no less favorable to the Company than could be
obtained from unaffiliated third parties.
43
DESCRIPTION OF SECURITIES
The following summary description of the Company's capital stock is
qualified in its entirety by reference to the Company's Certificate of
Incorporation.
COMMON STOCK
The Company is authorized to issue up to 25,000,000 shares of Common Stock,
$.01 par value per share. As of the date of this Prospectus, 2,643,440 shares of
Common Stock are issued and outstanding and held by 51 stockholders of record.
Upon the completion of the Offering, 3,643,440 shares of Common Stock will be
outstanding.
The holders of Common Stock are entitled to one vote for each share held of
record on each matter submitted to a vote of stockholders. There is no
cumulative voting for election of directors, with the result that the holders of
more than fifty percent of the shares voting for the election of directors can
elect all of the directors elected by the holders of Common Stock. Subject to
the prior rights of any series of Preferred Stock which may from time to time be
outstanding, if any, holders of Common Stock are entitled to receive ratably
such dividends as may be declared by the Board out of funds legally available
therefor and in the event of liquidation, dissolution, or winding up of the
Company, are entitled to share ratably in all assets remaining after payment of
liabilities and payment of accrued dividends and liquidation preferences on the
Preferred Stock, if any. Holders of Common Stock have no preemptive rights and
have no rights to convert their Common Stock into any other securities. All of
the outstanding shares of Common Stock are, and the shares of Common Stock to be
outstanding upon completion of the Offering will be, validly issued, fully paid
and nonassessable.
Prior to the Offering, the Company's current principal stockholders
beneficially owned approximately 74.7% of the outstanding shares of Common Stock
of the Company. Subsequent to the Offering, the Company's current principal
stockholders will beneficially own 54.2% of the outstanding shares of the Common
Stock of the Company (52.1% if the Underwriters' over-allotment option is
exercised in full). As a result, subject to the voting rights of any series of
Preferred Stock, they will likely be able to control all matters requiring
approval by the stockholders of the Company, including the election of
directors.
Upon the completion of the Offering, holders of approximately 2,343,440
shares of Common Stock (including the shares issuable upon the exercise of the
Outstanding Warrants) will be entitled to certain rights with respect to the
registration of such shares under the Securities Act, subject to certain
limitations. If the Company proposes to register any of its securities under the
Securities Act, either for its own account or for the account of other security
holders exercising registration rights, such holders are entitled to notice of
such registration and are entitled to include shares therein. These rights are
subject to certain conditions and limitations, including, in certain
circumstances, the right of the underwriters of an offering to limit the number
of shares included in such registration or exclude all shares.
The holders of the Representatives' Warrants also have the right for a
period beginning one year after the effective date of this Prospectus and ending
four years thereafter, to include shares of Common Stock issuable upon exercise
of the Representatives' Warrants or the Redeemable Warrants underlying the
Representatives' Warrants (the "Underlying Securities") as part of certain other
registered offerings of securities commenced by the Company. In addition, for a
period beginning one year after the effective date of this Prospectus and ending
four years thereafter, upon written demand of holders representing a majority of
the Representatives' Warrants, the Company has agreed, on one occasion, to
promptly register the Underlying Securities at the Company's expense. Upon
receipt of such a request, the Company has agreed to use its best efforts to
file a registration statement registering the Underlying Securities. Finally,
for a period beginning one year after the effective date of this Prospectus and
ending four years thereafter, upon written demand of any holder(s) of the
Representatives' Warrants, the Company has agreed, on one occasion, to promptly
register the Underlying Securities solely at the expense of such holder(s).
44
REDEEMABLE WARRANTS
The following summary description of certain provisions of the Redeemable
Warrants is believed to reflect all material provisions of the Redeemable
Warrants, but is not necessarily complete and reference is made to the Warrant
Agreement (the "Warrant Agreement") by and between the Company and American
Securities Transfer & Trust, Inc. (the "Transfer Agent"). The Warrant Agreement
has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part for a detailed description thereof.
Each Redeemable Warrant entitles the holder thereof to purchase one share of
Common Stock at an exercise price of $6.50 per share. Unless the Redeemable
Warrants are redeemed as provided below, the Redeemable Warrants may be
exercised at any time on or before , 2002, at which time the Redeemable
Warrants expire.
The Redeemable Warrants are redeemable by the Company at $.20 per Redeemable
Warrant upon 30 days prior written notice, provided that the average closing bid
price of the Common Stock equals or exceeds $9.00 per share for a 20 consecutive
day trading period ending within 10 days prior to the notice of redemption. For
purposes of the Warrant Agreement, "average closing bid price" is defined as the
closing bid price as quoted on the Nasdaq SmallCap Market. The Redeemable
Warrants may not be redeemed unless they are then exercisable and a current
prospectus covering the Redeemable Warrants and the shares of Common Stock
issuable thereunder is then in effect. The Redeemable Warrants will remain
exercisable until the close of business on the fifth business day prior to the
date of redemption. Redemption of the Redeemable Warrants may force the holders
to exercise the Redeemable Warrants and pay the exercise price at a time when it
may be disadvantageous for them to do so or sell the Redeemable Warrants at the
current market price when they might otherwise desire to hold the Redeemable
Warrants.
Upon the exercise of the Redeemable Warrants more than one year after this
Offering and to the extent not inconsistent with the guidelines of the National
Association of Securities Dealers, Inc., and the rules and regulations of the
Commission, the Company has agreed to pay the Representatives a commission equal
to five percent of the exercise price of the Redeemable Warrants. However, no
compensation will be paid to the Representatives in connection with the exercise
of the Redeemable Warrants if (a) the market price of the underlying shares of
Common Stock is lower than the exercise price, (b) the Redeemable Warrants are
exercised in an unsolicited transaction, or (c) the Redeemable Warrants are held
in any discretionary accounts and (d) advance disclosure is made to a Redeemable
Warrant holder. In addition, unless granted an exemption by the Commission from
Regulation M under the Exchange Act, the Representatives will be prohibited from
engaging in any market making activities or solicited brokerage activities with
regard to the Company's securities for a period of one to five days before the
solicitation of the exercise of any Redeemable Warrant or before the exercise of
any Redeemable Warrant based upon a prior solicitation, until the later of the
termination of such solicitation activity or the termination by waiver or
otherwise of any right the Representatives may have to receive a fee for the
exercise of the Redeemable Warrants following such solicitation.
The holders of the Redeemable Warrants will not have any of the rights or
privileges of stockholders of the Company (except to the extent they otherwise
own Common Stock) prior to the exercise of the Redeemable Warrants. The
Redeemable Warrants will be entitled to the benefit of adjustments in the
exercise price and in the number of shares of Common Stock deliverable upon the
exercise thereof upon the occurrence of certain events, including a stock
dividend, stock split or similar reorganization.
In order for a holder to exercise a Redeemable Warrant, there must be a
current registration statement on file with the Commission and various state
securities commissions to register the shares of Common Stock underlying the
Redeemable Warrants for sale to the holder of the Redeemable Warrant. Pursuant
to Section 10(a)(3) of the Securities Act, the information contained in this
Prospectus will be deemed "stale" nine months from the date of this Prospectus.
The Company has agreed, so long as the Redeemable Warrants are outstanding, to
use its best efforts to keep a registration statement effective under the
Securities Act and state securities laws to permit the issuance of the shares of
45
Common Stock upon exercise or exchange of the Redeemable Warrants. Nevertheless,
although the Company intends to do so, no assurance can be given that the
registration statement will be kept current, the failure of which may result in
the Redeemable Warrants not being exercisable or exchangeable and therefore
worthless.
REPRESENTATIVES' WARRANTS
In connection with this Offering, the Company has agreed to sell to the
Representatives, at a price of $.001 per warrant, warrants to purchase from the
Company 100,000 shares of Common Stock and 100,000 Redeemable Warrants (the
"Representatives' Warrants"). The Representatives' Warrants are exercisable at a
price of $8.00 per share of Common Stock and $.16 per Redeemable Warrant (160%
of the respective initial public offering price of the Securities) for a period
of four years commencing one year from the effective date of this Prospectus.
The shares of Common Stock and the Redeemable Warrants issuable upon exercise of
the Representatives' Warrants are identical to those offered hereby except for
the exercise prices and that the Redeemable Warrants contained therein cannot be
redeemed.
The Company has agreed to register, at its expense, under the Securities
Act, the Underlying Securities at the request of a majority in interest of the
holders thereof. Such request may be made at any time during a period beginning
one year after the effective date of this Prospectus and ending four years
thereafter. In addition, for a period beginning one year after the effective
date of this Prospectus and ending four years thereafter, upon written demand of
any holder(s) of the Representatives' Warrants, the Company has agreed, on one
occasion, to promptly register the Underlying Securities for purposes of a
public offering, solely at the expense of such holder(s). The Company also
granted the Representatives "piggyback" registration rights concerning the
Representatives' Warrants and the Underlying Securities which may be exercised
at any time during a period beginning one year after the effective date of this
Prospectus and ending four years thereafter.
For the term of the Representatives' Warrants, the holder thereof has the
opportunity to profit from a rise in the market price of the Company's
securities which may result in a dilution of the interest of the stockholders.
The Company may find it more difficult to raise additional equity capital if it
should be needed for the business of the Company while the Representatives'
Warrants are outstanding. At any time when the holders thereof might be expected
to exercise it, the Company would probably be able to obtain additional equity
capital on terms more favorable than those provided by the Representatives'
Warrants. See "RISK FACTORS -- Representatives' Warrants and Ongoing
Relationship with Schneider."
PREFERRED STOCK
The Company is authorized to issue up to 1,000,000 shares of Preferred
Stock, $.01 par value per share, none of which are issued and outstanding as of
the date of this Prospectus. The Preferred Stock may be issued in one or more
series, the terms of which may be determined at the time of issuance by the
Board, without further action by the stockholders, and may include voting rights
(including the right to vote as a series on particular matters), preferences as
to dividends and liquidation, conversion, redemption rights and sinking fund
provisions. The Company has no present plans for the issuance of any shares of
Preferred Stock. The issuance of any such Preferred Stock could reduce the
rights, including voting rights, of the holders of Common Stock, and, therefore,
reduce the value of the Common Stock. In particular, specific rights granted to
future holders of Preferred Stock could be used to restrict the Company's
ability to merge with or sell its assets to a third party, thereby preserving
control of the Company's existing management. See "RISK FACTORS -- Anti-takeover
Effects of Certificate of Incorporation, Bylaws and Delaware Law."
DELAWARE LAW AND CERTAIN CERTIFICATE OF INCORPORATION AND BYLAW PROVISIONS
Certain provisions of the Delaware General Corporation Law, the Company's
Certificate of Incorporation, Bylaws and the Incentive Plan, may be deemed to
have an anti-takeover effect and may delay, defer or prevent a hostile tender
offer or takeover attempt that a stockholder might consider in his or her best
interest, including those attempts that might result in a premium over the
market price for the shares held by stockholders.
46
DELAWARE ANTI-TAKEOVER LAW
Section 203 of the Delaware General Corporation Law ("Section 203") applies
to a Delaware corporation with a class of voting stock listed on a national
securities exchange, authorized for quotation on an interdealer quotation system
or held of record by 2,000 or more persons. In general, Section 203 prevents an
"interested stockholder" (defined generally as any person owning, or who is an
affiliate or associate of the corporation and has owned in the preceding three
years, 15 percent or more of a corporation's outstanding voting stock and
affiliates and associates of such person) from engaging in a "business
transaction" (as defined therein) with a Delaware corporation for three years
following the date such person became an interested stockholder unless (1)
before such person became an interested stockholder, the board of directors of
the corporation approved either the business combination or the transaction that
resulted in the stockholder becoming an interested stockholder; (2) upon
consummation of the transaction which resulted in the interested stockholder
becoming an interested stockholder, the interested stockholder owned at least 85
percent of the voting stock of the corporation outstanding at the time the
transaction commenced (excluding stock held by directors who are also officers
of the corporation and by employee stock plans that do not provide employees
with the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer); or (3) on or subsequent to
the date such person became an interested stockholder, the business combination
is approved by the board of directors of the corporation and authorized at a
meeting of stockholders by the affirmative vote of the holders of two-thirds of
the outstanding voting stock of the corporation not owned by the interested
stockholder. Under Section 203, the restrictions described above do not apply to
certain business combinations proposed by an interested stockholder following
the announcement or notification of one of certain extraordinary transactions
involving the corporation and a person who had not been an interested
stockholder during the previous three years or who became an interested
stockholder with the approval of a majority of the corporation's directors.
STOCKHOLDER ACTION BY WRITTEN CONSENT
The Certificate of Incorporation provides that no action required or
permitted to be taken at an annual or special meeting of the stockholders of the
Company may be taken without a meeting.
ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTOR
NOMINATIONS
The Company's Bylaws provide that stockholders seeking to bring business
before an annual meeting of stockholders, or to nominate candidates for election
as directors at an annual meeting of stockholders (an "Annual Meeting") or a
special meeting of stockholders called for the purpose of electing directors (an
"Election Special Meeting"), must provide timely notice thereof in writing and
be present at such meeting, either in person or by representative. For the first
Annual Meeting following the Offering, a stockholder's notice shall be timely if
delivered to, or mailed to and received by, the Company at its principal
executive office not later than the close of business on the later of (A) the
75th day prior to the scheduled date of such Annual Meeting or (B) the 15th day
following the day on which public announcement of the date of such of such
Annual Meeting is first made by the Company. For all subsequent Annual Meetings,
a stockholder's notice shall be timely if delivered to, or mailed to and
received by, the Company at its principal executive office not less than 75 days
nor more than 120 days prior to the anniversary date of the immediately
preceding Annual Meeting (the "Anniversary Date"); provided, however, that in
the event the Annual Meeting is scheduled to be held on a date more than 30 days
before the Anniversary Date or more than 60 days after the Anniversary Date, a
stockholder's notice shall be timely if delivered to, or mailed to and received
by, the Company at its principal executive office not later than the close of
business on the later of (A) the 75th day prior to the scheduled date of such
Annual Meeting or (B) the 15th day following the day on which public
announcement of the date of such Annual Meeting is first made by the Company.
For an Election Special Meeting, a stockholders' notice shall be timely if
delivered to, or mailed to and received by, the Company at its principal
executive office not later than the close of business on the 15th day following
the day on which a public announcement of the date of the Election Special
Meeting is first made by the Company. These provisions may preclude some
stockholders from bringing matters before the stockholders at an Annual Meeting
or from making nominations for directors at an Annual Meeting.
47
AMENDMENTS TO CERTIFICATE OF INCORPORATION AND THE BYLAWS
The Company's Certificate of Incorporation and Bylaws provide that subject
to the rights of the holders of Preferred Stock, the majority of all directors
or the vote of holders of two-thirds of the outstanding stock entitled to vote
is required to alter, amend or repeal the Bylaws; provided, however, if the
Board has previously recommended the action to be taken to the Company's
stockholders, the affirmative vote of a majority of the stockholders may amend
or repeal the Company's Bylaws. The Company's Certificate of Incorporation also
provides that, subject to the rights of the holders of Preferred Stock, the vote
of holders of two-thirds of the outstanding stock entitled to vote is required
to alter, amend, or repeal certain provisions of the Certificate of
Incorporation.
TRANSFER AGENT AND REGISTRAR
American Securities Transfer & Trust, Inc. will serve as the Company's
transfer agent and registrar.
48
UNDERWRITING
The underwriters named below (the "Underwriters"), for whom Schneider
Securities, Inc. and Lew Lieberbaum & Co., Inc. are acting as
co-representatives, have severally agreed, subject to the terms and conditions
of the Underwriting Agreement (the form of which has been filed as an exhibit to
the Registration Statement), to purchase from the Company the respective numbers
of shares of Common Stock and Redeemable Warrants set forth opposite their names
in the table below. The Underwriting Agreement provides that the obligations of
the Underwriters are subject to certain conditions precedent and that the
Underwriters shall be obligated to purchase all of the shares of Common Stock
and Redeemable Warrants, if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF SHARES NUMBER OF
NAME OF COMMON STOCK REDEEMABLE WARRANTS
---- --------------- -------------------
<S> <C> <C>
Schneider Securities, Inc.
Lew Lieberbaum & Co., Inc.
--------- -----------
TOTAL 1,000,000 1,000,000
</TABLE>
Through the Representatives, the several Underwriters have advised the
Company that they propose to offer the shares of Common Stock and the Redeemable
Warrants to the public at the initial public offering prices set forth on the
cover of this Prospectus. The Representatives have advised the Company that they
may allow to certain dealers concessions of not in excess of $.25 per share of
Common Stock and $.005 per Redeemable Warrant, of which a sum not in excess of
$.13 per share of Common Stock and $.0025 per Redeemable Warrant may in turn be
reallowed by such dealers to other dealers. After the issuance of the shares of
Common Stock and Redeemable Warrants, the public offering prices, the
concessions and the reallowances may be changed. The Representatives have
further advised the Company that they do not expect sales to discretionary
accounts to exceed five percent of the total number of Securities offered
hereby.
The Company has agreed to pay to the Representatives a non-accountable
expense allowance equal to three percent of the total proceeds of the Offering,
of which $50,000 has already been paid.
The Company has granted an option to the Underwriters, exercisable during
the 45-day period following the effective date of the Underwriting Agreement, to
purchase up to 150,000 shares of Common Stock and/or 150,000 Redeemable Warrants
at the offering price less underwriting discounts and the non-accountable
expense allowance. The Underwriters may exercise such option only to satisfy
over-allotments in the sale of the shares of Common Stock and Redeemable
Warrants.
