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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 1996 Commission File No. 1-9613
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XYTRONYX, INC.
(Exact Name of Registrant as specified in its charter)
Delaware 36-3258753
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
6555 Nancy Ridge Drive, Suite 200
San Diego, CA 92121
(619) 550-3900
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
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Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, $.02 Par Value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
NONE
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(Title of Class)
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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 requirements 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 registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by persons
considered by the registrant for this purpose to be nonaffiliates of the
registrant was approximately $22,749,000 on June 14, 1996, when the closing
price of such stock, as reported in the American Stock Exchange, was $2.8125.
The number of shares outstanding of the registrant's Common Stock,
$.02 par value, as of June 14, 1996 was 8,088,529 shares.
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DOCUMENTS INCORPORATED BY REFERENCE
1. Certain portions of the Registrant's Annual Report to Stockholders for the
fiscal year ended March 31, 1996, are incorporated into Part II hereof.
2. Certain portions of the Registrant's Proxy Statement for its Annual Meeting
of Stockholders to be held on August 9, 1996, which will be mailed on or
about June 17, 1996, are incorporated into Part III hereof.
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PART 1
ITEM 1. BUSINESS
SUMMARY
Xytronyx, Inc. (the "Company"), a development stage enterprise, was
organized as a Delaware corporation in September of 1983, and is engaged
primarily in the development and commercialization of medical products based on
biotechnological research regarding the treatment and detection of cancer and
other diseases.
During calendar 1996 the Company completed two transactions under
which it acquired or otherwise gained rights to proprietary technologies in the
areas of cancer therapy. First was the acquisition of an exclusive license to
the Photodynamic Immunotherapy-TM- ("PDIT-TM-") technology for treatment of
cancer. Second was an agreement which granted Xytronyx an option to acquire
Binary Therapeutics, Inc., the holder of certain proprietary technologies, also
for the treatment of cancer, in the Photodynamic Therapy ("PDT") area. The
Company believes that these two separate technologies and product development
opportunities compliment each other and offer the Company efficiencies and other
strategic benefits due to their similar development requirements and expected
uses. These transactions represented a significant expansion of the scope of
the Company's product development activities, and are described in more detail
below.
Prior to the expansion into the cancer therapy area, much of the
Company's efforts were directed toward the commercialization of (i) the
Periodontal Tissue Monitor (the "PTM"), a disposable test used to assist with
the diagnosis and monitoring of the treatment of periodontitis, a serious form
of periodontal disease and the most common cause of tooth loss in adults, and
(ii) the Company's photochromic technology.
Reference is made to Items 7 and 8 of this Report for further
information about the business of the Company during the past fiscal year. The
consolidated financial statements of the Company incorporated by reference in
Item 8 of this report include the accounts of Xytronyx, Inc. and its subsidiary
for all periods presented.
PHOTODYNAMIC IMMUNOTHERAPY-TM- (PDIT-TM-) TREATMENT
(BREAST, LUNG AND PROSTATE CANCER)
OVERVIEW OF CANCER MARKET. Cancer comprises a large and diverse group
of diseases resulting from the uncontrolled proliferation of abnormal
(malignant) cells. Most cancer will spread beyond its original site and invade
surrounding tissue, and may also metastasize to more distant sites and
ultimately cause death in the patient unless effectively treated. To be
effective, cancer treatment must target not only the primary site and/or tumor
but also its metastases. CANCER FACTS AND FIGURES, a report from the American
Cancer Society, states that a total of approximately 1,250,000 new cases
(EXCLUDING approximately 800,000 new cases of squamous cell and basal cell skin
cancers) and 550,000 deaths were reported for invasive cancers in the United
States in 1995, highlighting the prevalence of this group of diseases.
Traditional methods treating cancer generally include surgery
(including laser surgery), radiation therapy, and chemotherapy. Although these
techniques have achieved a high rate of success for many cancers, particularly
when detected in the early stages, each has drawbacks which may significantly
limit their success in treating certain types and stages of cancer. For
example, in many instances cancer will recur even after repeated attempts at
surgical removal of tumors or other treatment. Surgery may be successful in
removing visible tumors but may leave smaller nests of cancer cells in the
patient which continue to proliferate. Radiation or chemotherapy are relatively
imprecise methods for the destruction of
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cancer cells (i.e. such therapies can kill both cancer cells and normal cells)
and thus have toxic side effects which may themselves be lethal to the patient;
these toxic side effects may limit the application of these treatment modes to
less than optimal levels required to ensure eradication of the cancer. Despite
the successes of traditional therapies, the high numbers of cancer-related
deaths indicate the need for more efficacious therapies for many patients.
PHOTODYNAMIC IMMUNOTHERAPY-TM- ("PDIT-TM-") TREATMENT. The Company's
Photodynamic Immunotherapy-TM- ("PDIT-TM-") treatment for cancer is in
preparation for human clinical trials and is intended to initially target the
treatment of breast cancer. PDIT treatment consists of the co-injection of an
infrared absorbing dye (photosensitizing drug) and an adjuvant directly into a
tumor followed by illumination with an infrared laser. Similar to traditional
Photodynamic Therapy (see "Photodynamic Therapy (PDT) Overview"), PDIT therapy
is intended to produce tumor tissue destruction in the primary area of
treatment. An important distinction of PDIT treatment, however, is that this
therapy is also intended to trigger an immune reaction in the patient to
complete the destruction of the primary tumor and to also destroy metastatic
tumors. The Company believes that the potential of PDIT therapy to destroy
metastatic tumors offers an improved methodology for treatment of cancers such
as breast, lung and prostate, particularly when in more advanced stages.
Many experts believe that long-term control or elimination of cancer
requires the utilization of the patient's own immune surveillance and defense
systems. Normally a body's immune system recognizes "self" and "non-self" cells
and prevents uncontrolled proliferation of undesirable tissues. Therefore,
these experts believe that the optimal cancer treatment modality would be one
that fully restores and stimulates the body's normal immunobiological responses
against the growth of malignant cells. For reasons not completely understood,
the body's cellular and humoral (systemic) immune responses in cancer patients
are not fully stimulated and/or developed to the extent necessary to halt the
proliferation of and destroy malignant cells. Much work has been done in the
field of cancer immunotherapy in which patients are treated with
immunoadjuvants, antigens and chitosans (either in combination or separately) in
an attempt to activate the immune system. However, the use of a nonspecific
immunoadjuvant without a specific component (i.e., a factor which targets the
antigen unique to the specific cancer in the specific patient undergoing
treatment) may only activate the body's immune system without directing it to
the cancer cells. The Company is not aware of any factors which have been
identified which can serve as a specific component across a wide range of
cancers and patients, and some experts believe that differences among hosts may
preclude the identification of such a single factor. Without the activation of
immunity targeting specific antigens, immunotherapy using an adjuvant alone
appears to achieve only limited success in the treatment of cancer.
Preclinical studies of PDIT treatment conducted with animals indicate
that the therapy induces a specific immune response which destroys primary and
metastatic tumors, and provides longer-term protection against recurrence of the
cancer. As indicated above, PDIT treatment is initiated with the injection of a
combination of a infrared absorbing dye and an immunoadjuvant directly into a
tumor. The tumor is then illuminated with laser light which is absorbed by the
dye and produces photothermal destruction of tumor tissue. This photothermal
destruction is only the precursor of what is believed to be the more significant
course of action of PDIT therapy, the immune response. The hypothesis of the
Company is that this response proceeds as follows: The immunoadjuvant
stimulates an immune response directed against the specific antigen unmasked by
the photothermal treatment of the tumor, resulting in an immunological attack
against the tumor cell population weakened by the treatment. Even more
significantly, a systemic immune response also is stimulated which destroys
tumors distant from the site of treatment, including remote-site metastatic
tumors. Lastly, the immune response appears to be retained in the body
providing long-term immunity toward the cancer and the prospect for a "true
cure."
Preclinical testing of PDIT therapy has included treatment of rats
inflicted with a sub-surface breast cancer tumor. The breast cancer model
tested, the DMBA-4 cell line, is an extremely challenging model which is
characterized by rapid proliferation of the primary tumor and the formation of
metastatic
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tumors throughout the body; 99% of the untreated rats die, within an average of
30 days of tumor implantation. The model has also proven to be unresponsive to
traditional treatments including surgery, chemotherapy, radiation and laser
therapy. With application of what the principal researchers currently believe
to be optimal dosing, PDIT treatment has generated success (measured by both
tumor eradication and long-term survival) in the majority of animals treated.
Importantly, tumor eradication was achieved for both the primary tumor treated
and remote metastatic tumors not directly subject to the treatment, supporting
the hypotheses that an immune response has been stimulated. Lastly, upon
rechallenge (reintroduction of the tumor model to the animals subsequent to the
original tumor eradication) the "second generation" tumors are also eradicated,
indicating the existence of longer-term immunity against cancer. It should be
noted that this technology has only been tested in animal models to date and
there is no assurance that it will prove effective in humans.
The timeline for transferring PDIT treatment to human clinical studies
is accelerated by the fact that the infrared absorbing dye selected for initial
testing is already approved by the FDA for intravenous use as an imaging agent,
and the immunoadjuvant selected is a non-toxic biodegradable substance. Lasers
producing the appropriate wavelength for absorption by the dye have already been
approved by the FDA for a variety of surgical applications. Although an IND
approval from the FDA specific to the use of these compounds in PDIT therapy
will be required to initiate human clinical trials (see "See Government
Regulation"), the prior approvals are likely to reduce the magnitude of the
preclinical work required to attain such approval.
The Company believes that PDIT treatment could be useful in treating a
variety of cancers, particularly those with well-circumscribed tumors such as
breast, lung and prostate cancers. The Company has targeted breast cancer for
the initial human clinical studies, in part because of the success with the
preclinical breast models. The Company's current plan is to commence a Phase 1
clinical study of PDIT treatment of breast cancer patients who have been
nonresponsive to other treatment methodologies in late 1996 or early 1997 after
seeking IND approval from the FDA (see "Government Regulation"). Submission of
the IND application will require completion of certain preclinical work,
including preparation of GMP-grade materials (expected to be performed on a
contract basis outside the Company) and animal toxicity testing.
Commercialization of PDIT treatment (and the technologies described in
the "Photodynamic Therapy (PDT) - Binary Therapeutics, Inc." section below)
require the development of a "system" comprised of light delivery devices in
addition to the drug compounds. The Company expects that a clinician
administering PDIT (or PDT) treatment will need to be provided, in addition to
the drug compound, light delivery devices such as laser couplings, optical
fibers and light diffusing tips of a size and shape tailored to a particular
tumor site. The Company believes that some development will be required to
optimize available light delivery sources for clinical administration of PDIT
and PDT treatments, and expects to work with manufacturers of such products to
facilitate such development. The Company expects that PDIT and PDT treatments
will employ commercially available off-the-shelf lasers.
The Company obtained an exclusive worldwide license to the PDIT
technology in May 1996 under an agreement with Wound Healing of Oklahoma
("WHO"), a privately held company. The agreement calls for the Company to pay
WHO royalties based on sales of products incorporating the PDIT technology,
including a minimum royalty of $50,000 per year. The Company has also entered
into a research agreement (see - Product Development Strategy and Research
Agreements") with WHO under which the principal developers of the PDIT
technology are assisting with the preparation of the IND application to the FDA
and performing additional studies to investigate the mechanism of PDIT. Patent
applications encompassing the PDIT technology have been filed in the United
States and in major international markets (see "Patents").
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PHOTODYNAMIC THERAPY (PDT) - BINARY THERAPEUTICS, INC.
OPTION TO ACQUIRE BINARY THERAPEUTICS, INC. In June 1996 the Company
entered into an agreement with Binary Therapeutics, Inc. ("BTI") under which the
Company was granted an option to acquire BTI, a development stage company with
certain technologies in the area of Photodynamic Therapy for cancer. The
agreement gives the Company the right to acquire BTI at anytime prior to April
30, 1997 by a merger of BTI into a wholly owned subsidiary of the Company. If
the Company elects to exercise its option, the agreement calls for the Company
to issue common stock to the BTI stockholders with an aggregate acquisition
value of $6,000,000. The number of shares of the Company's common stock to be
issued will be determined based upon the market value of the Company's common
stock prior to the date of exercise, although the value of the common stock
cannot be less than $2.00 or more than $6.00 per share. Under the agreement, the
Company will assist BTI during the option period with the advancement of certain
PDT products into human clinical trials. In order for the merger to be
effected, the agreement will require approval by a majority of the stockholders
of BTI, and BTI is currently in the process of seeking such approval. The
Company may elect to, or under certain circumstances may be required to, obtain
the approval of its stockholders prior to effecting the merger. Additionally,
in order to exercise its rights to consummate the merger under the agreement,
the Company will have to satisfy certain conditions, including funding up to
$1,250,000 of product development expenses incurred by BTI during the option
period. In the event that the Company terminates the agreement, the Company
would remain obligated to continue the funding of such product development
expenses incurred during the period ending 90 days from such termination.
PHOTODYNAMIC THERAPY (PDT) OVERVIEW. Photodynamic Therapy is an
emerging mode of treatment for cancer which uses the combination of light-
activated drugs and nonthermal light to achieve selective, photochemical
destruction of cancer cells with minimal effect on surrounding normal tissues.
PDT typically has two primary components:
1. DRUG ADMINISTRATION: A non-toxic light-absorbing dye or other
"photosensitizing drug" is injected into the patient; PDT drugs are
designed to be "selective," i.e., taken up and retained in tumors and other
cancerous cells while conversely eschewing or quickly clearing from normal
cells. Unlike traditional chemotherapy drugs, the PDT drugs are designed
to be non-toxic in the absence of light and have no therapeutic effect on
their own.
2. ILLUMINATION WITH LIGHT: After administration of the PDT drug, a laser or
other source is used to illuminate the area of treatment with light with
the specific wavelength required for absorption by the drug. Similar to
the PDT drugs, the light has no therapeutic effect by itself.
The absorption of light energy by the drug generates biochemical reactions which
destroy the cancer cells; the reaction is highly controlled and will end upon
cessation of the light energy.
The potential advantages of PDT in the treatment of cancer are
expected to be as follows:
- - Selectivity: Selective to cancer cells with minimal effect on normal
healthy tissue, a significant benefit over chemotherapy and radiation
treatment.
- - More Extensive Eradication: Facilitates the treatment of not only the
larger, easily identifiable tumors but also other cancerous cells which are
in the field of illumination, a significant benefit over stand-alone
surgery which may leave cancerous cells behind in the patient.
