<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
/x/ Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1997
Commission File Number 0-9314
ACCESS PHARMACEUTICALS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 83-0221517
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(State of Incorporation) (I.R.S. Employer I.D. No.)
2600 Stemmons Freeway, Suite 176, Dallas, TX 75207
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code:(214) 905-5100
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Four Cents ($0.04) Par Value
------------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to
such filing requirement for the past 90 days. Yes /x/ No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K. / /
The aggregate market value of the outstanding voting stock held by
non-affiliates of the registrant as of March 27, 1998 was approximately
$5,957,000.
As of March 27, 1998 there were 37,442,343 shares of Access
Pharmaceuticals, Inc. Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of Registrant's Definitive
Proxy Statement filed with the Commission pursuant to Regulation 14A in
connection with the 1998 Annual Meeting are incorporated herein
by reference into Part III of this report. Other references incorporated
are listed in the exhibit list in Part IV of this report.
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PART I - FINANCIAL INFORMATION
ITEM 1. BUSINESS
Overview of Current Operations
Access Pharmaceuticals, Inc. (together with its
subsidiary, "Access" or the "Company") was founded in
1974 as Chemex Corporation, a Wyoming corporation, and
in 1983 changed its name to Chemex Pharmaceuticals,
Inc. ("Chemex"). Chemex changed its state of
incorporation from Wyoming to Delaware on June 30,
1989. In connection with the merger of Access
Pharmaceuticals, Inc., a Texas corporation ("API"),
with and into the Company on January 25, 1996, (the
"Merger"), the name of the Company was changed to
Access Pharmaceuticals, Inc.
On December 9, 1997, a wholly-owned subsidiary of the
Company merged with Tacora Corporation ("Tacora"), a
privately-held pharmaceutical company based in
Seattle, Washington, whereby Tacora became a wholly-
owned subsidiary of the Company. Under the terms of
the merger agreement, based upon the achievement of
certain milestones enumerated in the merger agreement,
the Company currently may be required to issue up to
approximately 2,750,000 shares of Common Stock to the
former stockholders of Tacora. Such shares of Common
Stock are payable at an escalating value over the
milestone period.
Access's principal executive office is at 2600
Stemmons Freeway, Suite 176, Dallas, Texas 75207; its
telephone number is (214) 905-5100.
Business Summary
Access is a drug delivery company using advanced
polymer technology for application in cancer
treatment, dermatology and imaging. In addition, the
Company has developed a drug to treat canker sores
that was sold to Block Drug Company ("Block") and is
currently being marketed in the United States by Block
subject to a royalty agreement with the Company. The
Company's lead compounds are as follows:
Polymer Platinate (AP 5070) - Platinum compounds are
one of the largest selling categories of
chemotherapeutic agents with annual sales in excess of
$800 million. As is the case with all
chemotherapeutic drugs, the use of Cisplatin is
associated with serious systemic side effects. The
drug delivery goal therefore is to enhance delivery of
the drug to the tumor and minimize the amount of drug
affecting normal organs in the body. The Company's
Polymer Platinate, (as to which the Company has
applied for patents) seeks to achieve this goal by
attaching a large polymer to a small Platinum
molecule, taking advantage of the fact that the cells
lining the walls of blood vessels that feed tumors are
usually leaky or hyperpermeable, allowing the large
Polymer Platinate molecule to enter the tumor in
preference to other tissue, which does not have leaky
or hyperpermeable blood vessels. On the other hand,
the capillary/lymphatic drainage system of tumors is
not well developed and limited, so the drug gets
trapped in the tumor. This effect is called enhanced
permeability and retention (EPR). In addition, the
polymer is designed to shield the Platinate to
minimize interactions with normal cells, thereby
reducing toxicity. The proposed mechanism of drug
uptake by tumor cells bypasses known membrane
associated mechanisms for development of tumor
resistance, which could provide a further significant
clinical advantage in treating drug resistant patients
and avoiding drug resistance.
In animal models, the Company's Polymer Platinate has
delivered up to 63 times the amount of Platinum to
tumors compared with Cisplatin alone at the maximum
tolerated dose, and the Company's Polymer Platinate
was approximately 2.5 times more effective in
inhibiting tumor growth than Cisplatin alone. In
terms of dosing, in animal studies, up to 15 times
more Platinum has been injected using the Company's
Polymer Platinate, which could be clinically
significant as Platinum has a steep dose response
curve. Consequently, clinical outcome could be
greatly improved as a result of the ability to deliver
additional drug to the tumor.
The Company plans to commence human clinical trials
for its Polymer Platinate in the next 12 months, if
the results of additional ongoing activities are
successful.
Zinc Clindamycin - The addition of zinc to a drug has
the effect of enhancing the penetration of the drug
into the skin, yet holding the drug in the skin,
making zinc effective for the delivery of
dermatological drugs. The Company has a broad patent
covering the use of zinc for such purposes.
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The first zinc drug being developed by Access, in
conjunction with its licensing partner, is Zinc
Clindamycin for the treatment of acne. Acne drugs
constitute an approximately $700 million dollar per
year market. Clindamycin is a widely prescribed drug
for the treatment of acne, and Access believes that
the addition of zinc could potentially significantly
increase the effectiveness of the drug through the
reservoir effect of zinc, the activity of zinc and
Clindamycin, the improved stability of the product and
the potential for zinc to overcome certain bacterial
resistance. Clinical trials for Zinc Clindamycin are
planned to commence in the second half of 1998.
The Company believes that its zinc technology could
provide a broad development platform for improved
delivery of many topically applied products. The next
product to be developed is expected to be zinc with
Bethamethazone, for applications in a variety of
inflammatory dermatological conditions. Additional
developments are planned using vitamin D, retanoids
and anti-fungals.
Access had entered into a license agreement with
Strakan Limited ("Strakan") relating to its zinc
technology. Strakan has agreed to fund the
development costs of Zinc Clindamycin and any
additional compounds developed utilizing the zinc
patent, and will share equally all milestones payments
received from the sublicensing of the compound. In
addition, Access will receive a royalty on sales of
products based on this technology.
MRI Imaging Agent - Magnetic resonance imaging (MRI)
is a non-radioactive method of producing imaging for
the diagnosis of a broad range of diseases and
conditions. To date, for the diagnosis of cancer, the
sensitivity of MRI has been insufficient to pick up
very small tumors. The Company is developing an
imaging agent that may greatly enhance the ability of
MRI to detect certain small tumors. Currently,
gadolinium, a rare earth metal, is used as an imaging
agent in MRI, but its use is restricted to imaging
brain tumors and the central nervous system. The
problem is that gadolinium alone defuses much too
rapidly throughout the body and is eliminated very
quickly. The Access imaging agent consists of
gadolinium bound to a chelate and attached to a
polymer that selectively binds to tumors. Animal
studies have indicated that the use of this imaging
agent can result in up to 40% brighter images and the
ability to detect tumors significantly smaller than
currently available techniques. In addition, in
animal studies, the imaging agent has increased the
time period during which images can be taken by factor
of up to four, which would be a major practical
advantage in diagnosing patients.
Access has a collaboration with The Dow Chemical
Company ("Dow Chemical") to develop an improved
compound utilizing Dow Chemical's chelation technology
to bind gadolinium and attach to the polymer. In
prior formulations of the imaging agent, the chelator
was considered insufficiently pure for purposes of
clinical development.
Amlexanox - This is currently the only compound
approved by the FDA for the treatment of canker sores.
Independent market research sponsored by the Company
indicates that more than 7 million patients visit
doctors or dentists per year in the United States with
complaints of canker sores. In 1995, Access sold
amlexanox to Block subject to a retained royalty.
Access is currently in negotiations with Block for the
international rights to the product (except for
Japan). On the closing of such an agreement Access
has agreed to grant Strakan rights to the product for
the United Kingdom and Ireland. Strakan has commenced
the European registration process for the product. It
is anticipated that the product will be registered
throughout Europe in 1999. An international
outlicensing program is ongoing.
Access has commenced work on developing an over-the-
counter version of amlexanox, which could have
significantly higher sales potential than the
prescription drug. In addition, Block has an
Investigational New Drug Application ("IND") to
commence clinical trials to expand the number of
indications for amlexanox. The Company expects that
such trials will initially focus on treatment of
mucositis in chemotherapy patients.
Access owns additional patented advanced technologies
designed to deliver drug in response to specific
diseases or take advantage of biological mechanisms.
This technology includes potential vaccine delivery
and recognition of disease sites, including cancer.
These technologies are designed to provide the
Company's next advanced drug delivery product
development candidates.
Company Profile
Access is a Site-Directed Targeting Company using
biresponsive drug carriers to target and control the
release of therapeutic agents into sites of disease
activity and clear the non-targeted fraction.
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Company Vision
Lead the industry in the Site-Directed Targeting and
Controlled Release of therapeutic agents that take
advantage of the body's biological mechanisms to
enhance the clinical effectiveness and reduce the
toxicity of a broad range of potent drugs.
Drug Development Strategy
Part of Access' integrated drug development strategy
is to form creative alliances with centers of
excellence so drug delivery opportunities can be fully
maximized. Access has signed agreements with The
School of Pharmacy, University of London for platinate
polymer technology, Dow Chemical in chelation
technology for imaging products and
radiopharmaceuticals, Strakan Ltd for the delivery of
topical therapeutic agents which exploit the Access
zinc patent and Duke University for advanced drug
delivery systems.
The Access strategy is to initially focus on utilizing
its technology in combination with approved drug
substances to develop novel patentable formulations of
potential therapeutic and diagnostic products. The
Company believes that this will expedite product
development, both preclinical and clinical, and
ultimately product approval. To reduce financial risk
and equity financing requirements, Access is directing
its resources to the preclinical and early clinical
phase of development and plans to outlicense to, or
co-develop with, marketing partners its current
product candidates during the clinical development
phases.
Access has initiated and will continue to expand its
internal core capabilities of chemistry, formulation,
analytical methods development, initial process scale
up, carbohydrate analysis, drug/diagnostic targeting
screens and project management capability to maximize
product opportunities in a timely manner. The
manufacturing scaleup, preclinical testing and product
production will be contracted to research
organizations, contract manufacturers and strategic
partners. Given the current cost containment and
managed care environment both in the United States and
overseas and the difficulty for a small company to
effectively market its products, Access does not
currently plan to become a fully integrated
pharmaceutical company.
Consequently, Access expects to form strategic
alliances for product development and to outlicense
the commercial rights to development partners. By
forming strategic alliances with major pharmaceutical
and diagnostic companies, it is believed that the
Access technology can be more rapidly developed and
successfully introduced into the marketplace.
Scientific Background
The ultimate criterion of effective drug delivery is
to control and optimize the localized release of drug
at the target site and rapidly clear the non-targeted
fraction. Conventional drug delivery systems such as
controlled release, sustained release, transdermal
systems, etc., are based on a physical erosion process
for enhancing active product into the systemic
circulation with the objective of improving patient
compliance. These systems do not address the
biologically relevant issues such as site targeting,
localized release and clearance of drug. The major
factors that impact the achievement of this ultimate
drug delivery goal are the physical characteristics of
the drug and the biological characteristics of the
disease target sites. The physical characteristics of
the drug affect solubility in biological systems, its
biodistribution throughout the body, and its
interactions with the intended pharmacological target
sites and undesired areas of toxicity. The biological
characteristics of the diseased area impact the
ability of the drug to selectively interact with the
intended target site to allow the drug to express the
desired pharmacological activity. The Access
technology platforms are differentiated from
conventional drug delivery systems in that they seek
to apply a disease specific approach to improve the
drug delivery process with polymer carrier
formulations to significantly enhance the
therapeutic efficacy and reduce toxicity of a broad
spectrum of products. This is achieved by utilizing
Bio~Responsive TM Polymers as novel drug delivery
solutions to match the specific physical properties of
each drug with the biological characteristics of each
disease and targeting sites of disease activity. The
Company believes that the ability to achieve
physiological triggering of drug release at the
desired site of action could enable the Access
Bio~Responsive TM Polymers to potentially have broad
therapeutic applications in the site specific delivery
of chemotherapeutic agents in cancer, infection,
inflammation, drugs for other autoimmune diseases,
proteins, peptides and gene therapy.
Bio~Responsive TM Polymers mimic the natural transport
mechanisms in the body which are involved in the
localized delivery of biological mediators and
cellular trafficking. Access uses a multi-faceted
approach through the use of both natural carbohydrates
and synthetic polymers. Access' central focus is to
use Bio~Responsive TM Polymers systems that
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can respond to normal biochemical or disease-induced signals to
localize drug carrier and release drug in a highly
selective fashion. These polymeric drug carriers can
be applied to a wide range of drug molecules including
proteins and nucleotides and can be engineered to
control pharmacokinetics and body distribution, site-
selectivity, site-release of drug and drug clearance
from non-target sites.
Access Core Technology Platforms
Access' current technology platforms take advantage of
the following biological mechanisms to improve drug
delivery:
* disease specific carbohydrate recognition by
vascular endothelial cells and underlying tissue
* enhanced permeability and retention in tumors
* triggered secretion of biological mediators
Access Carbohydrate Polymer Drug Delivery Technology
The Access carbohydrate polymer drug delivery
technology exploits specific changes in the vascular
endothelium that occur during disease processes. These
carriers mimic disease-specific, carbohydrate
recognition by vascular endothelium cells and
underlying tissue. It has been well established that
white blood cells can recognize, target and permeate
disease sites by means of surface carbohydrates which
bind to cytokine-induced endothelium plus underlying
tissue and cells. A number of receptors on the
endothelium and on underlying tissue are known to bind
sulfated glycosaminoglycans, such as heparin and
dermatan sulfate. Access has developed
glycosaminoglycan carriers to selectively image and
treat diseases involving the neovascular endothelium.
Access believes that its glycosaminoglycan technology
has broad potential in a number of therapeutic
applications including cancer, inflammation and
infection.
Access Synthetic Soluble Polymer Drug Delivery
Technology
In collaboration with The School of Pharmacy,
University of London, Access has developed a number of
synthetic polymers, including hydroxypropylmethacrylamide
co-polymers and polyamidoamines designed to be used to exploit EPR
("enhanced permeability and retention") in tumor cells
and control drug release. Many solid tumor cells
possess vasculature that is hyperpermeable (i.e.,
"leaky") to macromolecules. In addition to this
enhanced permeability, tumors usually lack effective
lymphatic and/or capillary drainage. Consequently they
selectively accumulate circulating macromolecules (up
to 10% of an intravenous dose per gram in mice). This
effect has been termed EPR, and is thought to
constitute the mechanism of action of SMANCS (styrene-
maleic/anhydride-neocarzinostatin), which is in
regular clinical use in Japan for the treatment of
hepatoma. These polymers take advantage of endothelial
permeability with the drug carrying polymers getting
trapped in tumors and then being taken up by tumor
cells. Linkages between the polymer and drug can be
designed to be cleaved extracellularly or
intracellularly. Drug is released inside the tumor
mass while polymer/drug not trapped in tumors is
renally cleared from the body. Data generated in
animal studies have shown that the polymer/drug
complexes are far less toxic than free drug alone and
that greater efficacy can be achieved. Thus, these
polymer complexes have demonstrated significant
improvement in the therapeutic index of anti-cancer
drugs, e.g. cisplatin.
Access Condensed Phase Smart Polymer Drug Delivery
Technology
The Access condensed phase polymer system is based on
the Smart Polymer Matrixes of Secretory Granules from
secretory cells such as the mast cell or goblet cell.
The matrix in the secretory granule of the mouse mast
cell contains a negatively charged, heparin
proteoglycan network which condenses in the presence
of divalent cations, such as calcium and histamine,
and monovalent cations, such as sodium. This matrix
has a number of unique electrical and mechanical
properties in response to biochemical or electrical
signals. The heparin gel expands several-fold when a
secretory granule fuses with a cell membrane, allowing
ions from outside the cell to rush in, causing release
of contents. Thus, nature has evolved a highly
advanced "smart polymer" gel to control the storage
and release of molecules destined for exocytosis.
These ubiquitous natural mechanisms can be mimicked by
engineering smart polymer matrices to deliver a wide
range of molecules, including proteins and genes, in
response to specific triggering stimuli. This natural
mechanism provides the basis of a novel technology for
releasing drugs on demand, with avoidance of systemic
toxicities. Access has commenced the development of a
system to mimic the secretory granule matrix to meet
the biological requirement of different drugs,
delivery routes and disease processes. In a unique
inventive step, bioengineered, pore-forming proteins,
with triggers and switches that self assemble in
membranes, can be incorporated
<PAGE> 6
into coated particles to control drug release. This represents a logical
step in the development of the next generation of
Access drug delivery technology platforms towards
commercialization of systems that can trigger the
release of drug, at site, in response to disease-
specific signals. Initial proof of concept will focus
on the triggered release of chemotherapeutic cancer
and anti-inflammatory agents and vaccines.
Access Topical Delivery Technology
Access has granted a license to Strakan, for the
development of compounds that utilize zinc ions to
produce a reservoir of drug in the skin to increase
the efficacy of topically applied products and to
reduce toxicity. There are many localized disease
conditions, which are effectively treated by topical
application of suitable pharmaceutical agents. In
order for such treatments to be maximally effective,
it is necessary that as much of the active agent as
possible be absorbed into the skin where it can make
contact with the disease condition in the dermal
tissue without being lost by rubbing off on clothing
or evaporation. At the same time, the agent must not
penetrate so effectively through the skin that it is
absorbed into the systemic circulation. This latter
factor is especially important after trying to
minimize unwanted side-effects of the
pharmacologically active agent. The ideal vehicle for
topically applied pharmaceuticals is one which can
produce a "reservoir effect" in the skin or mucous
membranes. Such a reservoir effect can be produced by
the complexation of suitable pharmaceutical agents
with zinc ions, by an as yet unknown mechanism. This
"reservoir effect" is defined as an enhancement of the
skin or membrane's ability to both absorb and retain
pharmacological agents, i.e.:
- To increase skin or membrane residence time
- To decrease drug transit time
- To reduce transdermal flux
A number of compounds are known to enhance the ability
of pharmacologically active agents to penetrate the
skin, but have the disadvantage of allowing rapid
systemic dispersion away from the site of disease.
Many topical agents, such as the retinoids used in the
treatment of acne, and methotrexate, used in the
treatment of psoriasis, are systemically toxic. There
is therefore a need for a method of enhancing the
ability of such agents to penetrate the skin so that
a lesser total dosage may be used, while at the same
time retarding their ability to move from the skin to
the systemic circulation.
Under the terms of this agreement Strakan has agreed
to fund the development costs of Zinc Clindamycin and
any additional compounds developed utilizing the zinc
patent, and will share equally in all milestone
payments received from sublicensing of the compound.
In addition, the Company will receive a royalty on
sales of products based on this technology.
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Research Projects, Products and Products in
Development
ACCESS DRUG PORTFOLIO
<TABLE>
<CAPTION>
FDA Clinical
Compound Originator Indication Filing Stage(1)
- -------- -------- -------- -------- --------
Cancer
- ------
<S> <C> <C> <C> <C>
AP 4010 Access Anti-tumor Development Pre-Clinical
AP 5070 Access Anti-tumor Development Pre-Clinical
AP 2011 Access MRI Contrast Agent Development Research
Radiopharmaceutical Access Cancer Diagnosis Development Research
Amlexanox(2) Takeda Mucositis IND Phase Phase I
Topical Delivery
- ----------------
Amlexanox(2)
(CHX-3673) Takeda Oral ulcers FDA Approved Completed
Zinc compound(3) Access Enhancing drug Development Pre-Clinical
penetration and
retention in the
skin (acne)
</TABLE>
(1) See "Government Regulations" for description of
clinical stages.
(2) Sold to Block. Subject to a Royalty Agreement.
(3) Licensed to Strakan.
Access begins the product development effort by
screening and formulating potential product
candidates, selecting an optimal active and
formulation approach and developing the processes and
analytical methods. Pilot stability, toxicity and
efficacy testing are conducted prior to advancing the
product candidate into formal preclinical development.
Specialized skills are required to produce these
product candidates utilizing the Access technology.
Access has a core internal development capability with
significant experience in these formulations.
Once the product candidate has been successfully
screened in pilot testing, Access' scientists together
with external consultants, assist in designing and
performing the necessary preclinical efficacy,
pharmacokinetic and toxicology studies required for
IND submission. External investigators and scaleup
manufacturing facilities are selected in conjunction
with Company consultants. Access does not plan to have
an extensive clinical development organization as this
is planned to be conducted by a development partner.
With all of Access's product development candidates,
there can be no assurance that the results of the in
vitro or animal studies are or will be indicative of
the results that will be obtained if and when these
product candidates are tested in humans. There can be
no assurance that any of these projects will be
successfully completed or that regulatory approval of
any product will be obtained.
The Company (both Chemex and API) expended
approximately $2,433,000, $1,405,000 and $1,981,000 on
research and development during the years 1997, 1996
and 1995, respectively. Expenditures on research and
development are expected to increase during 1998 and
subsequent years, subject to funding.
Approved Product Amlexanox
Amlexanox is the first and only prescription
medication indicated specifically for the treatment of
canker sores, in
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patients with normal immune systems.
There are numerous OTC products available which will
temporarily relieve the pain associated with canker
sores, however, amlexanox is the only prescription
medication specifically indicated to treat canker
sores. Current estimates indicate approximately 20% of
the U.S. adult population suffers from canker sores,
of which 15 million patients claim their canker sores
recur.
Block has the worldwide rights to the product and have
launched the product in the United States in December
1997. Access is currently in negotiations with Block
with respect to the international rights to the
product (expect Japan). On the closing of such an
agreement, Access has agreed to grant Strakan rights
to the product for the United Kingdom and Ireland.
Strakan has commenced the European registration
process for the product. It is anticipated that the
product will be registered throughout Europe in 1999.
An international outlicensing program is ongoing.
Development Program Topical Delivery
Access has a patent for enhancing drug penetration and
retention in the skin utilizing zinc ions, which is
licensed to Strakan. A wide range of agents are
potentially suitable for complexing with zinc ions,
with examples from all of the major dermatological
product groups including, anti-bacterials, anti-
fungals, steroids, anti-histamins, analgesics, anti-
inflammatories and anti-psoriasis agents.
Zinc clindamycin - the most advanced development
(scheduled for clinical testing commencing in the
second half of 1998) is a combination of zinc and
clindamycin in the treatment of acne. The market for
acne treatments exceeds $700 million in Europe and the
USA. The potential product advantage of this
development is anticipated to be improved efficacy
and/or reduced dosing.
Zinc steroid - formulation development has commenced
on incorporating a steroid in a zinc complex. It is
anticipated that preclinical development will be
concluded in 1998, with clinical testing commencing in
early 1999. Due to the serious side effects of
corticosteroids, potent steroids are used only when a
condition is unresponsive to milder treatment. A
broader usage of more potent steroids could be
achieved utilizing zinc ions to reduce uptake in
circulatory systems and consequently significantly
reduce side effects.
Development Programs Cancer
Approximately one-fourth of all deaths in the United
States are due to malignant tumors. More than 85% of
these are solid tumors, and approximately half of the
patients with these tumors die of their disease. The
cause of death is usually metastatic disease distant
from the original tumor, although uncontrolled primary
tumors can also be fatal. The distant metastases are
treated systematically with anti-cancer drugs and
biological agents, but these attempts are often
unsuccessful. The cost of treating these patients is
enormous, and in 1995 the estimated bill was $50
billion or 5% of the nation's total medical bill. As
the population ages and new sophisticated diagnostic
tests are launched, incidence of detected cancer
continues to rise.
Chemotherapy, surgery and radiation are the major
components in the clinical management of cancer
patients. Chemotherapy is usually the primary
treatment of hematologic malignancies, which cannot be
excised by surgery, and is increasingly used as an
adjunct to radiation and surgery, to improve efficacy,
and is used as the primary therapy for some solid
tumors and metastases. The current optimal strategy
for chemotherapy involves exposing patients to the
most intensive cytotoxic regimens they can tolerate.
Clinicians attempt to design a combination of drugs,
dosing schedule and method of administration to
increase the probability that cancerous cells will be
destroyed while minimizing the harm to healthy cells.
For chemotherapeutic agents to be effective in
treating cancer patients, the agent must reach the
target cells in effective quantities with minimal
toxicity in normal tissues.
Most current drugs have significant limitations.
Certain cancers are inherently unresponsive to
chemotherapeutic agents, other cancers initially
respond but subgroups of cancer cells acquire
resistance to the drug during the course of therapy,
with the resistant cells surviving and resulting in
relapse. Another limitation of current anti-cancer
drugs is that serious toxicity, including bone marrow
suppression or irreversible cardiotoxicity, can
prevent their administration in curative doses.
The Access anti-cancer program is designed to overcome
the physiological barriers to penetration of drugs
into tumor tissue by targeting potent drugs into sites
of disease activity and clearing the non-targeted
fraction.
<PAGE> 9
Polymer Platinate, AP-5070 - Access, in conjunction
with The School of Pharmacy, University of London, is
developing a soluble, synthetic polymer conjugate
formulation of cisplatin for the first line treatment
of solid tumors in indications where cisplatin is
currently approved. Preliminary animal studies
indicate:
* improved efficacy over standard cisplatin at
maximum tolerated dose
* reduced toxicity over standard cisplatin
* enhanced tumor uptake and retention of polymer
The Company has applied to the EORTC (the European
Organization for Research and Treatment of Cancer) to
enter into human trials. It is anticipated that Phase
I trials will commence in the next twelve months.
Glycopolymer Doxorubicin, AP-4010 - Access has
developed a glycopolymer formulation of doxorubicin
for the potential use in first line treatment of solid
tumors in tumor types where increased amounts of
standard doxorubicin without rate limiting toxicity
would be clinically beneficial. Preliminary animal
studies indicate:
* improved efficacy over standard doxorubicin at
equal dosing levels
* enhanced tumor permeation as indicated by
histological evidence
* reduced toxicity over standard doxorubicin
Due to resource limitations and the need to focus on
a limited number of opportunities this project is
currently on hold and subject to funding. It is not
anticipated that this product will advance to clinical
development until 1999 at the earliest.
Amlexanox Mucositis - Mucositis is often a significant
complication of chemotherapy and can be severe enough
to limit therapy. In addition to causing debilitating
pain, which adversely affects the patients' ability to
eat and speak, the mucositis may promote portals of
entry for harmful microorganisms in patients whose
immune systems can often be compromised. Any treatment
that would accelerate their healing and/or diminish
their rate of appearance would have a significant
beneficial impact on the quality of life of these
patients and may allow for more aggressive
chemotherapy. Mucositis appears to have many clinical
similarities to oral aphthous ulcers and since
amlexanox has been proven to accelerate their healing,
the Company believes it could also have clinical
benefit in chemotherapy-induced mucositis. Therefore,
amlexanox is now in Phase I clinical studies for this
indication with a newer, more suitable formulation.
These studies are being conducted by our partner Block
Drug Company.
Development Programs MRI Imaging Agents
Preoperative diagnostic imaging technologies are used
to determine the existence and the extent of disease.
The principal diagnostic imaging technologies are CT
Scanning and Magnetic Resonance Imaging ("MRI"). Both
methods produce images that show anatomic boundaries
between the tissue suspected of being malignant and
the surrounding tissue, to reveal potential disease.
Neither method gives information allowing a clear
distinction of malignant from nonmalignant tissue. A
more recently developed technology,
immunoscintigraphy, uses a gamma ray detection camera
externally to identify internally localized
radiolabeled antibodies potentially specific to
certain cancers. Although immunoscintigraphy with
certain radiolabeled antibodies appears capable of
distinguishing malignant tumors from nonmalignant
lesions and surrounding tissues, none of the external
imaging technologies, including immunoscintigraphy, is
effective in consistently identifying primary tumors
smaller than one centimeter, in precisely locating the
site or margins of the tumor, in consistently
identifying all metastatic tumor nodules, or in
distinguishing pre-invasive from functionally invasive
tumor behaviors.
The currently available contrast agents for MRI are
nonselective gadolinium based extracellular agents
predominantly used in imaging the central nervous
system.
Access is focused on expanding the utility of MRI
imaging to include body imaging by developing a
site-selective intravenous contrast agent with
improved localization and performance outside as well
as within the central nervous system. Access believes
that improved site selectivity, longer site contrast
with rapid blood clearance, the ability to clearly
delineate tumor boundaries and metastases and the
opportunity to obtain additional valuable information
on prognosis, function, therapeutic response
monitoring and anatomy at high resolution, could be
major competitive advantages of the technology.
<PAGE> 10
Access has formulated a site selective, MRI Contrast
Agent for the detection, staging and monitoring of
tumors. Access entered a collaboration with the Dow
Chemical Company for the development of products
incorporating Dow's chelation technology and Access'
Bio~Responsive TM Polymers. The collaboration is focused
on the development of MRI contrast agents and
radiopharmaceutical diagnostic and therapeutics. The
agreement provides Access with extensive chelation
technology, chelation chemistry and assistance over a
broad range of research and development activities.
Dow Chemical is actively participating in the
development of the product candidates.
Patents
Access believes that the value of technology both to
Access and to potential corporate partners is
established and enhanced by its broad intellectual
property positions. Consequently, Access already has
issued and seeks to obtain additional U.S. and foreign
patent protection for products under development and
for new discoveries. Patent applications are filed
with the U.S. Patent and Trademark Office and, when
appropriate, with the Paris Convention's Patent
Cooperation Treaty (PCT) Countries (most major
countries in Western Europe and the Far East) for its
inventions and prospective products.
A United States patent has issued and two European
patents are pending for the use of zinc as a
pharmaceutical vehicle for enhancing the penetration
and retention of drug in the skin. The patent covers
the method of inducing a reservoir effect in skin and
mucous membranes to enhance penetration and retention
of topically applied therapeutic and cosmetic
pharmacologically active agents. The patent also
relates to topical treatment methods including such
reservoir effect enhancers and to pharmaceutical
compositions containing them.
