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As filed with the Securities and Exchange Commission on February 24, 2000
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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AMENDMENT NO. 1
TO
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES OF SMALL BUSINESS ISSUERS
UNDER SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
-----------------------------
BIOSANTE PHARMACEUTICALS, INC.
(Name of Small Business Issuer in its charter)
WYOMING
(State or other jurisdiction of 58-2301143
incorporation or organization) (I.R.S. Employer Identification No.)
175 OLDE HALF DAY ROAD, SUITE 123
LINCOLNSHIRE, ILLINOIS 60069
(Address of principal executive offices) (Zip Code)
(847) 793-2458
(Issuer's telephone number, including area code)
-----------------------------
Securities to be registered under Section 12(b) of the Act:
NONE
Securities to be registered under Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE PER SHARE
(Title of Class)
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IN REVIEWING THIS REGISTRATION STATEMENT, YOU SHOULD CAREFULLY CONSIDER THE
MATTERS DESCRIBED UNDER THE HEADINGS "RISKS RELATING TO OUR COMPANY" BEGINNING
ON PAGE 15, "RISKS RELATING TO OUR INDUSTRY" ON PAGE 23 AND "RISKS RELATING TO
OUR COMMON STOCK" BEGINNING ON PAGE 24.
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
OVERVIEW
We are a development stage biopharmaceutical company engaged in the
development and commercialization of vaccine adjuvants or immune system
boosters, proprietary novel vaccines and drug delivery systems. Our core
technology, which we license on an exclusive basis from the University of
California, is based on the use of extremely small, solid, uniform particles,
which we call "nanoparticles," as immune system boosters and for drug
delivery. We have identified three potential initial applications for our
core technology:
- the creation of improved versions of current vaccines by the
"adjuvant" activity of our proprietary nanoparticles that
would enhance the ability of a vaccine to stimulate an immune
response;
- the development of new, unique vaccines against diseases for
which there currently are few or no effective methods of
prevention (E.G., genital herpes); and
- the creation of inhaled forms of drugs that currently must
be given by injection (E.G., insulin).
Our goal is to leverage our core technology to become a pharmaceutical
company that develops and commercializes a wide range of pharmaceutical
products. Our strategy to obtain this goal is to:
- enter into business collaborations or joint ventures to
further develop and commercialize products incorporating our
core technology;
- in-license or otherwise acquire products in the late-stage
development phase;
- in-license or otherwise acquire products already on the
market; and
- enter into business collaborations or joint ventures with
complementary firms outside the scope of our core technology.
On November 1, 1999, we announced that we formed a collaborative
research alliance with Medi-Ject Corporation to evaluate the efficacy of
continuing our nanoparticle drug delivery and adjuvant or immune system
boosters with Medi-Ject's needle-free pressure injection. This research
alliance will evaluate the ability of the combined systems to deliver DNA
vaccines as part of a DNA vaccine program at a major U.S. university.
On November 10, 1999, our shareholders approved our name change from
Ben-Abraham Technologies Inc. to BioSante Pharmaceuticals, Inc. Our company,
which was initially formed as a corporation organized under the laws of the
Province of Ontario on August 29, 1996, was continued as a corporation under
the laws of the State of Wyoming on December 19, 1996. Our company is the
continuing corporation resulting from an amalgamation, or consolidation, of
three companies, our company, which was previously named "Ben-Abraham
Technologies Inc.", Structured Biologicals Inc., a corporation organized
under the laws of the Province of Ontario and 923934 Ontario Inc., a
corporation organized under the laws of the Province of Ontario and a wholly
owned subsidiary
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of Structured Biologicals. The amalgamation was approved by our shareholders
on November 27, 1996 and the articles of arrangement were filed and became
effective as of December 6, 1996.
INDUSTRY BACKGROUND
In order to understand the three potential initial applications for
our core technology, it is helpful to understand the vaccine, vaccine
adjuvant and drug delivery markets and the need for products incorporating
our core technology in each of these.
NEW VACCINES. The function of the human immune system is to respond
to pathogens, which are agents that cause disease, such as infectious
bacteria and viruses that enter the body. However, a pathogen may establish
an infection and cause disease before it is eliminated by an immune response.
Antibodies are produced as part of the immune response to antigens, which are
components of the pathogen. These antibodies can continue to circulate in the
human body for many years, providing continued protection against reinfection
by the same pathogen.
Vaccines are a preemptive means of generating a protective antibody
response. A vaccine consists of either a weakened pathogen or
pathogen-specific, non-replicating antigens or antigens that do not
reproduce, which are deliberately administered to induce the production of
antibodies. When weakened pathogens are used as a vaccine, they replicate or
reproduce in the body, extending presentation to the immune system and
inducing the production of antibodies without causing the underlying disease.
When non-replicating antigens are used as a vaccine, they must be delivered
in sufficient quantity and remain in the body long enough to generate an
effective antibody response. To achieve this goal, many vaccines require
multiple administrations over a period of time.
The Centers for Disease Control and Prevention have estimated that
every dollar spent on vaccination saves $16 in healthcare costs. D&MD
Reports, an industry research report, indicates that the vaccine segment is
growing faster than any other part of the pharmaceutical market. From 1990 to
1997, annual worldwide vaccine sales increased from $1.6 billion to $4.1
billion. By the year 2000, the worldwide vaccine market is expected to hit
$6.5 billion. Worldwide vaccine sales are expected to grow 15% a year over
the next decade, and by year 2010 vaccines are forecasted to be a $14 billion
market. We believe that the acceleration of this growth rate will largely be
a result of advances in vaccine technologies and formulations that address
the shortcomings of existing vaccines. Areas of potential improvement include
enhancement of immune responses, which could lead to a reduction in the
number of doses required for effective protection as well as effective
immunization in a higher percentage of the population, and delivery of
vaccines through methods other than injection.
Our nanoparticle technology presents a new, and we believe, more
effective and safer, approach to vaccine preparation. Based on animal tests
to date, we are contemplating developing a vaccine to prevent or treat the
herpes simplex type II virus, which is most often associated with genital
herpes infections. Nearly 30 million people in the U.S. are infected with the
herpes simplex type II virus. Up to 500,000 new cases are reported each year,
according to the Alan Guttmacher Institute. To date, there is no approved
vaccine for genital herpes. In addition, we have begun discussions with other
companies to out-license our adjuvant, or immune system booster, for use in
those companies' vaccine development.
VACCINE ADJUVANTS. The antigens contained in many injectable
vaccines will not produce an immune response sufficient to confer protection
against infection and therefore will require the use of an adjuvant to
sustain the presentation of the antigens to the human immune system. As a
result, most vaccines are combined with an adjuvant that enhances the ability
of an injected vaccine to stimulate an immune response and thus protect the
recipient by preventing or treating diseases. Aluminum hydroxide, or alum, is
the only adjuvant currently approved by the United States Food and Drug
Administration for commercial use in humans. While alum has gained widespread
use, it does not sufficiently enhance the immune response to permit
administration
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of many existing injected vaccines in a single dose. In the case of certain
vaccines, such as influenza, alum is not effectively used as an adjuvant
because of the potential for allergic or other reactions. Accordingly, we
believe that there is a significant need for a new adjuvant that is safe,
works with a wide variety of antigens, and induces a protective immune
response with only one or two injections. These attributes could result in
certain benefits, including cost savings and improved patient compliance.
Our nanoparticles (we refer to our nanoparticles as CAP) when
combined with vaccines have been shown in animal studies conducted by us to
possess an ability to elicit a higher immune response than non-adjuvanted
vaccines and an immune response of the same magnitude as alum-formulated
vaccines but up to 100 times lower concentrations of adjuvant. These
preclinical studies also have shown that our CAP nanoparticles also may
sustain higher antibody levels over a longer time period than both
alum-formulated vaccines and non-adjuvanted vaccines. Based on these
preclinical results, we believe that our CAP nanoparticles may offer a means
of preparing new improved formulations of current vaccines that are equal or
better in their immunogenicity, that is, in their capacity to elicit an
immune response, to alum-formulated and non-adjuvanted vaccines but may be
injected in lower concentrations and less often which could result in certain
benefits, including cost savings and improved patient compliance.
DRUG DELIVERY SYSTEMS. The third field of use in which we are
exploring applying our proprietary nanoparticle technology is the creation of
inhaled forms of drugs that currently must be given by injection (E.G.,
insulin). Many therapeutic drugs, including insulin, are currently delivered
by injection. Injections are undesirable for numerous reasons, including
patient discomfort, inconvenience and risk of infection. Poor patient
acceptance of, and compliance with, injectable therapies can lead to
increased incidence of medical complications and higher disease management
costs. Alternatives to injection, such as oral, transdermal (through the
skin) and nasal delivery, have to date been shown generally to be
commercially unattractive due to low natural bioavailability. Bioavailability
is the amount of drug absorbed from the delivery site into the bloodstream.
As an alternative to the invasiveness of injection, we believe our
nanoparticle technology can assist in the creation of inhaled forms of drugs
that currently must be given by injection.
The first market in which we are targeting our development efforts
for an inhaled form of drug incorporating our nanoparticle technology is the
diabetes market. Diabetes is a chronic disease in which the body's metabolism
of glucose is ineffective due to inadequate production of insulin. Over time,
high blood glucose levels can lead to eye, kidney and nerve diseases. It is
estimated that there are as many as 120 million people with diabetes
worldwide, and according to the Centers for Disease Control and Prevention,
more than 16 million people in the United States have diabetes, of which 10.3
million have been diagnosed with diabetes and 5.4 million have undiagnosed
diabetes. There are two primary classes of diabetes, type I and type II. It
is estimated that there are over one million type I diabetics in the United
States, and about 45,000 new cases are diagnosed each year. Virtually all of
the type I diabetics require daily insulin injections and most are currently
monitoring their own blood glucose levels. According to the Centers for
Disease Control and Prevention, as of 1997, approximately eight to nine
million Americans have been diagnosed with type II diabetes. Although most
patients with type II diabetes do not require insulin as part of their
therapy, in aggregate, they consume the majority of insulin in the United
States due to their larger numbers. According to the Medical & Healthcare
Market Place Guide, the insulin market in the United States exceeded $2.7
billion in 1998.
Various manufacturers, including Eli Lilly and Company, Novo-Nordisk
A/S and Hoechst Marion Roussel AG supply insulin. Insulin is currently
marketed only in injectable form. Several companies, however, are working to
develop an insulin pulmonary delivery system to allow for delivery of insulin
into the lungs thereby eliminating the need for at least a portion of
injectable insulin. These companies include the combined efforts of Inhale
Therapeutic Systems, Inc., Pfizer, Inc. and Hoechst Marion Roussel AG; Dura
Pharmaceuticals Inc. and Eli Lilly and Company; and Aradigm Corporation and
Novo Nordisk A/S. We believe that we have created an improved formulation for
the inhaled delivery of insulin that could be used in conjunction with the
combined efforts of these companies.
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DESCRIPTION OF OUR CORE TECHNOLOGY
Research and development involving our core technology originated in
a project set up under an agreement dated April 6, 1989 between the University
of California and our predecessor company, Structured Biologicals, relating to
viral protein surface adsorption studies. The discovery research was performed
by Structured Biologicals at UCLA School of Medicine and was based, in essence,
on the use of extremely small, solid, uniform particles as components that
could increase the stability of drugs and act as systems to deliver drugs into
the body. These ultrafine particles are made from inert, biologically
acceptable materials, such as ceramics, pure crystalline carbon or a
biodegradable calcium phosphate compound. The size of the particles is in the
nanometer range. A nanometer is one millionth of a millimeter and typically
particles measure less than 1,000 nanometers (nm). For comparison, a polio
virus particle is about 27 nm in diameter, a herpes virus particle has a
central core measuring 100 nm in diameter, contained in an envelope measuring
150-200 nm, while a tuberculosis bacterium is rod-shaped, about 1,200 nm long
by 300 nm across. Because the size of these particles is measured in nanometers,
we use the term "nanoparticles" to describe them.
We use the nanoparticles as the basis of a delivery system by
applying a layer of a "bonding" coating of cellobiose or another carbohydrate
derivative. The critical property of these coated nanoparticles is that
biologically active molecules, proteins, peptides or pharmacological agents,
for example, vaccine components like bacterial or viral antigens or proteins
like insulin, attached to them retain their activity and can be protected
from natural alterations to their molecular structure by adverse environmental
conditions. It has been shown in studies conducted by us that, when these
combinations are injected into animals, the attachment can actually enhance
the biological activity as compared to injection of the molecule alone in
solution.
A major immune response that is triggered by these combination
particles is the creation of antibody molecules, which can then specifically
counteract an invading virus or bacterium. Similarly, a drug will produce an
effect on an organ system only if it can attach to specific receptors on the
surface of target cells (E.G., tumor cells). The stabilizing and slow release
capabilities of a drug carrier and delivery system based on this discovery
can lead to significant advances towards finding more effective and less
toxic or harmful molecules to seek out and attach to such receptors.
We believe our core technology has a number of benefits, including
the following:
- it is biodegradable (capable of being decomposed by natural
biological processes) and non-toxic and therefore potentially
safe to use and introduce into the human body;
- it is fast, easy and inexpensive to manufacture which will
keep our costs down and potentially improve our profit
margins;
- the nanometer (one-millionth of a millimeter) size range
makes it ideal for delivering drugs through aerosol sprays
or inhalation instead of using painful injections; and
- it has excellent "loading" capacity - the amount of
molecules that can bond with the nanoparticles - thereby
potentially decreasing the dose needed to be taken by
patients.
Research in these areas has resulted in the issuance of a number of
patents that we license from the University of California. For more information
of these patents, we refer you to the information under the heading "Patents,
Licenses and Proprietary Rights."
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PROPOSED PRODUCTS AND PRODUCT DEVELOPMENT
We plan to develop commercial applications of our core technology
and any proprietary technology developed as a result of our ongoing research
and development efforts. Initially, we plan to pursue the development of (1)
vaccine adjuvants, (2) new virus vaccines, including vaccines to treat or
prevent disease caused by Herpes viruses and (3) drug delivery systems,
including a method of delivering insulin through inhalation. Our research and
development team is currently pursuing these objectives in our laboratory in
Smyrna, Georgia.
VACCINE ADJUVANTS. Our nanoparticles when combined with vaccine
antigens have been shown in animal studies conducted by us to possess an
ability to elicit a higher immune response than non-adjuvanted vaccines and
an immune response of the same magnitude as alum-formulated vaccines but up
to 100 times lower concentrations. These preclinical studies also have shown
that our CAP nanoparticles also may sustain higher antibody levels over a
longer time period than both alum-formulated vaccines and non-adjuvanted
vaccines. Because our CAP nanoparticles are made of calcium phosphate, which
has a chemical nature similar to normal bone material and therefore is
natural to the human body, as opposed to aluminum hydroxide, or alum, which
is not natural to the human body, we believe that our nanoparticles may be
safer to use than alum. In our animal studies, we observed no material
adverse reactions when our CAP nanoparticles were administered at effective
levels.
Based on these preclinical results, we believe that our CAP
nanoparticles may offer a means of preparing new improved formulations of
current vaccines that are equal or better in their immunogenicity, that is,
in their capacity to elicit an immune response, to alum-formulated and
non-adjuvanted vaccines but may be injected in lower concentrations and less
often which could result in certain benefits, including cost savings and
improved patient compliance. We hope to file an investigational new drug
(IND) application with the FDA before the end of 2000 to commence a Phase I
human clinical trial. As discussed in more detail under the heading
"Government Regulation," the purpose of a Phase I trial is to evaluate the
metabolism and safety of the experimental product in humans, the side effects
associated with increasing doses, and, if possible, to gain early evidence of
possible effectiveness. The Phase I trial of our CAP specifically will look
at safety parameters, including local irritation and blood chemistry changes.
In anticipation of commencing the Phase I trial, we have made arrangements
with the University of Iowa to assist us in manufacturing our CAP
nanoparticles for use in our proposed Phase I human clinical trial.
In addition to continuing our own research and development in this
area, we intend to seek opportunities to enter into business collaborations
or joint ventures with vaccine companies and others interested in
co-development and co-marketing arrangements with respect to our nanoparticle
adjuvants. These arrangements also could include out-licenses of our core
technology to vaccine companies and others for further development in their
on-going vaccine development.
NEW VACCINES. We believe our nanoparticle technology presents a new,
and more effective and safer, approach to vaccine preparation. As with our
vaccine adjuvant technology, we are continuing our own research and
development in this area, but we also intend to seek opportunities to enter
into business collaborations or joint ventures with vaccine companies and
others interested in co-development and co-marketing arrangements. We believe
these collaborations may enable us to accelerate the development of potential
improved vaccines for any products developed from our core technology. These
arrangements also could include out-licenses of our core technology to
vaccine companies and others for further development and marketing. We have
begun discussions with other companies to out-license our adjuvant for use in
those companies' new vaccine development.
Based on animal tests to date, we hope to develop a vaccine using
our proprietary nanoparticle technology to prevent or treat genital herpes.
Herpes is the family name of over 50 related viruses that share
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common characteristics. The viruses that cause oro-facial (affecting the
lips, mouth and face and sometimes called "cold sores") and genital herpes
are two members of this group and are classified as herpes simplex virus type
I and herpes simplex virus type II, respectively. To date, there is no
currently approved vaccine for genital herpes.
DRUG DELIVERY SYSTEMS. The third field of use in which we are
exploring applying our core technology involves creating novel and improved
forms of delivery of drugs, including hormones (E.G., insulin). The
attachment of drugs to nanoparticles may enhance their stability in the body
or enable the addition of further protective coatings to permit oral,
delayed-release and mucosal (through mucous membranes) applications.
Currently, insulin is given by frequent, inconvenient and often painful
injections. However, several companies are in the process of developing and
testing products that will deliver insulin orally or through inhalation. We
believe we may have successfully created a formulation for the inhaled
delivery of insulin. Our research and development efforts in this area are on
going. We are in the process of contacting several insulin manufacturers and
companies with devices for inhalation of drugs to pursue collaborations for
this development.
FUTURE PRODUCT DEVELOPMENT
We intend to explore other applications of our nanoparticle technology. Such
applications may include the development of additional vaccines, including
DNA vaccines, and the treatment of diseases or conditions other than diabetes
in which inhaled delivery of drugs may be useful. We believe that our
nanoparticle technology has potentially major applications as an alternative
approach to vaccines and for drug delivery. The results obtained in our
animal studies indicate that similar combinations could be made using key
antigens, or molecules that can stimulate antibodies, extracted from the
surface membranes of pathogenic bacteria. Several biotechnology companies are
pursuing the bacterial extract approach and may offer future opportunities
for us to develop collaborations. On November 1, 1999, we announced that we
formed a collaborative research alliance with Medi-Ject Corporation to
evaluate the efficacy of continuing our nanoparticle drug delivery and
adjuvant system with Medi-Ject's needle-free pressure injection. This
research alliance will evaluate the ability of the combined systems to
deliver DNA vaccines as part of a DNA vaccine program at a major U.S.
university. Other than the area of DNA vaccines, we currently are not
pursuing, however, any of these programs or collaborations, and we cannot
assure you that we will have the personnel or resources to develop them in
the future.
BUSINESS STRATEGY
Our goal is to leverage our core technology to become a
pharmaceutical company that develops and commercializes a wide range of
pharmaceutical products. Our strategy to obtain this goal is to (1) develop
commercial applications of our core technology or enter into business
collaborations or joint ventures with vaccine companies and others interested
in either co-development and co-marketing arrangements or out-license
arrangements with respect to our core technology, (2) further enhance our
pharmaceutical portfolio by in-licensing or otherwise acquiring products in
the late-stage development phase or products already on the market and (3)
enter into business collaborations or joint ventures with complementary firms
outside the scope of our core technology.
- Enter into business collaborations or joint ventures to
further develop and commercialize products incorporating
our core technology. We intend to seek opportunities to
enter into business collaborations or joint ventures with
entities that have businesses or technologies complementary
to our business, such as vaccine and pharmaceutical companies.
We are particularly interested in entering into product
co-development and co-marketing arrangements with respect to
our core technology or out-licensing our core technology to
others for further development and marketing.
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We believe that this partnering strategy will enable us to
capitalize on our partner's strengths in products development,
manufacturing and commercialization and thereby enable us to
introduce into the market products incorporating our core
technology sooner than which we otherwise would be able. In
addition, such collaborations would significantly reduce our
cash requirements for developing and commercializing our core
technology and thereby permit us to spend cash on in-licensing
or otherwise acquiring products in the late-stage development
phase or products already on the market.
- IN-LICENSE OR OTHERWISE ACQUIRE PRODUCTS IN THE LATE-STAGE
DEVELOPMENT PHASE. We intend to seek opportunities to in-license
or otherwise acquire products in the late-stage development phase.
In seeking such opportunities, we intend to target products that
cover therapeutic areas treated by a limited number of physicians
and drugs that are in or require human clinical trials that
involve a limited number of patients and not a significant amount
of time and cost needed to complete them. We believe that
targeting these products that are currently in or ready for human
clinical trials would decrease the risk associated with product
development and would likely shorten the time before we can
introduce the products into the market.
- IN-LICENSE OR OTHERWISE ACQUIRE PRODUCTS ALREADY ON THE MARKET.
In addition to late-stage development products, we intend to seek
opportunities to in-license or otherwise acquire products that (1)
have FDA approval, (2) have been or are about to be commercially
introduced into the U.S. markets, (3) have a concentrated
physician prescriber audience, and (4) have the potential to
generate significant sales.
- ENTER INTO BUSINESS COLLABORATIONS OR JOINT VENTURES WITH
COMPLEMENTARY FIRMS OUTSIDE THE SCOPE OF OUR CORE TECHNOLOGY. We
intend to seek opportunities to enter into business collaborations
or joint ventures with entities that have businesses or technology
complementary to our business. We are particularly interested in
entering into product co-development and co-marketing
arrangements.
PATENTS, LICENSES AND PROPRIETARY RIGHTS
Our success depends and will continue to depend in part on our
ability to maintain patent protection for our products and processes, to
preserve our proprietary information and trade secrets and to operate without
infringing the proprietary rights of third parties. Our policy is to attempt
to protect our technology by, among other things, filing patent applications
or obtaining license rights for technology that we consider important to the
development of our business. The validity and breadth of claims covered in
medical technology patents involve complex legal and factual questions and,
therefore, may be highly uncertain. We cannot assure you that any of our
pending or future applications will result in patents being issued or, if
issued, that these patents, or the patents we license from University of
California, will provide us a competitive advantage, or that our competitors
will not design around any patents issued to or licensed by us.
UNIVERSITY OF CALIFORNIA. In June 1997, we entered into a licensing
agreement with the Regents of the University of California pursuant to which
the University has granted us an exclusive license to nine United States
patents owned by the University, including rights to sublicense such patents,
in fields of use pertaining to: (1) vaccine adjuvants; (2) vaccine constructs
or combinations for use in immunization against herpes virus; (3) drug
delivery systems; and (4) red blood cell surrogates. The University of
California has filed patent applications for this licensed technology in
certain foreign jurisdictions, including Canada, Europe and Japan. Some of
these foreign patents have issued but we cannot assure you that any others
will issue. Even if these foreign patents are obtained, they may not provide
the level of protection provided by United States patents.
The license agreement with the University of California requires us
to undertake various obligations, including:
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- payment of a $100,000 license issue fee, $75,000 of which
we have already paid and $25,000 of which is due in June 2000;
- payment of royalties to the University based on a percentage
of the net sales of any products incorporating the licensed
technology;
- payment of minimum annual royalties on February 28 of each
year beginning in the year 2004 in the amounts set forth
below, to be credited against earned royalties, for the life
of the agreement;
<TABLE>
<CAPTION>
Minimum Annual
Year Royalty Due
---- --------------
<S> <C>
2004 $ 50,000
2005 $ 100,000
2006 $ 150,000
2007 $ 200,000
2008 $ 400,000
2009 $ 600,000
2010 $ 800,000
2011 $1,500,000
Each year after 2011 $1,500,000
</TABLE>
- maintaining an annual minimum amount of available capital
for development and commercialization of products
incorporating the licensed technology until a product is
introduced to the market;
- payment of the costs of patent prosecution and maintenance of
the patents included in the agreement which as of September 30,
1999 have amounted to $57,000 and which we estimate will equal
approximately $70,000 per year;
- meeting performance milestones relating to:
- hiring or contracting with personnel to perform research
and development, regulatory and other activities relating
to the commercial launch of a proposed product;
- testing proposed products;
- obtaining government approvals;
- conducting clinical trials; and
- introducing products incorporating the licensed technology
into the market; and
- entering into partnership or alliance arrangements or agreements
with other entities regarding commercialization of the technology
covered by the license.
The license agreement further provides that we have the right to
abandon any project in any field of use without abandoning our license to
pursue other projects in that or other fields of use covered by the
agreement. In May 1999, we notified the University of California that we
would not pursue the red blood cell surrogate use because we do not believe
this will be proven an effective use of CAP. On October 26, 1999, we signed
an amendment to our license agreement with the University of California. The
amendment removes the red-blood
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cell surrogate use from the agreement. In addition, under the terms of the
amendment, the University agreed to make other changes we suggested to the
license agreement, including delaying minimum royalty payments until 2004 and
limiting the University of California's rights to terminate the agreement in
cases where we do not perform under the agreement.
We believe we are in substantial compliance with all of the material
terms of the license agreement. If we violate or fail to perform any term or
covenant of the license agreement and fail to cure this default within 60
days after written notice from the University of California, the University
of California may terminate some projects included in the agreement. The
termination of the agreement, however, will not relieve us of our obligation
to pay any royalty or license fees owing at the time of termination.
PATENTS AND PATENT APPLICATIONS. Although we do not own any United
States patents or foreign patents, on February 3, 2000, we filed a patent
application with the U.S. Trademark and Patent Office relating to our
development work with vaccine adjuvants, conventional, DNA and RNA vaccines
and drug delivery including aerosol delivery into the lungs.
TRADEMARKS AND TRADEMARK APPLICATIONS. We have filed an
intent-to-use application for the mark BioSante. On November 10, 1999, our
shareholders approved our name change from Ben-Abraham Technologies Inc. to
BioSante Pharmaceuticals, Inc. We currently do not have any registered
trademarks.
CONFIDENTIALITY AND ASSIGNMENT OF INVENTIONS AGREEMENTS. We require
our employees, consultants and advisors having access to our confidential
information to execute confidentiality agreements upon commencement of their
employment or consulting relationships with us. These agreements generally
provide that all confidential information we develop or make known to the
individual during the course of the individual's employment or consulting
relationship with us must be kept confidential by the individual and not
disclosed to any third parties. We also require all of our employees and
consultants who perform research and development for us to execute agreements
that generally provide that all inventions conceived by these individuals
will be our property.
LIMITATIONS OF OUR SAFEGUARDS. We cannot assure you, however, that
our confidentiality and assignment of inventions agreements and other
safeguards will protect our proprietary information and know-how or provide
adequate remedies for us in the event of unauthorized use or disclosure of
this information, or that others will not be able to independently develop
this information. In addition, to the extent, our strategic partners or
consultants apply technical information developed independently by them or
others to our projects or apply our technology to other projects, disputes
may arise as to the ownership of proprietary rights to this technology.
The issuance of a patent to us or of one of our licensed patents to
the University of California is not conclusive evidence as to the validity or
as to the enforceable scope of claims covered by the patent. The validity and
enforceability of a patent can be challenged by a request for re-examination
or litigation after its issuance, and, if the outcome of this litigation is
adverse to the owner of the patent, other parties may be free to use the
subject matter covered by the patent.
RESEARCH AND DEVELOPMENT
We expect to spend a significant amount of our financial resources
on research and development activities. We spent approximately $1,400,000 in
1998 and approximately $336,000 in 1997 on research and development
activities. Since we are not yet engaged in the commercial distribution of
any products and we have no revenues, other than interest revenues earned on
available cash balances, these research and development costs must be
financed by us. We estimate that we are currently spending approximately
$80,000
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to $100,000 per month on research and development activities. These
expenditures, however, may fluctuate from quarter-to-quarter and year-to-year
depending on the resources available and our development schedule. Results of
preclinical studies, clinical trials, regulatory decisions and competitive
developments may significantly influence the amount of our research and
development activities. In addition, we expect that our spending on product
development will increase if we are successful at in-licensing or otherwise
acquiring other late-stage development products.
GOVERNMENT REGULATION
Pharmaceutical products intended for therapeutic use in humans are
governed by extensive Food and Drug Administration regulations in the United
States and by comparable regulations in foreign countries. Any products
developed by us will require FDA approvals in the United States and
comparable approvals in foreign markets before they can be marketed. The
process of seeking and obtaining FDA approval for a previously unapproved new
human pharmaceutical product generally requires a number of years and
involves the expenditure of substantial resources.
Following drug discovery, the steps required before a drug product
may be marketed in the United States include:
- preclinical laboratory and animal tests;
- the submission to the FDA of an investigational new drug
application, commonly known as an IND application;
- clinical and other studies to assess safety and parameters
of use;
- adequate and well-controlled clinical trials to establish
the safety and effectiveness of the drug product;
- the submission to the FDA of a new drug application, commonly
known as an NDA; and
- FDA approval of the NDA prior to any commercial sale or
shipment of the product.
Typically, preclinical studies are conducted in the laboratory and
in animals to gain preliminary information on a proposed product's uses and
physiological effects and harmful effects, if any, and to identify any
potential safety problems that would preclude testing in humans. The results
of these studies, together with the general investigative plan, protocols for
specific human studies and other information, are submitted to the FDA as
part of the IND application. The FDA regulations do not, by their terms,
require FDA approval of an IND. Rather, they allow a clinical investigation
to commence if the FDA does not notify the sponsor to the contrary within 30
days of receipt of the IND. As a practical matter, however, FDA approval is
often sought before a company commences clinical investigations. That
approval may come within 30 days of IND receipt but may involve substantial
delays if the FDA requests additional information.
The initial phase of clinical testing, which is known as Phase I, is
conducted to evaluate the metabolism, uses and physiological effects of the
experimental product in humans, the side effects associated with increasing
doses, and, if possible, to gain early evidence of possible effectiveness.
Phase I studies can also evaluate various routes, dosages and schedules of
product administration. These studies generally involve a small number of
healthy volunteer subjects, but may be conducted in people with the disease
the product is intended to treat. The total number of subjects is generally
in the range of 20 to
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80. A demonstration of therapeutic benefit is not required in order to
complete Phase I trials successfully. If acceptable product safety is
demonstrated, Phase II trials may be initiated.
Phase II trials are designed to evaluate the effectiveness of the
product in the treatment of a given disease and involve people with the
disease under study. These trials often are well controlled, closely
monitored studies involving a relatively small number of subjects, usually no
more than several hundred. The optimal routes, dosages and schedules of
administration are determined in these studies. If Phase II trials are
successfully completed, Phase III trials are often commenced, although Phase
III trials are not always required.
Phase III trials are expanded, controlled trials that are performed
after preliminary evidence of the effectiveness of the experimental product
has been obtained. These trials are intended to gather the additional
information about safety and effectiveness that is needed to evaluate the
overall risk/benefit relationship of the experimental product and provide the
substantial evidence of effectiveness and the evidence of safety necessary
for product approval. Phase III trials usually include from several hundred
to several thousand subjects.
A clinical trial may combine the elements of more than one Phase and
typically two or more Phase III studies are required. A company's designation
of a clinical trial as being of a particular Phase is not necessarily
indicative that this trial will be sufficient to satisfy the FDA requirements
of that Phase because this determination cannot be made until the protocol
and data have been submitted to and reviewed by the FDA. In addition, a
clinical trial may contain elements of more than one Phase notwithstanding
the designation of the trial as being of a particular Phase. The FDA closely
monitors the progress of the Phases of clinical testing and may, at its
discretion, reevaluate, alter, suspend or terminate the testing based on the
data accumulated and its assessment of the risk/benefit ratio to patients. It
is not possible to estimate with any certainty the time required to complete
Phase I, II and III studies with respect to a given product.
Upon the successful completion of clinical testing, an NDA is
submitted to the FDA for approval. This application requires detailed data on
the results of preclinical testing, clinical testing and the composition of
the product, specimen labeling to be used with the drug, information on
manufacturing methods and samples of the product. The FDA typically takes
from six to 18 months to review an NDA after it has been accepted for filing.
Following its review of an NDA, the FDA invariably raises questions or
requests additional information. The NDA approval process can, accordingly,
be very lengthy. Further, there is no assurance that the FDA will ultimately
approve an NDA. If the FDA approves that NDA, the new product may be
marketed. The FDA often approves a product for marketing with a modification
to the proposed label claims or requires that post-marketing surveillance, or
Phase IV testing, be conducted.
All facilities and manufacturing techniques used to manufacture
products for clinical use or sale in the United States must be operated in
conformity with current "good manufacturing practice" regulations, commonly
referred to as "GMP" regulations, which govern the production of
pharmaceutical products. We currently do not have manufacturing capability.
In the event we undertake any manufacturing activities or contract with a
third-party manufacturer to perform our manufacturing activities, we intend
to establish a quality control and quality assurance program to ensure that
our products are manufactured in accordance with the GMP regulations and any
other applicable regulations.
Products marketed outside of the United States are subject to
regulatory approval requirements similar to those in the United States,
although the requirements governing the conduct of clinical trials, product
licensing, pricing and reimbursement vary widely from country to country. No
action can be taken to market any product in a country until an appropriate
application has been approved by the regulatory authorities in that country.
The current approval process varies from country to country, and the time
spent in gaining approval varies from that required for FDA approval. In
certain European countries, the sales price of a product must also be
approved. The pricing review period often begins after market approval is
granted. We intend to seek and utilize foreign partners to apply for foreign
approvals of our products.
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THIRD PARTY REIMBURSEMENT
Our ability to successfully commercialize our proposed products may
depend in part on the extent to which coverage and reimbursement for our
products will be available from government health care programs, private
health insurers and other third party payors or organizations. Significant
uncertainty exists as to the reimbursement status of new therapeutic products
and there can be no assurance that third party insurance coverage and
reimbursement will be available for any products we might develop. In the
United States, health care reform is an area of increasing national attention
and a priority of many governmental officials. Recent legislation, for
example, imposes limitations on the amount of reimbursement available for
specific drug products under some governmental health care programs. We
cannot assure you that future additional limitations will not be imposed in
the future on drug coverage and reimbursement.
COMPETITION
Competition in the biopharmaceutical industry is intense both in the
development of products for prevention and/or treatment of the same
infectious diseases we target and in the acquisition of products in the
late-stage development phase or already on the market. Potential competitors
in the United States are numerous and include major pharmaceutical and
specialized biotechnology companies, universities and other institutions. In
general, competition in the pharmaceutical industry can be divided into four
categories: (1) corporations with large research and developmental
departments that develop and market products in many therapeutic areas; (2)
companies that have moderate research and development capabilities and focus
their product strategy on a small number of therapeutic areas; (3) small
companies with limited development capabilities and only a few product
offerings; and (4) university and other research institutions.
All of our competitors in categories (1) and (2) and some of our
competitors in category (3) have longer operating histories, greater name
recognition, substantially greater financial resources and larger research
and development staffs than we do, as well as substantially greater
experience than us in developing products, obtaining regulatory approvals,
and manufacturing and marketing pharmaceutical products. We cannot assure you
that our competitors will not succeed in developing technologies and products
that are more effective than any of which we are developing or which we may
develop or which would render our technology and products obsolete and
noncompetitive. In addition, we cannot assure you that our products under
development will be able to compete successfully with existing products or
products under development by other companies, universities and other
institutions or that they will attain regulatory approval in the United
States or elsewhere. A significant amount of research in the field is also
being carried out at academic and government institutions. These institutions
are becoming increasingly aware of the commercial value of their findings and
are becoming more aggressive in pursuing patent protection and negotiating
licensing arrangements to collect royalties for use of technology that they
have developed. These institutions may also market competitive commercial
products on their own or in collaboration with competitors and will compete
with us in recruiting highly qualified scientific personnel. We expect our
products, if and when approved for sale, to compete primarily on the basis of
product efficacy, safety, patient convenience, reliability and patent
position. In addition, the first product to reach the market in a therapeutic
or preventative area is often at a significant competitive advantage relative
to later entrants in the market.