- - Controllability: The photosensitizing drugs are inactive until excited by
light within their specific absorption band. Photodynamic activity begins
only when the drug-saturated cells are exposed to light and ends when the
light is terminated.
- - Minimally Invasive.
- - Minimal Known Side Effects: The drugs are non-toxic and the light source
is low power, nonthermal light.
Among the clinical applications expected for PDT is as an adjunct to
surgery; PDT has the potential of increasing the effectiveness of surgery by
destroying cancerous cells missed by surgery. In other instances PDT might
serve as an alternative to surgery; PDT may represent a less invasive technique
for primary removal of a tumor where surgery is not indicated (for example,
inoperable tumors located
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close to nerves, major blood vessels or other critical tissue). Lastly, PDT may
be integrated with the patient's total treatment regimen; PDT could be used in
combination with or as an alternative to traditional treatment to palliate more
advanced disease. The Company expects that the applications will develop as PDT
becomes more proven and the range of clinical utility is demonstrated.
As further discussed in "Photodynamic Therapy - Competition" a limited
number of drug compounds and systems have been approved by the applicable
regulatory agencies both in the United States and internationally. PDT products
or systems currently approved for use, however, are limited to treatment of
superficial or surface tumors due to inherent limitations in the technologies.
BTI has two major classes of technologies which it believes hold
promise for use in PDT, Boronated Porphyrin compounds and Lipophilic Cationic
compounds.
BORONATED PORPHYRIN COMPOUNDS ("BOPP") - BRAIN AND PANCREATIC CANCERS.
BTI's Boronated Porphyrin compound ("BOPP") is currently undergoing preparation
for human clinical trials as a photosensitizing drug for PDT treatment of brain
cancer. The Company believes, based upon the results of preclinical studies,
that BOPP may be useful as a photosensitizing drug for PDT treatment of
pancreatic tumors, and that BOPP could also be used longer term for another
form of cancer treatment, Boron Neutron Capture Therapy (see - "Boron Neutron
Capture Therapy" below).
Pre-clinical testing of BOPP in the United States and Australia,
including testing of the compound with various animal models, has indicated that
BOPP has the following advantages over certain existing PDT agents (including
hematoporphyrin derivative, or "HpD") in the treatment of certain cancers:
- - Selective retention of BOPP in brain tumor models of as much as 400 to 1
(400 parts in tumor tissue to 1 part in healthy tissue) compared to 30 to 1
selectivity or less for existing known compounds.
- - Intracellular localization in mitochondria for more efficient tumor cell
killing.
- - Highly water soluble and stable under physiological conditions.
- - No observable short-term adverse side effects up to 200 mg/kg in animals.
BTI and the Company have agreed to target brain cancer for the initial
human clinical studies, in part because of the success with preclinical brain
tumor models in animals. BTI's current plan is to commence a Phase 1 clinical
study of PDT treatment with BOPP of brain cancer patients by mid-1997 after
seeking IND approval from the FDA (see "Government Regulation"). Submission of
the IND application will require completion of certain preclinical work,
including preparation of GMP-grade materials (expected to be performed on a
contract basis outside BTI) and animal toxicity testing.
BTI obtained an exclusive worldwide license to the BOPP technology in
July 1992 under an agreement with University of California ("UC"). The
agreement calls for BTI to pay UC royalties based on sales of products
incorporating the BOPP technology. BTI has also entered a research agreement
with UC (see - Product Development Strategy and Research Agreements") under
which investigators at the University of California at San Francisco (the
principal developers of the BOPP technology) will perform work related to the
further advancement of the use of BOPP and related compounds in cancer therapy.
Patents encompassing the BOPP technology have been issued in the United States,
and have either been issued or applications are pending in major international
markets (see "Patents").
BORON NEUTRON CAPTURE THERAPY - LONGER TERM THERAPEUTIC OPPORTUNITY.
In addition to Photodynamic Therapy, BTI's BOPP compounds are also designed for
use in Boron Neutron Capture Therapy ("BNCT"). In contrast to PDT, BNCT uses
neutron radiation to activate the boron component of the BOPP compound. High-
energy particles resulting from fission or splitting of the boron atom kill the
cancer cells. On the average, the particles travel only about the length of a
cell before dissipating their energy and thus will not emerge from tumor cells
to harm normal cells adjacent to the tumor, thereby
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limiting the potential to cause severe side effects. Another advantage of BNCT
is the potential to kill dividing and nondividing tumor cells alike (other forms
of radiation treatment work best only on cells that are dividing). BNCT raises
the possibility of treating more deep seated tumors virtually anywhere in the
body due to the fact that the neutron particles can penetrate up to 7 cm into
the body. As in PDT, both the drugs and the neutron radiation are administered
at non-toxic levels. BOPP was originally designed primarily for use in BNCT and
preclinical work indicates that its selectivity and ability to kill cancer cells
at low level neutron radiation make it an excellent candidate for this therapy.
Practical commercialization of the BNCT technology will require the development
by third parties of non-nuclear neutron generators suitable for wide-spread use
in conventional hospitals and other centers of treatment. Currently there are
only a limited number of facilities that can produce sufficient neutrons of the
right type for clinical testing, although successful testing of a BNCT compound
in these settings may encourage the development of commercially available
equipment. BTI's strategy is to develop BOPP as a PDT agent initially, and then
explore the possibility of expanding the use of the product into BNCT contingent
upon the rate of development of the field of BNCT.
LIPOPHILIC CATIONIC COMPOUNDS ("LCC'S") - CANCER THERAPY. BTI also
holds technologies encompassing the use of a second family of compounds,
Lipophilic Cationic Compounds ("LCC's"), for cancer treatment with PDT. LCC's
have been shown in early preclinical studies to offer potential significant
advantages over current compounds being used for PDT. As demonstrated in
certain laboratory models, the degree of tumor selectivity of these compounds
may prove to be substantially higher than that achieved by current competitive
products, and these compounds can be activated by light at substantially longer
wavelengths, allowing penetration of skin and tissue for the treatment of larger
and deeper tumors. Unlike current PDT drugs, LCC's may be effective in the
presence or absence of oxygen because they do not rely solely upon the
production of cytotoxic oxygen free radicals for their killing mechanism. BTI
believes that LCC's may be applicable to all major forms of solid tumor cancer.
BTI is currently evaluating various LCC's for the purpose of selecting
a lead LCC compound for preparation for clinical trials. BTI has initially
targeted mouth cancer as an initial demonstration of the safety and efficacy of
its lead LCC compound in PDT because of the favorable (in terms of ease of reach
and diagnosis) location of this cancer, although the ultimate indication
selected for treatment may be changed based on the characteristics of the LCC
selected for initial development. Additional preclinical work is likely to be
required to prepare the initial LCC for a Phase 1 clinical trial including
additional efficacy testing on animal models and toxicity testing.
BTI obtained an exclusive worldwide license to the LCC technology in
July 1992 under an agreement with Massachusetts General Hospital ("MGH"). The
agreement calls for BTI to pay MGH royalties based on sales of products
incorporating the LCC technology. BTI has also entered into a research
agreement with MGH (see - Product Development Strategy and Research
Agreements") under which investigators are performing work related to PDT and
LCC's. Patent applications encompassing the LCC technology have been issued in
the United States and in major international markets (see "Patents").
AST TECHNOLOGY - PERIODONTAL TISSUE MONITOR (PTM)
BACKGROUND OF PTM. The Company has developed the Periodontal Tissue
Monitor (the "PTM"), a disposable test used to assist with the diagnosis and
monitoring of the treatment of periodontitis, a serious form of periodontal
disease and the most common cause of tooth loss in adults. The PTM works by
identifying aspartate aminotransferase ("AST"), an enzyme which is released when
cells die. The Company's AST technology may also have application in diagnostic
products for other diseases and medical conditions.
The PTM is approved for sale in much of Western Europe, China and
Canada. Clinical trials required for United States Food and Drug Administration
("FDA") approval were completed in March
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1996, and the Company expects to submit a Premarket Approval ("PMA") application
to the U.S. Food and Drug Administration ("FDA") during the summer of 1996.
PERIODONTAL DISEASE. A World Health Organization report estimates
that the incidence of periodontal disease worldwide averages 33% of the total
adult population, or approximately 1.5 billion people. In the United States
alone, surveys by the American Dental Association indicate that approximately 20
million "scaling and root planing" sessions (a common treatment for
periodontitis) are held each year at an average cost of $200 to $800 per
session. Other estimates indicate that as much as $15 billion is spent in the
United States each year treating periodontitis. Prevalence of the disease and
expenditures for treatment are also significant in many international markets.
Because of the difficulty in diagnosing active periodontitis, and the
fact that all current diagnosis methods are retrospective, the dental
practitioner is often forced to treat the disease relatively late in its
progression and may treat the entire mouth of a patient even though the disease
is active in only a few specific sites. Treating the patient's full mouth in
such instances results in unnecessary cost and patient discomfort, and late
treatment may result in the need for more extensive, and costly, treatment
techniques.
PTM PRODUCT. The Company's proprietary Periodontal Tissue Monitor is
an eye-readable disposable test designed for use within the dental office to
assist practitioners (dentists and periodontists) in the diagnosis of
periodontitis and in the monitoring of the effectiveness of their efforts to
treat the disease. The PTM works by identifying the enzyme aspartate
aminotransferase ("AST") which is found in crevicular fluid when cells die. The
PTM is designed to be simple, easy to use, and performed chairside in the dental
office. The dental professional initiates the test by touching a small strip of
paper to the neck of the tooth to collect a fluid sample. The paper strip is
then placed in a solution which changes colors if the active disease is present,
a process which takes approximately 8 to 12 minutes. Due to the short turn-
around time, the test can be initiated at the start of an office visit with
results available before the patient leaves the dental chair. The PTM requires
no special equipment, no refrigeration or other special storage, and is
disposable. The most important benefits the Company expects from use of the PTM
are:
- - Assistance with early detection of the disease, facilitating earlier
treatment and less extensive treatment techniques.
- - Testing for active periodontal disease on a site-by-site basis, allowing
the clinician to treat only those sites with active disease. Accordingly,
an important benefit of the PTM is the potential reduction in the cost of
treating periodontal disease; estimates indicate that a significant portion
of the cost of treating periodontitis may be eliminated with the use of the
PTM.
- - Evaluation of the effectiveness of treatment within weeks of such
treatment, facilitating immediate follow-up treatment if necessary.
Periodontitis is usually chronic, in some patients reappearing from time to
time, and in others persisting for extended time periods. It is expected that
several PTM tests may be used on a patient throughout a year; one PTM prior to
treatment, and one or more following treatment to determine if the treatment has
been effective (or to monitor the patient over an extended period of time).
PTM PATENTS AND REGULATORY APPROVAL. The Company licensed certain
technology from the University of Illinois ("U of I") on the use of AST as an
adjunct to the diagnosis and monitoring of treatment of periodontal disease.
Two U.S. patents relating to the licensed technology have been issued;
international patent protection was only available on one of the technologies,
and patents have been received in major international markets. In addition to
the U of I patents, the Company has a U.S. Patent application, and corresponding
international patent applications, pending relating to the incorporation of the
chemistry facilitating the use of AST as a diagnostic market into a "one-step"
kit format. This latter technology has potential applications for diseases
beyond the PTM product.
The Company is required to obtain a Premarket Approval ("PMA") from
the U.S. Food and Drug Administration ("FDA") before commencing distribution of
the PTM in the United States. The Company completed 28-day clinical trials with
an earlier-generation PTM at three centers in June 1989. In August
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1989 the Company filed a PMA application with the FDA, and received a unanimous
recommendation for approval in May 1990 from an FDA dental advisory panel.
Subsequently, the Company has received a series of letters from the FDA
requesting additional information and clinical testing, and responded with a
series of amendments to the PMA application attempting to demonstrate adequacy
of the original clinical trial and results. In mid-1993 the Company initiated
the process of designing long-term clinical studies to meet new FDA
requirements. During this period the Company developed a 2nd-generation version
of PTM which it believes greatly increased ease of use, readability, accuracy,
shelf-life and other performance characteristics. In November 1993 the FDA
approved the Company's protocol for a 12-month clinical study to be conducted at
three sites. In April 1994 the Company and the clinical sites, University of
Washington, Harvard University and University of North Carolina, completed
planning for the clinicals and signed clinical research agreements. In June
1994 enrollment of patients in the clinical studies commenced, and full
enrollment was reached in March 1995, and the study was completed in March 1996.
The Company expects to submit a PMA application to the FDA during the summer of
1996.
PTM MARKETING. The Company's planned strategy is to establish
strategic marketing alliances with leading medical product companies throughout
the world to market the PTM; the objective of these alliances is to take
advantage of these companies' marketing expertise, established customer bases,
and distribution channels. In May 1996 the Company entered into an agreement
with Hawe-Neos Dental to distribute the "PTM" in Europe. Under the agreement,
Hawe-Neos, which is headquartered in Bioggio, Switzerland, will market the
product on an exclusive basis in Europe for a period of 18 months, and has the
option to extend the term of its distribution rights for an additional 5 years
subject to certain minimum purchase quantities. In January 1995 the Company
entered into an agreement with Shofu Dental Company of Japan under which Shofu
is to fund and manage clinical trials of PTM in Japan, and market the product in
Japan after obtaining approval in that country. The Company is pursuing
discussions with companies regarding potential marketing partnerships related to
PTM throughout the rest of the world. In October 1995 the Company entered into
an agreement with Procter & Gamble Company (P&G) under which P&G was granted an
option to acquire exclusive worldwide rights for marketing the PTM product. In
April 1996 P&G notified the Company that it was terminating the option
agreement; P&G's explanation for the termination was that P&G is refocusing on
its core oral care products and is eliminating efforts related to certain other
products.
PHOTOCHROMIC TECHNOLOGY ("KEPHRA-TM-")
KEPHRA TECHNOLOGY AND MARKET APPLICATIONS. The name "Kephra"
encompasses the Company's family of dyes which react with sunlight or other
sources of UV light ("photochromic dyes"). The Kephra dyes are colorless when
viewed under room fluorescent or incandescent light, but become very colorful
when exposed to UV light. The Kephra process is reversible such that when the
dyes are removed from sun light they return to their original colorless
appearance. Kephra dyes have a relatively long lifetime, and the colorless to
color process can be repeated numerous times depending upon the application.
Kephra dyes can be used in numerous printing processes, including lithography,
flexography, and silk screen. The dyes can also be incorporated into water-
based inks.