Access acquired the license to two provisional patent
applications for polymer platinum compounds. These two
provisional patent applications are the result of a
collaboration between the Company and the School of
Pharmacy, University of London, from whom the
technology has been licensed. The patents include a
number of synthetic polymers, including
hydroxypropylmethacrylamide and polyamidoamines, that
can be used to exploit enhanced permeability and
retention and control drug release. The provisional
patent application includes a pharmaceutical
composition for use in tumor treatment comprising
polymer-platinum compound through linkages which are
designed to be cleaved under selected conditions to
yield a platinum which accumulates at a tumor site.
The patent applications also include methods for
improving the pharmaceutical properties of platinum
compounds.
Access has recently acquired one U.S. patent and three
patent applications (two U.S. and one European) in
condensed-phase microparticles. These patents are
licensed from the Mayo Clinic and were acquired by
Access through the merger with Tacora in December
1997. This technology is based on the Smart Polymer
Matrices of Secretory Granules from secretory cells
such as the mast cell or goblet cell. The technology
has the following properties to control the storage
and release of molecules within the body: 1)
encapsulation of high concentration of small
molecules, nucleotides and proteins; 2) highly stable
storage medium for a variety of naturally occurring
biological molecules; and 3) release of stored
products in response to environments, external or
internal signals to ensure correct location, timing
and concentration of secreted products in the body.
Access holds U.S. and European patents with broad
composition of matter claims encompassing
glycosaminoglycan, acidic saccharide, carbohydrate and
other endothelial binding and targeting carriers in
combination with drugs and diagnostic agents
formulated by both physical and chemical covalent
means. Nine patents have issued commencing in 1990
(eight U.S. and one European) and an additional five
patent applications are pending (two U.S. and three
European).
These patents and applications relate to the in vivo
medical uses of drugs and diagnostic carrier
formulations which bind and cross endothelial and
epithelial barriers at sites of disease, including but
not limited to treatment and medical imaging of tumor,
infarct, infection and inflammation. They further
disclose the body's induction of endothelial,
epithelial, tissue and blood adhesins, selectins,
integrins, chemotaxins and cytotaxins at sites of
disease as a mechanism for selective targeting, and
they claim recognized usable carrier substances which
selectively bind to these induced target
determinants.
Access has a strategy of maintaining an ongoing line
of continuation applications for each major category
of patentable carrier and delivery technology. By this
approach, Access is extending the intellectual
property protection of its basic targeting technology
and initial agents to cover additional specific
carriers and agents, some of which are anticipated to
carry the priority dates of the original applications.
<PAGE> 11
The intellectual property around which API was founded
was originally licensed by way of a License Agreement
from the inventor and principal shareholder Dr. David
Ranney. A Patent Purchase Agreement dated April 5,
1994, (the "Patent Purchase Agreement") terminated the
License Agreement and provided for assignment of the
rights to the original patents to Access. The terms of
the Patent Purchase Agreement were amended effective
January 23, 1996 reducing the minimum royalty payments
due to Dr. Ranney. Additional patents covering the
technology were purchased from the University of Texas
system on October 31, 1990 and applied for directly by
Access. The technology was developed by Dr. Ranney
during his tenure at the University of Texas
Southwestern Medical School which retains a royalty
free non-exclusive right to use the patent rights for
its own research, teaching and other
educationally-related purposes.
Dr. Ranney has signed an Assignment of Intellectual
Property Agreement whereby all rights, title and
interest in and to all subsequent inventions and
confidential information will become the sole and
exclusive property of Access at the earlier of the
date of conception or development, or May 31, 1998.
Under the terms of the Patent Purchase Agreement as
amended, Dr. Ranney has retained certain rights and
interests in the intellectual property, including a
non-exclusive right to use the inventions and
technology covered by or relating to the patents for
his own research, teaching or other academic related
purposes, and for research and development of uses or
implementations of the inventions and technology
improvements. Access maintains the first right to
negotiate the acquisition of any new inventions or
technology improvements developed by Dr. Ranney
relating to the technology. Beginning in 1994, Access
has agreed to pay Dr. Ranney a royalty of three-
quarters of one percent (0.75%) of Access' gross
revenues derived from products covered by the patents
and to pay certain minimum payments.
In addition, the Patent Purchase Agreement, as
amended, establishes certain additional rights of Dr.
Ranney. The patent assignment will terminate in the
event Access fails to pay the amounts due to Dr.
Ranney pursuant to the Agreement, files a petition in
bankruptcy, fails to commercially develop the patents
or creates a security interest in the patents without
Dr. Ranney's approval. Also, in the event that parts
of the Access technology are not being developed prior
to January 2000, Dr. Ranney has the right of first
refusal to license or acquire at fair market value
development rights to such parts of the Access
technology.
Government Regulations
Access is subject to extensive regulation by the
federal government, principally by the FDA, and, to a
lesser extent, by other federal and state agencies as
well as comparable agencies in foreign countries where
registration of products will be pursued. Although a
number of Access' formulations incorporate extensively
tested drug substances, because the resulting
formulations make claims of enhanced efficacy and/or
improved side effect profiles they are expected to be
classified as new drugs by the FDA.
The Federal Food, Drug and Cosmetic Act and other
federal, state and foreign statutes and regulations
govern the testing, manufacturing, safety, labeling,
storage, shipping and record keeping of Access'
products. The FDA has the authority to approve or not
approve new drug applications and inspect research and
manufacturing records and facilities.
Among the requirements for drug approval and testing
is that the prospective manufacturer's facilities and
methods conform to the FDA's Code of Good
Manufacturing Practices ("GMP") regulations which
establish the minimum requirements for methods to be
used in, and the facilities or controls to be used
during the production process and the facilities are
subject to ongoing FDA inspection to insure
compliance.
The steps required before a pharmaceutical product may
be produced and marketed in the U.S. include
preclinical tests, the filing of an IND with the FDA,
which must become effective pursuant to FDA
regulations before human clinical trials may commence,
and the FDA approval of an NDA prior to commercial
sale.
Preclinical tests are conducted in the laboratory,
usually involving animals, to evaluate the safety and
efficacy of the potential product. The results of
preclinical tests are submitted as part of the IND
application and are fully reviewed by the FDA prior to
granting the sponsor permission to commence clinical
trials in humans. Clinical trials typically involve a
three-phase process. Phase I, the initial clinical
evaluations, consists of administering the drug and
testing for safety and tolerated dosages as well as
preliminary evidence of efficacy in humans. Phase II
involves a study to evaluate the effectiveness of the
drug for a particular indication and to determine
optimal dosage and dose interval
<PAGE> 12
and to identify possible adverse side effects and risks in a larger
patient group. When a product is found effective in
Phase II, it is then evaluated in Phase III clinical
trials. Phase III trials consist of expanded
multi-location testing for efficacy and safety to
evaluate the overall benefit or risk index of the
investigational drug in relationship to the disease
treated. The results of preclinical and human clinical
testing are submitted to the FDA in the form of an NDA
for approval to commence commercial sales.
The process of doing the requisite testing, data
collection, analysis and compilation of an IND and an
NDA is labor intensive and costly and may take a
protracted time period. In some cases tests may have
to be redone or new tests instituted to comply with
FDA requests. Review by the FDA may also take a
considerable time period and there is no guarantee an
NDA will be approved. Hence, Access cannot with any
certainty estimate how long the approval cycle may
take.
Access is also governed by other federal, state and
local laws of general applicability, such as laws
regulating working conditions, employment practices,
as well as environmental protection.
Competition
The pharmaceutical and biotechnology industry is
highly competitive. Most pharmaceutical and
biotechnology companies have considerably greater
research and development, financial, technical and
marketing resources than Access. Although Access'
proposed products utilize a novel drug delivery
system, they will be competing with established
pharmaceutical companies' existing and planned new
product introductions and alternate delivery forms of
the active substance being formulated by Access.
A number of companies are developing or may, in the
future, engage in the development of products
competitive with the Access delivery system.
Currently, in the therapeutic area, liposomal
formulations being developed by Nexstar, Inc., The
Liposome Company, Inc. and Sequus Pharmaceuticals,
Inc. are the major competitive intravenous drug
delivery formulations which utilize similar drug
substances. A number of companies are developing or
evaluating enhanced drug delivery systems. Access
expects that technological developments will occur at
a rapid rate and that competition is likely to
intensify as various alternative delivery system
technologies achieve certain if not identical
advantages.
The principal current competitors to Access' polymer
targeting technology fall into two categories:
monoclonal antibodies and liposomes. Access believes
its technology potentially represents a significant
advance over these older technologies because its
technology provides a system with a favorable
pharmacokinetic profile which has been shown to
effectively bind and cross neovascular barriers and to
penetrate the major classes of deep tissue and organ
disease, which remain partially inaccessible to other
technologies.
Even if Access' products are fully developed and
receive required regulatory approval, of which there
is no assurance, Access believes that its products can
only compete successfully if marketed by a company
having expertise and a strong presence in the
therapeutic area. Consequently, Access does not
currently plan to establish an internal marketing
organization. By forming strategic alliances with
major pharmaceutical and diagnostic medical imaging
companies, management believes that Access'
development risks should be minimized and the
technology will potentially be more rapidly developed
and successfully introduced into the marketplace.
Employees
As of January 1, 1998 Access has 18 full time employees, ten of
whom have advanced scientific degrees. Access believes
that it maintains good relations with its personnel.
In addition, to complement its internal expertise,
Access contracts with scientific consultants, contract
research organizations and university research
laboratories that specialize in various aspects of
drug development including toxicology, sterility
testing and preclinical testing to complement its
internal expertise.
Operations Prior to January 1996
Access operated as Chemex prior to the Merger, on
January 25, 1996. On September 14, 1995, at a Special
Meeting of Stockholders, the Chemex Stockholders
approved the sale of its rights to amlexanox to Block,
retaining the right to receive royalties from future
sales of amlexanox. As a consideration for the sale of
the Company's share of amlexanox, Block (a) made a
nonrefundable up-front royalty payment of $2.5
million; (b) is obligated to pay
<PAGE> 13
Access $1.5 million as a prepaid royalty at the end of the calendar month
during which Block together with any sublicensee has
achieved cumulative worldwide sales of amlexanox oral
products of $25 million; and (c) after the payment of
such $1.5 million royalty, is obligated to pay
royalties to Access for all sales in excess of
cumulative worldwide sales of amlexanox oral products
of $45 million, as defined.
The Company announced on December 19, 1996 that Block
has received approval from the U.S. Food and Drug
Administration for amlexanox. Amlexanox is marketed
under the name Apthasol TM.
Risk Factors
Certain of the statements contained in this Annual
Report on Form 10-K are forward looking statements
within the meaning of Section 27a of the Securities
Act of 1933, as amended, that involves risks and
uncertainties including but not limited to the risk
factors set forth below:
History of Losses and Expectation of Future Losses;
Uncertainty of Future Profitability The Company has
incurred a cumulative operating loss of approximately
$19.7 million through December 31, 1997. Losses have
resulted principally from costs incurred in research
and development activities related to the Company's
efforts to develop target candidates and from the
associated administrative costs. The Company expects
to incur significant additional operating losses over
the next several years and expects cumulative losses
to increase substantially due to expanded research and
development efforts, pre-clinical and clinical trials
and development of manufacturing capabilities. In the
next few years, the Company's revenues may be limited
to any amounts received under research or drug
development collaborations that the Company will
establish. There can be no assurance, however, that
the Company will be able to establish any
collaborative relationships on terms acceptable to the
Company. The Company's ability to achieve significant
revenue or profitability is dependent on its ability
to successfully complete the development of drug
candidates, to develop and obtain patent protection
and regulatory approvals for the drug candidates and
to manufacture and commercialize the resulting drugs.
The Company will not receive revenues or royalties
from commercial sales for a significant number of
years, if at all. Failure to receive significant
revenues or achieve profitable operations would impair
the Company's ability to sustain operations. There can
be no assurance that the Company will ever
successfully identify, develop, commercialize, patent,
manufacture and market any products, obtain required
regulatory approvals or achieve profitability.
Research and Development Focus Access' focus is on
commercializing proprietary biopharmaceutical patents.
Although Access may in the future have some royalty
income, it is still in the development stage, and its
proposed operations are subject to all the risks
inherent in the establishment of a new business
enterprise, including the need for substantial
capital. Access has recorded minimal revenue to date.
It is anticipated that Access will remain principally
engaged in research and development activities for an
indeterminate, but substantial, period of time. As a
non-revenue producing company, normal credit
arrangements are unavailable to Access and, therefore,
it is likely that Access would be forced to accept
unfavorable terms if it should attempt to raise
additional needed funds through borrowing. There can
be no assurance that any such credit arrangements
would be available. Further, it is anticipated that
additional losses will be incurred in the future, and
there can be no assurances that Access will ever
achieve significant revenues.
Uncertainties Associated with Research and Development
Activities Research and development activities, by
their nature, preclude definitive statements as to the
time required and costs involved in reaching certain
objectives. Actual research and development costs,
therefore, could exceed budgeted amounts and estimated
time frames may require extension. Cost overruns due
to unanticipated regulatory delays or demands,
unexpected adverse side effects or insufficient
therapeutic efficacy will prevent or substantially
slow the research and development effort and
ultimately could have a material adverse effect on
Access.
Absence of Operating Revenue Royalties received by
Access for sales of Actinex TM and Amlexanox TM have
not been significant to date. There can be no
assurance of revenue or profits in the future. Access
currently has no products approved for sale and there
can be no assurance as to the expenditures of time and
resources that may be required to complete the
development of potential Access products and obtain
approval for sale or if such completion and approval
can be realized.
Going Concern Uncertainty The Company's audited
consolidated financial statements at and for the
twelve months ended December 31, 1997 contain a
reference to the Company's ability to meet its
obligations as they occur and indicate that the
Company may be unable to continue as a going concern.
<PAGE> 14
Early Stage of Product Development; No Assurance of
Successful Commercialization The Company's potential
drug candidates will be subject to the risks of
failure inherent in the development of pharmaceutical
products based on new technologies. These risks
include the possibilities that any or all of the
Company's drug candidates will be found to be unsafe,
ineffective or toxic or otherwise fail to meet
applicable regulatory standards or receive necessary
regulatory clearances; that these drug candidates, if
safe and effective will be difficult to develop into
commercially viable drugs or to manufacture on a large
scale or will be uneconomical to market; that
proprietary rights of third parties will preclude the
Company from marketing such drugs; or that third
parties will market superior or equivalent drugs. The
failure to develop safe, commercially viable drugs
would have a material adverse effect on the Company's
business, operating results and financial condition.
Additional Financing Requirements; Uncertainty of
Available Funding. The Company will require
substantial additional funds for its development
programs, for operating expenses, for pursing
regulatory clearances, and for prosecuting and
defending its intellectual property rights before it
can expect to realize significant revenues from
commercial sales. The Company believes that existing
capital resources, interest income and revenue from
possible collaborative agreements, will be sufficient
to fund its operating expenses and capital
requirements as currently planned for two to six
months. However, there can be no assurance that such
funds will be sufficient to fund its operating
expenses and capital requirements during such period.
The Company's actual cash requirements may vary
materially from those now planned and will depend upon
numerous factors, including the results of the
Company's research and development and collaboration
programs, the timing and results of preclinical
trials, the ability of the Company to maintain
existing and establish new collaborative agreements
with other companies to provide funding to the
Company, the technological advances and activities of
competitors and other factors. Thereafter, the Company
will need to raise substantial additional capital to
fund its operations. The Company intends to seek such
additional funding through issuance of equity
securities or collaborative or other arrangements with
corporate partners. If additional funds are raised by
issuing equity securities, further dilution to
existing stockholders may result and future investors
may be granted rights superior to those of existing
stockholders. There can be no assurance, however, that
any such equity offerings will occur, or that
additional financing will be available from any of
these sources or, if available, will be available on
acceptable or affordable terms. If adequate funds are
not available, the Company may be required to delay,
reduce the scope of or eliminate one or more of its
research and development programs or to obtain funds
by entering into arrangements with collaborative
partners or others that require the Company to issue
additional equity securities or to relinquish rights
to certain technologies or drug candidates that the
Company would not otherwise issue or relinquish in
order to continue independent operations.
Dependence on Others; Collaborations The Company's
strategy for the research, development and
commercialization of its potential pharmaceutical
products may require the Company to enter into various
arrangements with corporate and academic
collaborators, licensors, licensees and others, in
addition to those already established, and may
therefore be dependent upon the subsequent success of
outside parties in performing their responsibilities.
There can be no assurance that the Company will be
able to establish additional collaborative
arrangements or license agreements that the Company
deems necessary or acceptable to develop and
commercialize its potential pharmaceutical products,
or that any of its collaborative arrangements or
license agreements will be successful.
No Marketing, Sales, Clinical Testing or Regulatory
Compliance Activities In view of the development
stage of the Company and its research and development
programs, the Company has restricted hiring to
research scientists and a small administrative staff
and has made no investment in manufacturing,
production, marketing, product sales or regulatory
compliance resources. If the Company successfully
develops any commercially marketable pharmaceutical
products, it may seek to enter joint venture,
sublicense or other marketing arrangements with
parties that have an established marketing capability
or it may choose to pursue the commercialization of
such products on its own. There can be no assurance,
however, that the Company will be able to enter into
such marketing arrangements on acceptable terms, if
at all. Further, the Company will need to hire
additional personnel skilled in the clinical testing
and regulatory compliance process and in marketing or
product sales if it develops pharmaceutical products
with commercial potential that it determines to
commercialize itself. There can be no assurance,
however, that it will be able to acquire such
resources or personnel.
Manufacturing Limitations The Company intends to
establish arrangements with contract manufacturers to
supply sufficient quantities of products to conduct
clinical trials as well as for the manufacture,
packaging, labeling and distribution of finished
pharmaceutical products if its potential products are
approved for commercialization. If the Company is
unable to contract for a sufficient supply of its
potential pharmaceutical products on acceptable terms, the
<PAGE> 15
Company's preclinical and human clinical testing
schedule may be delayed, resulting in the delay of
submission of products for regulatory approval and
initiation of new development programs, which may have
a material adverse effect on the Company. If the
Company encounters delays or difficulties in
establishing relationships with manufacturers to
produce, package, label and distribute its finished
pharmaceutical or other medical products (if any),
market introduction and subsequent sales of such
products would be adversely affected. Moreover,
contract manufacturers that the Company may use must
adhere to current Good Manufacturing Practices ("GMP")
required by the FDA. Manufacturing facilities must
pass a preapproval plant inspection before the FDA
will issue a pre-market approval or product and
establishment licenses, where applicable, for the
products. If the Company is unable to obtain or retain
third party manufacturing on commercially acceptable
terms, it may not be able to commercialize its
products as planned. The Company's potential
dependence upon third parties for the manufacture of
its products may adversely affect the Company's profit
margins and its ability to develop and deliver such
products on a timely and competitive basis. The
Company has no experience in the manufacture of
pharmaceutical products in clinical quantities or for
commercial purposes. In addition, there can be no
assurance that the Company will be able to manufacture
or enter into arrangements with third parties for the
manufacture of any products successfully and in a
cost-effective manner.
Hazardous Materials; Environmental Matters The
Company's research and development processes involve
the controlled use of hazardous materials. The Company
is subject to federal, state and local laws and
regulations governing the use, manufacture, storage,
handling and disposal of such materials and certain
waste products. Although the Company believes that its
safety procedures for storing, using, handling and
disposing of such materials comply with the standards
prescribed by such laws and regulations, the risk of
accidental contamination or injury from these
materials cannot be completely eliminated. In the
event of such accident, the Company could be held
liable for any damages that result and any such
liability could exceed the resources of the Company.
Although the Company believes that it is in compliance
in all material respects with applicable environmental
laws and regulations and currently does not expect to
make material capital expenditures for environmental
control facilities in the near-term, there can be no
assurance that the Company will not be required to
incur significant costs to comply with environmental
laws and regulations in the future, nor that the
operations, business or assets of the Company will not
be materially adversely affected by current or future
environmental laws or regulations.
Impact of Extensive Government Regulation. The FDA
and comparable agencies in foreign countries impose
substantial requirements upon the introduction of
pharmaceutical products through lengthy and detailed
preclinical, laboratory and clinical testing
procedures, sampling activities and other costly and
time-consuming procedures to establish their safety
and efficacy. All of the Company's drug candidates
will require governmental approvals for
commercialization, none of which have been obtained.
Preclinical and clinical trials and manufacturing of
the Company's drug candidates will be subject to the
rigorous testing and approval processes of the FDA and
corresponding foreign regulatory authorities.
Satisfaction of these requirements typically takes a
significant number of years and can vary substantially
based upon the type, complexity and novelty of the
product. There can be no assurance as to when the
Company, independently or with its collaborative
partners, might first submit an Investigational New
Drug Application ("IND") for FDA or other regulatory
review. Government regulation also affects the
manufacturing and marketing of pharmaceutical
products.
The effect of government regulation may be to delay
marketing of the Company's potential drugs for a
considerable or indefinite period of time, impose
costly procedural requirements upon the Company's
activities and furnish a competitive advantage to
larger companies or companies more experienced in
regulatory affairs. Delays in obtaining governmental
regulatory approval could adversely affect the
Company's marketing as well as the Company's ability
to generate significant revenues from commercial
sales. There can be no assurance that FDA or other
regulatory approvals for any drug candidates developed
by the Company will be granted on a timely basis or at
all. Moreover, if regulatory approval of a drug
candidate is granted, such approval may impose
limitations on the indicated use for which such drug
may be marketed. Even if initial regulatory approvals
for the Company's drug candidates are obtained, the
Company, its drugs and its manufacturing facilities
would be subject to continual review and periodic
inspection, and later discovery of previously unknown
problems with a drug, manufacturer or facility may
result in restrictions on such drug or manufacturer,
including withdrawal of the drug from the market. The
regulatory standards are applied stringently by the
FDA and other regulatory authorities and failure to
comply can, among other things, result in fines,
denial or withdrawal of regulatory approvals, product
recalls or seizures, operating restrictions and
criminal prosecution.
The FDA has developed two "fast track" policies for
certain new drugs (including anti-cancer agents), one
policy for expedited development and review and one
policy for accelerated approval. The expedited
development and review policy applies to new drug
therapies that are intended to treat persons with
life-threatening and severely-
<PAGE> 16
debilitating illnesses, especially where no satisfactory alternative therapy
exists. The accelerated approval policy applies to
certain new drugs that are intended to treat persons
with serious or life-threatening illnesses that
provide a meaningful therapeutic benefit to patients
over existing treatments. See "Business-Government
Regulation." There can be no assurance that any drug
candidate contemplated by the Company will qualify for
the FDA's various fast track or priority approval
policies. Nor can there by any assurance that such
policies will remain as currently implemented by the
FDA.
Drug-related Risks Adverse side effects of treatment
of diseases and disorders in both human and animal
patients are business risks in the pharmaceutical
industry. Adverse side effects can occur during the
clinical testing of a new drug on humans or animals
which may delay ultimate FDA approval or even cause a
company to terminate its efforts to develop the drug
for commercial use. Even after FDA approval of an NDA,
adverse side effects may develop to a greater extent
than anticipated during the clinical testing phase and
could result in legal action against a company. Drug
developers and manufacturers, including Access, may
face substantial liability for damages in the event of
adverse side effects or product defects identified
with their products used in clinical tests or marketed
to the public. There can be no assurance that Access
will be able to satisfy any claims for which it may be
held liable resulting from the use or misuse of
products which it has developed, manufactured or sold.
Potential Product Liability and Availability of
Insurance. The Company's business exposes it to
potential liability risks that are inherent in the
testing, manufacturing and marketing of pharmaceutical
products. The use of the Company's drug candidates in
clinical trials may expose the Company to product
liability claims and possible adverse publicity. These
risks will expand with respect to the Company's drug
candidates, if any, that receive regulatory approval
for commercial sale. Product liability insurance for
the biotechnology industry is generally expensive, if
available at all. The Company does not have product
liability insurance but intends to obtain such
coverage if and when its drug candidates are tested in
clinical trials. However, such coverage is becoming
increasingly expensive and there can be no assurance
that the Company will be able to obtain insurance
coverage at acceptable costs or in a sufficient
amount, if at all, or that a product liability claim
would not adversely affect the Company's business,
operating results or financial condition.
Reimbursement and Drug Pricing Uncertainty. The
successful commercialization of, and the interest of
potential collaborative partners to invest in, the
development of the Company's drug candidates will
depend substantially on reimbursement of the costs of
the resulting drugs and related treatments at
acceptable levels from government authorities, private
health insurers and other organizations, such as
health maintenance organizations ("HMOs"). There can
be no assurance that reimbursement in the United
States or elsewhere will be available for any drugs
the Company may develop or, if available, will not be
decreased in the future, or that reimbursement amounts
will not reduce the demand for, or the price of, the
Company's drugs, thereby adversely affecting the
Company's business. If reimbursement is not available
or is available only to limited levels, there can be
no assurance that the Company will be able to obtain
collaborative partners to manufacture and
commercialize its drugs, or would be able to obtain a
sufficient financial return on its own manufacture and
commercialization of any future drugs.
Third-party payors are increasingly challenging the
prices charged for medical products and services.
Also, the trend toward managed health care in the
United States and the concurrent growth of
organizations such as HMOs, which can control or
significantly influence the purchase of health care
services and products, as well as legislative
proposals to reform health care or reduce government
insurance programs, may result in lower prices of
pharmaceutical products. The cost containment measures
that health care providers are instituting, including
practice protocols and guidelines and clinical
pathways, and the effect of any health care reform,
could materially adversely affect the Company's
ability to sell any of its drugs if successfully
developed and approved. Moreover, the Company is
unable to predict what additional legislation or
regulation, if any, relating to the health care
industry or third-party coverage and reimbursement may
be enacted in the future or what effect such
legislation or regulation would have on the Company's
business.
Uncertainty of Patents and Proprietary Rights. The
Company's success will depend in part on its ability
to obtain U.S. and foreign patent protection for its
drug candidates and processes, preserve its trade
secrets and operate without infringing the proprietary
rights of third parties. Because of the length of time
and expense associated with bringing new drug
candidates through the development and regulatory
approval process to the marketplace, the
pharmaceutical industry has traditionally placed
considerable importance on obtaining patent and trade
secret protection for significant new technologies,
products and processes. Although Access has fourteen
U.S. patents and is either the owner or licensee of
technology and there are six U.S. patent applications
now pending, there can be no assurance that any
additional patents will issue from any of the patent
applications owned by, or licensed to, the Company. Further,
<PAGE> 17
there can be no assurance that any rights the
Company may have under issued patents will provide the
Company with significant protection against
competitive products or otherwise be commercially
viable. Legal standards relating to the validity of
patents covering pharmaceutical and biotechnological
inventions and the scope of claims made under such
patents are still developing. There is no consistent
policy regarding the breadth of claims allowed in
biotechnology patents. The patent position of a
biotechnology firm is highly uncertain and involves
complex legal and factual questions. There can be no
assurance that any existing or future patents issued
to, or licensed by, the Company will not subsequently
be challenged, infringed upon, invalidated or
circumvented by others. In addition, patents may have
been granted to third parties, or may be granted,
covering products or processes that are necessary or
useful to the development of the Company's drug
candidates. If the Company's drug candidates or
processes are found to infringe upon the patents or
otherwise impermissibly utilize the intellectual
property of others, the Company's development,
manufacturer and sale of such drug candidates could be
severely restricted or prohibited. In such event, the
Company may be required to obtain licenses from third
parties to utilize the patents or proprietary rights
of others. There can be no assurance that the Company
will be able to obtain such licenses on acceptable
terms, or at all. There has been significant
litigation regarding patents and other proprietary
rights. If the Company becomes involved in litigation
regarding its intellectual property rights or the
intellectual property rights of others, the potential
cost of such litigation (regardless of the strength of
the Company's legal position) and the potential
damages that the Company could be required to pay
could be substantial.
In addition to patent protection, the Company relies
on trade secrets, proprietary know-how and
technological advances which it seeks to protect, in
part, by confidentiality agreements with its
collaborative partners, employees and consultants.
There can be no assurance that these confidentiality
agreements will not be breached, that the Company
would have adequate remedies for any such breach, or
that the Company's trade secrets, proprietary know-how
and technological advances will not otherwise become
known or be independently discovered by others.
Intense Competition. The biotechnology and
pharmaceutical industries are intensely competitive
and subject to rapid and significant technological
change. Competitors of the Company in the United
States and elsewhere are numerous and include, among
others, major, multinational pharmaceutical and
chemical companies, specialized biotechnology firms
and universities and other research institutions. Many
of these competitors employ greater financial and
other resources, including larger research and
development staffs and more effective marketing and
manufacturing organizations, than the Company or its
collaborative partners. Acquisitions of competing
companies and potential competitors by large
pharmaceutical companies or others could enhance
financial, marketing and other resources available to
such competitors. As a result of academic and
government institutions becoming increasingly aware of
the commercial value of their research findings, such
institutions are more likely to enter into exclusive
licensing agreements with commercial enterprises,
including competitors of the Company, to market
commercial products. There can be no assurance that
the Company's competitors will not succeed in
developing technologies and drugs that are more
effective or less costly than any which are being
developed by the Company or which would render the
Company's technology and future drugs obsolete and
noncompetitive.
In addition, some of the Company's competitors have
greater experience than the Company in conducting
preclinical and clinical trials and obtaining FDA and
other regulatory approvals. Accordingly, the
Company's competitors may succeed in obtaining FDA or
other regulatory approvals for drug candidates more
rapidly than the Company. Companies that complete
clinical trials, obtain required regulation agency
approvals and commence commercial sale of their drugs
before their competitors may achieve a significant
competitive advantage, including certain patent and
FDA marketing exclusivity rights that would delay the
Company's ability to market certain products. There
can be no assurance that drugs resulting from the
Company's research and development efforts, or from
the joint efforts of the Company and its collaborative
partners, will be able to compete successfully with
competitors' existing products or products under
development or that they will obtain regulatory
approval in the United States or elsewhere.