Upon the exercise of the Redeemable Warrants more than one year after the
Offering and to the extent not inconsistent with the guidelines of the National
Association of Securities Dealers, Inc., and the rules and regulations of the
Commission, the Company has agreed to pay the Representatives a commission equal
to five percent of the exercise price of the Redeemable Warrants. However, no
compensation will be paid to the Representatives in connection with the exercise
of the Redeemable Warrants if (a) the market price of the underlying shares of
Common Stock is lower than the exercise price, (b) the Redeemable Warrants are
exercised in an unsolicited transaction, or (c) the Redeemable Warrants are held
in any discretionary accounts. In addition, unless granted an exemption by the
Commission from Regulation M promulgated under the Exchange Act, the
Representatives will be prohibited from engaging in any market making activities
or solicited brokerage activities with regard to the Company's securities for a
period of one or five days before the solicitation of the exercise of any
Redeemable Warrant or before the exercise of any Redeemable Warrant based upon a
prior solicitation, until the later of the termination of such solicitation
activity or the termination by waiver or otherwise of any right the
Representatives or any other soliciting broker-dealer may have to receive a fee
for the exercise of the Redeemable Warrants following such solicitation.
In connection with the Offering, the Company has agreed to sell to the
Representatives, for nominal consideration, the Representatives' Warrants, which
confer the right to purchase up to 100,000 shares of Common Stock and up to
100,000 Redeemable Warrants. The Representatives' Warrants are initially
49
exercisable at the price (the "Exercise Price") of $8.00 per share of Common
Stock and $.16 per Redeemable Warrant (160% of the respective initial public
offering prices) for a period of four years commencing one year from the
effective date of this Prospectus. The shares of Common Stock and Redeemable
Warrants issuable upon exercise of the Representatives' Warrants are identical
to those offered hereby. The Representatives' Warrants contain provisions
providing for adjustment of the Exercise Price and the number and type of
securities issuable upon the exercise thereof upon the occurrence of certain
events. The Representatives' Warrants grant to the holders thereof certain
demand and "piggyback" rights of registration of the securities issuable upon
the exercise thereof upon the occurrence of certain events beginning one year
after the date of this Prospectus.
The Company has agreed to enter into a three-year consulting agreement with
Schneider, pursuant to which Schneider will act as a financial consultant to the
Company, commencing upon the closing date of the Offering. Schneider will make
available qualified personnel for this purpose. The consulting fee of $3,000 per
month for a period of 36 months is payable in full at the closing of the
Offering.
Certain principal stockholders and the Company have agreed that, for a
period of 12 months from the date of this Prospectus, they will not sell any
securities (except for shares of Common Stock issued pursuant to exercise of
options which may be granted under the Incentive Plan and for shares issued
pursuant to the exercise of the Redeemable Warrants) without the
Representatives' prior written consent, which shall not be unreasonably
withheld.
The Underwriting Agreement provides for reciprocal indemnification between
the Company and the Underwriters against certain liabilities in connection with
the Registration Statement, including liabilities under the Securities Act.
The foregoing summary of certain provisions of the Underwriting Agreement
summarizes all of the material provisions of the Underwriting Agreement, but
does not purport to be a complete statement of all of its terms and conditions.
A copy of the Underwriting Agreement is on file with the Commission as an
exhibit to the Registration Statement of which this Prospectus is a part.
Prior to the Offering, there has been no public market for the Securities.
The initial public offering prices of the shares of Common Stock and Redeemable
Warrants will be determined by negotiations between the Company and the
Representatives and are not necessarily related to the Company's assets,
earnings, or book value or any other established criteria of value. Factors
considered in determining the initial public offering price of the shares of
Common Stock and Redeemable Warrants included estimates of business potential,
financial condition, future prospects, gross proceeds to be raised, percentage
of stock owned by officers and directors on the date hereof, the type of
business in which the Company engages, and an assessment of the Company's
management. The foregoing factors were evaluated in light of the existing state
of the securities market.
50
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 3,643,440 shares of
Common Stock outstanding (3,793,440 shares, if the Underwriters' over-allotment
option is exercised in full). Of these shares, the 1,000,000 shares offered
hereby will be freely tradable without further registration under the Securities
Act.
Up to 200,000 additional shares of Common Stock may be purchased by the
Representatives after the first anniversary of this Prospectus through the
exercise of the Representatives' Warrants and the Redeemable Warrants underlying
the Representatives' Warrants. Any and all shares of Common Stock purchased upon
exercise of the Representatives' Warrants may be freely tradable, provided that
the Company satisfies certain securities registration and qualification
requirements in accordance with the terms of the Representatives' Warrants. See
"UNDERWRITING."
All of the presently outstanding 2,643,440 shares of Common Stock are
"restricted securities" within the meaning of Rule 144 of the Securities Act and
will be eligible for sale in the public market in reliance upon, and in
accordance with, the provisions of Rule 144.
In general, Under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including a person who may be deemed to be an
"affiliate" of the Company as that term is defined under the Securities Act,
will be entitled to sell within any three-month period a number of shares
beneficially owned for at least two years that does not exceed the greater of
(i) 1% of the then outstanding shares of Common Stock, or (ii) the average
weekly trading volume in the Common Stock during the four calendar weeks
preceding such sale. Sales under Rule 144 are also subject to certain
requirements as to the manner of sale, notice, and the availability of current
public information about the Company. However, a person who is not deemed to
have been an affiliate of the Company during the 90 days preceding a sale by
such person, and who has beneficially owned the shares of Common Stock for at
least three years, may sell such shares without regard to the volume, manner of
sale, or notice requirements of Rule 144.
Prior to this Offering, there has been no public market for the Company's
Securities. Following this Offering, the Company cannot predict the effect, if
any, that sales of Common Stock pursuant to Rule 144 or otherwise, or the
availability of such shares for sale, will have on the market price prevailing
from time to time. Nevertheless, sales by the current stockholders of
substantial amounts of Common Stock in the public market could adversely affect
prevailing market prices for the Common Stock. In addition, the availability for
sale of a substantial amount of Common Stock acquired through the exercise of
the Redeemable Warrants or the Representatives' Warrants could adversely affect
prevailing market prices for the Common Stock. The Company's officers, directors
and certain holders of 5% of the outstanding shares of Common Stock have agreed
not to sell the shares beneficially owned by such persons during a 12 or 13
month period following the date of this Prospectus (except for shares of Common
Stock that are subject to the Underwriters over-allotment option) without the
Representatives' consent. In addition, the Company has agreed that it will not
issue any shares of Common Stock during a 13 month period following the date of
this Prospectus without the Representatives' written consent.
51
LEGAL MATTERS
The validity of shares of Common Stock offered hereby will be passed upon
for the Company by LeClair Ryan, A Professional Corporation, Richmond, Virginia,
and certain matters for the Underwriters by William M. Prifti, Esquire,
Lynnfield, Massachusetts.
EXPERTS
The financial statements of the Company as of November 30, 1996 appearing in
this Prospectus and Registration Statement have been audited by McGladrey &
Pullen, LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein and in the Registration Statement and have been
included herein in reliance upon such report given upon the authority of such
firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
SB-2 (as amended from time to time and together with all exhibits and schedules
thereto, the "Registration Statement") under the Securities Act with respect to
the Common Stock and the Redeemable Warrants to be sold in the Offering. This
Prospectus constitutes a part of the Registration Statement and does not contain
all the information set forth therein, certain portions of which have been
omitted as permitted by the rules and regulations of the Commission. Statements
contained in this Prospectus as to the content of any contract or other document
are not necessarily complete, and in each instance, reference is made to the
copy of such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference.
For further information regarding the Company, the Common Stock and the
Redeemable Warrants to be sold in the Offering, reference is hereby made to the
Registration Statement. A copy of the Registration Statement, including the
exhibits and schedules thereto, may be inspected by anyone without charge at the
Public Reference Section of the Commission at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549 and at the following Regional Offices
of the Commission: New York Regional Office, 7 World Trade Center, 13th Floor,
New York, New York 10048; and Chicago Regional Office, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of the Registration Statement and
the exhibits and schedules thereto can be obtained from the Public Reference
Section of the Commission upon payment of prescribed fees. In addition the
Commission maintains a Web site that contains reports, proxy and information
statements, and other information regarding issuers that file electronically
with the Commission. Such information can be accessed free of charge (other than
costs associated with acquiring access to the Internet) at the Commission's Web
site (http://www.sec.gov).
Prior to filing the Registration Statement of which this Prospectus is a
part, the Company was not subject to the reporting requirements of Section 13 or
15(d) of the Securities Exchange Act. Upon effectiveness of the Registration
Statement, the Company will become subject to the informational and periodic
reporting requirements of the Exchange Act, and in accordance therewith, will
file periodic reports, proxy statements and other information with the
Commission. Such periodic reports, proxy statements and other information will
be available for inspection and copying at the public reference facilities and
other regional officers referred to above. The Company intends to register the
Securities offered by the Registration Statement under the Exchange Act
simultaneously with the effectiveness of the Registration Statement and to
furnish its stockholders with annual reports containing audited financial
statements and quarterly reports for the first three quarters of each fiscal
year containing unaudited interim financial information.
The shares of Common Stock and the Redeemable Warrants registered in
connection with the Offering will be listed on the Nasdaq SmallCap Market.
Reports and other information required to be filed with such market may be
inspected at the offices of the Nasdaq SmallCap Market at 1735 K Street, N.W.,
Washington, D.C. 20006.
52
PERARDUA CORPORATION
(A DEVELOPMENT STAGE COMPANY)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditor's Report ...................................... F-2
Financial Statements:
Balance Sheet .................................................. F-3
Statement of Activities ........................................ F-4
Statement of Stockholders' Equity .............................. F-5
Statement of Cash Flows ........................................ F-6
Notes to Financial Statements .................................. F-7
</TABLE>
F-1
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
PERARDUA CORPORATION
Petersburg, Virginia
We have audited the accompanying balance sheet of PerArdua Corporation (a
development stage company) as of November 30, 1996, and the related statements
of activities, stockholders equity, and cash flows for the period from July 5,
1996, date of inception, to November 30, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit 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 audit provides 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 PerArdua Corporation as of
November 30, 1996, and the results of its activities and its cash flows for the
period from July 5, 1996, date of inception, to November 30, 1996 in conformity
with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered losses from its development stage
activities; the Company's operations will consist primarily of research and
development activities over the next several years; and the Company does not
expect operating profits or significant cash flows from operating activities
during that period. This raises substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
MCGLADREY & PULLEN, LLP
Richmond, Virginia
January 24, 1997, except
for Note 6 as to which
the date is April 9, 1997
F-2
PERARDUA CORPORATION
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
<TABLE>
<CAPTION>
NOVEMBER 30, FEBRUARY 28,
1996 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 495,421 $ 213,029
Prepaid expenses 106,459
Deferred offering costs 29,718 171,106
----------- -----------
Total current assets 525,139 490,594
Equipment 5,875
Organization costs, net of amortization 6,866 6,156
----------- -----------
$ 532,005 $ 502,625
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 20,036 $ 57,231
Accrued expenses 1,482 2,001
----------- -----------
Total current liabilities 21,518 59,232
----------- -----------
Stockholders' Equity:
Preferred Stock, par value $.01 per share, 1,000,000 shares
authorized, none issued
Common Stock, par value $.01 per share, 25,000,000
authorized 2,593,440 issued and outstanding at
November 30, 1996 (2,643,440 at February 28, 1997) 25,934 26,434
Additional paid-in capital 2,609,739 2,644,743
Deficit accumulated during the development stage (2,090,690) (2,227,784)
Subscription receivable (34,496)
----------- -----------
Total stockholders' equity 510,487 443,393
----------- -----------
$ 532,005 $ 502,625
=========== ===========
</TABLE>
See Notes to Financial Statements.
F-3
PERARDUA CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF ACTIVITIES
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
JULY 5, 1996, DATE THREE MONTHS JULY 5, 1996, DATE
OF INCEPTION, TO ENDED OF INCEPTION, TO
NOVEMBER 30, 1996 FEBRUARY 28, 1997 FEBRUARY 28, 1997
----------------- ----------------- -----------------
(UNAUDITED)
<S> <C> <C> <C>
Revenue:
Interest income $ 1,858 $ 2,475 $ 4,333
------------ ---------- -----------
Expense:
Research and development 2,058,980 73,249 2,132,229
General and administrative 33,568 66,320 99,888
------------ ---------- -----------
2,092,548 139,569 2,232,117
------------ ---------- -----------
Net loss $ (2,090,690) $ (137,094) $(2,227,784)
============ ========== ===========
Net loss per common share $ (.81) $ (0.05) $ (0.86)
============ ========== ===========
Weighted average common shares 2,593,440 2,593,996 2,593,668
============ ========== ===========
</TABLE>
See Notes to Financial Statements.
F-4
PERARDUA CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(DEFICIT)
ACCUMULATED
COMMON STOCK ADDITIONAL DURING THE STOCK
------------ PAID-IN DEVELOPMENT SUBSCRIPTION
SHARES AMOUNT CAPITAL STAGE RECEIVABLE TOTAL
------ ------ ------- ----- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
Stock issued at inception
retroactively restated to
reflect 41 2/3 to 1 stock
split declared on July 5,
1996 1,000,000 $ 10,000 $ 90,200 $ $ $ 100,200
Issuance (valued at $1.60
per share) for cash and
acquisition of technology 950,000 9,500 1,510,500 1,520,000
Issuance (at $1.60 per share)
for cash, net of issuance
costs of $48,527 643,440 6,434 1,009,039 (34,496) 980,977
Net loss (2,090,690) (2,090,690)
--------- ------- ---------- ----------- --------- -----------
Balance, November 30, 1996 2,593,440 $25,934 $2,609,739 $(2,090,690) $ (34,496) $ 510,487
(Unaudited)
Issuance (at $1.60 per
share) for cash, net
of costs of $10,000 50,000 500 35,004 34,496 70,000
Net loss (137,094) (137,094)
--------- ------- ---------- ----------- --------- ----------
Balance, February 28, 1997 2,643,440 $26,434 $2,644,743 $(2,227,784) $ 0 $ 443,393
========= ======= ========== =========== ========= ==========
</TABLE>
See Notes to Financial Statements.
F-5
PERARDUA CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
JULY 5, 1996, DATE THREE MONTHS JULY 5, 1996, DATE
OF INCEPTION, TO ENDED OF INCEPTION, TO
NOVEMBER 30, 1996 FEBRUARY 28, 1997 FEBRUARY 28, 1997
----------------- ----------------- -----------------
(UNAUDITED)
<S> <C> <C> <C>
Development stage activities:
Net loss $(2,090,690) $(137,094) $(2,227,784)
Adjustments to reconcile net loss to net cash used in
development stage activities:
Amortization 237 710 947
Charges to expense for value of stock issued for
technology 1,519,050 1,519,050
Change in operating assets and liabilities:
Increase in prepaid expenses (106,459) (106,459)
Increase (decrease) in accounts payable and
accrued expenses 21,518 (19,517) 2,001
Net cash used in development stage activities (549,885) (262,360) (812,245)
----------- --------- -----------
Investing activities:
Equipment purchases (5,875) (5,875)
Organization costs (7,103) (7,103)
----------- --------- -----------
Net cash used in investing activities (7,103) (5,875) (12,978)
----------- --------- -----------
Financing activities:
Proceeds from issuance of common stock 1,130,654 80,000 1,210,654
Offering costs (78,245) (94,157) (172,402)
----------- --------- -----------
Net cash provided by financing activities 1,052,409 (14,157) 1,038,250
----------- --------- -----------
Net increase (decrease) in cash 495,421 (282,392) 213,029
Cash, beginning of period 495,421
----------- --------- -----------
Cash, end of period $ 495,421 $ 213,029 $ 213,029
=========== ========= ==========
</TABLE>
See Notes to Financial Statements.
F-6
PERARDUA CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business: PerArdua Corporation (the Company) was incorporated in
1988. The Company was a "shell" corporation, i.e. without assets or liabilities,
until July 1996, when the Company acquired from PerArdua Investors, L.P. (the
Limited Partnership) a license to certain patent rights to a drug called
"Thiovir". The Company's operations will focus on the development and United
States Food and Drug Administration (FDA) approval of Thiovir for treatment of
HIV/AIDS patients and patients showing active infection of the opportunistic
virus cytomegalovirus (CMV) and, ultimately, commercial sale of the product.
The Company is in the development stage. Its major activities through
November 30, 1996 have been limited to acquiring a licensing agreement and
conducting research and development related to its proposed product and to
obtaining equity capital. These activities have not generated any recurring
revenues; accordingly, the accompanying financial statements include the
disclosures required by Statement of Financial Accounting Standard No. 7,
"Accounting and Reporting by Development Stage Enterprises".
Accounting Estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that effect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents: Cash and cash equivalents includes all cash
balances and highly liquid investments with a purchased maturity of three months
or less. The Company places its temporary cash investments with high credit
quality financial institutions. At November 30, 1996, the Company had cash
balances in excess of insured limits.
Research and Development: Research and development costs are expensed
as incurred.