Potential applications for Kephra include consumer health, apparel,
promotional and advertising programs, and other products benefiting from the
potential additional consumer appeal of the color-change feature. During 1994
Coors Brewing Company paid the Company $1 million for use of Kephra in a Summer
1994 promotion of its COORS LIGHT-Registered Trademark- brand. In January 1996
the Company entered into an agreement under which it granted a major
international soft drink company exclusive use of the Kephra technology in the
U.S. and Canadian soft drink markets for a period of 18 months. The Company
received a payment of $150,000 under the agreement and will receive a royalty on
the sale of any products using the technology. The Company also entered into a
license agreement with an international watch company who commenced marketing
watches produced with the Kephra technology in April 1996; the Company will
receive a royalty on any sales of the watches. The Company is currently
performing
8
<PAGE>
product development for a number of additional companies regarding the
incorporation of Kephra into their products, including a major consumer health
application.
KEPHRA PATENTS AND PROPRIETARY RIGHTS. Dyes which react to UV light
("Photochromes") have existed for a relatively long time. With the exception of
a few applications (for example, photosensitive eye glasses) commercial use of
Photochromes has been limited in part due to the fact that these dyes quickly
lose their color-changing capability after just a few hours of exposure to UV.
The Company acquires off-the-shelf Photochromes from a number of commercial
sources. The Company then formulates these Photochromes into Kephra dyes by
adding certain chemical compositions and performing certain processes to: (1)
facilitate the use of the Kephra dyes in specific applications, such as certain
printing processes, (2) provide a fuller array of colors than available from
off-the-shelf Photochromes and (3) increase the life-time or "stability" of the
Kephra dyes. The Company has achieved what it believes to be significant
advances in the stability and colors of its Kephra dyes, in some applications
hundreds of hours of stability compared to the several hours of off-the-shelf
Photochromes. The Company believes that these advances make Kephra commercially
viable as compared to the less developed photochromic technologies of the past.
The Company received a U.S. Patent relating to the use of Photochromes
with certain vehicles, including PVC. The Company has also filed for a U.S.
Patent application relating to the use of one family of stabilizers in the
formulation of Kephra dyes. The Company has filed corresponding patent
applications in certain international countries. In 1995 the Company also
acquired an exclusive license to a patent covering the use of another family of
stabilizers in the formulation of Photochromic dyes for printing applications.
Lastly, the Company believes that some degree of proprietary protection may be
provided, at least in the short-run, through its in-house expertise and trade
secrets.
PRODUCT DEVELOPMENT STRATEGY
The Company conducts its research and other product development
efforts through a combination of internal and collaborative programs. The
Company currently does and will rely upon research arrangements with
universities, contract research organizations, and similar institutions and
persons for a significant portion of its product development efforts,
particularly for preclinical work being conducted in the PDIT area. The Company
expects to increase its internal product development resources as its efforts
related to the PDIT and PDT areas increase. Product development efforts related
to the PTM and photochromic technologies (Kephra) technologies is conducted
primarily by the Company's internal personnel. The Company incurred product
development costs of $1,853,899, $2,118,247, and $1,217,924 in the years ended
March 31, 1996, 1995 and 1994, respectively. BTI relies almost exclusively on
such collaborative research arrangements for its PDT product development
efforts. The Company has relied upon licensing and other transactions to gain
access to proprietary technologies (see - "Photodynamic Immunotherapy ("PDIT"),"
"Option to Acquire Binary Therapeutics, Inc.," and "AST Diagnostic Technology -
Periodontal Tissue Monitor").
PATENTS AND PROPRIETARY RIGHTS
The Company believes that patents and other proprietary rights are
important to its business. The Company's policy is to file patent applications
to protect technology, inventions and improvements to its inventions that are
considered important to the development of its business. The Company also
relies upon trade secrets, know-how, continuing technological innovations and
licensing opportunities to develop and maintain its competitive position.
To date, the Company has received a number of patents, and filed a
number of other patent applications, relating to the Company's technologies in
the United States and internationally. The Company has also benefited from such
issuances or filings of others as a licensee. In addition, a potential
acquisition candidate of the Company, Binary Therapeutics, Inc., has also
benefited from such patent
9
<PAGE>
issuances or filings of others as a licensee (see discussions of specific
patents throughout this "BUSINESS" section).
The patent positions of biotechnology firms and other high-tech firms,
including the Company, are uncertain and involve complex legal and factual
questions for which important legal principles are largely unresolved. In
addition, the coverage claimed in a patent application can be significantly
reduced before a patent is issued. Consequently, the Company does not know
whether any patent applications will result in the issuance of patents.
Additionally, the Company does not know whether its existing patents (and any
patents related to its patent applications which subsequently may be issued)
will provide significant proprietary protection or will be circumvented or
invalidated. Since patent applications in the United States are maintained in
secrecy until foreign counterparts, if any, publish or issue patents and since
publication of discoveries in the scientific or patent literature often lag
behind actual discoveries, the Company cannot be certain that it or any licensor
was the first creator of inventions covered by existing patents or pending
patent applications or that it or such licensor was the first to file patent
applications for such inventions. Moreover, the Company might have to
participate in interference proceedings declared by the U.S. Patent and
Trademark Office to determine priority of inventions, which could result in
substantial cost to the Company, even if the eventual outcome were favorable to
the Company. There can be no assurance that the Company's current patents, or
patents relating to its patent applications, if issued, would be held valid by a
court or that a competitor's technology or product would be found to infringe
such patents.
A number of biotechnology and high-tech companies and research and
academic institutions have developed technologies, filed patent applications or
received patents on various technologies that may be related to the Company's
business. Some of these technologies, applications or patents may conflict with
the Company's technologies, patents or patent applications. Such conflict could
limit the scope of the patents (if any) that the Company has or may be able to
obtain or result in the denial of the Company's patent applications. In
addition, if patents that cover the Company's activities are issued to other
companies, there can be no assurance that the Company would be able to obtain
licenses to these patents at a reasonable cost or be able to develop or obtain
alternative technology.
The Company also relies upon trade secret protection for its
confidential and proprietary information. There can be no assurance that others
will not independently develop substantially equivalent proprietary information
and techniques or otherwise gain access to the Company's trade secrets or
disclose such technology or that the Company can meaningfully protect its trade
secrets.
It is the Company's policy to require its employees, consultants, and
other parties to collaborative agreements to execute confidentiality agreements
upon the commencement of employment or consulting relationships or a
collaboration with the Company. These agreements provide that all confidential
information developed or made known during the course of the relationship with
the Company is to be kept confidential and not disclosed to third parities
except in specific circumstances. In the case of employees, the agreements
provide that all inventions resulting from work performed for the Company,
utilizing property of the Company or relating to the Company's business and
conceived or completed by the individual during employment shall be the
exclusive property of the Company to the extent permitted by applicable law.
There can be no assurance, however, that these agreements will provide
meaningful protection of the Company's trade secrets or adequate remedies in the
event of unauthorized use or disclosure of such information.
MANUFACTURING AND MARKETING
The Company engages primarily in the development of biotechnological
products, and intends, through marketing agreements, sublicenses or other means,
to rely upon relationships with domestic and/or international companies for the
marketing of such products. The Company has relied upon contract manufacturers
for its products under development and for its limited commercial production
10
<PAGE>
requirements to date, although the Company has retained certain quality control
and managerial responsibility. The Company may elect to internalize more of the
manufacturing and marketing responsibilities at such time as such a strategy is
determined to be economically advantageous and as its financial resources and
personnel permit such efforts. The commercial success of some of the Company's
products (if successfully developed) may, to a large extent, depend upon the
manufacturing and marketing efforts of others.
GOVERNMENT REGULATION
The manufacturing and marketing of the Company's medical products are
subject to regulation for safety and efficacy by governmental authorities in the
United States and other countries. In the United States, pharmaceuticals are
subject to rigorous FDA regulation. The Federal Food, Drug and Cosmetic Act and
the Public Health Service Act govern the testing, manufacture, safety, efficacy,
labeling, storage, record keeping, approval, advertising and promotion of the
Company's medical products. Product development and approval within this
regulatory framework takes a number of years and involves the expenditure of
substantial resources.
The steps required before a pharmaceutical agent, such as the proposed
PDIT or PDT products, may be marketed in the United States include (i)
preclinical laboratory and animal tests, (ii) the submission to the FDA of an
IND, which must become effective before human clinical trials may commence,
(iii) adequate and well-controlled human clinical trials to establish the safety
and efficacy of the drug, (iv) the submission of the New Drug Application
("NDA") to the FDA, and (v) the FDA approval of the NDA prior to any commercial
sale or shipment of the drug. In addition to obtaining FDA approval for each
product, each domestic drug manufacturing establishment must be registered with
the FDA. Domestic manufacturing establishments are subject to biennial
inspections by the FDA and must comply with current Good Manufacturing Practices
("GMP") for drugs. To supply products for use in the United States, foreign
manufacturing establishments must comply with GMP and are subject to periodic
inspection by the FDA or by regulatory authorities in such countries under
reciprocal agreements with the FDA.
Preclinical tests include laboratory evaluation of product chemistry
and animal studies to assess the safety and efficacy of the product and its
formulation. The results of the preclinical tests are submitted to the FDA as
part of an IND, and unless the FDA objects, the IND will become effective 30
days following its receipt by the FDA.
Clinical trials involve the administration of the pharmaceutical
product to healthy volunteers or to patients identified as having the condition
for which the pharmaceutical is being tested. The pharmaceutical is
administered under the supervision of a qualified principal investigator.
Clinical trials are conducted in accordance with protocols previously submitted
to the FDA as part of the IND that detail the objectives of the study, the
parameters used to monitor safety and the efficacy criteria evaluated. Each
clinical study is conducted under the auspices of the independent Institutional
Review Board ("IRB") at the institution at which the study is conducted. The
IRB considers, among other things, ethical factors, the safety of the human
subjects and the possible liability for the institution.
Clinical trials are typically in three sequential phases that may
overlap. In Phase I, the initial introduction of the pharmaceutical into
healthy human volunteers, the emphasis is on testing for safety (adverse
effects), dosage tolerance, metabolism, distribution, excretion and clinical
pharmacology. Phase II involves studies in a limited patient population to
determine the efficacy of the pharmaceutical for specific targeted indications,
to determine dosage tolerance and optimal dosage and to identify possible
adverse side effects and safety risks. Once a compound is found to be effective
and to have an acceptable safety profile in Phase II evaluations, Phase III
trials are undertaken to evaluate clinical efficacy further and to further test
for safety within an expanded patient population at multiple clinical study
sites. The
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<PAGE>
FDA reviews both the clinical plans and the results of the trials and may
discontinue the trials at any time if there are significant safety issues.
The results of the preclinical and clinical trials are submitted to
the FDA in the form of an NDA for marketing approval. The testing and approval
process is likely to require substantial time and effort and there can be no
assurance that any approval will be granted on a timely basis, if at all. The
approval process is affected by a number of factors, including the severity of
the disease, the availability of alternative treatments and the risks and
benefits demonstrated in clinical trials. Additional animal studies or clinical
trials may be requested during the FDA review process and may delay marketing
approval. After FDA approval for the initial indications, further clinical
trials would be necessary to gain approval for the use of the product for any
additional indications. The FDA may also require post-marketing testing to
monitor for adverse effects, which can involve significant expense.
The Company's Periodontal Tissue Monitor is categorized as a medical
device under the FDA regulations and therefore a Premarket Approval application
must be filed and approved by the FDA before marketing of the product in the
U.S. can commence. See - PTM PATENTS AND REGULATORY APPROVAL - for a
description of the status of the FDA approval efforts relating to the PTM.
For both currently marketed and future products, failure to comply
with applicable regulatory requirements after obtaining regulatory approval can,
among other things, result in the suspension of regulatory approval, as well as
possible civil and criminal sanctions. In addition, changes in regulations
could have a material adverse effect on the Company.
COMPETITION
The PDIT and PDT drugs and systems which the Company is developing
will be competing with existing therapies. In addition, a number of companies
are pursuing the development of novel pharmaceuticals which target the same
diseases that the Company is targeting. A number of pharmaceutical and
biotechnology companies, academic institutions, government agencies, and other
public and private organizations conducting research are pursuing PDT-related
approaches to cancer therapy. A number of such organizations are also
developing potentially competitive products for diagnosing periodontal disease.
Furthermore, academic institutions, government agencies, and other public and
private organizations conducting research may seek patent protection with
respect to potentially competing products or technologies and may establish
collaborative arrangements with competitors of the Company.
Many of the Company's existing or potential competitors, particularly
large pharmaceutical companies, have substantially greater financial, technical
and human resources than the Company and may be better equipped to develop,
manufacture and market products. In addition, many of these companies have
extensive experience in preclinical testing and human clinical trials. These
companies may develop and introduce products and processes competitive with or
superior to those of the Company. The development by others of new treatment
methods for those indications for which the Company is developing products could
render these products noncompetitive or obsolete.
The Company's products under development are expected to address a
broad range of markets. The Company's competition will be determined in part by
the potential indications for which the Company's products are developed and
ultimately approved by regulatory authorities. For certain of the Company's
potential products, an important factor in competition may be the timing of
market introduction of the Company's or competitors' products. Accordingly, the
relative speed at which the Company or its existing or its future corporate
partners can develop products, complete the clinical trials and regulatory
approval processes, and supply commercial quantities of the products to the
market are expected to be important competitive factors. The Company expects
that competition among products
12
<PAGE>
approved for sale will be based, among other things, on product efficacy,
safety, reliability, availability, price and patent position.
The Company's competitive position also depends upon its ability to
attract and retain qualified personnel, obtain patent protection or otherwise
develop proprietary products or processes and secure sufficient capital
resources for the often substantial period between technological conception and
commercial sales.
The consumer markets into which the Kephra reversible photochromic
technology is targeted for marketing are extremely competitive. The Company is
aware of several companies which may represent potential competition to its
Kephra reversible photochromic UV technology. A number of U.S. and
international industrial chemical companies sell raw Photochromes, including the
Company's suppliers. Accordingly, raw Photochromes are available in the open
market to the Company's competitors. It is uncertain to what extent the
Company's proprietary protection, including patents, exclusive license, and
trade secrets, will allow it to maintain any existing advantage in areas such as
stability.
IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS
Certain statements set forth in this report are forward-looking statements and
are based upon the Company's current belief as to the outcome, occurrence and
timing of future events or current expectations and plans. As a result, these
forward-looking statements involve risks and uncertainties, including but not
limited to risks and uncertainties associated with (i) the Company's ability to
successfully complete the development and commercialization of its product
development efforts, (ii) the Company's ability to maintain protection of and
access to proprietary rights, (iii) market and competitive factors, (iv) the
regulatory approval process, (v) the Company's ability to raise additional funds
necessary to support current and planned operations, and (vi) other factors.
Actual events or results may differ from the Company's expectations.