We are aware of certain programs and products under development by
others which may compete with our programs and proposed products. The
international vaccine industry is dominated by three companies: SmithKline
Beecham plc, Rhone-Poulenc S.A. (through its subsidiaries, including Institut
Merieux International, Pasteur Merieux Serums et Vaccins, Connaught
Laboratories Limited and Connaught Laboratories, Inc.) and Merck & Co., Inc.
The larger, better known pharmaceutical companies have generally focused on a
traditional synthetic drug approach, although some have substantial expertise
in biotechnology. During the last decade, however, significant research
activity in the biotechnology industry has been completed by smaller research
and development companies, like us, formed to pursue new technologies.
Competitive or
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comparable companies to us include ID Biomedical Inc., which develops
sub-unit vaccines from mycobacteria and other organisms, ANTEX Inc., which is
similar to ID Biomedical Inc., and RIBI Pharmaceuticals, Inc., which develop
new vaccine adjuvants. The existence of products developed by these and other
competitors, or other products of which we are not aware or which may be
developed in the future, may adversely affect the marketability of our
products. In addition, our competitive position will depend upon our ability
to enter into business collaborations or joint ventures to further develop
and commercialize products incorporating our core technology, in-license or
otherwise acquire products in the late-stage development phase or products
already on the market and obtain additional financing when needed.
MANUFACTURING
We currently do not have any facilities suitable for manufacturing
on a commercial scale basis any of our proposed products nor do we have any
experience in volume manufacturing. If, and when we are ready to commercially
launch a product, we will either find our own manufacturing facilities, hire
additional personnel with manufacturing experience and comply with the
extensive GMP regulations of the FDA and other regulations applicable to such
a facility or we will more likely rely upon contractors to manufacture our
proposed products in accordance with these regulations. In September 1999, we
entered into an arrangement with the University of Iowa to manufacture our
CAP nanoparticles for use in our proposed Phase I human clinical trial. Under
the arrangement, the University of Iowa agreed to manufacture both a trial
batch of our CAP nanoparticles and a clinical batch we can use in the
clinical trial. We agreed to pay the University approximately $50,000,
approximately $10,000 of which we have already paid, a portion to be paid
upon completion of the trial batch and the remainder upon completion of the
clinical batch. In the event the University of Iowa is unable to perform
under the agreement or terminates the agreement at any time, we believe we
will be able to find another suitable manufacturer.
SALES AND MARKETING
We currently do not have any sales and marketing personnel to sell
on a commercial basis any of our proposed products. If and when we are ready
to commercially launch a product, we will either hire qualified sales and
marketing personnel or seek a joint marketing partner to assist us with this
function.
EMPLOYEES
We had six full-time employees as of February 1, 2000, including
four in research and development and two in management or administrative
positions. None of our employees is covered by a collective bargaining
agreement. We consider our relationships with our employees to be good.
FORWARD-LOOKING STATEMENTS
This registration statement contains forward-looking statements. In
addition, from time to time, our representatives or we may make
forward-looking statements orally or in writing. We base these
forward-looking statements on our expectations and projections about future
events, which we derive from the information currently available to us. These
forward-looking statements relate to future events or our future performance,
including:
- our financial performance;
- the timing of product development; and
- the timing of regulatory approvals.
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You can identify forward-looking statements by those that are not
historical in nature, particularly those that use terminology, such as "may,"
"will," "should," "expects," "anticipates," "contemplates," "estimates,"
"believes," "plans," "projected," "predicts," "potential" or "continue" or
the negative of these or similar terms. In evaluating these forward-looking
statements, you should consider various factors, including the risk factors
listed below. These factors may cause our actual results to differ materially
from any forward-looking statement.
Forward-looking statements are only predictions. The forward-looking
events discussed in this registration statement and other statements made
from time to time by us or our representatives, may not occur, and actual
events and results may differ materially and are subject to risks,
uncertainties and assumptions about us. We are not obligated to publicly
update or revise any forward-looking statement, whether as a result of new
information, future events or otherwise. In light of these risks,
uncertainties and assumptions, the forward-looking events discussed in this
registration statement and other statements made from time to time by our
representatives, or us might not occur.
RISKS RELATING TO OUR COMPANY
WE HAVE A HISTORY OF OPERATING LOSSES, EXPECT CONTINUING LOSSES AND MAY NEVER
ACHIEVE PROFITABILITY.
We have incurred losses in each year since our amalgamation in 1996
and expect to incur substantial and continuing losses for the foreseeable
future. We incurred a net loss of approximately $1,000,000 for the nine
months ended September 30, 1999, and as of September 30, 1999, our
accumulated deficit was approximately $11,800,000.
All of our revenue to date has been derived from interest earned on
invested funds. We have not commercially introduced any products. We expect
to incur substantial and continuing losses for the foreseeable future as we
seek to in-license or otherwise acquire new products and as our own product
development programs expand and various preclinical and clinical trials
commence. The amount of these losses may vary significantly from year-to-year
and quarter-to-quarter and will depend on, among other factors:
- the costs of licensure or acquisition of new products;
- the timing and cost of product development;
- the progress and cost of preclinical and clinical development
programs;
- the timing and cost of obtaining necessary regulatory approvals;
and
- the timing and cost of obtaining third party reimbursement.
In order to generate revenues, we must successfully develop and
commercialize our own proposed products or products in the late-stage human
clinical development phase or already on the market that we may in-license or
otherwise acquire or enter into collaborative agreements with others who can
successfully develop and commercialize them. Even if our proposed products
and the products we may license or otherwise acquire are commercially
introduced, they may never achieve market acceptance and we may never
generate revenues or achieve profitability.
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WE ARE A DEVELOPMENT STAGE COMPANY WITH A SHORT OPERATING HISTORY, MAKING IT
DIFFICULT FOR YOU TO EVALUATE OUR BUSINESS AND YOUR INVESTMENT.
We are in the development stage and our operations and the
development of our proposed products are subject to all of the risks inherent
in the establishment of a new business enterprise, including:
- the absence of an operating history;
- the lack of commercialized products;
- insufficient capital;
- expected substantial and continual losses for the foreseeable
future;
- limited experience in dealing with regulatory issues;
- the lack of manufacturing experience and limited marketing
experience;
- an expected reliance on third parties for the development and
commercialization of our proposed products;
- a competitive environment characterized by numerous,
well-established and well-capitalized competitors; and
- reliance on key personnel.
Because we are subject to these risks, you may have a difficult time
evaluating our business and your investment in our company.
OUR PROPOSED PRODUCTS ARE IN THE RESEARCH STAGES AND WILL LIKELY NOT BE
COMMERCIALLY INTRODUCED FOR SEVERAL YEARS, IF AT ALL.
Our proposed products are in the research stages and will require
further research and development, preclinical and clinical testing and
investment prior to commercialization in the United States and abroad. We
cannot assure you that any of our proposed products will:
- be successfully developed;
- prove to be safe and efficacious in clinical trials;
- meet applicable regulatory standards;
- demonstrate substantial protective or therapeutic benefits in the
prevention or treatment of any disease;
- be capable of being produced in commercial quantities at
reasonable costs; or
- be successfully marketed.
We do not anticipate that any of our proposed products will receive
the requisite regulatory approvals for commercialization in the United States
or abroad for a number of years, if at all, and we cannot assure you
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that any of our proposed products, if approved and marketed, will generate
significant product revenue and provide an acceptable return on our
investment.
WE WILL NEED TO RAISE SUBSTANTIAL ADDITIONAL CAPITAL IN THE FUTURE TO FUND
OUR OPERATIONS AND WE MAY BE UNABLE TO RAISE SUCH FUNDS WHEN NEEDED AND ON
ACCEPTABLE TERMS.
We currently do not have sufficient resources to complete the
commercialization of any of our proposed products. Therefore, we may need to
raise substantial additional capital to fund our operations sometime in the
future. We cannot be certain that any financing will be available when
needed. If we fail to raise additional financing as we need it, we may have
to delay or terminate our own product development programs or pass on
opportunities to in-license or otherwise acquire new products that we believe
may be beneficial to our business. We expect to continue to spend capital on:
- research and development programs;
- preclinical studies and clinical trials;
- regulatory processes;
- establishment of our own commercial scale manufacturing and
marketing capabilities or a search for third party manufacturers
and marketing partners to manufacture and market our products for
us; and
- the licensure or acquisition of new products.
The amount of capital we may need will depend on many factors,
including the:
- progress, timing and scope of our research and development
programs;
- progress, timing and scope of our preclinical studies and clinical
trials;
- time and cost necessary to obtain regulatory approvals;
- time and cost necessary to build our own manufacturing facilities
and obtain the necessary regulatory approvals for those facilities
or to seek third party manufacturers to manufacture our products
for us;
- time and cost necessary to establish our own sales and marketing
capabilities or to seek marketing partners to market our products
for us;
- time and cost necessary to respond to technological and market
developments;
- changes made or new developments in our existing collaborative,
licensing and other commercial relationships; and
- new collaborative, licensing and other commercial relationships
that we may establish.
In addition, our principal asset, a license agreement with the
University of California, requires us to have available minimum amounts of
funds each year for research and development activities relating to our
licensed technology and to achieve research and development milestones.
Moreover, our fixed expenses, such as rent, license payments and other
contractual commitments, may increase in the future, as we may:
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- enter into additional leases for new facilities and capital
equipment;
- enter into additional licenses and collaborative agreements; and
- incur additional expenses associated with being a public company.
Our cash on hand as of September 30, 1999 was $5,648,796. We believe
this cash will be sufficient to fund our operations through June 2002. We
have based this estimate on assumptions that may prove to be wrong. As a
result, we may need to obtain additional financing prior to that time. In
addition, we may need to raise additional capital at an earlier time to fund
our ongoing research and development activities, acquire new products or take
advantage of other unanticipated opportunities. Any additional equity
financings may be dilutive to our existing shareholders, and debt financing,
if available, may involve restrictive covenants on our business. In addition,
insufficient funds may require us to delay, scale back or eliminate some or
all of our programs designed to facilitate the commercial introduction of our
proposed products, prevent commercial introduction of our products altogether
or restrict us from acquiring new products that we believe may be beneficial
to our business.
OUR STRATEGY TO ACQUIRE PRODUCTS IN THE LATE-STAGE DEVELOPMENT PHASE OR
PRODUCTS ALREADY ON THE MARKET IS RISKY AND THE MARKET FOR ACQUIRING THESE
PRODUCTS IS COMPETITIVE.
We intend to acquire, through outright purchase, license, joint
venture or other methods, products in the late-stage development phase or
products already on the market, and assist in the final development and
commercialization of those products. There are a number of companies that
have similar strategies to ours, many of whom have substantially greater
resources than us. It is difficult to determine the value of a product that
has not been fully developed or commercialized, and the possibility of
significant competition for these products may tend to increase the cost to
us of these products beyond the point at which we will experience an
acceptable return on our investment. We cannot assure you that we will be
able to acquire any products on commercially acceptable terms or at all, that
any product we may acquire will be approved by the FDA or if approved, will
be marketable, or that even if marketed, that we will be able to obtain an
acceptable return on our investment.
While we have no current agreements or negotiations underway, if we
purchase any products, we could issue stock that would dilute existing
shareholders' percentage ownership, incur substantial debt or assume
contingent liabilities. These purchases also involve numerous other risks,
including:
- problems assimilating the purchased products;
- unanticipated costs associated with the purchase;
- incorrect estimates made in the accounting for acquisitions; and
- risks associated with entering markets in which we have no or
limited prior experience.
IF WE FAIL TO OBTAIN REGULATORY APPROVAL TO COMMERCIALLY MANUFACTURE OR SELL
ANY OF OUR FUTURE PRODUCTS, OR IF APPROVAL IS DELAYED, WE WILL BE UNABLE TO
GENERATE REVENUE FROM THE SALE OF OUR PRODUCTS.
We must obtain regulatory approval to sell any of our products in
the United States and abroad. In the United States, we must obtain the
approval of the FDA for each vaccine or drug that we intend to commercialize.
The FDA approval process is typically lengthy and expensive, and approval is
never certain. Products distributed abroad are subject to similar foreign
government regulation.
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Generally, only a very small percentage of newly discovered
pharmaceutical products that enter preclinical development are approved for
sale. Because of the risks and uncertainties in biopharmaceutical
development, our proposed products could take a significantly longer time to
gain regulatory approval than we expect or may never gain approval. If
regulatory approval is delayed or never obtained, our management's
credibility, the value of our company and our operating results would be
adversely affected.
Moreover, even if the FDA approves a product, such approval may be
conditioned upon commercially unacceptable limitations on the indications for
which a product may be marketed, and further studies may be required to
provide additional data on safety or effectiveness. The FDA may also require
post-marketing surveillance programs to monitor the product's side effects.
The later discovery of previously unknown problems with a product or
manufacturer may result in restrictions or sanctions on the product or
manufacturer, including the withdrawal of the product from the market.
TO OBTAIN REGULATORY APPROVAL TO MARKET OUR PRODUCTS, COSTLY AND LENGTHY
PRECLINICAL STUDIES AND CLINICAL TRIALS MAY BE REQUIRED, AND THE RESULTS OF
THE STUDIES AND TRIALS ARE HIGHLY UNCERTAIN.
As part of the FDA approval process, we must conduct, at our own
expense, preclinical studies on animals and clinical trials on humans on each
of our proposed products. We expect the number of preclinical studies and
clinical trials that the FDA will require will vary depending on the product,
the disease or condition the product is being developed to address and
regulations applicable to the particular product. We may need to perform
multiple preclinical studies using various doses and formulations before we
can begin clinical trials, which could result in delays in our ability to
market any of our products. Furthermore, even if we obtain favorable results
in preclinical studies on animals, the results in humans may be different.
After we have conducted preclinical studies in animals, we must
demonstrate that our products are safe and effective for use on the target
human patients in order to receive regulatory approval for commercial sale.
The data obtained from preclinical and clinical testing are subject to
varying interpretations that could delay, limit or prevent regulatory
approval. Adverse or inconclusive clinical results would prevent us from
filing for regulatory approval of our products. Additional factors that can
cause delay or termination of our clinical trials include:
- slow patient enrollment;
- longer treatment time required to demonstrate efficacy;
- adverse medical events or side effects in treated patients; and
- lack of effectiveness of the product being tested.
IF WE FAIL TO OBTAIN AN ADEQUATE LEVEL OF REIMBURSEMENT FOR OUR PRODUCTS BY
THIRD PARTY PAYORS, THERE WOULD BE NO COMMERCIALLY VIABLE MARKETS FOR OUR
PRODUCTS.
Our ability to commercialize our products successfully will depend
in part on the price we may be able to charge for our products and on the
extent to which reimbursement for the cost of our products and related
treatment will be available from government health administration
authorities, private health insurers and other third party payors. Third
party payors, such as government or private health care insurers, carefully
review and increasingly challenge the price charged for products.
Reimbursement rates from private companies vary depending on the third party
payor, the insurance plan and other factors. Reimbursement systems in
international markets vary significantly by country and by region, and
reimbursement approvals must be obtained on a country-by-country basis. We
cannot be certain that third party payors will pay for the costs of
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our products. We currently have limited expertise obtaining reimbursement. We
will need to seek additional reimbursement expertise unless we enter into
collaborations with other companies with the necessary expertise.
Even if we are able to obtain reimbursement from third party payors,
we cannot be certain that reimbursement rates will be high enough to allow us
to profit from sales of our products and realize an acceptable return on our
investment in product development. Certain payors may attempt to further
control costs by selecting exclusive providers of their pharmaceutical
products. If these types of arrangements were made with our competitors,
these payors would not reimburse patients for purchases of our competing
products.
We expect that in the future reimbursement will be increasingly
restricted both in the United States and internationally. The escalating cost
of health care has led to increased pressure on the health care industry to
reduce costs. Governmental and private third party payors have proposed
health care reforms and cost reductions. A number of federal and state
proposals to control the cost of health care, including the cost of drug
treatments, have been made in the United States. In some foreign markets, the
government controls the pricing of products which would affect our
profitability on these products. Current government regulations and possible
future legislation regarding health care may affect our future revenues and
profitability from sales of our products and may adversely affect our
business and prospects.
WE DO NOT HAVE ANY FACILITIES APPROPRIATE FOR CLINICAL TESTING, WE LACK
MANUFACTURING EXPERIENCE AND WE HAVE NO SALES AND MARKETING PERSONNEL. WE
WILL, THEREFORE, BE DEPENDENT UPON OTHERS FOR OUR CLINICAL TESTING,
MANUFACTURING, SALES AND MARKETING.
Our current facilities do not include accommodation for the testing
of our proposed products in animals to determine their harmful effects and
uses and physiological effects or in humans for the clinical testing required
by the FDA. We do not have a manufacturing facility that can be used for
full-scale production of our products. In addition, at this time, we do not
have any sales and marketing personnel. In the course of our development
program, we will therefore be required to enter into arrangements with other
companies or universities for our animal testing, human clinical testing,
manufacturing, and sales and marketing activities. If we are unable to retain
third parties for these purposes on acceptable terms, we may be unable to
successfully develop, manufacture and market our proposed products. In
addition, any failures by third parties to adequately perform their
responsibilities may delay the submission of our proposed products for
regulatory approval, impair our ability to deliver our products on a timely
basis or otherwise impair our competitive position. Our dependence on third
parties for the development, manufacture, sale and marketing of our products
may also adversely affect our profit margins.
WE WILL NOT BE ABLE TO SELL OUR PRODUCTS IF WE OR OUR THIRD PARTY
MANUFACTURERS FAIL TO COMPLY WITH MANUFACTURING REGULATIONS.
Before we can begin selling our products, we must obtain regulatory
approval of our manufacturing facility and process or the manufacturing
facility and process of the third party or parties with whom we may outsource
our manufacturing activities. In addition, the manufacture of our products
must comply with the FDA's current Good Manufacturing Practices regulations,
commonly known as GMP regulations. The GMP regulations govern quality control
and documentation policies and procedures. Our manufacturing facilities, if
any in the future, and the manufacturing facilities of our third party
manufacturers will be continually subject to inspection by the FDA and other
state, local and foreign regulatory authorities, before and after product
approval. We cannot guarantee that we, or any potential third party
manufacturer of our products, will be able to comply with the GMP regulations
or other applicable manufacturing regulations.
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WE LICENSE OUR CORE TECHNOLOGY FROM A THIRD PARTY AND MAY LOSE THE RIGHT TO
LICENSE IT.
We license our core technology from the University of California and
may lose the right to license some portions of it if we breach some of our
obligations under the license agreement.
Under the license agreement, we are required to:
- pay a $100,000 license issue fee, $75,000 of which we have
already paid and $25,000 of which is due in June 2000;
- pay royalties to the University based on a percentage of the net
sales of any products incorporating the licensed technology;
- pay minimum annual royalties beginning in the year 2004, to be
credited against earned royalties, for the life of the agreement;
- maintain an annual minimum amount of available capital for
development and commercialization of products incorporating the
licensed technology until a product is introduced to the market;
- pay the costs of patent prosecution and maintenance of the
patents included in the agreement;
- meet performance milestones relating to:
- hiring or contracting with personnel to perform research and
development, regulatory and other activities relating to the
commercial launch of a proposed product;
- testing proposed products;
- obtaining government approvals;
- conducting clinical trials; and
- introducing products incorporating the licensed technology
into the market; and
- enter into partnership or alliance arrangements or agreements
with other entities regarding commercialization of the technology
covered by the license.
For more information on the license agreement, we refer you to
"--Patents, Licenses and Proprietary Rights--University of California."
Although we intend to use our reasonable best efforts to meet these
obligations, if we violate or fail to perform any term or covenant of the
license agreement and fail to cure this default within 60 days after written
notice from the University of California, the University of California may
terminate certain projects contained in the agreement. The termination of the
agreement, however, will not relieve us of our obligation to pay any royalty
or license fees owing at the time of termination. Our failure to retain the
right to license our core technology could harm our business and future
operating results. For example, if we were to enter into an outlicense
agreement with a third party under which we agree to outlicense our core
technology for a license fee, the termination of the license agreement could
either, depending on the terms of the outlicense agreement, cause us to break
our obligations under the outlicense agreement or
21
<PAGE>
give the other party a right to terminate that agreement, thereby causing us
to lose the revenue generated by the outlicense fees.
IF WE ARE UNABLE TO PROTECT OUR PROPRIETARY TECHNOLOGY, WE MAY NOT BE ABLE TO
COMPETE AS EFFECTIVELY.
The pharmaceutical industry places considerable importance on
obtaining patent and trade secret protection for new technologies, products
and processes. Our success will depend, in part, on our ability to obtain,
enjoy and enforce protection for any products we develop or acquire under
United States and foreign patent laws and other intellectual property laws,
preserve the confidentiality of our trade secrets and operate without
infringing the proprietary rights of third parties.
Where appropriate, we seek patent protection for certain aspects of
our technology. In February 2000, we filed a patent application relating to
our technology. However, our owned and licensed patents and patent
applications will not ensure the protection of our intellectual property for
a number of other reasons:
- We do not know whether our patent applications will result in
actual patents. For example, we may not have developed a method
for treating a disease before others developed similar methods.
- Competitors may interfere with our patent process in a variety of
ways. Competitors may claim that they invented the claimed
invention before us or may claim that we are infringing on their
patents and therefore cannot use our technology as claimed under
our patent. Competitors may also contest our patents by showing
the patent examiner that the invention was not original or novel
or was obvious.
- We are in the research and development stage and are in the
process of developing proposed products. Even if we receive a
patent, it may not provide much practical protection. If we
receive a patent with a narrow scope, then it will be easier for
competitors to design products that do not infringe on our patent.
Even if the development of our proposed products is successful and
approval for sale is obtained, there can be no assurance that
applicable patent coverage, if any, will not have expired or will
not expire shortly after this approval. Any expiration of the
applicable patent could have a material adverse effect on the
sales and profitability of our proposed product.
- Enforcing patents is expensive and may require significant time by
our management. In litigation, a competitor could claim that our
issued patents are not valid for a number of reasons. If the court
agrees, we would lose that patent.
- We may also support and collaborate in research conducted by
government organizations or universities. We cannot guarantee that
we will be able to acquire any exclusive rights to technology or
products derived from these collaborations. If we do not obtain
required licenses or rights, we could encounter delays in product
development while we attempt to design around other patents or we
may be prohibited from developing, manufacturing or selling
products requiring these licenses. There is also a risk that
disputes may arise as to the rights to technology or products
developed in collaboration with other parties.
It is also unclear whether our trade secrets will provide useful
protection. While we use reasonable efforts to protect our trade secrets, our
employees or consultants may unintentionally or willfully disclose our
proprietary information to competitors. Enforcing a claim that someone else
illegally obtained and is using our trade secrets, like patent litigation, is
expensive and time consuming, and the outcome is unpredictable. In addition,
courts outside the United States are sometimes less willing to protect trade
secrets. Our competitors may independently develop equivalent knowledge,
methods and know-how.
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<PAGE>
CLAIMS BY OTHERS THAT OUR PRODUCTS INFRINGE THEIR PATENTS OR OTHER
INTELLECTUAL PROPERTY RIGHTS COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION.
The pharmaceutical industry has been characterized by frequent
litigation regarding patent and other intellectual property rights. Patent
applications are maintained in secrecy in the United States until the patents
are issued and are also maintained in secrecy for a period of time outside
the United States. Accordingly, we can conduct only limited searches to
determine whether our technology infringes any patents or patent applications
of others. Any claims of patent infringement would be time-consuming and
could likely:
- result in costly litigation;
- divert the time and attention of our technical personnel and
management;
- cause product development delays;
- require us to develop non-infringing technology; or
- require us to enter into royalty or licensing agreements.
Although patent and intellectual property disputes in the
pharmaceutical industry have often been settled through licensing or similar
arrangements, costs associated with these arrangements may be substantial and
often require the payment of ongoing royalties, which could hurt our gross
margins. In addition, we cannot be sure that the necessary licenses would be
available to us on satisfactory terms, or that we could redesign our products
or processes to avoid infringement, if necessary. Accordingly, an adverse
determination in a judicial or administrative proceeding, or the failure to
obtain necessary licenses, could prevent us from developing, manufacturing
and selling some of our products, which could harm our business, financial
condition and operating results.
BECAUSE WE ARE DEVELOPING NEW PRODUCTS, WE MAY FAIL TO GAIN MARKET ACCEPTANCE
FOR OUR PRODUCTS AND OUR BUSINESS COULD SUFFER.
None of the products we propose to develop or are developing have
yet been approved for marketing by regulatory authorities in the United
States or elsewhere. Even if our proposed products are ultimately approved
for sale, there can be no assurance that they will be commercially successful.
WE ARE DEPENDENT ON KEY PERSONNEL, MANY OF WHOM WOULD BE DIFFICULT TO REPLACE.
Our success will be largely dependent upon the efforts of Stephen M.
Simes, our President and Chief Executive Officer, Phillip B. Donenberg, our
Chief Financial Officer, Treasurer and Secretary, and other key employees. We
do not have key person life insurance on any of our key personnel, and with
the exception of Messrs. Simes and Donenberg, we generally do not have
written employment or noncompetition agreements with our employees. Our
future success also will depend in large part on our ability to identify,
attract and retain other highly qualified managerial, technical and sales and
marketing personnel. Competition for these individuals is intense. The loss
of the services of any of our key personnel, the inability to identify,
attract or retain qualified personnel in the future or delays in hiring
qualified personnel, could make it more difficult for us to manage our
business and meet key objectives, such as the timely introduction of our
proposed products, which would harm our business, financial condition and
operating results.
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<PAGE>
RISKS RELATING TO OUR INDUSTRY
BECAUSE OUR INDUSTRY IS VERY COMPETITIVE AND OUR COMPETITORS HAVE
SUBSTANTIALLY GREATER CAPITAL RESOURCES AND MORE EXPERIENCE IN RESEARCH AND
DEVELOPMENT, MANUFACTURING AND MARKETING THAN US, WE MAY NOT SUCCEED IN
DEVELOPING OUR PROPOSED PRODUCTS AND BRINGING THEM TO MARKET.
Competition in the pharmaceutical industry is intense. Potential
competitors in the United States are numerous and include pharmaceutical,
chemical and biotechnology companies, most of which have substantially
greater capital resources and more experience in research and development,
manufacturing and marketing than us. Academic institutions, hospitals,
governmental agencies and other public and private research organizations are
also conducting research and seeking patent protection and may develop and
commercially introduce competing products or technologies on their own or
through joint ventures. We cannot assure you that our competitors will not
succeed in developing similar technologies and products more rapidly than we
do or that these competing technologies and products will not be more
effective than any of those that we are currently developing or will develop.
IF WE DO NOT KEEP PACE WITH TECHNOLOGICAL CHANGE, OUR PRODUCTS MAY BE
RENDERED OBSOLETE AND OUR OPERATING RESULTS MAY SUFFER.
The pharmaceutical industry has experienced rapid and significant
technological change. We expect that pharmaceutical technology will continue
to develop rapidly, and our future success will depend, in large part, on our
ability to develop and maintain a competitive position. Rapid technological
development may result in our products or processes becoming obsolete before
they are marketed or before we can recover a significant portion of the
development and commercialization expenses we incurred in developing and
commercially introducing the products. In addition, innovations in drug
delivery systems, alternative therapies or new medical treatments that alter
existing treatment regimes, reduce the need for therapy or cure certain
chronic diseases could harm our business.
IF PRODUCT LIABILITY LAWSUITS ARE SUCCESSFULLY BROUGHT AGAINST US, WE MAY
INCUR SUBSTANTIAL LIABILITIES.
We are exposed to the potential product liability risks inherent in
the testing, manufacturing and marketing of human drug treatments. We
currently do not maintain insurance against product liability lawsuits.
Although we intend to obtain product liability insurance shortly before
initiating clinical trials for our products, we cannot be certain that we
will be able to obtain adequate insurance coverage. The pharmaceutical
industry has experienced increasing difficulty in maintaining product
liability insurance coverage at reasonable levels, and substantial increases
in insurance premium costs in many cases have rendered coverage economically
impractical. We cannot be certain that if any of our products receive FDA
approval, the product liability insurance we will need to obtain in
connection with the commercial sales of this product will be available at a
reasonable cost. In addition, we cannot be certain that we can successfully
defend any product liability lawsuit brought against us. If we are the
subject of a successful product liability claim which exceeds the limits of
any insurance coverage we may obtain, we may incur substantial liabilities
which would adversely affect our operating results and financial condition.
RISKS RELATING TO OUR COMMON STOCK
BECAUSE OUR COMMON STOCK IS TRADED ON THE CANADIAN VENTURE EXCHANGE AND THE
"PINK SHEETS," YOUR ABILITY TO SELL YOUR SHARES IN THE SECONDARY TRADING
MARKET MAY BE LIMITED.
Our common stock is currently traded on the Canadian Venture
Exchange and the National Quotation Bureau's "Pink Sheets" and we expect that
after the effectiveness of this registration statement, our common stock will
also be traded in the over-the-counter market on the OTC Electronic Bulletin
24
<PAGE>
Board. Consequently, the liquidity of our common stock is impaired, not only
in the number of shares that are bought and sold, but also through delays in
the timing of transactions, and coverage by security analysts and the news
media, if any, of our company. As a result, prices for shares of our common
stock may be lower than might otherwise prevail if our common stock was
traded on Nasdaq or a national securities exchange.
BECAUSE OUR SHARES ARE "PENNY STOCKS," YOU MAY HAVE DIFFICULTY SELLING THEM
IN THE SECONDARY TRADING MARKET.
Federal regulations under the Securities Exchange Act of 1934
regulate the trading of so-called "penny stocks," which are generally defined
as any security not listed on a national securities exchange or Nasdaq,
priced at less than $5.00 per share and offered by an issuer with limited net
tangible assets and revenues. Since our common stock currently trades on the
"Pink Sheets" at less than $5.00 per share, our shares are "penny stocks" and
may not be traded unless a disclosure schedule explaining the penny stock
market and the risks associated therewith is delivered to a potential
purchaser prior to any trade.
In addition, because our common stock is not listed on Nasdaq or any
national securities exchange and currently trades at less than $5.00 per
share, trading in our common stock is subject to Rule 15g-9 under the
Exchange Act. Under this rule, broker-dealers must take certain steps prior
to selling a "penny stock," which steps include:
- obtaining financial and investment information from the investor;
- obtaining a written suitability questionnaire and purchase
agreement signed by the investor; and
- providing the investor a written identification of the shares
being offered and the quantity of the shares.
If these penny stock rules are not followed by the broker-dealer,
the investor has no obligation to purchase the shares. The application of
these comprehensive rules will make it more difficult for broker-dealers to
sell our common stock and our shareholders, therefore, may have difficulty in
selling their shares in the secondary trading market.
OUR STOCK PRICE MAY BE VOLATILE AND YOUR INVESTMENT IN OUR COMMON STOCK COULD
SUFFER A DECLINE IN VALUE.
Prior to being listed on the "Pink Sheets," there was no public
market for our common stock in the United States. Our common stock has been
listed on the Canadian Venture Exchange since December 20, 1996. The market
price of our common stock may fluctuate significantly in response to a number
of factors, some of which are beyond our control. These factors include:
- progress of our products through the regulatory process;
- results of preclinical studies and clinical trials;
- announcements of technological innovations or new products by us
or our competitors;
- government regulatory action affecting our products or our
competitors' products in both the United States and foreign
countries;
- developments or disputes concerning patent or proprietary rights;
- general market conditions for emerging growth and pharmaceutical
companies;
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<PAGE>
- economic conditions in the United States or abroad;
- actual or anticipated fluctuations in our operating results;
- broad market fluctuations; and
- changes in financial estimates by securities analysts.
In addition, the value of our common stock may fluctuate because it
is listed on both the "Pink Sheets" (and eventually on the OTC Bulletin
Board) and the Canadian Venture Exchange. We do not know what effect, if any,
the dual listing will have on the price of our common stock in either market.
Listing on both the Canadian Venture Exchange and the Pink Sheets may
increase our stock price volatility due to:
- trading in different time zones;
- different ability to buy or sell our stock; and
- different trading volume.
WE MAY INCUR SIGNIFICANT COSTS FROM CLASS ACTION LITIGATION DUE TO OUR
EXPECTED STOCK VOLATILITY.
In the past, following periods of large price declines in the public
market price of a company's stock, holders of that stock have occasionally
instituted securities class action litigation against the company that issued
the stock. If any of our shareholders were to bring this type of lawsuit
against us, even if the lawsuit is without merit, we could incur substantial
costs defending the lawsuit. The lawsuit could also divert the time and
attention of our management, which would hurt our business. Any adverse
determination in litigation could also subject us to significant liabilities.
THE SALE OF 23,125,000 RESTRICTED SHARES OF OUR COMMON STOCK, OR 40% OF OUR
TOTAL OUTSTANDING SHARES, IN THE PUBLIC MARKET IN SEPTEMBER 2000 COULD CAUSE
THE MARKET PRICE OF OUR COMMON STOCK TO DECLINE SIGNIFICANTLY, EVEN IF OUR
BUSINESS IS DOING WELL.
Our current shareholders hold 52,642,686 shares, which they will
be able to sell in the public market in the near future. Holders of an
aggregate of approximately 30,999,300 shares have entered into lock-up
agreements under which they have agreed that they will not offer, sell or
otherwise dispose of any shares until September 2000. Upon effectiveness of
this registration statement, approximately 15,000,000 shares will be eligible
for immediate resale in the public market pursuant to Rule 144(k). Beginning
90 days after the date this registration statement is declared effective,
approximately 15,000,000 shares will be eligible for resale in the public
market subject to the limitations of Rule 144. The remaining shares will
become eligible for resale in the public market at various later times.
Public sales after the effectiveness of this registration statement may
include an aggregate of 15,845,625 shares currently issuable upon the
exercise of outstanding options and warrants. Sales of a substantial number
of shares of our common stock could cause our stock price to decline
significantly, even if our business is doing well. In addition, the sale of
these shares could limit our ability to raise capital through the sale of
additional stock. We refer you to the information under the heading "--Market
Information" beginning on page 46.
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PROVISIONS IN OUR CORPORATE DOCUMENTS AND WYOMING LAW COULD DISCOURAGE OR
PREVENT A TAKEOVER, EVEN IF AN ACQUISITION WOULD BE BENEFICIAL TO OUR
SHAREHOLDERS.
Provisions of our articles of incorporation and bylaws, as well as
provisions of Wyoming law, could make it more difficult for a third party to
acquire us, even if doing so would be beneficial to our shareholders. These
provisions include:
- authorizing the issuance of "blank check" preferred that could be
issued by our board of directors to increase the number of
outstanding shares and thwart a takeover attempt; and
- prohibiting cumulative voting in the election of directors, which
would otherwise allow less than a majority of shareholders to
elect director candidates.
In addition, the laws of the State of Wyoming, our state of
incorporation, contain certain provisions that could have the effect of
making it more difficult for a third party to acquire, or of discouraging a
third party from attempting to acquire, control of our company. Such
provisions could limit the price that certain investors might be willing to
pay in the future for shares of our common stock. These provisions could also
make it more difficult for shareholders to change the management of our
company or to effect certain transactions.
OUR DIRECTORS AND EXECUTIVE OFFICERS OWN A SUFFICIENT NUMBER OF SHARES OF OUR
COMMON STOCK TO CONTROL OUR COMPANY, WHICH COULD DISCOURAGE OR PREVENT A
TAKEOVER, EVEN IF AN ACQUISITION WOULD BE BENEFICIAL TO OUR SHAREHOLDERS.
Our directors and executive officers own or control approximately
50.4% of our outstanding voting power. Accordingly, these shareholders,
individually and as a group, may be able to influence the outcome of
shareholder votes, involving votes concerning the election of directors, the
adoption or amendment of provisions in our articles of incorporation and
bylaws and the approval of certain mergers or other similar transactions,
such as sales of substantially all of our assets. Such control by existing
shareholders could have the effect of delaying, deferring or preventing a
change in control of our company. In addition, under a shareholders agreement
entered into in connection with our May 1999 private placement, several of
our shareholders entered into a voting agreement with respect to the election
of directors.
WE DO NOT INTEND TO PAY ANY CASH DIVIDENDS IN THE FORESEEABLE FUTURE AND,
THEREFORE, ANY RETURN ON YOUR INVESTMENT IN OUR CAPITAL STOCK MUST COME FROM
INCREASES IN THE FAIR MARKET VALUE AND TRADING PRICE OF THE CAPITAL STOCK.