Income Taxes: The Company accounts for income taxes in accordance with the
provisions of Statement of Financial Accounting Standard No. 109, "Accounting
for Income Taxes," which utilizes an asset and liability approach to financial
accounting and reporting for income taxes. Deferred tax assets are recognized
for deductible temporary differences and operating loss and tax credit carry
forwards; deferred tax liabilities are recognized for taxable temporary
differences. Temporary differences are the differences between reported amounts
of assets and liabilities and their tax bases. Deferred income tax assets and
liabilities that will result in taxable or deductible amounts in the future are
based on enacted laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized. The income tax provision or credit is the tax payable or
refundable for the period plus or minus the change during the period in deferred
tax assets and liabilities.
Net Loss Per Common Share: Net loss per common share is computed based upon
the weighted average number of common shares outstanding during the year. As
further explained in Note 3, the Company is in the process of preparing its
initial public offering (IPO) of common stock and warrants. In accordance with
Securities and Exchange Commission Staff Accounting Bulletin Topic 4D, the
weighted average number of common shares outstanding includes for the entire
year, all common shares issued below the anticipated IPO price per share.
Deferred Offering Costs: Costs incurred in connection with the proposed IPO
have been deferred as of November 30, 1996. If the IPO is completed, the
deferred offering costs will be deducted from the proceeds and charged against
additional paid-in capital. If the IPO is not completed, such costs will be
charged to operations.
F-7
PERARDUA CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - (Continued)
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES --
(CONTINUED)
Interim Financial Information: The balance sheet as of February 28, 1997 and
the related statements of activities, stockholders' equity, and cash flows for
the three months then ended and the cumulative amounts from inception to
February 28, 1997 have been prepared by the Company, without audit. In the
opinion of management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position at February 28,
1997 and the results of activities and cash flows for the interim periods
presented have been made. The statement of activities for the three months ended
February 28, 1997 is not necessarily indicative of the results to be expected
for the full year.
NOTE 2. GOING CONCERN CONSIDERATIONS AND BASIS OF PRESENTATION
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles which contemplate the continuation of
the Company as a going concern. However, during the period from July 5, 1996,
date of inception, to November 30, 1996, the Company incurred a loss of
$2,090,690. Such loss was funded through proceeds received from issuance of
common stock. Management believes that the Company's operations will consist
primarily of research and development activities over the next several years,
and therefore, it does not expect the Company to generate operating profits or
significant cash flows from operating activities during that period. To obtain
the additional funds it needs to continue its research activities at planned
levels during the fiscal year ending November 30, 1997, management believes that
the Company will need substantial funds from debt obligations or equity
financing, such as its proposed IPO. Management cannot provide any assurances
that the Company will be able to obtain such financing. These conditions raise
substantial doubts about the Company's ability to continue as a going concern.
The accompanying financial statements do not include any adjustments relating to
the recoverability and classification of recorded asset amounts or the amounts
and classifications of liabilities that might be necessary should the Company be
unable to continue as a going concern.
NOTE 3. PROPOSED IPO
On October 24, 1996, the Company and an investment banking firm signed a
letter of intent whereby the investment banking firm agreed to underwrite the
Company's IPO, which is expected to consist of 1,000,000 shares of common stock
at $5.00 per share. Additionally, the letter of intent calls for issuance of
1,000,000 redeemable warrants at a price of $.10 each with an exercise price of
$6.50 per share of common stock for a period of 60 months commencing thirteen
(13) months from the effective date. The warrants will be redeemable by the
Company commencing thirteen (13) months from the effective date at $.20 per
warrant, provided that the average closing bid price of the common stock equals
or exceeds $9.00 per share for 20 consecutive trading days.
The letter of intent includes an over-allotment option which would allow for
the Underwriter to purchase securities, up to an additional 15% of the offering,
for a period of forty-five (45) days following the effective date solely for the
purpose of covering any short position in the offering. The Company has also
agreed to sell the underwriter, for nominal consideration, five (5) year
warrants to purchase ten percent (10%) of the number of securities being
underwritten. These warrants will be exercisable any time during a period of
four (4) years commencing one year from the effective date of the final
prospectus at a price equaling 160% of the IPO price.
NOTE 4. STOCKHOLDERS' EQUITY
On July 5, 1996, the Board of Directors and stockholders approved amendments
to the Company's Articles of Incorporation that (i) changed the name of the
Company from Home Test Inc. to PerArdua Corporation; (ii) converted the no par
common stock to common stock with a par value of $0.001 per
F-8
PERARDUA CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - (Continued)
NOTE 4. STOCKHOLDERS' EQUITY -- (CONTINUED)
share; (iii) increased the total number of authorized common shares from 30,000
to 10,000,000; and (iv) ordered that each share of Home Test Inc. no par common
stock be exchanged for 41 2/3 shares of PerArdua Corporation common stock, par
value of $0.001 per share.
Effective January 1997, the Company was merged with and into its
wholly-owned subsidiary PerArdua Corporation, a Delaware corporation. The sole
purpose of the merger was to change the Company's jurisdiction of incorporation
from Missouri to Delaware. As a result of the merger, the surviving Delaware
corporation assumed all of the assets and liabilities of the Company, and
holders of shares of common stock in the Missouri corporation became holders of
the same number of shares of common stock in the Delaware corporation; the par
value of common stock was changed from $.001 per share to $.01 per share; common
stock authorization was increased to 25,000,000 shares and 1,000,000 shares of
$.01 par value Preferred Stock were authorized for future issuance.
The changes in the par value of the common stock and the stock split have
been retroactively reflected in the accompanying financial statements and these
notes for the period from inception.
On August 20, 1996, the Company issued 500,000 warrants for the purchase of
the Company's common stock. The warrants grant the holders the right to purchase
additional shares of common stock at an exercise price of $10.00 per share. The
warrants can be exercised in whole or in part, from time to time, following FDA
approval, with a final expiration date of June 30, 2006.
On October 4, 1996, pursuant to a Private Placement Memorandum, dated August
20, 1996, the Company completed an offering of 665,000 shares of its common
stock at $1.60 per share. Net proceeds to the Company were $1,015,473, after
related expenses of $48,527.
During the private placement offering the Company accepted a subscription
from an investor for 21,560 shares of common stock. The total consideration for
this subscription was $34,496 and has been recognized as an increase to
additional paid in Capital.
On August 20, 1996 the Board of Directors approved the sale of 950,000
shares of common stock and warrants to purchase an additional 200,000 shares of
common stock. As more fully discussed in Note 5 below, the shares were valued at
$1.60 per share, although the Company only received cash consideration of $.001
per share ($950). The warrants grant the holders the right to purchase
additional shares of common stock at an exercise price of $10.00 per share. The
warrants can be exercised in whole or in part, from time to time, following FDA
approval, with a final expiration date of June 30, 2006.
The Board of Directors and the stockholders of the Company approved a stock
incentive plan (the Incentive Plan) during 1996. The plan provides for grants of
incentive stock options or stock appreciation rights only to the Company's
employees and nonqualified stock options and stock appreciation rights to the
Company's employees, directors, members of the advisory board, independent
contractors or consultants of the Company. The Company has reserved 500,000
shares of common stock for issuance under the Plan. The purchase price for each
share to be awarded or sold and the exercise price and the term for each option
or stock appreciation right to be granted under the Incentive Plan will be
determined by the Board of Directors or its Compensation Committee.
On August 20, 1996 the Board of Directors granted an officer of the Company
an option under the Incentive Plan to purchase 10,000 shares of common stock at
an exercise price of $7.50 per share. The option will vest one year after the
date employment commences and will remain in effect for a period of five years
unless employment is terminated earlier.
F-9
PERARDUA CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - (Continued)
NOTE 5. OPTION AND LICENSE AGREEMENT
Pursuant to an agreement, dated July 8, 1996 (the Acquisition Agreement),
the Company acquired certain rights from the Limited Partnership. The rights
acquired consist of an exclusive license to certain patent and other
intellectual property rights related to the drug, Thiovir.
The Limited Partnership's sole activity was to receive capital contributions
and fund research and development of Thiovir from 1994 to 1996, without
receiving any revenue. Expenditures incurred by the partnership were as follows:
<TABLE>
<CAPTION>
RESEARCH AND
DEVELOPMENT OTHER TOTAL
----------- ----- -----
<S> <C> <C> <C>
1994 ...................................... $164,000 $12,000 $176,000
1995 ...................................... 71,000 15,000 86,000
1996 ...................................... 53,000 42,000 95,000
-------- ------- ---------
$288,000 $69,000 $357,000
======== ======= ========
</TABLE>
The license rights are pursuant to a license agreement between the Limited
Partnership and the University of Southern California (USC) (the USC License
Agreement), the rights and obligations of which were transferred by the Limited
Partnership to the Company through an Assignment, Assumption and Consent
Agreement among the Company, the Limited Partnership and USC. The USC License
Agreement contains an exclusive worldwide license to practice the inventions set
forth in any relevant patents and patent applications of USC related to Thiovir.
In return, the Limited Partnership funded development of Thiovir through
research grants to USC. Funding of the research is now the responsibility of the
Company. Subsequent to November 30, 1996, the Company signed an agreement with
USC providing for $ 176,000 of research funding for the project. The research
period will be effective through September 30, 1997, at which time USC can
request an eight month extension period at no additional cost to the Company.
Consideration paid by the Company to the Limited Partnership under the
Acquisition Agreement consisted of $540,000 cash, which included $100,000 of
cash received from the initial stockholders and $440,000 paid out of the net
proceeds of the private offering (see Note 4). Additionally, the limited
partners, together with USC and three individuals who have been actively
involved in the development of Thiovir, were extended the right, which was
exercised, to acquire 950,000 shares of the Company's common stock for $950
($.001 per share) along with warrants to purchase 200,000 additional shares at
$10.00 per share through June 30, 2006. These warrants will only become
exercisable upon FDA approval of Thiovir. The 950,000 shares issued for $950
were valued at $1.60 per share as determined by the per share amount received in
the private offering completed several months after the completion of the
transactions contemplated by the Acquisition Agreement.
Charges resulting from cash paid ($540,000) and shares issued ($1,519,000)
under the Acquisition Agreement were recorded as research and development
expense since Thiovir is still in an early stage of development. The drug has
undergone certain laboratory and animal studies, but must still undergo
successful further studies, as well as in human clinical trials, all pursuant to
protocols yet to be approved by the FDA, in order to be commercially marketable.
The Acquisition Agreement also contains a provision whereby the purchase
price shall be adjusted upward in the event that the Company should sell all or
any portion of its rights in Thiovir in consideration of $5,000,000 or more
prior to the filing of a registration statement for its IPO. In that event, the
purchase price payable to the Limited Partnership by the Company shall be equal
to 49% of the sales proceeds.
F-10
PERARDUA CORPORATION
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS - (Continued)
NOTE 5. OPTION AND LICENSE AGREEMENT -- (CONTINUED)
Pursuant to the USC License Agreement (and subsequent Assignment, Assumption
and Consent Agreement), the Company will be obligated to pay royalties to USC in
conjunction with future sales and to reimburse USC for legal expenses that may
be incurred in connection with patent prosecution and defense. Royalties are
payable equal to 1% of sales of the products and 50% of any royalties earned
from sublicensees. Minimum annual royalties are payable starting at $12,500 in
1998, increasing to $125,000 in 2001 and each year thereafter.
NOTE 6. EMPLOYMENT AND CONSULTING AGREEMENTS
On August 20, 1996 the Company's Board of Directors approved and entered
into a Consulting Agreement with one of its stockholders for research and
development activities. The agreement's term is to be for the period from
October 1, 1996 until September 30, 1999 and requires retainers of $5,000 for
the period October 1, 1996 through March 31, 1997, $5,000 for the period April
1, 1997 through September 30, 1997, $12,500 for the period October 1, 1997
through September 30, 1998, and $15,000 for the period October 1, 1998 through
September 30, 1999 and a per diem of $1,000 for each full day and $600 for each
half day of consulting services provided to the Company.
On February 12, 1997, the Company entered into an employment agreement with
an individual who will serve as the Company's President and Chief Operating
Officer. The agreement expires on February 29, 2000, unless earlier terminated
in accordance with the terms thereof,and provides for a salary of $10,000 per
month. In addition, upon completion of the Proposed IPO, the Company is to grant
the President options to purchase 100,000 shares of the Company's Common Stock
pursuant to the Incentive Plan. The options will vest over a two year period and
will have an exercise price to be determined, but in no case less, than $5.00
per share.
The Company has also entered into an employment agreement with a stockholder
which provides for monthly compensation of $7,000. This agreement expires on
February 29, 2000, unless earlier terminated in accordance with the terms
thereof. In addition, upon completion of the Proposed IPO, the Company is to
grant the stockholder options to purchase 100,000 shares of the Company's Common
Stock pursuant to the Incentive Plan. The options will vest over a three year
period and will have an exercise price to be determined, but in no case less
than $5.00 per share.
NOTE 7. INCOME TAXES
At November 30, 1996, the Company had net operating loss (NOL) carryforwards
available to reduce future taxable income, if any, of approximately $37,710 for
federal and state income tax reporting purposes that expire in 2011. The
Company's ability to utilize the NOL will also be subject to annual limits
established by Internal Revenue Code Section 382.
The net operating loss carryforward and a temporary difference of $540,000 for
rights acquired under the Acquisition Agreement (see Note 5) could have resulted
in the recognition of deferred tax assets of approximately $217,000 at November
30, 1996. However, due to the uncertainties inherent in the Company's
operations, the deferred tax assets and the related tax benefits have been
offset by a valuation allowance in the same amount and accordingly, have not
been reflected in the accompanying financial statements.
Research and development expense of $1,519,000, represented by the value of
common stock issued under the Acquisition Agreement, is not deductible for
income tax purposes.
F-11
GLOSSARY
The following are definitions of certain medically-oriented terms used in
this Prospectus. Unless the context otherwise requires, the following terms
shall have the meanings set forth below for the purposes of this Prospectus:
"AIDS" means acquired immunodeficiency syndrome, which results from
infection with HIV.
"Bone Marrow Toxicity" means having a toxic effect which inhibits the
ability of bone marrow to produce blood cells.
"Central Intravenous Device" means a device surgically inserted into one of
the primary arteries of the heart to maintain a permanent route for
administration of fluids and medicines.
"CMV" means cytomegalovirus, an opportunistic virus which causes blindness
and other conditions in immunosuppressed patients.
"CMV Retinitis" means the manifestation of active CMV infection in the
retina of the eye, which destroys portions of the retina eventually causing
blindness.
"Combination Therapy" means the use of various combinations of protease
inhibitors, RT inhibitors and/or other drugs in the treatment of HIV/AIDS.
"Enzyme" means a chemical substance that facilitates the occurrence of a
chemical reaction involving other chemical substances in a living system.
"Gastrointestinal" means pertaining to the stomach and intestine.
"HIV" means human immunodeficiency virus, the virus which is the precursor
of AIDS.
"Immune System" means a complex system that defends the human body against
disease-causing microorganisms such as viruses that enter the body.
"Immunodeficiency" means a decreased or compromised ability of the immune
system to defend against infection.
"Immunogenicity" means the capacity to induce a detectable response from the
immune system.
"Inhibitor" means a chemical substance that stops enzyme activity.
"Intravenous" means within or into a vein.
"Intravitreal" means within the vitreous (clear watery gel) of the eye;
behind the lens and in front of the retina.
"In vitro" means in the test tube.
"Metabolism" means the chemical changes in living cells by which energy is
provided for vital processes and activities and by which new material is
assimilated.
"Monotherapy" means the treatment of HIV/AIDS with a single drug.
"Mutagenicity" means the capacity to induce a genetic mutation.
"Neurologic" means having to do with the nervous system.
"Nucleoside/Non-nucleoside" describes two different types of drugs which
bond to different portions of an enzyme, each resulting in a separate method of
enzyme inhibition.
"Opportunistic Infections" means infections which may reside in the body
without causing symptoms so long as the immune system is functioning properly,
but which become active (i.e. cause symptoms) as a result of immunodeficiency.
"Oral Availability/Oral Bioavailability" means the rate and extent to which
a drug enters the general circulation of the body when administered via the
mouth.
G-1
"Prophylactic" means an agent or regimen that contributes to the prevention
of infection or disease.
"Protease/Reverse Transcriptase" means two of the enzymes necessary for the
process of HIV replication.
"Renal Toxicity" means toxicity pertaining to the kidney which can impair
kidney function.
"Replication" means the duplication process of genetic material.
"Resistance" means a genetic factor in microorganisms, such as bacteria and
viruses, which enable them to be unaffected by treatment with antibiotic or
anti-viral drugs.
"RT" means reverse transcriptase.
"Synthesis" means, in chemistry, the production of a substance by union of
elements or simpler compounds or by degradation of a more complex compound.
"Teratogenecity" means the ability to adversely affect normal cellular
development in the embryo or fetus.
"Tolerance" means the capacity to endure a substance, and/or subsequent
doses of the substance, without an unacceptable adverse effect.
"Toxicity" means the degree of poisonous effect.
"TPFA" means thiophosphonoformic acid, an anti-viral compound for which the
Company has adopted the trade name "Thiovir(tm)."
"Viral Load" means the level of viral infection in the body.