Uncertainty Associated with Preclinical and Clinical
Testing. Before obtaining regulatory approvals for
the commercial sale of any of the Company's potential
drugs, the drug candidates will be subject to
extensive preclinical and clinical trials to
demonstrate their safety and efficacy in humans. The
Company is dependent on its collaborative partners to
conduct clinical trials for its drug candidates.
Furthermore, there can be no assurance that
preclinical or clinical trials of any future drug
candidates will demonstrate the safety and efficacy of
such drug candidates at all or to the extent necessary
to obtain regulatory approvals. Companies in the
biotechnology industry have suffered significant
setbacks in advanced clinical trials, even after
demonstrating promising results in earlier trials. The
failure to adequately demonstrate the safety and
efficacy of a drug candidate under development could
delay or prevent regulatory approval of the drug
candidate and would have a material adverse effect on
the Company's business, operating results and
financial condition. See "Business-Government
Regulation."
<PAGE> 18
No Assurance of Market Acceptance. There can be no
assurance that any drugs successfully developed by the
Company, independently or with its collaborative
partners, if approved for marketing, will achieve
market acceptance. The drugs which the Company is
attempting to develop will compete with a number of
well-established drugs manufactured and marketed by
major pharmaceutical companies. The degree of market
acceptance of any drugs developed by the Company will
depend on a number of factors, including the
establishment and demonstration of the clinical
efficacy and safety of the Company's drug candidates,
their potential advantage over existing therapies and
reimbursement policies of government and third-party
payors. There is no assurance that physicians,
patients or the medical community in general will
accept and utilize any drugs that may be developed by
the Company independently or with its collaborative
partners.
Dependence on Key Personnel. The Company is highly
dependent upon the efforts of its senior management
and scientific team, including its President and Chief
Executive Officer. The Company does not maintain key
man life insurance for any of its key employees and
does not intend to obtain such insurance. The loss of
the services of one or more of these individuals might
impede the achievement of the Company's development
objectives. Because of the specialized scientific
nature of the Company's business, the Company is
highly dependent upon its ability to attract and
retain qualified scientific and technical personnel.
There is intense competition among major
pharmaceutical and chemical companies, specialized
biotechnology firms and universities and other
research institutions for qualified personnel in the
areas of the Company's activities.
Concentration of Ownership Dr. David Ranney and
Nicholas Madonia currently beneficially own
approximately 24.4% and 17.1%, respectively, of the
issued and outstanding Common Stock. Dr. Ranney
subject to the terms of a certain Stockholder's
Agreement between Dr. Ranney and the Company (the
"Stockholder's Agreement") which provides that so long
as he beneficially owns fifteen percent or more of the
capital stock of Access, he will, subject to certain
conditions and exceptions, vote all of his shares of
the capital stock of Access as recommended by the
Board of Directors of Access for any proposal
presented to the Access Stockholders for approval.
Nicholas Madonia does not have a Stockholders
Agreement with the Company. In addition, each of Dr.
Ranney and Mr. Madonia has agreed not to sell any
shares of Common Stock of the Company for a period of
twenty-four months. See "Security Ownership of
Certain Beneficial Owners and Management" and "Certain
Relationships and Related Transactions."
Possible Volatility of Stock Price Stock prices for
many technology companies fluctuate widely for reasons
which may be unrelated to operating performance or new
product or service announcements. Broad market
fluctuations, earnings and other announcements of
other companies, general economic conditions or other
matters unrelated to Access and outside its control
also could affect the market price of the Common
Stock. See "Per Share Prices of and Dividends on
Common Stock."
Limited Market for Common Stock Trading in Access'
securities is presently conducted in the over-the-
counter market on the OTC Bulletin Board. As a result,
an investor may find it difficult to dispose of, or to
obtain accurate quotations as to the price of the
Company's securities. In addition, the Company's
securities are subject to a rule that imposes
additional sales practice requirements on broker-
dealers who sell such securities to persons other than
established customers and accredited investors
(generally with assets of $1,000,000, or annual income
exceeding $200,000, or $300,000 together with their
spouse). For transactions covered by this rule, the
broker-dealer must make a special suitability
determination for the purchaser and have received the
purchaser's written consent to the transaction prior
to the sale. Consequently, the rule may affect the
ability of broker-dealers to sell the securities of
the Company and may effect the ability of purchasers
to sell their securities in the secondary market.
Effect of Recapitalization of the Company through a
Proposed One-For-Twenty Reverse Stock Split and
Decrease in the Number of Authorized Shares The
Company will propose to its shareholders at its
shareholders meeting, to be held on April 14, 1998, an
amendment to its Certificate of Incorporation, as
amended, to effect a recapitalization (the
"Recapitalization") of the Company through a one-for-
twenty reverse stock split of its Common Stock and
decrease the number of authorized shares of Common
Stock from 60.0 million shares, par value $.04 per
share to 20.0 million shares, par value $.01 per
share. The Recapitalization would in fact
proportionately increase the number of authorized but
unissued shares when compared with the number of
issued and outstanding shares before the
Recapitalization. This proposal, if approved, would
decrease the number of outstanding shares of Common
Stock from approximately 37.4 million to 1.9 million.
This proposal has not been approved as of the date of
this report.
If the Company implements the Recapitalization, there
can be no assurances that the market price of the
<PAGE> 19
Company's Common Stock immediately after the
implementation of the proposed Recapitalization will
increase, and if it does increase, there can be no
assurance that such increase can be maintained for any
period of time, or that such market price will
approximate twenty times the market price before the
proposed reverse stock split. The Company currently
does not meet the listing requirements for the NASDAQ
SmallCap Market and there can be no assurances that
the Company will be listed on the NASDAQ SmallCap
Market or any exchange.
Effect of Certain Charter and By-Law Provisions;
Possible Issuance of Preferred Stock Access'
Certificate of Incorporation and Bylaws contain
provisions that may discourage acquisition bids for
Access. This could limit the price that certain
investors might be willing to pay in the future for
shares of Common Stock. In addition, shares of Access
Preferred Stock may be issued in the future without
further stockholder approval and upon such terms and
conditions, and having such rights, privileges and
preferences, as the Board of Directors may determine
(including, for example, rights to convert into Common
Stock). The rights of the holders of Common Stock will
be subject to, and may be adversely affected by, the
rights of the holders of any Access Preferred Stock
that may be issued in the future. The issuance of
Access Preferred Stock, while providing desirable
flexibility in connection with possible acquisitions
and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire,
or discouraging a third party from acquiring, a
majority of the outstanding voting Common Stock of
Access.
Market Impact of Future Sales of Common Stock Sales
of substantial amounts of shares of Access Common
Stock in the public market could adversely affect the
market price of the Common Stock. As of the date of
this report, all outstanding shares of Common Stock
are unrestricted and freely tradable or tradable under
Rule 144, however, shareholders holding approximately
17.6 shares of Common Stock have agreed not to sell
such shares for a period up to twenty-four months.
There also are outstanding options, warrants and
rights to purchase up to approximately 8.5 million
shares of the Common Stock. The sale of a substantial
amount of these shares could have a material adverse
effect on the future market price of the Common
Stock.
Absence of Dividends. Access has not paid cash
dividends on its Common Stock does not anticipate
paying cash dividends on Common Stock in the
foreseeable future. See "Share Prices of and Dividends
on Common Stock.
NASD Requirements. The Company's shares were delisted
from the NASDAQ Small Cap Market effective April 27,
1995 for failure to meet certain financial criteria.
The Common Stock continues to be traded in the over-
the-counter market and reported in the OTC Bulletin
Board. As such, the Common Stock, when recommended by
a broker-dealer, is subject to the limitations of rule
15g-9 under the Exchange Act, which Rule imposes
additional sales practices requirements on broker-
dealers which sell the Common Stock (1) to persons
other than (a) existing customers with a previous
history of trading through such broker-dealer, (b)
institutional accredited investors (for example, a
bank or savings and loan association) and (c) a
director and/or officer of the Company and/or the
beneficial owner of 5% or more of the Common Shares or
(2) in transactions not exempt by the Rule. For
transactions under Rule 15g-9, the broker-dealer must
obtain written information from the prospective
purchaser as to his or her financial situation,
investment experience and investment objectives and,
based on such information, reasonably determine that
transactions in the security are suitable for that
person and that the prospective investor (or his or
her independent adviser) has sufficient knowledge and
experience in financial matters so as to be reasonably
expected to be capable of evaluating the risks of
transactions in such security. The broker-dealer must
also receive the purchaser's written agreement to the
transaction prior to the sale. Certain broker-
dealers, particularly if they are market makers in the
Common Stock, will have to comply with the disclosure
requirements of Rule 15g-2, 15g-3, 15g-4, 15g-5 and
15g-6 under the Exchange Act. Consequently, Rule 15g-9
and these other Rules may adversely affect the ability
of broker-dealers to sell the Common Stock.
Penny Stock Regulations; Illiquid Securities The
regulations of the Securities and Exchange Commission
("Commission") promulgated under the Exchange Act
require additional disclosure relating to the market
for penny stocks in connection with trades in any
stock defined as a penny stock. Commission regulations
generally define a penny stock to be an equity that
has a market price of less than $5.00 per share,
subject to certain exceptions. Unless an exception is
available, those regulations require the delivery,
prior to any transaction involving a penny stock, of
a disclosure schedule explaining the penny stock
market and the risks associated therewith and impose
various sales practice requirements on broker-dealers
who sell penny stocks to persons other than
established customers and accredited investors
(generally institutions). In addition, the broker-
dealer must provide the customer with current bid and
offer quotations for the penny stock, the compensation
of the broker-dealer and its salesperson in the
transaction and monthly account statements showing the
market value of each penny stock held in the
customer's account. Moreover, broker-dealers who
recommend such securities to persons other than
established customers and
<PAGE> 20
accredited investors must make a special written suitability determination
for the purchaser and receive the purchaser's written
agreement to transactions prior to sale. Regulations
on penny stocks could limit the ability of broker-
dealers to sell the Company's securities and thus the
ability of purchasers of the Company's securities to
sell their securities in the secondary market
ITEM 2. PROPERTIES
Access maintains one facility of approximately 9,100
square feet of administrative offices and laboratories
in Dallas, Texas. Access has a lease agreement for the
facility, which terminates in November 2002, however,
the Company has an option for early termination.
Adjacent space is available for expansion which the
Company believes would accommodate growth for the
foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
Access is not a party to any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDERS MATTERS
Price Range of Common Stock and Dividend Policy
Since February 1, 1996, the Company's Common Stock
trades on the OTC Bulletin Board under the trading
symbol AXCS. Prior to this date the Common Stock
traded under the trading symbol CHMX. The following
table sets forth, for the periods indicated, the high
and low closing prices for the Common Stock as
reported by the OTC Bulletin Board for the Company's
past two fiscal years.
Common Stock
--------------
<TABLE>
<CAPTION>
High Low
------ ------
<S> <C> <C>
Fiscal Year Ended December 31, 1997
First quarter $1-9/32 $ 23/32
Second quarter 55/64 3/8
Third quarter 1/2 3/16
Fourth quarter 45/64 13/64
Fiscal Year Ended December 31, 1996
First quarter $2-11/16 $ 7/8
Second quarter 2-9/16 1-5/8
Third quarter 1-11/16 7/8
Fourth quarter 1-5/16 3/4
</TABLE>
The Company has never declared or paid any cash
dividends on its Preferred Stock or Common Stock and
does not anticipate paying any cash dividends in the
foreseeable future. The payment of dividends, if any,
in the future is within the discretion of the Board of
Directors and will depend on Access' earnings, its
capital requirements and financial condition and other
relevant facts. The Company currently intends to
retain all future earnings, if any, to finance the
development and growth of the Company's business.
<PAGE> 21
The number of record holders of Access Common Stock at
March 13, 1998 was approximately 5,000. Also on March
27, 1998, the closing sale price for the Common Stock
as quoted on the OTC Bulletin Board was $0.28. There
were 37,442,343 shares of common stock outstanding at
March 27, 1998.
To date, no preferred shares have been issued.
Recent Sales of Unregistered Securities
On March 20, 1998, the Company, assisted by an
investment bank, raised $725,000 in gross proceeds,
less issuance costs of $47,250, from the placement
of 29 Units. Each Unit consists of 166,667 shares of
Common Stock and warrants to purchase 166,667 shares
of Common Stock at $0.15 per share. The funds will be
used to fund the Company's activities until further
funds are raised. The investment bank has been engaged
to assist the Company in raising up to a total of
$8,000,000 to fund the Company's research and
development activities.
Effective December 31, 1997 the Company issued 200,000 shares of
Common Stock to The Dow Chemical Company in connection
with the License Agreement. The Company relied on Rule
506 and Section 4(2) of the Securities Act of 1933 as
exemption from the registration thereunder.
Effective December 31, 1997 the Company issued 417,686 shares
of Common Stock to creditors of Tacora Corporation in
connection with the Merger Agreement between the
Company and Tacora Corporation. The Company relied on
Rule 506 and Section 4(2) of the Securities Act of
1933 as exemption from the registration thereunder.
ITEM 6.SELECTED FINANCIAL DATA (Thousands, Except for
Net Loss Per Share) (1)
The following data, insofar as it relates to each of
the years in the five year period ended December 31,
1997, has been derived from the audited financial
statements of Access and notes thereto appearing
elsewhere herein. The data should be read in
conjunction with the Financial Statements and Notes
thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations"
appearing elsewhere in this Form 10K.
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Total Revenues $ 435 $167 $690 $1,039 $322
Operating Loss (4,524) (11,613) (1,046) (466) (1,386)
Other Income 119 196 5 9 34
Interest Expense 36 45 58 19 -
Loss Before Income Taxes (4,441) (11,462) (1,099) (476) (1,352)
Income taxes - - - - 32
Net Loss (4,441) (11,462) (1,099) (476) (1,384)
Common Stock Data:
Net Loss Per Basic and
Diluted Common Share $(.14) $(.38) $(.09) $(.04) $(.12)
Weighted Average Basic and
Diluted Common Shares
Outstanding 31,676 29,845 11,846 11,160 11,160
December 31,
-------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
Consolidated Balance Sheet Data:
Total Assets $1,447 $4,928 $424 $1,261 $1,079
Notes Payable - 110 100 - -
Total Liabilities 848 868 773 731 71
Stockholders' Equity (Deficit) 599 4,060 (349) 531 1,007
</TABLE>
(1) - Reflects Company data for 1997 and 1996 and API data for the years
1995, 1994 and 1993. Net Loss Per Basic and Diluted Common Share and
Weighted Average Basic and Diluted Common Shares Outstanding are
adjusted by the conversion factor 3.824251 used for the merger of
API with the Company.
<PAGE> 22
On December 9, 1997, a wholly-owned subsidiary of the
Company merged with Tacora Corporation ("Tacora"), a
privately-held pharmaceutical company based in
Seattle, Washington, whereby Tacora became a wholly-
owned subsidiary of the Company. Operations have been
included in the Company's consolidated financial
statements since the date of acquisition. Pro forma
disclosure relating to the Tacora acquisition is not
presented as the impact is immaterial to the Company.
The Company used the purchase method of accounting for
the investment in Tacora. The aggregate purchase price
was $733,000 payable in $124,000 in cash and $192,000 in
stock. Additionally, the Company assumed $239,000 in
trade and accrued payables and $184,000 of Tacora's
capital lease obligations. Based upon the achievement
of certain milestones enumerated in the merger
agreement, the Company may be required to issue up to
approximately 2,750,000 shares of common stock of the
Company ("Common Stock") to the former stockholders of
Tacora. Such shares of Common Stock are payable at an
escalating value over the milestone period. The excess
purchase price of the fair value of Tacora's net
assets of $579,544 was recorded and written off in
the fourth quarter of 1997 due to an impairment of the excess purchase
price based on estimated future cash flows.
On January 25, 1996, the Company shareholders, at a
Special Meeting, approved the merger with Access
Pharmaceuticals, Inc. ("API"), a Texas corporation.
Under the terms of the agreement, API was merged into
the Company with Chemex as the surviving entity.
Chemex also changed its name to Access
Pharmaceuticals, Inc. and the operations of the
consolidated company are now based in Dallas, Texas.
Shareholders of both companies approved the merger.
As a result of the merger, and at time of the merger,
the former API stockholders owned approximately 60% of
the issued and outstanding shares of the Company.
Generally accepted accounting principles require that
a company whose stockholders retain the controlling
interest in a combined business be treated as the
acquiror for accounting purposes. As a consequence,
the merger is being accounted for as a "reverse
acquisition" for financial reporting purposes and API
has been deemed to have acquired an approximate 60%
interest in Chemex. Despite the financial reporting
requirement to account for the acquisition as a
"reverse acquisition", the Company remains the
continuing legal entity and registrant for Securities
and Exchange Commission reporting purposes.
Subsequent to the Merger of API into Access, the
Company is now managed by the former management of API
and the focus of the Company has changed to the
development of enhanced delivery of parenteral
therapeutic and diagnostic imaging agents and topical
delivery systems through the utilization of its
patented and proprietary technology.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
In connection with the merger ("Merger") of Access
Pharmaceuticals, Inc., a Texas corporation ("API"),
with and into Chemex Pharmaceuticals, Inc. ("Chemex")
on January 25, 1996, the name of Chemex was changed to
Access Pharmaceuticals, Inc. ("Access" or the
"Company").
As a result of the merger and immediately after the
merger, the former API Stockholders owned
approximately 60% of the issued and outstanding shares
of the Company. Generally accepted accounting
principles require that a company whose stockholders
retain the controlling interest in a combined business
be treated as the acquiror for accounting purposes. As
a consequence, the merger was accounted for as a
"reverse acquisition" for financial reporting purposes
and API was deemed to have acquired an approximate 60%
interest in Chemex. Despite the financial reporting
requirement to account for the acquisition as a
"reverse acquisition," Chemex remains the continuing
legal entity and registrant for Securities and
Exchange Commission reporting purposes.
Subsequent to the Merger of API into Access, the
Company has been managed by the former management of
API and the focus of the Company has changed to a drug
delivery company using advanced drug carrier
technology for application in cancer treatment,
dermatology and imaging. In addition, the Company has
developed a drug to treat canker sores that was sold
to Block Drug Company ("Block") and is currently being
marketed in the United States by Block subject to a
royalty agreement with the Company.
In August 1997, the Company entered into an agreement
to enter into a collaboration with The Dow Chemical
Company ("Dow Chemical") for the development of
products incorporating Dow Chemical's chelation
technology and Access' Bio~Responsive TM polymer systems.
The collaboration focus is on the development of MRI
contrast agents and
<PAGE> 23
radiopharmaceutical diagnostics
and therapeutics. The advancement of the Access
developments in these areas are dependent on securing
chelation technology, which encapsulates metals to
avoid adverse effects on the body.
On December 9, 1997, a wholly-owned subsidiary of the
Company merged with Tacora Corporation ("Tacora"), a
privately-held pharmaceutical company based in
Seattle, Washington, whereby Tacora became a wholly-
owned subsidiary of the Company. Operations have been
included in the Company's consolidated financial
statements since the date of acquisition. Pro forma
disclosure relating to the Tacora acquisition is not
presented as the impact is immaterial to the Company.
The Company used the purchase method of accounting for
the investment in Tacora. The aggregate purchase price
was $730,000 in $124,000 in cash and $192,000 in
stock. Additionally, the Company assumed $239,000 in
trade and accrued payables and $184,000 of Tacora's
capital lease obligations. Based upon the achievement
of certain milestones enumerated in the merger
agreement, the Company may be required to issue up to
approximately 2,750,000 shares of common stock of the
Company ("Common Stock") to the former stockholders of
Tacora. Such shares of Common Stock are payable at an
escalating value over the milestone period. The excess
purchase price of the fair value of Tacora's net
assets of $579,544 was recorded and written off in
the fourth quarter of 1997 due to an immediate
of the excess purchase price based on estimated cash flows.
Since its inception, Access has devoted its resources
primarily to fund its research and development
programs. The Company has been unprofitable since
inception and to date has not received any revenues
from the sale of products. No assurance can be given
that the Company will be able to generate sufficient
product revenues to attain profitability on a
sustained basis if at all. The Company expects to
incur losses for the next several years as it
continues to invest in product research and
development, preclinical studies, clinical trials and
regulatory compliance. At December 31, 1997, the
Company's accumulated deficit was approximately $19.7
million.
Recent Developments
On March 20, 1998, the Company, assisted by an
investment bank raised $725,000 in gross proceeds, less
issuance costs of $47,250, from the placement of
29 Units. Each unit consists of 166,667 shares Common
Stock and warrants to purchase 166,667 shares of
Common Stock at $0.15 per share. The funds will be
used to fund the Company's activities until further
funds are raised. The investment bank has been engaged
to assist the Company in raising up to $8,000,000 to
fund the Company's research and development
activities.
On April 14, 1998 the Company will hold a special
shareholders meeting of stockholders to consider a
proposal to amend Access' Certificate of
Incorporation, as amended, to effect a
recapitalization of the Company through a one-for-
twenty reverse stock split of Access common stock,
$.04 par value per share (the "Common Stock"),
decrease the number of authorized shares of Common
Stock from 60.0 million to 20.0 million and decrease
the authorized shares of preferred stock of the
Company from 10.0 million to 2.0 million (the
"Recapitalization"). This proposal will decrease the
number of outstanding shares of Common Stock from
approximately 37.4 million to 1.9 million.
In addition, if the proposal is approved by
shareholders, the Company intends to submit an
application for listing on NASDAQ or an alternate
exchange if it meets all such listing qualifications.
There can be no assurances that the market price of
the Common Stock immediately after the implementation
of the proposed reverse stock split will increase, and
if it does increase, there can be no assurance that
such increase can be maintained for any period of
time, or that such market price will approximate
twenty times the market price before the proposed
reverse stock split. There can be no assurances that
the Company will be listed on NASDAQ or an alternate
exchange.
On February 26, 1998, the Company entered into a
license agreement with Strakan Limited ("Strakan")
relating to the Company's zinc technology. Strakan
has agreed to fund the development costs of Zinc
Clindamycin, for the treatment of acne, and any
additional compounds developed utilizing the zinc
patent, and will share equally all milestones payments
received from the sublicensing of the compound. In
addition, Access will receive a royalty on sales of
products based on this technology.
Liquidity and Capital Resources
The Company's principal source of liquidity as of
March 27, 1998, is $229,000 of cash and cash
equivalents. Working deficit as of December 31, 1997
was $(216,000), a decrease of $4,160,000 as compared
to the working capital as of December 31, 1996 of
$3,944,000. The decrease in working capital was
principally due to the
<PAGE> 24
current year's operations and the assumption of liabilities from the Tacora
acquisition.
Since its inception, the Company's expenses have
significantly exceeded its revenues, resulting in an
accumulated deficit of $19,748,000 at December 31,
1997. The Company has funded its operations primarily
through private sales of its equity securities,
contract research payments from corporate alliances
and the merger with Chemex Pharmaceuticals, Inc.
The Company has incurred negative cash flows from
operations since its inception, and has expended, and
expects to continue to expend in the future,
substantial funds to complete its planned product
development efforts. The Company expects that its
existing capital resources will be adequate to fund
the Company's operations through the next two to six
months. The Company is dependent on raising additional
capital to fund its development of technology and to
implement its business plan. Such dependence will
continue at least until the Company begins marketing
its new technologies.
If the anticipated revenues are delayed or do not
occur or the Company is unsuccessful in raising
additional capital on acceptable terms, the Company
would be required to curtail research and development
and general and administrative expenditures so that
working capital would cover reduced operations into
the third quarter of 1998. There can be no assurance,
however, that changes in the Company's operating
expenses will not result in the expenditure of such
resources before such time.
The Company will require substantial funds to conduct
research and development programs, preclinical studies
and clinical trials of its potential products. The
Company's future capital requirements and adequacy of
available funds will depend on many factors including:
the successful commercialization of amlexanox; the
ability to establish and maintain collaborative
arrangements for research, development and
commercialization of products with corporate partners;
continued scientific progress in the Company's
research and development programs; the magnitude,
scope and results of preclinical testing and clinical
trials; the costs involved in filing, prosecuting and
enforcing patent claims; competing technological
developments; the cost of manufacturing and scale-up;
and, the ability to establish and maintain effective
commercialization activities and arrangements.
The Company intends to seek additional funding through
research and development or licensing arrangements
with potential corporate partners, public or private
financing, or from other sources. The Company does not
have any committed sources of additional financing and
there can be no assurance that additional financing
will be available on favorable terms, if at all. In
the event that adequate funding is not available, the
Company may be required to delay, reduce or eliminate
one or more of its research or development programs or
obtain funds through arrangements with corporate
collaborators or others that may require the Company
to relinquish greater or all rights to product
candidates at an earlier stage of development or on
less favorable terms than the Company would otherwise
seek. Insufficient financing may also require the
Company to relinquish rights to certain of its
technologies that the Company would otherwise develop
or commercialize itself. If adequate funds are not
available, the Company's business, financial condition
and results of operations will be materially and
adversely effected.
The Company's business is subject to significant
risks, including, without limitation, uncertainties
associated with the length and expense of the
regulatory approval process, uncertainty associated
with obtaining and enforcing patents and risks
associated with dependence on corporate partners.
Although certain of the Company's products may appear
promising at an early stage of development, they may
not be successfully commercialized for a number of
reasons, such as the possibility that the potential
products will be determined to be ineffective during
clinical trials, fail to receive necessary approvals,
be precluded from commercialization by proprietary
rights of third parties or competitive technology is
more effective than product developed by the Company.
Further, there can be no assurance that any
collaborations will be initiated, continued or result
in successfully commercialized products.
Year 2000 Issue
The Company has developed a plan to modify its
information technology to be ready for the year 2000.
The Company relies upon PC-based systems and does not
expect to incur material costs to transition to Year
2000 compliant systems in its internal operations. The
Company does not expect this project to have a
significant effect on operations. The Company will
continue to implement systems and all new investments
are expected to be with Year 2000 compliant software.
<PAGE> 25
Results of Operations
Comparison of Years Ended December 31, 1997 and 1996
Revenues for 1997 were $435,000 as compared to
$167,000 in 1996, an increase of $158,000. Revenues
for 1997 were comprised of $325,000 of licensing
income from an ongoing agreement with an emerging
pharmaceutical company. The agreement provides for
royalty payments if a product is developed from the
technology. There was also $110,000 of option income
recorded in 1997. Revenues for 1996 were comprised of
option income with a pharmaceutical company.
Total research and development spending for 1997 was
$2,433,000 as compared to $1,405,000 for the same
period in 1996, an increase of $1,028,000. The
increase in research and development expenses was due
to the following: external research expenditures-
$683,000 primarily due to additional funding of
Polymer Platinate at University of London and research
at Duke University; salaries and related expenses-
$158,000 due to hiring of additional scientists;
equipment rental and maintenance costs- $82,000;
travel and entertainment- $44,000 due to project
management of external research; scientific consulting-
$43,000 due to additional consulting and manpower for
the ongoing projects; and other net increases totaling
$83,000. The increase in research and development
expenses is offset by lower moving expenses- $65,000
due to the relocation of scientists in 1996. If the
Company is successful in raising additional capital,
research spending is expected to increase in future
quarters as the Company intends to hire additional
scientific management and staff and will accelerate
activities to develop the Company's product
candidates. If the Company is not successful in
raising additional capital, research spending will be
curtailed.
Total general and administrative expenses were
$1,784,000 in 1997, a decrease of $154,000 as compared
to the same period in 1996. The decrease in spending
was due to the following decreases in: business
consulting fees- $109,000 primarily due to the fair
value of warrants issued in 1997 for consulting being
less than the fair value of the warrants issued in
1996; patent expenses- $74,000 due to fewer initial
patent filings in 1997 as compared to 1996; lower
moving expenses- $44,000 due to the moving expenses
associated with the hiring of a business development
vice president in 1996; and other decreases of
$27,000. The decreases are offset by higher salaries
and related expenses- $111,000 due to a full twelve
months of salaries in 1997 for all administrative
employees as compared to a partial period in 1996. If
the Company is not successful in raising additional
capital, general and administrative spending will be
curtailed.
Interest expense of $36,000 was $9,000 lower in 1997
versus 1996 due to the decrease of the outstanding
balance of capital lease obligations. Interest expense
will increase in 1998 due to the addition of capital
leases from the Tacora acquisition.
Depreciation and amortization increased to $162,000 in
1997 from $123,000 in 1996, an increase of $39,000.
The increase is due to the amortization of $25,000 of
licenses and one month of depreciation and
amortization of the Tacora assets.
Excess purchase price over the fair value of Tacora's
net assets of $580,000 was recorded and written off in
the fourth quarter of 1997. In 1996, excess purchase
price over the fair value of Chemex's net assets of
$8,314,000 was recorded and written off due to an
immediate impairment of the excess purchase price.
Total expenses were $4,849,000, including $580,000 of
excess purchase price written off for the Tacora
purchase, which resulted in a loss for the twelve
months of $4,441,000, or $.14 per share.
Comparison of Years Ended December 31, 1996 and 1995
Revenues for 1996 were $167,000 as compared to
$690,000 in 1995, a decrease of $523,000. The decrease
in revenues for 1996 as compared to the comparable
1995 period was principally due to option payments
recorded as income related to a third-party evaluation
of certain of the Company's technology. The company
performing the evaluation elected not to extend the
option period beyond March 29, 1996. An additional
$110,000 in option payments was recorded as unearned
revenue. Revenues for 1995 were comprised of sponsored
research and development revenues.