PERSONNEL
As of March 31, 1996, the Company had 13 full-time employees, none of
whom were covered by a collective bargaining agreement.
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<PAGE>
ITEM 2. PROPERTIES
At March 31, 1996, the Company occupied approximately 8,600 square
feet of office and laboratory space in San Diego, California under a ten year-
year lease which expires in June 1996, and has two five-year renewal options.
The Company has no current plans for any expansion of its facilities, but
believes that increases in its internal product development efforts related to
the PDIT and PDT product development projects may increase the Company's
facility requirements.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On March 28, 1996 the Company held a special meeting of its
stockholders to consider a proposed amendment to the Company's Certificate of
Incorporation to increase the number of authorized shares of common stock
available for issuance by the Company from 15 million to 30 million shares. The
stockholders approved the proposal, with 5,169,421 shares of Common Stock, or
90% of the shares voting and 64% of the total shares outstanding, voting in
favor of the proposal, 526,606 shares, or 9% of the voting shares, had voted
against the proposal, and 48,226 shares, or 1% of the voting shares had
abstained. 2,306,776 shares, or 29% of the total shares outstanding, did not
vote.
ADDITIONAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, their positions with the
Company and principal occupations and experience are set forth below.
Year in
which he
became an
Name Position(s) Age Officer
- ---- ---------- --- ---------
Larry O. Bymaster President and Chief 54 1990
Executive Officer
Dale A. Sander Vice President of Finance, 36 1993
Chief Financial Officer,
Secretary and Treasurer
The officers of the Company hold office at the discretion of the Board
of Directors of the Company. During Fiscal 1996, the officers of the Company
devoted substantially all of their business time to the affairs of the Company,
and they intend to do so during Fiscal 1997.
Mr. Bymaster was promoted to Chief Executive Officer of the Company by
the Board of Directors in November 1992, and was elected Chairman of the
Company's Board of Directors on January 1, 1995. He has senior management
experience in both large corporations and smaller medical companies, with
emphasis on the successful introduction and development of new products. From
late 1989 until he joined the Company as President and Chief Operating Officer
in September 1990, Mr. Bymaster was a Management Associate with The Bristol
Management and Investment Group, a consulting firm. From 1987 to 1989, he was a
corporate officer and Vice President with Cytotech, Inc., a San Diego
biotechnology company. From 1979 to 1987, he held management positions with
responsibilities for general management, business/marketing development,
strategic planning and acquisitions with Baxter
14
<PAGE>
Healthcare Corporation. From 1972 to 1979, he held various management positions
with Dart Industries. Mr. Bymaster holds a Masters Degree in Business Economics
from the University of Southern California.
Mr. Sander joined the Company in December 1993 as Vice President of
Finance, Chief Financial Officer, Secretary and Treasurer. From April 1991 to
December 1993, Mr. Sander served as Chief Financial Officer of Tactyl
Technologies, Inc., a medical device manufacturer, where his responsibilities
included raising capital and business planning. Prior to this he worked for
over nine years with Ernst & Young, an international professional service firm,
providing accounting, tax, and financial consulting services to a variety of
public and private companies; Mr. Sander's work with Ernst & Young included a
three-year tour as a senior manager in the firm's national emerging business
group. He is a Certified Public Accountant and has a Bachelor of Science Degree
in Accounting from San Diego State University.
15
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED MATTERS
The information required by this Item 5 is incorporated herein by
reference to the information located on the inside front cover and on page 22 of
the Company's Annual Report to Stockholders for the fiscal year ended March 31,
1996, filed as Exhibit 13 hereto.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item 6 is incorporated herein by
reference to the information set forth on the inside front cover of the
Company's Annual Report to Stockholders for the fiscal year ended March 31,
1996, filed as Exhibit 13 hereto.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
The information required by this Item 7 is incorporated herein by
reference to the information contained under the caption "Management's
Discussion and Analysis" on pages 4-6 of the Company's Annual Report to
Stockholders for the fiscal year ended March 31, 1996, filed as Exhibit 13
hereto.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item 8 is incorporated herein by
reference to the information located on the inside front cover and set forth on
pages 7-21 of the Company's Annual Report to Stockholders for the fiscal year
ended March 31, 1996, filed as Exhibit 13 hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
16
<PAGE>
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
Information concerning directors is incorporated herein by reference
to the information under the caption "Election of Directors" set forth in the
Company's definitive Proxy Statement to be filed with the Securities and
Exchange Commission within 120 days after March 31, 1996, for its Annual Meeting
of Stockholders to be held on August 9, 1996. Information concerning executive
officers is incorporated herein by reference to the information included in
Part I of this report under the caption "Executive Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated herein by
reference to the information under the caption "Executive Compensation" set
forth in the Company's definitive Proxy Statement to be filed with the
Securities and Exchange Commission within 120 days after March 31, 1996, for its
Annual Meeting of Stockholders to be held on August 9, 1996.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGERS
The information required by this Item 12 is incorporated herein by
reference to the information under the captions "Beneficial and Record Ownership
of Securities" and "Election of Directors" in the Company's definitive Proxy
Statement to be filed with the Securities and Exchange Commission within 120
days after March 31, 1996, for its Annual Meeting of Stockholders to be held on
August 9, 1996.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 13 is incorporated herein by
reference to the information under the captions "Election of Directors" in the
Company's definitive Proxy Statement to be filed with the Securities and
Exchange Commission within 120 days after March 31, 1996, for its Annual Meeting
of Stockholders to be held on August 9, 1996.
17
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES
AND REPORTS ON FORM 8-K
(a) Exhibits and Financial Statement Schedules
FINANCIAL STATEMENTS
The following financial statements are incorporated herein by
reference from pages 7-22 of the Company's Annual Report to Stockholders for the
fiscal year ended March 31, 1996:
Consolidated Statements of Operations for the years ended March
31, 1996, 1995, and 1994, and from September 23, 1983 (inception)
to March 31, 1996
Consolidated Balance Sheets as of March 31, 1996 and 1995
Consolidated Statements of Stockholders' Equity from
September 23, 1983 (inception) through March 31, 1996
Consolidated Statements of Cash Flows for the years ended March
31, 1996, 1995, and 1994, and from September 23, 1983 (inception)
to March 31, 1996
Notes to Consolidated Financial Statements
Independent Auditors' Report
Consolidated Quarterly Financial Summaries (unaudited).
FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted since the required information is
not present in amounts sufficient to require submission of the schedule, or
because the information required is included in the consolidated financial
statements or notes thereto.
18
<PAGE>
EXHIBITS
--------
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
2.1 Agreement and Plan of Merger between the Registrant and
Binary Therapeutics, Inc. dated June 4, 1996. (5)
3.1 Certificate of Incorporation of the Registrant. (1)
3.2 Certificate of Amendment of Certificate of Incorporation of
the Registrant. (2)
3.3 Certificate of Amendment of Certificate of Incorporation of
the Registrant. (3)
3.4 Certificate of Elimination with respect to the Registrant's
Series A Convertible Preferred Stock. (4)
3.5 Certificate of Designations of Convertible Preferred Stock,
Revised Series A of the Registrant. (4)
3.6 Certificate of Designations of Convertible Preferred Stock,
Series B of the Registrant. (4)
3.7 Form of Certificate of Designations of Series R Junior
Participating Cumulative Preferred Stock of the Registrant,
as filed with the Delaware Secretary of State on April 16,
1991. (6)
3.8 Bylaws of the Registrant Amended and Restated as of April 2,
1991. (6)
3.9 Certificate of Amendment of Certificate of Designations of
Preference of Convertible Preferred Stock, Series B filed
with the Delaware Secretary of State on September 14, 1989.
(13)
3.10 Bylaws of the Registrant amended and restated as of November
6, 1992. (16)
3.11 Certificate of Amendment of Certificate of Incorporation
filed with the Delaware Secretary of State on April 8, 1996.
(20)
3.12 Certificate of Amendment to Certificate of Designations of
Series R Junior Participating Cumulative Preferred Stock,
$25.00 par value, filed with the Delaware Secretary of State
on November 17, 1995. (19)
4.1 Description of the Registrant's Common Stock, $.02 par
value. (7)
4.2 Rights Agreement, dated as of April 2, 1991, by and between
the Registrant and First Chicago Trust Company of New York.
(6)
4.3 Form of Right Certificate pertaining to the Preferred Stock
Purchase Rights of the Registrant. (6)
4.4 Amendment No. 1 to Rights Agreement between Xytronyx, Inc.
and First Chicago Trust Company of New York as Rights Agent
dated November 10, 1995. (19)
19
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
10.1 Agreement for Cooperative Investigation dated September 6,
1984 between the Registrant and the Board of Trustees of the
University of Illinois. (1)
10.2 Agreement for Cooperative Investigation dated October 8,
1984 between the Registrant and the Board of Trustees of the
University of Illinois. (1)
10.3 Amendment dated October 3, 1985 to the Agreement for
Cooperative Investigation dated October 8, 1984 between the
Registrant and the Board of Trustees of the University of
Illinois. (8)
10.4 Agreement dated September 6, 1984 between the Registrant and
University Patents, Inc. (1)
10.6 Advice to Holders of the Company Common Stock Issued January
31, 1984. (1)
10.8 Research Agreement dated January 28, 1986 between the
Company and the University of Washington. (8)
10.9 Research Agreement dated March 4, 1987 between the
Registrant and the University of Washington. (3)
10.10* Nonqualified Stock Option Plan of the Registrant, as
amended. (8)
10.11* Incentive Stock Option Plan of the Registrant, as amended.
(8)
10.12* Stock Option Plan for Nonemployee and Non-Consultant
Directors of the Registrant. (8)
10.13* Stock Option Agreement between the Registrant and Morris
Weeden. (8)
10.14* Stock Option Agreement between the Registrant and William
Jorgenson. (8)
10.15 Lease Agreement dated February 19, 1986 between the
Registrant and McKellar Development of La Jolla. (8)
10.17 Form of Indemnity Agreement between the Registrant and its
directors and executive officers. (8)
10.18 Manufacture, Sales and Distribution Agreement dated November
23, 1987 among the Registrant, Perio Test, Inc., and
Colgate-Palmolive Company. (4)
10.19 Guaranty and Support Agreement dated November 23, 1987 by
and between the Registrant and Colgate-Palmolive Company.
(4)
10.20 Security Agreement and Consent dated November 23, 1987 by
and among the Registrant, Perio Test, Inc., Colgate-Palmolive
Company, University Patents, Inc., and the University of
Illinois. (4)
*Management contract, compensatory plan or arrangement
20
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
10.21* Amendment dated May 8, 1987 to the Incentive Stock Option
Plan of the Registrant. (4)
10.24* 1988 Stock Option Plan of the Registrant. (11)
10.25* Key Executive Stock Option Plan of the Registrant. (10)
10.28* 1991 Stock Option Plan for Employees and Consultants of the
Registrant. (14)
10.29* 1991 Stock Option Plan for Non-Employee and Non-Consultant
Directors of the Registrant. (14)
10.30 April 29, 1992, Unit Purchase Agreement. (15)
10.32 Ladenburg, Thalmann & Co., Inc. Warrant. (15)
10.33 Payne Financial Group, Inc. Stock Subscription Warrant. (15)
10.35 Amendment dated March 29, 1993, to the Manufacture, Sales
and Distribution Agreement dated as of November 23, 1987
among the Registrant, Perio Test, Inc. and Colgate-Palmolive
Company. (16)
10.37* Stock Option Agreement between the Registrant and Dr. Peter
Baram. (17)
10.38 Purchase Agreement dated April 30, 1994 between the
Registrant and Purely Hawaiian Licensing, Inc. (17)
10.39* Stock Option Agreement between the Registrant and Larry O.
Bymaster. (18)
10.40* Stock Option Agreement between the Registrant and Rand P.
Mulford. (18)
10.41 Consulting Agreement dated January 1, 1995 between the
Registrant and Dr. Peter Baram. (18)
10.42 Termination Agreement dated May 11, 1995 between the
Registrant and Colgate-Palmolive Company. (18)
10.43 License Agreement Between the Registrant and Wound Healing
of Oklahoma dated May 8, 1996. (5)
10.44* Employment Agreement dated as of January 1, 1995 between the
Registrant and Larry O. Bymaster. (5)
13 The Registrant's Annual Report to Stockholders for the
fiscal year ended March 31, 1996. (5)
21. Subsidiaries of the Registrant. (15)
*Management contract, compensatory plan or arrangement
21
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
23. Independent Auditors' Consent. (5)
27. Financial Data Schedule. (5)
99. Independent Auditors' Report. (5)
*Management contract, compensatory plan or arrangement
- --------------------
(1) Previously filed together with the Registrant's Registration Statement on
Form S-18 (File No. 2-98072) dated May 30, 1985.
(2) Previously filed together with Amendment No. 1 to the Registrant's
Registration Statement on Form S-18 (File No. 2-98072) dated July 29, 1985.
(3) Previously filed together with the Registrant's Annual Report on Form 10-K
(File No. 0-14838) filed June 29, 1987.
(4) Previously filed together with the Registrant's Annual Report on Form 10-K
(File No. 14838) filed June 17, 1988.
(5) Filed herewith.
(6) Previously filed together with the Registrant's Current Report on Form 8-K
(File No. 0-14838) on April 3, 1991.
(7) Incorporated by reference to the Registrants Registration Statement on Form
8-A (File No. 0-14838) declared effective Sept. 23, 1986.
(8) Previously filed together with the Registrant's Annual Report on Form 10-K
(File No. 0-14838) dated March 31, 1986.
(9) Previously filed together with Amendment No. 2 to the Registrant's
Registration Statement on Form S-18 (File No. 2-98072) dated July 29, 1985.
(10) Previously filed together with the Registrant's Annual Report on Form 10-K
(File No. 0-14838) on June 29, 1989.
(11) Previously filed together with the Registrant's Proxy Statement (File No.
0-14838) dated August 15, 1988, for the Annual Meeting of Stockholders held
on September 23, 1988.
(12) Previously filed together with the Registrant's Annual Report on Form 10-K
(File No. 0-14838) dated March 31, 1990.
(13) Previously filed together with Registrant's Annual Report on Form 10-K
(File No. 0-14934) dated March 31, 1991.
(14) Previously filed together with the Registrant's Registration Statement on
Form S-8 (File No. 33-45073) dated January 13, 1992.
(15) Previously filed together with the Registrant's Annual Report on Form 10-K
(File No. 1-9613) dated March 31, 1992.
22
<PAGE>
(16) Previously filed together with the Registrant's Annual Report on Form 10-K
(File No. 1-9613) dated March 31, 1993.