G-2
================================================================================
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO BUY ANY OF THE SECURITIES OFFERED
HEREBY TO ANY PERSON OR BY ANYONE IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MAKE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION 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 6
Special Note Regarding Forward-
Looking Statements 17
Use of Proceeds 18
Dividend Policy 18
Dilution 19
Capitalization 20
Selected Financial Data 21
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 22
Business 24
Management 34
Principal Stockholders 40
Certain Relationships and Related
Transactions 42
Description of Securities 44
Underwriting 49
Shares Eligible for Future Sale 51
Legal Matters 52
Experts 52
Additional Information 52
Index to Financial Statements F-1
Glossary G-1
</TABLE>
UNTIL ________________, 1997, ALL DEALERS EFFECTING TRANSACTIONS IN THE
REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THE DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATIONS OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
================================================================================
PERARDUA CORPORATION
1,000,000 SHARES OF COMMON STOCK
1,000,000 REDEEMABLE WARRANTS
----------
PROSPECTUS
----------
SCHNEIDER SECURITIES, INC.
LEW LIEBERBAUM & CO., INC.
, 1997
================================================================================
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 102(b)(7) of the Delaware General Corporation Law enables a
corporation in its original certificate of incorporation or an amendment thereto
validly approved by the corporation's stockholders to eliminate or limit
personal liability of members of its Board for violations of a director's
fiduciary duty of care. However, the elimination of limitation shall not apply
where there has been a breach of the duty of loyalty, failure to act in good
faith, engaging in intentional misconduct or knowingly violating a law, paying a
dividend or obtaining an improper personal benefit.
In addition, Section 145 of the Delaware General Corporation Law permits a
corporation organized under Delaware law to indemnify directors and officers
with respect to any matter in which the director or officer acted in good faith
and in a manner he or she reasonably believed to be not opposed to the best
interests of the Company, and, with respect to any criminal action, he or she
had reasonable cause to believe his or her conduct was not lawful.
Article VII, Section 2 of the Company's Certificate of Incorporation
provides as follows:
Subject to the operation of Section 4 of this Article VII, each [officer
and director of the Company) shall be indemnified and held harmless by the
[Company) to the fullest extent authorized by the General Corporation Law of
the State of Delaware, as the same exists or may hereafter be amended (but
in the case of such amendment, only to the extent that such amendment
permits the [Company) to provide broader indemnification rights than such
law permitted the [Company) to provide prior to such amendment) against any
and all [e)xpenses, judgments, penalties, fines and amounts reasonably paid
in settlement that are incurred by such [officer or director) or on such
[officer's or director's) behalf in connection with any threatened, pending
or completed [p)roceeding or any claim, issue or matter therein, which such
[officer or director) is, or is threatened to be made, a party to or
participant in by reason of such [officer's or director's) [c)orporate
[s)tatus, if such [officer or director) acted in good faith and in a manner
such [officer or director) reasonably believed to be in or not opposed to
the best interests of the [Company) and, with respect to any criminal
proceeding, has no reasonable cause to believe his or her conduct was
unlawful. The rights of indemnification provided by this Section 2 shall
continue as to an [officer or director) after he or she has ceased to be an
[officer or director) and shall inure to the benefit of his or her heirs,
executors, administrators and personal representatives. Notwithstanding the
foregoing, the [Company) shall indemnify any [officer or director) seeking
indemnification in connection with a [p)roceeding initiated by such [officer
or director) only if such [p)roceeding was authorized by the Board of
Directors of the [Company).
In addition, Article VII, Section 4 of the Company's Certificate of
Incorporation provides as follows:
Unless ordered by a court, no indemnification shall be provided pursuant
to this Article VII to an [o)fficer . . . unless a determination shall have
been made that such person acted in good faith and in a manner such person
reasonably believed to be in or not opposed to the best interests of the
[Company) and, with respect to any criminal [p)roceeding, such person had no
reasonable cause to believe his or her conduct was unlawful. Such
determination shall be made by (a) a majority vote of the [d)isinterested
[d)irectors, even though less than a quorum of the Board . . . (b) if there
are no such [d)isinterested [d)irectors, or if a majority of [d)isinterested
[d)irectors so direct by independent legal counsel in a written opinion, or
(c) by the stockholders of the [Company).
The Company's Certificate of Incorporation provides for payment of
indemnifiable expenses in advance of the final disposition of an action,
suit or proceeding upon receipt of an undertaking of the indemnified person
to repay such amount if it shall ultimately be determined that he or she is
II-1
not entitled to be indemnified by the Company, and further provides that the
Board of Directors may, in its discretion, provide indemnification to
non-officer employees.
The Company intends to enter into indemnification agreements (Exhibit
10.8 hereto) with each of its directors which attempt to provide the maximum
protection permitted by Delaware law, as it may be amended from time to
time. Under such additional indemnification provisions, however, an
individual will not receive indemnification for judgments, settlements or
expenses if he or she is found liable to the Company (except to the extent
the court determines he or she is fairly and reasonably entitled to
indemnity for expenses), for settlements not approved by the Company or for
settlements and expenses if the settlement is not approved by the court. In
the event the Company does not pay a requested indemnification amount, the
indemnification agreements will allow the indemnified party to contest this
determination by bringing an action against the Company to recover the
unpaid amount and costs and expenses. In the event indemnification is
unavailable and the Company is found jointly liable with the indemnified
party, the indemnification agreements will enable the indemnified party to
require the Company to contribute to the payment of damages and expenses,
based on the relative benefit to and fault of the indemnified party and the
Company. The Company also intends to purchase directors' and officers'
liability insurance.
The Underwriting Agreement (Exhibit 1.1 hereto) contains provisions by
which the Underwriters have agreed to indemnify the Company, each person, if
any, who controls the Company within the meaning of Section 15 of the
Securities Act, each director of the Company, and each officer of the
Company who signs this Registration Statement, with respect to liabilities
arising from information furnished in writing by or on behalf of the
Underwriters for use in the Registration Statement.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is a list of the estimated expenses to be incurred by the Company
in connection with the issuance and distribution of the shares of Common Stock
being registered, other than the underwriting discount and commissions. All of
the following expenses will be paid by the Company.
<TABLE>
<CAPTION>
<S> <C>
Commission Filing Fee $ 4,600.00
Nasdaq SmallCap Fee 5,000.00
NASD Filing Fee 2,000.00
Blue Sky Fees and Expenses 15,000.00
Non-Accountable Expense Allowance to the Representatives 153,000.00
Printing and Engraving Expenses 40,000.00
Accounting Fees and Expenses 25,000.00
Legal Fees and Expenses 85,000.00
Transfer Agent and Registrar Fees 5,000.00
Consulting Fees 108,000.00
Miscellaneous Fees and Expenses 7,400.00
-----------
TOTAL (Estimated) $450,000.00
===========
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Since June , 1994, the Company has sold and issued the following
unregistered securities:
On August 12, 1996, the Company issued warrants to purchase an aggregate of
150,000 shares of Common Stock at $10.00 per share to The Starwood Trust for no
consideration.
On August 12, 1996, the Company issued warrants to purchase an aggregate of
150,000 shares of Common Stock at $10.00 per share to Francis E. O'Donnell, Jr.
for no consideration.
II-2
On August 12, 1996, the Company issued warrants to purchase an aggregate of
200,000 shares of Common Stock at $10.00 per share to Thomas L. DePetrillo for
no consideration.
On August 16, 1996, the Company, in connection with the acquisition of a
license of certain rights to Thiovir, issued an aggregate of 200,000 warrants
and 200,000 shares of Common Stock to 16 investors for a total, aggregate cash
consideration of $200.00. Fifteen of the investors were limited partners in the
limited partnership which transferred the license; the other investor was the
University of Southern California, the licensor under the license.
On August 16, 1996, the Company issued 320,000 shares of Common Stock to
Charles E. McKenna, Ph.D. for $320.00.
On August 16, 1996, the Company issued 110,000 shares of Common Stock to
Mary Anthony Gray for $110.00.
On August 16, 1996, the Company issued 320,000 shares of Common Stock to
Thomas D. Wolfe for $320.00.
On September 8, 1996, the Company issued options to purchase 10,000 shares
of Common Stock at an exercise price of $7.50 per share to Mary Anthony Gray
pursuant to the Company's Stock Incentive Plan.
On October 4, 1996, the Company issued an aggregate of 643,440 shares of
Common Stock to 15 investors for a total, aggregate purchase price of
$1,029,504.
On January 9, 1997, the Company issued 21,560 shares of Common Stock to a
single investor for $34,496.
On March 1, 1997, the Company issued 28,440 shares of Common Stock to a
single investor for $45,504.
The sales and issuance of the securities in the above transactions were
deemed to be exempt under the Securities Act by virtue of Sections 3(b) and/or
4(2) thereof and/or Regulation D promulgated thereunder as transactions not
involving any public offering. The purchasers in each case represented their
intention to acquire the securities for investment only and not with a view to
the distribution thereof. Appropriate legends were affixed to the certificates
issued in such transactions.
Shortly after the completion of the Offering, the Company also intends to
issue options to purchase an aggregate of 230,000 shares of Common Stock to two
Officers and three of the Company's outside directors pursuant to the Incentive
Plan at an exercise price to be determined, but not less than $5.00 per share.
ITEM 27. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------ -----------------------
<S> <C>
1.1 -- Form of Underwriting Agreement*
1.2 -- Form of Selected Dealers Agreement*
1.3 -- Form of Agreement Among Underwriters*
2.1 -- Option and Asset Purchase Agreement, dated July 8, 1996, by and between PerArdua
Investors, L.P. and the Company*
3.1 -- Certificate of Incorporation of Registrant, as amended**
3.2 -- Bylaws of Registrant, as amended**
4.1 -- Form of Common Stock Certificate*
4.2 -- Form of Stock Purchase Warrant*
4.3 -- Form of Private Placement Subscription Agreement*
4.4 -- Form of Acquisition Transaction Subscription Agreement*
4.5 -- Form of Representatives' Warrants*
4.6 -- Form of Warrant Agreement (including form of Redeemable Warrant Certificate)*
II-3
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------ -----------------------
5.1 -- Form of Opinion of LeClair Ryan, A Professional Corporation*
10.1 -- Option & License Agreement, dated March 28, 1994, by and between PerArdua Investors,
L.P. and the University of Southern California*
10.2 -- Stockholders' Agreement, dated July 8, 1996, by and between the Company, the
stockholders of the Company, and the limited partners of PerArdua Investors, L.P.*
10.3 -- Research Agreement, dated January 7, 1997, by and between the University of Southern
California and the Company*
10.4 -- Consulting Agreement, dated September 30, 1996, by and between the Company and
Charles E. McKenna, Ph.D.*
10.5 -- Assignment, Assumption and Consent, dated as of July 31, 1996, by and between
PerArdua Investors, L.P., the Company and the University of Southern California*
10.6 -- Form of Consulting Agreement by and between the Company and Schneider Securities,
Inc.*
10.7 -- Employment Agreement, dated as of September 3, 1996 by and between the Company
and Mary Anthony Gray, as amended*
10.8 -- Form of Indemnification Agreement*
10.9 -- Employment Agreement, dated February 12, 1997, by and between the Company and
Nicholas Jon Virca*
10.10 -- PerArdua Corporation Stock Incentive Plan*
23.1 -- Consent of McGladrey & Pullen, LLP**
23.2 -- Consent of LeClair Ryan, A Professional Corporation (included in Exhibit 5.1 hereto)**
24.1 -- Power of Attorney (see Page II-5)*
27.1 -- Financial Data Schedule*
</TABLE>
- -------------
* Previously filed.
** Filed herewith.
ITEM 28. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in the volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the
effective registration statement; and
(iii) Include any additional or changed material information on the
plan of distribution.
Provided, however, that paragraphs 1(i) and 1(ii) do not apply if the
registration statement is on Form S-3 or Form S-8, and the information required
to be included in a post-effective amendment by those paragraphs is contained in
periodic reports filed by the registrant pursuant to Section 13 or Section 15(d)
of the Securities Exchange Act of 1934 that are incorporated by reference in the
registration statement.
II-4
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment 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.
(3) To remove from registration by means of a post-effective amendment of
any of the securities being registered which remain unsold at the termination of
the offering.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the small
business issuer pursuant to the foregoing provisions, or otherwise, the small
business issuer has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the small
business issuer of expenses incurred or paid by a director, officer or
controlling person of the small business issuer 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 small business
issuer 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 registrant hereby undertakes that:
(1) For the purpose 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 is 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 this offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
The undersigned small business issuer 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.
II-5
SIGNATURES
IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS OF FILING ON FORM SB-2 AND AUTHORIZED THIS AMENDMENT NO. 2 TO THE
REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, IN THE IN
THE CITY OF RICHMOND, COMMONWEALTH OF VIRGINIA, ON JUNE 5, 1997.
PERARDUA CORPORATION
By: /s/ NICHOLAS JON VIRCA
-------------------------------
NICHOLAS JON VIRCA
PRESIDENT AND CHIEF
OPERATING OFFICER
PURSUANT TO THE REQUIREMENT OF THE SECURITIES ACT, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE
DATES INDICATED:
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
*
------------------------------- Chairman of the Board and June 5, 1997
FRANCIS E. O'DONNELL, JR., M.D., Chief Executive Officer
(Principal Executive
Officer) and Director
Treasurer (Principal FinanciaL June 5, 1997
------------------------------- Officer), Secretary and
SAMUEL P. SEARS, JR. Director
* Director June 5, 1997
-------------------------------
EMANUELA I. CHARLTON, PH.D.
* Director June 5, 1997
-------------------------------
THOMAS QUINN
* Director June 5, 1997
-------------------------------
W. HOWARD LEWIN, M.D.
*/s/ SAMUEL P. SEARS, JR.
-------------------------------
ATTORNEY-IN-FACT
</TABLE>
II-6
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------ -----------------------
<S> <C>
1.1 -- Form of Underwriting Agreement*
1.2 -- Form of Selected Dealers Agreement*
1.3 -- Form of Agreement Among Underwriters*
2.1 -- Option and Asset Purchase Agreement, dated July 8, 1996, by and between PerArdua
Investors, L.P. and the Company*
3.1 -- Certificate of Incorporation of Registrant, as amended**
3.2 -- Bylaws of Registrant, as amended**
4.1 -- Form of Common Stock Certificate*
4.2 -- Form of Stock Purchase Warrant*
4.3 -- Form of Private Placement Subscription Agreement*
4.4 -- Form of Acquisition Transaction Subscription Agreement*
4.5 -- Form of Representatives' Warrants*
4.6 -- Form of Warrant Agreement (including form of Redeemable Warrant Certificate)*
5.1 -- Form of Opinion of LeClair Ryan, A Professional Corporation*
10.1 -- Option & License Agreement, dated March 28, 1994, by and between PerArdua Investors,
L.P. and the University of Southern California*
10.2 -- Stockholders' Agreement, dated July 8, 1996, by and between the Company, the
stockholders of the Company, and the limited partners of PerArdua Investors, L.P.*
10.3 -- Research Agreement, dated January 7, 1997, by and between the University of Southern
California and the Company*
10.4 -- Consulting Agreement, dated September 30, 1996, by and between the Company and
Charles E. McKenna, Ph.D.*
10.5 -- Assignment, Assumption and Consent, dated as of July 31, 1996, by and between
PerArdua Investors, L.P., the Company and the University of Southern California*
10.6 -- Form of Consulting Agreement by and between the Company and Schneider Securities,
Inc.*
10.7 -- Employment Agreement, dated as of September 3, 1996 by and between the Company
and Mary Anthony Gray, as amended*
10.8 -- Form of Indemnification Agreement*
10.9 -- Employment Agreement, dated February 12, 1997, by and between the Company and
Nicholas Jon Virca*
10.10 -- PerArdua Corporation Stock Incentive Plan*
23.1 -- Consent of McGladrey & Pullen, LLP**
23.2 -- Consent of LeClair Ryan, A Professional Corporation (included in Exhibit 5.1 hereto)*
24.1 -- Power of Attorney (see Page II-5)*
27.1 -- Financial Data Schedule*
</TABLE>
- ----------------
* Previously filed.
** Filed herewith.
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
PERARDUA CORPORATION
ARTICLE I
NAME
----
The name of the Corporation is PerArdua Corporation.
ARTICLE II
REGISTERED OFFICE
-----------------
The address of the registered office of the Corporation in the State of
Delaware is 1209 Orange Street, in the City of Wilmington, County of New Castle.
The name of its registered agent at such address is The Corporation Trust
Company.
ARTICLE III
PURPOSES
--------
The nature of the business or purposes to be conducted or promoted by
the Corporation is to engage in any lawful act or activity for which
corporations may be organized under the General Corporation Law of the State of
Delaware (the "DGCL").
ARTICLE IV
CAPITAL STOCK
-------------
Section 1. Number of Shares.
The total number of shares of capital stock which the Corporation shall
have the authority to issue is 26,000,000 shares, of which (i) 1,000,000 shares
shall be Preferred Stock, par value $.01 per share (the "Preferred Stock") and
(ii) 25,000,000 shares shall be common stock, par value $.01 per share (the
"Common Stock"). As set forth in this Article IV and subject to the terms of any
series of Preferred Stock (provided that any shares of such series are issued
and outstanding), the Board of Directors or any authorized committee thereof is
authorized from time to time to establish and designate one or more series of
Preferred Stock, to fix and determine the variations in the relative rights and
preferences as between the different series of Preferred Stock in the manner
hereinafter set forth in this Article IV, and to
fix or alter the number of shares comprising any such series and the designation
thereof to the extent permitted by law.
Except as provided to the contrary in the provisions establishing a
class of stock or a series of Preferred Stock, the number of authorized shares
of such class or series may be increased or decreased (but not below the number
of shares thereof then outstanding) by the affirmative vote of a majority of the
stock of the Corporation entitled to vote, voting as a single class.