<PAGE> 26
Total research spending for 1996 was $1,405,000 as
compared to $728,000 for the same period in 1995, an
increase of $677,000. The increase in expenses was due
to the following: increased salaries and related
expenses- $353,000; increased external research
expenditures- $133,000; increased equipment rental
costs- $88,000; increased scientific consulting-
$72,000; and other increases of $31,000.
Total general and administrative expenses were
$1,938,000 in 1996, an increase of $1,297,000 as
compared to the same period in 1995. The increase in
spending was due to the following increases in:
business consulting fees- $344,000; professional
expenses due to the Merger and legal costs of being a
public company- $301,000; salaries and related expenses-
$184,000; general business consulting fees and
expenses- $146,000; patent expenses- $142,000;
director fees and director and officer insurance-
$134,000; and other increases of $46,000.
Interest expense was $13,000 lower in 1996 versus 1995
due to the decrease of the outstanding balance of
capital lease obligations.
Depreciation and amortization decreased to $123,000 in
1996 from $367,000 in 1995, a decrease of $244,000.
The decrease is due to the write off of $246,000
capitalized patent and application costs in 1995.
Excess purchase price over the fair value of Chemex's
net assets of $8,314,000 was recorded and written off
in the first quarter of 1996 due to an immediate
impairment of the excess purchase price.
Total expenses were $11,780,000, including $8,314,000
of excess purchase price written off, which resulted
in a loss for the twelve months of $11,462,000, or
$.38 per share.
New Accounting Standard
In June 1997, the Financial Accounting Standards Board issued two new Statements
of Financial Accounting Standards ("SFAS") which are effective for financial
statements for periods beginning after December 15, 1997 and which will apply
to tghe Company beginning with its fiscal year ending December 31, 1998.
Management of the Company does not expect that the adoption of either
pronouncement will have a material impact on the Company's financial position,
results of operations, or liquidity.
SFAS No. 130, "Reporting Comprehensive Income," establishes standards for
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. Comprehensive income includes net
income and is defined as the change in net assets of a business enterprise
during a period from transactions and other events and circumstances from
nonowner sources. It includes all changes in equity during a period except
those from investments by owners and distributions to owners. Examples of
comprehensive income, other than net income, include unrealized gains and
losses on certain investments in debt and equity securities and foreign
currency items.
SFAS No. 131. "Disclosure About Segments of an Enterprise and Related
Information," establishes standards for the way that public enterprises report
information about operating segments in annual financial statements. It also
requires that those enterprises report selected information about operating
segments in interim financial reports issued to stockholders.
ITEM 8. FINANCIAL AND SUPPLEMENTARY DATA
The response to this Item is submitted as a separate
section of this report.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
COMPANY
The information requested by this item will be
contained in the Company's definitive Proxy Statement
("Proxy Statement") for its 1998 Annual Meeting of
Stockholders to be held on June 12, 1998 and is
incorporated by reference. Such Proxy Statement will
be filed with the Securities and Exchange Commission
not later than 120 days subsequent to December 31,
1997.
ITEM 11. EXECUTIVE COMPENSATION
The information requested by this item will be
contained in the Company's definitive Proxy Statement
and is incorporated by reference. Such Proxy Statement
will be filed with the Securities and Exchange
Commission not later than 120 days subsequent to
December 31, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The information requested by this item will be
contained in the Company's definitive Proxy Statement
and is incorporated by reference. Such Proxy Statement
will be filed with the Securities and Exchange
Commission not later than 120 days subsequent to
December 31, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS
The information requested by this item will be
contained in the Company's definitive Proxy Statement and is
<PAGE> 27
incorporated by reference. Such Proxy Statement
will be filed with the Securities and Exchange
Commission not later than 120 days subsequent to
December 31, 1997.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K
a. Financial Statements and Exhibits Page
1. Financial Statements. The following financial statements are
submitted as part of this report:
Independent Auditors' Report of KPMG Peat Marwick LLP F-1
Independent Auditors' Report of Smith Anglin and Company F-2
Consolidated Balance Sheets at December 31, 1997 and 1996 F-3
Consolidated Statements of Operations for the three
years ended December 31, 1997 and the period from
February 24, 1988 (Inception) to December 31, 1997 F-4
Consolidated Statements of Stockholders' Equity
(Deficit) for the period from February 24, 1988
(Inception) to December 31, 1997 F-5
Consolidated Statements of Cash Flows for the three
years ended December 31, 1997 and the period from
February 24, 1988 (Inception) to December 31, 1997 F-6
Notes to Consolidated Financial Statements F-7
2. Financial Statement Schedule.
No financial statement schedules are included because they are
not required or the information is included in the financial
statements or notes thereto.
3. Exhibits.
4. Exhibit Number
2.1 Amended and Restated Agreement of Merger and
Plan of Reorganization between Access Pharmaceuticals,
Inc. and Chemex Pharmaceuticals, Inc., dated as of
October 31, 1995 (Incorporated by reference to
Exhibit A of the Company's Registration Statement on
Form S-4 dated December 21, 1995, Commission File No. 33-64031)
3.0 Articles of incorporation and bylaws:
3.1 Certificate of Incorporation (Incorporated by
Reference to Exhibit 3(a) of the Company's Form 8-B
dated July 12, 1989, Commission File Number 9-9134)
3.2 Bylaws (Incorporated by referenced to Exhibit
3(b) of the Company's Form 8-B dated July 12, 1989,
Commission File Number 0-9314)
3.3 Certificate of Amendment of Certificate of
Incorporation filed August 21, 1992
3.4 Certificate of Merger filed January 25, 1996.
(Incorporated by reference to Exhibit E of the
Company's Registration Statement on Form S-4 dated
December 21, 1995, Commission File No. 33-64031)
3.5 Certificate of Amendment of Certificate of
Incorporation filed January 25, 1996. (Incorporated
by reference to Exhibit E of the Company's
Registration Statement on Form S-4 dated December 21,
1995, Commission File No. 33-64031)
3.6 Amended and Restated Bylaws (Incorporated by
reference to Exhibit 3.1 of the Company's Form 10-Q
for the quarter ended June 30, 1996)
3.7 Certificate of Amendment of Certificate of
Incorporation filed July 18, 1996
10.0 Material contracts:
<PAGE> 28
10.1 Irrevocable Assignment of Proprietary
Information with Dr. Charles G. Smith (Incorporated by
reference to Exhibit 10.6 of the Company's Form 10-K
for the year ended December 31, 1991)
10.2 Conversion Agreement with Sentinel Charitable
Remainder Trust dated June 18, 1990 (Incorporated by
reference to Exhibit 10 of the Company's Form 10-K for
the year ended December 31, 1990)
10.3 Asset Purchase and Royalty Agreement between
Block Drug Company, Inc. and the Company dated June 7,
1995 (Incorporated by reference to Exhibit 10.28 of
the Company's Form 10-Q for the quarter ended June 30, 1995)
*10.4 1995 Stock Option Plan (Incorporated by
reference to Exhibit F of the Company's Registration
Statement on Form S-4 dated December 21, 1995,
Commission File No. 33-64031)
10.5 Stockholder's Agreement dated October 1995
between Access Pharmaceuticals, Inc. and Dr. David F.
Ranney (Incorporated by reference to Exhibit A of the
Company's Registration Statement on Form S-4 dated
December 21, 1995, Commission File No. 33-64031).
10.6 Patent Purchase Agreement dated April 5, 1994
between David F. Ranney and Access Pharmaceuticals,
Inc. (Incorporated by reference to Exhibit 10.16 of
the Company's Form 10-K for the year ended December 31, 1995)
10.7 First Amendment to Patent Purchase Agreement
dated January 23, 1996 between David F. Ranney and
Access Pharmaceuticals, Inc. (Incorporated by
reference to Exhibit 10.17 of the Company's Form 10-K
for the year ended December 31, 1995)
10.8 Lease Agreement between Pollock Realty
Corporation and the Company dated July 25, 1996
(Incorporated by reference to Exhibit 10.19 of the
Company's Form 10-Q for the quarter ended September 30, 1996)
10.9 Platinate HPMA Copolymer Royalty Agreement
between The School of Pharmacy, University of London
and the Company dated November 19, 1996
10.10 License Agreement between The Dow Chemical
Company and the Company dated June 30, 1997.
(Incorporated by reference to Exhibit 10.12 of the
Company's Form 10-Q for the quarter ended September 30, 1997)
10.11 Agreement of Merger and Plan of
Reorganization, dated May 23, 1997 among the Company,
Access Holdings, Inc and Tacora Corporation
21. Subsidiaries of the registrant
23.0 Consent of Experts and Counsel
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of Smith, Anglin & Co.
27.1 Financial Data Schedule
* Management contract or compensatory plan required to be filed as an
Exhibit to this Form pursuant to Item 14(c) of the report
b. Reports on Form 8-K.
There were no reports on Form 8-K during the fourth quarter of 1997.
<PAGE> 29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
ACCESS PHARMACEUTICALS, INC.
Date March 30, 1998 By: /s/ Kerry P. Gray
----------------------
Kerry P. Gray
President and Chief Executive
Officer, Treasurer
Date March 30, 1998 By: /s/ Stephen B. Thompson
---------------------------
Stephen B. Thompson
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated.
Date March 30, 1998 By:/s/ Kerry P. Gray
---------------------------
Kerry P. Gray
President and Chief Executive
Officer, Treasurer, Director
Date March 30, 1998 By:/s/ J. Michael Flinn
--------------------------
J. Michael Flinn, Director
Date March 30, 1998 By:/s/ Stephen B. Howell
---------------------------
Stephen B. Howell, Director
Date March 30, 1998 By:/s/ Max Link
-----------------
Max Link, Director
Date March 30, 1998 By:/s/ Herbert H. McDade, Jr.
--------------------------------
Herbert H. McDade, Jr., Director
<PAGE> 30
Independent Auditors' Report
The Board of Directors and Stockholders
Access Pharmaceuticals, Inc.:
We have audited the accompanying consolidated balance
sheets of Access Pharmaceuticals, Inc. and subsidiary
(a development stage company) as of December 31, 1997
and 1996, and the related consolidated statements of
operations, stockholders' equity (deficit), and cash
flows for each of the years in the three-year period
ended December 31, 1997 and for the period February 24, 1988
(inception) to December 31, 1997. These consolidated financial
statements are the responsibility of the Company's
management. Our responsibility is to express an
opinion on these consolidated financial statements
based on our audits. The cumulative statements of
operations, stockholders' equity (deficit), and cash
flows for the period February 24, 1988 (inception) to
December 31, 1997 include amounts for the period from
February 24, 1988 (inception) to December 31, 1988 and
for each of the years in the six-year period ending
December 31, 1994, which were audited by other
auditors whose report has been furnished to us and is
included herein, and our opinion, insofar as it
relates to the amounts included for the period
February 24, 1988 (inception) through December 31,
1994, is based solely on the report of the other
auditors.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require
that we plan and perform the audit to obtain
reasonable assurance about whether the financial
statements are free of material misstatement. An audit
includes examining, on a test basis, evidence
supporting the amounts and disclosures in the
financial statements. An audit also includes assessing
the accounting principles used and significant
estimates made by management, as well as evaluating
the overall financial statement presentation. We
believe that our audits provide a reasonable basis for
our opinion.
In our opinion, based on our audits and report of the
other auditors included herein, the consolidated
financial statements for the three-year period ended
December 31, 1997 referred to above present fairly, in
all material respects the financial position of Access
Pharmaceuticals, Inc. and subsidiary (a development
stage company) as of December 31, 1997 and 1996, and
the results of their operations and their cash flows
for each of the years in the three-year period ended
December 31, 1997 and for the period February 24, 1988
(inception) to December 31, 1997, in conformity with generally
accepted accounting principles.
The accompanying consolidated financial statements
have been prepared assuming that the Company will
continue as a going concern. As discussed in note 11
to the consolidated financial statements, the Company
has suffered recurring losses from operations and has
a net capital deficiency that raise substantial doubt
about its ability to continue as a going concern.
Management's plan's in regard to these matters are
also described in note 11. The consolidated financial
statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ KPMG Peat Marwick LLP
-------------------------
KPMG Peat Marwick LLP
Dallas, Texas
March 24, 1998
<PAGE> 31
Independent Auditors' Report
The Board of Directors and Stockholders
of Access Pharmaceuticals, Inc.:
We have audited the accompanying statements of
operations, stockholders' equity and cash flows of
Access Pharmaceuticals, Inc. (a development stage
company) for the period February 24, 1988 (inception)
through December 31, 1994. These financial statements
are the responsibility of the Company's management.
Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require
that we plan and perform the audit to obtain
reasonable assurance about whether the financial
statements are free of material misstatement. An audit
includes examining, on a test basis, evidence
supporting the amounts and disclosures in the
financial statements. An audit also includes assessing
the accounting principles used and significant
estimates made by management, as well as evaluating
the overall financial statement presentation. We
believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements referred to
above present fairly, in all material respects, the
period February 24, 1988 (inception) through December
31, 1994, in conformity with generally accepted
accounting principles.
/s/ Smith, Anglin & Co.
-----------------------
Smith, Anglin & Co.
Dallas, Texas
September 21, 1995
<PAGE> 32
ACCESS PHARMACEUTICALS, INC. AND SUBSIDIARY
a development stage company
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
1997 1996
---------- ----------
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 438,000 $4,428,000
Accounts receivable 1,000 1,000
Prepaid expenses and other current assets 51,000 190,000
---------- ----------
Total Current Assets 490,000 4,619,000
Property and equipment, net (note 5) 422,000 300,000
Licenses, net (note 1) 475,000 -
Other assets 60,000 9,000
---------- ----------
Total Assets $1,447,000 $4,928,000
=========== ==========
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable and accrued expenses $ 434,000 $ 399,000
Royalties payable (note 10) 53,000 50,000
Accrued insurance premium 38,000 74,000
Current portion of obligations
under capital leases (note 6) 181,000 152,000
---------- ----------
Total Current Liabilities 706,000 675,000
Obligations under capital leases, net of
current portion (note 6) 142,000 83,000
Unearned revenue (note 3) - 110,000
---------- ----------
Total Liabilities 848,000 868,000
Commitments and Contingencies (notes 6, 10 & 11)
Stockholders' Equity (note 7)
Preferred stock, at December 31, 1997 and 1996,
$.01 par value, Authorized 10,000,000 shares,
none issued or outstanding - -
Common stock, $.04 par value, authorized
60,000,000 shares, 32,609,010 and 31,391,324
issued and outstanding at December 31, 1997
and 1996, respectively 1,304,000 1,256,000
Additional paid-in capital 19,043,000 18,111,000
Deficit accumulated during the development stage (19,748,000) (15,307,000)
---------- ----------
Total Stockholders' Equity 599,000 4,060,000
Total Liabilities and Stockholders' Equity $1,447,000 $4,928,000
========== ==========
</TABLE>
- ----------------------------------------------
See Accompanying Notes to Consolidated Financial Statements
<PAGE> 33
ACCESS PHARMACEUTICALS, INC. AND SUBSIDIARY
a development stage company
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31, (Inception) to
1997 1996 1995 December 31, 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C>
Revenues (note 3)
Research and development $ - $ - $ 690,000 $2,711,000
Option income 110,000 167,000 - 2,149,000
Licensing revenues 325,000 - - 325,000
---------- ---------- ---------- ----------
Total Revenues 435,000 167,000 690,000 5,185,000
Expenses
Research and development 2,433,000 1,405,000 728,000 8,609,000
General and administrative 1,784,000 1,938,000 641,000 6,863,000
Depreciation and amortization 162,000 123,000 367,000 1,056,000
Write-off of excess purchase price 580,000 8,314,000 - 8,894,000
---------- ---------- ---------- ----------
Total Expenses 4,959,000 11,780,000 1,736,000 25,422,000
Loss From Operations (4,524,000) (11,613,000) (1,046,000) (20,237,000)
Other Income (Expense)
Interest and miscellaneous income 119,000 196,000 5,000 774,000
Interest expense (36,000) (45,000) (58,000) (158,000)
---------- ---------- ---------- ----------
83,000 151,000 (53,000) 616,000
Loss Before Income Taxes (4,441,000) (11,462,000) (1,099,000) (19,621,000)
Provision for Income Taxes - - - 127,000
---------- ---------- ---------- ----------
Net Loss $(4,441,000)$(11,462,000) $(1,099,000)$(19,748,000)
========== ========== ========== ==========
Basic and Diluted Loss Per Common Share $(0.14) $(0.38) $(0.09)
Weighted Average Basic and Diluted
Common Shares Outstanding 31,675,708 29,845,560 11,846,329
</TABLE>
- ----------------------------------------
See Accompanying Notes to Consolidated Financial Statements
<PAGE> 34
ACCESS PHARMACEUTICALS, INC. AND SUBSIDIARY
a development stage company
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Deficit
Common Stock Additional Accumulated
---------------------- Paid-in During the
Shares Amount Capital Development Stage
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Balance, February 24, 1988 - $ - $ - $ -
Common stock issued, $0.33 per share 294,000 3,000 94,000 -
Common stock issued, $0.08 per share 153,000 3,000 9,000 -
Net loss for the period February 24,
1988 to December 31, 1988 - - - (30,000)
---------- ---------- ---------- ----------
Balance, December 31, 1988 447,000 6,000 103,000 (30,000)
Common stock issued, $0.33 per share 87,000 - 29,000 -
Common stock issued, $1.65 per share 75,000 - 124,000 -
Common stock issued, $0.01 per share 1,950,000 20,000 (11,000) -
Net loss for the year - - - (191,000)
---------- ---------- ---------- ----------
Balance, December 31, 1989 2,559,000 26,000 245,000 (221,000)
Common stock issued, $3.00 per share 73,000 - 218,000 -
Common stock issued, $7.82 per share 284,000 3,000 2,222,000 -
Net loss for the year - - - (219,000)
---------- ---------- ---------- ----------
Balance, December 31, 1990 2,916,000 29,000 2,685,000 (440,000)
Common stock issued, $3.00 per share 2,000 - 6,000 -
Contribution of equipment by shareholder - - 468,000 -
Net income for the year - - - 413,000
---------- ---------- ---------- ----------
Balance, December 31, 1991 2,918,000 29,000 3,159,000 (27,000)
Contribution of equipment by shareholder - - 89,000 -
Net loss for the year - - - (859,000)
---------- ---------- ---------- ----------
Balance, December 31, 1992 2,918,000 29,000 3,248,000 (886,000)
Net loss for the year - - - (1,384,000)
---------- ---------- ---------- ----------
Balance, December 31, 1993 2,918,000 29,000 3,248,000 (2,270,000)
Net loss for the year - - - (476,000)
---------- ---------- ---------- ----------
Balance, December 31, 1994 2,918,000 29,000 3,248,000 (2,746,000)
Common stock issued, $2.00 per share 25,000 - 50,000 -
Exercise of stock options between
$0.25 and $1.25 per share 623,000 6,000 163,000 -
Common stock grants 74,000 1,000 (1,000) -
Net loss for the year - - - (1,099,000)
---------- ---------- ---------- ----------
Balance, December 31, 1995 3,640,000 36,000 3,460,000 (3,845,000)
Merger 19,018,000 871,000 9,130,000 -
Common stock issued, $.70 share 8,571,000 343,000 5,160,000 -
Exercise of stock options/SAR's
between $0.00 and $0.88 per share 162,000 6,000 17,000 -
Warrants issued at $1.00 per share
for consulting services - - 344,000 -
Net loss for the year - - - (11,462,000)
---------- ---------- ---------- ----------
Balance, December 31, 1996 31,391,000 1,256,000 18,111,000 (15,307,000)
Common stock issued, $0.75 share 800,000 32,000 568,000 -
Common stock issued, $0.46 share 418,000 16,000 176,000 -
Warrants issued at $0.60 and $0.90 per
share for financial consulting services - - 188,000 -
Net loss for the year - - - (4,441,000)
---------- ---------- ---------- ----------
Balance, December 31, 1997 32,609,000 $1,304,000 $19,043,000 $(19,748,000)
========== ========== ========== ==========
</TABLE>
- ----------------------------------------
See Accompanying Notes to Consolidated Financial Statements
<PAGE> 35
ACCESS PHARMACEUTICALS, INC. AND SUBSIDIARY
a development stage company
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31, February 24, 1988
-------------------------------------- (Inception) to
1997 1996 1995 December 31, 1997
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Cash Flows From Operating Activities:
Net Loss $(4,441,000) $(11,462,000) $(1,099,000) $(19,748,000)
Adjustments to reconcile net loss to
net cash used in operating activities:
Write off of excess purchase price 580,000 8,314,000 - 8,894,000
Consulting expense related to
warrants granted 188,000 344,000 - 532,000
Research expenses related to
common stock granted 100,000 - - 100,000
Depreciation and amortization 162,000 123,000 367,000 1,056,000
Unearned revenue (110,000) - - (110,000)
Change in operating assets and liabilities:
Accounts receivable (1,000) 2,000 (3,000) (2,000)
Prepaid expenses and other
current assets 139,000 (186,000) 16,000 (52,000)
Other assets (1,000) (7,000) 1,000 (8,000)
Accounts payable and accrued expenses (244,000) 354,000 43,000 232,000
----------- ------------ ----------- ------------
Net Cash Used In Operating Activities (3,628,000) (2,668,000) (705,000) (9,106,000)
Cash Flows From Investing Activities:
Capital expenditures (16,000) (38,000) - (1,164,000)
Sales of capital equipment 6,000 - - 6,000
Purchase of Tacora, net of cash acquired (124,000) - - (124,000)
Other investing activities (50,000) - - (50,000)
----------- ------------ ---------- ------------
Net Cash Used In Investing Activities (184,000) (38,000) - (1,332,000)
Cash Flows From Financing Activities
Proceeds from notes payable - 118,000 100,000 721,000
Payments of principal on obligations
under capital leases (178,000) (127,000) (117,000) (454,000)
Cash acquired in merger with Chemex - 1,587,000 - 1,587,000
Proceeds from stock issuances - 5,526,000 219,000 9,022,000
------------ ------------ ---------- ------------
Net Cash (Used In) Provided by
Financing Activities (178,000) 7,104,000 202,000 10,876,000
Net Increase (Decrease) in Cash
and Cash Equivalents (3,990,000) 4,398,000 (503,000) 438,000
Cash and Cash Equivalents
At Beginning of Period 4,428,000 30,000 533,000 -
----------- ------------ --------- ------------
Cash and Cash Equivalents
at End of Period $438,000 $4,428,000 $ 30,000 $438,000
=========== ============ ========= ============
Cash Paid for Interest $34,000 $45,000 $58,000 $155,000
Cash Paid for Income Taxes - - - 127,000
Supplemental disclosure of noncash transactions
Payable accrued for fixed asset purchase $- $- $47,000 $47,000
Elimination of note payable to
Chemex Pharmaceuticals due to merger - 100,000 - 100,000
Stock issued for License on patents 500,000 - - 500,000
Equipment purchases financed through
capital leases 82,000 - - 82,000
Net liabilities assumed in acquisition
of Tacora Corporation (note 1) 455,000 - - 455,000
</TABLE>
- -----------------------------------------
See Accompanying Notes to Consolidated Financial Statements
<PAGE> 36
ACCESS PHARMACEUTICALS, INC. AND SUBSIDARY
(a development stage company)
Notes to Consolidated Financial Statements
Three Years Ended December 31, 1997
(1) Summary of Significant Accounting Policies:
(a) Business
Access Pharmaceuticals, Inc. ("Access" or the
"Company") is a site-directed targeting company using
bioresponsive drug carriers to target and control the
release of therapeutic agents into sites of disease
activity and clear the non-targeted drug-fraction. The
Company operates in a single industry segment.
On December 9, 1997, a wholly-owned subsidiary of the
Company merged with Tacora Corporation ("Tacora"), a
privately-held pharmaceutical company based in
Seattle, Washington, whereby Tacora became a wholly-
owned subsidiary of the Company. The Company used the purchase method
of accounting for the investment in Tacora. The aggregate purchase price
was $739,000 payable $124,000 in cash, $192,000 in stock representing
418,000 shares of Company common stock and assumption of $239,000 in
trade and accrued payables and $184,000 of Tacora's
capital lease obligations. Based upon the achievement
of certain milestones enumerated in the merger
agreement, the Company may be required to issue up to
approximately 2,750,000 shares of common stock of the
Company ("Common Stock") to the former stockholders of
Tacora. Such shares of Common Stock are payable at an
escalating value over the milestone period. The aggregate purchase price
has been allocated to the net assets acquired based on management's
estimated of the fair value of assets acquired and liabilities
assumed. The excess purchase price over the fair value of Tacora's net
identifiable assets of $579,544 was recorded and written off in
the fourth quarter of 1997 due to an impairment of the excess
purchase price based on estimated future cash flows.
Access, formerly known as Chemex Pharmaceuticals, Inc.
("Chemex"), merged with Access Pharmaceuticals, Inc.,
a Texas corporation ("API") on January 25, 1996.
Shareholders of both companies approved the merger.
Under the terms of the merger agreement, API was
merged into Chemex with Chemex as the surviving legal
entity. Chemex acquired all of the outstanding shares
of API in exchange for 13,919,979 shares of registered
common stock of Chemex, a conversion factor of
3.824251 Chemex shares for each API share. The fair
value of Chemex was $10.0 million. The excess of
purchase price over the net assets acquired of
$8,313,516 was recorded and written off during the
first quarter of 1996 due to an immediate impairment
of the excess purchase price. Chemex also changed its
name to Access Pharmaceuticals, Inc. and the
operations of the merged company are now based in
Dallas, Texas.
As a result of the merger and immediately after the
merger, the former API Stockholders owned
approximately 60% of the issued and outstanding shares
of Chemex. Generally accepted accounting principles
require that a company whose stockholders retain the
controlling interest in a combined business be treated
as the acquiror for accounting purposes. As a
consequence, the merger was accounted for as a
"reverse acquisition" for financial reporting purposes
and API was deemed to have acquired an approximate 60%
interest in Chemex. Despite the financial reporting
requirement to account for the acquisition as a
"reverse acquisition," Chemex remains the continuing
legal entity and registrant for Securities and
Exchange Commission reporting purposes.
In March 1996 the Company concluded a $6.0 million
private placement of 8.571 million shares of common
stock.
The Company's products will require clinical trials,
U.S. Food and Drug Administration ("FDA") approval, or
approval of similar authorities internationally and
acceptance in the marketplace prior to
commercialization. Although the Company believes its
patents and patent applications are valid, the
invalidation of its major patents would have a
material adverse effect upon its business. The
Company competes with specialized biotechnology
companies and major pharmaceutical companies. Many of
these competitors have substantially greater resources
than the Company.
The Company is in the development stage and its
efforts have been principally devoted to research and
development resulting in significant losses since
inception on February 24, 1988.
<PAGE> 37
(b) Principles of Consolidation
The consolidated financial statements include the
financial statements of Access Pharmaceuticals, Inc.
and Tacora Corporation, a wholly-owned subsidiary. All
significant intercompany balances have been eliminated
in consolidation.
(c) Cash and Cash Equivalents
The Company considers all highly liquid instruments
with an original maturity of three months or less to
be cash equivalents for purposes of the statements of
cash flows. Cash and cash equivalents consist
primarily of cash in banks and money market funds.
(d) Property and Equipment
Property and equipment are recorded at cost.
Depreciation is provided using the straight-line
method over estimated useful lives ranging from three
to seven years. Assets acquired pursuant to capital
lease arrangements are amortized over the shorter of
the estimated useful lives or the lease terms.
(e) Patents and Applications
In the fourth quarter of 1995, the Company changed
from deferring and amortizing patent and application
costs to recording them as expenses as incurred
because, even though the Company believes the patents
and underlying processes have continuing value, the
amount of future benefits to be derived therefrom are
uncertain. Accordingly, the new accounting method has
been adopted in recognition of a possible change in
estimated future benefits. Since the effect of this
change in accounting principle is inseparable from the
effect of the change in accounting estimate, such
change has been accounted for as a change in estimate
in accordance with Opinion No. 20 of the Accounting
Principles Board. Future patent and application costs
are expected to be expensed since the benefits to be
derived therefrom are likely to be uncertain. As a
result of the change, the Company wrote down
capitalized patent and application costs by
approximately $246,000 which amounts were included in
depreciation and amortization expense in the
accompanying Statement of Operations for 1995.
(f) Licenses
The Company recognizes the purchase value of licenses
and amortizes them over the estimated useful lives.
The Company acquired a license to certain patents for
$500,000 by issuing 700,000 shares of Common Stock in 1997. The License is
amortized over ten years. Amortization was $25,000 for
the year ended December 31, 1997.
(g) Revenue Recognition
Sponsored research and development revenues are
recognized as research and development activities are
performed under the terms of research contracts.
Advance payments received are recorded as unearned
revenue until the related research activities are
performed. Option revenues are recognized when the
earnings process is completed pursuant to the terms of
the respective contract.
(h) Research and Development Expenses
Research and development costs are expensed as
incurred.
(i) Income Taxes
Tax credits related to research and development and to
investments in equipment and improvements are reported as
<PAGE> 38
a reduction of income tax expense in the year
realized. Income taxes are accounted for under the
asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax
consequences attributable to differences between the
financial statement carrying amounts of existing
assets and liabilities and their respective tax bases
and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income
in the years in which those temporary differences are
expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that
includes the enactment date.
(j) Net Loss Per Share
In February 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting
Standards No. 128, "Earnings per Share" ("SFAS No.
128"). SFAS No. 128 revised the previous calculation
methods and presentations of earnings per share and
requires that all prior-period earnings (loss) per
share data be restated. The Company adopted SFAS No.
128 in the forth quarter of 1997 as required by this
Statement. In accordance with SFAS No. 128, the
Company has presented basic loss per share, computed
on the basis of the weighted average number of common
shares outstanding during the year, and diluted loss
per share, computed on the basis of the weighted
average number of common shares and all dilutive
potential common shares outstanding during the year.