We do not intend to pay any cash dividends in the foreseeable future
and, therefore, any return on your investment in our capital stock must come
from increases in the fair market value and trading price of the capital
stock.
WE WILL LIKELY ISSUE ADDITIONAL EQUITY SECURITIES WHICH WILL DILUTE YOUR
SHARE OWNERSHIP.
We will likely issue additional equity securities to raise capital
and through the exercise of options and warrants that are outstanding or may
be outstanding. These additional issuances will dilute your share ownership.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
GENERAL
We are a development stage biopharmaceutical company engaged in the
development and commercialization of vaccine adjuvants, proprietary novel
vaccines and drug delivery systems. Our core technology, which we license on
an exclusive basis from the University of California, is based on the use of
extremely small, solid, uniform particles, which we call "nanoparticles," as
immune system boosters and for drug delivery. We have identified three
potential initial applications for our core technology:
- the creation of improved versions of current vaccines by the
"adjuvant" activity of our proprietary nanoparticles;
- the development of new, unique vaccines against diseases for which
there currently are few or no effective methods of prevention
(E.G., genital herpes); and
- the creation of inhaled forms of pharmaceutical compounds that
currently must be given by injection (E.G., insulin).
Our goal is to leverage our core technology to become a
pharmaceutical company that develops and commercializes a wide range of
pharmaceutical products. Our strategy to obtain this goal is to :
- enter into business collaborations or joint ventures to further
develop and commercialize products incorporating our core
technology;
- in-license or otherwise acquire products in the late-stage
development phase;
- in-license or otherwise acquire products already on the market;
and
- enter into business collaborations or joint ventures with
complementary firms outside the scope of our core technology.
Our strategy over the next 12 months is to continue development of
our core technology and to actively seek collaborators and licensees to
accelerate the development and commercialization of products incorporating
our core technology. We hope to file an investigational new drug application
with the FDA before the end of 2000 to commence a Phase I human clinical
trial with respect to our CAP nanoparticles. In addition, during the next 12
months, we intend to seek opportunities to in-license or otherwise acquire
products in the late-stage development phase or products already on the
market.
We currently do not expect any significant changes in the number of
our employees unless we are able to enter into a business collaboration or
joint venture to further develop and commercialize products incorporating our
core technology or in-license or otherwise acquire products in the late-stage
human clinical development phase or products already on the market.
Alternatively, if we are able to enter into business collaborations or joint
ventures, in lieu of hiring additional employees, we may elect to enter into
arrangements with third parties to accomplish the similar tasks of hired
employees.
Since our inception, we have experienced significant operating
losses, and we expect to incur substantial and continuing losses for the
foreseeable future. We incurred a net loss of approximately $1,000,000 for
the nine months ended September 30, 1999, and as of September 30, 1999, our
accumulated deficit was approximately $11,800,000.
All of our revenue to date has been derived from interest earned on
invested funds. We have not commercially introduced any products. We expect
to incur substantial and continuing losses for the foreseeable
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<PAGE>
future as we seek to in-license or otherwise acquire new products and as our
own product development programs expand and various preclinical and clinical
trials commence. The amount of these losses may vary significantly from
year-to-year and quarter-to-quarter and will depend on, among other factors:
- the costs of licensure or acquisition of new products;
- the timing and cost of product development;
- the progress and cost of preclinical and clinical development
programs;
- the timing and cost of obtaining necessary regulatory approvals;
and
- the timing and cost of obtaining third party reimbursement.
In order to generate revenues, we must successfully develop and
commercialize our own proposed products or products in the late-stage human
clinical development phase or already on the market that we may in-license or
otherwise acquire or enter into collaborative agreements with others who can
successfully develop and commercialize them. Even if our proposed products
and the products we may license or otherwise acquire are commercially
introduced, they may never achieve market acceptance and we may never
generate revenues or achieve profitability.
In connection with the acquisition of SBI, accounted for under the
purchase method, BioSante acquired the rights to negotiate with the
Regents of the University of California for licenses of specific technologies
and products. The specific technologies and products relate to investigative
research funded by SBI. At the time of acquisition, the technologies and
products had not yet been approved for human clinical research. The value
ascribed to the rights, based on an independent evaluation, was $5,377,000.
This amount was immediately expensed as the technologies and products did not
have their technological feasibility established and had no identified future
alternative use.
As of the date of acquisition, the technology related to the
development of products for six indications [i.e. applications of the
technology.]. BioSante determined the value of the in process research and
development related to the acquired rights based on an independent valuation
using discounted cash flows. Principal assumptions used in the valuation were
as follows:
- FDA approval for the products for the six indications was
expected to be received at various dates between 2002 and 2004
however, there are many competitive products in development.
There are also many requirements that must be met before FDA
approval is secured. There is no assurance that the products will
be successfully developed, proved to be safe in clinical trials
and meet applicable regulatory standards or demonstrate
substantial benefits in the treatment or prevention of any disease.
- The estimated additional research and development expenditures
required before FDA approval was $26.5 million, to be incurred
over 8 to 10 years.
- Future cash flows were estimated based on estimated market size,
with costs determined based on industry norms, an estimated
annual growth rate of 3%.
- The cash flows were discounted at 25%. The rate was preferred
due to the high risk nature of the biopharmaceutical business.
- BioSante is continuing to develop the technology related
to five of the six indications.
- In June 1997, BioSante exercised its option and entered
into a license agreement with UCLA for the technology that it
had previously supported.
LIQUIDITY AND CAPITAL RESOURCES
To date, we, as well as our predecessor, Structured Biologicals,
have consistently raised equity financing to fund our activities, and we
expect to continue this practice to fund our ongoing activities. From
inception through October 1, 1999, we have raised net proceeds of $9.1
million from private equity financings, class A and class B stock conversions
and warrant exercises. In May 1999, we sold an aggregate of 23,125,000 shares
of common stock and warrants to purchase 11,562,500 shares of common stock at
an exercise price of $0.30 per share to 31 accredited investors in a private
placement. Several current members of our board of directors and an executive
officer participated in this private placement. Stephen M. Simes, our
President and Chief Executive Officer, purchased 250,000 shares of common
stock; Victor Morgenstern, a member of our board of directors, and a trust
and partnership affiliated with Mr. Morgenstern purchased an aggregate of
2,500,000 shares of common stock; Fred Holubow, a member of our board of
directors, purchased 250,000 shares of common stock and a company affiliated
with Ross Mangano, a member of our board of directors, purchased 7,500,000
shares of common stock. The net proceeds to us from this private placement
was approximately $4.4 million, thereby increasing our cash balance to
approximately $5.6 million as of September 30, 1999.
Our cash and cash equivalents were $5,648,796 and $2,841,250 at
September 30, 1999 and December 31, 1998. The increase in our cash balance is
due to the net proceeds from our private placement completed in May 1999.
We used cash in operating activities of $1,413,578 in the nine month
period ended September 30, 1999 versus cash used in operating activities of
$2,494,828 in the nine month period ended September 30, 1998. This change was
driven by a reduction in general and administrative expenses during the nine
month period ended September 30, 1999. Net cash used in investing activities
was $4,219 for the nine month period ended September 30, 1999 versus $120,124
for the nine month period ended September 30, 1998. The significant uses of
cash in investing activities for the nine month period ended September 30,
1999 were capital expenditures for the purchase of office furniture and a
computer. The significant uses of cash in investing activities for the nine
month period ended September 30, 1998 included capital expenditures for
laboratory equipment and laboratory office furniture. Net cash provided by
financing activities was $4,225,343 for the nine month period ended
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September 30, 1999 compared to $4,257,328 for the nine month period ended
September 30, 1998. Net cash provided in the nine month period ended
September 30, 1999 was primarily the result of our private placement
completed in May 1999. Net cash provided in the nine month period ended
September 30, 1998 was primarily the result of the conversion of class A and
class C stock into shares of common stock.
We used cash in operating activities of $3,041,425 in 1998 versus
cash used in operating activities of $1,244,698 in 1997. This change was
driven by the scale-up of our laboratory facility and various research and
development programs. Net cash used in investing activities was $124,984 for
1998 versus $723,649 for 1997. The significant uses of cash in investing
activities for 1998 included capital expenditures for the purchase of
laboratory equipment and laboratory office furniture. The significant uses of
cash in investing activities for the 1997 included capital expenditures for
the construction of a laboratory. Net cash provided by financing activities
was $4,257,328 for 1998 compared to $244,402 for 1997. This change resulted
from an increase in the number of class A and class C stock that were
converted into shares of common stock in 1998 compared to 1997.
We expect to continue to incur significant expenses, primarily
relating to our research and development activities. Management estimates
that it is currently expending approximately $80,000 to $100,000 per month on
research and development activities and approximately $125,000 to $150,000
per month in total expenses, including research and development activities.
Our research and development expenditures, however, may fluctuate from
quarter-to-quarter and year-to-year depending on the resources available and
our development schedule. Results of studies, clinical trials, regulatory
decisions and competitive developments also may influence our expenditures.
We are required under the terms of our license agreement with the University
of California to have available certain amounts of funds for research and
development activities. In the event, however, we are able to in-license or
otherwise acquire drugs in the late-stage development phase or drugs already
on the market, it is likely that our research and development and total
expenses would increase significantly.
We incurred cash expenditures of $1 million in the nine months ended
September 30, 1999. The capital equipment expenditures of $4,200 were
principally for the acquisition of office furniture and a computer. We expect
to spend approximately $10,000 to $20,000 in capital expenditures during the
next 12 months.
We have several financial commitments, including the following
minimum annual lease payments:
<TABLE>
<CAPTION>
MINIMUM ANNUAL
YEAR LEASE PAYMENTS
---- --------------
<C> <C>
2000 $101,341
2001 $ 98,520
2002 $ 87,944
2003 $ 48,051
</TABLE>
Under our license agreement with the University of California, we
are required to:
- pay a $100,000 license issue fee, $75,000 of which we have
already paid and $25,000 of which is due in June 2000;
- pay royalties to the University based on a percentage of the net
sales of any products incorporating the licensed technology;
- pay the following minimum annual royalties on February 28 of
each year beginning in the year 2004, to be credited against
earned royalties, for the life of the agreement:
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<PAGE>
<TABLE>
<CAPTION>
MINIMUM ANNUAL
YEAR ROYALTY DUE
----------------------- ---------------------
<S> <C>
2004 $ 50,000
2005 $ 100,000
2006 $ 150,000
2007 $ 200,000
2008 $ 400,000
2009 $ 600,000
2010 $ 800,000
2011 $1,500,000
Each year after 2011 $1,500,000
</TABLE>
- maintain an annual minimum amount of available capital for
development and commercialization of products incorporating the
licensed technology until a product is introduced to the market;
- pay the costs of patent prosecution and maintenance of the
patents included in the agreement;
- meet performance milestones relating to:
- hiring personnel to perform research and development,
regulatory and other activities relating to the commercial
launch of a proposed product;
- testing proposed products;
- obtaining government approvals;
- conducting clinical trials; and
- introducing products incorporating the licensed technology
into the market; and
- enter into partnership or alliance arrangements or agreements
with other entities regarding commercialization of the technology
covered by the license.
Our fixed expenses, such as rent, license payments and other
contractual commitments, may increase in the future, as we may:
- enter into additional leases for new facilities and capital
equipment;
- enter into additional licenses and collaborative agreements; and
- incur additional expenses associated with being a public company.
We currently do not have sufficient resources to complete the
commercialization of any of our proposed products or to carry out our
business strategy or to meet the financial commitments described above.
Therefore, we will likely need to raise substantial additional capital to
fund our operations sometime in the future. We expect that our cash balance
of approximately $5.6 million as of September 30, 1999 will be sufficient to
fund our operations through at least June 2002. We have based this estimate,
however, on
31
<PAGE>
assumptions that may prove to be wrong. As a result, we may need to obtain
additional financing prior to that time. In addition, we may need to raise
additional capital at an earlier time to fund our ongoing research and
development activities, acquire new products or take advantage of other
unanticipated opportunities. We cannot be certain that any financing will be
available when needed. Any additional equity financings may be dilutive to
our existing shareholders, and debt financing, if available, may involve
restrictive covenants on our business. In addition, if we fail to raise
additional financing as we need it, we may have to delay or terminate our own
product development programs or pass on opportunities to in-license or
otherwise acquire new products that we believe may be beneficial to our
business.
We expect to continue to spend capital on:
- research and development programs;
- preclinical studies and clinical trials;
- regulatory processes;
- establishment of our own commercial scale manufacturing and
marketing capabilities or a search for third party manufacturers
and marketing partners to manufacture and market our products for
us; and
- the licensure or acquisition of new products.
The amount of capital we may need will depend on many factors,
including the:
- progress, timing and scope of our research and development
programs;
- progress, timing and scope of our preclinical studies and
clinical trials;
- time and cost necessary to obtain regulatory approvals;
- time and cost necessary to build our own manufacturing
facilities and obtain the necessary regulatory approvals for
those facilities or to seek third party manufacturers to
manufacture our products for us;
- time and cost necessary to establish our own sales and marketing
capabilities or to seek marketing partners to market our products
for us;
- time and cost necessary to respond to technological and market
developments;
- changes made or new developments in our existing collaborative,
licensing and other commercial relationships; and
- new collaborative, licensing and other commercial relationships
that we may establish.
32
<PAGE>
IMPACT OF YEAR 2000
During 1999, we conducted a comprehensive review of our computer
systems to identify the systems that could be affected by the year 2000
issue. To date, we have experienced no problems with respect to year 2000
issues. The only expenses we incurred in preparing our business for the year
2000 were consulting fees in the amount of less than $200.
ITEM 3. DESCRIPTION OF PROPERTY.
Our principal executive office is located in Lincolnshire, Illinois.
We lease approximately 700 square feet of office space for approximately
$1,000 per month, which lease expires in June 2000. Our research and
development operations are located in Smyrna, Georgia where we lease
approximately 11,840 square feet of laboratory space for approximately $5,100
per month, which lease expires in October 2003. We also lease approximately
2,600 square feet of office space in Atlanta, Georgia for approximately
$3,500 per month, which lease expires in September 2002. Effective September
16, 1999, we entered into a sublease agreement for the Atlanta office space
under which we receive approximately $3,500 per month from the sub-tenant
through September 14, 2002. Management of our company considers our leased
properties suitable and adequate for our current needs and adequately covered
by insurance.
33
<PAGE>
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth information known to us with respect
to the beneficial ownership of our capital stock as of October 1, 1999 for
(1) each person known by us to beneficially own more than 5% of any class of
our voting securities, (2) each of the executive officers named in the
Summary Compensation Table under the heading "Item 6. Executive Compensation"
beginning on page 38, (3) each of our current directors, and (4) all of our
executive officers and directors as a group. Except as otherwise indicated,
we believe that the beneficial owners of our capital stock listed below,
based on information provided by these owners, have sole investment and
voting power with respect to such shares, subject to community property laws
where applicable.
<TABLE>
<CAPTION>
COMMON STOCK PERCENT OF
COMMON STOCK CLASS C STOCK AND COMMON TOTAL
---------------------------- --------------------- STOCK VOTING
NAME NUMBER PERCENT NUMBER PERCENT EQUIVALENTS(1) POWER(2)
- ----------------------------------- ----------------- --------- ---------- -------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Stephen M. Simes (3)............... 1,621,110 (4) 3.0% -- -- 1,621,110 2.6%
Louis W. Sullivan, M.D. (3)........ -- -- 1,000,000 20.8% 1,000,000 1.7%
Edward C. Rosenow III, M.D. (3).... 100,000 (5) * -- -- 100,000 *
Victor Morgenstern (3)............. 3,750,000 (6) 7.0% -- -- 3,750,000 6.4%
Fred Holubow (3)................... 375,000 (7) * -- -- 375,000 *
Ross Mangano (3)................... 11,250,000 (8) 19.9% -- -- 11,250,000 18.4%
Angela Ho (3)...................... 700,000 (9) 1.3% 1,000,000 20.8% 1,700,000 3.1%
Peter Kjaer (3).................... -- -- -- -- -- --
Avi Ben-Abraham, M.D. (3).......... 12,467,300 (10) 23.6% -- -- 12,467,300 21.6%
JO & Co............................ 11,250,000 (11) 19.9% -- -- 11,250,000 18.4%
Hans Michael Jebsen................ 3,750,000 (12) 7.0% 1,000,000 20.8% 4,750,000 8.2%
King Cho Fung...................... 3,187,500 (13) 6.0% 625,000 13.0% 3,812,500 6.6%
All executive officers and
directors as a group (10 persons).. 30,582,498 (14) 51.1% 2,000,000 41.6% 32,582,498 50.4%
</TABLE>
- ---------------------
* less than 1%.
34
<PAGE>
(1) In calculating an individual's percentage ownership, conversion of any
shares of our class C stock owned by such individual is assumed for
purposes of such calculation.
(2) In calculating the percent of total voting power, the voting power
of shares of our class C stock and our common stock is aggregated.
(3) Address: 175 Olde Half Day Road, Suite 123, Lincolnshire, IL 60069.
(4) Mr. Stephen M. Simes' beneficial ownership includes 1,246,110 shares of
common stock issuable under currently exercisable options and 125,000
shares of common stock issuable under a warrant.
(5) Dr. Edward C. Rosenow's beneficial ownership includes 100,000 shares of
common stock issuable under currently exercisable options.
(6) Mr. Victor Morgenstern's beneficial ownership includes 750,000 shares
of common stock issuable under a currently exercisable warrant, 250,000
shares of common stock issuable under a currently exercisable warrant
and 500,000 shares of common stock held by Mr. Morgenstern's wife as
trustee of the Morningstar Trust and 250,000 shares of common stock
issuable under a currently exercisable warrant and 500,000 shares of
common stock held by Resolute Partners. Victor Morgenstern is a partner
of Resolute Partners.
(7) Mr. Fred Holubow's beneficial ownership includes 125,000 shares of
common stock issuable under a currently exercisable warrant.
(8) Mr. Ross Mangano's beneficial ownership includes 3,750,000 shares of
common stock issuable under a currently exercisable warrant and
7,500,000 shares of common stock held by JO & Co. to which Mr. Mangano
has sole voting power. See note (12) below.
(9) Ms. Angelo Ho's beneficial ownership includes 100,000 shares of common
stock issuable under currently exercisable options.
(10) Dr. Ben-Abraham's beneficial ownership includes 200,000 shares of
common stock issuable under currently exercisable options. Dr.
Ben-Abraham has entered into an agreement limiting voting rights with
respect to his or her shares of class C stock and common stock in
certain circumstances. See "Item 8 - Description of Securities." The
percentage has been calculated without taking these restrictions into
account.
(11) Includes 3,750,000 shares of common stock issuable under a currently
exercisable warrant. Ross Mangano, a director of BioSante, has sole
voting power over these shares. The address for JO & Co. is 112 West
Jefferson Boulevard, Suite 613, South Bend, Indiana 46634.
(12) Mr. Hans Michael Jebsen's beneficial ownership includes 750,000 shares
of common stock issuable under a currently exercisable warrant. Mr.
Jebsen's address is c/o Jebsen & Co. Ltd., 28/F Caroline Center, 28 Yun
Ping Road, Causeway Bay, Hong Kong.
(13) Mr. King Cho Fung's beneficial ownership includes 750,000 shares of
common stock issuable under a currently exercisable warrant. Mr. Fung's
address is Room 2101, Lyndhurst Tower, One Lyndhurst Terrace, Central
Hong Kong.
35
<PAGE>
(14) The amount beneficially owned by all current directors and executive
officers as a group includes the aggregate of 2,965,198 shares issuable
under currently exercisable warrants and exercisable options. Also
includes an aggregate of 4,250,000 shares issuable under currently
exercisable warrants held by Resolute Partners, Morningstar Trust and
JO & Co., respectively. See notes (6), (8) and (11) above.
36
<PAGE>
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.
Set forth below are our directors and executive officers and their ages
and positions as of February 15, 2000:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Louis W. Sullivan, M.D. (1)(2)(3).......... 66 Chairman of the Board
Stephen M. Simes........................... 48 Vice Chairman, President and Chief Executive Officer
Victor Morgenstern (2)..................... 56 Director
Fred Holubow (3)........................... 60 Director
Ross Mangano (1)........................... 53 Director
Edward C. Rosenow III, M.D. (3)............ 64 Director
Angela Ho (2).............................. 46 Director
Peter Kjaer (1)............................ 38 Director
Avi Ben-Abraham, M.D....................... 41 Director
Phillip B. Donenberg....................... 39 Chief Financial Officer, Treasurer and Secretary
- ---------------------------------
</TABLE>
(1) Member of the Audit and Finance Committee
(2) Member of the Compensation Committee
(3) Member of the Scientific Review Committee
THE HONORABLE LOUIS W. SULLIVAN, M.D. has been our Chairman of the
Board since March 1998 and has been a director of our company since its
formation. Dr. Sullivan served as Secretary of Health and Human Services in
the cabinet of President George Bush from 1989 to 1993. Since retiring from
the Bush Administration, Dr. Sullivan has been President of the Morehouse
School of Medicine in Atlanta, Georgia. He had previously served as President
and Dean of the School from 1981 to 1985. Since 1993, Dr. Sullivan has served
and continues to serve on the boards of several large U.S. corporations
including 3M Corp., Bristol-Myers Squibb, Cigna, General Motors Corporation,
Georgia Pacific Corp. and Household International Inc.
STEPHEN M. SIMES has served as our Vice Chairman, President and a
director of our company since January 20, 1998 and Chief Executive Officer
since March 1998. From October 1994 to January 1997, Mr. Simes was President,
Chief Executive Officer and a Director of Unimed Pharmaceuticals, Inc., a
company with a product focus on infectious diseases, AIDS, endocrinology and
oncology. From 1989 to 1993, Mr. Simes was Chairman, President and Chief
Executive Officer of Gynex Pharmaceuticals, Inc., a company which
concentrated on the AIDS, endocrinology, urology and growth disorders
markets. In 1993, Gynex was acquired by Bio-Technology General Corp., and
from 1993 to 1994, Mr. Simes served as Senior Vice President and Director of
Bio-Technology General Corp. Mr. Simes' career in the pharmaceutical industry
started in 1974 with G.D. Searle & Co.
37
<PAGE>
VICTOR MORGENSTERN was elected a director of our company in July
1999 in connection with the May 1999 private placement. Mr. Morgenstern has
more than 31 years of investment experience and is a partner and chairman of
Harris Associates L.P., a Chicago, Illinois-based investment management firm
since 1976. He is a director of Nvest Companies, L.P. and a trustee of the
Illinois Institute of Technology.
FRED HOLUBOW was elected a director of our company in July 1999 in
connection with the May 1999 private placement. Mr. Holubow has been a Vice
President of Pegasus Associates, a registered investment advisement firm
since he founded Pegasus in 1982. He specializes in analyzing and investing
in pharmaceutical and biotechnology companies. Mr. Holubow serves on the
board of directors for ThermoRetec and has served on the Board of Directors
for Bio-Technology General Corp. and Unimed Pharmaceuticals.
ROSS MANGANO was elected a director of our company in July 1999 in
connection with the May 1999 private placement. Mr. Mangano has been the
President and a director of Oliver Estate, Inc., a management company
specializing in investments in public and private companies since 1971. He
has been the Chairman of Cerprobe Corporation, and serves as a director for
Blue Chip Casino, Inc.; Orchard Software Corporation; Tower Federal Savings
Bank; and U.S. RealTel Inc.
EDWARD C. ROSENOW, III, M.D. has been a director of our company
since November 1997. Dr. Rosenow was the Arthur M. and Gladys D. Gray
Professor of Medicine at the Mayo Clinic from 1988 until his recent
retirement. Beginning with his residency in 1960, Dr. Rosenow has worked at
the Mayo Clinic in many professional capacities including as a Consultant in
Internal Medicine (Thoracic Diseases) from 1966 to 1996, an Assistant
Professor, Associate Professor and Professor of Medicine at the Mayo Clinic
Medical School, President of the Mayo Clinic Staff in 1986, and Chair of the
Division of Pulmonary and Critical Care Medicine from 1987 to 1994. Dr.
Rosenow has also served as a consultant to NASA, space station FREEDOM at the
Johnson Space Center in Houston, Texas from 1989 to 1990 and as the President
of the American College of Chest Physicians from 1989 to 1990.
ANGELA HO has been a director of our company since June 1998. Ms. Ho
was elected to our Board of Directors as a representative of our major
investors in Hong Kong. Ms. Ho has been the Vice Chairman and Chief Managing
Officer of Jet Asia Ltd., a Hong Kong-based aircraft and management company,
since April 1996. From June 1996 to June 1998, Ms. Ho was the President of Ho
Galleries Ltd., a New York art gallery. She specializes in investments in
small and microcap companies.
PETER KJAER has been a director of our company since July 1999. Mr.
Kjaer has been President and Chief Executive Officer of Jet Asia Ltd., a Hong
Kong-based aircraft and management company, since April 1996 and a
representative of our major investors in that province. From April 1989 to
July 1996, Mr. Kjaer was the General Manager and a director of the Gallery of
Contemporary Living Ltd., a Hong Kong-based art gallery.
AVI BEN-ABRAHAM, M.D. founded our company and has been a director of
our company since inception. Dr. Ben-Abraham was the Chairman of the Board
and Chief Executive Officer of our company from inception to March 1998. Dr.
Ben-Abraham was a trustee of the Morehouse School of Medicine in Atlanta,
Georgia until December 1998. From July 1995 to March 1998, Dr. Ben-Abraham
served as Chairman, Chief Executive Officer and Director of Structured
Biologicals, Inc.
PHILLIP B. DONENBERG has served as our Chief Financial Officer,
Treasurer and Secretary since July 1998. Before joining our company, Mr.
Donenberg was Controller of Unimed Pharmaceuticals, Inc. from January 1995 to
June 1998. From May 1993 to December 1994, Mr. Donenberg was Controller of
Molecular Geriatrics Corporation, a bio-tech corporation. Prior to this, Mr.
Donenberg held similar positions with other pharmaceutical companies: Gynex
Pharmaceuticals, Inc. and Xtramedics, Inc.
38
<PAGE>
ITEM 6. EXECUTIVE COMPENSATION.
EXECUTIVE COMPENSATION
The following table provides information concerning cash and
non-cash compensation paid to or earned by our Chief Executive Officer and
the only other executive officer whose salary and bonus exceeded $100,000 for
the fiscal year ended December 31, 1998:
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION COMPENSATION
------------ ------------
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OPTIONS (#) COMPENSATION ($)
- --------------------------- ---- --------- -------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
Stephen M. Simes (1).................... 1998 $218,795 $0 1,000,000 $16,333 (2)
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Claus G.J. Wagner-Bartak, D.Sc. (3)..... 1998 $105,000 $0 500,000 $65,000 (4)
EXECUTIVE VICE PRESIDENT AND CHIEF
SCIENTIFIC OFFICER
- --------------------------
</TABLE>
(1) Mr. Simes became our President in January 1998 and Chief Executive
Officer in March 1998.
(2) Represents an auto allowance ($11,333) and a 401(k) matching
contribution ($5,000).
(3) Effective February 28, 1999, Dr. Wagner-Bartak's employment with our
company was terminated and his options to purchase 500,000 shares of
common stock were cancelled.
(4) Represents amounts paid to a corporation controlled by Dr.
Wagner-Bartak ($60,000) and a 401(k) matching contribution ($5,000) to
Dr. Wagner-Bartak.
39
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table summarizes stock option grants during 1998 to each
of our Named Executive Officers.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS (1)
------------------------------------------------------------------
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO EXERCISE
OPTIONS EMPLOYEES IN PRICE EXPIRATION
NAME GRANTED (#) FISCAL YEAR PER SHARE DATE
- ---- ------------------------------------------------------------------
<S> <C> <C> <C> <C>
Stephen M. Simes........................ 600,000 (2) 27.5% $0.29 04/20/03
400,000 (3) 18.3% $0.28 10/06/03
Claus G.J. Wagner-Bartak, D.Sc.......... 165,000 (4) 7.6% $0.29 04/20/03
335,000 (4) 15.3% $0.28 10/06/03
- --------------------------
</TABLE>
(1) All of the options granted to the Named Executive Officers were
initially granted under our 1997 Stock Option Plan. These options,
however, were subsequently transferred to our 1998 Stock Option Plan.
We refer you to the information under the heading "- Stock Option Plan"
on page 41 for a discussion of the material terms of our 1998 Stock
Option Plan.
(2) These options become exercisable as follows: (1) 100,000 shares are
immediately exercisable, and (2) the remaining shares become
exercisable in as nearly equal as possible quarterly installments over
a three-year period, so long as the executive remains employed by us or
one of our subsidiaries at that date. To the extent not already
exercisable, these options become immediately exercisable in full upon
certain changes in control of our company and remain exercisable for
the remainder of their term. We refer you to the information under the
heading "- Employment Agreements" on page 40 and "- Stock Option Plan"
on page 41.
(3) These options become exercisable as follows: (1) 33,333 shares are
immediately exercisable, and (2) the remaining shares become
exercisable in as nearly equal as possible quarterly installments over
a three-year period, so long as the executive remains employed by us or
one of our subsidiaries at that date. To the extent not already
exercisable, these options become immediately exercisable in full upon
certain changes in control of our company and remain exercisable for
the remainder of their term. We refer you to the information under the
heading "- Employment Agreements" on page 40 and "- Stock Option Plan"
on page 41.
(4) These options were exercisable annually over a three-year period, so
long as the executive remains employed by us or one of our subsidiaries
at that date. Dr. Wagner-Bartak's employment with our company was
terminated effective as of February 28, 1999, at which time all of his
options were cancelled.
40
<PAGE>
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following table summarizes the number and value of options exercised
during 1998 and the value of options held by the Named Executive Officers at
December 31, 1998.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT DECEMBER 31, 1998 AT DECEMBER 31, 1998 (1)
----------------------------- ------------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Stephen M. Simes........................ 325,000 675,000 $0 $0
Claus G.J. Wagner-Bartak, D.Sc. (2)..... 0 500,000 $0 $0
</TABLE>
- -----------------------
(1) Value based on the difference between the fair market value of one
share of our common stock at December 31, 1998 ($0.18), the closing
sale price on that date as reported by the Canadian Venture Exchange,
and the exercise price of the options ranging from $0.28 to $1.07 per
share. Options are in-the-money if the market price of the shares
exceeds the option exercise price.
(2) Dr. Wagner-Bartak's employment with our company was terminated
effective as of February 28, 1999, at which time all of his options
were cancelled.
EMPLOYMENT AGREEMENTS
On January 21, 1998, we entered into a letter agreement with Stephen
M. Simes pursuant to which Mr. Simes serves as our President, Chief Executive
Officer and Executive Vice Chairman. The initial term of this agreement
continues until December 31, 2000, after which time the term will be
automatically extended for three additional years unless on or before October
1 of the preceding year, either party gives written notice to the other of
the termination of the agreement. Mr. Simes' base salary is $250,000 per
year, and he is entitled to receive an annual performance bonus of up to 50%
of his then base salary if certain performance criteria are met. Under the
terms of this agreement, Mr. Simes was granted a five-year option to purchase
600,000 shares of common stock at an exercise price of $0.29 per share. This
option is immediately exercisable with respect to 100,000 shares and will
become exercisable with respect to the remaining 500,000 shares in 12 equal
quarterly installments over the initial three-year term of the agreement. Mr.
Simes was also granted an option to purchase an additional 400,000 shares of
common stock at an exercise price of $0.28 per share. This option is
immediately exercisable with respect to 33,333 shares and will become
exercisable with respect to the remaining 366,666 shares in 12 equal
quarterly installments over the initial three-year term of the agreement. In
the event Mr. Simes is terminated without cause or upon a change in control
or in the event he terminates his employment for good reason, all of his
options will become immediately exercisable and will remain exercisable for a
period of one year (for the remainder of their term in the event of a change
in control), and he will be entitled to a minimum severance payment of 12
months base salary. Mr. Simes is also subject to assignment of inventions,
confidentiality and non-competition provisions. The company and Mr. Simes
amended this agreement in connection with our May 1999 private placement, to
clarify that the anti-dilution rights held by Mr. Simes apply only in the
context of a stock dividend, stock split or exchange or other similar change
in capital and to waive any rights Mr. Simes may have under the agreement in
the event the May 1999 private placement would have resulted in a change in
control of our company, including the acceleration of the exercisability of
his stock options. In connection with the amendment, we granted Mr. Simes an
option to purchase 5% of the number of shares of common stock sold in the May
1999 private placement (excluding any shares issuable pursuant to the
warrants).
On June 11, 1998, we entered into a letter agreement with Phillip B.
Donenberg pursuant to which Mr. Donenberg serves our Chief Financial Officer.
Mr. Donenberg's base salary is $110,000 per year, and he is
41
<PAGE>
entitled to receive an annual performance bonus of up to 30% of his then base
salary if certain performance criteria are met. Under the terms of this
agreement, Mr. Donenberg was granted a five-year option to purchase 340,000
shares of common stock at an exercise price of $0.28 per share. This option
is immediately exercisable with respect to 34,000 shares and will become
exercisable with respect to the remaining 306,000 shares in 12 equal
quarterly installments with the first installment vesting on October 1, 1998.
In the event Mr. Donenberg is terminated without cause or upon a change in
control or in the event he terminates his employment for good reason, all of
his options will become immediately exercisable and will remain exercisable
for a period of one year (for the remainder of their term in the event of a
change in control), and he will be entitled to a minimum severance payment of
12 months base salary. Mr. Donenberg is also subject to assignment of
inventions, confidentiality and non-competition provisions. The company and
Mr. Donenberg amended this agreement in connection with our May 1999 private
placement, among other things, to clarify that the anti-dilution rights held
by Mr. Donenberg apply only in the context of a stock dividend, stock split
or exchange or other similar change in capital and to waive any rights Mr.
Donenberg may have under the agreement in the event the May 1999 private
placement would have resulted in a change in control of our company,
including the acceleration of the exercisability of his stock options. In
connection with the amendment, we granted Mr. Donenberg an option to purchase
1.5% of the number of shares of common stock sold in the May 1999 private
placement (excluding any shares issuable pursuant to the warrants).
STOCK OPTION PLAN
From time to time we grant options under our 1998 Stock Option Plan.
The 1998 Plan was approved by our Board of Directors on December 8, 1998 and
approved by shareholders on July 13, 1999. The 1998 Plan provides for the
grant to employees, officers, directors, consultants and independent
contractors of our company and our subsidiaries of options to purchase shares
of common stock that qualify as "incentive stock options" within the meaning
of Section 422 of the Internal Revenue Code of 1986, as amended, as well as
non-statutory options that do not qualify as incentive stock options. This
plan is administered by the Compensation Committee of our Board of Directors,
which determines the persons who are to receive awards, as well as the type,
terms and number of shares subject to each award.
We have reserved an aggregate of 5,000,000 shares of common stock
for awards under the 1998 Plan. As of October 1, 1999, options to purchase an
aggregate of 4,283,125 shares of common stock were outstanding under the 1998
Plan, of which 2,026,865 were fully vested, and a total of 716,875 shares of
common stock remained available for grant. As of October 1, 1999, the
outstanding options under the plan were held by an aggregate of nine
individuals and were exercisable at prices ranging from $0.23 to $1.07 per
share of common stock.
Incentive stock options granted under the plans may not have an
exercise price less than the fair market value of the common stock on the
date of the grant (or, if granted to a person holding more than 10% of our
voting stock, at less than 110% of fair market value). Non-statutory stock
options granted under the plans may not have an exercise price less than 85%
of fair market value on the date of grant. Aside from the maximum number of
shares of common stock reserved under the plans, there is no minimum or
maximum number of shares that may be subject to options under the plans.
However, the aggregate fair market value of the stock subject to incentive
stock options granted to any optionee that are exercisable for the first time
by an optionee during any calendar year may not exceed $100,000. Options
generally expire when the optionee's employment or other service is
terminated with us. Options generally may not be transferred, other than by
will or the laws of descent and distribution, and during the lifetime of an
optionee, may be exercised only by the optionee. The term of each option,
which is fixed by our Board of Directors at the time of grant, may not exceed
5 years from the date the option is granted if our common stock is then
listed on the Canadian Venture Exchange and we have not been exempted from the
Canadian Venture Exchange requirements in this regard (except that an incentive
stock option may be exercisable only for 10 years and an incentive stock
42
<PAGE>
option granted to a person holding more than 10% of our voting stock may be
exercisable only for five years regardless of the availability of such
exemption).