Section 2. General.
The designations, powers, preferences and rights of, and the
qualifications, limitations and restrictions upon, each class or series of stock
shall be determined in accordance with, or as set forth below in, Sections 3 and
4 of this Article IV.
Section 3. Common Stock.
Subject to all of the rights, powers and preferences of the Preferred
Stock, and except as provided by law or in this Article IV (or in any
certificate of designation of any series of Preferred Stock, provided that any
shares of such series are issued and outstanding) or by the Board of Directors
or any authorized committee thereof pursuant to this Article IV:
(a) the holders of the Common Stock shall have the exclusive
right to vote for the election of Directors and on all other matters requiring
stockholder action, each share being entitled to one vote;
(b) dividends may be declared and paid or set apart for
payment upon the Common Stock out of any assets or funds of the Corporation
legally available for the payment of dividends, but only when and as directed by
the Board of Directors or any authorized committee thereof; and
(c) upon the voluntary or involuntary liquidation, dissolution
or winding up of the Corporation, the net assets of the Corporation shall be
distributed pro rata to the holders of the Common Stock in accordance with their
respective rights and interests.
Section 4. Preferred Stock.
Subject to any limitations prescribed by law or by the terms of any
series of Preferred Stock (provided that any shares of such series are issued
and outstanding), the Board of Directors or any authorized committee thereof is
expressly authorized to provide for the issuance of the shares of Preferred
Stock in one or more series of such stock, and by filing a certificate pursuant
to applicable law of the State of Delaware, to establish or change from time to
time the number of shares to be included in each such series, and to fix the
designations, powers, preferences and the relative, participating, optional or
other special
2
rights of the shares of each series and any qualifications, limitations and
restrictions thereof. Any action by the Board of Directors or any authorized
committee thereof under this Section 4 shall require the affirmative vote of a
majority of the Directors then in office or a majority of the members of such
committee. The Board of Directors or any authorized committee thereof shall have
the right to determine to fix one or more of the following with respect to each
series of Preferred Stock to the extent permitted by law:
(a) The distinctive serial designation and the number of
shares constituting such series;
(b) The dividend rates or the amount of dividends to be paid
on the shares of such series, whether dividends shall be cumulative and, if so,
from which date or dates, the payment date or dates for dividends, and the
participating and other rights, if any, with respect to dividends;
(c) The voting powers, full or limited, if any, of the shares
of such series;
(d) Whether the shares of such series shall be redeemable and,
if so, the price or prices at which, and the terms and conditions on which, such
shares may be redeemed;
(e) The amount or amounts payable upon the shares of such
series and any preferences applicable thereto in the event of voluntary or
involuntary liquidation, dissolution or winding up of the Corporation;
(f) Whether the shares of such series shall be entitled to the
benefit of a sinking or retirement fund to be applied to the purchase or
redemption of such shares, and if so entitled, the amount of such fund and the
manner of its application, including the price or prices at which such shares
may be redeemed or purchased through the application of such fund;
(g) Whether the shares of such series shall be convertible
into, or exchangeable for, shares of any other class or classes or of any other
series of the same or any other class or classes of stock of the Corporation
and, if so convertible or exchangeable, the conversion price or prices, or the
rate or rates of exchange, and the adjustments thereof, if any, at which such
conversion or exchange may be made, and any terms and conditions of such
conversion or exchange;
(h) The price or other consideration for which the shares of
such series shall be issued;
(i) Whether the shares of such series which are redeemed or
converted shall have the status of authorized but unissued shares of Preferred
Stock (or series thereof) and
3
whether such shares may be reissued as shares of the same or any other class or
series of stock; and
(j) Such other powers, preferences, rights, qualifications,
limitations and restrictions thereof as the Board of Directors or any authorized
committee thereof may deem advisable.
ARTICLE V
STOCKHOLDER ACTION
------------------
Any action required or permitted to be taken by the stockholders of the
Corporation at any annual or special meeting of stockholders of the Corporation
must be effected at a duly called annual or special meeting of stockholders and
may not be taken or effected by a written consent of stockholders in lieu
thereof.
ARTICLE VI
DIRECTORS
---------
Section 1. General.
The business and affairs of the Corporation shall be managed by or
under the direction of the Board of Directors, except as otherwise provided
herein or required by law.
Section 2. Election of Directors.
Election of Directors need not be by written ballot unless the Bylaws
of the Corporation shall so provide.
Section 3. Number and Terms of Directors.
The number of Directors of the Corporation shall be fixed by resolution
duly adopted from time to time by the Board of Directors. The Directors, other
than those who may be elected by the holders of any series of Undesignated
Preferred Stock of the Corporation, shall be classified, with respect to the
term for which they severally hold office, into three classes as nearly equal in
number as possible. The initial Class I Directors of the Corporation shall be
Emanuela I. Charlton, Ph.D. and Thomas Quinn; the initial Class II Directors of
the Corporation shall be Samuel P. Sears, Jr. and William Lewin, M.D.; and the
initial Class III Director of the Corporation shall be Francis E. O'Donnell,
Jr., M.D. The initial Class I Directors shall serve for a term expiring at the
annual meeting of stockholders to be held in 1997, the initial Class II
Directors shall serve for a term expiring at the annual meeting of stockholders
to be held in 1998; and the initial Class III Director shall serve for a term
expiring at the annual meeting of stockholders to be held in 1999. At each
annual meeting of stockholders, the successor or successors of the class of
Directors whose term expires at that meeting shall be elected by a plurality of
the votes cast at such meeting and shall hold office for a term
4
expiring at the annual meeting of stockholders held in the third year following
the year of their election. The Directors elected to each class shall hold
office until their successors are duly elected and qualified or until their
earlier resignation or removal.
Notwithstanding the foregoing, whenever, pursuant to the provisions of
Article IV of this Certificate of Incorporation, the holders of any one or more
series of Undesignated Preferred Stock shall have the right, voting separately
as a series or together with holders of other such series, to elect Directors at
an annual or special meeting of stockholders, the election, term of office,
filling of vacancies and other features of such directorships shall be governed
by the terms of this Certificate of Incorporation and any certificate of
designations applicable thereto, and such Directors so elected shall not be
divided into classes pursuant to this Section 3.
During any period when the holders of any series of Preferred Stock
have the right to elect additional Directors as provided for or fixed pursuant
to the provisions of Article IV hereof, then upon commencement and for the
duration of the period during which said right continues: (i) the then otherwise
total authorized number of Directors of the Corporation shall automatically be
increased by such specified number of Directors, and the holders of such
Preferred Stock shall be entitled to elect the additional Directors so provided
for or fixed pursuant to said provisions, and (ii) each such additional Director
shall serve until such Director's successor shall have been duly elected and
qualified, or until such Director's right to hold such office terminates
pursuant to said provisions, whichever occurs earlier, subject to such
Director's earlier death, disqualification, resignation or removal. Except as
otherwise provided by the Board in the resolution or resolutions establishing
such series, whenever the holders of any series of Preferred Stock having such
right to elect additional Directors are divested of such right pursuant to the
provisions of such stock, the terms of office of all such additional Directors
elected by the holders of such stock, or elected to fill any vacancies resulting
from the death, resignation, disqualification or removal of such additional
Directors, shall forthwith terminate and the total and authorized number of
Directors of the Corporation shall be reduced accordingly.
Section 4. Removal.
Subject to the rights, if any, of any series of Preferred Stock to
elect Directors and to remove any Director whom the holders of any such stock
have the right to elect, any Director (including persons elected by Directors to
fill vacancies in the Board of Directors) may be removed from office (i) only
with cause and (ii) only by the affirmative vote of at least two-thirds of the
total votes which would be eligible to be cast by stockholders in the election
of such Director. At least 30 days prior to any meeting of stockholders at which
it is proposed that any Director be removed from office, written notice of such
proposed removal shall be sent to the Director whose removal will be considered
at the meeting. For purposes of this
5
Certificate of Incorporation, "cause," with respect to the removal of any
Director shall mean only (i) conviction of a felony, (ii) declaration of unsound
mind by order of court, (iii) gross dereliction of duty, (iv) commission of any
action involving moral turpitude, or (v) commission of an action which
constitutes intentional misconduct or a knowing violation of law if such action
in either event results both in an improper substantial personal benefit and
material injury to the Corporation.
ARTICLE VII
INDEMNIFICATION
---------------
Section 1. Definitions. For purposes of this Article:
(a) "Officer" means any person who serves or has served the
Corporation (i) as a director on the Board of Directors of the Corporation, or
(ii) as an officer appointed by the Board of Directors of the Corporation;
(b) "Non-Officer Employee" means any person who serves or has served
as an employee of the Corporation, but who is not or was not an Officer;
(c) "Proceeding" means any threatened, pending, or completed action,
suit, arbitration, alternate dispute resolution mechanism, inquiry,
investigation, administrative hearing or other proceeding, whether civil,
criminal, administrative, arbitrative or investigative;
(d) "Expenses" means all reasonable attorney's fees, retainers, court
costs, transcript costs, fees of expert witnesses, private investigators and
professional advisors (including, without limitation, accountants and investment
bankers), travel expenses, duplicating costs, printing and binding costs, costs
of preparation of demonstrative evidence and other courtroom presentation aids
and devices, costs incurred in connection with document review, organization,
imaging and computerization, telephone charges, postage, delivery service fees,
and other disbursements, costs or expenses of the type customarily incurred in
connection with prosecuting, defending, preparing to prosecute or defend,
investigating, being or preparing to be a witness in, settling or otherwise
participating in, a Proceeding;
(e) "Corporate Status" describes the status of a person who (i) in the
case of an Officer, is or was a director, officer, employee or agent of the
Corporation or of any other corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise which such Officer is or was serving
at the written request of the Corporation, or (ii) in the case of a Non-Officer
Employee, is or was an employee of the Corporation or a director, officer,
employee or agent of any other corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise which such Non-Officer Employee is or
was serving at the written request of the Corporation; and
6
(f) "Disinterested Director" means, with respect to each Proceeding in
respect of which indemnification is sought hereunder, a director of the
Corporation who is not and was not a party to such Proceeding.
Section 2. Indemnification of Officers. Subject to the operation of
Section 4 of this Article VII, each Officer shall be indemnified and held
harmless by the Corporation to the fullest extent authorized by the General
Corporation Law of the State of Delaware, as the same exists or may hereafter be
amended (but in the case of any such amendment, only to the extent that such
amendment permits the Corporation to provide broader indemnification rights than
such law permitted the Corporation to provide prior to such amendment) against
any and all Expenses, judgments, penalties, fines and amounts reasonably paid in
settlement that are incurred by such Officer or on such Officer's behalf in
connection with any threatened, pending or completed Proceeding or any claim,
issue or matter therein, which such Officer is, or is threatened to be made, a
party to or participant in by reason of such Officer's Corporate Status, if such
Officer acted in good faith and in a manner such Officer reasonably believed to
be in or not opposed to the best interests of the Corporation and, with respect
to any criminal proceeding, has no reasonable cause to believe his or her
conduct was unlawful. The rights of indemnification provided by this Section 2
shall continue as to an Officer after he or she has ceased to be an Officer and
shall inure to the benefit of his or her heirs, executors, administrators and
personal representatives. Notwithstanding the foregoing, the Corporation shall
indemnify any Officer seeking indemnification in connection with a Proceeding
initiated by such Officer only if such Proceeding was authorized by the Board of
Directors of the Corporation.
Section 3. Indemnification of Non-Officer Employees. Subject to the
operation of Section 4 of this Article VII, each Non-Officer Employee may, in
the discretion of the Board of Directors of the Corporation, be indemnified by
the Corporation to the fullest extent authorized by the General Corporation Law
of the State of Delaware, as the same exists or may hereafter be amended (but,
in the case of any such amendment, only to the extent that such amendment
permits the Corporation to provide broader indemnification rights than such law
permitted the Corporation to provide prior to such amendment) against any or all
Expenses, judgments, penalties, fines and amounts reasonably paid in settlement
that are incurred by such Non-Officer Employee or on such Non-Officer Employee's
behalf in connection with any threatened, pending or completed Proceeding, or
any claim, issue or matter therein which such Non-Officer Employee is, or is
threatened to be made, a party to or participant in by reason of such
non-officer Employee's Corporate Status, if such Non-Officer Employee acted in
good faith and in a manner such Non-Officer Employee reasonably believed to be
in or not opposed to the best interests of the Corporation, and with respect to
any criminal proceeding, had no reasonable cause to believe his or her conduct
was unlawful. The rights of indemnification provided by this Section 3 shall
continue as to a Non-Officer Employee after he or she has ceased to be a
Non-Officer Employee and shall inure to the benefit of his or her heirs,
personal representatives, executors and administrators. Notwithstanding the
foregoing, the Corporation may indemnify any Non-Officer Employee seeking
indemnification in connection with a Proceeding initiated by such Non-Officer
7
Employee only if such Proceeding was authorized by the Board of Directors of the
Corporation.
Section 4. Good Faith. Unless ordered by a court, no indemnification
shall be provided pursuant to this Article VII to an Officer or to a Non-Officer
Employee unless a determination shall have been made that such person acted in
good faith and in a manner such person reasonably believed to be in or not
opposed to the best interests of the Corporation and, with respect to any
criminal Proceeding, such person had no reasonable cause to believe his or her
conduct was unlawful. Such determination shall be made by (a) a majority vote of
the Disinterested Directors, even though less than a quorum of the Board of
Directors, (b) if there are no such Disinterested Directors, or if a majority of
Disinterested Directors so direct by independent legal counsel in a written
opinion, or (c) by the stockholders of the Corporation.
Section 5. Advancement of Expenses to Officers Prior to Final
Disposition. The Corporation shall advance all Expenses incurred by or on behalf
of any Officer in connection with any Proceeding in which such Officer is
involved by reason of such Officer's Corporate Status within ten days after the
receipt by the Corporation of a statement or statements from such Officer
requesting such advance or advances from time to time, whether prior to or after
final disposition of such Proceeding. Such statement or statements shall
reasonably evidence the Expenses incurred by such Officer and shall be preceded
or accompanied by an undertaking by or on behalf of such Officer to repay any
Expenses so advanced if it shall ultimately be determined that such Officer is
not entitled to be indemnified against such Expenses.
Section 6. Advancement of Expenses to Non-Officer Employees Prior to
Final Disposition. The Corporation may, in the discretion of the Board of
Directors of the Corporation, advance any or all Expenses incurred by or on
behalf of any Non-Officer Employee in connection with any Proceeding in which
such Non-Officer Employee is involved by reason of such Non-Officer Employee's
Corporate Status upon the receipt by the Corporation of a statement or
statements from such Non-Officer Employee requesting such advance or advances
from time to time, whether prior to or after disposition of such Proceeding.
Such statement or statements shall reasonably evidence the Expenses incurred by
such Non-Officer Employee and shall be preceded or accompanied by an undertaking
by or on behalf of such Non-Officer Employee to repay any Expenses so advanced
if it shall ultimately be determined that such Non-Officer Employee is not
entitled to be indemnified against such Expenses.
Section 7. Contractual Nature of Rights. The foregoing provisions of
this Article VII shall be deemed to be a contract between the Corporation and
each Officer and Non-Officer Employee who serves in such capacity at any time
while this Article VII is in effect, and any repeal or modification thereof
shall not affect any rights or obligations then existing with respect to any
state of facts then or heretofore existing or any Proceeding heretofore or
thereafter brought based in whole or in part upon any such state of facts. If a
claim for indemnification or advancement of Expenses hereunder by an Officer or
Non-Officer
8
Employee is not paid in full by the Corporation within (a) 60 days after the
Corporation's receipt of a written claim for indemnification, or (b) 10 days
after the Corporation's receipt of documentation of Expenses and the required
undertaking, such Officer or Non-Officer Employee may at any time thereafter
bring suit against the Corporation or recover the unpaid amount of the claim,
and if successful in whole or in part, such Officer or Non-Officer Employee
shall also be entitled to be paid the expenses of prosecuting such claim. The
failure of the Corporation (including its Board of Directors or any committee
thereof, independent legal counsel, or stockholders) to make a determination
concerning the permissibility of such indemnification or advancement of Expenses
under this Article VII shall not be a defense to the action and shall not create
a presumption that such indemnification or advancement is not permissible.
Section 8. Non-Exclusivity of Rights. The rights to indemnification and
advancement of Expenses set forth in this Article VII shall not be exclusive of
any other right which any Officer or Non-Officer Employee may have or hereafter
acquire under any statute, provision of this Certificate of Incorporation,
agreement, vote of stockholders or Disinterested Directors or otherwise.
Section 9. Insurance. The Corporation may maintain insurance, at its
expense, to protect itself and any Officer or Non-Officer Employee against any
liability of any character asserted against or incurred by the Corporation or
any such Officer or Non-Officer Employee or arising out of any such person's
Corporate Status, whether or not the Corporation would have the power to
indemnify such person against such liability under the General Corporation Law
of the State of Delaware or the provisions of this Article VII.
ARTICLE VIII
LIMITATION OF LIABILITY
-----------------------
A Director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a Director, except for liability (i) for any breach of the Director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the DGCL or (iv) for any
transaction from which the Director derived an improper personal benefit. If the
DGCL is amended after the effective date of this Certificate of Incorporation to
authorize corporate action further eliminating or limiting the personal
liability of Directors, then the liability of a Director of the Corporation
shall be eliminated or limited to the fullest extent permitted by the DGCL, as
so amended.