All prior period loss per share amounts have been
restated in accordance with this Statement.
At December 31, 1997, the Company has options and
common stock warrants outstanding (notes 7 & 8). These
options and warrants would have resulted in
additional weighted average securities, under the
treasury stock method, totaling 410,459, 1,133,822 and
203,951 for the three years ended December 31, 1997, respectively.
The potetially dilutive effect of these securities has
not been considered in the computation of diluted net
loss per common share since their inclusion would be
anti-dilutive.
(k) Use of Estimates
Management of the Company has made a number of
estimates and assumptions relative to the reporting of
assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these
consolidated financial statements in conformity with
generally accepted accounting principles. Actual
results could differ from those estimates.
(l) Reclassifications
Certain reclassifications have been made to prior year
financial statements to conform with the December 31,
1997 presentation.
(m) Year 2000 Issue
The Company has developed a plan to modify its
information technology to be ready for the year 2000.
The Company relies upon PC-based systems and does not
expect to incur material costs to transition to Year
2000 compliant systems in its internal operations. The
Company does not expect this project to have a
significant effect on operations. The Company will
continue to implement systems and all new investments
are expected to be with Year 2000 compliant software.
(n) Stock Option Plans
Prior to January 1, 1996, the Company accounted for
its stock option plan in accordance with the
provisions of Accounting Principles Board ("APB")
Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. As such,
compensation expense would be recorded on the day of
grant only if the current market price of the
underlying stock exceeded the exercise price. On
January 1, 1996, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation, which permits
<PAGE> 39
entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the
date of grant. Alternatively, SFAS No. 123 also allows
entities to continue to apply the provisions of APB
Opinion No. 25 and provide pro forma net income (loss)
and pro forma earnings (loss) per share disclosures
for employee stock option grants made in 1995 and
future years as if the fair-value-based method defined
in SFAS No. 123 had been applied. The Company has
elected to continue to apply the provisions of ABP
Opinion No. 25 and provide the pro forma disclosure
provisions of SFAS No. 123.
Impairment of Long-Lived Assets and Long-Lived Assets
to Be Disposed Of
The Company adopted the provisions of SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to Be Disposed Of, on January 1,
1996. This Statement requires that long-lived assets
and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held
and used is measured by a comparison of the carrying
amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are
considered to be impaired, the impairment to be
recognized is measured by the amount by which the
carrying amount of the assets exceed the fair value of
the assets. Assets to be disposed of are reported at
the lower of the carrying amount or fair value less
costs to sell. Adoption of this Statement did not have
a material impact on the Company's financial position,
results of operations, or liquidity.
(2) Related Party Transactions:
Under consulting agreements between Thoma Corporation
("Thoma") and the Company, Thoma receives payments for
consulting services and reimbursement of direct
expenses. Herbert H. McDade, Jr., the Chairman of the
Board of Directors of the Company, is an owner of
Thoma Corp. During 1997, 1996 and 1995 Thoma received
payments for consulting services of $72,000, $60,000
and $0 respectively. Thoma was also reimbursed for
expenses of $6,000, $18,000, and $3,000 respectively,
in 1997, 1996 and 1995.
Stephen B. Howell, M.D., Director of the Company
receives payments for consulting services and
reimbursement of direct expenses. Dr. Howell consulted
with the Company in 1997 and received $2,000 in
consulting fees and $1,000 in expenses.
On October 4, 1995, Chemex made a loan to API of
$100,000 which was evidenced by a 7% promissory note.
In addition, Chemex sold the remainder of its fixed
assets to API at book value in the fourth quarter of
1995. A payable to Chemex for approximately $47,000
was recorded at December 31, 1995 for these fixed
assets. The loan and payable were both eliminated on
January 25, 1996, the date of the merger.
See Note 10 "Commitments", for transactions regarding
Dr. David F. Ranney, a major shareholder of the
Company.
(3) Research and Development Agreements:
On August 1, 1997, the Company entered into an
agreement with The Dow Chemical Company ("Dow
Chemical") for the development of products
incorporating Dow Chemical's chelation technology and
Access' Bio~Responsive polymer systems. The
collaboration will focus on the development of MRI
contrast agents and radiopharmaceutical diagnostics
and therapeutics. The advancement of the Access
developments in these areas are dependent on securing
chelation technology, which encapsulates metals to
avoid adverse effects on the body.
The Company entered into a technology evaluation option agreement with a
pharmaceutical company. The Company recognized revenues under the
agreement as certain milestones were achieved and accounted for $110,000
and $165,000 in 1997 and 1996, respectively. Proceeds received in excess
of amounts recognized were accounted for as unearned income. This
agreement was terminated March 29, 1996.
<PAGE> 40
On April 26, 1994, the Company entered into
agreements, as amended, with Corange International
Ltd. (Corange) to develop drugs based on the Company's
endothelial binding technology for use in the oncology
area. Under the agreements, the Company granted
Corange an option for a period up to two years, as
defined, to exclusively license worldwide, any
oncology agent developed pursuant to the terms of the
common research agreement. In 1995, Corange made
$495,000 in payments to the Company for sponsored
research and development which amounts were recognized
as revenue in 1995. In addition, $180,000 of unearned
revenue at December 31, 1994 was recognized as revenue
in 1995 pursuant to the Corange agreements. The
Corange agreements were terminated by Corange on June
30, 1995.
(4) Fair Value of Financial Instruments
The carrying value of current assets and current
liabilities approximates fair value due to the short
maturity of these items.
(5) Property and Equipment:
Property and equipment, of which a majority is held
under capital leases, consists of the following:
<TABLE>
<CAPTION>
December 31,
1997 1996
---------- ----------
<S> <C> <C>
Laboratory equipment $ 852,000 $448,000
Laboratory and building improvements 25,000 23,000
Furniture and equipment 170,000 114,000
---------- ----------
1,047,000 585,000
Less accumulated depreciation and amortization 625,000 285,000
----------- ----------
Net property and equipment $ 422,000 $300,000
</TABLE>
Depreciation and amortization on property and
equipment was $137,000, $123,000, and $115,000 for the
years ended December 31, 1997, 1996 and 1995,
respectively.
(6) Leases:
At December 31, 1997, future minimum lease payments
under capital lease obligations and commitments under
noncancelable operating leases were as follows:
<TABLE>
<CAPTION>
Capital leases Operating leases
-------------- ---------------
<S> <C> <C>
1998 $ 211,000 $ 77,000
1999 126,000 81,000
2000 31,000 85,000
2001 - 90,000
2002 - 85,000
-------------- ---------------
Total future minimum lease
payments 368,000 $418,000
Less amount representing interest 45,000 ===============
Present value of minimum capital
lease payments 323,000
Less current portion 181,000
-------------
Obligations under capital leases,
excluding current portion $142,000
=============
</TABLE>
The Company leases certain office and research and
development facilities under an operating lease. Rent
expense for the years ended December 31, 1997, 1996
and 1995 was $74,000, $69,000 and $59,000,
respectively.
In September 1994, pursuant to a sales leaseback
transaction, the Company sold substantially all of its
property and
<PAGE> 41
equipment for $426,000, which amount equaled the net book value of
the property and equipment sold. The lease agreement is classified as
a capital lease with an initial minimum obligation of
$426,000, payable in 42 monthly installments plus
interest. The agreement allows for the purchase of
the equipment at the end of the lease term for
$43,000, which management intends to purchase in April 1998.
The Company also issued a warrant to the lessor for the purchase
of 135,899 shares of the Company's common stock at an exercise price of $0.52
per share, subject to adjustment, as part of the transaction (see Note 7).
(7) Stockholders' Equity:
(a) Preferred Stock
The Company is authorized to issue 10,000,000 shares
of $0.01 par value preferred stock, none of which was
issued or outstanding at December 31, 1997 or 1996.
(b) Common Stock
The Company is authorized to issue 60,000,000 shares
of $0.04 par value common stock, 32,609,010 of which
was issued or outstanding at December 31, 1997. No
dividends have been paid or declared by the Company
since its inception.
(c) Warrants
The Company has issued 500,000 Units to the Sentinel
Charitable Remainder Trust (the "Trust") consisting in
the aggregate of 500,000 shares of common stock and
warrants exercisable in the aggregate for an
additional 700,000 shares of common stock. The
authorization and issuance of the Units was made in connection with
a Conversion Agreement, dated June 18, 1990, as
amended, by and between the Company and the Trust (the
"Conversion Agreement"). Pursuant to the terms of the
Conversion Agreement, each Unit has an exercise price
of $2.50 and the rights to subscribe for the Units
expire on January 1, 1999.
Each warrant issuable in connection with the Units
described above is exercisable for one share of common
stock (subject to adjustment as provided in the
warrant), with 500,000 of the warrants exercisable at
$6.25 and the remaining 200,000 warrants exercisable
at $2.50, all upon terms and conditions set forth in
the Conversion Agreement. The warrants expire on
January 1, 2000.
Under the terms of the 1994 lease agreement (described
in Note 6), the leasing company received a warrant to
purchase 135,899 shares of common stock. The warrant
remains exercisable for seven years from the date of
issuance and will expire on September 19, 2001. The
warrant is exercisable at $.52 per share. The warrant
may be adjusted under some conditions, as defined, for
dividends, changes in stock price, reorganization,
consolidation or merger and extraordinary events.
On October 5, 1995 API entered into an agreement with
a shareholder to purchase 47,803 Units of API equity.
Each Unit consisted of one share of stock and one
warrant. The exercise price for the warrants is $0.52
for every two warrants, which entitles the holder to
one share of common stock. The warrants are
exercisable until October 5, 1999.
Under the terms of the merger on January 25, 1996, a
maximum of 750,000 warrants could have been issued to
the former holders of record of API Common Stock upon
the occurrence of certain conditions within twelve
months of the merger. These warrants would have been
exercisable at $0.75 per share with a 5 year
expiration from the date of issue. These conditions
did not occur by January 25, 1997, therefore these
warrants were not issued and have expired.
During 1996, under terms of a consulting agreement, a
shareholder received warrants to purchase 600,000
shares of common stock at an exercise price of $1.00
per share any time from March 5, 1997 until March 4, 2000, for
<PAGE> 41
compensation for consulting services. The
fair value of the warrants was $0.77 on the date of
the grant using the Black-Scholes pricing model with
the following assumptions: 1996-expected dividend
yield 0.0%, risk-free interest rate 6.1%, expected
volatility 100% and an expected life of 3 years. The
portion of the total fair value of the warrants
relating to the consulting services ($344,000) has
been recorded as general and administrative expense
and an increase to additional paid-in capital in the
accompanying 1996 consolidated financial statements.
During 1997, under terms of an agreement, a financial
advisor received warrants to purchase 750,000 shares
of common stock, one-half (375,000 shares) at an
exercise price of $0.60 per share, and one-half
(375,000 shares) at an exercise price of $0.90 per
share any time from January 1, 1998 until June 30,
2002, for financial consulting services rendered in
1997. The fair value of the warrants was $0.25 on the
date of the grant using the Black-Scholes pricing
model with the following assumptions: 1997-expected
dividend yield 0.0%, risk-free interest rate 5.6%,
expected volatility 129% and an expected life of 5
years. Total fair value of the warrants relating to
the consulting services ($188,000) has been recorded
as general and administrative expense and an increase
to additional paid-in capital in the accompanying 1997
consolidated financial statements.
(8) Stock Option Plans
The Company adopted a new stock option plan (the "1995
Stock Awards Plan") on January 25, 1996 and reserved
2,000,000 shares of the Company's authorized but
unissued common stock for issuance to optionees
including officers, employees, and other individuals
performing services for the Company. The 1995 Stock
Awards Plan replaced the previously approved stock
options plan (the "1987 Stock Awards Plan") and API's
stock option plan ("API Stock Option Plan"). Options
granted under the plans vest ratably over a 4-5 year
period and are generally exercisable over a ten-year
period from the date of grant. However, as a result of
certain events occurring in 1995, all granted options
in the 1987 Stock Awards Plan became vested and
exercisable and all options in the API Stock Option
Plan were exercised or forfeited. No further grants
have been or can be made under the 1987 Stock Awards
Plan and the API Stock Option Plan has been canceled.
New stock options are generally granted with an
exercise price equal to the stock's quoted market
value at the date of grant.
At December 31, 1997 there were 1,357,000 additional
shares available for grant under the 1995 Stock Awards
Plan. The per share weighted-average fair value of
stock options granted during 1997 was $0.65
on the date of grant using the Black-Scholes option
pricing method with the following weighted-average
assumptions: 1997-expected dividend yield 0.0%, risk-
free interest rate 5.6%, expected volatility 129% and
an expected vesting life of 4 years for option grants.
The per share weighted-average fair value of stock
options granted during 1996 was $0.92 on the date of
grant using the Black-Scholes option pricing method
with the following weighted-average assumptions: 1996-
expected dividend yield 0.0%, risk-free interest rate
6.0%, expected volatility 100% and an expected life of
4 years.
The Company applies APB Opinion No. 25 in accounting
for its 1995 Stock Awards Plan. Accordingly, no
compensation expense has been recognized in the
accompanying Consolidated Statements of Operations for
employee stock options because the quoted market price
of the underlying common stock did not exceed the
exercise price of the option at the date of grant. Had
the Company determined compensation cost based on the
fair value at the grant date for its stock options
under SFAS No. 123, the Company's net loss and loss
per share would have been reduced to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
----------- ------------ ------------
<S> <C> <C> <C>
Net Loss
As reported $(4,441,000) $(11,462,000) $(1,099,000)
Pro forma (4,614,000) (11,563,000) (1,101,000)
Basic and diluted loss per share
As reported $(0.14) $(0.38) $(0.09)
Pro forma $(0.15) $(0.39) $(0.09)
</TABLE>
<PAGE> 43
Pro forma net loss and loss per share amounts reflect
only options granted in 1997 and 1996. No options were granted in 1995.
Therefore, the full impact of calculating compensation
cost for stock options under SFAS No. 123 is not
reflected in the pro forma net loss amounts and loss
per share presented above because compensation cost is
reflected over the awards' vesting period of four and
five years and compensation cost for options granted
prior to January 1, 1995 is not considered.
(a) 1995 Stock Awards Plan
Summarized information for the 1995 Stock Awards Plan
is as follows:
<TABLE>
<CAPTION>
1995 Stock Awards Plan
Weighted-Average
Stock Options Exercise Price
------------ -------------
<S> <C> <C>
Outstanding options at December 31, 1995 - $ -
Granted 665,998 1.32
Forfeited (36,000) (1.44)
Exercised - -
------------
Outstanding options at December 31, 1996 629,998 1.31
Granted 164,335 .65
Forfeited (151,333) (1.38)
Exercised - -
------------
Outstanding options at December 31, 1997 643,000 1.02
</TABLE>
At December 31, 1997, the range of
exercise prices and weighted average remaining
contractual life of outstanding options was $0.28 -
$1.81 and 9 years, respectively.
At December 31, 1997, the number of awards exercisable was 179,000
and the weighted-average exercise price of those
options was $1.28. At December 31, 1996, the number of options
was 95,000 and the weighted-average exercise price of those
awards was $1.31.
(b) 1987 Stock Awards Plan
Chemex adopted the 1987 Stock Awards Plan in 1987. All
issued options and stock appreciation rights ("SAR's")
became vested and exercisable due to the merger on
January 25, 1996. No further grants can be made.
Summarized information for the 1987 Stock Awards Plan
is as follows:
<TABLE>
<CAPTION>
1987 Stock Awards Plan
1987 Non- Weighted-
Employee Average
Incentive Director Exercise
Stock Options SAR's Plan Price
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Outstanding awards, from
Chemex,December 31, 1995 976,097 338,665 279,117 $1.99
Granted - - - -
Forfeited (151,375) - (100,900) 2.57
Exercised (27,428) (134,714) - .15
<PAGE> 44
Outstanding awards,
December 31, 1996 797,294 203,951 178,217 2.04
Granted - - - -
Forfeited (22,500) - (73,217) 3.62
Exercised - - - -
Outstanding awards at
December 31, 1997 774,794 203,951 105,000 1.90
</TABLE>
At December 31, 1996, the range of exercise prices and
weighted average remaining contractual life of
outstanding awards was $0.00 - $9.00 and 6 years
respectively. At December 31, 1997, the range of
exercise prices and weighted average remaining
contractual life of outstanding awards was $0.00 -
$5.13 and 5 years respectively.
At December 31, 1996, the number of awards exercisable
was 1,179,462 and the weighted-average exercise price
of those awards was $2.04. At December 31, 1997, the
number of awards exercisable was 1,083,745 and the
weighted-average exercise price of those awards was
$1.90.
(9) Income Taxes:
The Company follows Statement of Financial Accounting
Standards Number 109 - Accounting for Income Taxes
("FASB 109"). No provision for federal income taxes
has been made in fiscal years 1997, 1996 and 1995 due
to the operating losses incurred for income tax
purposes. The Company's only significant temporary
difference relates to net operating loss
carryforwards. This resulted in gross deferred tax
assets of approximately $14,700,000 and $13,515,000
at December 31, 1997 and 1996, respectively, all of which have been
fully reserved. Because
the Company has a history of losses, a 100% provision
against the deferred tax assets was recorded in the
form of a valuation allowance. Increases in the
valuation allowance amounted to $1,185,000, $954,000 and $360,000
during the years ended December 31, 1997, 1996 and 1995, respectively.
At December 31, 1997, the Company's regular and
alternative minimum tax net operating loss carry-
forwards for federal income tax purposes approximated
$42 million, which if not utilized, will expire in
varying amounts through the year 2011. As a result of
the merger on January 25, 1996, a change in control
occurred for federal income tax purposes which limited
the utilization of pre-merger net operating loss
carry-forwards related to Chemex to approximately
$530,000 per year.
(10) Commitments and Contingencies:
The Company is not currently a party to any material
legal proceedings.
Under the terms of the "Patent Purchase Agreement"
dated April 5, 1994, as amended on January 23, 1996
between Dr. David F. Ranney and the Company, Dr.
Ranney, a majority stockholder, is entitled to yearly
cash royalty payments as consideration for the
assignment of patents to the Company as follows:
Royalty Payments
Date Amount
----------- --------------
April 15, 1994 $7,500
January 31, 1995 $15,000
January 31, 1996 $25,000
January 31, 1997 $50,000
Thereafter each January 31, payments equal to 105% of
the payment made in the immediately preceding calendar
year will be paid to Dr. Ranney through the life of
the patents. A royalty of $52,500 and $ 50,000 was
payable at December 31, 1997 and 1996, respectively,
and included in the accompanying
consolidated balance sheets. Access will also pay Dr.
Ranney a royalty of three quarters of one percent
(0.75%) of gross revenues derived from products
covered by the patents.
(11) Liquidity:
The Company has incurred negative cash flows from
operations since its inception, and has expended, and expects to
<PAGE> 45
continue to expend in the future,
substantial funds to complete its planned product
development efforts. The Company expects that its
existing capital resources will be adequate to fund
the Company's operations through the next two to six
months. The Company is dependent on raising additional
capital to fund its development of technology and to
implement its business plan. Such dependence will
continue at least until the Company begins marketing
its new technologies.
If the anticipated revenues are delayed or do not
occur or the Company is unsuccessful in raising
additional capital on acceptable terms, the Company
would be required to curtail research and development
and general and administrative expenditures so that
working capital would cover reduced operations into
the third quarter of 1998. There can be no assurance,
however, that changes in the Company's operating
expenses will not result in the expenditure of such
resources before such time.
The Company will require substantial funds to conduct
research and development programs, preclinical studies
and clinical trials of its potential products. The
Company's future capital requirements and adequacy of
available funds will depend on many factors including:
the successful commercialization of amlexanox; the
ability to establish and maintain collaborative
arrangements for research, development and
commercialization of products with corporate partners;
continued scientific progress in the Company's
research and development programs; the magnitude,
scope and results of preclinical testing and clinical
trials; the costs involved in filing, prosecuting and
enforcing patent claims; competing technological
developments; the cost of manufacturing and scale-up;
and, the ability to establish and maintain effective
commercialization activities and arrangements.
The Company intends to seek additional funding through
research and development or licensing arrangements
with potential corporate partners, public or private
financing, or from other sources. The Company does not
have any committed sources of additional financing and
there can be no assurance that additional financing
will be available on favorable terms, if at all. In
the event that adequate funding is not available, the
Company may be required to delay, reduce or eliminate
one or more of its research or development programs or
obtain funds through arrangements with corporate
collaborators or others that may require the Company
to relinquish greater or all rights to product
candidates at an earlier stage of development or on
less favorable terms than the Company would otherwise
seek. Insufficient financing may also require the
Company to relinquish rights to certain of its
technologies that the Company would otherwise develop
or commercialize itself. If adequate funds are not
available, the Company's business, financial condition
and results of operations will be materially and
adversely effected.
(12) Subsequent Events:
On March 11, 1998 the Company sent to the shareholders
a request to amend Access' Certificate of
incorporation, as amended, to effect a
recapitalization of the Company through a one-for-
twenty reverse stock split of Access common stock,
$.04 par value per share (the "Common Stock"),
decrease the number of authorized shares of Common
Stock from 60.0 million to 20.0 million and decrease
the authorized shares of preferred stock of the
Company from 10.0 million to 2.0 million (the
"Recapitalization"). This proposal will decrease the
number of outstanding shares of Common Stock from
approximately 37.4 million to 1.9 million.
In addition, if the proposal is approved by
shareholders, the Company intends to submit an
application for listing on NASDAQ or an alternate
exchange if it meets all such qualifications. There
can be no assurances that the market price immediately
after the implementation of the proposed reverse stock
split will increase, and if it does increase, there
can be no assurance that such increase can be
maintained for any period of time, or that such market
price will approximate twenty times the market price
before the proposed reverse stock split. There can be
no assurances that the Company will be listed on any
exchange or NASDAQ or an exchange.
On March 20, 1998, the Company, assisted by an
investment bank, raised $725,000 in gross proceeds,
less issuance costs of $47,250, from the placement
of 29 Units. Each Unit consists of 166,667 shares of
Common Stock and warrants to purchase 166,667 shares
of Common Stock at $0.15 per share. The funds will be
used to fund the Company's activities until further
funds are raised. The investment bank has been engaged
to assist the Company in raising up to a total of
$8,000,000 to fund the Company's research and
development activities.
EXHIBIT 10.11
Agreement of Merger and Plan of
Reorganization
between
Access Pharmaceuticals, Inc.
and
Access Holdings, Inc.
and
Tacora Corporation
dated May 23, 1997
AGREEMENT OF MERGER AND PLAN OF REORGANIZATION
AGREEMENT dated as of May 23, 1997, among ACCESS
Pharmaceuticals, Inc., a Delaware corporation
("Parent"), ACCESS Holdings, Inc., a Delaware
corporation and direct wholly-owned subsidiary of the
Parent ("Acquirer"), and Tacora Corporation, a
Delaware corporation ("Target").
WHEREAS, the Boards of Directors of each of Parent,
Acquirer, and Target believe that the merger of
Acquirer into Target (the "Merger") would be
advantageous and beneficial to their respective
corporations and stockholders;
WHEREAS, this Agreement is intended to be and is
adopted as a plan of reorganization within the meaning
of paragraph 368(a) of the Internal Revenue Code of 1986, as
amended (the "Code");
NOW, THEREFORE, in consideration of the mutual
covenants and agreements hereinafter set forth, the
parties hereto agree that Acquirer shall be merged
into Target upon the terms and subject to the
conditions set forth in this Agreement.
1. The Merger.
1.1. Closing and Effective Date of Merger. Subject
to the closing conditions in paragraphs 7 and 8, at a closing
to be held at the offices of Parent on June 4, 1997 at
10:00 a.m., or on such date and at such time prior to
the termination date referred to in paragraph 13 as may be
agreed to by the parties (the "Closing Date"), Target
and Acquirer shall cause to be definitively executed
and delivered to one another the Certificate of Merger
substantially in the form attached hereto as Exhibit
A (the "Certificate of Merger") and shall cause such
document to be filed with the Secretary of State of
Delaware, in order to cause the Merger contemplated by
this Agreement to become effective under the laws of
the State of Delaware. The Merger shall become
effective on the date and at the time of the filing of
the Certificate of Merger with the Secretary of State
of Delaware (the "Effective Date"). References herein
to the "Surviving Corporation" shall mean Target on
and after the Effective Date.
1.2. Terms and Conditions of Merger. Upon the
Effective Date, pursuant to the Certificate of Merger
and this Agreement,
(a) Acquirer shall be merged with and into Target
and the separate existence of Acquirer shall cease;
(b) Target shall continue as the Surviving
Corporation organized under the laws of the state of
Delaware, the authorized capital stock of which shall
be one thousand (1,000) shares of common stock, par
value $.01 per share;
(c) the Certificate of Incorporation of the
Surviving Corporation shall be the Certificate of
Incorporation of Acquirer in effect immediately prior
to the Effective Date;
(d) all of the issued and outstanding shares of the
capital stock of Target shall be deemed canceled,
without further act by any person, and shall not
represent any share of the capital stock of the
Surviving Corporation, all of such shares of the
capital stock of Target, together with the interests
of certain holders of Target options, warrants and
other rights to acquire capital stock of Target
("Claims"), being automatically converted (subject to
statutory dissenters' rights of appraisal) into rights
("Rights") to receive shares of the common stock
(subject to adjustments for any recapitalizations of
Parent), $.04 par value per share, of Parent (the
"Parent Common Stock") all as provided, and according
to the priorities set forth, in paragraphs 2.1 and 2.2, with
the certificates representing such shares of the
capital stock of Target thereupon representing such
Rights to receive such shares of Parent Common Stock
(subject to statutory dissenters' rights of
appraisal), such Rights shall not be transferable
except by will or the laws of descent and distribution
without the prior written consent of Parent and Parent
shall be entitled to rely on the stock and other
records of Target as of immediately before the
Effective Date in determining any Target Stockholder
or other third party entitled to receive any Rights or
distributions thereon pursuant to this Agreement and
shall not be liable to any person for any payments or
distributions made in reliance on such records;
(e) The capital stock of Acquirer shall remain
outstanding as the capital stock of Surviving
Corporation, all of which shall be owned by Parent as
of the Effective Date;
(f) the By-Laws of the Surviving Corporation shall
be the By-Laws of Acquirer in effect immediately prior
to the Effective Date;
(g) all of the estate, properties, rights,
privileges, powers and franchises of Target and
Acquirer and all of their property, real, personal and
mixed, and all debts and obligations of any kind of
Target or Acquirer shall vest in the Surviving
Corporation, without further act or deed; and
(h) the directors and officers of the Surviving
Corporation as of the Effective Date shall be those
specified in the Certificate of Merger.
2. Conversion of Shares, Payments, etc.
2.1. Conversion of Shares. As provided in paragraph 1.2(d),
upon the Effective Date, the issued and outstanding
shares of the capital stock of Target and all Claims
shall be automatically converted, without further act
by any person, into Rights to acquire shares of the
Parent Common Stock in accordance with the following
provisions of this paragraph 2.1, and the earn-out payments
specified in paragraph 2.2:
(a) Conversion; Exchange Rate. Each share of the
capital stock of Target which is issued and
outstanding at the Effective Date and each Claim
shall, at the Effective Date, be converted (subject to
statutory dissenters' rights of appraisal) without any
further act by any person, into the right to receive
such number of shares of Parent Common Stock as
determined in accordance with paragraph 2.2 and the priorities
set forth therein.
(b) Procedures. Each of the former Target
Stockholders shall, from and after the Effective Date
and upon surrender to Parent at its main office
located in Dallas, Texas of the certificate or
certificates formerly representing all of the shares
of the capital stock of Target held by the former
Target Stockholder, receive in exchange therefor the
right to receive the number of shares of Parent Common
Stock as determined in accordance with paragraph 2.2 and the
priorities set forth therein. The aggregate amount of
such shares of Parent Common Stock exchanged pursuant
to this paragraph 2, shall hereinafter be referred to as the
"Exchanged Shares." All certificates representing the
Exchanged Shares shall bear federal securities law and
other applicable securities law restrictive legends.
(c) Fractional Shares. No fractional shares of, and
no scrip or fractional share certificates for Parent
Common Stock will be issued or delivered pursuant to
this Agreement, and no right to vote or receive any
dividend or other distribution or any other right of
a stockholder shall attach to any fractional interest
in Parent Common Stock to which any former Target
Stockholder would otherwise be entitled. In lieu
thereof, there shall be paid to each former Target
Stockholder who would otherwise have been entitled to
a fractional share of Parent Common Stock pursuant to
paragraph 2.1(a) and (b), a cash payment in respect of such
fractional interest determined by valuing Parent
Common Stock at its unweighted average closing price
on the OTC Bulletin Board for the five (5) trading
days before the Effective Date.
(d) Rights After Effective Date and Until Surrender,
etc. No former Target Stockholder shall be entitled
to exercise any rights with respect to Target after
the Effective Date (except prosecution of statutory
dissenters' rights of appraisal). Each former Target
Stockholder entitled to receive Exchanged Shares
hereunder shall be entitled to receive dividends and
other distributions on or in respect of each Exchanged
Share to which he or she is entitled, from and after
the Effective Date and the date on which such Exchange
Shares become vested, and to vote such shares, but
will not be entitled to receive the certificate
therefor until the surrender and exchange provided for
in paragraph 2.1 (b) is completed.
(e) Exercise of Options, Warrants and Conversion of
Notes. On or before the Effective Date, all
outstanding stock options, warrants, Claims and other
rights to purchase or acquire capital stock of the
Target shall be exercised or exchanged as provided in
paragraph 7.9 hereof, and all outstanding Convertible
Promissory Notes of Target and other securities
exchangeable for or convertible into capital stock of
the Target shall be exchanged and/or converted into
capital stock of the Target. For all purposes of this
Agreement, the shares of the capital stock of Target
issued upon exercise or in exchange for such
outstanding stock options, warrants and other rights
or upon conversion of such Convertible Promissory
Notes and other securities exchangeable for or
convertible into the capital stock of Target shall be
deemed to be shares of the capital stock of Target for
purposes of this Agreement and the recipients thereof
shall be deemed to be Target Stockholders.