(17) Previously filed together with the Registrant's Annual Report on Form 10-K
(File No. 1-9613) dated March 31, 1994.
(18) Previously filed together with the Registrant's Annual Report on Form 10-K
(File No. 1-9613) dated March 31, 1995.
(19) Previously filed together with the Registrant's Current Report on Form 8-K
(File No. 0-14838) on November 10, 1995.
(20) Previously filed together with the Registrant's Current Report on Form 8-K
(File No. 0-14838) on April 1, 1996
23
<PAGE>
(b) Reports on Form 8-K.
A report on Form 8-K, dated February 12, 1996, was filed under
Item 5 of Form 8-K with respect to the announcement of the Company's
financial results for the quarter ended December 31, 1995, and included a
schedule entitled Consolidated Financial Data.
A report on Form 8-K, dated March 6, 1996, was filed under Item
5 of Form 8-K with respect to the announcement of letter of intent regarding
option to purchase Binary Therapeutics, Inc.
A report on Form 8-K, dated March 18, 1996, was filed under
Item 5 of Form 8-K with respect to the announcement regarding the completion
of the U.S. clinical studies of its Periodontal Tissue Monitor.
A report on Form 8-K, dated April 1, 1996, was filed under Item
5 of Form 8-K regarding results of special stockholders meeting.
A report on Form 8-K, dated April 9, 1996, was filed under Item
5 of Form 8-K with respect to the announcement regarding notification from
Procter & Gamble Company concerning the termination of their option agreement
to market the Xytronyx Periodontal Tissue Monitor.
A report on Form 8-K, dated May 13, 1996, was filed under Item
5 of Form 8-K with respect to the announcement of the acquisition of an
exclusive license to novel cancer therapy.
A report on Form 8-K, dated May 22, 1996, was filed under Item
5 of Form 8-K with respect to the announcement of a European Distribution
Agreement for the Company's Periodontal Tissue Monitor.
A report on Form 8-K, dated June 5, 1996, was filed under Item
5 of Form 8-K with respect to the announcement of the signing of an agreement
for an option to acquire Binary Therapeutics, Inc.
A report on Form 8-K, dated June 17, 1996, was filed under Item
5 of Form 8-K with respect to the announcement of the Company's financial
results for the year and the quarter ended March 31, 1996, and included a
schedule entitled Consolidated Financial Data.
24
<PAGE>
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.
XYTRONYX, INC.
By: /S/ DALE A. SANDER
------------------
Dale A. Sander,
Vice President of Finance
Chief Financial Officer,
Date: June 18, 1996
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
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/S/ LARRY O. BYMASTER Chairman of the Board June 18, 1996
- ---------------------------- Director, President and
Larry O. Bymaster Chief Executive Officer
(Principal Executive Officer)
/S/ DALE A. SANDER Vice President of Finance, and June 18, 1996
- ---------------------------- Chief Financial Officer
Dale A. Sander (Principal Accounting Officer
and Principal Financial Officer)
/S/ H. LAWRENCE GARRETT, III Director June 18, 1996
- ----------------------------
H. Lawrence Garrett, III
/S/ JACK H. HALPERIN Director June 18, 1996
- ----------------------------
Jack H. Halperin
/S/ WILLIAM L. JORGENSON Director June 18, 1996
- ----------------------------
William L. Jorgenson
/S/ JOHN M. KOLBAS Director June 18, 1996
- ----------------------------
John M. Kolbas
/S/ ELLIOTT H. VERNON Director June 18, 1996
- ----------------------------
Elliott H. Vernon
/S/ MORRIS S. WEEDEN Director June 18, 1996
- ----------------------------
Morris S. Weeden
/S/ MICHAEL S. WEISS Director June 18, 1996
- ----------------------------
Michael S. Weiss
25
<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT ("Agreement") is made and entered into effective this
4th day of June, 1996, by and among XYX Acquisition Corp., a Delaware
corporation ("Newco"), Xytronyx, Inc., a Delaware corporation and the owner of
all the issued and outstanding shares of capital stock of Newco ("XYX"), and
Binary Therapeutics, Inc., a Delaware corporation ("BTI").
WITNESSETH
WHEREAS, the Boards of Directors of XYX, Newco and BTI have each determined
that it is in the best interests of their respective shareholders for BTI to
merge with and into Newco upon the terms and subject to the conditions set forth
herein; and
WHEREAS, XYX, Newco and BTI desire to make certain representations,
warranties, covenants and agreements in connection with the transactions
contemplated hereby;
NOW THEREFORE, in consideration of the premises and mutual covenants
contained herein, the parties agree as follows:
1. GENERAL DEFINITIONS
For purposes of this Agreement, the following terms shall have the
respective meanings set forth below:
1.1 BEST KNOWLEDGE. "Best Knowledge" means both what a Person knew as
well as what the Person should have known had the Person exercised reasonable
diligence. When used with respect to a Person other than a natural person, the
term "Best Knowledge" shall include matters that are known to the current
directors and executive officers of the Person.
1.2 BUSINESS DAY. "Business Day" means any day which is not a Saturday,
Sunday or a permitted or required bank holiday in New York, New York.
1.3 CLOSING AND CLOSING DATE AND CLOSING NOTICE. "Closing" and "Closing
Date" and "Closing Notice" have the meaning ascribed to such terms,
respectively, in Section 5.1 hereof.
1.4 CODE. "Code" means the Internal Revenue Code of 1986, as amended.
1.5 CONVERSION RATE. "Conversion Rate" has the meaning ascribed to such
term in Section 4.2 hereof.
<PAGE>
1.6 CONVERTIBLE SUBORDINATED NOTES. "Convertible Subordinated Notes" has
the meaning ascribed to such term in Section 9.3 hereof.
1.7 EFFECTIVE TIME. "Effective Time" has the meaning ascribed to such
term in Section 2.2 hereof.
1.8 ERISA. "ERISA" means the Employment Retirement Income Security Act of
1974, as amended.
1.9 EXCHANGE ACT. "Exchange Act" means the Securities Exchange Act of
1934, as amended.
1.10 FISCAL YEAR. "Fiscal Year" means a twelve-month period beginning
January 1 for BTI and a twelve-month period beginning April 1 for XYX and Newco.
1.11 GOVERNMENTAL AUTHORITY. "Governmental Authority" means any and all
foreign, federal, state or local governments, governmental institutions, public
authorities and governmental entities of any nature whatsoever, and any
subdivisions or instrumentalities thereof, including, but not limited to,
departments, boards, bureaus, commissions, agencies, courts, administrations and
panels, and any division or instrumentalities thereof, whether permanent or ad
hoc and whether now or hereafter constituted or existing.
1.12 GOVERNMENTAL REQUIREMENT. "Governmental Requirement" means any and
all laws (including, but not limited to, applicable common law principles),
statutes, ordinances, codes, rules, regulations, interpretations, guidelines,
directions, orders, judgments, writs, injunctions, decrees, decisions or similar
items or pronouncements, promulgated, issued, passed or set forth by any
Governmental Authority.
1.13 HOLDER. "Holder" means any individual or entity owning of record BTI
Shares, BTI Convertible Debt, BTI Options, BTI Warrants, BTI Rights or such XYX
Shares or XYX Rights received upon conversion thereof but not including the
Convertible Subordinated Notes or any other indebtedness of BTI to XYX or BTI
Shares issuable upon conversion thereof.
1.14 INVESTMENT REPRESENTATION, REGISTRATION RIGHTS AND PROXY AGREEMENT.
"Investment Representation, Registration Rights and Proxy Agreement" means the
agreement in the form set forth as Exhibit A hereto.
1.15 IRS. "IRS" means the Internal Revenue Service.
1.16 LEGAL REQUIREMENTS. "Legal Requirements" means applicable common law
and any statute, ordinance, code or other laws, rule, regulation, order,
technical or other
2
<PAGE>
standard, requirement, judgment, or procedure enacted, adopted, promulgated,
applied or followed by any governmental authority, including, without
limitation, any order, decree, award, verdict, findings of fact, conclusions
of law, decision or judgment, whether or not final or appealable, of any
court, arbitrator, arbitration board or administrative agency.
1.17 OWNERSHIP INTEREST. "Ownership Interest" means any form of direct or
indirect interest in the ownership, equity or profits, whether certificated or
non-certificated, issued or unissued, contingent or otherwise, including,
without limitation, the following: shares, or the right thereto, executory
rights to receive shares, options, warrants, instruments or obligations
convertible into shares or profit interests.
1.18 PERSON. "Person" means any natural person, any Governmental Authority
and any entity the separate existence of which is recognized by any Governmental
Authority or Governmental Requirement, including, but not limited to,
corporations, partnerships, joint ventures, joint stock companies, trusts,
estates, companies and associations, whether organized for profit or otherwise.
1.19 PURCHASE PRICE. "Purchase Price" has the meaning ascribed to such
term in Section 4.2 hereof.
1.20 SECTION. Unless otherwise stated herein, the term "Section" when used
in this Agreement refers to the Sections of this Agreement.
1.21 SECURITIES ACT. "Securities Act" means the Securities Act of 1933, as
amended.
1.22 TAX. "Tax" means any federal, state, local, or foreign income, gross
receipts, license, payroll, employment, excise, severance, stamp, occupation,
premium, windfall profits, environmental (including taxes under Section 59A of
the Code), customs duties, capital stock, franchise, profits, withholding,
social security (or similar), unemployment, disability, real property, personal
property, sales, use, transfer, registration, value added, alternative or add-on
minimum, estimated, or other tax of any kind whatsoever, including any interest,
penalty, or addition thereto, whether disputed or not.
1.23 TAX RETURN. "Tax Return" means any return, declaration, report, claim
for refund, or information return or statement relating to Taxes, including any
schedule or attachment thereto, and including any amendment thereof.
1.24 XYX MARKET PRICE. "XYX Market Price" means the amount determined as
follows:
(A) If the XYX Common Stock is listed for trading on the AMEX, the
Fair Market Value shall be equal to the average closing bid price of the XYX
Common
3
<PAGE>
Stock on the AMEX for the twenty (20) business days ending on the last
business day prior to BTI's receipt of the Closing Notice; or
(B) If the XYX Common Stock is not listed for trading on the AMEX,
but is listed on any other national securities exchange, the Fair Market Value
shall be equal to the average closing bid price of the XYX Common Stock for the
twenty (20) business days ending on the last business day prior to BTI's receipt
of the Closing Notice; or
(C) If the XYX Common Stock is not listed for trading on any national
securities exchange, the Fair Market Value shall be the average of the closing
bid price quoted on the Over The Counter Bulletin Board (the "OTC") or the Pink
Sheets of the XYX Common Stock for the twenty (20) business days ending on the
last business day prior to BTI's receipt of the Closing Notice; or
(D) If the XYX Common Stock is not listed for trading on any national
securities exchange and the bid and asked prices are not reported on the OTC or
the Pink Sheets, the Fair Market Value shall be an amount, not less than the
book value per share of the XYX Common Stock at the end of its most recent
fiscal year ending prior to BTI's receipt of the Closing Notice, determined in
such reasonable manner as may in good faith be prescribed by the Board of
Directors of XYX.
2. THE MERGER
2.1. THE MERGER. Subject to the terms and conditions of this Agreement, at
the Effective Time as defined below, BTI shall be merged with and into Newco and
the separate corporate existence of BTI shall thereupon cease (the "Merger").
At the Effective Time, Newco shall be the surviving corporation in the Merger
(sometimes hereinafter referred to as the "Surviving Corporation") and shall
continue to be governed by the laws of the State of Delaware, and the separate
corporate existence of Newco with all of its rights, privileges, immunities,
powers and franchises shall continue unaffected by the Merger. The Merger shall
have the effects specified in the Delaware General Corporation Law (the "DGCL").
2.2. EFFECTIVE TIME. At the Closing, XYX, Newco and BTI will cause a
Certificate of Merger, in the form set forth in Exhibit 2.2 hereto (the
"Delaware Certificate of Merger"), to be executed and delivered to the Secretary
of State of the State of Delaware as provided in Section 251 of the DGCL. The
Merger shall become effective upon the filing of the Delaware Certificate of
Merger with the Secretary of State of the State of Delaware or at such time
thereafter as is specified in the Delaware Certificate of Merger (the "Effective
Time").
4
<PAGE>
3. THE SURVIVING CORPORATION
3.1. THE ARTICLES OF INCORPORATION. The Certificate of Incorporation of
Newco (the "Certificate") in effect immediately prior to the Effective Time
shall be the Certificate of Incorporation of the Surviving Corporation, except
that such Certificate shall be amended at and as of the Effective Time as set
forth in the Delaware Certificate of Merger. As so amended, such Certificate
shall be the Certificate of Incorporation of the Surviving Corporation until
duly amended in accordance with the terms thereof and the DGCL.
3.2. THE BYLAWS. The Bylaws of Newco (the "Bylaws") in effect immediately
prior to the Effective Time shall be the Bylaws of the Surviving Corporation,
until duly amended in accordance with the terms thereof and the DGCL.
3.3. OFFICERS AND DIRECTORS. The officers and the directors of Newco
immediately prior to the Effective Time, shall, from and after the Effective
Time, be the directors and officers, respectively, of the Surviving Corporation
until their successors have been duly elected or appointed and qualified or
until their earlier death, resignation or removal in accordance with the
Surviving corporation's Certificate of Incorporation and the Bylaws.
4. CONVERSION OF SHARES IN THE MERGER
4.1. CONVERSION OF SHARES, CONVERTIBLE DEBT, OPTIONS AND WARRANTS. At the
Effective Time, by virtue of the Merger, and without any action on the part of
the holders thereof:
(A) Each share of the common stock, $0.01 par value per share, of
Newco issued and outstanding immediately prior to the Effective Time shall
remain outstanding, which shares shall thereafter constitute the only issued and
outstanding shares of capital stock of the Surviving Corporation.
(B) Each share of the common stock, $.001 par value per share, of
BTI but not including any such shares issuable upon conversion of the
Convertible Subordinated Notes (the "BTI Shares") issued and outstanding
immediately prior to the Effective Time shall be converted into the right to
receive, without interest, a number of shares of common stock, par value $0.02
per share, of XYX ("XYX Shares") determined by multiplying each such BTI Share
by the Conversion Rate.
(C) Each debt instrument of BTI convertible into shares of BTI
Common Stock, as set forth on Exhibit 4.1(C) hereof but not including the
Convertible Subordinated Notes or other indebtedness of BTI to XYX ("BTI
Convertible Debt"), shall be converted into the right to receive, without
interest, that number of XYX Shares determined by multiplying each BTI Share
issuable upon conversion of the BTI Convertible Debt by the
5
<PAGE>
Conversion Rate.