Any repeal or modification of this Article VIII by either of (i) the
stockholders of the Corporation or (ii) an amendment to the DGCL, shall not
adversely affect any right or protection existing at the time of such repeal or
modification with respect to any acts or
9
omissions occurring before such repeal or modification of a person serving as a
Director at the time of such repeal or modification.
ARTICLE IX
AMENDMENT OF BYLAWS
-------------------
Section 1. Amendment by Directors
In furtherance and not in limitation of the powers conferred by statute
and subject to the terms of any series of Preferred Stock (provided that any
shares of such series are issued and outstanding), the Board of Directors of the
Corporation is expressly authorized to make, alter or repeal the Bylaws of the
Corporation.
Section 2. Amendment by Stockholders
Subject to the terms of any series of Preferred Stock (provided that
any shares of such series are issued and outstanding), the Bylaws of the
Corporation may be amended or repealed at any annual meeting of stockholders, or
special meeting of stockholders called for such purpose, by the affirmative vote
of at least two-thirds of the total votes eligible to be cast on such amendment
or repeal by holders of voting stock, voting together as a single class;
provided, however, that, subject to the terms of any series of Preferred Stock
(provided that any shares of such series are issued and outstanding), if the
Board of Directors recommends that stockholders approve such amendment or repeal
at such meeting of stockholders, such amendment or repeal shall only require the
affirmative vote of a majority of the total votes eligible to be cast on such
amendment or repeal by holders of voting stock, voting together as a single
class.
ARTICLE X
AMENDMENT OF CERTIFICATE OF INCORPORATION
-----------------------------------------
Subject to the terms of any series of Preferred Stock (provided that
any shares of such series are issued and outstanding), the Corporation reserves
the right to amend or repeal this Certificate of Incorporation in the manner now
or hereafter prescribed by statute and this Certificate of Incorporation, and
all rights conferred upon stockholders herein are granted subject to this
reservation. No amendment or repeal of this Certificate of Incorporation shall
be made unless the same is first approved by the Board of Directors pursuant to
a resolution adopted by the Board of Directors in accordance with Section 242 of
the DGCL, and, except as otherwise provided by law, thereafter approved by the
stockholders. Subject to the terms of any series of Preferred Stock (provided
that any shares of such series are issued and outstanding), whenever any vote of
the holders of voting stock is required, and in addition to any other vote of
holders of voting stock that is required by this Certificate of Incorporation or
by law, the affirmative vote of a majority of the total votes eligible to be
cast by holders of voting stock with respect to such amendment or repeal, voting
together as a single class, at a duly constituted meeting of stockholders called
expressly for such purpose shall be required to amend or repeal any provisions
of this Certificate of Incorporation; provided, however, that, subject to the
terms of any series of Preferred Stock (provided that any shares of such series
are issued and outstanding), the affirmative vote of not less than 80% of the
total votes eligible to be cast by holders of
10
voting stock, voting together a single class, shall be required to amend or
repeal any of the provisions of Article X of this Certificate of Incorporation.
The name of the Incorporator of the Corporation is J. Benjamin English,
Esquire and his business address is 707 East Main Street, 11th Floor, in the
City of Richmond, Virginia 23219.
/s/ J. Benjamin English
--------------------------------------
Incorporator
J. Benjamin English
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
PERARDUA CORPORATION
1. The name of the Corporation is PerArdua Corporation. The amendments
to the Corporation's Certificate of Incorporation set forth herein were adopted
and approved in accordance with Section 242 of the Delaware General Corporation
Law by the Directors of the Corporation by unanimous consent effective April 9,
1997, and by the stockholders of the Corporation at the Corporation's Annual
Meeting of Stockholders duly held on April 23, 1997 (the "Annual Meeting").
2. The first paragraph of Article VI, Section 3 of the Certificate of
Incorporation is amended in its entirety to read as follows:
"The number of Directors of the Corporation shall be fixed by
resolution duly adopted from time to time by the Board of Directors. Directors
elected at an annual meeting of stockholders or at a special meeting of
stockholders shall be elected by a plurality of the votes cast at such meeting
and shall hold office for a term expiring at the next annual meeting of
stockholders and until their successors are duly elected and qualified, or until
their earlier resignation or removal."
3. Article VI, Section 4 of the Certificate of Incorporation is amended
in its entirety to read as follows:
"Section 4. Removal.
Subject to the rights, if any, of any series of Preferred Stock to
elect Directors and to remove any Director whom the holders of any such stock
have the right to elect, any Director (including persons elected by Directors to
fill vacancies in the Board of Directors) may be removed from office with or
without cause by the affirmative vote of a majority of the total votes which
would be eligible to be cast by stockholders in the election of such Director.
At least 30 days prior to any meeting of stockholders at which it is proposed
that any Director be removed from office, written notice of such proposed
removal shall be sent to the Director whose removal will be considered at the
meeting."
4. Article X of the Certificate of Incorporation is amended in its
entirety to read as follows:
"ARTICLE X
AMENDMENT OF CERTIFICATE OF INCORPORATION
Subject to the terms of any series of Preferred Stock (provided that
any shares of such series are issued and outstanding), the Corporation reserves
the right to amend or repeal this Certificate of Incorporation in the manner now
or hereafter prescribed by statute and this Certificate of Incorporation, and
all rights conferred upon stockholders herein are granted subject to this
reservation. No amendment or repeal of this Certificate of Incorporation shall
be made unless the same is first approved by the Board of Directors pursuant to
a resolution adopted by the Board of Directors in accordance with Section 242 of
the DGCL, and, except as otherwise provided by law, thereafter approved by the
stockholders. Subject to the terms of any series of Preferred Stock (provided
that any shares of such series are issued and outstanding), whenever any vote of
the holders of voting stock is required, and in addition to any other vote of
holders of voting stock that is required by this Certificate of Incorporation or
by law, the affirmative vote of a majority of the total votes eligible to be
cast by holders of voting stock with respect to such amendment or repeal, voting
together as a single class, at a duly constituted meeting of stockholders called
expressly for such purpose shall be required to amend or repeal any provisions
of this Certificate of Incorporation; provided, however, that, subject to the
terms of any series of Preferred Stock (provided that any shares of such series
are issued and outstanding), the affirmative vote of not less than two-thirds of
the total votes eligible to be cast by holders of voting stock, voting together
a single class, shall be required to amend or repeal any of the provisions of
Article V, VII, VIII, IX OR X of this Certificate of Incorporation."
5. Of the 2,643,440 shares of common stock, par value $0.01 per share,
outstanding as of the record date for the Annual Meeting of April 10, 1997, all
of which were entitled to vote on the amendments as a class, 2,299,577 shares
were present and voted at the Annual Meeting, either in person or by proxy. Of
such shares, 2,299,577 shares were voted FOR the amendments and no shares were
voted AGAINST the amendments. The number of shares voted for the amendments was
sufficient for their approval.
6. Except to the extent expressly amended hereby, the Certificate of
Incorporation of the Corporation shall remain in full force and effect.
IN WITNESS WHEREOF, PerArdua Corporation has caused this Certificate to
be executed by Samuel P. Sears, Jr., Secretary of the Corporation and its duly
authorized officer, on the 24th day of April, 1997.
PERARDUA CORPORATION
By:
----------------------
Samuel P. Sears, Jr.,
Secretary
2
EXHIBIT 3.2
BYLAWS
OF
PERARDUA CORPORATION
ARTICLE I
------------
Stockholders
------------
SECTION 1. Annual Meeting. The annual meeting of stockholders shall be
held at the hour, date and place within or without the United States which is
fixed by the majority of the Board of Directors, the Chairman of the Board, if
one is elected, or the President, which time, date and place may subsequently be
changed at any time by vote of the Board of Directors. If no annual meeting has
been held for a period of thirteen months after the Corporation's last annual
meeting of stockholders, a special meeting in lieu thereof may be held, and such
special meeting shall have, for the purposes of these Bylaws or otherwise, all
the force and effect of an annual meeting. Any and all references hereafter in
these Bylaws to an annual meeting or annual meetings also shall be deemed to
refer to any special meeting(s) in lieu thereof.
SECTION 2. Matters to be Considered at Annual Meetings. At any annual
meeting of stockholders or any special meeting in lieu of annual meeting of
stockholders (the "Annual Meeting"), only such business shall be conducted, and
only such proposals shall be acted upon, as shall have been properly brought
before such Annual Meeting. To be considered as properly brought before an
Annual Meeting, business must be: (a) specified in the notice of meeting, (b)
otherwise properly brought before the meeting by, or at the direction of, the
Board of Directors, or (c) otherwise properly brought before the meeting by any
holder of record (both as of the time notice of such proposal is given by the
stockholder as set forth below and as of the record date for the Annual Meeting
in question) of any shares of capital stock of the Corporation entitled to vote
at such Annual Meeting who complies with the requirements set forth in this
Section 2.
In addition to any other applicable requirements, for business to be
properly brought before an Annual Meeting by a stockholder of record of any
shares of capital stock entitled to vote at such Annual Meeting, such
stockholder shall: (i) give timely notice as required by this Section 2 to the
Secretary of the Corporation and (ii) be present at such meeting, either in
person or by a representative. For the first Annual Meeting following the
initial public offering of common stock of the Corporation, a stockholder's
notice shall be timely if delivered to, or mailed to and received by, the
Corporation at its principal executive office not later than the close of
business on the later of (A) the 75th day prior to the scheduled date of such
Annual Meeting or (B) the 15th day following the day on which public
announcement of
the date of such of such Annual Meeting is first made by the Corporation. For
all subsequent Annual Meetings, a stockholder's notice shall be timely if
delivered to, or mailed to and received by, the Corporation at its principal
executive office not less than 75 days nor more than 120 days prior to the
anniversary date of the immediately preceding Annual Meeting (the "Anniversary
Date"); provided, however, that in the event the Annual Meeting is scheduled to
be held on a date more than 30 days before the Anniversary Date or more than 60
days after the Anniversary Date, a stockholder's notice shall be timely if
delivered to, or mailed to and received by, the Corporation at its principal
executive office not later than the close of business on the later of (A) the
75th day prior to the scheduled date of such Annual Meeting or (B) the 15th day
following the day on which public announcement of the date of such Annual
Meeting is first made by the Corporation.
For purposes of these Bylaws, "public announcement" shall mean: (i)
disclosure in a press release reported by the Dow Jones News Service, Associated
Press or comparable national news service, (ii) a report or other document filed
publicly with the Securities and Exchange Commission (including, without
limitation, a Form 8-K), or (iii) a letter or report sent to stockholders of
record of the Corporation at the time of the mailing of such letter or report.
A stockholder's notice to the Secretary shall set forth as to each
matter proposed to be brought before an Annual Meeting: (i) a brief description
of the business the stockholder desires to bring before such Annual Meeting and
the reasons for conducting such business at such Annual Meeting, (ii) the name
and address, as they appear on the Corporation's stock transfer books, of the
stockholder proposing such business, (iii) the class and number of shares of the
Corporation's capital stock beneficially owned by the stockholder proposing such
business, (iv) the names and addresses of the beneficial owners, if any, of any
capital stock of the Corporation registered in such stockholder's name on such
books, and the class and number of shares of the Corporation's capital stock
beneficially owned by such beneficial owners, (v) the names and addresses of
other stockholders known by the stockholder proposing such business to support
such proposal, and the class and number of shares of the Corporation's capital
stock beneficially owned by such other stockholders, and (vi) any material
interest of the stockholder proposing to bring such business before such meeting
(or any other stockholders known to be supporting such proposal) in such
proposal.
If the Board of Directors or a designated committee thereof determines
that any stockholder proposal was not made in a timely fashion in accordance
with the provisions of this Section 2 or that the information provided in a
stockholder's notice does not satisfy the information requirements of this
Section 2 in any material respect, such proposal shall not be presented for
action at the Annual Meeting in question. If neither the Board of Directors nor
such committee makes a determination as to the validity of any stockholder
proposal in the manner set forth above, the presiding officer of the Annual
Meeting shall determine whether the stockholder proposal was made in accordance
with the terms of this Section 2. If the presiding officer determines that any
stockholder proposal was not made in a timely fashion in accordance with the
provisions of this Section 2 or that the information provided in a stockholder's
notice does not satisfy the information requirements of this Section 2 in any
2
material respect, such proposal shall not be presented for action at the Annual
Meeting in question. If the Board of Directors, a designated committee thereof
or the presiding officer determines that a stockholder proposal was made in
accordance with the requirements of this Section 2, the presiding officer shall
so declare at the Annual Meeting and ballots shall be provided for use at the
meeting with respect to such proposal.
Notwithstanding the foregoing provisions of this Bylaw, a stockholder
shall also comply with all applicable requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act") and the rules and regulations
thereunder with respect to the matters set forth in this Bylaw, and nothing in
this Bylaw shall be deemed to affect any rights of stockholders to request
inclusion of proposals in the Corporation's proxy statement pursuant to Rule
14a-8 under the Exchange Act.
SECTION 3. Special Meetings. Except as otherwise required by law and
subject to the rights, if any, of the holders of any series of Preferred Stock,
special meetings of the stockholders of the Corporation may be called only by
the Board of Directors pursuant to a resolution approved by the affirmative vote
of a majority of the Directors then in office.
SECTION 4. Matters to be Considered at Special Meetings. Only those
matters set forth in the notice of the special meeting may be considered or
acted upon at a special meeting of stockholders of the Corporation, unless
otherwise provided by law.
SECTION 5. Notice of Meetings; Adjournments. A written notice of all
Annual Meetings stating the hour, date and place of such Annual Meetings shall
be given by the Secretary or an Assistant Secretary (or other person authorized
by these Bylaws or by law) not less than 10 days nor more than 60 days before
the Annual Meeting, to each stockholder entitled to vote thereat and to each
stockholder who, by law or under the Certificate of Incorporation or under these
Bylaws, is entitled to such notice, by delivering such notice to him or by
mailing it, postage prepaid, addressed to such stockholder at the address of
such stockholder as it appears on the Corporation's stock transfer books. Such
notice shall be deemed to be delivered when hand delivered to such address or
deposited in the mail so addressed, with postage prepaid.
Notice of all special meetings of stockholders shall be given in the
same manner as provided for Annual Meetings, except that the written notice of
all special meetings shall state the purpose or purposes for which the meeting
has been called.
Notice of an Annual Meeting or special meeting of stockholders need not
be given to a stockholder if a written waiver of notice is signed before or
after such meeting by such stockholder or if such stockholder attends such
meeting, unless such attendance was for the express purpose of objecting at the
beginning of the meeting to the transaction of any business because the meeting
was not lawfully called or convened. Neither the business to be transacted at,
nor the purpose of, any Annual Meeting or special meeting of stockholders need
be specified in any written waiver of notice.
3
The Board of Directors may postpone and reschedule any previously
scheduled Annual Meeting or special meeting of stockholders and any record date
with respect thereto, regardless of whether any notice or public disclosure with
respect to any such meeting has been sent or made pursuant to Section 2 of this
Article I or Section 3 of Article II hereof or otherwise. In no event shall the
public announcement of an adjournment, postponement or rescheduling of any
previously scheduled meeting of stockholders commence a new time period for the
giving of a stockholder's notice under Section 2 of Article I and Section 3 of
Article II of these Bylaws.
When any meeting is convened, the presiding officer may adjourn the
meeting if (a) no quorum is present for the transaction of business, (b) the
Board of Directors determines that adjournment is necessary or appropriate to
enable the stockholders to consider fully information which the Board of
Directors determines has not been made sufficiently or timely available to
stockholders, or (c) the Board of Directors determines that adjournment is
otherwise in the best interests of the Corporation. When any Annual Meeting or
special meeting of stockholders is adjourned to another hour, date or place,
notice need not be given of the adjourned meeting other than an announcement at
the meeting at which the adjournment is taken of the hour, date and place to
which the meeting is adjourned; provided, however, that if the adjournment is
for more than 30 days, or if after the adjournment a new record date is fixed
for the adjourned meeting, notice of the adjourned meeting shall be given to
each stockholder of record entitled to vote thereat and each stockholder who, by
law or under the Corporation's Certificate of Incorporation or these Bylaws, is
entitled to such notice.
SECTION 6. Quorum. The holders of shares of voting stock representing a
majority of the voting power of the outstanding shares of voting stock issued,
outstanding and entitled to vote at a meeting of stockholders, represented in
person or by proxy at such meeting, shall constitute a quorum; but if less than
a quorum is present at a meeting, the holders of voting stock representing a
majority of the voting power present at the meeting or the presiding officer may
adjourn the meeting from time to time, and the meeting may be held as adjourned
without further notice, except as provided in Section 5 of this Article I. At
such adjourned meeting at which a quorum is present, any business may be
transacted which might have been transacted at the meeting as originally
noticed. The stockholders present at a duly constituted meeting may continue to
transact business until adjournment, notwithstanding the withdrawal of enough
stockholders to leave less than a quorum.
SECTION 7. Voting and Proxies. Stockholders shall have one vote for
each share of stock entitled to vote owned by them of record according to the
books of the Corporation, unless otherwise provided by law or by the
Corporation's Certificate of Incorporation. Stockholders may vote either in
person or by written proxy, but no proxy shall be voted or acted upon after
three years from its date, unless the proxy provides for a longer period.
Proxies shall be filed with the Secretary of the meeting before being voted.