The 1998 Plan contains provisions under which options would become
fully exercisable following certain changes in control of our company, such
as (1) the sale, lease, exchange or other transfer of all or substantially
all of the assets of our company to a corporation that is not controlled by
us, (2) the approval by our shareholders of any plan or proposal for the
liquidation or dissolution of our company, (3) certain merger or business
combination transactions, (4) more than 50% of our outstanding voting shares
are acquired by any person or group of persons who did not own any shares of
common stock on the effective date of the plan, or (5) certain changes in the
composition of our Board of Directors.
Payment of an option exercise price may be made in cash, or at the
Compensation Committee's discretion, in whole or in part by tender of a
broker exercise notice, a promissory note or previously acquired shares of
our common stock having an aggregate fair market value on the date of
exercise equal to the payment required.
BOARD COMPOSITION AND STRUCTURE
In connection with our May 1999 private placement, we entered into a
Shareholders Agreement with the investors, which included Stephen Simes,
Victor Morgenstern, including an affiliated trust and a partnership, Fred
Holubow and JO & Co. This agreement contains, among other things, a voting
agreement with respect to the election of directors. Under the Shareholders
Agreement, our Board of Directors will consist of not less than three nor
more than 12 directors. So long as Avi Ben-Abraham, M.D. holds at least 10%
of our outstanding capital stock, he will be entitled to be nominated as a
director and, at the next two general elections for directors our current
shareholders located in Hong Kong or representing shareholders located in
Hong Kong, which we refer to in this registration statement as the "Hong Kong
Investors," must, subject to certain exceptions, vote all of the shares of
capital stock held by them to elect Dr. Ben-Abraham as a director. The
holders of a majority of the shares of capital stock held by the Starbow
Investors (the lead investors in the May 1999 private placement) will be
entitled to nominate three members of our Board of Directors, and all of the
parties to the Shareholders Agreement must vote their shares of our capital
stock to elect the Starbow Investors' nominees to our Board of Directors. In
addition, the holders of a majority of the shares of capital stock held by
the Investor Shareholders, which excludes the Hong Kong Investors, will be
entitled to nominate three members of our Board of Directors and all parties
to the Shareholders Agreement must vote their shares of our capital stock to
elect their nominees to the Board of Directors. The right to nominate three
directors held by the Starbow Investors and the Hong Kong Investors will
terminate immediately prior to the later of the third general election of
directors subsequent to the date of the closing of the May 1999 private
placement or March 31, 2001.
BOARD COMMITTEES
Our Board has created a Compensation Committee, an Audit and Finance
Committee and a Scientific Review Committee. The Compensation Committee
reviews general programs of compensation and benefits for all our employees
and makes recommendations to the Board concerning such matters as
compensation to be paid to our officers and directors. The Compensation
Committee consists of Dr. Sullivan (Chairman), Mr. Morgenstern and Ms. Ho.
The Audit and Finance Committee provides assistance to the Board in
satisfying our fiduciary responsibilities relating to our accounting,
auditing, operating and reporting practices, and reviews our annual financial
statements, the selection and work of our independent auditors and the
adequacy of internal controls for compliance with corporate policies and
directives. The Audit and Finance Committee consists of Mr. Kjaer (Chairman),
Dr. Sullivan and Mr. Mangano. The Scientific Review Committee helps to
evaluate our
43
<PAGE>
potential licenses or new products. The Scientific Review Committee consists
of Dr. Rosenow (Chairman), Dr. Sullivan and Mr. Holubow.
DIRECTOR COMPENSATION
We do not pay fees to the members of the Board of Directors. We do,
however, periodically compensate our directors through the granting of stock
options. On November 7, 1997 and October 7, 1998, respectively, our board of
directors granted Dr. Rosenow two options to purchase an aggregate of 100,000
shares of our common stock at an exercise price of $1.04 and $.28,
respectively. Such options vested immediately with respect to 50,000 shares
and vested on October 7, 1999 for the remaining 50,000 shares.
On October 7, 1998, Ms. Angelo Ho was granted an option to purchase
100,000 shares of our common stock at an exercise price of $.28. Such option
vested on October 7, 1999.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
DIRECTOR RELATIONSHIPS
Angela Ho, a director of our company, owns approximately 3.0% of our
outstanding voting securities and was elected to our Board of Directors as a
representative of our several investors located in Hong Kong. Ms. Ho has not
entered into any voting agreements with these Hong Kong investors nor does
she otherwise have any control over the voting of shares held by these
investors.
Our operations were located at the Morehouse School of Medicine from
November 1996 until June 1997, when our laboratory facilities were completed
and we paid rent during such period to the Morehouse School of Medicine.
Louis W. Sullivan, M.D., our Chairman, is the President, and Avi Ben-Abraham,
a director and a principal shareholder of our company, was a trustee of
Morehouse School of Medicine during this time. We believe that the lease
payments reflected payments that would have been made by an arm's length
lessee.
Avi Ben-Abraham, M.D., a director and a founder of our company and
our former Chief Executive Officer and Chairman of the Board, entered into an
agreement with us in May 1998 pursuant to which, among other things, he
agreed to convert shares of our former class A stock held by him into shares
of common stock at $0.25 per share and to transfer shares of common stock
held by him to certain third parties. In addition, Dr. Ben-Abraham agreed,
subject to certain exceptions, not to sell any shares of common stock or any
other securities of our company for a period of 15 months. He also agreed to
transfer certain shares of class A and class C stock held by him to us. In
addition, under the agreement, we agreed to indemnify Dr. Ben-Abraham for
certain actions, and he agreed to indemnify us upon the occurrence of certain
events.
Claus Wagner-Bartak, a current shareholder, was directly employed by
our company on a full time basis from June 1, 1998 until February 28, 1999
when his employment was terminated. Dr. Bartak was a member of our Board of
Directors until June 30, 1999. Prior to June 1998. Dr. Bartak's services as a
member of our management were provided to us under an agreement with a
consulting company controlled by Dr. Bartak. Management fees of $94,200 and
$185,000 were paid to the company controlled by Dr. Bartak in 1998 and 1997,
respectively. Also, financing fees of $44,019 were paid to the company
controlled by Dr. Bartak for financing services provided to us.
At December 31, 1998, $133,901 was included in accounts payable
composed of $130,000 accrued for bonuses payable to Stephen M. Simes and
Phillip Donenberg, both members of our management, for contributions to our
company in 1998, and $3,901 was included for outstanding expenses due to
Stephen M. Simes and Claus Wagner Bartak, both members of our management at
December 31, 1998. At December 31,
44
<PAGE>
1997, $156,412 was included in accounts payable which reflected accrued
management fees payable to a company controlled by Dr. Bartak for services
provided to us in 1997.
Messrs. Morgenstern, Holubow and Mangano were elected to our Board
of Directors in July 1999 as representatives of the new investors (Starbow
investors) in the May 1999 private placement. In May 1999, the Starbow
investors entered into a shareholders agreement, which contains a voting
agreement, with respect to the election of these directors. We refer you to
the information on page 42 under the heading "Item 6. Executive
Compensation--Board Composition and Structure" for a description of this
voting agreement. This right terminates immediately prior to the later of May
6, 2002, three years from the closing of the May 1999 private placement or
March 31, 2001.
Mr. Kjaer was elected to our Board of Directors as a representative
of our Hong Kong investors in July 1999. Mr. Kjaer has not entered into any
voting agreements with these Hong Kong investors nor does he otherwise have
any control over the voting of shares held by these investors.
EMPLOYMENT AGREEMENTS
For a discussion of the employment agreements we have entered into
with our executive officers, we refer you to "Item 6. Executive
Compensation--Employment Agreements."
ITEM 8. DESCRIPTION OF SECURITIES.
AUTHORIZED SHARES
We are authorized to issue an unlimited number of shares of common
stock, no par value per share, and an unlimited number of shares of
preference stock, no par value per share. The following is a summary of the
material terms and provisions of our capital stock. Because it is a summary,
it does not include all of the information that is included in our Articles
of Continuance. The text of our Articles of Continuance, which is attached as
an exhibit to this registration statement, is incorporated into this section
by reference.
COMMON STOCK
We are authorized to issue an unlimited number of shares of common
stock, of which 52,642,686 shares were issued and outstanding as of October
1, 1999. Each share of our common stock entitles its holder to one vote per
share. Holders of our common stock are entitled to receive dividends as and
when declared by our Board of Directors from time to time out of funds
properly applicable to the payment of dividends. Subject to the liquidation
rights of any outstanding preferred stock, the holders of our common stock
are entitled to share pro rata in the distribution of the remaining assets of
our company upon a liquidation, dissolution or winding up of our company. The
holders of our common stock have no cumulative voting, preemptive,
subscription, redemption or sinking fund rights. The holders of shares of our
common stock purchased in connection with our May 1999 private placement
offering and issuable upon exercise of warrants issued in connection with
this private placement are entitled to preemptive rights under a
shareholders' agreement. The investors, which included Stephen Simes, Victor
Morgenstern, including an affiliated trust and a partnership, Fred Holubow
and JO & Co. and the Hong Kong Investors, were granted a right of first offer
for a two year period to which, subject to certain exceptions, we must give
the investors written notice prior to selling any securities. The preemptive
rights expire on May 6, 2001.
CLASS C SPECIAL STOCK
We are authorized to issue an unlimited number of shares of class C
special stock, of which 4,807,865 shares were issued and outstanding as of
October 1, 1999. Each share of class C special stock entitles its holder
45
<PAGE>
to one vote per share. Each share of our class C special stock is
exchangeable, at the option of the holder, for one share of common stock, at
an exchange price of $.25 per share, subject to adjustment upon certain
capitalization events. Holders of our class C special stock are not entitled
to receive dividends. Holders of our class C special stock are not entitled
to participate in the distribution of our assets upon any liquidation,
dissolution or winding-up of our company. The holders of our class C special
stock have no cumulative voting, preemptive, subscription, redemption or
sinking fund rights.
PREFERRED STOCK
We are authorized to issue an unlimited number of shares of
preferred stock, none of which are issued and outstanding. Our Board of
Directors is authorized to issue one or more series of preferred stock With
such rights, privileges, restrictions and conditions as our Board may
determine. The preferred stock, if issued, may be entitled to rank senior to
our common stock with respect to the payment of dividends and the
distributions of assets in the event of a liquidation, dissolution or
winding-up of our company.
OPTIONS AND WARRANTS
As of October 1, 1999, we had outstanding options to purchase an
aggregate of 4,283,125 shares of common stock at a weighted average exercise
price of $0.30 per share. All outstanding options provide for antidilution
adjustments in the event of certain mergers, consolidations, reorganizations,
recapitalizations, stock dividends, stock splits or other similar changes in
our corporate structure and shares of our capital stock. We typically grant
options with a five-year term. We have outstanding warrants to purchase an
aggregate of 11,562,500 shares of common stock at an exercise price of $0.30
per share with a five-year term. The warrants provide for antidilution
adjustments in the event of certain mergers, consolidations, reorganizations,
recapitalizations, stock dividends, stock splits or other changes in our
corporate structure of our company and, subject to certain exceptions, the
issuance by our company of any securities for a purchase price of less than
$0.20 per share.
REGISTRATION RIGHTS
The holders of the common stock and warrants purchased in our May
1999 private placement are entitled to certain registration rights under the
Securities Act. If at any time after we become listed on Nasdaq, the holders
of a specified amount of these registrable shares request that we file a
registration statement covering the shares, we will use commercially
reasonable efforts to cause these shares to be registered. We are not
required to file more than two registration statements under these demand
rights, or more than one registration statement in any twelve-month period.
In addition, the holders of these registrable shares are entitled to have
their shares included in a registration statement under the Securities Act in
connection with the public offering of our securities. In any underwritten
public offering, the registration rights are limited to the extent that the
managing underwriter has the right to (1) limit the number of registrable
shares to be included in the registration statement; (2) prohibit the sale of
any of our securities other than those registered and included in the
underwritten offering for a period of 180 days; and (3) require holders of
registrable shares not to sell or otherwise dispose of any securities of our
company (other than securities included in the registration) without the
prior written consent of the underwriters for a period of up to 180 days from
the effective date of such registration. These registration rights will
terminate as to any registrable shares when such registrable shares are
effectively registered and sold by the holder thereof or when such
registrable shares are sold pursuant to Rule 144(k) or are sold pursuant to
Rule 144 under the Securities Act.
TRANSFER AGENTS AND REGISTRARS
The transfer agents and registrars for our common stock in Canada is
Montreal Trust Company of Canada and in the United States is American
Securities Transfer.
46
<PAGE>
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS.
MARKET INFORMATION
Our common stock has been traded in the United States on the
National Quotation Bureau, commonly referred to as the "Pink Sheets," under
the symbol "BTPH" since September 10, 1999 and on the Canadian Venture
Exchange, formerly known as the Alberta Stock Exchange under the symbol "BAI"
since December 20, 1996.
The following table sets forth, in U.S. dollars and in dollars and
cents (in lieu of fractions), the high and low sales prices for each of the
calendar quarters indicated, as reported by the Canadian Venture Exchange. The
prices in the table may not represent actual transactions.
<TABLE>
<CAPTION>
CANADIAN VENTURE EXCHANGE
1997 HIGH LOW
---- ---- ---
<S> <C> <C>
First Quarter.......................................... $2.41 $1.11
Second Quarter......................................... $1.38 $0.95
Third Quarter.......................................... $1.31 $0.98
Fourth Quarter......................................... $1.28 $0.94
1998
----
First Quarter.......................................... $0.98 $0.55
Second Quarter......................................... $0.84 $0.26
Third Quarter.......................................... $0.65 $0.33
Fourth Quarter......................................... $0.48 $0.10
1999
----
First Quarter.......................................... $0.24 $0.15
Second Quarter......................................... $0.50 $0.21
Third Quarter.......................................... $0.37 $0.23
NATIONAL QUOTATION BUREAU ("PINK SHEETS")
1999
----
Third Quarter.......................................... $.51 $.27
</TABLE>
As of October 1, 1999, 52,642,686 shares of our common stock were
issued and outstanding held by approximately 1,600 holders of record and
4,807,865 shares of our class C special stock were issued and outstanding
held by approximately 11 holders of record.
As of October 1, 1999, we had outstanding options and warrants to
purchase an aggregate of 15,845,625 shares of our common stock.
47
<PAGE>
As of October 1, 1999, holders of approximately 36,742,300 shares of
our common stock, have entered into lock-up arrangements under which they
have agreed that they will not, offer, sell or otherwise dispose of, any
shares of our common stock, owned by them until September 6, 2000.
Approximately 14,334,000 shares of our common stock are eligible to be sold
in compliance with Rule 144(k) without regard to the volume and manner of
sale limitations in Rule 144 and approximately 15,103,686 shares of our
common stock are eligible to be sold in compliance with the limitations of
Rule 144 under the Securities Act, although certain holders have been granted
registration rights which, if exercised, would cause their shares to be
registered and eligible for sale. We refer to the information under the
heading "Item 8. Description of Securities--Registration Rights."
In general, under Rule 144 as currently in effect, a person ( or
persons whose shares are aggregated), including an affiliate, who has
beneficially owned shares for at least one year, within any three-month
period commencing 90 days after the date of this registration statement, may
sell a number of shares that does not exceed the greater of (1) one percent
of the number of shares of common stock then outstanding (approximately
526,427 shares) or (2) the average weekly trading volume of the common stock
during the four calendar weeks preceding such sale. Sales under Rule 144 are
generally subject to certain manner of sale provisions and notice
requirements and to the availability of our current public information. Under
Rule 144(k), a person who is not deemed to have been an affiliate of BioSante
at any time during the 90 days preceding a sale, and who has beneficially
owned the shares proposed to be sold for at least two years, is entitled to
sell such shares without having to comply with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. Under Rule
701 under the Securities Act, persons who purchase shares upon exercise of
options granted prior to the effective date of this registration statement in
reliance on Rule 144, without having to comply with the holding period
requirements of Rule 144 and, in the case of non-affiliates, without having
to comply with the public information, volume limitation or notice provisions
of Rule 144.
DIVIDEND POLICY
To date, we have neither declared nor paid any cash dividends on our
common stock. We currently intend to retain any future earnings, if any, to
fund the development and growth of our business and, therefore, do not
anticipate paying any cash dividends in the foreseeable future.
ITEM 2. LEGAL PROCEEDINGS.
We are not a party to any material legal proceedings.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
None.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES.
Since our formation on August 29, 1996, we have issued the following
securities in transactions not registered under the Securities Act of 1933
(all information is presented in U.S. dollars and reflects the reverse split
which occurred as part of the Amalgamation):
1. Prior to the Amalgamation on December 6, 1996, we issued 20,000,000
shares of our former class A stock (17,000,000 of such shares to Dr.
Ben-Abraham) for $0.0001 per share for an aggregate payment of
$2,000 and 3,000,000 shares to three accredited investors for $0.0001
per shares for an aggregate payment of $300, 4,150,000 shares of
class C stock (1,050,000 of such shares to Dr. Ben-Abraham to be held
by him in trust for the benefit of others; 500,000 of such shares to
Wagner-Bartak Holdings Inc.; 1,000,000 of such shares to Dr. Louis
Sullivan; 1,000,000 of such shares to Angela Ho; and the remainder to
an accredited investor) for $0.0001 per share for an aggregate
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<PAGE>
payment of $415 and 4,100,000 shares of our common stock to eight
accredited investors for $1.00 per share for an aggregate payment
of $4,100,000.
2. In December 1996, we issued: (1) an aggregate of 1,429 shares of our
common stock pursuant to the exercise of warrants issued prior to the
Amalgamation, at an exercise price of $1.79 per share, for an
aggregate payment of $2,557.91; and (2) an aggregate of 87,143 shares
of our common stock pursuant to the exercise of warrants issued prior
to the Amalgamation, at an exercise price of $1.28 per share, for an
aggregate payment of $111,543.04.
3. In connection with the Amalgamation, we issued 7,434,322 shares of our
common stock to the shareholders of SBI in exchange for their common
shares of SBI at a ratio of 1 share of common stock for every 3.5
common shares of SBI.
4. In January 1997, we issued: (1) an aggregate of 24,000 shares of common
stock pursuant to the exercise of warrants issued prior to the
Amalgamation, at an exercise price of $1.53 per share, for an
aggregate payment of $36,720; (2) 377,135 shares of common stock
(94,285 of such shares to Wagner-Bartak Holdings Inc. and 282,850 of
such shares to an unaffiliated accredited investor) pursuant to the
conversion of an aggregate of 377,135 class C stock, at a conversion
price of $0.25 per share, for an aggregate payment of $94,283.75 to
us; and (3) an aggregate of 28,571 shares of common stock pursuant
to the exercise of warrants issued prior to the Amalgamation, at an
exercise price of $1.28 per share, for an aggregate payment of
$36,570.88.
5. In July 1997, we issued an aggregate of 20,000 shares of common stock
pursuant to the exercise of warrants issued prior to the Amalgamation,
at an exercise price of $1.28 per share, for an aggregate payment of
$25,500.
6. In December 1997, we issued an aggregate of 206,386 shares of common
stock (106,386 of such shares to Wagner-Bartak Holdings Inc. and
100,000 of such shares to Marblegate Holdings Limited) pursuant to the
conversion of an aggregate of 206,386 class C stock at a conversion
price of $0.25 per share, for an aggregate payment of $51,596.50.
7. In March 1998, we issued 30,000 shares of common stock to one
accredited investor pursuant to the conversion of class C stock, at a
conversion price of $0.25 per share for an aggregate payment of $7,500.
8. In May 1998, we issued 15,000,000 shares of common stock to Dr.
Ben-Abraham pursuant to his conversion of class A stock at a conversion
price of $0.25 per share for a payment of $3,750,000. In addition,
Dr. Ben-Abraham returned 1,468,614 class A stock and 250,000
class C stock to our treasury for no consideration.
9. In June 1998, we issued an aggregate of 2,000,000 shares of common
stock pursuant to the conversion of class A stock to two accredited
investors, at a conversion price of $0.25 per share for an aggregate
payment of $500,000.
10. In February 1999, we issued 10,000 shares of common stock to an
accredited investor pursuant to the conversion of class C stock, at a
conversion price of $0.25 per share, which was satisfied by the
settlement of claims.
49
<PAGE>
11. In May 1999, we issued an aggregate of 23,125,000 shares of common
stock and warrants to purchase 11,562,500 shares of common stock at an
exercise price of $0.30 per share to 31 accredited investors pursuant
to a private placement of our stock for an aggregate payment of
$4,372,500. Stephen Simes purchased 250,000 shares of common stock,
Victor Morgenstern, including an affiliated Trust and a Partnership,
purchased an aggregate of 2,500,000 shares of common stock, Fred
Holubow purchased 250,000 shares of common stock and JO & Co. purchased
7,500,000 shares of common stock to which Ross Mangano has sole voting
power.
12. In August 1999, an outstanding liability of $25,000 was converted into
70,000 shares of common stock to an accredited investor at
approximately $.36 per share for executive placement services.
No underwriting commissions or discounts were paid with respect to
the sales of the unregistered securities described above. All of the above
sales were made to accredited investors and we have disclosed any related
party sales. In addition, all of the above sales were made to accredited
investors in reliance on Rule 506 of Regulation D and Section 4(2) under the
Securities Act and to persons outside the United States within the meaning of
Regulation S of the Securities Act. With regard to the reliance by us upon
the exemptions set forth in the previous sentence, certain inquiries were
made by us to establish that such sales qualified for such exemptions from
the registration requirements. In particular, we confirmed that (1) all
offers of sales and sales were made by personal contact from our officers or
directors or other persons closely associated with us; (2) each investor made
representations that he or she was sophisticated in relation to this
investment (and we have no reason to believe such representations were
incorrect); (3) each purchaser gave assurance of investment intent and the
certificates for the shares bear a legend accordingly; and (4) offers and
sales within any offering were made to a limited number of persons.
ITEM 5. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
LIMITATION ON LIABILITY OF DIRECTORS AND INDEMNIFICATION
Our Articles of Continuance limit the liability of our directors and
officers to the fullest extent permitted by the Wyoming Business Corporation
Act. Specifically, our directors will not be personally liable for monetary
damages for breach of fiduciary duty as our directors, except liability for
(1) the amount of financial benefit received by our director to which our
director is not entitled, (2) an intentional infliction of harm to us or our
shareholders, (3) a violation of Section 17-16-833 of the Wyoming Business
Corporation Act, and (4) an intentional violation of criminal law. Liability
under federal securities law is not limited by our Articles of Continuance.
We also maintain an insurance policy for our directors and executive
officers pursuant to which our directors and executive officers are insured
against liability for certain actions in their capacity as our directors and
executive officers.
The Wyoming Business Corporation Act requires that we indemnify any
director, made or threatened to be made a party to a proceeding, by reason of
the former or present official capacity of the person, against reasonable
expenses incurred in connection with the proceeding if certain statutory
standards are met. "Proceeding" means a threatened, pending or completed
civil, criminal, administrative, arbitration or investigative proceeding,
including a derivative action by us. Reference is made to the detailed terms
of the Wyoming indemnification statute, Section 17-16-852 of the Wyoming
Business Corporation Act, for a complete statement of such indemnification
rights. Section 15 of our Articles of Continuance also require us to provide
indemnification beyond the mandatory indemnification in Section 17-16-852 for
our officers and directors.
50
<PAGE>
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to our directors, officers or persons
controlling us pursuant to the foregoing provisions, we are aware that in the
opinion of the Securities and Exchange Commission this indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
51
<PAGE>
PART F/S
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Description Page
- ----------- ----
<S> <C>
Independent Auditors' Report............................................................................F-1
Balance Sheets as of December 31, 1998 and 1997.........................................................F-2
Statements of Operations for the year ended December 31, 1998 and 1997..................................F-3
Statements of Stockholders' Equity as of December 31, 1998 and 1997.....................................F-4
Statements of Cash Flows for the year ended December 31, 1998 and 1997 and the
cumulative period from August 29, 1996 to December 31, 1998.............................................F-5
Notes to the Financial Statements for the year ended December 31, 1998 and 1997 and the
cumulative period from August 29, 1996 to December 31, 1998......................................F-6 - F-18
Unaudited Balance Sheet as of September 30, 1999 and Audited Balance Sheet as of
December 31, 1998......................................................................................F-19
Unaudited Statements of Operations for the nine and three months ended September 30, 1999 and
1998 and the cumulative period from August 29, 1996 to September 30, 1999..............................F-20
Unaudited Statement of Stockholders' Equity for the cumulative period from August 29, 1996
to September 30, 1999..................................................................................F-21
Unaudited Statements of Cash Flows for the nine months ended September 30, 1999 and 1998
and the cumulative period from August 29, 1996 to September 30, 1999...................................F-22
Notes to Financial Statements for the nine months ended September 30, 1999......................F-23 - F-27
</TABLE>
<PAGE>
PART III
ITEM 1. EXHIBITS.
Reference is made to the Exhibit Index included in this Registration Statement
at pages 56 through 57.
Listed below are all exhibits filed as part of this Registration Statement:
Exhibit 2.1** Arrangement Agreement, dated October 23, 1996,
between Structured Biologicals Inc. and BioSante
Pharmaceuticals, Inc.
Exhibit 3.1** Articles of Continuance of BioSante
Pharmaceuticals, Inc.
Exhibit 3.2** Bylaws of BioSante Pharmaceuticals, Inc.
Exhibit 4.1** Form of Warrant issued in connection with the May
1999 Private Placement
Exhibit 10.1* License Agreement, dated June 18, 1997, between
BioSante Pharmaceuticals, Inc. and the Regents of
the University of California
Exhibit 10.2* Amendment to License Agreement, dated October 26,
1999, between BioSante Pharmaceuticals, Inc. and
the Regents of the University of California
Exhibit 10.3** 1998 Stock Option Plan
Exhibit 10.4** Stock Option Agreement, dated July 6, 1995,
between BioSante Pharmaceuticals, Inc. and Avi
Ben-Abraham, M.D.
Exhibit 10.5** Stock Option Agreement, dated December 7, 1997,
between BioSante Pharmaceuticals, Inc. and
Edward C. Rosenow, III, M.D.
Exhibit 10.6** Stock Option Agreement, dated December 8, 1998,
between BioSante Pharmaceuticals, Inc. and
Stephen M. Simes
Exhibit 10.7** Stock Option Agreement, dated December 8, 1998,
between BioSante Pharmaceuticals, Inc. and
Stephen M. Simes
Exhibit 10.8** Stock Option Agreement, dated March 30, 1999,
between BioSante Pharmaceuticals, Inc. and
Stephen M. Simes
Exhibit 10.9** Escrow Agreement, dated December 5, 1996, among
BioSante Pharmaceuticals, Inc., Montreal Trust
Company of Canada, as Escrow Agent, and certain
shareholders of BioSante Pharmaceuticals, Inc.
Exhibit 10.10** Voting Rights Limitation Agreement, dated
November 28, 1996, by Avi Ben-Abraham, M.D.
to the Canadian Venture Exchange
<PAGE>
Exhibit 10.11** Voting Agreements, dated May 6, 1999, between
BioSante Pharmaceuticals, Inc.,
Avi Ben-Abraham, M.D. and certain shareholders of
BioSante Pharmaceuticals, Inc.
Exhibit 10.12** Shareholders' Agreement, dated May 6, 1999,
between BioSante Pharmaceuticals, Inc.,
Avi Ben-Abraham, M.D. and certain shareholders of
BioSante Pharmaceuticals, Inc.
Exhibit 10.13** Registration Rights Agreement, dated May 6, 1999,
between BioSante Pharmaceuticals, Inc. and certain
shareholders of BioSante Pharmaceuticals, Inc.
Exhibit 10.14** Securities Purchase Agreement, dated May 6, 1999,
between BioSante Pharmaceuticals, Inc. and certain
shareholders of BioSante Pharmaceuticals, Inc.
Exhibit 10.15** Lease, dated September 15, 1997, between BioSante
Pharmaceuticals, Inc. and Highlands Park Associates
Exhibit 10.16** Employment Agreement, dated January 21, 1998,
between BioSante Pharmaceuticals,Inc. and
Stephen M. Simes, as amended
Exhibit 10.17 Employment Agreement, dated June 11, 1998, between
BioSante Pharmaceuticals, Inc. and Phillip B.
Donenberg, as amended
Exhibit 24.1 Power of Attorney (included on signature page of
registration statement)
Exhibit 27.1** Financial Data Schedule
- --------------------------
* Confidential treatment has been requested with respect to designated
portions of this document. Such portions have been omitted and filed
separately with the Secretary of the Commission pursuant to Rule 24b-2
of the Securities Exchange Act of 1934, as amended.
** Previously Filed.
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
Registrant caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: February 22, 2000 BIOSANTE PHARMACEUTICALS, INC.
By /s/ Stephen M. Simes
-------------------------------------------------
Stephen M. Simes
Vice Chairman, President and Chief Executive
Officer
By /s/ Phillip B. Donenberg
------------------------------------------------
Phillip B. Donenberg
Chief Financial Officer, Treasurer and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Registration Statement has been signed by the following persons in the
capacities indicated, on February 22, 2000.
NAME AND SIGNATURE TITLE
/s/ Stephen M. Simes Vice Chairman, President and Chief Executive
- ---------------------------- Officer (Principal Executive Officer)
Stephen M. Simes
/s/ Phillip B. Donenberg Chief Financial Officer, Treasurer and Secretary
- ---------------------------- (Principal Financial Officer)
Phillip B. Donenberg
<PAGE>
* Chairman of the Board
- ----------------------------
Louis W. Sullivan, M.D.
* Director
- ----------------------------
Avi Ben-Abraham, M.D.
* Director
- ----------------------------
Victor Morgenstern
* Director
- ----------------------------
Edward C. Rosenow, III, M.D.
* Director
- ----------------------------
Fred Holubow
* Director
- ----------------------------
Ross Mangano
* Director
- ----------------------------
Angela Ho
* Director
- ----------------------------
Peter Kjaer
/s/ Stephen M. Simes *Attorney-in-fact
- ----------------------------
Stephen M. Simes
/s/ Phillip B. Donenberg *Attorney-in-fact
- ----------------------------
Phillip B. Donenberg
<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
EXHIBIT INDEX
TO
FORM 10-SB
------------------
BIOSANTE PHARMACEUTICALS, INC.
------------------
<TABLE>
<CAPTION>
METHOD
OF
EXHIBIT NO. EXHIBIT FILING
- ----------- ------- ------
<S> <C> <C>
2.1 Arrangement Agreement, dated October 23, 1996, between Structured
Biologicals Inc. and BioSante Pharmaceuticals,
Inc................................................................. (1)
3.1 Articles of Continuance of BioSante Pharmaceuticals, Inc.,
as amended.......................................................... (1)
3.2 Bylaws of BioSante Pharmaceuticals, Inc............................. (1)
4.1 Form of Warrant issued in connection with May 1999 Private
Placement........................................................... (1)
10.1* License Agreement, dated June 18, 1997, between BioSante
Pharmaceuticals, Inc. and The Regents of the University Filed herewith
of California....................................................... electronically
10.2* Amendment to License Agreement, dated October 26, 1999, between
BioSante Pharmaceuticals, Inc. and the Regents of the University of Filed herewith
California.......................................................... electronically
10.3 1998 Stock Option Plan.............................................. (1)
10.4 Stock Option Agreement, dated July 6, 1995, between BioSante
Pharmaceuticals, Inc. and Avi Ben-Abraham, M.D...................... (1)
<PAGE>
10.5 Stock Option Agreement, dated December 7, 1997, between BioSante
Pharmaceuticals, Inc. and Edward C. Rosenow, III, M.D............... (1)
10.6 Stock Option Agreement, dated December 8, 1998, between BioSante
Pharmaceuticals, Inc. and Stephen M. Simes.......................... (1)
10.7 Stock Option Agreement, dated December 8, 1998, between BioSante
Pharmaceuticals, Inc. and Stephen M. Simes.......................... (1)
10.8 Stock Option Agreement, dated March 30, 1999, between BioSante
Pharmaceuticals, Inc. and Stephen M. Simes.......................... (1)
10.9 Escrow Agreement, dated December 5, 1996, among BioSante
Pharmaceuticals, Inc., Montreal Trust Company of Canada, as Escrow
Agent, and certain shareholders of BioSante Pharmaceuticals, Inc.... (1)
10.10 Voting Rights Limitation Agreement, dated November 28, 1996, by Avi
Ben-Abraham, M.D. to the Canadian Venture Exchange.................. (1)
10.11 Voting Agreements, dated May 6, 1999, between BioSante
Pharmaceuticals, Inc., Avi Ben-Abraham, M.D. and certain
shareholders of BioSante Pharmaceuticals, Inc....................... (1)
10.12 Shareholders' Agreement, dated May 6, 1999, between BioSante
Pharmaceuticals, Inc., Avi Ben-Abraham, M.D. and certain
shareholders of BioSante Pharmaceuticals, Inc....................... (1)
10.13 Registration Rights Agreement, dated May 6, 1999, between BioSante
Pharmaceuticals, Inc. and certain shareholders of BioSante
Pharmaceuticals, Inc................................................ (1)
10.14 Securities Purchase Agreement, dated May 6, 1999, between BioSante
Pharmaceuticals, Inc. and certain shareholders of BioSante
Pharmaceuticals, Inc................................................ (1)
10.15 Lease, dated September 15, 1997, between BioSante Pharmaceuticals,
Inc. and Highlands Park Associates.................................. (1)
<PAGE>
10.16 Employment Agreement, dated January 21, 1998, between
BioSante Pharmaceuticals, Inc. and Stephen M. Simes, as amended..... (1)
10.17 Employment Agreement, dated June 11, 1998, between BioSante Filed herewith
Pharmaceuticals, Inc. and Phillip B. Donenberg, as amended.......... electronically
24.1 Power of Attorney (included on signature page of registration
statement).......................................................... (1)
27.1 Financial Data Schedule............................................. (1)
</TABLE>
- --------------------------
* Confidential treatment has been requested with respect to designated
portions of this document. Such portions have been omitted and filed
separately with the Secretary of the Commission pursuant to Rule 24b-2
of the Securities Exchange Act of 1934, as amended.
(1) Previously Filed.
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Ben-Abraham Technologies Inc.
We have audited the accompanying balance sheets of Ben-Abraham Technologies
Inc. (a development stage company) as of December 31, 1998 and 1997 and the
related statements of operations, stockholders' equity and cash flows for the
years ended December 31, 1998 and 1997, and for the period from August 29,
1996 (date of incorporation) to December 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatements. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1998 and
1997 and the results of its operations and its cash flows for the years ended
December 31, 1998 and 1997, and for the period from August 29, 1996 (date of
incorporation) to December 31, 1998 in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the financial statements, the Company is in the
development stage.
/s/ Deloitte & Touche LLP
Chartered Accountants
Toronto, Ontario
February 19, 1999
F-1
<PAGE>
BEN-ABRAHAM TECHNOLOGIES INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
1998 1997
------------------ ----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $2,841,250 $1,750,331
Prepaid expenses and other sundry assets 75,266 21,890
- -------------------------------------------------------------------------------------------------------------------------
2,916,516 1,772,221
CAPITAL ASSETS (Note 4) 532,829 677,545
- -------------------------------------------------------------------------------------------------------------------------
$3,449,345 $2,449,766
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable (Note 11) $ 202,696 $1,207,804
Accrued expenses 487,902 81,128
Due to licensor 127,317 127,317
- -------------------------------------------------------------------------------------------------------------------------
817,915 1,416,249
- -------------------------------------------------------------------------------------------------------------------------
COMMITMENTS (Note 10)
STOCKHOLDERS' EQUITY (Note 6)
Capital stock
Issued
1,531,386 (1997 - 20,000,000) Class A special shares 153 2,000
3,286,479 (1997 - 3,566,479) Class C special shares 329 357
29,437,686 (1997 - 12,407,686) Subordinate voting shares 13,427,166 9,167,963
- -------------------------------------------------------------------------------------------------------------------------
13,427,648 9,170,320
Deficit accumulated during the development stage (10,796,218) (8,136,803)
- -------------------------------------------------------------------------------------------------------------------------
2,631,430 1,033,517
- -------------------------------------------------------------------------------------------------------------------------
$3,449,345 $2,449,766
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to the financial statements.