(D) Each option ("Option") or warrant ("Warrant") or other right
to purchase shares of BTI Common Stock, as set forth on Exhibit 4.1(D) hereof
("BTI Rights"), shall be converted into the right to receive, without interest,
an option or warrant to purchase (with terms substantially equivalent to each
converted BTI Right) that number of shares of XYX Common Stock (the "XYX
Rights") that would be issuable in the Merger based on the Conversion Rate had
the holders of the BTI Rights exercised such Rights to purchase shares of BTI
Common Stock immediately prior to the Merger.
4.2 CONVERSION RATE AND PURCHASE PRICE. The "Conversion Rate" shall be
determined by dividing (x) the Purchase Price as defined below by (y) the XYX
Market Price, and by dividing the resulting quotient by (z) the total of (i) the
aggregate number of shares of BTI Common Stock issued and outstanding
immediately prior to the Effective Date, excluding any shares held by XYX, plus
(ii) the aggregate number of shares of BTI Common Stock into which the BTI
Convertible Debt is convertible immediately prior to or at the Effective Time
pursuant to Section 4.1(C) plus (iii) the aggregate number of shares of BTI
Common Stock into which all BTI Rights are convertible immediately prior to or
at the Effective Time pursuant to Section 4.1(D). The XYX Market Price shall
not be less than $2.00 per share or more than $6.00 per share for purposes of
(y) above. The Conversion Rate shall be subject to adjustment as set forth in
Section 4.3. The "Purchase Price" shall be $6,000,000. The Purchase Price
shall be reduced to the extent, if any, that the Total Funding (as defined in
Section 9.1) exceeds $1,250,000 due to the funding of mutually agreed upon and
specified expenses.
4.3 ADJUSTMENT OF CONVERSION RATE. In the event of any reclassification,
stock split (including reverse stock split), stock dividend or other general
distribution of securities, cash or other property with respect to XYX Common
Stock (or if a record date with respect to any of the foregoing should occur) on
or after the date of this Agreement and on or prior to the date of the Effective
Time, appropriate and equitable adjustments shall be made to the Conversion
Rate.
4.4. NO FRACTIONAL SHARES. Any fractional shares resulting from such
conversion to which the holder of XYX Shares otherwise would be entitled shall
not be issued but shall be paid in cash.
4.5 EFFECT OF MERGER. The XYX Shares and XYX Rights into which the BTI
Shares, BTI Convertible Debt, Options and Warrants are converted pursuant to
Section 4.1 and any cash payable in lieu of fractional shares pursuant to
Section 4.4 are collectively referred to herein as the "Merger Consideration."
All BTI Shares, BTI Convertible Debt, Options and Warrants, by virtue of the
Merger and without any action on the part of the holders thereof, shall no
longer be outstanding and shall be canceled and retired and shall cease to
exist, and each holder of a certificate or other instrument representing any
such share, debt, option or warrant shall thereafter cease to have any rights
with respect to such shares, debt, option or warrant, except the right to
receive the Merger Consideration for
6
<PAGE>
such shares, debt, options or warrants upon the surrender of such certificate
or other instrument in accordance with Section 4.6.
4.6 PAYMENT FOR SHARES.
(A) At the Effective Time, each Holder shall have a right to
surrender to XYX such certificate or certificates or other instrument or
instruments representing BTI Shares, BTI Convertible Debt, Options or Warrants
and to receive in exchange therefor a certificate representing the number of XYX
Shares and/or XYX Rights into which the BTI Shares, BTI Convertible Debt,
Options or Warrants represented by the surrendered certificate or certificates
or other instrument or instruments shall have been converted pursuant to Section
4.1, and cash in lieu of any fractional XYX Shares to which the Holder otherwise
would be entitled pursuant to Section 4.4.
(B) As soon as reasonably practicable after the Effective Time, XYX
shall mail to each Holder of a certificate or certificates or other instrument
or instruments which immediately prior to the Effective Time represented BTI
Shares, BTI Convertible Debt, Options or Warrants (the "Certificate"): (i) a
letter of transmittal (which shall specify that delivery shall be effected, and
risk of loss and title to the Certificate shall pass, only upon delivery of the
Certificate to XYX and shall be in a form and have such other provisions as XYX
may reasonably specify) and (ii) instructions for use in effecting the surrender
of the Certificate in exchange for the Merger Consideration. Upon surrender of
a Certificate for cancellation to XYX or to such agent or agents as may be
appointed by XYX, together with such letter of transmittal, duly executed, and
such other documents as may reasonably be required by XYX, the holder of such
Certificate shall be entitled to receive in exchange therefor the amount of XYX
Shares and/or XYX Rights into which the BTI Shares, BTI Convertible Debt,
Options or Warrants theretofore represented by such Certificate shall have been
converted pursuant to Section 4.5, and the Certificate so surrendered shall
forthwith be canceled. In the event of a transfer of ownership of BTI Shares,
BTI Convertible Debt, Options or Warrants that is not registered in the transfer
records of BTI, payment may be made to a Person other than the Person in whose
name the Certificate so surrendered is registered, if such Certificate shall be
properly endorsed or otherwise be in proper form for transfer and the Person
requesting such payment shall pay any transfer or other Taxes required by reason
of the payment to a Person other than the registered holder of such Certificate
or establish to the satisfaction of the Surviving Corporation that such Tax has
been paid or is not applicable. Until surrendered as contemplated by this
Section 4.6, each Certificate shall be deemed at any time after the Effective
Time to represent only the right to receive upon such surrender the amount of
XYX Shares or XYX Rights, without interest, into which the BTI Shares, BTI
Convertible Debt, Options or Warrants theretofore represented by such
Certificate shall have been converted pursuant to Section 4.5. No interest will
be paid or will accrue on the cash payable upon the surrender of any
Certificate. No dividends or distributions will be paid to a Holder until he or
she has surrendered his or her Certificate or Certificates representing BTI
Shares, BTI Convertible Debt, Options or Warrants, upon which surrender there
shall
7
<PAGE>
be paid to such Holder, but without interest thereon, all dividends and
distributions payable on the XYX Shares subsequent to the Effective Time. No
transfer shall be made on the stock transfer books of the Surviving
Corporation at the Effective Time, except as provided in Section 4.1(A).
(C) At the Effective Time, the stock transfer books of BTI shall be
closed, and there shall be no further registration of transfers on the stock
transfer books of BTI of the BTI Shares, BTI Convertible Debt, Options or
Warrants that were outstanding immediately prior to the Effective Time. If,
after the Effective Time, Certificates are presented to the Surviving
Corporation or XYX for any reason, they shall be canceled and exchanged as
provided in this Section 4.6.
(D) None of XYX, Newco or BTI shall be liable to any Holder for any
XYX Shares and/or XYX Rights transferred or any amount paid to a public official
pursuant to any applicable abandoned property, escheat or similar law.
4.7 INCOME TAX CONSIDERATIONS. It is the intention of the parties hereto
that the merger contemplated by this Agreement will qualify for treatment as a
tax-free reorganization under the Code and the parties hereby agree to undertake
all reasonable actions necessary both before and after the consummation of the
Merger to effect such treatment.
4.8 COMPLIANCE WITH SECURITIES LAWS. The payment of the Merger
Consideration shall be undertaken in reliance upon exemptions from the
registration requirements of Section 5 of the Securities Act contained in
Sections 4(2) and 3(b) thereof. XYX shall cause Newco to take such actions as
may be necessary or advisable in order to consummate the Merger in conformity
with Governmental Requirements including, without limitation, federal and state
securities laws; and BTI, together with its directors and officers, agrees to
take such actions as may be necessary or advisable upon the reasonable request
of XYX and/or Newco to consummate the Merger in conformity with such
Governmental Requirements.
8
<PAGE>
5. CLOSING
5.1 GENERAL PROCEDURE. Subject to the terms and conditions of this
Agreement, the closing (the "Closing") of this Agreement and the transactions
contemplated hereunder, shall occur at the offices of XYX, 6555 Nancy Ridge
Drive, Suite 100, San Diego, California 92121 or such other place as may be
agreed to by XYX and BTI on a date and time to be specified by XYX within 90
days plus 5 Business Days after XYX has delivered notice to BTI of its election
to consummate the Merger (the "Closing Notice") (the date of the Closing being
herein referred to as the "Closing Date"); provided, however, that XYX may not
deliver a Closing Notice unless it has fulfilled its obligations as set forth in
Section 9 of this Agreement, including, without limitation, its Funding
Obligation, as defined in Section 9.1 and its obligation to pay certain
indebtedness of BTI, as set forth in Section 9.2.
5.2 COVENANTS REGARDING CLOSING. BTI, Newco and XYX each hereby covenant
and agree that they shall (i) use reasonable efforts to cause each of their
respective Exhibits to be prepared and exchanged with the other party, and its
legal counsel, within 10 Business Days following the execution of this
Agreement, except to the extent the express terms of this Agreement provide for
a different time period for such delivery to be accomplished, (ii) use
reasonable efforts to cause all of their respective obligations that are to be
fulfilled on or prior to the Effective Time to be so fulfilled, (iii) use
reasonable efforts to cause all conditions to the Closing set forth in this
Agreement to be satisfied on or prior to the Effective Time, and (iv) use
reasonable efforts to deliver to each other at the Closing the certificates,
updated lists, notices, consents, authorizations, approvals, agreements,
transfer documents, receipts and amendments required hereby (with such additions
or exceptions to such items as are necessary to make the statements set forth in
such items true and correct, provided that if any such additions or exceptions
cause any of the conditions to its respective obligations hereunder as set forth
hereinbelow not to be performed, satisfied or fulfilled, such additions and
exceptions shall in no way limit the rights of the parties hereto to terminate
this Agreement or refuse to consummate the transactions contemplated hereby).
5.3 CONDITIONS TO OBLIGATION OF XYX AND NEWCO. The obligation of each
of XYX and Newco to effect the Merger on the terms set forth in this Agreement
is, at the option of XYX and Newco, subject to the satisfaction of or written
waiver by XYX and Newco of each of the following conditions:
(A) ACCURACY OF REPRESENTATIONS AND WARRANTIES. The representations
and warranties made by BTI in this Agreement to XYX and Newco shall be true and
correct in all material respects as of the date of this Agreement and as of the
Effective Time with the same force and effect as though such representations and
warranties had been made on and as of the Effective Time, except to the extent
that such representations and warranties expressly relate to a different date in
which case they shall have been true and correct as of such date.
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(B) COMPLIANCE WITH COVENANTS. All covenants which BTI is required
to perform, satisfy or comply with on or before the Effective Time shall have
been complied with or performed in all material respects.
(C) CORPORATE APPROVALS. Any action required to be taken by the
Board of Directors of each of XYX and BTI or its shareholders to authorize the
execution, delivery and performance of this Agreement and the consummation of
the transactions contemplated hereby shall have been duly and validly taken.
(D) CONSENTS AND APPROVALS. To the extent that any material lease,
mortgage, deed of trust, contract or agreement to which BTI is a party shall
require the consent of any Person to the Merger or any other transaction
provided for herein, such consent shall have been obtained and XYX and Newco
shall have received reasonably satisfactory evidence thereof; provided, however,
that BTI shall not make, as a condition for the obtaining of any such consent,
any agreements or undertakings not approved in writing by XYX and Newco to the
extent that such condition otherwise has an effect on XYX and Newco. XYX and
Newco shall have been furnished with evidence reasonably satisfactory to it of
the timely consent or approval of, filing with or notice to, each Governmental
Authority or Person which in the good faith reasonable judgment of XYX and Newco
is necessary or required by or with respect to BTI with respect to the execution
and delivery by BTI and the consummation by BTI of the transactions contemplated
hereby.
(E) NO LITIGATION, ETC. No action, investigation, litigation or
arbitration or other proceeding by or before any Governmental Authority, or
before any arbitral, mediation panel or tribunal of any kind shall have been
instituted or threatened on or after the date of the Closing Notice (i) to
restrain or prohibit the transactions contemplated by this Agreement, or (ii) to
claim that the consummation of any such transaction is illegal or (iii) which,
if determined adversely, would materially and adversely affect XYX, Newco or BTI
following consummation of the transactions contemplated hereby and BTI shall
have delivered to XYX and Newco a certificate dated as of the Closing Date and
executed by BTI, stating that to its Best Knowledge, no such proceedings exist.
(F) NO MATERIAL ADVERSE CHANGE. No material adverse change in the
business, property or assets of BTI shall have occurred, and no loss or damage
to any of the assets, whether or not covered by insurance, with respect to BTI
hereto has occurred, in each case, on or after the date of the Closing Notice
and BTI shall have delivered to XYX and Newco a certificate dated as of the
Closing Date to such effect.
(G) UPDATE OF CONTRACTS. BTI shall have delivered to XYX and Newco
an accurate list, as of the Closing Date, showing (i) all agreements, contracts
and commitments of the type listed on Exhibit 6.20 hereof entered into since the
date of this Agreement; and (ii) all other agreements, contracts and commitments
related to the businesses or the assets of BTI entered into since the date of
this Agreement, together with true, complete and accurate copies of all such
documents (the "BTI New Contracts").
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(H) ORDINARY COURSE OF BUSINESS. During the period from the date of
this Agreement until the Closing Date, except as contemplated by the business
plan set forth in the Budget (as defined in Section 9.1) or approved by XYX or
Newco, BTI shall have carried on its business in the ordinary and usual course,
and shall have delivered to XYX and Newco a certificate to that effect.
(I) LIENS. BTI shall have delivered to XYX and Newco a reasonably
current lien and judgment search (both state and county levels in each
jurisdiction where BTI is qualified to or is doing business or owns material
assets) confirming the absence of any judicial liens, security interests, tax
liens and similar such liens affecting any of its business or assets.
(J) APPROVAL OF COUNSEL. All actions, proceedings, instruments and
documents required or incidental to carry out this Agreement, including all
schedules and exhibits thereto, and all other related legal matters shall have
been approved by counsel to XYX and Newco which approval will not be
unreasonably withheld or delayed.
(K) OTHER DOCUMENTS. The Selling Parties shall have delivered or
caused to be delivered the Investment Representation, Registration Rights and
Proxy Agreements and all other documents, agreements, resolutions, certificates
or declarations as XYX or Newco or their counsel may have reasonably requested.