Except as otherwise limited therein or as otherwise provided by law, proxies
shall entitle the persons authorized thereby to vote at any adjournment of such
meeting, but they shall not be valid after final adjournment of such meeting. A
proxy with respect to stock held in the name of two or more persons shall be
valid if executed by or on behalf of any one of them unless at or prior to
4
the exercise of the proxy the Corporation receives a specific written notice to
the contrary from any one of them. A proxy purporting to be executed by or on
behalf of a stockholder shall be deemed valid, and the burden of proving
invalidity shall rest on the challenger.
SECTION 8. Action at Meeting. When a quorum is present, any matter
before any meeting of stockholders shall be decided by the vote of a majority of
the voting power of shares of voting stock, present in person or represented by
proxy at such meeting and entitled to vote on such matter, except where a larger
vote is required by law, by the Certificate of Incorporation or by these Bylaws.
Any election by stockholders shall be determined by a plurality of the votes
cast, except where a larger vote is required by law, by the Certificate of
Incorporation or by these Bylaws. The Corporation shall not directly or
indirectly vote any shares of its own stock; provided, however, that the
Corporation may vote shares which it holds in a fiduciary capacity to the extent
permitted by law.
SECTION 9. Stockholder Lists. The Secretary or an Assistant Secretary
(or the Corporation's transfer agent or other person authorized by these Bylaws
or by law) shall prepare and make, at least 10 days before every Annual Meeting
or special meeting of stockholders, a complete list of the stockholders entitled
to vote at the meeting, arranged in alphabetical order, and showing the address
of each stockholder and the number of shares registered in the name of each
stockholder. Such list shall be open to the examination of any stockholder, for
any purpose germane to the meeting, during ordinary business hours, for a period
of at least 10 days prior to the meeting, either at a place within the city
where the meeting is to be held, which place shall be specified in the notice of
the meeting, or, if not so specified, at the place where the meeting is to be
held. The list shall also be produced and kept at the hour, date and place of
the meeting during the whole time thereof, and may be inspected by any
stockholder who is present.
SECTION 10. Presiding Officer. The Chairman of the Board, if one is
elected, or if not elected or in his absence, the President, shall preside at
all Annual Meetings or special meetings of stockholders and shall have the
power, among other things, to adjourn such meeting at any time and from time to
time, subject to Sections 5 and 6 of this Article I. The order of business and
all other matters of procedure at any meeting of the stockholders shall be
determined by the presiding officer.
SECTION 11. Voting Procedures and Inspectors of Elections. The
Corporation shall, in advance of any meeting of stockholders, appoint one or
more inspectors to act at the meeting and make a written report thereof. The
Corporation may designate one or more persons as alternate inspectors to replace
any inspector who fails to act. If no inspector or alternate is able to act at a
meeting of stockholders, the presiding officer shall appoint one or more
inspectors to act at the meeting. Any inspector may, but need not, be an
officer, employee or agent of the Corporation. Each inspector, before entering
upon the discharge of his duties, shall take and sign an oath faithfully to
execute the duties of inspector with strict impartiality and according to the
best of his or her ability. The inspectors shall perform such duties as are
required by the General Corporation Law of the State of Delaware, as amended
from time to time, including the counting of all votes and ballots. The
inspectors may appoint
5
or retain other persons or entities to assist the inspectors in the performance
of the duties of the inspectors. The presiding officer may review all
determinations made by the inspectors, and in so doing the presiding officer
shall be entitled to exercise his or her sole judgment and discretion and he or
she shall not be bound by any determinations made by the inspector(s). All
determinations by the inspector(s) and, if applicable, the presiding officer
shall be subject to further review by any court of competent jurisdiction.
ARTICLE II
----------
Directors
---------
SECTION 1. Powers. The business and affairs of the Corporation shall be
managed by or under the direction of the Board of Directors except as otherwise
provided by the Certificate of Incorporation or required by law.
SECTION 2. Number and Terms. The number and terms of Directors of the
Corporation shall be in accordance with the Corporation's Certificate of
Incorporation.
SECTION 3. Director Nominations. Nominations of candidates for election
as directors of the Corporation at any Annual Meeting may be made only (a) by,
or at the direction of, a majority of the Board of Directors or (b) by any
holder of record (both as of the time notice of such nomination is given by the
stockholder as set forth below and as of the record date for the Annual Meeting
in question) of any shares of the capital stock of the Corporation entitled to
vote at such Annual Meeting who complies with the timing, informational and
other requirements set forth in this Section 3. Any stockholder who seeks to
make such a nomination or his representative must be present in person at the
Annual Meeting. Only persons nominated in accordance with the procedures set
forth in this Section 3 shall be eligible for election as directors at an Annual
Meeting.
Nominations, other than those made by, or at the direction of, the
Board of Directors, shall be made pursuant to timely notice in writing to the
Secretary of the Corporation as set forth in this Section 3. For the first
Annual Meeting following the initial public offering of common stock of the
Corporation, a stockholder's notice shall be timely if delivered to, or mailed
to and received by, the Corporation at its principal executive office not later
than the close of business on the later of (A) the 75th day prior to the
scheduled date of such Annual Meeting or (B) the 15th day following the day on
which public announcement of the date of such Annual Meeting is first made by
the Corporation. For all subsequent Annual Meetings, a stockholder's notice
shall be timely if delivered to, or mailed to and received by, the Corporation
at its principal executive office not less than 75 days nor more than 120 days
prior to the Anniversary Date; provided, however, that in the event the Annual
Meeting is scheduled to be held on a date more than 30 days before the
Anniversary Date or more than 60 days after the Anniversary Date, a
stockholder's notice shall be timely if delivered to, or mailed and received by,
the Corporation at its principal executive office not later than the close of
business on the later of (i) the 75th day prior to the scheduled date of such
Annual Meeting or
6
(ii) the 15th day following the day on which public announcement of the date of
such Annual Meeting is first made by the Corporation.
A stockholder's notice to the Secretary shall set forth as to each
person whom the stockholder proposes to nominate for election or re-election as
a director: (i) the name, age, business address and residence address of such
person, (ii) the principal occupation or employment of such person, (iii) the
class and number of shares of the Corporation's capital stock which are
beneficially owned by such person on the date of such stockholder notice, and
(iv) the consent of each nominee to serve as a director if elected. A
stockholder's notice to the Secretary shall further set forth as to the
stockholder giving such notice: (i) the name and address, as they appear on the
Corporation's stock transfer books, of such stockholder and of the beneficial
owners (if any) of the Corporation's capital stock registered in such
stockholder's name and the name and address of other stockholders known by such
stockholder to be supporting such nominee(s), (ii) the class and number of
shares of the Corporation's capital stock which are held of record, beneficially
owned or represented by proxy by such stockholder and by any other stockholders
known by such stockholder to be supporting such nominee(s) on the record date
for the Annual Meeting in question (if such date shall then have been made
publicly available) and on the date of such stockholder's notice, and (iii) a
description of all arrangements or understandings between such stockholder and
each nominee and any other person or persons (naming such person or persons)
pursuant to which the nomination or nominations are to be made by such
stockholder.
If the Board of Directors or a designated committee thereof determines
that any stockholder nomination was not timely made in accordance with the terms
of this Section 3 or that the information provided in a stockholder's notice
does not satisfy the informational requirements of this Section 3 in any
material respect, then such nomination shall not be considered at the Annual
Meeting in question. If neither the Board of Directors nor such committee makes
a determination as to whether a nomination was made in accordance with the
provisions of this Section 3, the presiding officer of the Annual Meeting shall
determine whether a nomination was made in accordance with such provisions. If
the presiding officer determines that any stockholder nomination was not timely
made in accordance with the terms of this Section 3 or that the information
provided in a stockholder's notice does not satisfy the informational
requirements of this Section 3 in any material respect, then such nomination
shall not be considered at the Annual Meeting in question. If the Board of
Directors, a designated committee thereof or the presiding officer determines
that a nomination was made in accordance with the terms of this Section 3, the
presiding officer shall so declare at the Annual Meeting and ballots shall be
provided for use at the meeting with respect to such nominee.
Notwithstanding anything to the contrary in the second sentence of the
second paragraph of this Section 3, in the event that the number of directors to
be elected to the Board of Directors of the Corporation is increased and there
is no public announcement by the Corporation naming all of the nominees for
director or specifying the size of the increased Board of Directors at least 75
days prior to the Anniversary Date, a stockholder's notice required by this
Section 3 shall also be considered timely, but only with respect to nominees
7
for any new positions created by such increase, if such notice shall be
delivered to, or mailed to and received by, the Corporation at its principal
executive office not later than the close of business on the 15th day following
the day on which such public announcement is first made by the Corporation.
No person shall be elected by the stockholders as a Director of the
Corporation unless nominated in accordance with the procedures set forth in this
Section. Election of Directors at the annual meeting need not be by written
ballot, unless otherwise provided by the Board of Directors or presiding officer
at such annual meeting. If written ballots are to be used, ballots bearing the
names of all the persons who have been nominated for election as Directors at
the annual meeting in accordance with the procedures set forth in this Section
shall be provided for use at the annual meeting.
SECTION 4. Qualification. No Director need be a stockholder of the
Corporation.
SECTION 5. Vacancies. Except as otherwise fixed pursuant to the
provisions of Article IV of the Certificate of Incorporation of the Corporation
relating to the rights of the holders of any series of preferred stock to elect
Directors, any and all vacancies in the Board of Directors, however occurring,
including, without limitation, by reason of an increase in size of the Board of
Directors, or the death, resignation, disqualification or removal of a Director,
shall be filled solely by the affirmative vote of a majority of the remaining
Directors then in office, even if less than a quorum of the Board of Directors.
Any Director appointed in accordance with the preceding sentence shall hold
office for the remainder of the full term of the class of Directors in which the
new directorship was created or the vacancy occurred and until such Director's
successor shall have been duly elected and qualified or until his or her earlier
resignation or removal. When the number of Directors is increased or decreased,
the Board of Directors shall determine the class or classes to which the
increased or decreased number of Directors shall be apportioned; provided,
however, that no decrease in the number of Directors shall shorten the term of
any incumbent Director. In the event of a vacancy in the Board of Directors, the
remaining Directors, except as otherwise provided by law, may exercise the
powers of the full Board of Directors until the vacancy is filled.
SECTION 6. Removal. Directors may be removed from office in the manner
provided in the Corporation's Certificate of Incorporation.
SECTION 7. Resignation. A Director may resign at any time by giving
written notice to the Chairman of the Board, if one is elected, the President or
the Secretary. A resignation shall be effective upon receipt, unless the
resignation otherwise provides.
SECTION 8. Regular Meetings. The regular annual meeting of the Board of
Directors shall be held, without notice other than this Bylaw, on the same date
and at the same place as the Annual Meeting following the close of such meeting
of stockholders. Other regular meetings of the Board of Directors may be held at
such hour, date and place as the Board of Directors may by resolution from time
to time determine without notice other than such resolution.
8
SECTION 9. Special Meetings. Special meetings of the Board of Directors
may be called, orally or in writing, by or at the request of a majority of the
Directors, the Chairman of the Board, if one is elected, or the President. The
person calling any such special meeting of the Board of Directors may fix the
hour, date and place thereof.
SECTION 10. Notice of Meetings. Notice of the hour, date and place of
all special meetings of the Board of Directors shall be given to each Director
by the Secretary or an Assistant Secretary, or in case of the death, absence,
incapacity or refusal of such persons, by the Chairman of the Board, if one is
elected, or the President or such other officer designated by the Chairman of
the Board, if one is elected, or the President. Notice of any special meeting of
the Board of Directors shall be given to each Director in person, by telephone,
or by telex, telecopy, telegram, or other written form of electronic
communication, sent to his business or home address, at least 24 hours in
advance of the meeting, or by written notice mailed to his business or home
address, at least 48 hours in advance of the meeting. Such notice shall be
deemed to be delivered when hand delivered to such address, read to such
Director by telephone, deposited in the mail so addressed, with postage thereon
prepaid if mailed, dispatched or transmitted if telexed or telecopied, or when
delivered to the telegraph company if sent by telegram.
When any Board of Directors meeting, either regular or special, is
adjourned for 30 days or more, notice of the adjourned meeting shall be given as
in the case of an original meeting. It shall not be necessary to give any notice
of the hour, date or place of any meeting adjourned for less than 30 days or of
the business to be transacted thereat, other than an announcement at the meeting
at which such adjournment is taken of the hour, date and place to which the
meeting is adjourned.
A written waiver of notice signed before or after a meeting by a
Director and filed with the records of the meeting shall be deemed to be
equivalent to notice of the meeting. The attendance of a Director at a meeting
shall constitute a waiver of notice of such meeting, except where a Director
attends a meeting for the express purpose of objecting at the beginning of the
meeting to the transaction of any business because such meeting is not lawfully
called or convened. Except as otherwise required by law, by the Certificate of
Incorporation of the Corporation or by these Bylaws, neither the business to be
transacted at, nor the purpose of, any meeting of the Board of Directors need be
specified in the notice or waiver of notice of such meeting.
SECTION 11. Quorum. At any meeting of the Board of Directors, a
majority of the Directors then in office shall constitute a quorum for the
transaction of business, but if less than a quorum is present at a meeting, a
majority of the Directors present may adjourn the meeting from time to time, and
the meeting may be held as adjourned without further notice, except as provided
in Section 10 of this Article II. Any business which might have been transacted
at the meeting as originally noticed may be transacted at such adjourned meeting
at which a quorum is present.
9
SECTION 12. Action at Meetings. At any meeting of the Board of
Directors at which a quorum is present, a majority of the Directors present may
take any action on behalf of the Board of Directors, unless otherwise required
by law, by the Certificate of Incorporation of the Corporation or by these
Bylaws.
SECTION 13. Action by Consent. Any action required or permitted to be
taken at any meeting of the Board of Directors may be taken without a meeting if
all members of the Board of Directors consent thereto in writing. Such written
consent shall be filed with the records of the meetings of the Board of
Directors and shall be treated for all purposes as a vote at a meeting of the
Board of Directors.
SECTION 14. Manner of Participation. Directors may participate in
meetings of the Board of Directors by means of conference telephone or similar
communications equipment by means of which all Directors participating in the
meeting can hear each other, and participation in a meeting in accordance
herewith shall constitute presence in person at such meeting for purposes of
these Bylaws.
SECTION 15. Committees. The Board of Directors, by vote of a majority
of the Directors then in office, may elect from its number one or more
committees, including an Executive Committee, a Compensation Committee and an
Audit Committee, and may delegate thereto some or all of its powers except those
which by law, by the Certificate of Incorporation of the Corporation or by these
Bylaws may not be delegated. Except as the Board of Directors may otherwise
determine, any such committee may make rules for the conduct of its business,
but unless otherwise provided by the Board of Directors or in such rules, its
business shall be conducted so far as possible in the same manner as is provided
by these Bylaws for the Board of Directors. All members of such committees shall
hold such offices at the pleasure of the Board of Directors. The Board of
Directors may abolish any such committee at any time. Any committee to which the
Board of Directors delegates any of its powers or duties shall keep records of
its meetings and shall report its action to the Board of Directors. The Board of
Directors shall have power to rescind any action of any committee, to the extent
permitted by law, but no such rescission shall have retroactive effect.
SECTION 16. Compensation of Directors. Directors shall receive such
compensation for their services as shall be determined by a majority of the
Board of Directors provided that Directors who are serving the Corporation as
employees and who receive compensation for their services as such, shall not
receive any salary or other compensation for their services as Directors of the
Corporation.
ARTICLE III
-----------
Officers
--------
SECTION 1. Enumeration. The officers of the Corporation shall consist
of a President, a Treasurer, a Secretary and such other officers, including,
without limitation, a
10
Chairman of the Board of Directors and one or more Vice-Presidents (including
Executive Vice Presidents or Senior Vice Presidents), Assistant Vice Presidents,
Assistant Treasurers and Assistant Secretaries, as the Board of Directors may
determine.
SECTION 2. Election. At the regular annual meeting of the Board
following the annual meeting of stockholders, the Board of Directors shall elect
the President, the Treasurer and the Secretary. Other officers may be elected by
the Board of Directors at such regular annual meeting of the Board of Directors
or at any other regular or special meeting.
SECTION 3. Qualification. No officer need be a stockholder or a
Director. Any person may occupy more than one office of the Corporation at any
time. Any officer may be required by the Board of Directors to give bond for the
faithful performance of his duties in such amount and with such sureties as the
Board of Directors may determine.
SECTION 4. Tenure. Except as otherwise provided by the Certificate of
Incorporation of the Corporation or by these Bylaws, each of the officers of the
Corporation shall hold office until the regular annual meeting of the Board of
Directors following the next annual meeting of stockholders and until his
successor is elected and qualified or until his earlier resignation or removal.
SECTION 5. Resignation. Any officer may resign by delivering his or her
written resignation to the Corporation addressed to the President or the
Secretary, and such resignation shall be effective upon receipt unless it is
specified to be effective at some other time or upon the happening of some other
event.
SECTION 6. Removal. Except as otherwise provided by law, the Board of
Directors may remove any officer with or without cause by the affirmative vote
of a majority of the Directors then in office; provided, however, that if an
officer is to be removed for cause, he or she may only be removed after
reasonable notice and an opportunity to be heard by the Board of Directors.
SECTION 7. Absence or Disability. In the event of the absence or
disability of any officer, the Board of Directors may designate another officer
to act temporarily in place of such absent or disabled officer.
SECTION 8. Vacancies. Any vacancy in any office may be filled for the
unexpired portion of the term by the Board of Directors.