F-2
<PAGE>
BEN-ABRAHAM TECHNOLOGIES INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND 1997 AND
THE CUMULATIVE PERIOD FROM AUGUST 29, 1996 (DATE OF INCORPORATION) TO
DECEMBER 31, 1998
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CUMULATIVE
PERIOD FROM
AUGUST 29, 1996
(DATE OF
YEAR ENDED YEAR ENDED INCORPORATION) TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1998
------------------- ----------------------- ----------------------
<S> <C> <C> <C>
REVENUE
Interest income $ 123,061 $ 143,718 $ 320,135
- -------------------------------------------------------------------------------------------------------------------------
EXPENSES
Research and development 1,400,129 335,823 1,735,952
General and administration 1,112,647 1,618,436 3,278,268
Depreciation and amortization 139,769 51,938 192,369
Loss on disposal of capital assets 129,931 27,614 157,545
Costs of acquisition of Structured
Biologicals Inc. -- -- 375,219
Purchased in-process research
and development -- -- 5,377,000
- -------------------------------------------------------------------------------------------------------------------------
2,782,476 2,033,811 11,116,353
- -------------------------------------------------------------------------------------------------------------------------
NET LOSS $ (2,659,415) $ (1,890,093) $ (10,796,218)
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
BASIC AND DILUTED NET LOSS
PER SHARE (Note 8) $ (0.08) $ (0.05) $ (0.32)
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 34,858,243 35,961,528 33,886,262
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to the financial statements.
F-3
<PAGE>
BEN-ABRAHAM TECHNOLOGIES INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY
DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Class A Class C
Special Shares Special Shares
------------------------------------- --------------------------
Shares Amount Shares Amount
--------------- ------------------- -------------- ----------
<S> <C> <C> <C> <C>
BALANCE, AUGUST 29, 1996,
DATE OF INCORPORATION - $ - - $ -
Issuance of Class "C" shares August 29, 1996
($0.0001 per share) - - 4,150,000 415
Issuance of Class "A" shares September 23, 1996
($0.0001 per share) 20,000,000 2,000 - -
Issuance of Subordinate voting shares
September 23, 1996 - - - -
Financing fees accrued - - - -
November 27, 1996 - issued as consideration
upon acquisition of SBI (Note 3) - - - -
Exercise of Series "X" warrants (Note 6) - - - -
Exercise of Series "Z" warrants (Note 6) - - - -
Net loss - - - -
- -------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 20,000,000 2,000 4,150,000 415
Conversion of shares
January 13, 1997 - - (282,850) (28)
January 13, 1997 - - (94,285) (9)
December 2, 1997 - - (106,386) (11)
December 2, 1997 - - (100,000) (10)
Exercise of Series "V" warrants (Note 6) - - - -
Exercise of Series "X" warrants (Note 6) - - - -
Exercise of Series "W" warrants (Note 6) - - - -
Adjustment for partial shares issued
upon amalgamation - - - -
Financing fees reversed - - - -
Net loss - - - -
- -------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 20,000,000 2,000 3,566,479 357
Conversion of shares
March 4, 1998 - - (20,000) (2)
March 16, 1998 - - (10,000) (1)
May 8, 1998 (15,000,000) (1,500) - -
June 1, 1998 (1,000,000) (100) - -
June 1, 1998 (1,000,000) (100) - -
Return of shares to treasury
May 8, 1998 (1,468,614) (147) - -
May 8, 1998 - - (250,000) (25)
Net loss - - - -
- -------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 1,531,386 $ 153 3,286,479 $ 329
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Deficit
Subordinate Accumulated
Voting Shares During the
-------------------------------- Development
Shares Amount Stage Total
--------------- --------------- ----------------- --------------
<S> <C> <C> <C> <C>
BALANCE, AUGUST 29, 1996,
DATE OF INCORPORATION - $ - $ - $ -
Issuance of Class "C" shares August 29, 1996
($0.0001 per share) - - - 415
Issuance of Class "A" shares September 23, 1996
($0.0001 per share) - - - 2,000
Issuance of Subordinate voting shares
September 23, 1996 4,100,000 4,100,000 - 4,100,000
Financing fees accrued - (410,000) - (410,000)
November 27, 1996 - issued as consideration
upon acquisition of SBI (Note 3) 7,434,322 4,545,563 - 4,545,563
Exercise of Series "X" warrants (Note 6) 215,714 275,387 - 275,387
Exercise of Series "Z" warrants (Note 6) 1,428 2,553 - 2,553
Net loss - - (6,246,710) (6,246,710)
- -------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 11,751,464 8,513,503 (6,246,710) 2,269,208
Conversion of shares
January 13, 1997 282,850 70,741 - 70,713
January 13, 1997 94,285 23,580 - 23,571
December 2, 1997 106,386 26,607 - 26,596
December 2, 1997 100,000 25,010 - 25,000
Exercise of Series "V" warrants (Note 6) 24,000 36,767 - 36,767
Exercise of Series "X" warrants (Note 6) 28,571 36,200 - 36,200
Exercise of Series "W" warrants (Note 6) 20,000 25,555 - 25,555
Adjustment for partial shares issued
upon amalgamation 130 - - -
Financing fees reversed - 410,000 - 410,000
Net loss - - (1,890,093) (1,890,093)
- -------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 12,407,686 $ 9,167,963 (8,136,803) 1,033,517
Conversion of shares
March 4, 1998 20,000 5,002 - 5,000
March 16, 1998 10,000 2,501 - 2,500
May 8, 1998 15,000,000 3,751,500 - 3,750,000
June 1, 1998 1,000,000 250,100 - 250,000
June 1, 1998 1,000,000 250,100 - 250,000
Return of shares to treasury -
May 8, 1998 - - - (147)
May 8, 1998 - - - (25)
Net loss - - (2,659,415) (2,659,415)
- -------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 29,437,686 $13,427,166 $(10,796,218) $ 2,631,430
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to the financial statements.
F-4
<PAGE>
BEN-ABRAHAM TECHNOLOGIES INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
AND THE CUMULATIVE PERIOD FROM AUGUST 29, 1996 (DATE OF INCORPORATION) TO
DECEMBER 31, 1998
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CUMULATIVE
PERIOD FROM
AUGUST 29, 1996
(DATE OF
YEAR ENDED YEAR ENDED INCORPORATION) TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1998
--------------------- ------------------- -----------------------
<S> <C> <C> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES
Net loss $ (2,659,415) $ (1,890,093) $ (10,796,218)
Adjustments to reconcile net loss to
net cash used in operating activities
Depreciation and amortization 139,769 51,938 192,369
Purchased in-process research and development - - 5,377,000
Loss on disposal of equipment 129,931 27,614 157,545
Changes in other assets and liabilities
affecting cash flows from operations
Prepaid expenses (53,376) (10,831) (72,298)
Accounts payable and accrued expenses (598,334) 712,306 (49,589)
Due to licensor - (135,632) 127,317
Due from SBI - - (128,328)
- ---------------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES (3,041,425) (1,244,698) (5,192,202)
- ---------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS USED IN INVESTING ACTIVITIES
Purchase of capital assets (124,984) (723,649) (848,633)
- ---------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES
(Conversion) issuance of Class "A" shares (1,847) - 153
(Conversion) issuance of Class "C" shares (28) (58) 329
Proceeds from sale or conversion of shares 4,259,203 244,460 8,881,603
- ---------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 4,257,328 244,402 8,882,085
- --------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 1,090,919 (1,723,945) 2,841,250
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 1,750,331 3,474,276 -
- ---------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,841,250 $ 1,750,331 $ 2,841,250
- ---------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL SCHEDULE OF
CASH FLOW INFORMATION
Acquisition of SBI
Purchased in-process research and development $ - $ - $ 5,377,000
Other net liabilities assumed - - (831,437)
- ---------------------------------------------------------------------------------------------------------------------------------
- - 4,545,563
Less: subordinate voting shares issued therefor - - 4,545,563
- ---------------------------------------------------------------------------------------------------------------------------------
$ - $ - $ -
- ---------------------------------------------------------------------------------------------------------------------------------
Income tax paid $ - $ - $ -
- ---------------------------------------------------------------------------------------------------------------------------------
Interest paid $ - $ - $ -
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to the financial statements.
F-5
<PAGE>
BEN-ABRAHAM TECHNOLOGIES INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997, AND THE CUMULATIVE PERIOD
FROM AUGUST 29, 1996 (DATE OF INCORPORATION) TO DECEMBER 31, 1998
- -------------------------------------------------------------------------------
1. ORGANIZATION
On December 19, 1996, Ben-Abraham Technologies Inc. ("the Company") was
continued under the laws of the State of Wyoming, U.S.A. Previously, the
Company had been incorporated under the laws of the Province of Ontario
effective August 29, 1996. Effective December 6, 1996, the Company
acquired Structured Biologicals Inc. and its wholly-owned subsidiary
923934 Ontario Inc. ("SBI"), a Canadian public company listed on the
Alberta Stock Exchange. The "acquisition" was effected by a statutory
amalgamation wherein the stockholders of the Company were allotted a
significant majority of the shares of the amalgamated entity. Upon
amalgamation, the then existing stockholders of SBI received 7,434,322
subordinate voting shares of the Company (1 such share for every 3 1/2
shares held in SBI). The shareholders meeting to approve this
arrangement was held on November 27, 1996. The articles of arrangement
were not actually filed until December 6, 1996.
The Company was established to develop prescription pharmaceutical
products, vaccines and vaccine adjuvants using its core nanoparticle
technology licensed from the University of California. Research on this
technology was conducted by a predecessor company and as a result the
Company is continuing its efforts to develop several different potential
products using this core technology.
The Company has been in the development stage since its inception. The
Company's successful completion of its development program and its
transition to profitable operations is dependent upon obtaining
regulatory approval from the United States Food and Drug Administration
("FDA") prior to selling its products within the U.S., and
foreign regulatory approval must be obtained to sell its products
internationally. There can be no assurance that the Company's products
will receive regulatory approvals, and a substantial amount of time may
pass before the achievement of a level of sales adequate to support the
Company's cost structure. Obtaining marketing approval will be directly
dependent on the Company's ability to implement the necessary regulatory
steps required to obtain marketing approval in the United States and in
other countries. It is not possible at this time to predict with
assurance the outcome of these activities.
The research and development on the Company's CAP technology is conducted
in the Company's Atlanta, Georgia laboratory facility. The business
office is located in Lincolnshire, Illinois.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
These financial statements are expressed in U.S. dollars.
The financial statements have been prepared in accordance with generally
accepted accounting principles in the United States and SFAS No. 7
"Accounting and Reporting by Development Stage Enterprises". The
preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
the disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
F-6
<PAGE>
BEN-ABRAHAM TECHNOLOGIES INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997, AND THE CUMULATIVE PERIOD
FROM AUGUST 29, 1996 (DATE OF INCORPORATION) TO DECEMBER 31, 1998
- -------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, the Company considers all
instruments with original maturities of three months or less to be cash
equivalents.
CAPITAL ASSETS
Capital assets are stated at cost less accumulated depreciation and
amortization. Depreciation of computer, office and laboratory equipment
is computed primarily by accelerated methods over estimated useful lives
of seven years. Leasehold improvements are amortized on a straight-line
basis over the terms of the leases, plus option renewals.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to expense as incurred.
BASIC AND DILUTED NET LOSS PER SHARE
The Company implemented the provisions of SFAS No. 128, "Earnings Per
Share", which requires presentation of basic and diluted earnings (loss)
per share, as of December 31, 1997. Basic earnings (loss) per share is
computed by dividing income (loss) available to common stockholders by
the weighted average number of shares outstanding for the reporting
period. Diluted earnings (loss) per share reflects the potential dilution
that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock. All prior period weighted
average and per share information has been restated in accordance with
SFAS No. 128. The computation of diluted earnings (loss) per share does
not include stock options and warrants with dilutive potential that would
have an antidilutive effect on earnings (loss) per share.
STOCK-BASED COMPENSATION
The Company follows the provisions of APB Opinion No. 25, which requires
compensation cost for stock-based employee compensation plans be
recognized based on the difference, if any, between the quoted market
price of the stock and the amount the employee must pay to acquire the
stock. As a result of the Company continuing to apply APB No. 25, SFAS
No. 123, "Accounting for Stock-Based Compensation" requires increased
disclosure of the compensation expense arising from the Company's fixed
and performance stock compensation plans. The expense is measured as the
fair value of the award at the date it was granted using an
option-pricing model that takes into account the exercise price and the
expected term of the option, the current price of the underlying stock,
its expected volatility, expected dividends on the stock and the expected
risk-free rate of return during the term of the option. The compensation
cost is recognized over the service period, usually the period from the
grant date to the vesting date. The company has disclosed the required
pro forma net loss and loss per share data in Note 8 as if the Company
has applied the SFAS No. 123 method.
F-7
<PAGE>
BEN-ABRAHAM TECHNOLOGIES INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997, AND THE CUMULATIVE PERIOD
FROM AUGUST 29, 1996 (DATE OF INCORPORATION) TO DECEMBER 31, 1998
- -------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
COMPREHENSIVE INCOME
The Company has implemented SFAS No. 130, REPORTING COMPREHENSIVE INCOME
as of December 31, 1998. The statement establishes standards for the
reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses) is a full set of general-purpose
financial statements. The statement requires all items that are required
to be recognized under accounting standards as components of
comprehensive income be reported separately from the Company's
accumulated deficit balance in a financial statement that is displayed
with the same prominence as other financial statements. The Company has
determined that there is no impact as a result of the implementation
of this statement.
SEGMENT REPORTING
The Company has implemented SFAS No. 131, DISCLOSURE ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION, as of December 31, 1998. The
Statement establishes standards for the way that a public business
enterprise reports information about operating segments in annual
financial statements and interim financial reports issued to
shareholders. It also established standards for related disclosures about
products and services, geographic areas, and major customers. The Company
has determined that, at present, it does not have any reportable
segments.
PENSIONS AND OTHER POSTRETIREMENT BENEFITS
The Company has implemented SFAS No. 132, EMPLOYERS' DISCLOSURES ABOUT
PENSIONS AND OTHER POSTRETIREMENT BENEFITS, as of December 31, 1998. The
Statement standardizes the disclosure requirements for pensions and other
postretirement benefits. No additional disclosures were required as a
result of the implementation of this statement.
NEW STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
In June 1998, and subsequently amended, the FASB issued SFAS No. 133,
ACCOUNTING FOR DERIVITIVES INSTRUMENTS AND HEDGING ACTIVITIES. This
Statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedge activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair
value. The statement is effective for the fiscal quarters of the
Company's fiscal year ending December 31, 2001. The Company is in
the process of evaluating the effect of this Statement on its financial
statements.
F-8
<PAGE>
BEN-ABRAHAM TECHNOLOGIES INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997, AND THE CUMULATIVE PERIOD
FROM AUGUST 29, 1996 (DATE OF INCORPORATION) TO DECEMBER 31, 1998
- -------------------------------------------------------------------------------
3. ACQUISITION
Effective November 27, 1996, the Company completed the acquisition of
100% of the outstanding shares of SBI. The acquisition was effected by a
statutory amalgamation wherein the stockholders of the Company were
allotted a significant majority of the shares of the amalgamated entity.
Upon amalgamation, the then existing shareholders of SBI received
7,434,322 subordinate voting shares of the Company, (1 such share for
every 3 1/2 shares they held in SBI). SBI's results of operations have
been included in these financial statements from the date of acquisition.
The acquisition was accounted for by using the purchase method of
accounting, as follows:
<TABLE>
<S> <C>
ASSETS
In-process research and development $ 5,377,000
Other 37,078
--------------------------------------------------------------------------------------------- -----------------
5,414,078
--------------------------------------------------------------------------------------------- -----------------
LIABILITIES
Current liabilities 679,498
Due to directors 60,689
Due to the Company 128,328
--------------------------------------------------------------------------------------------- -----------------
868,515
--------------------------------------------------------------------------------------------- -----------------
Net Assets Acquired $ 4,545,563
--------------------------------------------------------------------------------------------- -----------------
CONSIDERATION
Subordinate voting shares $ 4,545,563
--------------------------------------------------------------------------------------------- -----------------
</TABLE>
In connection with the acquisition of SBI, accounted for under the
purchase method, the Company acquired the rights to negotiate with the
Regents of the University of California for licenses of specific
technologies and products. The specific technologies and products
relate to investigative research funded by SBI. At the time of
acquisition, the technologies and products had not yet been approved
for human clinical research. The value ascribed to the rights, based on
an independent evaluation, was $5,377,000. This amount was immediately
expensed as the technologies and products did not have their
technological feasibility established and had no identified future
alternative use.
As of the date of acquisition, the technology related to the
development of products for six indications [i.e. applications of the
technology.]. The Company determined the value of the in process
research and development related to the acquired rights based on an
independent valuation using discounted cash flows. Principal
assumptions used in the valuation were as follows:
- FDA approval for the products for the six indications was
expected to be received at various dates between 2002 and 2004,
however, there are many competitive products in development.
There are also many requirements that must be met before FDA
approval is secured. There is no assurance that the products will
be successfully developed, proved to be safe in clinical trials
and meet applicable regulatory standards or demonstrate
substantial benefits in the treatment or prevention of any
disease.
- The estimated additional research and development expenditures
required before FDA approval was $26.5 million, to be incurred
over 8 to 10 years.
- Future cash flows were estimated based on estimated market
size, with costs determined based on industry norms, an
estimated annual growth rate of 3%.
- The cash flows were discounted at 25%. The rate was preferred
due to the high risk nature of the biopharmaceutical business.
- The Company is continuing to develop the technology related
to five of the six indications.
- In June 1997, the Company exercised its option and entered
into a license agreement with UCLA for the technology that it
had previously supported.
F-9
<PAGE>
BEN-ABRAHAM TECHNOLOGIES INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997, AND THE CUMULATIVE PERIOD
FROM AUGUST 29, 1996 (DATE OF INCORPORATION) TO DECEMBER 31, 1998
- -------------------------------------------------------------------------------
4. CAPITAL ASSETS
<TABLE>
<CAPTION>
1998 1997
-------------- -------------
<S> <C> <C>
Computer equipment $ 22,976 $ 3,321
Office equipment 29,619 27,301
Laboratory equipment 103,012 211,455
Leasehold improvements - Laboratory 470,094 481,096
----------------------------------------------------------------------------- ---------------- -------------
625,701 723,173
Accumulated depreciation and amortization (92,872) (45,628)
----------------------------------------------------------------------------- ---------------- -------------
$ 532,829 $ 677,545
----------------------------------------------------------------------------- ---------------- -------------
</TABLE>
5. INCOME TAXES
The components of the Company's net deferred tax asset at December 31,
1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
-------------- ---------------
<S> <C> <C>
Net operating loss carryforwards $ 1,778,246 $ 768,277
Amortization of intangibles 1,759,186 1,904,429
Research & development credits 144,310 29,478
Other 16,594 421
-------------- ---------------
3,698,336 2,702,605
Valuation allowance (3,698,336) (2,702,605)
-------------- ---------------
Net deferred tax asset $ -- $ --
-------------- ---------------
-------------- ---------------
</TABLE>
The Company has no current tax provision due to its accumulated
losses, which result in net operating loss carryforwards. At December
31, 1998, the Company had approximately $5,230,000 of net operating loss
carryforwards that are available to reduce future taxable income for a
period up to 15 years. The net operating loss carryforwards expire in
the years 2011-2013. The net operating loss carryforwards as well as
amortization of various intangibles, principally acquired in process
research and development, generate deferred tax benefits, which have
been recorded as deferred tax assets and entirely offset by a tax
valuation allowance. The valuation allowance has been provided at 100%
to reduce the deferred tax assets to zero, the amount that management
believes is more likely than not to be realized. Additionally, the
Company has approximately $144,000 of research and development credits
available to reduce future income taxes though the year 2012.
F-10
<PAGE>
BEN-ABRAHAM TECHNOLOGIES INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997, AND THE CUMULATIVE PERIOD
FROM AUGUST 29, 1996 (DATE OF INCORPORATION) TO DECEMBER 31, 1998
- -------------------------------------------------------------------------------
The provision for income taxes differs from the amount computed by
applying the U.S. statutory federal income tax rate of 34% to pre-tax
income as follows:
5. INCOME TAXES (CONTINUED)
<TABLE>
<CAPTION>
1998 1997
-------------- ---------------
<S> <C> <C>
Tax at U.S.federal statutory rate $ (904,201) $ (642,632)
State taxes, net of federal benefit (90,810) (55,284)
Change in valuation allowance 986,730 641,025
Other, net 8,281 56,891
-------------- ---------------
$ - $ -
-------------- ---------------
-------------- ---------------
</TABLE>
6. STOCKHOLDERS' EQUITY
a) AUTHORIZED
PREFERENCE SHARES
An unlimited number of preference shares issuable in series subject
to limitation, rights, and privileges as determined by the
directors. No preference shares have been issued as of December 31,
1998.
SPECIAL SHARES
An unlimited number of Class A special shares without par value,
convertible to Class B special shares or subordinate voting shares
on the basis of one Class A share and U.S. $0.25. These shares are
not entitled to a dividend and carry ten votes per share.
An unlimited number of Class B special shares without par value
convertible to subordinate voting shares on the basis of one
subordinate voting share for each Class B share. These shares are
entitled to dividends as declared by the directors not to exceed
the dividends per share declared on the subordinate voting shares,
and carry ten votes per share. No Class B special shares have been
issued as of December 31, 1998.
An unlimited number of Class C special shares without par value,
convertible to subordinate voting shares on the basis of one Class
C share and U.S. $0.25. These shares are not entitled to a dividend
and carry one vote per share.
SUBORDINATE VOTING SHARES
An unlimited number of subordinate voting shares without par value,
and carry one vote per share.
Significant equity transactions since the date of the Company's
incorporation are as follows:
F-11
<PAGE>
BEN-ABRAHAM TECHNOLOGIES INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997, AND THE CUMULATIVE PERIOD
FROM AUGUST 29, 1996 (DATE OF INCORPORATION) TO DECEMBER 31, 1998
- -------------------------------------------------------------------------------
- Prior to the Amalgamation on December 6, 1996, the Company
issued 20,000,000 shares of the Company's class A stock for
$0.0001 per share, 4,150,000 shares of class C stock for
$0.0001 per share and 4,100,000 shares of the Company's
subordinate voting shares for $1.00 per share.
6. STOCKHOLDERS' EQUITY (CONTINUED)
- In May 1998, the Company issued 15,000,000 shares of
subordinate voting shares pursuant to the conversion of class
A stock at a conversion price of $0.25 per share. In addition,
1,468,614 class A stock and 250,000 class C stock were returned
to the Company for no consideration.
- In June 1998, the Company issued an aggregate of 2,000,000
shares of subordinate voting shares pursuant to the conversion
of class A stock at a conversion price of $0.25 per share.
b) WARRANTS
The Company upon the acquisition of SBI assumed the following
warrants, all of which were exercisable, to purchase subordinate
voting shares. The warrants were fully vested at the time of
the acquisition, accordingly, no pro forma compensation expense,
as required for disclosure by SFAS No. 123, "Accounting for
Stock-Based Compensation," would have been recorded in the 1998
or 1997 financial statements. As of December 31, 1998, no
warrants were outstanding.
<TABLE>
<CAPTION>
Exercise Price per share
------------------------
Actual Actual
Series Number of Warrants Cdn. $ US. $ Expiry Date
------ ------------------ ------ ------ -----------
<S> <C> <C> <C>
V 171,829 $ 2.10 $1.37 March 28, 1997
W 114,286 $ 1.75 $1.14 June 30, 1997
X 1,651,014 $ 1.75 $1.14 September 30, 1997
Z 640,000 $ 2.45 $1.59 February 28, 1998
As of December 31, 1998, per the OANDA Currency Converter (which
utilizes a sample of 435 prices) 1.5368 Canadian dollars is
equal to 1 US dollar.
</TABLE>
A summary of the status of the Company's warrants is as follows:
<TABLE>
<CAPTION>
SERIES
---------------------------------------------------
V W X Z
------- ------- --------- -------
<S> <C> <C> <C> <C>
Balance, December 31, 1996 171,829 114,286 1,435,300 638,572
Warrants exercised
January 13, 1997 (24,000) - - -
January 23, 1997 - - (28,571) -
June 30, 1997 - (20,000) - -
Warrants expired (147,829) (94,286) (1,406,729) -
---------------------------------- ------------- ------------ ------------ ----------------- ------------
Balance, December 31, 1997 - - - 638,572
Warrants expired - - - (638,572)
---------------------------------- ------------- ------------ ------------ ----------------- ------------
Balance, December 31, 1998 - - - -
---------------------------------- ------------- ------------ ------------ ----------------- ------------
</TABLE>
F-12
<PAGE>
BEN-ABRAHAM TECHNOLOGIES INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997, AND THE CUMULATIVE PERIOD
FROM AUGUST 29, 1996 (DATE OF INCORPORATION) TO DECEMBER 31, 1998
- -------------------------------------------------------------------------------
7. STOCK OPTIONS
The Company has a stock option plan for certain officers, directors,
employees and consultants whereby 2,465,000 shares of subordinate voting
stock have been reserved for issuance. Options for 2,465,000 shares of
subordinate voting stock have been granted as of December 31, 1998 at
prices equal to the ten-day weighted average closing price of the stock
at the date of the grant and are exercisable and vest in a range
substantially over a three year period. The options expire five years
from the date of the grants.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its plan. Accordingly, no compensation cost has been
recognized for the plan. Had the compensation cost for the Company's plan
been determined based on the fair value of the rates of award under the
plan consistent with the method of SFAS No. 123 "Accounting for
Stock-Based Compensation" the Company's net loss, cumulative net loss,
and basic net loss per common share would have been increased to the
prof forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997
--------------- ----------------
<S> <C> <C>
Net loss
As reported $ (2,659,415) $ (1,890,093)
Pro forma $ (2,771,391) $ (1,953,587)
Basic and diluted net loss per share
As reported $ (0.08) $ (0.05)
Pro forma $ (0.08) $ (0.05)
Cumulative net loss
As reported $ (10,796,218) $ (8,136,803)
Pro forma $ (11,159,995) $ (8,388,604)
Cumulative basic and diluted net loss per share
As reported $ (0.32) $ (0.25)
Pro forma $ (0.32) $ (0.25)
</TABLE>
The weighted average fair value of the options at the date of the grant
for options granted during 1998 and 1997 was $0.44 and $0.19,
respectively, and was estimated using the Cox Rubinstien binomial model
and the Black-Scholes option-pricing model with following weighted
average assumptions:
<TABLE>
<CAPTION>
1998 1997
------------- ------------
<S> <C> <C>
Expected option life (years) 5 5
Risk free interest rate 5.05% 5.44%
Expected stock price volatility 350.00% 105.81%
Dividend yield - -
</TABLE>
F-13
<PAGE>
BEN-ABRAHAM TECHNOLOGIES INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997, AND THE CUMULATIVE PERIOD
FROM AUGUST 29, 1996 (DATE OF INCORPORATION) TO DECEMBER 31, 1998
- -------------------------------------------------------------------------------
7. STOCK OPTIONS (CONTINUED)
Changes for the stock option plan during the years ended December 31,
1998 and 1997 were as follows:
<TABLE>
<CAPTION>
Weighted Weighted
Average Exercise Average Exercise
Price Price
----------------------------- ----------------------------
1998 (Cdn.$) (US $) 1997 (Cdn.$) (US $)
- ------------------------------------- --------------- ------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding,
Beginning of period 250,000 $ 1.64 $ 1.07 200,000 $ 1.65 $ 1.07
Options granted 2,225,000 $ 0.45 $ 0.29 50,000 $ 1.60 $ 1.04
Options cancelled/expired (10,000) $ 0.44 $ 0.29
Options exercised - - - - -
- ------------------------------------- --------------- ------------- -------------- ------------- --------------
Options outstanding,
end of period 2,465,000 $ 0.57 $ 0.37 250,000 $ 1.64 $ 1.07
- ------------------------------------- --------------- ------------- -------------- ------------- --------------
Options exercisable,
end of year 674,500 $ 0.92 $ 0.60 250,000 $ 1.64 $ 1.07
- ------------------------------------- --------------- ------------- -------------- ------------- --------------
</TABLE>
As of December 31, 1998, per the OANDA Currency Converter (which utilizes
a sample of 435 prices) 1.5368 Canadian dollars is equal to 1 US dollar.
F-14
<PAGE>
BEN-ABRAHAM TECHNOLOGIES INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997, AND THE CUMULATIVE PERIOD
FROM AUGUST 29, 1996 (DATE OF INCORPORATION) TO DECEMBER 31, 1998
- -------------------------------------------------------------------------------
7. STOCK OPTIONS (CONTINUED)
The following table summarizes information about stock options
outstanding and exercisable at December 31, 1998:
<TABLE>
<CAPTION>
Outstanding Options
--------------------------------------------------------------------------
Range of Range of Weighted Average Weighted Average
Exercise Prices Exercise Prices Number Remaining Exercise Price
-------------------------------------
(Cdn. $) (US. $) Outstanding Contractual Life (Cdn. $) (US $)
- --------------- --------------- ----------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
$0.43-0.44 $0.28-0.29 2,175,000 4.5 years $ 0.434 $ 0.28
$1.10 $0.72 40,000 0.75 years $ 1.10 $ 0.72
$1.645-1.845 $1.04-1.07 250,000 2.0 years $ 1.636 $ 1.06
-----------
2,465,000
===========
<CAPTION>
Options Exercisable
-----------------------------------------------------
Range of Range of Weighted Average
Exercise Prices Exercise Prices Number Exercise Price
--------------------------------------
(Cdn. $) (US. $) Outstanding (Cdn. $) (US $)
- --------------- --------------- ----------- ---------------- ----------------
<S> <C> <C> <C> <C>
$0.43-0.44 $0.28-0.29 384,500 $ 0.436 $ 0.28
$1.10 $0.72 40,000 $ 1.10 $ 0.72
$1.60-1.845 $1.04-1.07 250,000 $ 1.636 $ 1.06
-----------
674,500
===========
</TABLE>
8. BASIC AND DILUTED NET LOSS PER SHARE
The basic and diluted net loss per share is computed based on the
weighted average number of the aggregate of subordinate voting shares,
Class A shares and Class C shares outstanding, all being considered as
equivalent of one another. The computation of diluted loss per share
does not include stock options and warrants with dilutive potential
that would have an antidilutive effect on loss per share.
F-15
<PAGE>
BEN-ABRAHAM TECHNOLOGIES INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997, AND THE CUMULATIVE PERIOD
FROM AUGUST 29, 1996 (DATE OF INCORPORATION) TO DECEMBER 31, 1998
- -------------------------------------------------------------------------------
9. RETIREMENT PLAN
In July 1998, the company began offering a discretionary 401(k) Plan (the
Plan) to all of its employees. Under the Plan, employees may defer income
on a tax-exempt basis, subject to IRS limitation. Under the Plan the
Company can make discretionary matching contributions. Company
contributions expensed in 1998 totaled $21,799.
10. COMMITMENTS
The Company has entered into lease commitments for rental of its office
space and laboratory facilities. The minimum lease payments are:
<TABLE>
<S> <C>
1999 $ 110,891
2000 101,341
2001 98,520
2002 87,944
2003 48,051
THEREAFTER -
---------------------------------------------------------------------------------------------------------
$ 446,747
---------------------------------------------------------------------------------------------------------
</TABLE>
Rent expense amounted to $105,396 and $36,755 for the year ended December
31, 1998 and 1997, respectively.
The license agreement with the University of California requires us to
undertake various obligations, including:
- payment of a $100,000 license issue fee, $75,000 of which we have
already paid and $25,000 of which is due in June 2000;
- payment of royalties to the University based on a percentage of the
net sales of any products incorporating the licensed technology;
- payment of minimum annual royalties on February 28 of each year
beginning in the year 2004 in the mounts set forth below, to be
credited against earned royalties, for the life of the agreement;
F-16
<PAGE>
BEN-ABRAHAM TECHNOLOGIES INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997, AND THE CUMULATIVE PERIOD
FROM AUGUST 29, 1996 (DATE OF INCORPORATION) TO DECEMBER 31, 1998
- -------------------------------------------------------------------------------
10. COMMITMENTS (CONTINUED)
<TABLE>
<CAPTION>
Minimum Annual
Year Royal Due
----------------------------------------
<S> <C>
2004 $ 50,000
2005 $ 100,000
2006 $ 150,000
2007 $ 200,000
2008 $ 400,000
2009 $ 600,000
2010 $ 800,000
2011 $1,500,000
Each year after 2011 $1,500,000
</TABLE>
- maintaining an annual minimum amount of available capital for
development and commercialization of products incorporating the
licensed technology until a product is introduced to the market;
- payment of the costs of patent prosecution and maintenance of the
patents included in the agreement which as of September 30, 1999 have
amounted to $57,000 and which we estimate will equal approximately
$70,000 per year;
- meeting performance milestones relating to:
- hiring or contracting with personnel to perform research and
development, regulatory and other activities relating to the
commercial launch of a proposed product;
- testing proposed products;
- obtaining government approvals;
- conducting clinical trials; and
- introducing products incorporating the licensed technology into
the market; and
- entering into partnership or alliance arrangements or agreements
with other entities regarding commercialization of the technology
covered by the license.
F-17
<PAGE>
BEN-ABRAHAM TECHNOLOGIES INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997, AND THE CUMULATIVE PERIOD
FROM AUGUST 29, 1996 (DATE OF INCORPORATION) TO DECEMBER 31, 1998
- -------------------------------------------------------------------------------
11. RELATED PARTY TRANSACTIONS
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Management fees paid to a company controlled
by a member of management, who is also a shareholder
and member of the Board of Directors $ 94,200 $ 185,000
Financing expenses paid to a company controlled by a
member of management, who is also a shareholder
and member of the Board of Directors $ - $ 44,019
</TABLE>
Included in accounts payable is an amount of $133,901 (1997 - $156,412)
due to directors and officers of the Company.
12. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
The Year 2000 Issue arises because many computerized systems use two
digits rather than four to identify a year. Date sensitive systems may
recognize the Year 2000 as 1900 or some other date, resulting in errors
when information using Year 2000 dates is processed. In addition, similar
problems may arise in some systems which use certain dates in 1999 to
represent something other than a date. The effects of the Year 2000 Issue
may be experienced before, on, or after January 1, 2000, and, if not
addressed, the impact on operations and financial reporting may range
from minor errors to significant systems failure which could affect the
Company's ability to conduct normal business operations. It is not
possible to be certain that all aspects of the Year 2000 Issue affecting
the Company, including those related to the efforts of customers,
suppliers, or other third parties, will be fully resolved.
F-18
<PAGE>
BEN-ABRAHAM TECHNOLOGIES INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- --------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 5,648,796 $ 2,841,250
Prepaid expenses and other sundry assets 93,891 75,266
------------- --------------
5,742,687 2,916,516
CAPITAL ASSETS, net of depreciation 469,068 532,829
------------- --------------
$ 6,211,755 $ 3,449,345
------------- --------------
------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 144,299 $ 202,696
Accrued and other liabilities 86,374 487,902
Due to licensor 127,317 127,317
------------- --------------
357,990 817,915
------------- --------------
STOCKHOLDERS' EQUITY
Capital stock
Issued
4,807,865 (1998 - 4,817,865) Class C 481 482
52,642,686 (1998 - 29,437,686) Common 17,652,510 13,427,166
------------- --------------
17,652,991 13,427,648
Deficit accumulated during the development stage (11,799,226) (10,796,218)
------------- --------------
5,853,765 2,631,430
------------- --------------
$ 6,211,755 $ 3,449,345
------------- --------------
------------- --------------
</TABLE>
See accompanying notes to financial statements.