(L) APPRAISAL RIGHTS AND/OR DISSENTERS' RIGHTS. At or prior to
Closing, no beneficial or record owner of any outstanding shares of BTI Common
Stock or BTI Rights shall have exercised or shall have given notice to XYX or
BTI of their intent to exercise any rights under applicable state law, if any,
to dissent from the Merger or obtain the payment of the fair market value of
such shares of BTI Common Stock or BTI Rights in lieu of participating in the
Merger in accordance with the terms and subject to the conditions set forth
herein, other than the exercise of appraisal rights or similar action by the
holders of not more than 10% of the BTI Shares. BTI shall promptly inform XYX
of any Holder of BTI Shares or BTI Rights with respect to whom BTI has
information to the effect that such Holder intends to exercise any such rights
of dissent and any such Holders shall be listed on Exhibit 5.3(L).
(M) NON-DISCLOSURE. On or prior to Closing, all current directors,
officers and other personnel of BTI and all agents, advisors and consultants to
BTI with access to BTI or XYX Confidential Information shall have executed and
delivered to XYX and Newco a confidential information agreement restricting such
person's right to disclose or use any Confidential Information.
(N) FINANCIAL ADVISORY FEES. At or prior to Closing, XYX shall have
reasonably determined that there are no obligations or commitments of BTI to any
financial advisors or investment bankers due to be paid or otherwise satisfied
as a result of the completion of the Merger.
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5.4 CONDITIONS TO OBLIGATION OF BTI. The obligation of BTI to effect the
Merger on the terms set forth in this Agreement are, at the option of BTI,
subject to the satisfaction or written waiver by BTI of each of the following
conditions:
(A) ACCURACY OF REPRESENTATIONS AND WARRANTIES. The representations
and warranties made by XYX and Newco in this Agreement shall be true and correct
in all material respects as of the date of this Agreement and as of the
Effective Time with the same force and effect as though such representations and
warranties had been made on and as of the Effective Time, except to the extent
that such representations and warranties expressly relate to an earlier date in
which case they shall have been true and correct as of such earlier date.
(B) COMPLIANCE WITH COVENANTS. All covenants which XYX and Newco are
required to perform, satisfy or comply with on or before the Effective Time
shall have been fully complied with or performed in all material respects.
(C) CORPORATE APPROVALS. Any action required to be taken by the
Board of Directors of XYX and Newco and their shareholders to authorize the
execution, delivery and performance of this Agreement and the consummation of
the transactions contemplated hereby shall have been duly and validly taken.
(D) COMPLIANCE WITH SECURITIES LAWS. XYX and Newco shall have taken
all actions necessary or advisable to consummate the Merger in conformity with
all Governmental Requirements, including, without limitation, applicable federal
and state securities laws.
(E) NO LITIGATION, ETC. No action, investigation, litigation or
arbitration or proceeding by or before any Governmental Authority, or before any
arbitral, mediation panel or tribunal of any kind shall have been instituted or
threatened by a party other than the Selling Parties (i) to restrain or prohibit
the transactions contemplated by this Agreement, or (ii) to claim that the
consummation of any such transaction is illegal, and each of XYX and Newco shall
have delivered to BTI a certificate dated as of the Closing Date and executed by
it stating that to its Best Knowledge, no such items exist.
(F) XYX FUNDING OBLIGATION. XYX shall have satisfied its obligations
pursuant to Sections 9.1 and 9.2.
(G) APPROVAL OF COUNSEL. All actions, proceedings, instruments and
documents required or incidental to carry out this Agreement, including all
schedules and exhibits thereto, and all other related legal matters shall have
been approved by counsel to BTI which approval will not be unreasonably withheld
or delayed.
(H) OTHER DOCUMENTS. XYX and Newco shall have delivered or caused
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to delivered all other documents, agreements, resolutions, certificates or
declarations as BTI or its counsel may have reasonably requested.
5.5 SPECIFIC ITEMS TO BE DELIVERED AT THE CLOSING. The parties shall
deliver the following items to the appropriate party at the Closing of the
transactions contemplated by this Agreement.
(A) TO BE DELIVERED BY BTI:
(i) A certificate dated the Closing Date of BTI, signed by the
Chief Executive Officer of BTI stating that the representations and warranties
of BTI set forth in this Agreement are true and correct in all material respects
as of the Closing Date, except to the extent that such representations and
warranties expressly relate to an earlier date in which case they shall have
been true and correct as of such earlier date. Said certificate shall further
verify and affirm that all consents or waivers, if any, which may be necessary
to execute and deliver this Agreement have been obtained and are in full force
and effect.
(ii) A certificate dated the Closing Date of BTI, signed by the
Chief Executive Officer of BTI, certifying that the conditions precedent to the
Closing set forth in Section 5.4 to the obligations of BTI to close, have been
fulfilled or waived in writing.
(iii) Certificates dated the Closing Date of BTI, signed by
the Secretary of BTI, (a) certifying attached copies of resolutions duly adopted
by the Board of Directors of BTI, authorizing the execution of this Agreement
and the other transactions to be consummated pursuant thereto; (b) certifying
the names and incumbency of the officers of BTI who executed the Agreement and
any certificates delivered pursuant to this Section 5.5(A) for and on behalf of
BTI; (c) certifying the authenticity of copies of the Articles of Incorporation
and Bylaws of BTI; and (d) certifying the authenticity of a reasonably current
Certificate of Good Standing from the Secretary of State of the State of
Delaware.
(iv) Opinion of counsel to BTI, substantially in the form of
Exhibit 5.5(A)(iv).
(B) TO BE DELIVERED BY XYX AND NEWCO:
(i) Certificate or certificates representing the number of
shares of XYX Shares determined in accordance with Sections 4.1 and 4.2.
(ii) Certificate or certificates representing the XYX Rights
against delivery of the canceled BTI Rights in accordance with the provisions of
Section 4.1(D).
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(iii) A certificate dated the Closing Date of XYX and Newco,
signed by the Chief Executive Officer of XYX and Newco, respectively, stating
that the representations and warranties of XYX and Newco set forth in this
Agreement are true and correct in all material respects as of the Date of
Closing, except to the extent that such representations and warranties expressly
relate to a different date in which case they shall have been true and correct
as of such date. Said certificate shall further verify and affirm that all
consents or waivers, if any, which may be necessary to execute and deliver this
Agreement have been obtained and are in full force and effect.
(iv) A certificate dated the Closing Date of XYX and Newco,
signed by the Chief Executive Officer and the Chief Financial Officer of XYX and
Newco, respectively, certifying that the conditions precedent set forth to the
Closing set forth in Section 5.3 to the obligations of XYX and Newco to close,
have been fulfilled or waived in writing.
(v) Certificates dated the Closing Date of XYX and Newco, signed
by the Secretary of XYX and Newco, respectively, (a) certifying attached copies
of resolutions duly adopted by the Board of Directors of XYX and Newco,
respectively, authorizing the execution of this Agreement and the other
transactions to be consummated pursuant thereto; (b) certifying the names and
incumbency of the officers of XYX and Newco who executed the Agreement and any
certificates delivered pursuant to this Section 5.5(B) for and on behalf of XYX
and Newco; (c) certifying the authenticity of copies of the Articles of
Incorporation and Bylaws of XYX and Newco; and (d) certifying the authenticity
of a reasonably current Certificate of Good Standing from the Secretary of State
of the State of Delaware.
(vi) Opinion of counsel to XYX and Newco, substantially in the
form of Exhibit 5.5(B)(vi).
6. REPRESENTATIONS AND WARRANTIES OF BTI
BTI represents and warrants to XYX and Newco as follows:
6.1 ORGANIZATION AND STANDING. BTI 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 its assets and
properties and to carry on its business as it is now being conducted.
6.2 AUTHORITY, EXECUTION, DUE DELIVERY, NO CONFLICTS, ETC. BTI has full
corporate power and authority to execute and deliver this Agreement, and the
other agreements and instruments to be executed and delivered by BTI pursuant
hereto, subject to approval of this Agreement by the shareholders of BTI, to
consummate the transactions contemplated hereby and thereby. All corporate acts
and other proceedings required to be
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taken by or on the part of BTI, to authorize such execution, delivery and
consummation, have been or will be duly and properly taken as of the Closing.
This Agreement has been duly executed and delivered by BTI and constitutes,
and such other agreements and instruments when duly executed and delivered by
BTI pursuant hereto will constitute, legal, valid and binding obligations of
BTI enforceable in accordance with their respective terms except as such
enforceability may be limited by applicable bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium or other laws or equitable
principles form time to time in effect relating to or affecting the rights
creditors generally. The execution and delivery by BTI of this Agreement and
the execution and delivery by BTI of such other agreements and instruments
pursuant hereto, and consummation by BTI of the transactions contemplated
hereby and thereby, will not violate any law, or conflict with, result in any
breach of, constitute a default (or an event which with notice or lapse of
time or both would become a default) under, or result in the creation of a
lien or encumbrance on any of the properties or assets of BTI pursuant to the
certificate of incorporation or by-laws of BTI, or any indenture, mortgage,
lease, agreement or other instrument to which BTI is a party or by which BTI
or its properties or assets, are bound, except to the extent that the
foregoing does not, in the aggregate, have a material adverse effect on BTI.
Assuming compliance with State blue sky laws and the Securities Act, and
filing of an appropriate certificate of merger in accordance with the DGCL,
to the best knowledge of BTI, no approval, authorization, consent or other
order or action of or filing with any court, administrative agency or other
governmental authority in the United States of America is required for the
execution and delivery by BTI of this Agreement and the execution and
delivery by BTI of such other agreements and instruments or the consummation
by BTI of each of the transactions contemplated hereby or thereby.
6.3 SUBSIDIARIES, ETC. BTI does not have any direct or indirect Ownership
Interest in any Person.
6.4 QUALIFICATION. Except for any jurisdiction where the failure to be
qualified to engage in business as a foreign corporation would not have a
material adverse affect on BTI, BTI is not qualified to engage in business as a
foreign corporation in any state other than Delaware and there is no other
jurisdiction wherein the character of the properties presently owned by BTI or
the nature of the activities presently conducted by BTI makes necessary the
qualification, licensing or domestication of BTI as a foreign corporation.
6.5 CORPORATE AUTHORITY. Neither the execution and delivery of this
Agreement nor the consummation of the transactions contemplated hereby nor
compliance by BTI with any of the provisions hereof will:
(A) Conflict with or result in a breach of any provision of its
Articles of Incorporation or By-Laws;
(B) Result in a default (or give rise to any right of termination,
cancellation, or acceleration) under any of the terms, conditions or provisions
of any note,
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bond, mortgage, indenture, license, agreement or other instrument or
obligation to which BTI is a party, or by which any of its properties or
assets may be bound except for such default (or right of termination,
cancellation, or acceleration) as to which requisite waivers or consents
shall either have been obtained by BTI prior to the Closing Date or the
obtaining of which shall have been waived by XYX and Newco; or
(C) Violate any order, writ, injunction, decree or, to BTI's Best
Knowledge, any statute, rule or regulation applicable to BTI or any of its
properties or assets. No consent or approval by any Governmental Authority is
required in connection with the execution and delivery by BTI of this Agreement
or the consummation by BTI of the transactions contemplated hereby.
6.6 FINANCIAL STATEMENTS. (A) As promptly as possible after requested by
XYX and, in any event, within 90 days of such request, the following statements
shall be provided to XYX by BTI and attached to this Agreement as Exhibit 6.6:
audited financial statements (the "Financial Statements") of BTI accompanied by
a report of its independent certified public accountants containing audited
balance sheets for the period beginning at inception and ending with the end of
BTI's most recent fiscal year (the "Financial Statement Date"), together with
statements of operations from inception to and including the Financial Statement
Date.
(B) Such financial statements, together with and subject to the
disclosures and notes thereto, if any, shall (i) be in accordance with the books
and records of BTI; (ii) present fairly the financial condition of BTI as of the
Financial Statement Date; (iii) present fairly the results of operations for the
periods covered by such statements; (iv) have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis; and (v)
include all adjustments (consisting of only normal recurring accruals) which are
necessary for a fair presentation of the financial condition of BTI and of the
results of operations of BTI for the periods covered by such statements.
(C) As of the Closing Date, except as disclosed on Exhibit 6.6, BTI
does not have any liabilities or payables (absolute or contingent, known or
unknown) except for liabilities or payables set forth on the foregoing financial
statements or which have not otherwise been disclosed in writing to XYX on or
prior to the Closing Date.
6.7 CAPITALIZATION. The authorized capital stock of BTI consists of:
(i) 5,000,000 shares of Preferred Stock, $.001 par value, none of which are
issued and outstanding, and (ii) 20,000,000 shares of Common Stock, $.001 par
value, of which 11,194,740 shares are issued and outstanding. All issued and
outstanding BTI Shares have been duly authorized and validly issued and are
fully paid and non-assessable. The BTI Convertible Debt is convertible into the
aggregate number of BTI Shares of Common Stock set forth on Exhibit 4.1(C),
which BTI Convertible Debt is held by the holders set forth on Exhibit 4.1(C).
The BTI Rights are exercisable to purchase the aggregate number of BTI Shares
set forth on Exhibit 4.1(D) hereof, which BTI Rights are owned of record by the
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holders set forth on Exhibit 4.1(D). Except for the BTI Convertible Debt and
the BTI Rights, there are no other outstanding rights, options, warrants,
subscriptions, calls, convertible securities or agreement of any character or
nature under which BTI is or may become obligated to issue any shares of its
capital stock of any kind, other than those shares indicated in this Section as
presently outstanding and shares issuable in accordance with the terms of this
Agreement including, without limitation, Section 9.3.
6.8 TAX MATTERS.
(A) Except as disclosed on Exhibit 6.8, BTI has properly and timely
filed all Tax Returns that it was required to file. All such Tax Returns are
true, correct and complete in all material respects. All Taxes required to be
shown on such Tax Returns or otherwise due have been timely paid or reserved
for. BTI has not received any extension of time within which to file any Tax
Return. No claim has ever been made by an authority in a jurisdiction where BTI
does not file Tax Returns that it is or may be subject to taxation by that
jurisdiction. There are no liens, encumbrances or other security interests on
any of the assets of BTI that arose in connection with any failure (or alleged
failure) to pay any Tax. Newco will not have any income reportable for a period
ending after the Closing Date that is attributable to a transaction involving
BTI occurring outside the ordinary course of business in, or a change in
accounting method made for, a period of BTI ending on or prior to the Closing
Date which resulted in a deferred reporting of income from such transaction or
from such change in accounting method.
(B) BTI has withheld and paid in a timely manner all Taxes required
to have been withheld and paid in connection with amounts paid or owing to any
employee, independent contractor, creditor, stockholder, or other third party.