2.2. Consideration
As consideration for the Merger, the Target
Stockholders, holders of Claims and other persons or
entities entitled hereunder to receive shares of
Parent Common Stock (subject to payments made to
creditors as set forth in this paragraph2.2) shall be issued
shares of Parent Common Stock, if any, in the amounts
and according to the priorities set forth in this
paragraph 2.2:
(a) Effective Date Amounts. Upon the Effective
Date, such number of shares of Parent Common Stock as
shall equal $100,000 divided by the average of the
closing prices of the Parent Common Stock on the OTC
Bulletin Board for each of the five trading days prior
to the Effective Date plus such number of shares of
Parent Common Stock as shall equal $500,000 divided by
the share price of the Parent Common Stock as
determined in accordance with paragraph 2.2(d).
(b) Milestone Amounts. On the achievement, as
determined by a majority of the members of the
Development Committee (as defined below), of each of
the following milestones (each a "Milestone" and
together the "Milestones"), such number of Unvested
Parent Common Shares as have an aggregate value, as
determined pursuant to paragraphs 2.2(c) and 2.2(d) as of the
date on which the Milestone shall have been achieved
and payable in accordance with the terms of paragraph 2.2(b)
and 2.2(c), equal to the value of the Milestone as set
forth below shall be released in accordance with the
provisions of paragraphs 2.2(b) and 2.2(c) as of the Closing
Date, at the end of the fiscal quarter of Parent
during which the Milestone shall have been achieved;
provided, however, that the Milestone must have been
achieved prior to the date that is the last day of the
thirtieth (30th) month after the Commencement Date for
such Milestone as determined by reference to the
following table, provided that if, in the
determination of the Development Committee, work on or
towards a Milestone is ceased or materially affected
by reason of strikes, riots, war, invasion, acts of
God, fire, explosion, floods, acts of civil or
military government agencies or instrumentalities
(except for delays in or the refusal to grant
approvals or clearances for drugs, products or devices
by the United States Food and Drug Administration or
any similar or successor United States government
agency (the "FDA") or by any non-United States
government agency having similar functions or a
similar mandate as the FDA or delays in or the refusal
to grant or award patents or patent allowances by the
United States Patent and Trademark Office or any
successor United States government agency (the "PTO")
or by any non-United States government agency having
similar functions or a similar mandate as the PTO) and
other similar contingencies beyond the reasonable
control of Parent or any of the Target Stockholders,
the date for achievement of such Milestone shall be
extended to such date that the Development Committee
shall select (the "Milestone Deadline Date");
provided, further, that if at the date such shares
vest there shall have been delivered to the
Representative any Notice of Indemnification pursuant
to paragraph 14.2(b), then all such shares of Parent Common
Stock shall be held by Parent pending resolution of
any claims for indemnification in such Notice(s) of
Indemnification:
<TABLE>
Commencement
Value Payable Date (in calendar)
in Parent days after the
Milestone Common Stock Closing Date
- ----------------------------------------- ------------ ------------
<S> <C> <C>
1. EORTC approval to initiate human studies with
Cisplatin or other polymer platinates based on animal
efficacy and toxicity achieving the EORTC's
predetermined parameters. $ 3 million 45
2. Completion of Phase I/II study with Cisplatin and
agreement by the technology development committee to
proceed to Phase III or Phase II B Studies. $ 2 million 45
3. Commercial alliance for Cisplatin development. $1 million 45
4. Commencing process of commercialization of one
additional Tacora oncology compound and EORTC or IND
approval of Phase I studies. $500,000 90
5. Loaded particle with triggered pore stable in
plasma with positive efficacy in an animal model with
agreement to proceed to development. $1 million 90
6. Filing of an IND for a product being developed
under the Mayo/Fernandez technology license. $1 million 90
7. Acceptance for publication of "Landmark"
manuscript in Nature, Science or a journal of similar
stature including the Journal of Controlled Release. $250,000 0
8. Successful formulation of antigen/adjuvant with
in vivo proof of principal of incremental efficacy. $500,000 90
9. Completion of commercial alliance with an
antigen/adjuvant to commence development. $500,000 45
10. U.S. notice of allowance of Cisplatin patent
covering product development. $350,000 0
11. European Patent Office Notice of Allowance of
Cisplatin patent covering product development. $150,000 0
12. U.S. notice of allowance of pore-forming protein
patent or new Tacora core patent. $350,000 0
13. European Patent Office Notice of Allowance of
pore-forming protein patent or new Tacora patent. $150,000 0
14. Commercial agreement to develop an ultrasound
triggered release condensed particle therapeutic
system. $500,000 90
15. Commercial agreement to develop a product in an
additional field of use. $500,000 0
</TABLE>
Upon EORTC approval to initiate human studies with
Cisplatin or other polymer platinates, Milestone 1,
the Milestone payment will be calculated based on such
approval date and the Parent Common Stock issuable
will be held in escrow by Parent pending successful
completion of the scale-up, production and stability
testing of the final formulation and completion for
the formal toxicology studies to enable commencement
of Phase 1 clinical testing.
(c) Milestone Payment Priorities. (i) The Parties
anticipate that Target's unaudited balance sheet as of
the Closing Date will reveal total liabilities of
approximately $1,455,000. Such liabilities shall
become liabilities of the Surviving Corporation after
the Closing Date. Parent shall contribute to the
capital of the Surviving Corporation and the Surviving
Corporation shall be obligated to pay the first
$250,000 of such liabilities (to creditors on a pro
rata basis) within thirty (30) days after the Closing
without any offset against Milestones that are
otherwise due to the Target Stockholders and holders
of Claims hereunder. Any liabilities of the Surviving
Corporation in excess of $250,000 shall first be
offset dollar for dollar against Parent Common Stock
otherwise due to Target Stockholders and holders of
Claims (or creditors) under the next Milestone(s) to
come due; provided however that shares of Parent
Common Stock issued under paragraph 2.2(a) shall be used to pay
any such liabilities in excess of such $250,000.
Unless one or more creditors of Target agrees in
writing to subordinate its position to other
creditors, the Surviving Corporation shall be entitled
to pay all creditors of Target on a pro rata basis or
in such order of priority as determined by Parent in
its sole discretion, based upon the amount then due
and owing to such creditors.
(ii) At such time as all outstanding liabilities to
creditors of Target are satisfied (other than
liabilities to creditors as set forth in
paragraphs 2.2(c)(iii), (iv) and (v) below), the Parent Common
Stock issued for the next Milestone(s) achieved will
be used to settle Target's outstanding loan to Medical
Innovation Partners which is estimated at the Closing
Date to be $365,500. Medical Innovation Partners will
be entitled to receive a number of shares which equals
the amount of such debt divided by the Parent's
current share price; provided, however, that the
Milestone payment in Parent Common Stock will be
calculated in accordance with paragraphs 2.2(d).
(iii) Proceeds from the next Milestone(s) achieved
will be used to satisfy, pro rata, Target's
outstanding obligations relating to the Glynn Wilson
and Donald McCarren settlement agreements, executed
copies of which have been delivered to Parent.
Target's obligations under such settlement agreements
are estimated to be $78,269 for Glynn Wilson and
$180,000 for Donald McCarren. These amounts are
subject to adjustment for any subsequent payments made
under such settlement agreements. The Milestone
payment in Parent Common Stock shall be calculated in
accordance with paragraph 2.2(d).
(iv) After satisfaction of all obligations to
creditors set forth in paragraphs 2.2(c)(i)-(iii) set forth
above, proceeds from the next Milestone(s) achieved
shall be payable as follows:
(x) to Dr. Glynn Wilson as per the employment
settlement agreement dated as of February 1, 1997
between Target and Dr. Wilson as follows:
(A) 1% of any Milestone achieved;
(B) 1% of any Milestone achieved within the
timetable for Milestones set forth on Schedule 2.2
hereto; and
(C) 1% of any Milestone achieved within the thirty
(30) month time period for achievement thereof under
this Agreement if and to the extent employed full-time
by Parent, with a proportionate reduction in such
percentage if Wilson is then employed less than full
time by Parent.
The parties agree that Dr. Wilson shall be entitled to
receive an amount of Parent Common Stock equal to the
1% commissions described in (A), (B), and (C) above at
the fair market value of the Parent Common Stock at
the time of the achievement of any such Milestones.
These commissions shall accrue and will be paid out
subordinate to and after the priority payments
described in paragraphs 2.2(c) (i-iii) to Dr. Wilson upon the
achievement, if at all, of sufficient Milestones to
make such payments in addition to any subsequent
commissions earned and payable as a result of the
ongoing achievement of Milestones. These commissions
shall be deductions from any such Milestone payments
to Target Stockholders.
(y) to Grayson & Associates, Inc. ("Grayson") as per
the letter agreement between Target and Grayson, dated
October 30, 1995 commissions on total consideration
paid by Parent under this paragraph 2.2 including any payments
made to satisfy outstanding liabilities, payments to
trade creditors, outstanding loans, and other payments
made to Target creditors under this paragraph 2.2, such
commissions to be calculated as follows:
5% of the first $2,000,000;
4% of amounts over $2,000,000 and up to $4,000,000;
3% of amounts over $4,000,000 and up to $6,000,000;
2% of amounts over $6,000,000 and up to $8,000,000;
1% of amounts over $8,000,000.
The parties agree that Grayson shall be entitled to
receive an amount of Parent Common Stock equal in
value to the amount calculated from the table above at
the fair market value of the Parent Common Stock at
the time of any payments made on behalf of Target
described in paragraph (y) above. These commissions
shall accrue and shall be paid out subordinate to and
after such priority payments described in paragraphs 2.2(c) (i-
iii) above. These accrued commissions shall be paid
out upon achievement, if at all, of sufficient
Milestones to make such payments in addition to any
subsequent commissions earned and payable as a result
of the ongoing achievement of Milestones. These
commissions shall be deductions from any such
Milestone payments to Target Stockholders and holders
of Claims.
(v) The actual, direct out-of-pocket costs and
expenses incurred by Target representative with
observation rights on the Parent's Board of Directors,
the Development Committee members appointed by the
Target Shareholders and the Representatives incurred
in carrying out their responsibilities under this
Merger Agreement shall be treated as general
creditors' claims and shall be paid, if at all, only
in shares of Parent Common Stock issued under paragraph 2.2(a)
based on the fair market value of Parent Common Stock
payable as Milestones are met; provided that Parent
shall not be required to make any payments over and
above any amounts that would be otherwise due with
respect to the achievement of Milestones.
(vi) Proceeds from the next Milestone(s) will be
used to satisfy the liquidation preference of Target's
Preferred Shareholders and applicable Claim holders
(i.e., those Claim holders who voluntarily waived and
released their claim to receive Target Preferred Stock
in exchange for treatment hereunder equivalent to a
Target Preferred Shareholder) of $1.00 per share
(representing up to an aggregate of $5,922,832)
pursuant to the liquidation preference provisions of
Target's Series A Preferred Stock contained in
Target's Certificate of Incorporation. At such time
as such liquidation preference has been satisfied,
thereafter, Target Preferred and Common shareholders
and any other persons entitled to receive
consideration equivalent to that of a Common
Shareholder (i.e., those Claim holders who voluntarily
waived and released their rights under Target's
outstanding options and warrants) will participate on
a pro rata basis in all future Milestone(s) payments
as calculated in accordance with paragraph 2.2(d).
(d) For purposes of this paragraph 2.2, the number of Common
Parent Shares which will become vested and shall be
released to the Target Stockholders on the achievement
of a Milestone shall be calculated by averaging the
closing price of the Parent Common Stock for each of
the five (5) trading days preceding the day on which
the Milestone was achieved divided into the value
attributed to the Milestone; provided, however, in
order to provide a floor and ceiling on the number of
shares of Parent Common Stock to be issued, in no
event will the closing price of Parent Common Stock
used in such calculation be at prices below the floor
share price or above the ceiling share price as
determined by the following schedule:
Time of Milestone Achievement Floor Share Price
Ceiling Share Price
Effective Date thru and including month 6 2.50 3.50
Beginning of month 7 thru and including month 12 3.50 5.00
Beginning of month 13 thru and including month 18 4.50 6.00
Beginning of month 19 thru and including month 30 5.50 6.50
;provided, further, that in the event of any
reorganization, recapitalization or reclassification
of the capital stock of Parent, or if at any time or
from time to time after the date of this Agreement
Parent shall subdivide or recapitalize its outstanding
shares of capital stock, or if at any time after the
date of this Agreement Parent shall declare a dividend
or make any other distribution upon any class or
series of capital stock of Parent payable in Parent
Common Stock or securities convertible into Parent
Common Stock, the Floor Share Prices and the Ceiling
Share Prices set forth above shall be adjusted
proportionately to reflect such reorganization,
recapitalization or reclassification, such subdivision
or the payment of such stock dividend, as applicable.
(e) Cash Payment for Achievement of Milestones Prior
to Closing. Up to $400,000 of any revenues of Target
received as a result of ongoing business activities of
Target prior to the Closing Date may be used by Target
to satisfy any outstanding liabilities as set forth on
Target's current unaudited balance sheet a copy of
which is attached to Schedule 3.7; provided, however,
that an amount equal to the total amount of any such
payments shall be deducted from the stated value of
the appropriate Milestone relating to any such
revenues.
(f) Research and Development Commitment. Parent
will commit at least $320,000, to be used as set forth
on Exhibit B attached hereto, to achieve the
Milestones. In addition, Parent will use commercially
reasonable efforts to support achievement of the
Development Plan, whether through the Surviving
Corporation or any third party licensee or alliance
partner involved with the Technology, towards
achieving the Milestones. As used herein,
"Technology" means the Surviving Corporation's
intellectual property, know-how, trade secrets and
other technology. The Development Committee will
monitor and oversee research and development
activities towards achieving the Milestones pursuant
to the Product Development Plan. The Development
Committee shall meet no less often than every three
(3) months in order to monitor progress towards
meeting the approved Product Development Plan. Parent
will ensure that the Target Stockholder
representatives on the Development Committee receive
copies of all relevant correspondence to and from any
governmental agency concerning the Technology as well
as all relevant correspondence to and from any third
party concerning the licensing, research, development
or use of the Technology. Parent will ensure that the
Surviving Corporation diligently and in good faith
files, prosecutes and maintains any and all patents
and patent applications concerning any Technology.
(g) Parent Covenant to Maintain Technology. From
and after the date of this Agreement to the Milestone
Deadline Date, Parent shall not transfer, assign or
sell any of the Technology; provided that the sole
remedy of the Target, the Target Stockholders and all
Claim holders for a breach of this covenant by Parent
shall be that all then remaining Milestones to which,
in the determination of the Development Committee, the
transferred, assigned or sold Technology relates will
be deemed to be accomplished as of the date of such
transfer, assignment or sale and payment on any such
Milestone as determined pursuant to paragraphs 2.2(c) and (d)
shall be made within ten (10) business days after such
date.
(h) Establishment of Development Committee;
Meetings. The Development Committee shall be created
within one (1) month after the Effective Date and
shall be comprised of two (2) representatives
appointed by the Parent and two (2) representatives
appointed by a majority of the Target Stockholders.
The party appointing a representative to the
Development Committee shall have the sole right to
remove and replace such individual. All decisions of
the Development Committee shall be made by the
affirmative vote of at least three (3) committee
members in the exercise of good faith to benefit the
interests of the Surviving Corporation and the optimum
use of the Technology. Within three (3) months of the
Effective Date, the Development Committee shall
prepare and approve a Product Development Plan,
establishing the means for accomplishing the
Milestones. All matters submitted to the Development
Committee shall be decided upon at the time of the
meeting of the Development Committee or within thirty
(30) days thereafter. Such decision shall take into
consideration such goals as adhering to ethical
standards for the research-based pharmaceutical
industry, the use of commercially reasonable efforts
to develop the Technology, and obtaining patent
protection and other governmental approvals concerning
the Technology. In the event that a decision cannot
be reached by the Development Committee within the
time period set forth above, the President of the
Parent shall meet with the appointed observer of the
Board of Directors of Parent of the Target
Stockholders and during such meeting each of the
President and such representatives shall in good faith
attempt to reach a decision on the matter. If the
President and the representatives are unable to reach
a decision on the matter, the matter shall be referred
to arbitration in accordance with paragraph 2.2(i) herein.
(i) Dispute Resolution.
(i) Disputes Covered by Arbitration. The Parent or
a majority of the Target Stockholders may seek to
resolve any dispute among the Development Committee
members and/or any dispute concerning any Milestone,
as the case may be, by initiating an Alternative
Dispute Resolution ("ADR") in which the complaining
and defending parties each select an independent third
party with demonstrated expertise in the
pharmaceutical industry (each a "Neutral") as provided
herein.
(ii) Selection of Neutrals. An ADR shall be
initiated by a party by sending written notice thereof
to the other party, which notice shall state the
issues to be resolved and such party's selection of a
Neutral. Within ten (10) business days after receipt
of such notice, the other party will, by sending
written notice to the initiating party, add issues to
be resolved, if any, and reveal such party's selection
of its Neutral. Within fifteen (15) days after the
date of the original ADR notice, the two Neutrals
shall together select a third.
(iii) ADR Hearing. The Neutrals shall hold a
hearing to resolve the issues within thirty (30)
business days after selection. The location of the
hearing shall be mutually agreed upon or, if the
parties are unable to agree, at Dallas, Texas. Each
party may be represented by counsel. Prior to the
hearing, the parties shall be entitled to engage in
discovery under procedures of the Federal Rules of
Civil Procedure; provided, however, that a party may
not submit more than one hundred (100) written
interrogatories or take more than four (4)
depositions. There shall not be, and the Neutrals
shall not permit, any discovery within five (5) days
of the hearing. The Neutrals shall have sole
discretion regarding the admissibility of evidence
under the Federal Rules of Civil Procedure and conduct
of the hearing. At least three (3) business days
prior to the hearing, each party shall submit to the
other party and the Neutral a copy of all exhibits on
which such party intends to rely at the hearing, a
pre-hearing brief (up to 30 pages) and a proposed
disposition of the dispute (up to 5 pages). The
proposed disposition shall be limited to proposed
rulings and remedies on each issue, and shall contain
no argument on or analysis of the facts or issues;
provided, however, that the parties will not present
proposed monetary remedies. Within five (5) business
days after close of the hearing, each party may submit
a post-hearing brief (up to 10 pages) to the Neutrals.
(iv) ADR Ruling; Fees and Expenses. The Neutrals
shall render a disposition on the proposed rulings as
expeditiously as possible after the hearing, but not
later than fifteen (15) business days after the
conclusion of the hearing. The Neutrals shall rule on
each issue and a decision of a majority of the
Neutrals shall control, but in all events, the
majority of Neutrals shall adopt in its entirety the
proposed ruling of one of the parties on each issue.
In the circumstances where the Neutrals rule for a
party on a claim in the form of a claim for monetary
damages, the parties will then submit a proposed
remedy within ten (10) days of notice of the ruling.
The proposed remedy may be accompanied by a brief in
support of the remedy not to exceed five (5) pages.
A majority of the Neutrals will rule on and adopt one
of the proposed remedies within ten (10) days of their
submission. The Neutrals' disposition shall be final.
A judgment on the Neutrals' disposition may be entered
in any court having jurisdiction over the parties.
The reasonable fees and expenses of the Neutrals shall
be borne equally by the parties or as they otherwise
agree.
(v) AAA Rules. Except as otherwise provided in this
Section 2.2(h), the Commercial Arbitration Rules of
the American Arbitration Association shall be used in
connection with the ADR.
(vi) Waiver. A party shall not be prohibited from
bringing a claim for resolution under this Section
2.2(i) on the grounds that the claim could have been
brought during an earlier proceeding under this
Section.
2.3. Target Representation Rights. A majority of
the Target Stockholders together will have the right
to appoint one person who will have observation rights
on the Parent Board of Directors meetings for three
years from the Effective Date. A majority of the
Target Stockholders who may appoint such a person
shall have the right to remove and replace such person
at any time and from time to time during such three
year period.
3. Representations and Warranties of Target. Target
hereby represents and warrants to Parent and Acquirer
as follows. For purposes of this Agreement, the term
"Knowledge" in relation to Target means the actual
knowledge, after reasonable inquiry, of Donald J.
McCarren, Glynn Wilson or F. J. Daugherty.
3.1. Incorporation; Authority. Target is a
corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware
and has all requisite corporate power and authority to
own or lease and operate its properties and to carry
on its business as now conducted in all material
respects. Target has made available to Parent
complete and correct copies of its Certificate of
Incorporation and By-Laws and all amendments thereto.
3.2. Corporate Power, Binding Effect. Subject to
the Target Stockholders' approval, Target has all
requisite corporate power and authority to enter into
this Agreement and the Certificate of Merger, and to
perform all of its agreements and obligations under
this Agreement and the Certificate of Merger in
accordance with their terms. This Agreement has been
duly authorized by Target's Board of Directors, has
been duly executed and delivered by Target and
constitutes the legal, valid and binding obligation of
Target, enforceable against Target in accordance with
its terms, subject only, in respect of the
consummation of the Merger, to requisite approval by
the Target Stockholders, and except that (i) such
enforcement may be subject to applicable bankruptcy,
insolvency, reorganization, moratorium or other
similar laws affecting creditors' rights generally and
(ii) the remedy of specific performance and injunctive
and other forms of equitable relief may be subject to
equitable defenses and to the discretion of the court
before which a proceeding therefor may be brought
(collectively, the "Enforcement Exceptions"). Upon
execution and delivery by Target of the Certificate of
Merger on the Closing Date, the Certificate of Merger
will have been duly authorized, executed and delivered
by, and constitute the legal, valid and binding
obligations of, Target subject to the Enforcement
Exceptions. Neither the execution, delivery or
performance by Target of this Agreement nor of the
Certificate of Merger in accordance with their
respective terms will result in any violation of or
default or creation of any lien under, or the
acceleration or vesting or modification of any right
or obligation under, or in any conflict with, Target's
Certificate of Incorporation or by-laws or of any
agreement, instrument, judgment, decree, order,
statute, rule or regulation binding on or applicable
to Target, except where any of the foregoing would not
have a material adverse effect on the business, assets
or financial condition of Target.
3.3. Subsidiaries. Target does not have any
subsidiaries and does not own or hold of record and/or
beneficially any shares of any class in the capital
stock of any corporation. Target does not own any
legal and/or beneficial interests in any partnerships,
business trusts or joint ventures or in any other
unincorporated business enterprise.
3.4. Qualification. Target is duly qualified and in
good standing as a foreign corporation in each
jurisdiction in which the character of the properties
owned or leased or the nature of the activities
conducted by it makes such qualification necessary.
3.5. Capitalization. The authorized capital of
Target consists of 20,000,000 shares of Target Common
Stock, 461,269 shares of which are issued and
outstanding on the date hereof and 6,000,000 shares of
Target Preferred Stock 1,810,000 shares of which are
issued and outstanding on the date hereof. All such
outstanding shares of Target Common Stock and Target
Preferred Stock are owned of record by the Target
Stockholders and the Target Preferred Stockholders as
set forth on Schedule 3.5 hereto and are validly
issued, fully paid and non-assessable. Schedule 3.5
hereto sets forth a list of all holders of Claims
together with the amount of Target Preferred Stock or
Target Common Stock to which such Claim holder would
have otherwise been entitled to if such Claim holder
had not waived and released his or its rights to
Target Preferred or Common Stock. Except as set forth
in Schedule 3.5, Target is neither a party to nor is
bound by any outstanding subscriptions, options,
warrants, calls, commitments or agreements of any
character calling for Target to issue, deliver or
sell, or cause to be issued, delivered or sold any
shares of Target Common Stock or Target Preferred
Stock or any other equity security of Target or any
securities convertible into, exchangeable for or
representing the right to subscribe for, purchase or
otherwise receive any shares of Target Common Stock or
Target Preferred Stock or any other equity security of
Target or obligating Target to grant, extend or enter
into any such subscriptions, options, warrants, calls,
commitments or agreements. As of the date hereof
there are no outstanding contractual obligations of
the Target to repurchase, redeem or otherwise acquire
any shares of capital stock of the Target.
3.6. Lawful Issuance. All of the outstanding shares
of Target Common Stock and Target Preferred Stock were
issued pursuant to exemptions from registration under
the Securities Act of 1933, as amended (the
"Securities Act") and applicable state and other
securities laws, and all rules and regulations
thereunder. There exists no valid right to rescind
any purchase thereof from or issuance thereof by
Target. No class of securities of Target is required
to be registered under any provision of the Securities
Exchange Act of 1934, as amended (the "Exchange Act").
3.7. Financial Statements. Attached as Schedule 3.7
hereto, are copies of (i) the audited balance sheet of
Target as of December 31, 1995, (the "Audited Balance
Sheet"), and the related audited statements of income
and stockholders' equity and changes in financial
position of Target for the fiscal years ended December
31, 1994 and 1995 accompanied by a report and opinion
thereon of KPMG Peat Marwick and (ii) the unaudited
balance sheet of Target for the quarter ended June 30,
1996, and related unaudited statements of income for
such quarter and an unaudited balance sheet and
statement of income for the fiscal year ended December
31, 1996. Additionally, Target hereby agrees to
provide Parent with unaudited quarterly updates of its
balance sheet and related statement of income for such
quarters after December 31, 1996, and up to and
including the date of execution and delivery of this
Agreement and thereafter up to and including the
Closing Date. The Audited Balance Sheet and each
other such balance sheet fairly presents the financial
condition of Target in all material respects as of its
date; and each of such statements of income and
stockholders' equity and changes in financial position
and statements of operations fairly presents the
results of operations, stockholders' equity and
changes in financial position of Target for the period
covered thereby.
3.8. Absence of Certain Changes. Except as set
forth on Schedule 3.8, since the date of the Audited
Balance Sheet, there has not been: (i) any change in
the business of Target or in its relationships with
suppliers other than changes which were both in the
ordinary course of business and have not had a
material adverse effect on the business, assets or
financial condition of Target; (ii) any acquisition or
disposition by Target of any material amount of assets
or properties other than in the ordinary course of
business; (iii) any damage, destruction or loss,
whether or not covered by insurance, materially and
adversely affecting, either in any case or in the
aggregate, the business of Target; (iv) any
declaration, setting aside or payment of any dividend
or any other distributions in respect of any class of
the capital stock of Target; (v) any issuance of any
shares of any class of the capital stock of Target or
any direct or indirect redemption, purchase or other
acquisition of any shares of any class of the capital
stock of Target; (vi) any increase in the
compensation, pension or other benefits payable or to
become payable by Target to any of its officers or
employees, or any bonus payments or arrangements made
to or with any of them; (vii) any entry by Target into
any transaction other than in the ordinary course of
business; (viii) any incurrence by Target of any
material obligations or liabilities, whether absolute,
accrued, contingent or otherwise (including, without
limitation, liabilities as guarantor or otherwise with
respect to obligations of others), other than
obligations and liabilities incurred in the ordinary
course of business; (ix) any mortgage, pledge, lien,
lease, security interest or other charge or
encumbrance on any of the assets, tangible or
intangible, of Target, other than those arising by
operation of law which do not materially impair the
operation of Target's business; (x) any change in
accounting principles, practices or methods used by
Target; or (xi) any discharge or satisfaction by
Target of any lien or encumbrance or payment by Target
of any obligation or liability (fixed or contingent)
other than (A) current liabilities included in the
Audited Balance Sheet and (B) current liabilities
incurred since the date of the Audited Balance Sheet
in the ordinary course of business.
3.9. Title to Property, Leases, etc. Except as set
forth in Schedule 3.9(a) hereto, Target has good and
marketable title to all of its tangible properties and
assets, including, without limitation, all those
reflected in the Audited Balance Sheet (except for
properties or assets sold or otherwise disposed of in
the ordinary course of business since the date of the
Audited Balance Sheet), all free and clear of all
liens, pledges, charges, security interests,
mortgages, encumbrances or title retention agreements
of any kind or nature. All such properties and assets
are "as-is." Schedule 3.9(b) hereto sets forth a
complete and correct list of all capital assets and
real properties of Target having a book or fair market
value in excess of $10,000. Schedule 3.9(c) hereto
sets forth a complete and correct description of all
leases of real property under which Target is lessor
or lessee and all other leases having a remaining term
of more than twelve (12) months or an aggregate
remaining rental obligation of more than $10,000 to
which Target is a party, whether as lessor or lessee.
Complete and correct copies of all such leases have
been delivered to Parent. Each such lease is valid
and subsisting and no event or condition exists which
constitutes, or after notice or lapse of time or both
would constitute, a default thereunder.
3.10. Indebtedness. Except for Indebtedness (as
defined in paragraph 16) reflected or reserved against in the
Audited Balance Sheet and Indebtedness incurred in the
ordinary course of business after the date of the
Audited Balance Sheet, Target has no material
Indebtedness outstanding at the date hereof. Except
as set forth on Schedule 3.10, Target is not in
default with respect to any outstanding Indebtedness
or any instrument relating thereto and no such
Indebtedness or any instrument or agreement relating
thereto purports to limit the issuance of any
securities by Target or the operation of the business
of Target. Complete and correct copies of all
instruments (including all amendments, supplements,
waivers and consents) relating to any Indebtedness of
Target have been made available to Parent.
3.11. Absence of Undisclosed Liabilities. Except to
the extent reflected or reserved against in the
Audited Balance Sheet or incurred in the ordinary
course of business after the date of the Audited
Balance Sheet or described in any Schedule hereto,
Target has no liabilities or obligations of any
nature, whether accrued, absolute, contingent or
otherwise (including, without limitation, liabilities
as guarantor or otherwise with respect to obligations
of others) and whether due or to become due,
including, without limitation, any liabilities for
taxes due or to become due, which would have a
material adverse effect on the business, assets or
financial condition of Target, taken as a whole, or
would be required by generally accepted accounting
principles to be reflected on a balance sheet of
Target.