SECTION 9. President. Unless otherwise provided by the Board of
Directors or the Certificate of Incorporation, the President shall be the Chief
Executive Officer of the Corporation and shall, subject to the direction of the
Board of Directors, have general supervision and control of the Corporation's
business. If there is no Chairman of the Board or if he is absent, the President
shall preside, when present, at all meetings of stockholders and of the Board of
Directors. The President shall have such other powers and perform such other
duties as the Board of Directors may from time to time designate.
11
SECTION 10. Chairman of the Board. The Chairman of the Board, if one is
elected, shall preside, when present, at all meetings of the stockholders and of
the Board of Directors. The Chairman of the Board shall have such other powers
and shall perform such other duties as the Board of Directors may from time to
time designate.
SECTION 11. Vice Presidents and Assistant Vice Presidents. Any Vice
President (including any Executive Vice President or Senior Vice President) and
any Assistant Vice President shall have such powers and shall perform such
duties as the Board of Directors or the Chief Executive Officer may from time to
time designate.
SECTION 12. Treasurer and Assistant Treasurers. The Treasurer shall,
subject to the direction of the Board of Directors and except as the Board of
Directors or the Chief Executive Officer may otherwise provide, have general
charge of the financial affairs of the Corporation and shall cause to be kept
accurate books of account. The Treasurer shall have custody of all funds,
securities, and valuable documents of the Corporation. He or she shall have such
other duties and powers as may be designated from time to time by the Board of
Directors or the Chief Executive Officer.
Any Assistant Treasurer shall have such powers and perform such duties
as the Board of Directors or the Chief Executive Officer may from time to time
designate.
SECTION 13. Secretary and Assistant Secretaries. The Secretary shall
record all the proceedings of the meetings of the stockholders and the Board of
Directors (including committees of the Board) in books kept for that purpose. In
his absence from any such meeting, a temporary secretary chosen at the meeting
shall record the proceedings thereof. The Secretary shall have charge of the
stock ledger (which may, however, be kept by any transfer or other agent of the
Corporation). The Secretary shall have custody of the seal of the Corporation,
and the Secretary, or an Assistant Secretary, shall have authority to affix it
to any instrument requiring it, and, when so affixed, the seal may be attested
by his or her signature or that of an Assistant Secretary. The Secretary shall
have such other duties and powers as may be designated from time to time by the
Board of Directors or the Chief Executive Officer. In the absence of the
Secretary, any Assistant Secretary may perform his or her duties and
responsibilities.
Any Assistant Secretary shall have such powers and perform such duties
as the Board of Directors or the Chief Executive Officer may from time to time
designate.
SECTION 14. Other Powers and Duties. Subject to these Bylaws and to
such limitations as the Board of Directors may from time to time prescribe, the
officers of the Corporation shall each have such powers and duties as generally
pertain to their respective offices, as well as such powers and duties as from
time to time may be conferred by the Board of Directors or the Chief Executive
Officer.
12
ARTICLE IV
----------
Capital Stock
-------------
SECTION 1. Certificates of Stock. Each stockholder shall be entitled to
a certificate of the capital stock of the Corporation in such form as may from
time to time be prescribed by the Board of Directors. Such certificate shall be
signed by the Chairman of the Board of Directors, Vice Chairman of the Board of
Directors, the President or a Vice President and by the Treasurer or an
Assistant Treasurer, or the Secretary or an Assistant Secretary. The Corporation
seal and the signatures by Corporation officers, the transfer agent or the
registrar may be facsimiles. In case any officer, transfer agent or registrar
who has signed or whose facsimile signature has been placed on such certificate
shall have ceased to be such officer, transfer agent or registrar before such
certificate is issued, it may be issued by the Corporation with the same effect
as if he were such officer, transfer agent or registrar at the time of its
issue. Every certificate for shares of stock which are subject to any
restriction on transfer and every certificate issued when the Corporation is
authorized to issue more than one class or series of stock shall contain such
legend with respect thereto as is required by law.
SECTION 2. Transfers. Subject to any restrictions on transfer and
unless otherwise provided by the Board of Directors, shares of stock may be
transferred only on the books of the Corporation by the surrender to the
Corporation or its transfer agent of the certificate theretofore properly
endorsed or accompanied by a written assignment or power of attorney properly
executed, with transfer stamps (if necessary) affixed, and with such proof of
the authenticity of signature as the Corporation or its transfer agent may
reasonably require.
SECTION 3. Record Holders. Except as may otherwise be required by law,
by the Certificate of Incorporation of the Corporation or by these Bylaws, the
Corporation shall be entitled to treat the record holder of stock as shown on
its books as the owner of such stock for all purposes, including the payment of
dividends and the right to vote with respect thereto, regardless of any
transfer, pledge or other disposition of such stock, until the shares have been
transferred on the books of the Corporation in accordance with the requirements
of these Bylaws.
It shall be the duty of each stockholder to notify the Corporation of
his or her post office address and any changes thereto.
SECTION 4. Record Date. In order that the Corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors may fix a record date, which record
date shall not precede the date upon which the resolution fixing the record date
is adopted by the Board of Directors, and which record date: (1) in the case of
determination of stockholders entitled to vote at any meeting of stockholders,
shall, unless
13
otherwise required by law, not be more than sixty nor less than ten days before
the date of such meeting and (2) in the case of any other action, shall not be
more than sixty days prior to such other action. If no record date is fixed: (1)
the record date for determining stockholders entitled to notice of or to vote at
a meeting of stockholders shall be at the close of business on the day next
preceding the day on which notice is given, or, if notice is waived, at the
close of business on the day next preceding the day on which the meeting is held
and (2) the record date for determining stockholders for any other purpose shall
be at the close of business on the day on which the Board of Directors adopts
the resolution relating thereto.
SECTION 5. Replacement of Certificates. In case of the alleged loss,
destruction or mutilation of a certificate of stock, a duplicate certificate may
be issued in place thereof, upon such terms as the Board of Directors may
prescribe.
ARTICLE V
---------
Miscellaneous Provisions
------------------------
SECTION 1. Fiscal Year. Except as otherwise determined by the Board of
Directors, the fiscal year of the Corporation shall end on the last day of
November of each year.
SECTION 2. Seal. The Board of Directors shall have power to adopt and
alter the seal of the Corporation.
SECTION 3. Execution of Instruments. All deeds, leases, transfers,
contracts, bonds, notes and other obligations to be entered into by the
Corporation in the ordinary course of its business without Director action may
be executed on behalf of the Corporation by the Chairman of the Board, if one is
elected, the President or the Treasurer or any other officer, employee or agent
of the Corporation as the Board of Directors or Executive Committee may
authorize.
SECTION 4. Voting of Securities. Unless the Board of Directors
otherwise provides, the Chairman of the Board, if one is elected, the President
or the Treasurer may waive notice of and act on behalf of this Corporation, or
appoint another person or persons to act as proxy or attorney in fact for this
Corporation with or without discretionary power and/or power of substitution, at
any meeting of stockholders or shareholders of any other corporation or
organization, any of whose securities are held by this Corporation.
SECTION 5. Resident Agent. The Board of Directors may appoint a
resident agent upon whom legal process may be served in any action or proceeding
against the Corporation.
SECTION 6 Corporate Records. The original or attested copies of the
Certificate of Incorporation, Bylaws and records of all meetings of the
incorporators, stockholders and the Board of Directors and the stock transfer
books, which shall contain the names of all
14
stockholders, their record addresses and the amount of stock held by each, may
be kept outside the State of Delaware and shall be kept at the principal office
of the Corporation, at the office of its counsel or at an office of its transfer
agent or at such other place or places as may be designated from time to time by
the Board of Directors.
SECTION 7. Certificate of Incorporation. All references in these Bylaws
to the Certificate of Incorporation shall be deemed to refer to the Certificate
of Incorporation of the Corporation, as amended and in effect from time to time.
SECTION 8. Amendment of Bylaws.
(a) Amendment by Directors. Except as provided otherwise by law, these
Bylaws may be amended or repealed by the affirmative vote of a majority of the
Directors then in office.
(b) Amendment by Stockholders. These Bylaws may be amended or repealed
at any annual meeting of stockholders, or special meeting of stockholders called
for such purpose, by the affirmative vote of at least two-thirds of the total
votes eligible to be cast on such amendment or repeal by holders of voting
stock, voting together as a single class; provided, however, that if the Board
of Directors recommends that stockholders approve such amendment or repeal at
such meeting of stockholders, such amendment or repeal shall only require the
affirmative vote of a majority of the total votes eligible to be cast on such
amendment or repeal by holders of voting stock, voting together as a single
class.
15
AMENDMENTS TO THE BYLAWS
OF
PERARDUA CORPORATION
1. Article I, Section 3 of the Bylaws is amended in its entirety to read as
follows:
"SECTION 3. Special Meetings. Except as otherwise required by law and
subject to the rights, if any, of the holders of any series of Preferred
Stock, special meetings of the stockholders of the Corporation may be
called only by (i) the Board of Directors pursuant to a resolution approved
by the affirmative vote of a majority of the Directors then in office, or
(ii) one or more stockholders holding shares in the aggregate entitled to
cast not less than ten percent (10%) of the votes at that meeting.
Stockholders wishing to call a special meeting of stockholders shall send
by registered mail, or deliver to, the Secretary of the Corporation at the
principal executive office of the Corporation a request in writing, which
request shall state (i) a brief description of each item of business to be
brought before the special meeting and the reasons for conducting such
business at the special meeting, (ii) the name and address, as they appear
on the Corporation's stock transfer books, of each stockholder proposing
such business, (iii) the class and number of shares of the Corporation's
capital stock beneficially owned by each stockholder proposing such
business, (iv) the names and addresses of the beneficial owners, if any, of
any capital stock of the Corporation registered in each such stockholder's
name on such books, and the class and number of shares of the Corporation's
capital stock beneficially owned by such beneficial owners, and (v) any
material interest of each stockholder proposing to bring such business
before such meeting in such proposal. Upon due receipt of such a request,
it shall be the duty of the Secretary of the Corporation, within 15 days of
receipt of such request, to cause notice to be given to the stockholders
entitled to vote that a meeting will be held on a date to be specified in
the notice of meeting, which date shall be determined by the Board of
Directors of the Corporation and shall be not more than 75 days after the
date of receipt of the stockholder request to call a special meeting."
2. Article II, Section 3 of the Bylaws is amended in its entirety to read as
follows:
"SECTION 3. Director Nominations. Nominations of candidates for
election as directors of the Corporation at any Annual Meeting or special
meeting of stockholders duly called for the purpose of electing directors
(an "Election Special Meeting") may be made only (a) by, or at the
direction of, a majority of the Board of Directors or (b) by any holder of
record (both as of the time notice of such nomination is given by the
stockholder as set forth below and as of the record date for the Annual
Meeting or the Election Special Meeting in question) of any shares of the
capital stock of the Corporation entitled to vote at such Annual Meeting or
Election Special Meeting who complies with the timing, informational and
other requirements set forth in this Section 3. Any stockholder who seeks
to make such a nomination or his representative must be present in person
at the Annual Meeting or the Election Special Meeting. Only persons
nominated in accordance with the procedures set forth in this Section 3
shall be eligible for election as directors at an Annual Meeting or an
Election Special Meeting.
Nominations, other than those made by, or at the direction of, the
Board of Directors, shall be made pursuant to timely notice in writing to
the Secretary of the Corporation as set forth in this Section 3. For the
first Annual Meeting following the initial public offering of common stock
of the Corporation, a stockholder's notice shall be timely if delivered to,
or mailed to and received by, the Corporation at its principal executive
office not later than the close of business on the later of (A) the 75th
day prior to the scheduled date of such Annual Meeting or (B) the 15th day
following the day on which public announcement of the date of such Annual
Meeting is first made by the Corporation. For all subsequent Annual
Meetings, a stockholder's notice shall be timely if delivered to, or mailed
to and received by, the Corporation at its principal executive office not
less than 75 days nor more than 120 days prior to the Anniversary Date;
provided, however, that in the event the Annual Meeting is scheduled to be
held on a date more than 30 days before the Anniversary Date or more than
60 days after the Anniversary Date, a stockholder's notice shall be timely
if delivered to, or mailed and received by, the Corporation at its
principal executive office not later than the close of business on the
later of (i) the 75th day prior to the scheduled date of such Annual
Meeting or (ii) the 15th day following the day on which public announcement
of the date of such Annual Meeting is first made by the Corporation. For an
Election Special Meeting, a stockholder's notice shall be timely if
delivered to, or mailed to and received by, the Corporation at its
principal executive office not later than the close of business on the 15th
day following the day on which a public announcement of the date of the
Election Special Meeting is first made by the Corporation.
A stockholder's notice to the Secretary shall set forth as to each
person whom the stockholder proposes to nominate for election or
re-election as a director: (i) the name, age, business address and
residence address of such person, (ii) the principal occupation or
employment of such person, (iii) the class and number of shares of the
Corporation's capital stock which are beneficially owned by such person on
the date of such stockholder notice, and (iv) the consent of each nominee
to serve as a director if elected. A stockholder's notice to the Secretary
shall further set forth as to the stockholder giving such notice: (i) the
name and address, as they appear on the Corporation's stock transfer books,
of such stockholder and of the beneficial owners (if any) of the
Corporation's capital stock registered in such stockholder's name and the
name and address of other stockholders known by such stockholder to be
supporting such nominee(s), (ii) the class and number of shares of the
Corporation's capital stock which are held of record, beneficially owned or
represented by proxy by such stockholder and by any other stockholders
known by such stockholder to be supporting such nominee(s) on the record
date for the Annual Meeting or the Election Special Meeting in question (if
such date shall then have been made publicly available) and on the date of
such stockholder's notice, and (iii) a description of all arrangements or
understandings between such stockholder and each nominee and any other
person or persons (naming such person or persons) pursuant to which the
nomination or nominations are to be made by such stockholder.
If the Board of Directors or a designated committee thereof determines
that any stockholder nomination was not timely made in accordance with the
terms of this Section 3 or that the information provided in a stockholder's
notice does not satisfy the informational
2
requirements of this Section 3 in any material respect, then such
nomination shall not be considered at the Annual Meeting or the Election
Special Meeting in question. If neither the Board of Directors nor such
committee makes a determination as to whether a nomination was made in
accordance with the provisions of this Section 3, the presiding officer of
the Annual Meeting or the Election Special Meeting shall determine whether
a nomination was made in accordance with such provisions. If the presiding
officer determines that any stockholder nomination was not timely made in
accordance with the terms of this Section 3 or that the information
provided in a stockholder's notice does not satisfy the informational
requirements of this Section 3 in any material respect, then such
nomination shall not be considered at the Annual Meeting or the Election
Special Meeting in question. If the Board of Directors, a designated
committee thereof or the presiding officer determines that a nomination was
made in accordance with the terms of this Section 3, the presiding officer
shall so declare at the Annual Meeting or the Election Special Meeting and
ballots shall be provided for use at the meeting with respect to such
nominee.
Notwithstanding anything to the contrary in the second sentence of the
second paragraph of this Section 3, in the event that the number of
directors to be elected to the Board of Directors of the Corporation is
increased and there is no public announcement by the Corporation naming all
of the nominees for director or specifying the size of the increased Board
of Directors at least 75 days prior to the Anniversary Date, a
stockholder's notice required by this Section 3 shall also be considered
timely, but only with respect to nominees for any new positions created by
such increase, if such notice shall be delivered to, or mailed to and
received by, the Corporation at its principal executive office not later
than the close of business on the 15th day following the day on which such
public announcement is first made by the Corporation.
No person shall be elected by the stockholders as a Director of the
Corporation unless nominated in accordance with the procedures set forth in
this Section. Election of Directors at the Annual Meeting or an Election
Special Meeting need not be by written ballot, unless otherwise provided by
the Board of Directors or presiding officer at such Annual Meeting or
Election Special Meeting. If written ballots are to be used, ballots
bearing the names of all the persons who have been nominated for election
as Directors at the Annual Meeting or the Election Special Meeting in
accordance with the procedures set forth in this Section shall be provided
for use at the Annual Meeting or the Election Special Meeting."
3 Article II, Section 5 of the Bylaws is amended in its entirety to read as
follows:
"SECTION 5. Vacancies. Except as otherwise fixed pursuant to the
provisions of Article IV of the Certificate of Incorporation of the
Corporation relating to the rights of the holders of any series of
preferred stock to elect Directors, any and all vacancies in the Board of
Directors, however occurring, including, without limitation, by reason of
an increase in size of the Board of Directors, or the death, resignation,
disqualification or removal of a Director, shall be filled either by the
affirmative vote of a majority of the remaining Directors then in office,
even if less than a quorum of the Board of Directors, or by the vote of a
plurality of the shares voting at an Annual Meeting or an Election Special
3
Meeting. Any Director appointed or elected in accordance with the preceding
sentence shall hold office until the next Annual Meeting and until such
Director's successor shall have been duly elected and qualified, or until
his or her earlier resignation or removal. In the event of a vacancy in the
Board of Directors, the remaining Directors, except as otherwise provided
by law, may exercise the powers of the full Board of Directors until the
vacancy is filled."
4
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the use in this Registration Statement of our report,
dated January 24, 1997, except for Note 6 as to which the date is April 9, 1997,
relating to the financial statements of PerArdua Corporation, and to the
reference to our Firm under the caption "Experts" in the Prospectus.
MCGLADREY & PULLEN, LLP
Richmond, Virginia
June 5, 1997