F-19
<PAGE>
BEN-ABRAHAM TECHNOLOGIES INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
THREE MONTH AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 1998 AND THE
CUMULATIVE PERIOD FROM AUGUST 29, 1996 (DATE OF INCORPORATION) TO
SEPTEMBER 30, 1999
(UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS NINE MONTHS
ENDED ENDED ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998 SEPTEMBER 30, 1999
------------------ ------------------ ------------------
<S> <C> <C> <C>
REVENUE
Interest income $ 62,022 $ 45,659 $ 134,538
- ---------------------------------------------------------------------------------------------------------------------------------
EXPENSES
Research and development 160,671 309,696 477,202
General and administration 232,932 163,276 592,364
Depreciation and amortization 23,160 29,783 67,980
- ---------------------------------------------------------------------------------------------------------------------------------
416,763 502,755 1,137,546
- ---------------------------------------------------------------------------------------------------------------------------------
LOSS BEFORE OTHER EXPENSES (354,741) (457,096) (1,003,008)
- ---------------------------------------------------------------------------------------------------------------------------------
OTHER EXPENSES
Loss on disposal of equipment - - -
Costs of acquisition of Structured
Biologicals Inc. - - -
Purchased in-process research
and development - - -
- ---------------------------------------------------------------------------------------------------------------------------------
- - -
- ---------------------------------------------------------------------------------------------------------------------------------
NET LOSS $ (354,741) $ (457,096) $ (1,003,008)
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
BASIC AND DILUTED NET LOSS
PER SHARE $ (0.01) $ (0.01) $ (0.02)
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 57,415,551 34,255,551 46,719,269
<CAPTION>
CUMULATIVE PERIOD FROM
NINE MONTHS AUGUST 29, 1996 (DATE
ENDED OF INCORPORATION) TO
SEPTEMBER 30, 1998 SEPTEMBER 30, 1999
-------------------- ----------------------
<S> <C> <C>
REVENUE
Interest income $ 88,599 $ 454,673
- ---------------------------------------------------------------------------------------------------------------------------------
EXPENSES
Research and development 623,673 2,213,154
General and administration 912,401 3,870,632
Depreciation and amortization 90,081 260,349
- ---------------------------------------------------------------------------------------------------------------------------------
1,626,155 6,344,135
- ---------------------------------------------------------------------------------------------------------------------------------
LOSS BEFORE OTHER EXPENSES (1,537,556) (5,889,462)
- ---------------------------------------------------------------------------------------------------------------------------------
OTHER EXPENSES
Loss on disposal of equipment - 157,545
Costs of acquisition of Structured
Biologicals Inc. - 375,219
Purchased in-process research
and development - 5,377,000
- ---------------------------------------------------------------------------------------------------------------------------------
- 5,909,764
- ---------------------------------------------------------------------------------------------------------------------------------
NET LOSS $ (1,537,556) $ (11,799,226)
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
BASIC AND DILUTED NET LOSS
PER SHARE $ (0.04) $ (0.32)
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 35,061,348 36,989,372
</TABLE>
The accompanying notes are an integral part of these statements.
F-20
<PAGE>
BEN-ABRAHAM TECHNOLOGIES INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND THE YEARS ENDED DECEMBER 31,
1998 AND 1997
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS C
SPECIAL SHARES SPECIAL SHARES
---------------------------- ----------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 20,000,000 2,000 4,150,000 415
Conversion of shares
January 13, 1997 - - (282,850) (28)
January 13, 1997 - - (94,285) (9)
December 2, 1997 - - (106,386) (11)
December 2, 1997 - - (100,000) (10)
Exercise of Series "V" warrants
Exercise of Series "X" warrants - - - -
Exercise of Series "W" warrants - - - -
Adjustment for partial shares issued upon amalgamation - - - -
Financing Fees - - - -
Net loss - - - -
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 20,000,000 2,000 3,566,479 357
Conversion of shares
March 4, 1998 - - (20,000) (2)
March 16, 1998 - - (10,000) (1)
May 8, 1998 (15,000,000) (1,500) - -
June 1, 1998 (1,000,000) (100) - -
June 1, 1998 (1,000,000) (100) - -
Return of shares to treasury
May 8, 1998 (1,468,614) (147) - -
May 8, 1998 - - (250,000) (25)
Net loss - - - -
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 1,531,386 $ 153 3,286,479 $ 329
Conversion of shares
February 2, 1999 - - (10,000) (1)
Private placement of shares
May 6, 1999 - - - -
Share redesignation
July 13, 1999 (1,531,386) (153) 1,531,386 153
Issuance of shares
August 15, 1999 - - - -
Net loss - - - -
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1999 (UNAUDITED) - $ - 4,807,865 $ 481
- ---------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
DEFICIT
COMMON ACCUMULATED
STOCK DURING THE
-------------------------------- DEVELOPMENT
SHARES AMOUNT STAGE TOTAL
---------- --------- ------------- ---------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 11,751,464 8,513,503 (6,246,710) 2,269,208
Conversion of shares
January 13, 1997 282,850 70,741 - 70,713
January 13, 1997 94,285 23,580 - 23,571
December 2, 1997 106,386 26,607 - 26,596
December 2, 1997 100,000 25,010 - 25,000
Exercise of Series "V" warrants 24,000 36,767 - 36,767
Exercise of Series "X" warrants 28,571 36,200 - 36,200
Exercise of Series "W" warrants 20,000 25,555 - 25,555
Adjustment for partial shares 130 - -
issued upon amalgamation
Financing Fees - 410,000 - 410,000
Net loss - - (1,890,093) (1,890,093)
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 12,407,686 9,167,963 (8,136,803) 1,033,517
Conversion of shares
March 4, 1998 20,000 5,002 - 5,000
March 16, 1998 10,000 2,501 - 2,500
May 8, 1998 15,000,000 3,751,500 - 3,750,000
June 1, 1998 1,000,000 250,100 - 250,000
June 1, 1998 1,000,000 250,100 - 250,000
Return of shares to treasury
May 8, 1998 - - - (147)
May 8, 1998 - - - (25)
Net loss - - (2,659,415) (2,659,415)
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 29,437,686 $ 13,427,166 $ (10,796,218) $ 2,631,430
Conversion of shares
February 2, 1999 10,000 2,501 - 2,500
Private placement of shares
May 6, 1999 23,125,000 4,197,843 - 4,197,843
Share redesignation
July 13, 1999 - - - -
Issuance of shares
August 15, 1999 70,000 25,000 - 25,000
Net loss - - (1,003,008) (1,003,008)
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1999 (UNAUDITED) 52,642,686 $ 17,652,510 $ (11,799,226) $ 5,853,765
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-21
<PAGE>
BEN-ABRAHAM TECHNOLOGIES INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 AND THE CUMULATIVE PERIOD
FROM AUGUST 29, 1996 (DATE OF INCORPORATION) TO SEPTEMBER 30, 1999
(UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CUMULATIVE PERIOD
FROM AUGUST 29,
NINE MONTHS ENDED SEPTEMBER 30, 1996 (DATE OF
------------------------------------- INCORPORATION) TO
1999 1998 SEPTEMBER 30, 1999
-------------- -------------- ------------------
<S> <C> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES
Net loss $ (1,003,008) $ (1,537,556) $ (11,799,226)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 67,980 90,081 260,350
Purchased in-process research & development - - 5,377,000
Loss on disposal of equipment - - 157,545
Changes in other assets and liabilities impacting cash
flows from operations:
Prepaid expenses (18,625) (13,410) (90,924)
Accounts payable, accrued expenses & other liabilities (459,925) (877,531) (509,514)
Due to other - - 127,317
Due to the Company - - (128,328)
Due to directors and officers - (156,412) -
-------------- -------------- ------------------
NET CASH USED IN OPERATING ACTIVITIES (1,413,578) (2,494,828) (6,605,780)
-------------- -------------- ------------------
CASH FLOWS USED IN INVESTING ACTIVITIES
Purchase of capital assets (4,219) (120,124) (852,852)
-------------- -------------- ------------------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES
(Conversion) Issuance of Class "A" & "C" stock - (175) 482
Issuance of common stock 4,225,343 4,257,503 13,106,946
-------------- -------------- ------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 4,225,343 4,257,328 13,107,428
-------------- -------------- ------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,807,546 1,642,376 5,648,796
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,841,250 1,750,331 -
-------------- -------------- ------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,648,796 $ 3,392,707 $ 5,648,796
-------------- -------------- ------------------
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Acquisition of SBI
Purchased in-process research & development $ - $ - $ 5,377,000
Other net liabilities assumed - - (831,437)
-------------- -------------- ------------------
- - 4,545,563
Less: subordinate voting shares issued therefor - - 4,545,563
-------------- -------------- ------------------
$ - $ - $ -
-------------- -------------- ------------------
Income tax paid $ - $ - $ -
-------------- -------------- ------------------
Interest paid $ - $ - $ -
-------------- -------------- ------------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-22
<PAGE>
BEN-ABRAHAM TECHNOLOGIES INC.
NOTES TO THE FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
1. ORGANIZATION
On December 19, 1996, Ben-Abraham Technologies Inc. (the "Company") was
continued under the laws of the State of Wyoming, U.S.A. Previously,
the Company had been incorporated under the laws of the Province of
Ontario effective August 29, 1996. Effective December 6, 1996, the
Company acquired Structured Biologicals Inc. and its wholly-owned
subsidiary 923934 Ontario Inc. ("SBI"), a Canadian public company
listed on the Alberta Stock Exchange. The "acquisition" was effected by
a statutory amalgamation wherein the stockholders of the Company were
allotted a significant majority of the shares of the amalgamated
entity. Upon amalgamation, the then existing stockholders of SBI
received 7,434,322 subordinate voting shares of the Company (one such
share for every 3 1/2 shares held in SBI). The shareholders meeting to
approve this arrangement was held on November 27, 1996. The articles of
arrangement were not filed until December 6, 1996.
The Company was established to develop prescription pharmaceutical
products, vaccines and vaccine adjuvants using its core nanoparticle
technology licensed from the University of California. Research on this
technology was conducted by a predecessor company and as a result the
Company is continuing its efforts to develop several different potential
products using this core technology.
The Company intends to in-license other products in order to expand its
portfolio of potential pharmaceutical products in the next several years.
The Company has been in the development stage since its inception. The
Company's successful completion of its development program and its
transition to profitable operations is dependent upon obtaining
regulatory approval from the United States Food and Drug Administration
("FDA") prior to selling its products within the U.S., and foreign
regulatory approval must be obtained to sell its products
internationally. There can be no assurance that the Company's products
will receive regulatory approvals, and a substantial amount of time may
pass before the achievement of a level of sales adequate to support the
Company's cost structure. Obtaining marketing approval will be directly
dependent on the Company's ability to implement the necessary
regulatory steps required to obtain marketing approval in the United
States and in other countries. It is not possible at this time to
predict with assurance the outcome of these activities.
The research and development on the Company's CAP technology is
conducted in the Company's Atlanta, Georgia laboratory facility. The
business office is located in Lincolnshire, Illinois.
2. SUMMARY OF ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying financial statements follows.
BASIS OF PRESENTATION
The financial statements are expressed in United States dollars and have
been prepared in accordance with generally accepted accounting principles
in the United States and SFAS No. 7 "Accounting and Reporting by
Development Stage Enterprises".
F-23
<PAGE>
BEN-ABRAHAM TECHNOLOGIES INC.
NOTES TO THE FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
2. SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
DEPRECIATION
Depreciation of computer, office and laboratory equipment is computed
primarily by accelerated methods over estimated useful lives of five to
seven years.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect amounts reported in the financial statements and
notes. Actual results may differ from these estimates.
BASIC AND DILUTED NET LOSS PER SHARE
The basic and diluted net loss per share is computed based on the weighted
average number of the aggregate of common stock and Class C shares
outstanding, all being considered as equivalent of one another. The
computation of diluted loss per share does not include stock options and
warrants with dilutive potential that would have an antidilutive effect on
loss per share.
NEW STATEMENT OF FINANCIAL ACCOUNTING STANDARDS
In June 1998, and subsequently amended, the FASB issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". The
Statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. This
Statement is effective for the fiscal quarters of the Company's year
ended December 31, 2001. The Company does not anticipate that the
implementation of this Statement will have a material impact on the
financial statements.
3. INCOME TAXES
The Company estimates that as of September 30, 1999 it has a loss
carryforward of approximately $6,700,000. This amount may be carried
forward up to 15 taxation years to be claimed against future income.
Additionally, the Company had approximately $175,000 of research and
development credits available to reduce future income taxes through year
2013.
The resulting deferred tax asset of approximately $4,200,000 has been
fully reserved and accordingly is not recorded in these financial
statements. When realized, the income tax benefit relating to this item
will be reflected in the current operations as a reduction of income tax
expense.
F-24
<PAGE>
BEN-ABRAHAM TECHNOLOGIES INC.
NOTES TO THE FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
4. STOCKHOLDERS' EQUITY
Effective July 13, 1999, and by articles of amendment dated July 20, 1999,
the subordinate voting shares of the Corporation were redesignated as
common stock, the Class A special shares, which carry 10 votes per share,
were reclassified as Class C special shares and the Class B special
shares were eliminated. There were no changes in number of shares
outstanding.
AUTHORIZED
PREFERENCE SHARES - An unlimited number of preference shares issuable in
series subject to limitations, rights and privileges as determined by the
directors. No preference shares have been issued as of September 30, 1999.
SPECIAL SHARES - An unlimited number of Class C special shares without par
value convertible to common stock on the basis of one Class C share and
U.S. $0.25. These shares are not entitled to a dividend and carry one vote
per share.
COMMON STOCK - An unlimited number of common stock without par value, and
carry one vote per share.
CAPITAL STOCK ISSUED AND OUTSTANDING
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE
---------------- ----------------
<S> <C> <C>
Class C special shares 4,807,865 $ 481
Common Stock 52,642,686 17,652,510
---------- ----------
57,450,551 $17,652,991
---------- ----------
---------- ----------
</TABLE>
In May 1999, the Company issued an aggregate of 23,125,000 shares of
common stock and warrants to purchase 11,562,500 shares of common stock
at an exercise price of $0.30 per share for net proceeds of $4,197,843.
MATERIAL CONVERSION OF SHARES
During the third quarter of 1999, an outstanding liability of $25,000
was converted into 70,000 shares of common stock.
WARRANTS
Pursuant to the Company's private placement financing which closed on May
6, 1999, warrants to purchase an aggregate of 11,562,500 shares of common
stock were issued at an exercise price of US$ 0.30 (CDN$ 0.436) per share
with a term of five years. These warrants represent the total number of
warrants outstanding as of September 30, 1999.
F-25
<PAGE>
BEN-ABRAHAM TECHNOLOGIES INC.
NOTES TO THE FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
5. STOCK OPTIONS
The Company has reserved an aggregate of 5,000,000 shares of common stock
for awards under the 1998 Plan. As of September 30, 1999, options to
purchase an aggregate of 4,283,125 shares of common stock were outstanding
under the 1998 Plan, of which 2,026,865 were fully vested, and a total of
716,875 shares of common stock remained available for grant. The rules of
the Alberta Stock Exchange restrict the aggregate number of our shares of
common stock reserved for issuance pursuant to any stock options up to 10%
of the number of our common stock on a non-diluted basis. As of September
30, 1999, the outstanding options under the plan were held by an aggregate
of nine individuals and were exercisable at prices ranging from $0.23 to
$1.07 per share of common stock.
Incentive stock options granted under the plan may not have an exercise
price less than the fair market value of the common stock on the date of
the grant (or, if granted to a person holding more than 10% of our voting
stock, at less than 110% of fair market value). Non-statutory stock
options granted under the plan may not have an exercise price less than
85% of fair market value on the date of grant. The options are exercisable
and vest in a range substantially over a three-year period and expire five
years from the date of the grants.
6. RELATED PARTY TRANSACTIONS
No remuneration has been paid to directors for acting in this capacity.
7. YEAR 2000 PROGRAM
The Company will continue to conduct a comprehensive review of its
computer systems to identify the systems that could be affected by the
"Year 2000" issue. The Company presently believes that, with modifications
to existing software and converting to new software, the Year 2000 problem
will not pose significant operational problems for the Company's computer
systems as so modified and converted. However, if such modifications and
conversions are not completed in a timely manner, the Year 2000 problem
may have a material impact on the operations of the Company.
8. SUBSEQUENT EVENTS
In the Company's License Agreement with the University of California,
as amended October 26, 1999, assuming the Company continues its product
development efforts under the agreement, the Company is obligated to pay
minimum annual royalties beginning in the year 2004. Under the original
license agreement, this obligation began in the year 2003. Minimum annual
royalties in 2004 equal $50,000 rising each year until 2011 when the
minimum annual royalty is $1.5 million. Under the original agreement, the
minimum annual royalty in 2003 equaled $100,000 rising each year until
2007 when the minimum annual royalty equaled $1.5 million. Under the
amended agreement, the total minimum royalty obligation for the years 2004
through 2013 is $6.8 million. Under the original agreement, the total
minimum royalty obligation for the years 2003 through 2013 would have been
$12.4 million. Furthermore, the amended agreement removed the red blood
cell surrogate from the agreement and limited the University's right to
terminate the agreement in cases where the Company does not perform under
the agreement.
F-26
<PAGE>
BEN-ABRAHAM TECHNOLOGIES INC.
NOTES TO THE FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
8. SUBSEQUENT EVENTS (CONTINUED)
On November 10, 1999, our shareholders approved our name change from
Ben-Abraham Technologies Inc. to BioSante Pharmaceuticals, Inc.
F-27
<PAGE>
PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIALITY UNDER RULE 24b-2 OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED. A COPY OF THIS AGREEMENT WITH THIS EXHIBIT INTACT HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
EXCLUSIVE LICENSE AGREEMENT
BETWEEN
THE REGENTS OF THE UNIVERSITY OF CALIFORNIA
AND
BEN-ABRAHAM TECHNOLOGIES, INC.
FOR
SELECTED APPLICATIONS OF COATED NANOCRYSTALLINE PARTICLES
CASE NO. 89-204
<PAGE>
TABLE OF CONTENTS
ARTICLE NO. TITLE PAGE
RECITALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2. GRANT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
3. LICENSE ISSUE FEE . . . . . . . . . . . . . . . . . . . . . . . . . 8
4. ROYALTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
5. DUE DILIGENCE . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
6. PROGRESS AND ROYALTY REPORTS. . . . . . . . . . . . . . . . . . . . 16
7. BOOKS AND RECORDS . . . . . . . . . . . . . . . . . . . . . . . . . 18
8. LIFE OF THE AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . 18
9. TERMINATION BY THE REGENTS. . . . . . . . . . . . . . . . . . . . . 19
10. TERMINATION BY LICENSEE. . . . . . . . . . . . . . . . . . . . . . 20
11. DISPOSITION OF PATENT PRODUCTS ON HAND UPON TERMINATION. . . . . . 20
12. USE OF NAMES AND TRADEMARKS. . . . . . . . . . . . . . . . . . . . 21
13. LIMITED WARRANTY . . . . . . . . . . . . . . . . . . . . . . . . . 21
14. PATENT PROSECUTION AND MAINTENANCE . . . . . . . . . . . . . . . . 23
15. PATENT MARKING . . . . . . . . . . . . . . . . . . . . . . . . . . 25
16. PATENT INFRINGEMENT. . . . . . . . . . . . . . . . . . . . . . . . 25
17. INDEMNIFICATION. . . . . . . . . . . . . . . . . . . . . . . . . . 27
18. NOTICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
19. ASSIGNABILITY. . . . . . . . . . . . . . . . . . . . . . . . . . . 29
20. LATE PAYMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . 29
21. WAIVER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
22. FAILURE TO PERFORM . . . . . . . . . . . . . . . . . . . . . . . . 30
23. GOVERNING LAWS . . . . . . . . . . . . . . . . . . . . . . . . . . 30
24. GOVERNMENT APPROVAL OR REGISTRATION. . . . . . . . . . . . . . . . 31
25. EXPORT CONTROL LAWS. . . . . . . . . . . . . . . . . . . . . . . . 31
26. FORCE MAJEURE. . . . . . . . . . . . . . . . . . . . . . . . . . . 31
27. CONFIDENTIALITY. . . . . . . . . . . . . . . . . . . . . . . . . . 32
28. MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . . . . 33
<PAGE>
UC Case No. 89-204
Exclusive License Agreement
for
Selected Applications of Coated Nanocrystalline Particles
This license agreement ("Agreement") is effective this 18th day of June,
1997 by and between The Regents of the University of California ("The
Regents"), a California corporation, having its statewide administrative
offices at 300 Lakeside Drive, 22nd Floor, Oakland, California 94612-3550 and
Ben-Abraham Technologies, Inc. ("Licensee"), a Wyoming corporation, having a
principal place of business at 372 Bay Street, Suite 302, Toronto, Canada,
M5H 2W9.
RECITALS
Whereas, certain inventions, characterized as "Applications of Coated
Nanocrystalline Particles" ("Invention"), useful in the development of
vaccine adjuvants, virus vaccine constructs, drug delivery systems, and a red
blood cell surrogate, were made at the University of California, Los Angeles
by Dr. Nir Kossovsky et al. and are claimed in Patent Rights defined below;
Whereas, the Licensee is a "small entity" as defined in 37 C.F.R.
Section 1.9 and a "small-business concern" defined in 15 U.S.C. Section 632;
Whereas, both parties recognize that royalties due under this Agreement
will be paid on pending patent applications and issued patents;
Whereas, Licensee requested certain rights from The Regents to
commercialize the Invention; and
<PAGE>
Whereas, The Regents responded to the request of Licensee by granting the
following rights to Licensee so that the products and other benefits derived
from the Invention can be enjoyed by the general public.
The parties agree as follows:
1. DEFINITIONS
As used in this Agreement, the following terms will have the meaning set
forth below:
1.1 "Patent Rights" means all U.S. patents and patent applications
and foreign patents and patent applications assigned to The Regents, and in
the case of foreign patents and patent applications those requested under
Paragraph 14.4 herein, including any reissues, extensions, substitutions,
continuations, divisions, and continuations-in-part applications (only to the
extent, however, that claims in the continuations-in-part applications are
supported in the specification of the parent patent application) based on and
including any subject matter claimed in or covered by the following:
1.1a U.S. Patent No. 5,178,882 entitled "Viral Decoy Vaccine," issued
January 12, 1993 by Dr. Nir Kossovsky et al., and assigned to The
Regents;
1.1b U.S. Patent No. 5,219,577 entitled "Biologically Active Composition
Having a Nanocrystalline Core," issued June 15, 1993 by Dr. Nir
Kossovsky et al., and assigned to The Regents;
1.1c U.S. Patent No. 5,306,508 entitled "Red Blood Cell Surrogate,"
issued April 26, 1994 by Dr. Nir Kossovsky et al., and assigned to
The Regents;
1.1d U.S. Patent No. 5,334,394 entitled "Human Immunodeficiency Virus
Decoy," issued August 2, 1994 by Dr. Nir Kossovsky et al., and
assigned to The Regents;
2
<PAGE>
1.1e U.S. Patent No. 5,460,830 entitled "Biochemically Active Agents for
Chemical Catalysis and Cell Receptor Activation," issued October
24, 1995 by Dr. Nir Kossovsky et al., and assigned to The Regents;
1.1f U.S. Patent No. 5,460,831 entitled "Targeted Transfection
Nanoparticles," issued October 24, 1995 by Dr. Nir Kossovsky et
al., and assigned to The Regents;
1.1 g U.S. Patent No. 5,462,750 entitled "Biologically Active
Compositions Having a Nanocrystalline Core," issued October 31,
1995 by Dr. Nir Kossovsky et al., and assigned to The Regents;
1.1h U.S. Patent No. 5,462,751 entitled "Biological and Pharmaceutical
Agents Having a Nanomeric Biodegradable Core," issued October 31,
1995 by Dr. Nir Kossovsky et al., and assigned to The Regents; and
1.1i U.S. Patent No. 5,464,634 entitled "Red Blood Cell Surrogate,"
issued November 7, 1995 by Dr. Nir Kossovsky et al., and assigned
to The Regents.
1.2 "Patent Products" means:
i any kit, composition of matter, material, or product;
ii any kit, composition of matter, material, or product to be
used in a manner requiring the performance of the Patent
Method; or
iii any kit, composition of matter, material, or product
produced by the Patent Method;
to the extent that the manufacture, use, or sale of such kit, composition of
matter, material, or product, in a particular country, would be covered by or
infringe, but for the license granted to Licensee pursuant to this Agreement,
an unexpired claim of a patent or pending claim of a patent application were
it issued as a claim in a patent under Patent Rights in that country in which
such patent has issued or application is pending. This definition of Patent
Products also includes a service either used by Licensee or provided by
Licensee to its customers when such service requires the practice of the
Patent Method.
3
<PAGE>
1.3 "Patent Method" means any process or method covered by the claims
of a patent application or patent within Patent Rights or the use or practice
of which would constitute, in a particular country, but for the license
granted to Licensee pursuant to this Agreement, an infringement of an
unexpired claim of a patent or pending claim of a patent application were it
issued as a claim in a patent within Patent Rights in that country in which
the Patent Method is used or practiced.
1.4 "Vaccine Adjuvant" means coated nanocrystalline particles used to
improve, augment or potentiate the biological activity, and especially the
immunogenicity, of a pharmaceutical preparation intended for the immunization of
humans or other animals against diseases.
1.5 "Virus Vaccine Construct" means nanocrystalline particles coated
with viral antigens intended for use in the immunization of humans against HIV,
Epstein Barr virus, or herpes virus infections.
1.6 "Drug Delivery System" means coated nanocrystalline particles
used in pharmaceutical preparations to facilitate the therapeutic delivery of
5-fluorouracil, taxol, or insulin in humans.
1.7 "Red Blood Cell Surrogate" means coated nanocrystalline particles
used to serve as a substitute for human or animal red blood cells.
1.8 "Field" means vaccine Adjuvant, Virus Vaccine Construct, Drug
Delivery System and Red Blood Cell Surrogate.
1.9 "Excluded Field" means any application or use of coated
nanocrystalline particles in pharmaceutical preparations intended for use in
human or animal contraception, human or
4
<PAGE>
animal diagnostic application, human or animal antibiotic therapy, or human
or animal hormone therapy and any other field of use not expressly included
in Paragraphs 1.4, 1.5, 1.6 and 1.7, above.
1.10 "Net Sales" means the gross invoice prices from the sale of
Patent Products by Licensee, an Affiliate, a Joint Venture, or a sublicensee
to independent third parties for cash or other forms of consideration in
accordance with generally accepted accounting principles limited to the
following deductions (if not already deducted from the gross invoice price
and at rates customary within the industry): (a) allowances (actually paid
and limited to rejections, returns, and prompt payment and volume discounts
granted to customers of Patent Products, whether in cash or Patent Products
in lieu of cash); (b) freight, transport packing, insurance charges
associated with transportation; and (c) taxes, tariffs or import/export
duties based on sales when included in gross sales, but not value-added taxes
or taxes assessed on income derived from such sales. Where Licensee
distributes Patent Products for end use to itself, an Affiliate, a Joint
Venture, or a sublicensee, then such distribution will be considered a sale
at the price normally charged to independent third parties, and The Regents
will be entitled to collect a royalty on such sale in accordance with Article
4 (Royalties).
1.11 "Affiliate(s)" of Licensee means any entity which, directly or
indirectly, controls Licensee, is controlled by Licensee, or is under common
control with Licensee ("control" for these purposes being defined as the
actual, present capacity to elect a majority of the directors of such
affiliate, or if not, the capacity to elect the members that control forty
percent (40%) of the outstanding stock or other voting rights entitled to
elect directors) provided, however, that in any country where the local law
will not permit foreign equity participation of a majority, then an
5
<PAGE>
"Affiliate" will include any company in which Licensee will own or control,
directly or indirectly, the maximum percentage of such outstanding stock or
voting rights permitted by local law. Each reference to Licensee herein will
be meant to include its Affiliates.
1.12 "Joint Venture" means any separate entity established pursuant to
an agreement between a third party and Licensee to constitute a vehicle for a
joint venture, in which the separate entity manufactures, uses, purchases,
sells, or acquires Patent Products from Licensee. Each reference to Licensee
herein will be meant to include its Joint Venture(s).
2. GRANT
2.1 Subject to the limitations set forth in this Agreement, The Regents
hereby grants to Licensee exclusive licenses under Patent Rights to make, use,
sell, offer for sale, and import Patent Products in the Field and to practice
the Patent Method in the Field.
2.2 The licenses granted hereunder expressly prohibit the right to
make, use, sell, offer for sale, and import Patent Products in the Excluded
Field and to practice the Patent Method in the Excluded Field.
2.3 The manufacture of Patent Products in the Field and the practice of
the Patent Method in the Field will be subject to applicable government
importation laws and regulations of a particular country on Patent Products made
outside the particular country in which such Patent Products are used or sold.
2.4 The Regents also grants to Licensee the right to issue
sublicenses to third parties to make, use, sell, offer for sale, and import
Patent Products in the Field and to practice the Patent Method in the Field,
provided Licensee retains current exclusive rights thereto under this
Agreement. If the exclusive licenses granted to Licensee in any Field are
reduced to nonexclu-
6
<PAGE>
sive licenses for any reason, then Licensee will be entitled to retain any
sublicenses in that Field granted by Licensee prior to the date on which the
reduction to nonexclusive licenses became effective. Licensee, however, is
prohibited from granting any additional sublicenses in the Field in which the
exclusive licenses were reduced to non-exclusive licenses. To the extent
applicable, such sublicenses will include all of the rights of and
obligations due to The Regents that are contained in this Agreement including
payment to The Regents of royalties at the rates provided for in Article 4
(Royalties).
2.5 Licensee will notify The Regents of each sublicense granted
hereunder and provide The Regents with a copy of each sublicense. Licensee
will collect and pay all fees and royalties due The Regents as set forth in
Paragraphs 3.1 and 4.1 below (and guarantee all such payments due from
sublicensees). Licensee will require sublicensees to provide it with progress
and royalty reports in accordance with the provisions herein, and Licensee
will collect and deliver to The Regents all such reports due from
sublicensees.
2.6 Upon termination of this Agreement for any reason, The Regents,
at its sole discretion, will determine whether any or all sublicenses will be
assigned to The Regents, except that The Regents will not be bound by any
duties or obligations contained in any sublicenses that extend beyond the
duties and obligations contained in this Agreement.
2.7 Nothing in this Agreement will be deemed to limit the right of
The Regents to publish any and all technical data resulting from any research
performed by The Regents relating to the Invention and to make and use the
Invention, Patent Product(s), Patent Method(s), and associated technology
solely for educational and research purposes and for purposes not covered by
this Agreement.
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3. LICENSE ISSUE FEE
3.1 As partial consideration for all the rights and licenses granted
to Licensee, Licensee will pay to The Regents a license issue fee of One
Hundred Thousand Dollars ($100,000.00) according to the following schedule:
3.1a Twenty-five Thousand Dollars ($25,000) within 30 days after
execution of this Agreement;
3.1b Twenty-five Thousand Dollars ($25,000) on or before the first
anniversary of the effective date of this Agreement;
3.1c Twenty-five Thousand Dollars ($25,000) on or before the second
anniversary of the effective date of this Agreement; and
3.1d Twenty-five Thousand Dollars ($25,000) on or before the third
anniversary of the effective date of this Agreement.
3.2 The fees set forth in Paragraph 3.1 above are non-refundable,
non-creditable, and not an advance against royalties.
4. ROYALTIES
4.1 As further consideration for all the rights and licenses granted
to Licensee, Licensee and its sublicensees will pay to The Regents an earned
royalty at the rate of four percent (4%) based on the Net Sales of Patent
Products. If, however, Licensee has granted both the right to manufacture and
sell a Vaccine Adjuvant to a party that also manufactures and sells a
pharmaceutical product that is combined with the Vaccine Adjuvant, then
Licensee may exchange the royalty rate paid to The Regents specified above
for a royalty rate of two percent (2%) based on the Net Sales of the
pharmaceutical product that contains the Vaccine Adjuvant.
4.2 Paragraphs 1.1, 1.2 and 1.3 define Patent Rights, Patent
Products, and Patent Method so that royalties will be payable on Patent
Products and Patent Method covered by both
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<PAGE>
pending patent applications and issued patents. Earned royalties will accrue
in each country for the duration of Patent Rights in that country and will be
payable to The Regents when Patent Products are invoiced, or if not invoiced,
when delivered to a third party or to itself, an Affiliate, Joint Venture, or
sublicensee in the case where such delivery of the Patent Products to
Licensee, an Affiliate, Joint Venture, or sublicensee is intended for end use
or for purposes other than clinical trials.
4.3 Royalties accruing to The Regents will be paid to The Regents
quarterly on or before the following dates of each calendar year:
February 28 for the calendar quarter ending December 31
May 31 for the calendar quarter ending March 31
August 31 for the calendar quarter ending June 30
November 30 for the calendar quarter ending September 30
4.4 Each such payment will be for royalties which accrued up to the
most recently completed calendar quarter of Licensee.
4.5 Beginning in the year 2003, Licensee will pay to The Regents a
minimum annual royalty in the amounts and at the times set forth below:
<TABLE>
<S> <C>
2003 - $ 100,000
2004 - $ 250,000
2005 - $ 500,000
2006 - $ 1,000,000
2007 - $ 1,500,000
</TABLE>
9
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In each succeeding calendar year after the year 2007, Licensee will pay a
minimum annual royalty of One Million Five Hundred Thousand Dollars
($1,500,000) and thereafter for the life of this Agreement. This minimum
annual royalty will be paid to The Regents by February 28 of the year
following accrual of the royalties and will be credited against the earned
royalty due and owing for the calendar year in which the minimum payment was
made.
4.6 All monies due The Regents will be payable in United States funds
collectible at par in San Francisco, California. When Patent Products are
sold for monies other than United States dollars, the earned royalties will
first be determined in the foreign currency of the country in which such
Patent Products were sold and then converted into equivalent United States
funds. The exchange rate will be that rate quoted in the Wall Street Journal
on the last business day of the reporting period.
4.7 Earned royalties on sales of Patent Products occurring in any
country outside the United States will not be reduced by any taxes, fees, or
other charges imposed by the government of such country except those taxes,
fees, and charges allowed under the provisions of Paragraph 1.10 (Net Sales).
Licensee will also be responsible for all bank transfer charges.
4.8 Notwithstanding the provisions of Article 26 (Force Majeure), if at
any time legal restrictions prevent prompt remittance of part or all royalties
owed to The Regents by Licensee with respect to any country where a Patent
Product is sold or distributed, Licensee will convert the amount owed to The
Regents into United States funds and will pay The Regents directly from another
source of funds for the amount impounded.
4.9 In the event that any patent or any claim thereof included within
the Patent Rights is held invalid in a final decision by a court of competent
jurisdiction and last resort and from
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which no appeal has or can be taken, all obligation to pay royalties based on
such patent or claim or any claim patentably indistinct therefrom will cease
as of the date of such final decision. Licensee will not, however, be
relieved from paying any royalties that accrued before such decision or that
are based on another patent or claim that has not expired or that is not
involved in such decision.
5. DUE DILIGENCE
5.1 The Licensee, upon execution of this Agreement, shall diligently
proceed with the development, manufacture, and sale of Patent Products and
shall earnestly and diligently market the same within a reasonable time after
execution of this Agreement and in quantities sufficient to meet the market
demands therefor.
5.2 Licensee will be entitled to exercise prudent and reasonable
business judgment in the manner in which it meets its due diligence
obligations hereunder. In no case, however, will Licensee be relieved of its
obligations to meet the due diligence provisions of this Article 5 (Due
Diligence).
5.3 The Licensee will obtain all necessary governmental approvals in
each country that Patent Products are manufactured, used, and sold.
5.4 Licensee will have available not less than $________ million
per year for development and commercialization of Patent Products for the
first three years that this Agreement is in effect and $________ million
for every year thereafter until a Patent Product is introduced to the market.
[PORTIONS OF THIS SECTION HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR
CONFIDENTIALITY UNDER RULE 24b-2 OF THE SECURITIES EXCHANGE OF 1934, AS
AMENDED. A
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<PAGE>
COPY OF THIS AGREEMENT WITH THIS SECTION INTACT HAS BEEN FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION.]
5.5 Licensee will not knowingly hire any person into a management or
decision-making position who has been convicted or is under investigation by any
governmental entity in the United States or Canada for fraud in association with
the trading of securities. Licensee must diligently investigate the background
of all potential management hirees before hiring any person into a management or
decision-making position to determine if the person has been under investigation
in the United States or Canada for fraud in association with the trading of
securities.