3.12. Taxes and Tax Returns.
(a) All material Taxes of any nature whatsoever due
and payable by Target prior to the execution hereof
and all Tax Returns required to be filed prior to such
date have been properly computed in all material
respects, duly and timely filed (taking into
consideration extensions of time to file) and fully
paid and discharged. There are no outstanding
agreements or waivers extending the statutory period
of limitations applicable to any Tax or Tax Return for
any period. Target has paid all material Taxes which
have become due pursuant to Tax Returns and has paid
all installments of estimated Taxes due. All material
Taxes and other material assessments and levies which
it is required by law to withhold or to collect have
been duly withheld and collected, and have been paid
over to the proper governmental authorities to the
extent due and payable. All material Taxes not yet
due and payable have been properly accrued on the
financial statements of it. Subsequent to the date
hereof and prior to the Closing Date hereunder, all
Tax Returns shall be timely and accurately filed, and
any material Tax payable as shown thereby shall be
paid, as required by applicable law. Target has not
requested nor been granted an extension of the time
for filing any Tax Return to a date later than the
Closing Date. There are no determined material tax
deficiencies or proposed tax assessments (or to the
best of its knowledge and belief, the prospects for
the same) against it. Target has not incurred any
material liability for penalties, assessments or
interest under any federal, state, local or foreign
tax laws. Target has withheld and paid all material
Taxes required to have been withheld and paid by it in
connection with amounts paid or owing to any employee,
creditor, independent contractor or other third party.
(b) There are no liens for Taxes (other than current
Taxes not yet due and payable) on Target's assets.
There is no audit, action, suit, or taxing authority
proceeding now in progress, pending or to its
Knowledge threatened against it or with respect to any
Tax of it, and no claim has ever been made by a taxing
authority in a jurisdiction where it does not pay Tax
or file Tax Returns that it is or may be subject to
Taxes assessed by that jurisdiction.
(c) Target has not been a member of any affiliated
group (as defined in Section 1504 of the Code) or
filed or been included in a combined, consolidated,
aggregate, or unitary income Tax Return. It has never
been and is not now a party to or bound by any Tax
indemnification, Tax allocation, or Tax sharing
agreement or other contractual obligation pursuant to
which it is or may at any time in the future be
obligated to indemnify any other person or entity with
respect to Taxes.
(d) Target is not a party to any agreement,
contract, arrangement, or plan that has resulted, or
could result by reason of the transactions
contemplated hereby, separately or in the aggregate,
in the payment of any "excess parachute payments"
within the meaning of Section 280G of the Code.
(e) Target has provided the other party with true
and complete copies of all Tax Returns filed with
respect to it for taxable periods ending after
December 31, 1990, and all examination reports and
statements of deficiencies assessed against or agreed
to be paid by it with respect to such taxable periods.
3.13. Litigation, etc. No action, suit, proceeding
or investigation (whether conducted by any judicial or
regulatory body or other person) is pending or, to the
Knowledge of Target, threatened against Target (nor is
there any basis therefor to the Knowledge of Target)
which questions the validity of this Agreement or any
action taken or to be taken pursuant hereto or which
might reasonably be expected, either in any case or in
the aggregate, to materially adversely affect the
business, assets, or financial condition of Target or
materially impair the right or the ability of Target
to carry on its business substantially as now
conducted.
3.14. Safety, Zoning and Environmental Matters.
Neither the offices or properties in or on which
Target carries on its business nor the activities
carried on therein are in violation of any zoning,
health or safety law or regulation, including, without
limitation, the Occupational Safety and Health Act of
1970, as amended, except where a violation would not
have a material adverse effect on the business, assets
or financial condition of the Target. To Target's
Knowledge:
(a) Target is not in violation of any judgment,
decree, order, law, license, rule or regulation
purporting to regulate environmental matters,
including without limitation, those arising under the
Resource Conservation and Recovery Act ("RCRA"), the
Comprehensive Environmental Response, Compensation and
Liability Act of 1980 as amended ("CERCLA"), the
Superfund Amendments and Reauthorization Act of 1986
("SARA"), the Federal Clean Water Act, the Federal
Clean Air Act, the Toxic Substances Control Act, or
any state or local statute, regulation, ordinance,
order or decree relating to health, safety or the
environment (hereinafter "Environmental Laws"), which
violation would have a material adverse effect on the
business, assets, or financial condition of Target;
(b) Target has not received notice from any third
party including without limitation any federal, state
or local governmental authority, (i) that Target or
any predecessor in interest has been identified by the
United States Environmental Protection Agency ("EPA")
as a potentially responsible party under CERCLA with
respect to a site listed on the National Priorities
List, 40 C.F.R. Part 300 Appendix B (1986); (ii) that
any hazardous waste as defined by 42 U.S.C. paragraph 6903(5),
any hazardous substances as defined by 42 U.S.C.
paragraph 9601(14), any pollutant or contaminant as defined by
42 U.S.C. paragraph 9601(33) and any toxic substance, oil or
hazardous materials or other chemicals or substances
regulated by any Environmental Laws ("Hazardous
Substances") which Target has generated, transported
or disposed of has been found at any site at which a
federal, state or local agency or other third party
has conducted or has ordered that Target conduct a
remedial investigation, removal or other response
action pursuant to any Environmental Law; or (iii)
that Target is or shall be a named party to any claim,
action, cause of action, complaint (contingent or
otherwise) legal or administrative proceeding arising
out of any third party's incurrence of costs,
expenses, losses or damages of any kind whatsoever in
connection with the release of Hazardous Substances;
(c) except where any of the following would not have
a material adverse effect on the business, assets, or
financial condition of Target, (i) no portion of the
property of Target has been used for the handling,
manufacturing, processing, storage or disposal of
Hazardous Substances except in accordance with
applicable Environmental Laws; and no underground tank
or other underground storage receptacle for Hazardous
Substances is located on such properties; (ii) in the
course of any activities conducted by Target no
Hazardous Substances have been generated or are being
used on such properties except in accordance with
applicable Environmental Laws; (iii) there have been
no releases (i.e. any past or present releasing,
spilling, leaking, pumping, pouring, emitting,
emptying, discharging, injecting, escaping, disposing
or dumping) or threatened releases of Hazardous
Substances on, upon, into or from the properties of
Target, which releases would have a material adverse
effect on the value of such properties or adjacent
properties or the environment; (iv) there have been no
releases on, upon, from or into any real property in
the vicinity of the real properties of Target which,
through soil or groundwater contamination, have come
to be located on, and which would have a material
adverse effect on the value of, the properties of
Target; and (v) in addition, any Hazardous Substances
that have been generated on the properties of Target,
have been transported in accordance with applicable
Environmental Laws; and
(d) none of the properties of Target are currently
subject to any applicable environmental cleanup
responsibility law or environmental restrictive
transfer law or regulation by virtue of the
transactions set forth herein and contemplated hereby.
3.15. Labor Relations. Target is in compliance in
all material respects with all federal and state laws
respecting employment and employment practices, terms
and conditions of employment, wages and hours and
nondiscrimination in employment, and is not engaged in
any unfair labor practice. There is no charge pending
or, to the knowledge of Target, threatened against
Target alleging unlawful discrimination in employment
practices before any court or agency and there is no
charge of or proceeding with regard to any unfair
labor practice against Target pending before the
National Labor Relations Board. There is no labor
strike, dispute, slow-down or work stoppage actually
pending or to the knowledge of Target threatened
against or involving Target. No representation
question exists respecting any of the employees of
Target. No grievance or arbitration proceeding
arising out of or under any collective bargaining
agreement is pending against Target and no claim
therefor has been asserted. None of the employees of
Target is covered by any collective bargaining
agreement, and no collective bargaining agreement is
currently being negotiated by Target. Except as
described on Schedule 3.15 hereto, Target has not
experienced any work stoppage or other material labor
difficulty during the last five years.
3.16. Contracts. Except for contracts, agreements,
or other arrangements that have been fully performed
and with respect to which Target has no further
obligations or liabilities and except as listed in
Schedule 3.16, Target is not a party to or otherwise
bound by any agreement, instrument, or commitment that
is material to its financial condition, operations,
business or assets, and Target is not a party to or
otherwise bound by any agreement, instrument, or
commitment that may materially and adversely affect
its ability to consummate the transactions
contemplated hereby, including without limitation any:
(a) agreement for the purchase, sale, lease, or
license by or from it of assets, products, or services
requiring total payments by or to it in excess of
$10,000 in any instance, or entered into other than in
the ordinary course of the operation of its business;
(b) agreement or other commitment pursuant to which
it has agreed to indemnify or hold harmless any other
Person, including without limitation, for any
liabilities, penalties, losses, damages, or costs, or
expenses related thereto, arising out of or in
connection with any presence, use, generation,
treatment, storage, transportation, recycling,
disposal, or release of any Hazardous Substances;
(c) (i) employment agreement, (ii) consulting
agreement, or (iii) agreement providing for severance
payments or other additional rights or benefits
(whether or not optional) in the event of the sale or
other change in control of it;
(d) agreement with any current or former affiliate,
stockholder, officer or director of it or with any
Person in which, to Target's Knowledge, any such
affiliate of it has an interest;
Target has delivered or made available to Parent
correct and complete copies (or written summaries of
the material terms of oral agreements or
understandings) of each agreement, instrument, and
commitment listed in Schedule 3.16 hereto, each as
amended to date. Each such agreement, instrument, and
commitment is a valid, binding and enforceable
obligation of Target, and, to the Knowledge of Target,
of the other party or parties thereto, subject as to
enforcement to the Enforcement Exceptions, and is in
full force and effect. Neither Target nor, to its
Knowledge, any other party thereto, is in breach of or
noncompliance with any term of any such agreement,
instrument, or commitment (nor to the Knowledge of
Target is there any reasonable basis for any of the
foregoing), except where any such breach or non-
compliance would not have a material adverse effect on
the business, assets, or financial condition of the
Target. No agreement, instrument, or commitment
listed in Schedule 3.16 hereto, includes or
incorporates any provision, the effect of which could
reasonably be expected to enlarge or accelerate any of
the obligations of Target or to give additional rights
to any other party thereto, or to terminate, lapse, or
in any other way be affected, by reason of the
transactions contemplated by this Agreement.
3.17. Intellectual Property. Schedule 3.17 contains
an accurate and complete list of all patents, patent
applications, trademarks, tradenames, service marks,
logos, copyrights, and licenses known to be used in or
necessary to Target's business as now being conducted
(collectively, and together with any technology, know-
how, trade secrets, processes, formulas and techniques
used in or necessary to its business, the
"Intellectual Property"). Target owns, or is licensed
or believes to otherwise have the full unrestricted
right to use, all Intellectual Property used in or
necessary to its business, and no other intellectual
property rights, privileges, licenses, contracts, or
other instruments, or evidences of interests are
believed necessary to the conduct of its business as
currently conducted, with only such exceptions as have
no material adverse effect on its business condition
(financial or otherwise), or its prospects.
In any instance where Target's rights to Intellectual
Property arise under a license or similar agreement,
this is indicated in Schedule 3.17 and such rights are
licensed exclusively to it, except as indicated in
Schedule 3.17. Except as indicated in Schedule 3.17,
it has no knowledge of any obligation to compensate
any other Person for the use of any Intellectual
Property. Schedule 3.17 lists every instance in which
it has granted to any other person any license or
other right to use in any manner any of the
Intellectual Property, whether or not requiring the
payment of royalties (other than commercial licenses
of software entered into in the ordinary course of
business). No other person has an interest in or
right or license to use any of its Intellectual
Property. To the best of Target's knowledge, none of
its Intellectual Property (except patent applications)
is being infringed by others, or is subject to any
outstanding order, decree, judgment, or stipulation.
Except as set forth in Schedule 3.17, no litigation
(or other proceedings in or before any court or other
governmental, adjudicatory, arbitral, or
administrative body) relating to its Intellectual
Property is pending, or to the best of its knowledge,
threatened, nor, to the best of its knowledge, is
there any basis for any such litigation or proceeding.
No litigation (or other proceedings in or before any
court or other governmental, adjudicatory, arbitral,
or administrative body) charging Target with
infringement of any patent, trademark, copyright, or
other proprietary right is pending, or to the best of
Target's knowledge, threatened, nor, to the best of
Target's knowledge, is there any basis for any such
litigation or proceeding. Target maintains reasonable
security measures for the preservation of the secrecy
and proprietary nature of such of its Intellectual
Property as constitutes trade secrets.
3.18 Insurance. Schedule 3.18 lists the policies of
theft, fire, liability (including products liability),
worker's compensation, life, property and casualty,
directors' and officers', and other insurance owned or
held by it. Such policies of insurance are maintained
with financially sound and reputable insurance
companies, funds, or underwriters, are of the kinds
and cover such risks, and are in such amounts and with
such deductibles and exclusions, as are consistent
with prudent business practice. All such policies are
in full force and effect, are sufficient for
compliance in all material respects by it with all
requirements of law and of all agreements to which it
is a party, and provide that they will remain in full
force and effect through the respective dates set
forth in Schedule 3.18 and will not terminate or lapse
or otherwise be affected in any way by reason of the
Merger or the other transactions contemplated hereby.
3.19. Governmental Consent, Non-Contravention, etc.
Except as described in Schedule 3.19, Target holds no
licenses, permits or other authorizations issued by
any governmental agency to Target related to its
properties or business. No consent, approval or
authorization of or registration, designation,
declaration or filing with any governmental authority,
federal or other, on the part of Target, is required
in connection with the Merger or the consummation of
any other transaction contemplated hereby, except for
the filing of the Certificate of Merger with the
Secretary of State of Delaware. The execution and
delivery of this Agreement and the consummation of the
transactions contemplated hereby will not violate (i)
any provision of the charter or by-laws of Target, or
(ii) any order, judgment, injunction, award or decree
of any court or state or federal governmental or
regulatory body applicable to Target.
3.20. Employee Benefit Plans. Target does not
maintain or have any obligation to make contributions
to, any employee benefit plan (an "ERISA Plan") within
the meaning of Section 3(3) of the United States
Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), or, except as set forth on Schedule
3.20 hereto, any other retirement, profit sharing,
stock option, stock bonus or employee benefit plan (a
"Non-ERISA Plan"). Target has heretofore delivered to
Parent true, correct and complete copies of each Non-
ERISA Plan. All such Non-ERISA Plans have been
maintained and operated in all material respects in
accordance with all federal, state and local laws
applicable to such plans, and the terms and conditions
of the respective plan documents.
3.21. Potential Conflicts of Interest. Except as
set forth on Schedule 3.21, no officer or director of
Target (i) owns, directly or indirectly, any interest
in (excepting not more than 1% stock holdings for
investment purposes in securities of publicly held and
traded companies) or is an officer, director, employee
or consultant of any Person which is a lessor, lessee,
customer or supplier of Target; (ii) owns, directly or
indirectly, in whole or in part, any tangible or
intangible property which Target is using or the use
of which is necessary for the business of Target; or
(iii) has any cause of action or other claim
whatsoever against, or owes any amount to, Target,
except for claims in the ordinary course of business,
such as for accrued vacation pay, accrued benefits
under employee benefit plans and similar matters and
agreements.
3.22. Brokers. Except as set forth on Schedule
3.22, no finder, broker, agent or other intermediary
has been retained or utilized by, or has acted for or
on behalf of, Target in connection with the
negotiation or consummation of the transactions
contemplated hereby.
3.23. Compliance with Other Instruments, Laws, etc.
Target has complied in all material respects with, and
is in compliance in all material respects with, (i)
all laws, statutes, governmental regulations and all
judicial or administrative tribunal orders, judgments,
writs, injunctions, decrees or similar commands
applicable to its business, (ii) all unwaived terms
and provisions of all contracts, agreements and
indentures to which Target is a party, or by which
Target or any of its properties is subject, and (iii)
its charter and by-laws, each as amended to date,
except where any such failure to comply would not have
a material adverse effect on the business, assets or
financial condition of Target. Except as described on
Schedule 3.23, Target does not have or need any
licenses, permits or other authorizations from
governmental authorities for the conduct of its
business or in connection with the ownership or use of
its properties, except where the failure to have any
such license, permit or other authorization would not
have a material adverse effect on the business, assets
or financial condition of the Target.
3.24. Minute Books. The minute books of Target
made available to Acquirer for inspection accurately
record therein all actions taken by Target's Board of
Directors and shareholders.
3.25. Absence of Registration Obligations. Target
has no obligation, contingent or otherwise, by reason
of any agreement to register any of its securities
under the Securities Act.
3.26. Ownership of Parent Common Stock. As of the
date hereof the Target (i) does not beneficially own,
directly or indirectly, and (ii) is not a party to any
agreement, arrangement or understanding for the
purpose of acquiring, holding, voting or disposing of,
in each case, shares of capital stock of Parent, which
in the aggregate represent 5% or more of the
outstanding shares of capital stock of Parent entitled
to vote generally in the election of directors.
3.27. Full Disclosure. To the best of its Knowledge
and belief, no representations or warranties of Target
herein or in the Schedules hereto are materially
misleading.
4. Representations and Warranties of Parent and
Acquirer. Parent and Acquirer represent and warrant
to Target (for the benefit of Target prior to the
Effective Date and for the benefit of Target
Stockholders after the Effective Date) as follows.
For purposes of this Agreement, the term "Knowledge"
in relation to Parent or Acquirer means the actual
knowledge, after reasonable inquiry, of Kerry P. Gray
or Stephen B. Thompson.
4.1. Organization and Standing of Parent and
Acquirer. Each of Parent and Acquirer is a
corporation duly organized, validly existing and in
corporate good standing under the laws of the State of
Delaware, and has all requisite corporate power and
authority to own or lease and operate its properties
and to carry on its business as now conducted. Each
of Parent and Acquirer has delivered to Target
complete and correct copies of its Certificate of
Incorporation and By-Laws and all amendments thereto.
Parent is duly qualified and in good standing as a
foreign corporation in each jurisdiction, if any, in
which the character of the properties owned or leased
or the nature of the activities conducted by it makes
such qualification necessary.
4.2. Corporate Power, Binding Effect. Each of
Parent and Acquirer has all requisite corporate power
and authority to enter into this Agreement and the
Registration Rights Agreement among the Parent and
each of the Target Stockholders substantially in the
Form of Exhibit C attached hereto (the "Registration
Rights Agreement") and to perform all of its
agreements and obligations under this Agreement and
the Registration Rights Agreement in accordance with
their respective terms. Acquirer has all requisite
power and authority to enter into the Certificate of
Merger and to perform all of its obligations under the
Certificate of Merger. This Agreement and the
Registration Rights Agreement have been duly
authorized by each of Parent's and Acquirer's Board of
Directors, has been duly executed and delivered by
Parent and Acquirer and constitutes the legal, valid
and binding obligations of Parent and Acquirer,
enforceable against Parent and Acquirer in accordance
with its terms. Neither the execution, delivery or
performance by either Parent or Acquirer of this
Agreement or the Certificate of Merger or the
Registration Rights Agreement, as applicable, in
accordance with their respective terms will result in
any violation of or default or creation of any lien
under, or the acceleration or vesting or modification
of any right or obligation under, or in any conflict
with, either Parent's or Acquirer's Certificate of
Incorporation or by-laws or of any agreement,
instrument, judgment, decree, order, statute, rule or
regulation binding on or applicable to Parent or
Acquirer, except where any of the foregoing would not
have a material adverse effect on the business, assets
or financial condition of Parent or Acquirer.
4.3. Capitalization. The authorized capital of
Acquirer consists of 1000 shares of common stock, par
value $.001 per share, all of which shares have been
issued to and are owned by Parent as of the date
hereof. The authorized capital of Parent consists of
60,000,000 shares of Parent Common Stock, 31,391,324
shares of which are issued and outstanding on the date
hereof and 10,000,000 shares of preferred stock, none
of which shares are issued and outstanding as of the
date hereof. All of such outstanding shares are
validly issued and outstanding, fully paid and
nonassessable. All shares of Parent Common Stock to
be issued to Target Stockholders under this Agreement
(including under paragraph 2.1 and paragraph paragraph 2.2) will,
when issued, be duly authorized, validly issued, fully paid and
nonassessable. Except as set forth in the Parent
Reports (as defined below), Parent is neither a party
to nor is bound by any outstanding subscriptions,
options, warrants, calls, commitments or agreements of
any character calling for Parent to issue, deliver or
sell, or cause to be issued, delivered or sold any
shares of any equity security of Parent or any
securities convertible into, exchangeable for or
representing the right to subscribe for, purchase or
otherwise receive any shares of any equity security of
Parent or obligating Parent to grant, extend or enter
into any such subscriptions, options, warrants, calls,
commitments or agreements.
4.4. Reports and Financial Statements. Parent has
previously furnished to Target complete and accurate
copies, as amended or supplemented, of its (i) Annual
Reports on Form 10-K for the fiscal years ended 1995
and 1996, together with all exhibits thereto, as filed
with the Securities and Exchange Commission (the
"Commission"), (ii) proxy statement relating to the
Annual Meeting of Stockholders to be held on May 29,
1997, (iii) Quarterly Reports on Form 10-Q, together
with all exhibits thereto, as filed with the
Commission since December 31, 1996 and (iv) other
reports filed by Parent with the Commission since
December 31, 1996 (such reports and other filings,
together with any amendments or supplements thereto,
are collectively referred to herein as the "Parent
Reports"). As of their respective dates, the Parent
Reports did not contain any untrue statement of a
material fact or omit to state a material fact
required to be stated therein or necessary to make the
statements therein, in light of the circumstances
under which they were made, not misleading. The
audited financial statements and unaudited interim
financial statements of Parent included in the Parent
Reports (i) comply as to form in all material respects
with applicable accounting requirements and the
published rules and regulations of the Commission with
respect thereto, (ii) have been prepared in accordance
with generally accepted accounting principles applied
on a consistent basis throughout the periods covered
thereby (except in the case of quarterly financial
statements, as permitted by Form 10-Q under the
Exchange Act), (iii) fairly present the financial
condition, results of operations and cash flows of
Parent as of the respective dates thereof and for the
periods referred to therein, and (iv) are consistent
with the books and records of Parent. Since December
31, 1996, there has been no material adverse change in
the business, assets or financial condition of Parent.
4.5. Government Consents, etc. No consent, approval
or authorization of or registration, designation,
declaration or filing with any governmental authority,
federal or other, on the part of it is required in
connection with the Merger or the consummation of any
other transaction contemplated hereby, except for the
filing of the Certificate of Merger with the Secretary
of State of Delaware. The execution and delivery of
this Agreement and the consummation of the
transactions contemplated hereby will not violate (i)
any provision of the charter and by-laws of Parent or
Acquirer, or (ii) any order, judgment, injunction,
award or decreed of any court or state or federal
governmental or regulatory body applicable to Parent
or Acquirer.
4.6. Brokers. Neither Parent nor Acquirer has
retained, utilized or been represented by any broker
or finder in connection with the negotiation or
consummation of this Agreement or the transactions
contemplated hereby.
4.7. Full Disclosure. To the best of its knowledge
and belief, no representations or warranties of Parent
or Acquirer herein or in the Schedules hereto are
materially misleading.
5. Conduct of Target Business Prior to Effective
Date.
Target covenants and agrees that, from and after the
date of this Agreement and until the Effective Date,
except as otherwise provided herein or specifically
consented to or approved by Parent in writing:
5.1. Full Access. Target shall afford to Parent and
Acquirer and their authorized representatives full
access during normal business hours and with
reasonable advance notice to all properties, books,
records, contracts and documents of Target and a full
opportunity to make such investigations as they shall
reasonably desire to make of Target, and the Target
shall furnish or cause to be furnished to Parent and
Acquirer and their authorized representatives all such
information with respect to the affairs and businesses
of Target as Parent or Acquirer may reasonably
request.
5.2. Carry on in Regular Course. Target shall use
commercially reasonable efforts to preserve all of its
accounting and business records, corporate records,
trade secrets and proprietary information and other
Intellectual Property for the benefit of the Surviving
Corporation.
5.3. No Dividends, Issuances, Repurchases, etc.
Target shall not declare or pay any dividends (whether
in cash, shares of stock or otherwise) on, or make any
other distribution in respect of, any shares of its
capital stock, or, except as set forth on Schedule
5.3, issue, purchase, redeem or acquire for value any
shares of its capital stock, or issue any options,
warrants or other rights to acquire shares of its
capital stock or securities exchangeable for or
convertible into shares of its capital stock, except
for the issuance of shares of capital stock of Target
upon the exercise of options or warrants outstanding
on the date hereof or upon the conversion of
convertible promissory notes outstanding on the date
hereof as provided in paragraph 2.1(e) and paragraph 7.9 of this
Agreement.
5.4. No General Increases. Target shall not grant
any increases in the rates of pay to its employees,
consultants or officers nor by means of any bonus,
insurance, pension or stock option or other benefit
plan or other contract or commitment increase in any
amount the benefits or compensation of any such
person, including without limitation, by adding or
increasing any benefits payable or contingent upon the
Merger.
5.5. Contracts and Commitments. Target shall not
enter into any contract or commitment or engage in any
transaction not in the usual and ordinary course of
business and consistent with its normal business
practices, including without limitation, any contract
or commitment relating to Target's Intellectual
Property.
5.6. Sale of Capital Assets. Target shall not (i)
sell, lease as lessor, license as licensor, or
otherwise dispose of any capital asset with a market
value in excess of $10,000, or of capital assets of
market value aggregating with respect to Target taken
as a whole in excess of $10,000, (ii) sell, lease as
lessor, license as licensor, or otherwise dispose of
any asset other than in the ordinary course of
business; provided, that Target shall not license any
of Target's Intellectual Property, (iii) borrow money,
(iv) incur or pay any material liability other than in
the ordinary course of business, or (v) guarantee or
otherwise incur any material liability with respect to
the obligation of any other Person.
5.7. Preservation of Organization. Target shall use
commercially reasonable efforts to preserve for Parent
and Acquirer the present relationships with suppliers
and others having business relations with Target.
Target shall not amend its Certificate of
Incorporation or by-laws. Target shall not merge or
consolidate with any other corporation, or acquire any
stock of, or, except in the ordinary course of
business, acquire any assets or property of any other
business entity whatsoever.
5.8. No Default. Target shall not do any act or
omit to do any act, or permit any act or omission to
act, which will cause a material breach of any
contract, commitment or obligation of Target, except
where any of the foregoing would not have a material
adverse effect on the business, assets or financial
condition of Target.
5.9. Compliance with Laws. Target shall duly
comply with all laws, regulations and orders
applicable with respect to its business, except where
any of the foregoing would not have a material adverse
effect on the business, assets or financial condition
of Target.
5.10. Advice of Change. Target shall promptly
advise Parent in writing of any development or change
in circumstance (including any litigation to which it
may become a party or of which it may gain Knowledge)
that does or could reasonably be expected to (i) call
into question the validity of this Agreement or any
action taken or to be taken pursuant hereto, (ii)
adversely affect the ability of the parties to
consummate the transactions contemplated hereby, or
(iii) have any material adverse effect on the
business, financial condition, or assets of Target.
5.11. Stockholders Meeting; No Shopping, etc.
Target shall call a special meeting of the Target
Stockholders to consider and vote upon the approval of
this Agreement and the Merger and the other
transactions contemplated hereby. Target shall
recommend to its stockholders the approval of this
Agreement and the Merger and the other transactions
contemplated hereby and shall use its best efforts to
solicit and obtain the requisite vote of approval and
Target shall not solicit from any person or otherwise
encourage or support any person in making any offers,
inquiries or proposals relating to the acquisition of
any securities or assets of Target or any merger with
Target and will not supply to any person any
non-public information concerning Target for any such
purpose or with any such likely effect.
5.12. Consents of Third Parties. Target shall use
commercially reasonable efforts to secure, before the
Closing Date, the consent, in form and substance
satisfactory to Parent and Parent's counsel, to the
consummation of the transactions contemplated by this
Agreement, by each party to any contract, commitment
or obligation of Target, in each case under which such
consent is required.
5.13. Satisfaction of Conditions Precedent. Target
shall use commercially reasonable efforts to cause the
satisfaction of the conditions precedent contained in
paragraphs 7 and 8 hereof.
6. Conduct of Parent Business Prior to Effective
Date.
Parent covenants and agrees that, from and after the
date of this Agreement and until the Effective Date,
except as otherwise provided herein or specifically
consented to or approved by Target in writing:
6.1. Compliance with Laws. Parent shall duly comply
with all laws, regulations and orders applicable with
respect to its business, except where any of the
foregoing would not have a material adverse effect on
the business, assets or financial condition of Parent.
6.2. Advice of Change. Parent shall promptly advise
Target in writing of any development or change in
circumstance (including any litigation to which it may
become a party or of which it may gain Knowledge) that
does or could reasonably be expected to (i) call into
question the validity of this Agreement or any action
taken or to be taken pursuant hereto, (ii) adversely
affect the ability of the parties to consummate the
transactions contemplated hereby, or (iii) have any
material adverse effect on the business or financial
condition of Parent.
6.3. Satisfaction of Conditions Precedent. Parent
shall use its best efforts to cause the satisfaction
of the conditions precedent contained in paragraphs 7 and 8
hereof.
7. Conditions Precedent to Parent's and Acquirer's
Obligations. Notwithstanding the provisions of paragraphs 1
and 2, Parent and Acquirer shall be obligated to
perform the acts contemplated for performance by them
under paragraphs 1 and 2 only if each of the following
conditions is satisfied at or prior to the Closing
Date, unless any such condition is waived by Parent
and Acquirer:
7.1. Accuracy of Representations and Warranties by
Target. The representations and warranties of Target
set forth in paragraph 3 of this Agreement (including any
schedules thereto) shall be true and correct in all
material respects as of the Closing Date with the same
force and effect as though made again at and as of the
Closing Date, except for changes permitted or required
by this Agreement.
7.2. Compliance by Target. Target shall have
performed and complied in all material respects with
all covenants and agreements contained in this
Agreement required to be performed or complied with by
it on or before the Closing Date.
7.3. Approval by Stockholders; Delivery of Agreement
of Merger. The Target Stockholders shall have
authorized and approved this Agreement and the Merger
contemplated hereby as required by applicable law and
the Certificate of Incorporation and By-laws of Target
and Target shall have duly executed and delivered or
caused to be duly executed and delivered the
Certificate of Merger and the Related Agreements.
7.4. No Restraining Order. No restraining order or
injunction or other order issued by any court of
competent jurisdiction, or other legal restraint or
prohibition shall prevent the consummation of the
Merger or other transactions contemplated by this
Agreement, and no petition or request for any such
injunction or other order shall be pending.
7.5. No Material Change. There shall not have been
any material adverse change in the business or assets
of Target.
7.6. Officers' Certificates. Target shall have
executed and delivered to Acquirer and Parent at and
as of the Closing (i) a certificate, duly executed by
Target's President or any Vice President, in form and
substance satisfactory to Parent and Parent's counsel,
certifying that each of the conditions specified in
this paragraph 7 have been satisfied and (ii) a certificate in
the form of Exhibit D attached hereto.
7.7. Resignations of Directors and Officers. All of
the directors and officers of Target that Parent or
the Acquirer have requested resign their positions
shall have resigned their positions with Target on or
prior to the Closing Date, and prior thereto shall
have executed such appropriate documents with respect
to the transfer or establishment of bank accounts,
signing authority, etc., as Parent shall have
requested.
7.8. Opinion of Target's Counsel. Target shall have
delivered to Parent and Acquirer an opinion of Perkins
Coie, counsel to Target, dated the Closing Date, such
opinion to contain customary exceptions, limitations
and assumptions, to be based in part on customary
certificates of public officials and Target officers,
and to be in form and substance reasonably
satisfactory to Parent and substantially in the form
of Exhibit E attached hereto.
7.9. Exercise and Exchange of Stock Options;
Conversion of Convertible Promissory Notes; Release of
Claims. Each outstanding stock option, warrant, Claim
and other right to acquire the capital stock of Target
shall have been exercised, waived or released and/or
Target shall have entered into an agreement,
satisfactory in form and substance to Parent and its
counsel, with each person holding outstanding stock
options, warrants, Claims and other rights to purchase
shares of the capital stock of Target. Target's Stock
Plan shall have been terminated as of the Closing Date
and shall be of no further force or effect.
7.10. Liabilities of Target. Other than (i)
accounts payable of not more than $700,000; (ii) loans
payable of not more than $363,500 (including all
principal amounts and accrued interest as of the
Closing Date and interest due and payable within
thirty (30) days after the Closing Date); and (iii)
capital lease obligations on the capital equipment of
Target, there shall be no other liabilities shown on
the unaudited balance sheet of Target dated the
Closing Date, such unaudited balance sheet fairly
presenting the financial condition of Target as of
such date in all material respects and being
acceptable to Parent (the "Target Closing Balance
Sheet").
7.11. Tax Opinion. The delivery by Bingham, Dana &
Gould LLP to Parent and Acquirer of an opinion, in
form and substance reasonably acceptable to Parent and
Acquirer, that the Merger is a tax free reorganization
under Section 368(a) of the Code.
7.12. Consents. All consents required to be secured
by Target pursuant to paragraph 5.12 shall have been secured on
or prior to the Closing Date.
7.13. Facility Lease. The Facility Lease by and
between Target and David Sabey shall have been
terminated and Target shall have no further
obligations under any lease.
7.14. Lock-Up Agreement. Medical Innovation Fund II
shall have executed and delivered to Parent a Lock-Up
Agreement substantially in the form of Exhibit F
attached hereto.
7.15. Employment Agreements. All of the employment
and consulting agreements to which Target is a party
or to or by which Target is bound (including the
agreements with Donald McCarren and Glyn Wilson) shall
have been resolved upon terms and conditions
acceptable to Parent.
7.16. Proceedings and Documents Satisfactory. All
proceedings in connection with the Merger contemplated
by this Agreement and the other transactions
contemplated hereby and all certificates and documents
delivered to Parent or Acquirer pursuant to this paragraph 7 or
otherwise reasonably requested by Parent or Acquirer
shall be executed and delivered by Target and shall be
reasonably satisfactory to Parent, Acquirer and their
counsel.
7.17. Private Placement. The issuance of the Parent
Common Stock to the Target Stockholders and all
holders of Claims shall qualify as a private placement
under Regulation D of the Securities Act and shall be
exempt from registration under the Federal Securities
laws and all state and other securities laws.
7.18. Settlements With Certain Creditors. Target
shall have executed settlement and release agreements
with each of Donald McCarren, Glynn Wilson, Joseph
Daugherty, Grayson, Medical Innovation Partners (and
its affiliates), David Sabey and any other creditor
reasonably requested by Parent in form and substance
satisfactory to Parent providing for the full and
final settlement of any claims of such parties against
Target and releasing Target from any liabilities
incurred prior to the execution of such agreements.
8. Conditions Precedent to Target's Obligations.
Notwithstanding the provisions of paragraphs 1 and 2, Target
and Target Stockholders shall be obligated to perform
the acts contemplated for performance by them under
paragraphs 1 and 2 only if each of the following conditions is
satisfied at or prior to the Closing Date, unless any
such condition is waived by Target:
8.1. Accuracy of Representations and Warranties by
Parent and Acquirer. The representations and
warranties of Parent and Acquirer set forth in paragraph 4 of
this Agreement shall be true and correct in all
material respects as of the Closing Date with the same
force and effect as though made again at and as of the
Closing Date, except for changes permitted or required
by this Agreement.
8.2. Compliance by Parent and Acquirer. Parent and
Acquirer shall have performed and complied in all
material respects with all of the covenants and
agreements required to be performed or complied with
by them by the Closing Date.
8.3. No Restraining Order. No restraining order or
injunction or other order issued by any court of
competent jurisdiction, or other legal restraint or
prohibition shall prevent the Merger or other
transactions contemplated by this Agreement, and no
petition or request for any such injunction or other
order shall be pending.
8.4. Parent Certificates. Parent shall have
delivered to Target (i) a certificate of its President
or one of its Vice Presidents dated the Closing Date,
in form and substance satisfactory to Target and
Target's counsel, certifying that the conditions set
forth in each of paragraphs 8.1, 8.2, and 8.3 have been
satisfied, and (ii) a certificate in the form attached
hereto as Exhibit G.
8.5. Other Documents. Acquirer shall have duly
executed and delivered the Certificate of Merger.
Parent shall have duly executed and delivered the
Related Agreements.
8.6. Opinion of Parent's Counsel. Parent shall have
delivered to Target an opinion of Bingham, Dana &
Gould LLP., counsel for Parent and Acquirer, dated the
Closing Date, such opinion to contain customary
exceptions, limitations and assumptions and to be
based in part on customary certificates of public
officials and Parent officers, and to be in form and
substance reasonably satisfactory to Target and
substantially similar to Exhibit H attached hereto.
8.7. Assumption of Guaranty. Parent shall indemnify
and hold harmless Medical Innovation Partners and/or
Medical Innovation Fund II from all claims,
liabilities and costs arising from a claim by the
lessor for payment of any amount owing under the
guarantee of either with respect to the equipment
leases of Target set forth on Schedule 8.7 hereto.
The aggregate amounts owing under such leases is
approximately $294,000.
9. Confidential Information; No Publicity. Any and
all non-public information disclosed by Parent and
Acquirer to Target or by Target to Parent or Acquirer
as a result of the negotiations leading to the
execution of this Agreement, or in furtherance hereof,
shall remain confidential and be subject to the
Confidentiality Agreement dated March 21, 1996 between
Parent and Target. If the consummation of the
transactions contemplated by this Agreement does not
take place for any reason, each of Parent and Acquirer
on the one hand and Target on the other will return
promptly all documents containing non-public
information relating to the other side.
10. Securities Laws Matters. Target agrees to
cooperate with Parent and Acquirer in qualifying the
issue of Parent Common Stock to the Target
Stockholders under paragraph 4(2) and/or Regulation D of the
Commission under the Securities Act and in complying
with all state and other securities laws in respect
thereto. Neither Target nor any of its agents is or
shall be authorized to act on Parent's or Acquirer's
behalf with respect to any aspect of the transactions
contemplated by this Agreement or make any
solicitations of or representations to any of the
Target Stockholders on Parent's or Acquirer's behalf.
Neither this Agreement nor any other by Parent or
Acquirer shall be deemed an offer with respect to
Parent Common Stock.
11. Survival and Materiality of Representations.
Each of the representations and warranties made by the
parties hereto shall survive the Closing Date and
Effective Date and consummation of the transactions
contemplated hereby. Notwithstanding the foregoing,
the representations and warranties of the parties
hereto shall expire and have no further force or
effect on the date that is eighteen (18) months after
the Effective Date or following any final arbitration
award or determination without appeal regarding the
Milestones pursuant to paragraph 2.2(i) hereto with respect to
any claim made within such eighteen (18) month period.
Any claims made under or with respect to such
representations and warranties on or before the date
that is eighteen (18) months or such later date after
the Effective Date shall survive until, and only for
purposes of, resolution of such claims.
12. Tax Consequences to the Parties. Parent and
Acquirer, on the one hand, and Target, on the other,
understand and agree that neither Parent and Acquirer,
on the one hand, nor Target, on the other, are making
any representation or warranty as to the tax
consequences of this Agreement and the events and
actions contemplated hereby. Nonetheless, all parties
hereto agree to report the transactions contemplated
hereby on their respective federal income tax returns
as a tax-free reorganization under paragraph 368(a) of the Code
and to take no action inconsistent with such
characterization.
13. Termination; Liabilities Consequent Thereon.
This Agreement, the Related Agreements and (if
executed) the Certificate of Merger may be terminated
and the Merger contemplated hereby abandoned at any
time prior to the Effective Date (whether before or
after approval of the Merger by the Target
Stockholders or by Parent as sole stockholder of
Acquirer) only as follows:
(a) by Parent or Acquirer, upon notice to Target if
(i) Target shall be in material breach of its
obligations hereunder and shall not have cured such
breach within a period of ten (10) days after written
notice from Parent or Acquirer or (ii) if the
conditions set forth in paragraph 7 shall not have been
satisfied, or waived by Parent, on or prior to June 4,
1997 or (iii) a material adverse change in any
representation or warranty made by Target herein or
(iv) any material adverse change in the business or
operations of the Target; or
(b) by Target, upon notice to Parent, if (i) Parent
or Acquirer shall be in material breach of its
obligations hereunder and shall not have cured such
breach within a period of ten (10) days after written
notice from Target or (ii) if the conditions set forth
in paragraph 8 shall not have been satisfied, or waived by
Target, on or prior to June 4, 1997 or (iii) a
material adverse change in any representation or
warranty made by Parent or Acquirer herein or (iv) any
material adverse change in the business or operations
of Parent; or
(c) at any time by mutual agreement of the Boards of
Directors of Parent and Target.
If this Agreement is terminated by Target other than
pursuant to paragraph 13(b) or paragraph 13(c), then the Target shall
pay Parent a break up fee of $250,000. If this
Agreement is terminated by Parent and Acquirer other
than pursuant to paragraph 13(a) or paragraph 13(c), then Parent shall
pay Target a break up fee of $150,000 in addition to
the $100,000 nonrefundable advance previously made to
Target.
14. Indemnification.
14.1. By Target's Stockholders.
(a) If the Closing occurs, the Target Stockholders
and all Claim holders, jointly and severally (the
"Indemnifying Parties"), agree to indemnify and hold
Parent and Acquirer and their respective directors,
officers, employees, shareholders and affiliates (the
"Indemnified Parties") harmless from and with respect
to all Damages related to or arising out of (i) any
failure or any breach of any representation or
warranty of Target, (ii) any failure to perform any
covenant, obligation, undertaking or agreement of
Target or any Target Stockholder contained in this
Agreement (including any Schedules hereto); provided,
however, that the obligation of any Target Stockholder
or Claim holder under this pargraph 14.1(a) shall not exceed
an amount equal to the fair market value (as of the
date of payment) of Parent Common Stock which is
represented by the sum of the fair market value (as of
the date of payment) of the following categories of
Parent Common Stock held by Target Stockholders (x)
Parent Common Stock which has not become vested and
paid pursuant to the terms of Sections 2.1 and 2.2
herein or, (y) Parent Common Stock which has become
vested and paid but as of the time of any claim have
not been registered by Parent pursuant to the
Registration Rights Agreement, or (z) Parent Common
Stock which has become vested but as of the time of
any claim remains subject to the Lock-Up Agreement;
provided, that no shares of Parent Common Stock shall
be counted more than once in connection with such
calculation. Any liquidated claim of indemnity
hereunder shall be payable by the Indemnifying Parties
solely in kind in Parent Common Stock from the
categories set forth in the preceding sentence.
Parent Common Stock shall be applied to any such
liquidated claim based on its fair market value (as of
the date of payment) in order of priority from
category (y) first, then category (z) after all the
Parent Common Stock in category (y) has been applied,
and finally to category (x) after all Parent Common
Stock in categories (y) and (z) has been applied.
(b) The adoption of this Agreement and the approval
of the Merger by the Target Stockholders shall
constitute approval by the Target Stockholders of all
of the arrangements relating hereto and thereto,
including without limitation, (i) the appointment of
the Representatives (as hereinafter defined) and (ii)
the authority of the Representatives to defend and/or
settle any claims for which the Target Stockholders
may be required to indemnify the Indemnified Parties
pursuant to this paragraph 14. All decisions and actions by
the Representatives shall be binding upon all Target
Stockholders and no Target Stockholder shall have the
right to object, dissent, protest or otherwise contest
the same.
(c) The Parent, Acquirer and/or their agents have
completed a due diligence investigation of the
Target's assets, contracts and business for their own
purposes to determine the Parent's and Acquirer's
willingness to enter into the transactions
contemplated by this Agreement. The representations,
warranties or indemnification obligations of Target
and its shareholders shall not be deemed waived or
otherwise limited in any manner by any such
investigation; provided, however, if the Parent or
Acquirer gains any specific actual knowledge of a
specific breach of any of the Target's representations
or warranties (and not a mere awareness of a set of
circumstances which later manifests itself as a
breach) prior to the Closing, which specific actual
knowledge is able to be demonstrated by written
evidence that was delivered to the Chief Executive
Officer or Chief Financial Officer of Parent prior to
the Effective Date, Parent and Acquirer shall be
deemed to have waived such breach if Parent and
Acquirer proceed to close the transactions
contemplated hereby. Notwithstanding the foregoing,
no knowledge of any person may be imputed to either
the Chief Executive Officer or Chief Financial
Officer.
14.2. Method of Asserting Claims.
(a) All claims for indemnification by an Indemnified
Party pursuant to this paragraph 14 shall be made in accordance
with the provisions of this Agreement.
(b) The Indemnified Parties shall give prompt
written notification to the Representatives of the
commencement or threatened commencement of any action,
suit or proceeding (and the facts constituting the
basis therefor) or any other basis for which
indemnification pursuant to this paragraph 14 may be sought (an
"Indemnification Notice"). In the event of any such
claim for indemnification hereunder, the notice shall
specify, if known, the amount or an estimate of the
amount of the liability arising therefrom.
(c) Within thirty (30) days after delivery of such
notification, the Representatives may, upon written
notice thereof to the Indemnified Parties, assume
control of the defense of any action, suit or
proceeding brought by any person other than the
Indemnified Parties with counsel reasonably
satisfactory to the Indemnified Parties. If the
Representatives do not so assume control of such
defense, the Indemnified Parties shall control such
defense. The party not controlling such defense may
participate therein at its own expense; provided that
if the Representatives assume control of such defense
and the counsel selected by the Representatives
concludes that such counsel has a conflict of interest
due to the existence of conflicting or different
defenses available to the Indemnifying Parties and the
Indemnified Parties with respect to such action, suit
or proceeding, the reasonable fees and expenses of one
firm of separate counsel for all Indemnified Parties
shall be paid by the Indemnifying Parties. The party
controlling such defense shall keep the other party
advised of the status of such action, suit or
proceeding and the defense thereof and shall consider
in good faith recommendations made by the other party
with respect thereto. The Indemnified Parties shall
not agree to any settlement of such action, suit or
proceeding without the prior written consent of the
Representatives, which shall not be unreasonably
withheld. The Representatives shall not agree to any
settlement of such action, suit or proceeding without
the prior written consent of the Indemnified Parties,
which shall not be unreasonably withheld.
14.3. Appointment of Representatives.
(a) Target, Target Stockholders and the Claim
holders appoint F. Joseph Daugherty and Robert
Nickoloff (the "Representatives" and each a
"Representative") to represent the Target Stockholders
and the Claim holders for the purposes specified in
this Agreement (including acting as a purchaser
representative under Regulation D of the Securities
Act if necessary).
(b) The Representatives shall not be liable for any
error of judgment, or any action taken, suffered or
omitted to be taken hereunder except in the case of
bad faith, nor shall they be liable for the default or
misconduct of any employee, agent or attorney
appointed by them who shall have been selected with
reasonable care. The Representatives may consult with
counsel of their own choice and shall have full and
complete authorization and protection for any action
taken or suffered by them hereunder in good faith or
in accordance with the opinion of such counsel.
(c) The Representatives (or any successor
Representatives hereunder) may at any time resign and
be discharged of the duties imposed hereunder by
giving at least fifteen (15) days' prior notice to the
Target Stockholders and Claim holders, in which event,
or upon the death or legal disability of any
Representative, the Target Stockholders shall appoint
a successor Representative by written consent of the
holders of a majority of the capital stock of Target
at the Effective Date ("Pro Rata Shares").
(d) All actions of the Representatives under this
paragraph 14 may be taken by either Representative individually
or both Representatives jointly, except that each
Representative agrees not to take any action singly
unless it is impracticable under the circumstances to
first consult with the other Representative.
15. Expenses. All expenses incurred by Target or
any Target Stockholder in connection with the
preparation and execution of this Agreement and the
other agreements contemplated hereby and the
consummation of the transactions contemplated hereby
and thereby, including any expenses of finders,
brokers, attorneys or the like, including any fees or
expenses of Grayson, shall be borne by Target or the
Target Stockholders, as the case may be, and shall be
paid in accordance with the payment priorities set
forth in Section 2.2(c). All expenses incurred by
Parent or Acquirer shall be borne by Parent.
16. Certain Definitions.
As used herein the following terms not otherwise
defined have the following respective meanings:
"Indebtedness" (a) All indebtedness for borrowed
money, whether current or long-term, or secured or
unsecured, (b) all indebtedness of the deferred
purchase price of property or services represented by
a note or security agreement, (c) all indebtedness
created or arising under any conditional sale or other
title retention agreement (even though the rights and
remedies of the seller or lender under such agreement
in the event of default may be limited to repossession
or sale of such property), (d) all indebtedness
secured by a purchase money mortgage or other lien to
secure all or part to the purchase price of property
subject to such mortgage or lien, (e) all obligations
under leases that have been or must be, in accordance
with GAAP, recorded as capital leases in respect of
which it is liable as lessee, (f) any liability in
respect of banker's acceptances or letters of credit,
and (g) all indebtedness of Target, the Target
Stockholders or any other Person that is guaranteed by
Target or that Target has agreed (contingently or
otherwise) to purchase or otherwise acquire or in
respect of which Target has otherwise assured a
creditor against loss.
"Person": means any natural person, entity, or
association, including without limitation any
corporation, partnership, limited liability company,
government (or agency or subdivision thereof), trust,
joint venture, or proprietorship.
"Related Agreements": means the Escrow Agreement, the
License Agreements, the Lock-Up Agreement and the
Target Stockholder Representation Certificates.
"Securities Act" shall mean the Securities Act of
1933, as amended, and the rules and regulations of the
Commission thereunder, all as the same shall be in
effect from time to time.
"Tax": Any federal, state, local, or foreign
income, gross receipts, franchise, estimated,
alternative minimum, add-on minimum, sales, use,
transfer, registration, value added, excise, natural
resources, severance, stamp, occupation, premium,
windfall profit, environmental, customs, duties, real
property, personal property, capital stock,
intangibles, social security, unemployment,
disability, payroll, license, employee, or other tax
or levy, of any kind whatsoever, including any
interest, penalties, or additions to tax in respect of
the foregoing.
"Tax Return": Any return, declaration, report,
claim for refund, information return, or other
document (including any related or supporting
estimates, elections, schedules, statements, or
information) filed or required to be filed in
connection with the determination, assessment, or
collection of any Tax or the administration of any
laws, regulations, or administrative requirements
relating to any Tax.
17. Miscellaneous Provisions.
17.1. Amendments. This Agreement may be amended in
any manner and at any time prior to the submission of
this Agreement to the Target Stockholders and, after
such submission, may be amended to extend the Closing
Date and termination date referred to in paragraph 13 or to
make other amendments which, in the opinion of the
respective counsel for Parent and Target, do not
substantially alter the terms hereof, by written
instrument stating that it is an amendment of this
Agreement executed by Parent, Acquirer and Target and
approved by the Boards of Directors of Acquirer and
Target.
17.2. Notices and Representatives. Any notice
expressly provided for under this Agreement shall be
in writing, shall be given either manually or by
written telecommunication, fax or mail, and shall be
deemed sufficiently given when received by the party
to be notified at its address set forth below or if
and when mailed by registered mail, postage prepaid,
addressed to such party at such address. Any party
and any representative designated below may, by notice
to the others, change its address for receiving such
notices.
Address for notices to Parent and Acquirer:
ACCESS Pharmaceuticals, Inc.
2600 N. Stemmons Frwy, Suite 176
Dallas, TX 75207-2107
Attn: Kerry P. Gray, President
Fax: (214) 905-5101
Phone: (214) 905-5100
with a copy to:
John J. Concannon III, Esq.
Bingham, Dana & Gould LLP
150 Federal Street
Boston, MA 02110
Fax: (617) 951-8736
Phone: (617) 951-8000
Address for notices to Target, Target Stockholders
and any Claim holder:
Timothy Maudlin
Medical Innovation Partners
9900 Bren Road East
Suite 421
Minnetonka, MN 55343
Fax: (612) 931-0003
Phone: (612) 931-0154
with a copy to:
David M. Williamson, Esq.
Perkins, Coie
One Bellevue Center
Suite 1800
411 108th Avenue, N.E.
Bellevue, WA 98004
Fax: (206) 453-7350
Phone: (206) 453-6980
17.3. Assignment and Benefits of Agreement. This
Agreement shall be binding upon and shall inure to the
benefit of the parties and their respective
successors, but may not be assigned by any of the
foregoing without the written consent of the others.
Except as aforesaid, nothing in this Agreement,
express or implied, is intended to confer upon any
person other than the parties hereto and Target
Stockholders and their said successors and assigns,
any rights under or by reason of this Agreement.
17.4. Governing Law. This Agreement shall be
construed and enforced in accordance with, and rights
of the parties shall be governed by, the internal laws
of the State of Delaware (without reference to
principles of conflicts or choice of law that would
cause the application of the internal laws of any
other jurisdiction).
17.5. SUBMISSION TO JURISDICTION; WAIVERS. PARENT
AND EACH OF THE TARGET STOCKHOLDERS (BY APPROVAL OF
THIS AGREEMENT AND THE TRANSACTIONS CONTEMPLATED
HEREBY), FOR ITSELF AND ON BEHALF OF ITS SUCCESSORS,
ASSIGNS AND TRANSFEREES, HEREBY IRREVOCABLY AND
UNCONDITIONALLY:
(i) SUBMITS FOR ITSELF AND ITS PROPERTY IN ANY LEGAL
ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR FOR
RECOGNITION AND ENFORCEMENT OF ANY JUDGMENT IN RESPECT
THEREOF, TO THE NONEXCLUSIVE GENERAL JURISDICTION OF
THE COURTS OF THE STATES OF TEXAS AND WASHINGTON, THE
COURTS OF THE UNITED STATES OF AMERICA FOR THE
DISTRICTS OF TEXAS AND WASHINGTON, AND APPELLATE
COURTS FROM ANY THEREOF;
(ii) CONSENTS THAT ANY SUCH ACTION OR PROCEEDING MAY
BE BROUGHT IN SUCH COURTS, AND WAIVES ANY OBJECTION
THAT IT MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY
SUCH ACTION OR PROCEEDING IN ANY SUCH COURT OR THAT
SUCH ACTION OR PROCEEDING WAS BROUGHT IN AN
INCONVENIENT COURT AND AGREES NOT TO PLEAD OR CLAIM
THE SAME;
(iii) AGREES THAT SERVICE OF PROCESS IN ANY SUCH
ACTION OR PROCEEDING MAY BE EFFECTED BY MAILING A COPY
THEREOF BY REGISTERED OR CERTIFIED NAIL (OR ANY
SUBSTANTIALLY SIMILAR FORM OF MAIL), POSTAGE PREPAID,
AT ITS ADDRESS AS PROVIDED IN PARAGRAPH 17.2 HEREOF OR AT SUCH
OTHER ADDRESS AS IT SHALL HAVE NOTIFIED EACH OF THE
OTHER PARTIES HERETO IN THE MANNER PROVIDED IN PARAGRAPH 17.2
HEREOF;
(iv) AGREES THAT NOTHING HEREIN SHALL AFFECT THE
RIGHT TO EFFECT SERVICE OF PROCESS IN ANY OTHER MANNER
PERMITTED BY LAW; AND
(v) WAIVES TRIAL BY JURY IN ANY LEGAL ACTION OR
PROCEEDING RELATING TO THIS AGREEMENT AND FOR ANY
COUNTERCLAIM THEREIN.
17.6. Counterparts. This Agreement may be executed
by the parties in separate counterparts, each of which
when so executed and delivered shall be an original,
but all such counterparts shall together constitute
but one and the same instrument.
17.7. Section Headings. All enumerated subdivisions
of this Agreement are herein referred to as "pargraph." The
headings of sections or subsections are for reference
only and shall not limit or control the meaning
thereof.
17.8. Public Statements or Releases. The parties
hereto each agree that no party to this Agreement
shall make, issue or release any public announcement,
statement or acknowledgment of the existence of, or
reveal the status of, the transactions provided for
herein, without first obtaining the consent of the
other parties hereto. Nothing contained in this paragraph 17.8
shall prevent any party from making such public
announcements as such party may consider necessary in
order to satisfy such party's legal or contractual
obligations.
IN WITNESS WHEREOF, the parties hereto have duly
executed this Agreement as an instrument under seal as
of the date and year first above written.
PARENT:
ACCESS Pharmaceuticals, Inc.
By: /s/ Kerry P. Gray
- ---------------------
President & Chief Executive Officer
ACQUIRER:
ACCESS Holdings, Inc.
By: /s/ Kerry P. Gray
- ---------------------
President & Chief Executive Officer
TARGET:
Tacora Corporation
By: /s/ F. J. Daugherty
- -----------------------
Title: Chairman
TARGET STOCKHOLDERS
Medical Innovation Fund II
By: /s/ Timothy I Maudlin
- -------------------------
Title: General PArtner of its General Partner
Acknowledged and Agreed for the purpose of being bound
by any terms of this Agreement relating to the
agreements, obligations and covenants of the
Representatives:
/s/ F. J. Daugherty
- -------------------
F. Joseph Daugherty
/s/ Robert Nickoloff
- --------------------
Robert Nickoloff
EXHIBITS
A - Certificate of Merger
B - Research and Development Commitment
C - Registration Rights Agreement
D - Officers' Certificate and Secretary's Certificate - Tacora
E - Form of Perkins Coie Opinion
F - Lock-up Agreement
G - Officer's Certificate and Secretary's Certificate - Parent and Holdings
H - Form of Bingham Dana & Gould Opinion
EXHIBIT 21
Subsidiaries of the Registrant
Tacora Corporation, a Delaware company
EXHIBIT 23.1
Independent Auditors' Consent
The Board of Directors and Stockholders
of Access Pharmaceuticals, Inc.
We consent to the incorporation by reference in
Registration Statement Nos. 33-42052, 33-32137 and 33-
22750 on Form S-3 and in Registration Statement Nos.
33-10626 and 33-41134 on Form S-8 of Access
Pharmaceuticals, Inc. (formerly Chemex
Pharmaceuticals, Inc.) of our report dated March 24,
1998, relating to the consolidated balance sheets of Access
Pharmaceuticals, Inc. and subsidiary as of December
31, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity and
cash flows for each of the years in the three-year
period ended December 31, 1997, which report appears
in the December 31, 1997 annual report on Form 10-K of
Access Pharmaceuticals, Inc.
Our report dated March 24, 1998, contains an
explanatory paragraph that states that the Company has
suffered recurring losses from operations and has a
net capital deficiency, which raise substantial doubt
about its ability to continue as a going concern. The
consolidated financial statements do not include any adjustments
that might result from the outcome of that
uncertainty.
/s/ KPMG Peat Marwick LLP
- --------------------------
KPMG Peat Marwick LLP
Dallas, Texas
March 24, 1998
EXHIBIT 23.2
Consent of Independent
Auditors
The Board of Directors and Stockholders
of Access Pharmaceuticals, Inc.
We consent to the incorporation by reference of our
report dated September 21, 1995, relating to
statements of operations, stockholders' equity and
cash flows for the period February 24, 1988
(inception) through December 31, 1994 which report
appears in the December 31, 1997 annual report on Form
10-K of Access Pharmaceuticals, Inc.
/s/ Smith Anglin & Co.
- ----------------------
Smith Anglin & Co.
Dallas, Texas
March 27, 1998
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