5.6 Within 6 months of the effective date of this Agreement, Licensee
will acquire (by purchase, construction, rental, lease, or other means) the
necessary laboratory, pilot plant, and supporting area space necessary for
carrying out the projects specified in Paragraph 5.9. Within 18 months of the
effective date of this Agreement, Licensee will acquire (by purchase,
construction, rental, lease, or other means) the necessary laboratory,
manufacturing, and supporting area space to manufacture the Patent Products
specified in Paragraph 5.9 under good manufacturing practice conditions. The
majority of research and development work, including animal, toxicity and
product development work, will be conducted in facilities acquired (purchased,
constructed, rented or leased) by Licensee.
5.7 Licensee must hire the following key employees by the designated
dates:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Position Description # Req. Hiring Target Date
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Director, Research & Development 1 December 1, 1996
Senior Vaccine Development Specialist 1 June 30, 1997
Senior Pharmaceutical Development Specialist 1 June 30, 1997
Process Development Scientist 1 April 30, 1997
Quality Control/Assurance Manager 1 December 31, 1997
Information Management Systems Specialist 1 December 31, 1997
Regulatory Specialist 1 December 31, 1998
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
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5.8 In the hiring of key employees designated in Paragraph 5.7 above,
Licensee will use the criteria set forth below to select and hire qualified
candidates.
5.8a Director, Research and Development: Requires a Ph.D. in
microbiology and 15 to 20 years' experience in the
biotechnology industry. Requires a demonstrated ability to
manage a development facility and guide development programs.
The selection of the candidate to fill this position is
subject to the approval of The Regents, whose approval will
not be unreasonably withheld.
5.8b Senior Vaccine Development Specialist: Requires a Ph.D. in
microbiology, virology, bacteriology, or immunology, with a
minimum of 5 years' biotechnology industrial experience in a
management position. Experience with the preparation of
purified subunit vaccines by extraction of microorganisms
produced through genetic engineering techniques would be
beneficial. Requires familiarity with regulatory requirements
for pilot plant operation. This individual must be capable of
leading a team in the development of new antigen presentation
and vaccine adjuvant systems.
5.8c Senior Pharmaceutical Development Scientist: Requires a Ph.D.
with a minimum of five years' experience in the
pharmaceutical industry. This position requires a thorough
familiarity with drug formulation technology, preferably
including the use of microcarrier formulations for drug
targeting and controlled delivery. Knowledge of the relevant
regulations governing such formulations is required. This
individual must have the capability to lead a team in the
development of novel drug delivery systems based upon the
nanoparticles, concentrating initially on formulations of
insulin that might be suitable for oral or nasal
administration and improved delivery of taxol and other anti-
tumor drugs.
5.8d Process Development Scientist: Requires a B.S. and 5 years'
experience in process development and the demonstrated
ability to scale-up protocols from the bench-top scale to
production scale.
5.8e Quality Control & Assurance Manager: Requires a B.S. in
biological sciences with 5 years' experience in the QC/QA
division of a biopharmaceutical company and thorough
knowledge of the United States, Canadian, and European GLP and
GMP biological and pharmaceutical manufacturing and testing
regulations. This individual must be capable of writing and
editing Standard Operating Procedure and Batch Production
Master Record documents and have experience in the validation
of manufacturing and testing equipment, processes and
procedures. Requires a demonstrated ability to manage all QC/
QA procedures in the development facility, including the
eventual quality control of operations of a GMP pilot plant
for biopharmaceuticals.
5.8f Information Management Systems Analyst: Requires a B.S. or
M.S. in computer sciences, with a minimum 3 years' experience
in LAN systems management, preferably in a laboratory setting.
This individual must have demonstrated the ability to set up
and operate computer-based systems for company records,
information retrieval and management and all laboratory
records, including research manufacture and QC/QA.
5.8g Regulatory Specialist: Requires a B.S. degree in the
biological sciences and preferably an advanced degree. This
individual must have the demonstrated ability to prepare
product submissions to the United States F.D.A. and a
demonstrated capability to get such products approved. The
selection of the candidate to fill this position is subject to
the approval of The Regents, whose approval will not be
unreasonably withheld.
5.9 Licensee must perform the following in the designated Fields:
5.9a Vaccine Adjuvant Project
[PORTIONS OF THIS SECTION HAVE BEEN OMITTED PURSUANT TO A REQUEST
FOR CONFIDENTIALITY UNDER RULE 24b-2 OF THE SECURITIES EXCHANGE
ACT OF 1934, AS AMENDED. A COPY OF THIS AGREEMENT WITH THIS SECTION
INTACT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION.]
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<PAGE>
5.9b Epstein Barr Vaccine Project
[PORTIONS OF THIS SECTION HAVE BEEN OMITTED PURSUANT TO A REQUEST
FOR CONFIDENTIALITY UNDER RULE 24b-2 OF THE SECURITIES EXCHANGE
ACT OF 1934, AS AMENDED. A COPY OF THIS AGREEMENT WITH THIS SECTION
INTACT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION.]
5.9c Herpes 2 Vaccine Project
[PORTIONS OF THIS SECTION HAVE BEEN OMITTED PURSUANT TO A REQUEST
FOR CONFIDENTIALITY UNDER RULE 24b-2 OF THE SECURITIES EXCHANGE
ACT OF 1934, AS AMENDED. A COPY OF THIS AGREEMENT WITH THIS SECTION
INTACT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION.]
5.9d HIV Vaccine Project
[PORTIONS OF THIS SECTION HAVE BEEN OMITTED PURSUANT TO A REQUEST
FOR CONFIDENTIALITY UNDER RULE 24b-2 OF THE SECURITIES EXCHANGE
ACT OF 1934, AS AMENDED. A COPY OF THIS AGREEMENT WITH THIS SECTION
INTACT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION.]
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<PAGE>
5.9e Oral Insulin Project
[PORTIONS OF THIS SECTION HAVE BEEN OMITTED PURSUANT TO A REQUEST
FOR CONFIDENTIALITY UNDER RULE 24b-2 OF THE SECURITIES EXCHANGE
ACT OF 1934, AS AMENDED. A COPY OF THIS AGREEMENT WITH THIS SECTION
INTACT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION.]
5.9f Taxol Delivery Project
[PORTIONS OF THIS SECTION HAVE BEEN OMITTED PURSUANT TO A REQUEST
FOR CONFIDENTIALITY UNDER RULE 24b-2 OF THE SECURITIES EXCHANGE
ACT OF 1934, AS AMENDED. A COPY OF THIS AGREEMENT WITH THIS SECTION
INTACT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION.]
5.9g 5-Fluorouracil
[PORTIONS OF THIS SECTION HAVE BEEN OMITTED PURSUANT TO A REQUEST
FOR CONFIDENTIALITY UNDER RULE 24b-2 OF THE SECURITIES EXCHANGE
ACT OF 1934, AS AMENDED. A COPY OF THIS AGREEMENT WITH THIS SECTION
INTACT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION.]
5.9h Red Blood Cell Surrogate
[PORTIONS OF THIS SECTION HAVE BEEN OMITTED PURSUANT TO A REQUEST
FOR CONFIDENTIALITY UNDER RULE 24b-2 OF THE SECURITIES EXCHANGE
ACT OF 1934, AS AMENDED. A COPY OF THIS AGREEMENT WITH THIS SECTION
INTACT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION.]
15
<PAGE>
5.10 [PORTIONS OF THIS SECTION HAVE BEEN OMITTED PURSUANT TO A REQUEST
FOR CONFIDENTIALITY UNDER RULE RULE 24b-2 OF THE SECURITIES EXCHANGE
ACT OF 1934, AS AMENDED. A COPY OF THIS AGREEMENT WITH THIS SECTION
INTACT HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE
COMMISSION.]
5.11 The Regents shall have the right and option to terminate this
Agreement or reduce Licensee's exclusive licenses to non-exclusive licenses in
accordance with Paragraph 5.12 below, if any of the provisions of this Article 5
have not been met by Licensee. The exercise of this right and option by The
Regents supersedes the rights granted in Article 2 (Grant).
5.12 To exercise either the right to terminate this Agreement or reduce
the exclusive licenses granted to Licensee to non-exclusive licenses for lack of
diligence required in this Article 5, The Regents will give Licensee written
notice of the deficiency. Licensee thereafter has 60 (sixty) days to cure the
deficiency. These notices will be subject to Article 18 (Notices).
6. PROGRESS AND ROYALTY REPORTS
6.1 Beginning August 31, 1997 and semi-annually thereafter, Licensee
will submit to The Regents a progress report covering activities by Licensee
related to developing and testing all Patent Products and obtaining governmental
approvals necessary for marketing them. These
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<PAGE>
progress reports will be provided to The Regents to cover the progress of the
research and development of the Patent Products until their first commercial
sale in the United States.
6.2 The progress reports submitted under Paragraph 6.1 will include,
but not be limited to, the following topics so that The Regents may be able
to determine the progress of the development of Patent Products and may also
be able to determine whether or not Licensee has met its diligence
obligations set forth in Article 5 (Due Diligence) above:
6.2a summary of work completed
6.2b key scientific discoveries
6.2c summary of work in progress
6.2d current schedule of anticipated events or milestones
6.2e market introduction date of Patent Products
6.2f raise the dollar amount to satisfy the diligence provisions
specified in Paragraph 5.4
6.2g activities of sublicensees and strategic partners.
6.3 Licensee will also report to The Regents in its immediately
subsequent progress and royalty report the date of first commercial sale of a
Patent Product(s) in each country.
6.4 After the first commercial sale of a Patent Product, Licensee will
provide The Regents with quarterly royalty reports to The Regents on or before
each February 28, May 31, August 31, and November 30 of each year. Each such
royalty report will cover the most recently completed calendar quarter of
Licensee (October through December, January through March, April through June,
and July through September) and will show:
17
<PAGE>
6.4a the gross sales and Net Sales of Patent Products sold by Licensee
and reported to Licensee as sold by its sublicensees during the
most recently completed calendar quarter;
6.4b the number of Patent Products sold or distributed by Licensee and
reported to Licensee as sold or distributed by its sublicensees;
6.4c the royalties, in U.S. dollars, payable hereunder with respect to
Net Sales; and
6.4d the exchange rates used, if any.
6.5 If no sales of Patent Products have been made during any reporting
period after the first commercial sale of a Patent Product, then a statement to
this effect is required.
7. BOOKS AND RECORDS
7.1 Licensee will keep books and records accurately showing all
Patent Products manufactured, used, and/or sold under the terms of this
Agreement. Such books and records will be preserved for at least five years
after the date of the royalty payment to which they pertain and will be open
to inspection by representatives or agents of The Regents upon request and at
reasonable times to determine the accuracy of the books and records and to
determine compliance by Licensee with the terms of this Agreement.
7.2 The fees and expenses of representatives of The Regents
performing such an examination will be borne by The Regents. However, if an
error in royalties of more than five percent (5%) of the total royalties due
for any year is discovered, then the fees and expenses of these
representatives will be borne by Licensee.
8. LIFE OF THE AGREEMENT
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<PAGE>
8.1 Unless otherwise terminated by operation of law or by acts of the
parties in accordance with the terms of this Agreement, this Agreement will
be in force from the effective date recited on page one and will remain in
effect for the life of the last-to-expire patent licensed under this
Agreement, or until the last patent application licensed under this Agreement
is abandoned.
8.2 Any termination of this Agreement will not affect the rights and
obligations set forth in the following Articles:
Article 7 Books and Records
Article 11 Disposition of Patent Products on Hand Upon
Termination
Article 12 Use of Names and Trademarks
Paragraph 14.6 Patent Prosecution and Maintenance
Article 17 Indemnification
Article 22 Failure to Perform
Article 27 Confidentiality
9. TERMINATION BY THE REGENTS
9.1 If Licensee should violate or fail to perform any term or covenant
of this Agreement, then The Regents may give written notice of such default
("Notice of Default") to Licensee. If Licensee should fail to repair such
default within sixty (60) days after the date such notice takes effect, The
Regents will have the right to terminate this Agreement and the licenses herein
by a second written notice ("Notice of Termination") to Licensee. If a Notice of
Termination is sent to Licensee, this Agreement will automatically terminate on
the date such notice takes effect. Such termination will not relieve Licensee of
its obligation to pay any royalty or
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<PAGE>
license fees owing at the time of such termination and will not impair any
accrued right of The Regents. These notices will be subject to Article 18
(Notices).
10. TERMINATION BY LICENSEE
10. Licensee will have the right at any time to terminate this
Agreement in whole or as to any portion of Patent Rights by giving notice in
writing to The Regents. Such Notice of Termination will be subject to Article 18
(Notices) and termination of this Agreement will be effective sixty (60) days
after the effective date thereof. Licensee's right to terminate any portion of
the Patent Rights under this Agreement in accordance with the foregoing notice
requirements shall include the right to abandon a specified project within a
Field without affecting Licensee's rights and obligations under this Agreement
with respect to other specified projects within that Field or another Field.
10.2 Any termination pursuant to the above Paragraph will not relieve
Licensee of any obligation or liability accrued hereunder prior to such
termination or rescind anything done by Licensee or any payments made to The
Regents hereunder prior to the time such termination becomes effective, and such
termination will not affect in any manner any rights of The Regents arising
under this Agreement prior to such termination.
11. Disposition of Patent Products on Hand Upon Termination
11.1 Upon termination of this Agreement, Licensee will have the
privilege of disposing of all previously made or partially made Patent Products,
but no more, within a period of one hundred twenty (120) days, provided,
however, that the sale of such Patent Products will be subject to the terms of
this Agreement including, but not limited to, the payment of royalties
20
<PAGE>
based on the Net Sales of Patent Products at the rates and at the times
provided herein and the rendering of reports in connection therewith.
12. USE OF NAMES AND TRADEMARKS
12.1 Nothing contained in this Agreement will be construed as
conferring any right to use in advertising, publicity, or other promotional
activities any name, trade name, trademark, or other designation of either
party hereto by the other (including contraction, abbreviation or simulation
of any of the foregoing). Unless required by law, the use by Licensee of the
name "The Regents of the University of California" or the name of any campus
of the University of California for use in advertising, publicity, or other
promotional activities is expressly prohibited.
12.2 It is understood that The Regents will be free to release to the
inventors and senior administrative officials employed by The Regents the
terms of this Agreement upon their request. If such release is made, The
Regents will request that such terms will be kept in confidence in accordance
with the provisions of Article 27 (Confidentiality) and not be disclosed to
others. It is further understood that should a third party inquire whether a
license to Patent Rights is available, The Regents may disclose the existence
of this Agreement and the extent of the grant in Article 2 (Grant) to such
third party, but will not disclose the name of Licensee, except where The
Regents is required to release such information under either the California
Public Records Act or other applicable law.
13. LIMITED WARRANTY
13.1 The Regents warrants to Licensee that it owns the Patent Rights
that are the subject of this license and that it has the lawful right to grant
this license.
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<PAGE>
13.2 The Regents agrees that it will inform Licensee in writing if The
Regents, as represented by the actual knowledge of the Licensing Associate
responsible for administration of this Agreement, receives notice or
otherwise becomes aware of any claims, actions, suits or other proceedings
directly involving the Patent Rights in the Fields that are the subject of
this Agreement or The Regents' lawful right to grant the licenses contained
in this Agreement.
13.3 This license and the associated Invention, Patent Rights, Patent
Method, and Patent Products are provided WITHOUT WARRANTY OF MERCHANTABILITY
OR FITNESS FOR A PARTICULAR PURPOSE OR ANY OTHER WARRANTY, EXPRESS OR
IMPLIED. THE REGENTS MAKES NO REPRESENTATION OR WARRANTY THAT THE INVENTION,
PATENT PRODUCTS, OR PATENT METHOD WILL NOT INFRINGE ANY PATENT OR OTHER
PROPRIETARY RIGHT.
13.4 IN NO EVENT WILL THE REGENTS BE LIABLE FOR ANY INCIDENTAL,
SPECIAL, OR CONSEQUENTIAL DAMAGES RESULTING FROM EXERCISE OF THIS LICENSE OR
THE USE OF THE INVENTION, PATENT RIGHTS, PATENT METHOD, OR PATENT PRODUCTS.
13.5 Nothing in this Agreement will be construed as:
13.5a a warranty or representation by The Regents as to the
validity, enforceability, or scope of any Patent Rights; or
13.5b a warranty or representation that anything made, used, sold,
or otherwise disposed of under any license granted in this
Agreement is or will be free from infringement of patents of
third parties; or
13.5c an obligation to bring or prosecute actions or suits against
third parties for patent infringement except as provided in
Article 16 (Patent Infringement); or
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<PAGE>
13.5d conferring by implication, estoppel, or otherwise any
license or rights under any patents of The Regents other
than Patent Rights as defined herein, regardless of whether
such patents are dominant or subordinate to Patent Rights;
or
13.5e an obligation to furnish any know-how not provided in Patent
Rights or Patent Products.
14. PATENT PROSECUTION AND MAINTENANCE
14.1 The Regents will diligently prosecute and maintain the United
States and foreign patents comprising Patent Rights using counsel of its
choice. The Regents will promptly provide Licensee with copies of all
relevant documentation so that Licensee may be currently and promptly
informed and apprised of the continuing prosecution, and may comment upon
such documentation sufficiently in advance of any initial deadline for filing
a response, provided, however, that if Licensee has not commented upon such
documentation prior to the initial deadline for filing a response with the
relevant government patent office or The Regents must act to preserve Patent
Rights, The Regents will be free to respond appropriately without
consideration of comments by Licensee, if any. Both parties hereto will keep
this documentation in confidence in accordance with the provisions of Article
27 (Confidentiality) herein. Counsel for The Regents will take instructions
only from The Regents.
14.2 The Regents will use all reasonable efforts to amend any patent
application to include claims requested by Licensee and required to protect
the Patent Products contemplated to be sold or Patent Method to be practiced
under this Agreement.
14.3 The Regents and Licensee will cooperate in applying for an
extension of the term of any patent included within Patent Rights, if
appropriate, under the Drug Price Competition and Patent Term Restoration Act of
1984. Licensee will prepare all such documents, and The
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<PAGE>
Regents will execute such documents and will take such additional action as
Licensee may reasonably request in connection therewith.
14.4 The Regents will, at the request of Licensee, file, prosecute,
and maintain patent applications and patents covered by Patent Rights in
foreign countries if available. Within nine months of the filing of the
corresponding United States patent application, Licensee must request that
The Regents file any foreign counterpart patent applications of interest to
Licensee. This notice concerning foreign filing must be in writing and must
identify the countries desired. The absence of such a notice from Licensee to
The Regents within the nine (9) month period will be considered an election
by Licensee not to request The Regents to secure foreign patent rights on
behalf of Licensee. The Regents will have the right to file patent
applications at its own expense in any country Licensee has not included in
its list of desired countries, and such applications and resultant patents,
if any, will not be included in the licenses granted under this Agreement.
14.5 All past, present and future costs of preparing, filing,
prosecuting and maintaining all United States and foreign patent applications
and all costs and fees relating to the preparation and filing of patents
covered by Patent Rights in Paragraph 1.1 will be borne by Licensee. This
includes patent preparation and prosecution costs for the Patent Rights
incurred by The Regents prior to the execution of this Agreement. Any
outstanding costs incurred by The Regents and not already reimbursed by
Licensee will be due upon execution of this Agreement and will be paid at the
time that the license issue fee is paid. Licensee will reimburse The Regents
for all other costs and charges within thirty (30) days following receipt of
an itemized invoice from The Regents for same. The costs of all interferences
and oppositions will be considered prosecution expenses and also will be
borne by Licensee. Notwithstanding the foregoing, if The Regents grants a
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<PAGE>
license under the Patent Rights to a licensee other than the Licensee, all
patent costs associated with the patents and applications which are the
subject of such license agreement will be allocated by The Regents
appropriately between Licensee and such licensee.
14.6 The obligation of Licensee to underwrite and to pay patent
preparation, filing, prosecution, maintenance, and related costs will
continue for costs incurred until three months after receipt by either party
of a Notice of Termination. Licensee will reimburse The Regents for all
patent costs incurred during the term of the Agreement and for three (3)
months thereafter whether or not invoices for such costs are received during
the three (3) month period after receipt of a Notice of Termination. Licensee
may, with respect to any particular patent application or patent, terminate
its obligations to the patent application or patent in any or all designated
countries upon three (3) months' written notice to The Regents. The Regents
may continue prosecution and/or maintenance of such application(s) or
patent(s) at its sole discretion and expense, provided, however, that
Licensee will have no further right or licenses thereunder.
14.7 Licensee will notify The Regents of any change of its status as a
small entity (as defined by the United States Patent and Trademark Office) and
of the first sublicense granted to an entity that does not qualify as a small
entity as defined therein.
15. PATENT MARKING
15.1 Licensee will mark all Patent Products made, used, or sold under
the terms of this Agreement, or their containers, in accordance with the
applicable patent marking laws.
16. PATENT INFRINGEMENT
16.1 In the event that Licensee learns of the substantial infringement
of any patent licensed under this Agreement, Licensee will call the attention of
The Regents thereto in writing
25
<PAGE>
and will provide The Regents with reasonable evidence of such infringement.
Both parties to this Agreement acknowledge that during the period and in a
jurisdiction where Licensee has exclusive rights under this Agreement,
neither will notify a third party of the infringement of any of Patent Rights
without first obtaining consent of the other party, which consent will not be
unreasonably withheld. Both parties will use their best efforts in
cooperation with each other to terminate such infringement without litigation.
16.2 Licensee may request that The Regents take legal action against
the infringement of Patent Rights. Such request must be made in writing and
must include reasonable evidence of such infringement and damages to
Licensee. If the infringing activity has not been abated within ninety (90)
days following the effective date of such request, The Regents will have the
right to elect to:
16.2a commence suit on its own account; or
16.2b refuse to participate in such suit and The Regents will give
notice of its election in writing to Licensee by the end of the 100th day
after receiving notice of such request from Licensee. Licensee may thereafter
bring suit for patent infringement if and only if The Regents elects not to
commence suit and if the infringement occurred during the period and in a
jurisdiction where Licensee had exclusive rights under this Agreement.
However, in the event Licensee elects to bring suit in accordance with this
Paragraph, The Regents may thereafter join such suit at its own expense.
16.3 Such legal action as is decided upon will be at the expense of
the party on account of whom suit is brought and all recoveries recovered
thereby will belong to such party, provided, however, that legal action
brought jointly by The Regents and Licensee and participated in by
26
<PAGE>
both will be at the joint expense of the parties and all recoveries will be
allocated in the following order: a) to each party reimbursement in equal
amounts of the attorney's costs, fees, and other related expenses to the
extent each party paid for such costs, fees, and expenses until all such
costs, fees, and expenses are consumed for each party; and b) any remaining
amount shared jointly by them in proportion to the share of expenses paid by
each party.
16.4 Each party will cooperate with the other in litigation
proceedings instituted hereunder but at the expense of the party on account
of whom suit is brought. Such litigation will be controlled by the party
bringing the suit, except that The Regents may be represented by counsel of
its choice in any suit brought by Licensee.
17. INDEMNIFICATION
17.1 Licensee will (and require its sublicensees to) indemnify, hold
harmless, and defend The Regents, its officers, employees, and agents; the
sponsors of the research that led to the Invention; the inventors of any
invention covered by patents or patent applications in Patent Rights
(including the Patent Products and Patent Method contemplated thereunder) and
their employers against any and all claims, suits, losses, damage, costs,
fees, and expenses resulting from or arising out of exercise of this license
or any sublicense. This indemnification will include, but will not be limited
to, any product liability.
17.2 Licensee, at its sole cost and expense, will insure its
activities in connection with the work under this Agreement and obtain, keep
in force, and maintain insurance as follows (or an equivalent program of self
insurance):
17.3 Comprehensive or Commercial Form General Liability Insurance
(contractual liability included) with limits as follows:
27
<PAGE>
Each Occurrence ............................................... $5,000,000
Products/Completed Operations Aggregate ....................... $5,000,000
Personal and Advertising Injury ............................... $5,000,000
General Aggregate (commercial form only)....................... $5,000,000
It should be expressly understood, however, that the coverages and limits
referred to under the above will not in any way limit the liability of
Licensee. Licensee will furnish The Regents with certificates of insurance
evidencing compliance with all requirements. Such certificates will:
17.3a Provide for thirty (30) days' advance written notice to The Regents
of any modification;
17.3b Indicate that The Regents has been endorsed as an additional
Insured under the coverages referred to under the above; and
17.3c Include a provision that the coverages will be primary and will not
participate with nor will be excess over any valid and collectable
insurance or program of self-insurance carried or maintained by The
Regents.
17.4 The Regents will promptly notify Licensee in writing of any claim
or suit brought against The Regents in respect of which The Regents intends to
invoke the provisions of this Article 17 (Indemnification). Licensee will keep
The Regents informed on a current basis of its defense of any claims pursuant to
this Article 17 (Indemnification).
18. NOTICES
18.1 Any notice or payment required to be given to either party will be
deemed to have been properly given and to be effective (a) on the date of
delivery if delivered in person or (b) five (5) days after mailing if mailed by
first-class certified mail, postage paid, to the respective addresses given
below, or to another address as it may designate by written notice given to the
other party.
28
<PAGE>
In the case of Licensee: Ben-Abraham Technologies, Inc.
Suite 302, 372 Bay Street
Toronto, Canada, M5H 2W9
Telephone: (416) 364-9279
Facsimile: (416) 364-6725
Attention: Dr. Claus G. J. Wagner-Bartak
In the case of The Regents: THE REGENTS OF THE UNIVERSITY OF CALIFORNIA
Harbor Bay Parkway, Suite 150
Alameda, California 94502
Tel: (510) 748-6600
Fax: (510) 748-6639
Attention: Executive Director;
Research Administration and
Technology Transfer
Referring to: U.C. Case No. 89-204
19. ASSIGNABILITY
19.1 This Agreement is binding upon and will inure to the benefit of The
Regents, its successors and assigns, but will be personal to Licensee and
assignable by Licensee only with the written consent and at the sole discretion
of The Regents.
20. LATE PAYMENTS
20.1 In the event royalty payments, fees, or patent prosecution costs
are not received by The Regents when due, Licensee will pay to The Regents
interest charges at a rate of ten percent (10%) simple interest per annum.
Such interest will be calculated from the date payment was due until actually
received by The Regents. Acceptance by The Regents of any late payment
interest from Licensee under this Paragraph 20.1 will in no way affect the
provision of Article 21 (Waiver) herein.
29
<PAGE>
21. WAIVER
21.1 It is agreed that no waiver by either party hereto of any breach
or default of any of the covenants or agreements herein set forth will be
deemed a waiver as to any subsequent and/or similar breach or default.
22. FAILURE TO PERFORM
22.1 In the event of a failure of performance due under the terms of
this Agreement and if it becomes necessary for either party to undertake
legal action against the other on account thereof, then such legal action
will take place in San Francisco, California and the prevailing party will be
entitled to reasonable attorney's fees in addition to costs and necessary
disbursements.
23. GOVERNING LAWS
23.1 THIS AGREEMENT WILL BE INTERPRETED AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF CALIFORNIA, excluding any choice of law rules
that would direct the application of the laws of another jurisdiction, but
the scope and validity of any patent or patent application will be governed
by the applicable laws of the country of such patent or patent application.
24. GOVERNMENT APPROVAL OR REGISTRATION
24.1 If this Agreement or any associated transaction is required by
the law of any nation to be either approved or registered with any
governmental agency, Licensee will assume all legal obligations to do so.
Licensee will notify The Regents if it becomes aware that this Agreement is
subject to a United States or foreign government reporting or approval
require-
30
<PAGE>
ment. Licensee will make all necessary filings and pay all costs including
fees, penalties, and all other out-of-pocket costs associated with such
reporting or approval process.
25. EXPORT CONTROL LAWS
25.1 Licensee will observe all applicable United States and foreign
laws with respect to the transfer of Patent Products and related technical
data to foreign countries, including, without limitation, the International
Traffic in Arms Regulations (ITAR) and the Export Administration Regulations.
26. FORCE MAJEURE
26.1 The parties to this Agreement will be excused from any performance
required hereunder if such performance is rendered impossible or unfeasible due
to any acts of God, catastrophes, or other major events beyond their reasonable
control, including, without limitation, war, riot, and insurrection; laws,
proclamations, edicts, ordinances, or regulations; strikes, lock-outs, or other
serious labor disputes; and floods, fires, explosions, or other natural
disasters. However, any party to this Agreement will have the right to terminate
this Agreement upon thirty (30) days' prior written notice if either party is
unable to fulfill its obligations under this Agreement due to any of the causes
mentioned above and such inability continues for a period of one year. Notices
will be subject to Article 18 (Notices).
27. CONFIDENTIALITY
Licensee and The Regents respectively will treat and maintain the proprietary
business, patent prosecution, software, engineering drawings, process and
technical information, and other proprietary information ("Proprietary
Information") of the other party in confidence using at least the same degree of
care as that party uses to protect its own proprietary information of a like
31
<PAGE>
nature for a period from the date of disclosure until five years after the
date of termination of this Agreement. This confidentiality obligation will
apply to the information defined as "Data" under the Secrecy Agreement, and
such Data will be treated as Proprietary Information hereunder.
27.1 All Proprietary Information will be labeled or marked
confidential or as otherwise similarly appropriate by the disclosing party,
or if the Proprietary Information is orally disclosed, it will be reduced to
writing or some other physically tangible form, marked and labeled as set
forth above by the disclosing party, and delivered to the receiving party
within thirty (30) days after the oral disclosure as a record of the
disclosure and the confidential nature thereof. Notwithstanding the
foregoing, Licensee and The Regents may use and disclose Proprietary
Information to its employees, agents, consultants, contractors, and, in the
case of Licensee, its sublicensees, provided that any such parties are bound
by a like duty of confidentiality.
27.2 Nothing contained herein will in any way restrict or impair the
right of Licensee or The Regents to use, disclose, or otherwise deal with any
Proprietary Information:
27.3a that recipient can demonstrate by written records was previously
known to it;
27.3b that is now, or becomes in the future, public knowledge other than
through acts or omissions of recipient;
27.3c that is lawfully obtained without restrictions by recipient from
sources independent of the disclosing party;
27.3d that is required to be disclosed to a governmental entity or agency
in connection with seeking any governmental or regulatory approval,
or pursuant to the lawful requirement or request of a governmental
entity or agency;
27.3e that is furnished to a third party by the recipient with similar
confidentiality restrictions imposed on such third party, as
evidenced in writing; or
27.3f that The Regents is required to disclose pursuant to the California
Public Records Act or other applicable law.
32
<PAGE>
27.3 Upon termination of this Agreement, Licensee and The Regents will
destroy or return to the disclosing party proprietary information received from
the other in its possession within fifteen (15) days following the effective
date of termination. Licensee and The Regents will provide each other, within
thirty (30) days following termination, with a written notice that Proprietary
Information has been returned or destroyed. Each party may, however, retain one
copy of Proprietary Information for archival purposes in non-working files.
28. MISCELLANEOUS
28.1 The headings of the several sections are inserted for convenience
of reference only and are not intended to be a part of or to affect the meaning
or interpretation of this Agreement.
28.2 This Agreement will not be binding upon the parties until it has
been signed below on behalf of each party, in which event, it will be effective
as of the date recited on page one.
28.3 No amendment or modification hereof will be valid or binding upon
the parties unless made in writing and signed on behalf of each party.
28.4 This Agreement embodies the entire understanding of the parties and
will supersede all previous communications, representations or understandings,
either oral or written, between the parties relating to the subject matter
hereof.
28.5 In case any of the provisions contained in this Agreement are held
to be invalid, illegal, or unenforceable in any respect, such invalidity,
illegality, or unenforceability will not affect any other provisions hereof, but
this Agreement will be construed as if such invalid or illegal or unenforceable
provisions had never been contained herein.
33
<PAGE>
The Regents and Licensee execute this Agreement in duplicate originals by
their respective, authorized officers on the date indicated.
Ben-Abraham Technologies, Inc. The Regents of the University of
California
By /s/ Dr. Avi Ben-Abraham By /s/ Terence A. Feuerborn
----------------------- ------------------------
(Signature) (Signature)
Name: Dr. Avi Ben-Abraham Name: Terence A. Feuerborn
-------------------
(Please Print)
Title: Chairman & CEO Title: Executive Director
-------------- Research Administration and
Technology Transfer
Date May 30th 1977 Date --------------------
- ----------------------------------
34
<PAGE>
[PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED PURSUANT TO A
REQUEST FOR CONFIDENTIALITY UNDER RULE 24b-2 OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. A COPY OF THIS
AGREEMENT WITH THIS EXHIBIT INTACT HAS BEEN FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION.]
FIRST AMENDMENT TO
EXCLUSIVE LICENSE AGREEMENT
FOR
SELECTED APPLICATIONS OF COATED NANOCRYSTALLINE PARTICLES
BETWEEN
THE REGENTS OF THE UNIVERSITY OF CALIFORNIA
AND
BEN-ABRAHAM TECHNOLOGIES INC.
UC CASE NO. 89-204
<PAGE>
FIRST AMENDMENT TO THE EXCLUSIVE LICENSE AGREEMENT
FOR SELECTED APPLICATIONS OF COATED NANOCRYSTALLINE PARTICLES
This amendment ("Amendment") is effective this 26th day of October,
1999, by and between The Regents of the University of California ("The
Regents"), a California corporation, having its statewide administrative
offices at 1111 Franklin Street, 12th Floor, Oakland, California 94607-5200,
and Ben-Abraham Technologies Inc. ("Licensee"), a Wyoming corporation, having
a principal place of business at 175 Olde Half Day Road, Suite 123,
Lincolnshire, Illinois 60069.
RECITALS
Whereas, Licensee and The Regents entered into a license agreement
entitled "Exclusive License Agreement for Selected Applications of Coated
Nanocrystalline Particles," effective on June 18, 1997, having U.C. Agreement
Control Number 1997-04-0671 ("License Agreement"), covering licensure to
Licensee by The Regents of rights in certain inventions developed by Dr. Nir
Kossovsky et al. at the University of California, Los Angeles and covered by
Patent Rights (as defined in the License Agreement);
Whereas, although Licensee and The Regents both agree that the other
party has substantially complied with the terms of the License Agreement,
changed circumstances have necessitated that certain other provisions of the
License Agreement be modified and amended;
Whereas, Licensee has requested that The Regents amend certain
provisions in the License Agreement to a more financial and time feasible
schedule; and
Whereas, The Regents is willing to amend the License Agreement to
reflect such request.
Now, Therefore, in consideration of the foregoing and the mutual
promises and covenants contained herein, the parties hereto agree as follows:
<PAGE>
1. Paragraph 1.6 (Definitions) of the License Agreement is deleted in its
entirety and replaced with the following:
"1.6 Drug Delivery System" means coated nanocrystalline
particles used in pharmaceutical preparations to facilitate
the therapeutic delivery of insulin in humans."
2. Paragraph 1.7 (Definition) of the License Agreement is deleted in its
entirety and replaced with the following:
"1.7 [reserved]."
3. Paragraph 1.8 (Definitions) of the License Agreement is deleted in its
entirety and replaced with the following:
"1.8 "Field" means Vaccine Adjuvant, Virus Vaccine
Construct, and Drug Delivery System."
4. Paragraph 1.13 (Definitions) is added to the License Agreement
as follows:
"1.13 "Project" means the Vaccine Adjuvant project specified
in Subparagraph 5.9a, Epstein Barr Vaccine project specified in
Subparagraph 5.9b, Herpes 2 Vaccine project specified in Subparagraph
5.9c, HIV Vaccine project specified in Subparagraph 5.9d, and Insulin
project specified in Subparagraph 5.9e."
5. Paragraph 4.5 (Royalties) of the License Agreement is deleted in its
entirety and replaced with the following:
"4.5 Beginning in the year 2004, Licensee will pay to The
Regents a minimum annual royalty in the amounts and at the times set
forth below:
<TABLE>
<S> <C>
2004 $ 50,000
2005 $ 100,000
2006 $ 150,000
2007 $ 200,000
2008 $ 400,000
2009 $ 600,000
2010 $ 800,000
2011 $ 1,500,000
</TABLE>
2
<PAGE>
In each succeeding calendar year after the year 2011, Licensee will pay
a minimum annual royalty of One Million Five Hundred Thousand Dollars
($1,500,000) and thereafter for the life of this Agreement. This
minimum annual royalty will be paid to The Regents by February 28 of
the year following accrual of the royalties and will be credited
against the earned royalty due and owing for the calendar year in which
the minimum payment was made."
5. Paragraph 5.7 (Due Diligence) of the License Agreement is deleted in
its entirety and replaced with the following:
"5.7 Licensee must hire the following key employees or
independent contractors by the designated dates:
<TABLE>
<CAPTION>
- ------------------------------------------------------------ ------------------ --------------------------------------
Position Description # Req. Hiring Target Date
- ------------------------------------------------------------ ------------------ --------------------------------------
<S> <C> <C>
Director, Research & Development 1 December 1, 1996
Senior Vaccine Development Specialist 1 June 30, 1997
Senior Pharmaceutical Development Specialist 1 June 30, 1997
Process Development Scientist 1 April 30, 1997
Quality Control/Assurance Manager 1 December 31, 1997
Information Management Systems Specialist 1 December 31, 1997
Regulatory Specialist 1 December 31, 1998
</TABLE>
6. Paragraph 5.8 (Due Diligence) of the License Agreement is deleted in
its entirety and replaced with the following:
"5.8 In the hiring of key employees or independent contractors
designated in Paragraph 5.7 above, Licensee will use the criteria set forth
and hire qualified candidates.
3
<PAGE>
7. Sub-paragraph 5.9a (Due Diligence) of the License Agreement is deleted
in its entirety and replaced with the following:
5.9a Vaccine Adjuvant Project
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------- --------------------------
Milestones # Target Date
- ------------------------------------------------------------------------------------------- --------------------------
<S> <C>
- ------------------------------------------------------------------------------------------- --------------------------
- ------------------------------------------------------------------------------------------- --------------------------
</TABLE>
[Portions of this Exhibit have been omitted pursuant to a request for
confidentiality under Rule 24b-2 of the Securities Exchange Act of
1934, as amended. A copy of this agreement with this Exhibit intact
has been filed separately with the Securities and Exchange Commission.]
8. Sub-paragraph 5.9b (Due Diligence) of the License Agreement is deleted
in its entirety and replaced with the following:
5.9b Epstein Barr Vaccine Project
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------- --------------------------
Milestones # Target Date
- ------------------------------------------------------------------------------------------- --------------------------
<S> <C>
- ------------------------------------------------------------------------------------------- --------------------------
- ------------------------------------------------------------------------------------------- --------------------------
</TABLE>
[Portions of this Exhibit have been omitted pursuant to a request for
confidentiality under Rule 24b-2 of the Securities Exchange Act of
1934, as amended. A copy of this agreement with this Exhibit intact
has been filed separately with the Securities and Exchange Commission.]
9. Sub-paragraph 5.9c (Due Diligence) of the License Agreement is deleted
in its entirety and replaced with the following:
5.9c Herpes 2 Vaccine Project
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------- --------------------------
Milestones # Target Date
- ------------------------------------------------------------------------------------------- --------------------------
<S> <C>
- ------------------------------------------------------------------------------------------- --------------------------
- ------------------------------------------------------------------------------------------- --------------------------
</TABLE>
[Portions of this Exhibit have been omitted pursuant to a request for
confidentiality under Rule 24b-2 of the Securities Exchange Act of
1934, as amended. A copy of this agreement with this Exhibit intact
has been filed separately with the Securities and Exchange Commission.]
4
<PAGE>
10. Sub-paragraph 5.9d (Due Diligence) of the License Agreement is deleted
in its entirety and replaced with the following:
5.9d HIV Vaccine Project
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------- --------------------------
Milestones # Target Date
- ------------------------------------------------------------------------------------------- --------------------------
<S> <C>
- ------------------------------------------------------------------------------------------- --------------------------
- ------------------------------------------------------------------------------------------- --------------------------
</TABLE>
[Portions of this Exhibit have been omitted pursuant to a request for
confidentiality under Rule 24b-2 of the Securities Exchange Act of
1934, as amended. A copy of this agreement with this Exhibit intact
has been filed separately with the Securities and Exchange Commission.]
11. Sub-paragraph 5.9e (Due Diligence) of the License Agreement is deleted
in its entirety and replaced with the following:
5.9e Insulin Project
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------- --------------------------
Milestones # Target Date
- ------------------------------------------------------------------------------------------- --------------------------
<S> <C>
- ------------------------------------------------------------------------------------------- --------------------------
- ------------------------------------------------------------------------------------------- --------------------------
</TABLE>
[Portions of this Exhibit have been omitted pursuant to a request for
confidentiality under Rule 24b-2 of the Securities Exchange Act of
1934, as amended. A copy of this agreement with this Exhibit intact
has been filed separately with the Securities and Exchange Commission.]
12. Sub-paragraphs 5.9f, 5.9g and 5.9h (Due Diligence) are deleted in their
entirety from the License Agreement.
13. Paragraph 5.11 (Due Diligence) of the License Agreement is deleted in
its entirety and replaced with the following:
"5.11 The Regents shall have the right and option to either (1)
terminate this Agreement when Licensee fails to meet due diligence provisions
for any three of the five projects specified under Projects, as defined in
Paragraph 1.13 above; or (2) reduce the exclusive license granted to
non-exclusive licenses for each project specified under Projects, as defined
in Paragraph 1.13 above, when Licensee fails to meet due diligence provisions
for that particular project, subject to the notice and opportunity to repair
provisions of Paragraph 9.1."
14. Paragraph 9.1 (Termination by the Regents) of the License Agreement is
deleted in its entirety and replaced with the following:
5
<PAGE>
"9.1 Subject to Paragraph 5.11, if Licensee should violate or fail
to perform any term or covenant of this Agreement, then The Regents may give
written notice of such default ("Notice of Default") to Licensee. If Licensee
should fail to repair such default within sixty (60) days after the date such
notice takes effect, The Regents will have the right to terminate this
Agreement and the licenses herein by a second written notice ("Notice of
Termination") to Licensee. If a Notice of Termination is sent to Licensee,
this Agreement will automatically terminate on the date such notice takes
effect. Such termination will not relieve Licensee of its obligation to pay
any royalty or license fees owing at the time of such termination and will
not impair any accrued right of The Regents. These notices will be subject to
Article 18 (Notices)."
15. Paragraph 18.1 (Notices) of the License Agreement is deleted in its
entirety and replaced with the following:
"18.1 Any notice or payment required to be given to either party
will be deemed to have been properly given and to be effective:
18.1a on the date of delivery if delivered in person;
18.1b on the date of mailing if mailed by first-class
certified mail, postage paid; or
18.1c on the date of mailing if mailed by any global express
carrier service that requires the recipient to sign the
documents demonstrating the delivery of such notice of
payment;
to the respective addresses given below, or to another address as designated
in writing by the party changing its prior address.
In the case of Licensee: Ben-Abraham Technologies, Inc.
175 Olde Half Day Road, Suite 123
Lincolnshire, Illinois 60069
Telephone: (847) 793-2434
Facsimile: (847) 793-2435
Attention: Stephen M. Simes
President & CEO
In the case of The Regents: The Regents of the University of California
Office of the President
Office of Technology Transfer
1111 Franklin Street, 5th Floor
Oakland, California 94607-5200
Telephone: (510) 587-6000
Facsimile: (510) 587-6090
Attention: Executive Director
Office of Technology Transfer
Referring to: U.C. Case No. 89-204
6
<PAGE>
In Witness Whereof, both The Regents and the Licensee have executed
this Amendment, in duplicate originals, by their respective officers hereunto
duly authorized, on the day and year hereinafter written.
BEN-ABRAHAM THE REGENTS OF THE
TECHNOLOGIES INC. UNIVERSITY OF CALIFORNIA
By /s/ Stephen M. Simes By /s/ Terence A. Feuerborn
------------------------------------ --------------------------------
(Signature) (Signature)
Name Stephen M. Simes Name Terence A. Feuerborn
----------------------------------
Title President & CEO Title Executive Director,
---------------------------------- Research Administration
and Technology Transfer
Date 10/22/99 Date 10/26/99
---------------------------------- ------------------------------
Approved as to legal form: /s/ Edwin H. Baker 10/22/99
---------------------------------
Edwin H. Baker Date
University Counsel
Office of General Counsel
7
<PAGE>
CONFIDENTIAL
June 11, 1998
Mr. Phillip B. Donenberg
2090 Sheridan
Buffalo Grove, IL 60089
Dear Phil:
I am pleased to confirm our agreement with you concerning your
employment by Ben-Abraham Technologies, Inc. (the "Company"), which is subject
to review, approval, and ratification by the Company's Board of Directors.
I. EMPLOYMENT. Subject to the terms and conditions described in this
Employment Agreement (the "Agreement"), the Company agrees to employ
you as the Chief Financial Officer. As evidenced by your signature
below, you accept this employment on the following terms and
conditions.
II. DUTIES.
1. You agree to perform, on a full-time basis, exercising best
efforts, duties commensurate with your position as Chief
Financial Officer, including, but not limited to, preparing
monthly financial statements, complying with public reporting
requirements, timely completion of audits, tax returns,
maintenance of Company budgets, Company benefit plans, and
other duties as shall be assigned to you from time-to-time by
the President of the Company or the Chairman of the Board of
Directors. You shall report directly to the President and CEO
of the Company.
2. While you are employed by the Company, except as otherwise
permitted by the Company's Conflict of Interest policy or this
Agreement, you will not engage in any business activity or
outside employment that conflicts with the Company's interests
or adversely affect the performance of your duties for the
Company.
3. You shall be based at, and shall perform your duties at, an
office located in Chicago, Illinois, or the surrounding
suburban area. However, you shall also travel to other
locations at such times as may be appropriate for the
performance of your duties under this Agreement.
III. EFFECTIVE DATE. This Agreement is effective July 1, 1998 (the
"Effective Date"), and may be terminated by either party pursuant to
Section V of this Agreement.
<PAGE>
Mr. Phillip B. Donenberg
June 11, 1998
Page 2
CONFIDENTIAL
IV. COMPENSATION.
A. BASE SALARY. Commencing on the Effective Date, the Company
agrees to pay you an annual base salary of One Hundred
Thousand Dollars ($100,000) in accordance with the Company's
standard payroll practices ("Base Salary"). Beginning January
1, 1999 your Base Salary shall be increased to One Hundred and
Ten Thousand Dollars ($110,000). In subsequent years, the
Board of Directors shall have the sole discretion to establish
your Base Salary, except that, at a minimum, it shall be
adjusted upward consistent with changes to the Consumer Price
Index.
B. BONUSES. If you are still employed by the Company on January
4, 1999, you shall receive a minimum bonus of Six Thousand Two
Hundred and Fifty Dollars ($6,250). Beginning January 1, 2000
and in subsequent years, you will be eligible to receive an
annual performance bonus based upon the prior year's work, not
to exceed 30% of your Base Salary in effect during the year
under review. The amount of said bonus shall be determined in
the sole discretion of the Compensation Committee and approved
by the Board of Directors.
C. OPTIONS.
1. Upon execution of this Agreement, the Company will
grant you three hundred forty thousand (340,000)
stock options to purchase Subordinate Voting Shares
of stock of the Company at the lowest permissible
price when this agreement is executed, thirty-four
thousand (34,000) of which shall vest at the time of
the grant. The remainder shall vest in twelve equal
quarterly installments with the first installment
vesting on October 1, 1998. Any unvested options
remaining on the effective date of the termination of
this Agreement shall not vest.
2. In the event of any reorganization, merger,
consolidation, recapitalization, liquidation,
reclassification, stock dividend, reverse stock
split, combination of shares, rights offering,
extraordinary dividend or divestiture (including a
spin-off) or any other change in the corporate
structure or shares of the Company, (or, if the
Company is not the surviving corporation in any such
transaction, the board of directors of the surviving
corporation), in order to prevent dilution or
enlargement of your rights, the Company (or the
board of the surviving corporation) shall make
appropriate adjustment as to the number of
securities subject to this Option.
All of the options granted pursuant to this Section IV.C.2
(the "Anti-Dilution Options") shall automatically vest in
accordance with the same vesting schedule set forth in Section
IV.C.1 above. (As an illustration, if 68,000 of the 340,000
<PAGE>
Mr. Phillip B. Donenberg
June 11, 1998
Page 3
CONFIDENTIAL
options granted pursuant to Section IV.C.1 above were vested
at the time of the grant of the Anti-Dilution Options pursuant
to this Section IV.C.2, then 20% of the Anti-Dilution Options
would automatically vest immediately at the time of the grant,
and the remaining 80% would vest simultaneously with the
vesting of the remaining options granted pursuant to Section
IV.C.1).
D. BENEFITS. In addition to the other compensation to be paid
under this Section IV, you will be entitled to participate in
all benefit plans available to all full-time, eligible
employees either in existence or hereafter established by the
Company, in accordance with the terms and conditions of such
plans. These plans include, bit are not limited to, the
following: a 401(k) plan; group hospitalization; health;
dental; disability; and term life insurance.
E. REIMBURSEMENT OF BUSINESS EXPENSES. In addition to payment of
compensation under this Section IV, the Company agrees to
reimburse you for all reasonable out-of-pocket business
expenses incurred by you on behalf of the Company, provided
that you properly account to the Company for all such expenses
in accordance with the rules and regulations of the Internal
Revenue Service promulgated under the Internal Revenue Code of
1986, as amended, and in accordance with the standard policies
of the Company relating to reimbursement of business expenses.
F. AUTOMOBILE ALLOWANCE. The Company shall provide you with a
monthly stipend of Six Hundred Dollars ($600.00) for your
automobile use.
G. VACATION. You are entitled to three (3) weeks of paid vacation
per calendar year. You shall be entitled to carry forward one
(1) week of accrued but unused vacation from one year to the
next. A request that any additional accrued but unused
vacation be carried forward is subject to approval, which
shall be in the sole discretion of the President of the
Company.
V. TERMINATION.
A. EARLY TERMINATION. Subject to the respective continuing
obligations of the parties pursuant to Sections VI, VII and
VIII, this Section sets forth the terms for early termination
of this Agreement.
B. TERMINATION FOR CAUSE. The Company may terminate this
Agreement and your employment immediately for cause. For this
purpose, "cause" means any of the following: (1) fraud, (2)
theft or embezzlement of the Company's assets, (3) a violation
of law involving moral turpitude, (4) your repeated and
willful failure to follow instructions of the Board provided
that the conduct has not ceased or the offense cured within
thirty (30) days following written warning from the Company
that sets forth in reasonable detail the facts claimed to
provide the basis
<PAGE>
Mr. Phillip B. Donenberg
June 11, 1998
Page 4
CONFIDENTIAL
for such termination. In the event of termination for cause
pursuant to this Section V.B, you will be paid at the usual
rate your annual Base Salary, car allowance, and any
out-of-pocket expenses, through the date of termination
specified in any notice of termination and any amounts to
which you are entitled under any Company benefit plan in
accordance with the terms of such plan.
C. TERMINATION WITHOUT CAUSE. Either you or the Company may
terminate this Agreement and your employment without cause on
thirty (30) days written notice. In the event of termination
of this Agreement and of employment pursuant to this Section
V.C, compensation will be paid as follows:
1. if the termination is by you without cause, you will
be paid at the usual rate of your annual Base Salary,
car allowance, and any out-of-pocket expenses
incurred on behalf of the Company and accounted for
pursuant to Section IV.E through the date of
termination specified in such notice (but not to
exceed thirty (30) days from the date of such
notice); or
2. Notwithstanding any provision to the contrary
contained herein, in the event your employment is
terminated by the Company at any time for any reason
other than justifiable cause, disability or death,
the Company shall:
(i) pay you a severance benefit, in twelve
equal monthly installments consistent with the
Company's payroll, an amount equal to your annual
base rate of compensation at the time of termination;
(ii) continue to provide you, at the
Company's expense, with term life insurance, as
provided herein until the earlier of (A) the
expiration of the "Severance Period" which shall mean
the shorter of these two periods: one year from the
date of termination, or (B) your obtaining full-time
employment;
(iii) continue to allow you and your family
to participate, at the Company's expense, in the
Company's group hospitalization, health, dental and
disability insurance programs until the earlier of
(A) the expiration of the Severance Period, or (B)
your becoming eligible to participate in another
employer's corresponding group insurance and
disability plans;
(iv) reimburse out-of-pocket expenses
incurred by you on behalf of the Company and
accounted pursuant to Section IV.E; and
(v) reimburse you for any and all unused
vacation days accrued to the date of such
termination.
<PAGE>
Mr. Phillip B. Donenberg
June 11, 1998
Page 5
CONFIDENTIAL
D. TERMINATION FOR GOOD REASON. You may terminate this Agreement
upon thirty (30) days written notice to the Company for good
reason. For this purpose, "good reason" means: (i) the
assignment to you of any duties inconsistent with your
positions, duties, responsibilities and status with the
Company as of the date hereof, or a change in your reporting
responsibilities, titles or offices, or any removal of you
from or any failure to re-elect you to any of such positions;
(ii) the failure of the Company to continue in effect any
fringe benefit or compensation plan, retirement plan, life
insurance plan, health or disability plan in which you were
participating (except as such change is prompted in good faith
by a change in the law), or the taking of any action by the
Company, which could reasonably be expected to adversely
affect your participation in or materially reduce your
benefits under any such plans or deprive you of any material
fringe benefit enjoyed by you, (iii) the reduction of your
salary or car allowance or failure to increase such salary as
is provided in Section IV.A above; or (iv) the occurrence of a
Change in Control as defined in Section IX. In any such case
the Company will pay you the amounts, and provide you the
benefits, all as set forth in Section V.C.2 above.
E. TERMINATION IN THE EVENT OF DEATH OR PERMANENT DISABILITY.
This agreement and your employment will terminate in the event
of your death or permanent disability.
1. In the event of your death, Base Salary will be
terminated as of the end of the month in which death
occurs.
2. For the purposes of this Agreement, the term
"disability" shall mean your inability, due to
illness, accident or any other physical or mental
incapacity, to substantially perform your duties for
a period of four (4) consecutive months or for a
total of six (6) months (whether or not consecutive)
in any twelve (12) month period during the term of
this Agreement.
F. Upon your "disability", the Company shall have the right to
terminate your employment. Notwithstanding any inability to
perform your duties, you shall be entitled to receive your
compensation (including bonuses, if any) as provided herein
until the later of (i) the date of your termination of
employment for disability in accordance with this Agreement,
or (ii) the date upon which you begin to receive disability
insurance benefits under the policy provided by the Company
pursuant to this Agreement. Any termination pursuant to
Section V.E.2 shall be effective on the date thirty (30) days
after which you shall have received written notice of the
Company's election to terminate.
<PAGE>
Mr. Phillip B. Donenberg
June 11, 1998
Page 6
CONFIDENTIAL
G. ENTIRE TERMINATION PAYMENT.
1. The compensation provided for in Sections V.B, V.C,
V.D, V.E, and V.F for early termination of this
Agreement will constitute your sole remedy for such
termination. You will not be entitled to any other
termination or severance payment which might
otherwise be payable to you under any other agreement
between you and the Company or under any policy of
the Company. This Section will not have any effect on
distributions to which you may be entitled at
termination from any qualified tax plan or any other
plan (other than a severance payment or similar
plan).
2. Notwithstanding any other provisions of this
Agreement or any other agreement, contract or
understanding heretofore or hereafter entered into
between you and the Company, if any "payments"
(including, without limitation, any benefits or
transfers of property or the acceleration of the
vesting of any benefits) in the nature of
compensation under any arrangement that is
considered contingent on a Change in Control for
purposes of Section 280G of the Internal Revenue
Code of 1986, as amended (the "Code"), together with
any other payments that you have the right to
receive from the Company or any corporation that is
a member of an "affiliated group" (as defined in
Section 1504(a) of the Code without regard to
Section 1504(b) of the Code) of which the Company is
a member, would constitute a "parachute payment" (as
defined in Section 280G of the Code), such payments
will be reduced to the largest amount as will result
in no portion of such payments being subject to the
excise tax imposed by Section 4999 of the Code;
provided, however, that you will be entitled to
designate those payments that will be reduced or
eliminated in order to comply with the foregoing
provision.
H. REQUIRED RESIGNATIONS UPON EARLY TERMINATION OR EXPIRATION.
You agree that upon any termination of your employment with
the Company, such termination under this Agreement will
automatically and without further action be deemed to
constitute your simultaneous resignation from all director,
officer, trustee, agent and any other positions within the
Company, all of its affiliates (including but not limited to
any entity that is a shareholder of the Company and any
subsidiaries and any parent of the Company), the Company's
employee benefit plans, trusts and foundations (charitable or
otherwise) or any other similar position associated with the
Company. Simultaneously upon such termination of employment or
expiration of this employment agreement, you agree to execute
and deliver to the Company any and all documents, agreements,
certificates, letters or other written instruments confirming
all such resignations.
<PAGE>
Mr. Phillip B. Donenberg
June 11, 1998
Page 7
CONFIDENTIAL
VI. INVENTIONS.
A. You agree that all Inventions (as defined below) you make,
conceive, reduce to practice or author (either alone or with
others) during or within one year after the term of this
Agreement will be the Company's sole and exclusive property.
You will, with respect to any such Invention: (i) keep
current, accurate, and complete records, which will belong to
the Company and be kept and stored on the Company's premises
while you are employed by the Company; (ii) promptly and fully
disclose the existence and describe the nature of the
Invention to the Company in writing (and without request);
(iii) assign (and you do hereby assign) to the Company all of
your rights to the Invention, any applications you make for
patents or copyrights in any country, and any patents or
copyrights granted to you in any country; and (iv) acknowledge
and deliver promptly to the Company any written instruments,
and perform any other acts necessary in the Company's opinion
to preserve property rights in the Invention against
forfeiture, abandonment, or loss and to obtain and maintain
patents and/or copyrights on the Invention and to vest the
entire right and title to the Invention in the Company.
B. "Inventions," as used in this Section, means any discoveries,
improvements, creations, ideas and inventions, including
without limitation software and artistic and literary works
(whether or not they are described in writing or reduced to
practice) or other works of authorship (whether or not they
can be patented or copyrighted) that: (i) relate directly to
the Company's business or the Company's research or
development during the term of this Agreement; (ii) result
from any work you perform for the Company; (iii) use the
Company's equipment, supplies, facilities or trade secret
information; or (iv) you develop during any time that Section
II above obligates you to perform your employment duties.
The requirements of this Section do not apply to an Invention
for which no equipment, supplies, facility or trade secret information
of the Company was used and which was developed entirely on your own
time, and which neither (1) relates directly to the Company's business
or to the Company's actual or demonstrably anticipated research or
development, nor (2) results from any work you performed for the
Company. Except as previously disclosed to the Company in writing, you
do not have, and will not assert, any claims to or rights under any
Inventions as having been made, conceived, authored or acquired by you
prior to your employment by the Company.
VII. PROPRIETARY INFORMATION.
A. Except as required in your duties to the Company, you will
never, either during or after your employment by the Company,
use or disclose Proprietary Information to any person not
authorized by the Company to receive it. When your employment
with the Company ends, you will promptly turn over to the
Company all records and any compositions, articles, devices,
apparatus and other items that
<PAGE>
Mr. Phillip B. Donenberg
June 11, 1998
Page 8
CONFIDENTIAL
disclose, describe or embody Proprietary Information,
including all copies, reproductions and specimens of the
Proprietary Information in your possession, regardless of who
prepared them.
B. "Proprietary Information," as used in this Section VII, means
any nonpublic information concerning the Company, including
information relating to the Company's research, product
development, engineering, purchasing, product costs,
accounting, leasing, servicing, manufacturing, sales,
marketing, administration and finances. This information
includes, without limitation: (i) trade secret information
about the Company and its products; (ii) "Inventions," as
defined in Section VI.B; (iii) information concerning any of
the Company's past, current or possible future products.
Proprietary Information or confidential information also
includes any information which is not generally disclosed and
which is useful or helpful to the Company and/or which would
be useful or helpful to competitors. More specific examples
include financial data, sales figures for individual projects
or groups of projects, planned new projects or planned
advertising programs, areas where the Company intends to
expand, lists of suppliers, lists of customers, wage and
salary data, capital investment plans, projected earnings,
changes in management or policies of the Company, testing
data, manufacturing methods, suppliers' prices to us, or any
plans we may have for improving any of our products. This
information is confidential or Proprietary Information
regardless of its form, e.g. oral, written, electronic or
other, and whether or not it is labeled as "proprietary" or
"confidential." The Company's Proprietary Information or
confidential information includes our information and that of
our affiliates and third parties concerning or relating to us.
VIII. COMPETITIVE ACTIVITIES.
A. You agree that during your employment with the Company, you
will not alone, or in any capacity with another person or
entity, (i) directly or indirectly engage in any employment or
activity that competes with the Company's business at the time
your employment with the Company ends, within any state in the
United States or within Canada, (ii) in any way interfere or
attempt to interfere with the Company's relationships with any
of its current or potential customers, or (iii) solicit for
employment any of the Company's then employees on your own
behalf or on behalf of any other entity competing with the
Company.
B. You also agree that for a period of one year after the
termination of this Agreement for any one of the following
reasons: (i) for "cause" as defined above, or (ii) voluntarily
by you without "good reason" as defined above, you will abide
by clauses (ii) and (iii) of Section VIII.A above.
<PAGE>
Mr. Phillip B. Donenberg
June 11, 1998
Page 9
CONFIDENTIAL
IX. CHANGE IN CONTROL.
A. For purposes of this Agreement, a "Change in Control" of the
Company will mean the following:
(i) the sale, lease, exchange or other transfer,
directly or indirectly, of substantially all of the assets of
the Company (in one transaction or in a series of related
transactions) to a person or entity that is not controlled by
the Company;
(ii) the approval by the shareholders of the Company
of any plan or proposal for the liquidation or dissolution of
the Company;
(iii) a change in control of the Company of a nature
that would be required to be reported in response to Item 5(f)
of Schedule 14A of Regulation 14A or to Item 1 of Form 8-K
promulgated under the Securities Exchange Act of 1934, as
amended (the "Act"), provided that, without limitation, a
Change in Control shall be deemed to have occurred if (i) any
"person" (as such term is used in Sections 13(d) and 14(d)(2)
of the Act) is or shall become the beneficial owner, directly
or indirectly, of securities of the Company representing 30%
or more of the Company's then outstanding securities; or (ii)
during any period of twenty-four (24) consecutive months,
individuals who at the beginning of such period constitute the
entire Board of Directors shall cease for any reason to
constitute a majority thereof unless the election, or the
nomination for election by the Company's stockholders, of each
new director was approved by a vote of at least two-thirds of
the directors then still in office who were directors at the
beginning of the period.
B. If a Change in Control occurs, the Option will become
immediately exercisable in full and will remain exercisable
for the remainder of its term, regardless of whether you
remain in the employ or service of the Company.
C. For purposes of this Section IX, you shall be entitled to the
severance benefits provided in Section V.D if the date of
termination occurs either (i) while there is to the Company's
knowledge actively pending a proposed transaction, which, if
consummated, could reasonably be expected to result within one
(1) year in a Change in Control, or (ii) within two (2) years
following a Change in Control; unless, in the case of either
(i) or (ii), your employment is terminated or this Agreement
is not renewed because of death or disability or by the
Company for "cause" or voluntarily by you other than for "good
reason".
X. MISCELLANEOUS.
A. NO ADEQUATE REMEDY. You understand that if you fail to fulfill
your obligations under this Agreement, the damages to the
Company would be very difficult to
<PAGE>
Mr. Phillip B. Donenberg
June 11, 1998
Page 10
CONFIDENTIAL
determine. Therefore, in addition to any other rights or
remedies available to the Company at law, in equity, or by
statute, you hereby consent to the specific enforcement of
this Agreement by the Company through an injunction or
restraining order issued by an appropriate court.
B. GOVERNING LAW. The laws of Illinois will govern the validity,
construction, and performance of this Agreement.
C. ARBITRATION. Any and all disputes which arise concerning the
rights, duties or obligations of either party under any
provision of this Agreement shall be resolved exclusively by
binding arbitration in accordance with the following terms and
conditions. The party seeking arbitration shall commence a
proceeding in arbitration in Chicago, Illinois under the Rules
of the American Arbitration Association. Within one month from
one of the party's request for arbitration, the party
requesting arbitration shall appoint one arbitrator and within
one month of the date of such appointment, the other party
shall appoint an arbitrator. Within three weeks of the date
that the second arbitrator is appointed, and prior to any
examination of the merits of the case, the two arbitrators
shall mutually select a third arbitrator. If either of the
parties fails to appoint an arbitrator or if the two
arbitrators fail to appoint the third arbitrator within the
periods referred to above, one shall be appointed in
accordance with the Rules within fifteen (15) days of the
expiry date of the respective period referred to above. The
three arbitrators so selected shall constitute the arbitral
panel. The arbitral panel shall make its decisions by the
majority of its members. The arbitral panel shall render its
decision and award in writing within ninety (90) days from its
final constitution. There shall be no appeal from the decision
and award of the arbitral panel, which shall be final and
binding on the parties and may be entered in any court having
jurisdiction thereof.
D. RIGHTS IN THE EVENT OF DISPUTE. If, with respect to any
alleged failure by the Company to comply with any of the terms
of this Agreement, you hire legal counsel with respect to this
Agreement or institute any negotiations or institute or
respond to legal action to assert or defend the validity of,
enforce your rights under, or recover damages for breach of
this Agreement, the Company shall pay, as they are incurred,
your actual expenses for attorneys' fees and disbursements,
together with such additional payments, if any, as may be
necessary so that the net-after-tax payments to you equal such
fees and disbursements, provided that such payments shall be
reimbursed by you to the Company if the Arbitration panel
rules in favor of the Company and further decides that such
reimbursement is appropriate. Further, pending the resolution
of any such claim or dispute, you shall not be deemed
terminated for purposes of this Agreement.
E. CONSTRUCTION. Wherever possible, each provision of this
agreement will be interpreted so that it is valid under the
applicable law. If any provision of this
<PAGE>
Mr. Phillip B. Donenberg
June 11, 1998
Page 11
CONFIDENTIAL
agreement is to any extent invalid under the applicable law,
that provision will still be effective to the extent it
remains valid under the applicable law. The remainder of this
agreement also will continue to be valid, and the entire
agreement will continue to be valid in other jurisdictions.
F. WAIVERS. No failure or delay by either the Company or you in
exercising any right or remedy under this agreement will waive
any provision of the agreement. Nor will any single or partial
exercise by either the Company or you of any right or remedy
under this agreement preclude either the Company or you from
otherwise or further exercising these rights or remedies, or
any other rights or remedies granted by any law or any related
document.
G. ENTIRE AGREEMENT. THIS AGREEMENT IS THE ENTIRE AGREEMENT
BETWEEN THE PARTIES AND REPLACES ALL OTHER ORAL NEGOTIATIONS,
COMMITMENTS, WRITINGS AND UNDERSTANDINGS BETWEEN THE PARTIES
CONCERNING THE MATTERS IN THIS AGREEMENT. THIS AGREEMENT CAN
ONLY BE MODIFIED BY MUTUAL WRITTEN CONSENT OF THE PARTIES. YOU
ACKNOWLEDGE THAT YOU HAVE BEEN ADVISED TO SEEK LEGAL COUNSEL
TO REVIEW THIS AGREEMENT WITH YOU BEFORE YOU SIGN IT.
H. SUCCESSORS AND ASSIGNS. Except as otherwise provided in
Section IX, this Agreement will be binding upon and inure to
the benefit of the successors and assigns of the Company
whether by way of merger, consolidation, operation of law,
purchase or other acquisition of substantially all of the
assets or business of the Company, and any such successor or
assign will absolutely and unconditionally assume all of the
Company's obligations under this Agreement.
I. NOTICES. All notices, requests and demands given to or made
pursuant hereto will, except as otherwise specified herein, be
in writing and be delivered or mailed to any such party at its
address which:
1. In the case of the Company will be:
Ben-Abraham Technologies
225 Peachtree Street, NE
Suite 1400, South Tower
Atlanta, GA 30303
Attention: Stephen M. Simes, CEO
and
<PAGE>
Mr. Phillip B. Donenberg
June 11, 1998
Page 12
CONFIDENTIAL
Raymond D. Cotton, Esq.
Oppenheimer Wolff Donnelly & Bayh LLP
1350 Eye Street, N.W., Suite 200
Washington, D.C. 20005
2. In the case of employee will be:
Phillip B. Donenberg
2090 Sheridan
Buffalo Grove, IL 60089
Any party may, by notice to the other party, designate a changed
address. Any notice, if mailed properly addressed, postage prepaid,
registered or certified mail, will be deemed dispatched on the
registered date or that date stamped on the certified mail receipt, and
will be deemed received within the second business day thereafter or
when it is actually received, whichever is sooner.
J. CAPTIONS. The various headings or captions in this agreement
are for convenience only and will not affect the meaning or
interpretation of this agreement.
<PAGE>
Mr. Phillip B. Donenberg
June 11, 1998
Page 13
CONFIDENTIAL
Would you please confirm that this agreement is in accordance with your
understanding and that you have received a copy of this letter by signing an
dating it where indicated below, and returning an executed copy for our records.
Very truly yours,
BEN-ABRAHAM TECHNOLOGIES, INC.
/s/ Stephen M. Simes
By: Stephen M. Simes*
Its: Chief Executive Officer
Agreed to and confirmed as of June __, 1998:
/s/ Phillip B. Donenberg
- -----------------------------------
Phillip B. Donenberg
* Subject to approval by the Company's Board of Directors which shall be
recommended by Mr. Simes.
<PAGE>
CONFIDENTIAL
April 15, 1999
Mr. Phillip B. Donenberg
2090 Sheridan
Buffalo Grove, IL 60089
Dear Phil:
As you are aware, Ben-Abraham Technologies, Inc. (the "Company") has
agreed to sell securities (the "Transaction") to certain investors on the date
hereof pursuant to a Private Placement Memorandum dated March 19, 1999 and
certain Securities Purchase Agreements (the "Securities Purchase Agreements")
with such purchasers (the "Purchasers"). The Securities Purchase Agreements
specify, as a condition to closing, that (i) the certain letter agreement dated
as of June 11, 1998 between you and the Company regarding your employment (the
"Employment Agreement") be amended; and (ii) you waive certain rights you may
have under such Employment Agreement. Terms not defined herein shall have the
meanings ascribed to such terms in the Employment Agreement.
1. Section IV.C.3 of the Employment Agreement is hereby amended in its
entirety to read as follows:
"In the event the Company issues a stock dividend, or
effectuates a stock split or exchange of any shares of the
Company, whether by way of reorganization, reclassification,
conversion or other means, the Company shall make appropriate
adjustment to the terms of the Option in order to prevent
dilution or enlargement of your rights."
Notwithstanding the foregoing, the Company has agreed to issue to you
concurrently with the closing of the Transaction additional options to purchase
that number of subordinate voting shares of the Company equal to the product of
(i) one and five tenths percent (1.5%) multiplied by (ii) the number of
subordinate voting shares sold in the Transaction (excluding any shares issuable
pursuant to warrants). You acknowledge that any future sales of securities by
the Company will not entitle you to additional options.
2. In the event the Transaction would be deemed a "Change of Control",
or cause a "Change of Control" to have occurred, as such term is defined in
Section IX.A of the Employment Agreement, you hereby agree to waive only with
respect to any deemed "Change of Control" arising out of or related to the
Transaction (which, for greater certainty, includes the change in constitution
of the Board of Directors), any rights you have under Section IX.B. including
without limitation the right for the Option to become immediately exercisable.
<PAGE>
3. Except as otherwise specifically set forth herein, the Employment
Agreement shall remain in full force and effect.
You hereby acknowledge that the Company and the Purchasers are entering into the
Securities Purchase Agreements in reliance upon on this letter. Please indicate
your agreement to the foregoing by signing the enclosed copy of this letter
where indicated and returning such executed copy to the Company.
Very truly yours,
Ben-Abraham Technologies, Inc.
By: /s/ Louis W. Sullivan
--------------------------------------------
Its: Chairman, Board of Directors and Chairman,
Compensation Committee
ACCEPTED AND AGREED:
/s/ Phillip B. Donenberg
- ---------------------------
Phillip B. Donenberg
Dated: 4/15/99
---------------------