(C) There is no dispute or claim concerning any Tax liability of BTI
either claimed or raised by any authority in writing or as to which BTI (or
employees or officers of BTI responsible for Tax matters) has knowledge based
upon personal contact with any agent of such authority. BTI has provided XYX or
Newco with true and complete copies of all federal, state, local and foreign Tax
Returns as well as any correspondence and agreements with the IRS or such state,
local or foreign authorities for the jurisdictions in which such returns are
filed for all periods for which assessments are not barred by operation of the
relevant statute of limitations.
(D) BTI has not waived any statute of limitations in respect of Taxes
or agreed to any extension of time with respect to a Tax to which BTI may be
subject.
(E) To the best knowledge of BTI, the unpaid Taxes of BTI shall not
exceed the reserve for Tax liability (determined in accordance with generally
accepted accounting principles applied on a basis consistent with that of prior
years) set forth on the face of the financial statements described in Exhibit
6.6. To the best knowledge of BTI, BTI does not have nor will have any
liability, whether direct, indirect, fixed or contingent,
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for any Taxes in excess of the reserves for Taxes established on the
financial statements described in Exhibit 6.6 as of the date hereof, or, as
to liabilities accruing thereafter, as of the Closing Date, subject to normal
year-end adjustments, which will not be material.
(F) BTI is not a party to any agreement which would require it to
make any payment which would constitute a "parachute payment" for purposes of
Section 280G and 4999 of the Code. BTI has disclosed on its federal income Tax
Returns all positions taken therein that could give rise to a substantial
understatement of federal income Tax within the meaning of Section 6662 of the
Code. BTI is not a party to any Tax allocation or sharing agreement. BTI has
not been a member of an affiliated group within the meaning of Section 1504(a)
of the Code or any similar group defined under a similar provision of state,
local or foreign law filing a consolidated federal income Tax Return and has no
liability for the Taxes of any person under Treas. Reg. Section 1.1502-6 (or any
similar provision of state, local, or foreign law), as a transferee or
successor, by contract, or otherwise. BTI is not a "real property holding
company" within the meaning of Sections 897(c)(2) and 897(c)(1)(A)(ii) of the
Code. None of the Selling Parties is a "foreign person" within the meaning of
Section 1445 of the Code.
(G) To the Best Knowledge of BTI as of the date of this Agreement, no
BTI shareholder has any present plan, intention, or arrangement to dispose of
XYX Shares or XYX Rights received in the Merger. BTI will promptly notify XYX
upon obtaining knowledge to the effect that any BTI shareholder has such a plan,
intention or arrangement.
(H) BTI shall in good faith provide XYX or Newco with such
cooperation and information as XYX or Newco may request of them in filing any
Tax Return, amended Tax Return or claim for refund of any Tax, determining a
liability for Taxes or a right to a refund of Taxes, or participating in or
conducting any audit or other proceeding in respect of Taxes. Such cooperation
and information shall include providing copies of relevant Tax Returns in their
possession (and not already in the possession of the XYX or Newco) or portions
thereof, together with accompanying schedules, related work papers and documents
relating to rulings or other determinations by tax authorities. BTI shall
provide any explanations of any documents or information provided hereunder.
(I) Within ten (10) business days of the date of this Agreement, BTI
will furnish XYX with all BTI tax returns filed for the past three years,
together with all correspondence relating to proposed tax adjustments.
6.9 NO ACTIONS, PROCEEDINGS, ETC. There is no action or proceeding
(whether or not purportedly on behalf of BTI) pending or to its knowledge
threatened by or against BTI which might result in any material adverse change
in the condition, financial or otherwise, of BTI's business or assets. No
order, writ or injunction or decree has been issued by, or requested of any
court or Governmental Agency which does nor may result in any material adverse
change in the BTI's assets or properties or in the financial condition or the
business of the BTI. BTI is not liable for damages to any employee or former
employee as a result
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of any violation of any state, federal or foreign laws directly or indirectly
relating to such employee or former employee.
6.10 POST BALANCE SHEET CHANGES. As of the Closing Date, except as set
forth on the attached Exhibit 6.10, or as contemplated by this Agreement or the
Budget as defined in Section 9.2 or otherwise approved by XYX, since the
Financial Statement Date, the Corporation has not (a) issued, bought, redeemed
or entered into any agreements, commitments or obligations to sell, buy or
redeem any shares of its capital stock; (b) incurred any obligation or liability
(absolute or contingent), other than current liabilities incurred, and
obligations under contracts entered into, in the ordinary course of business;
(c) discharged or satisfied any lien or encumbrance or paid any obligation or
liability (absolute or contingent), other than current liabilities incurred in
the ordinary course of business; (d) mortgaged, pledged or subjected to lien
charges, or other encumbrance any of its assets, other than the lien of current
or real property taxes not yet due and payable; (e) waived any rights of
substantial value, whether or not in the ordinary course of business; (f)
suffered any damage, destruction or loss, whether or not covered by insurance,
materially and adversely affecting its assets or its business; (g) made or
suffered any amendment or termination of any material contract or any agreement
which adversely affects its business; (h) received notice or had knowledge of
any labor trouble other than routine grievance matters, none of which is
material; (i) increased the salaries or other compensation of any of its
directors, officers or employees or made any increase in other benefits to which
employees may be entitled, other than employee salary increases made in the
ordinary course of business and reflected on an Exhibit hereto; (j) sold,
transferred or otherwise disposed of any of its assets, other than in the
ordinary course of business; (k) declared or made any distribution or payments
to any of its shareholders, officers or employees, other than wages and salaries
made to employees in the ordinary course of business; (l) revalued any of its
assets; or (m) entered into any transactions not in the ordinary course of
business.
6.11 NO BREACHES. Except as disclosed in Exhibit 6.11 hereto, BTI is not
in violation of, and the consummation of the transactions contemplated hereby do
not and will not result in any material breach of, any of the terms or
conditions of any mortgage, bond, indenture, agreement, contract, license or
other instrument or obligation to which the BTI is a party or by which its
assets are bound; nor will the consummation of the transactions contemplated
hereby cause BTI to violate any statute, regulation, judgment, writ, injunction
or decree of any court, threatened or entered in a proceeding or action in which
the BTI is, was or may be bound or to which any of BTI's assets are subject.
6.12 CONDITION OF BTI'S ASSETS. Except with respect to any asset which is
subject to Sections 6.13, 6.14 or 6.15 or as disclosed on Exhibit 6.12, BTI's
assets are currently in good and usable condition and there are no defects or
other conditions which, in the aggregate, materially and adversely affect the
operation or values of such assets taken as a whole. Except as disclosed on
Exhibit 6.12, no person other than BTI (including any officer or employee of
BTI) has any proprietary interest in any know-how or other
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intangible assets used by BTI in the conduct of its business. BTI does not
currently market any products for sale.
6.13 INVENTORY. As of the Financial Statements Date, all inventories
reflected in BTI's Financial Statements in excess of the reserves for excess or
obsolete inventories in the Financial Statements shall be stated at the lowest
of cost, replacement cost or market, and, as so stated, shall be in good
condition and usable or salable in the category in which they are inventoried,
in the ordinary course of business of BTI, without discounts other than normal
trade discounts regularly offered by BTI, for prompt payment or quantity
purchase.
6.14 ACCOUNTS RECEIVABLE. As of the Financial Statements Date, the
accounts receivable of BTI, if any, as set forth on the line item therefor in
the Financial Statements shall represent valid and enforceable obligations due
to BTI and are fully collectible in the ordinary course of Seller's business,
except to the extent of the appropriate reserves for bad debts on accounts
receivable as set forth on the books of the Company. As of the Financial
Statements Date and the Closing Date, BTI shall not have received any notice of
any material counterclaim or set-off with respect to such accounts receivable,
except to the extent of the appropriate reserves.
6.15 REGISTERED RIGHTS AND PROPRIETARY INFORMATION. (A) Exhibit 6.15
hereto contains a true and complete list of all patents, letters patent and
patent applications, service marks, trademark and service mark registrations and
applications, copyright, copyright registrations and applications, grants of
licenses and rights to BTI with respect to the foregoing, both domestic and
foreign, claimed by the BTI or used or proposed to be used by BTI in the conduct
of its business (collectively herein, "BTI Registered Rights") (BTI's trade
secret, know-how, process, formula, discovery, development, research, design,
technique, customer and supplier list, contracts, product development plans,
product development concepts, author contracts, marketing and purchasing
strategy, invention, and any other matter required for, incident to, or related
to the conduct of its business, whether or not protected by Registered Rights,
are herein referred to as "Proprietary Information"). Except as described in
Exhibit 6.15 hereto, BTI is not obligated or under any liability whatever to
make any payments by way of royalties, fees or otherwise to any owner or
licensor of, or other claimant to, any BTI Registered Right or BTI Proprietary
Information with respect to the use thereof in the conduct of its business or
otherwise.
(B) Except as described in Exhibit 6.15 hereto, BTI owns and has the
unrestricted right to use the BTI Registered Rights and BTI Proprietary
Information required for or incident to the design, development, manufacture,
operation, sale and use of all products and services sold or rendered or
proposed to be sold or rendered by BTI or relating to the conduct or proposed
conduct of its business free and clear of any right, title, interest, equity or
claim of others. BTI has taken all necessary steps (including without
limitation entering into appropriate confidentiality, assignment of rights and
non-competition agreements with all officers, directors, employees and
consultants of BTI and
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others with access to or knowledge of the BTI Proprietary Information) to
safeguard and maintain the secrecy and confidentiality of, and its
proprietary rights in, the BTI Proprietary Information and all related
documentation and intellectual property rights therein necessary for the
conduct or proposed conduct of its business.
(C) BTI has not sold, transferred, assigned, licensed or subjected to
any right, lien, encumbrance or claim of others, any BTI Proprietary
Information, including without limitation any BTI Registered Right, or any
interest therein, related to or required for the design, development,
manufacture, operation, sale or use of any product or service currently under
development or manufactured, or proposed to be developed, sold or manufactured,
by it. Except as described in Exhibit 6.15 hereto, there are no claims or
demands of any person pertaining to, or any proceedings that are pending or
threatened, which challenge the rights of BTI in respect of any BTI Proprietary
Information used in the conduct of its business.
(D) Except as described in Exhibit 6.15 hereto, BTI owns and on the
Closing Date shall own, has and shall have, holds and shall hold, exclusively
all right, title and interest in the BTI Registered Rights, free and clear of
all liens, encumbrances, restrictions, claims and equities of any kind
whatsoever, has and shall have the exclusive right to use, sell, license or
dispose of, and has and shall have the exclusive right to bring action for the
infringement of the BTI Registered Rights and the BTI Proprietary Information.
The marketing, promotion, distribution or sale by BTI of any products or
interests subject to the BTI Registered Rights or making use of BTI Proprietary
Information shall not constitute an infringement of any patent, copyright,
trademark, service mark or misappropriation or violation of any other party's
proprietary rights or a violation of any license or agreement by BTI. Except as
described in Exhibit 6.15 hereto, to the knowledge of BTI after due inquiry no
facts or circumstances exist that could result in the invalidation of any of the
BTI Registered Rights.
6.16 CHANGES IN SUPPLIERS AND CUSTOMERS. BTI is not aware of any fact
which indicates that any of the suppliers supplying products, components or
materials to BTI intends to cease selling such products to BTI nor is BTI aware
of any fact which indicates that any major customer of BTI intends to terminate
its business relations with BTI.
6.17 NO LIENS OR ENCUMBRANCES. BTI has good and marketable title to
all of the property and assets, tangible and intangible, employed in the
operations of its business, free of any material mortgages, security interests,
pledges, easements or encumbrances of any kind whatsoever except as set forth on
the attached Exhibit 6.17 and except for such property and assets as may be
leased by BTI.
6.18 EMPLOYEE MATTERS. Exhibit 6.18 attached hereto contains a true,
complete and accurate list of all employees of BTI and the remuneration of each
(including wages, salaries and fringe benefits). BTI has no information or
facts indicating that any employee listed on Exhibit 6.18 intends to terminate
his/her employment relationship with BTI prior
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or subsequent to the Closing Date, except as may be required by this
Agreement. Except as specifically described on Exhibit 6.18, neither BTI nor
any entity which is affiliated with BTI under Section 414(b), (c), (m) or (o)
of the Code or Section 4001 of ERISA, has ever maintained, sponsored or
contributed to any employee benefit plan, agreement, commitment, practice or
arrangement of any type (including any "employee benefit plan) as defined
under Section 3(3) of ERISA). Except as set forth in Exhibit 6.10, BTI shall
not have made any commitment or agreements to increase the wages or modify
the conditions or terms of employment of any of the employees of BTI used in
connection with its business, and between the date of this Agreement and the
Closing Date, BTI will not make any agreement to increase the wages or modify
the conditions or terms of employment of any of the employees of BTI used in
the conduct of its business, without the prior written consent of all parties
hereto.
6.19 LEGAL PROCEEDINGS AND COMPLIANCE WITH LAW. BTI has not received
notice of any legal, administrative, arbitration or other proceeding or
governmental investigation pending or threatened (including those relating to
the health, safety, employment of labor, or protection of the environment)
pertaining to BTI which might result in the aggregate in money damages payable
by BTI in excess of insurance coverage or which might result in a permanent
injunction against BTI. BTI has substantially complied with, and is not in
default in any respect under any laws, ordinances, requirements, regulations, or
orders applicable to the business of BTI, the violation of which might
materially and adversely affect it. BTI is not a party to any agreement or
instrument, nor is it subject to any certificate of incorporation or other
corporate restriction or any judgment, order, writ, injunction, decree, rule,
regulation, code or ordinance which materially and adversely affects, or might
reasonably be expected materially and adversely to affect the business,
operations, prospects, property, assets or condition, financial or otherwise, of
BTI. Any real property owned or operated by BTI currently or in the past does
not contain hazardous materials and has never been the subject of any activities
representing a violation or alleged violation of any environmental Legal
Requirements or Governmental Requirement.
6.20 CONTRACT SCHEDULES. Attached as Exhibit 6.20 hereto are an accurate
list of the following:
(A) All contracts, leases, agreements, covenants, licenses,
instruments or commitments of BTI pertaining to the business of BTI calling for
the payment of $5,000 or more or which is otherwise material to the business of
BTI, including, without limitation, the following:
(i) Executory contracts for the sale of products and services;
(ii) Executory contracts for the purchase, sale or lease of any
assets;
(iii) Management or consulting contracts;
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(iv) Patent, trademark and copyright applications, registrations
or licenses, and know-how, intellectual property and trade secret agreements or
other licenses;
(v) Note agreements, loan agreements, indentures and the like,
other than those entered into and executed in the ordinary course of business;
(vi) All sales, agency, distributorship or franchise agreements;
and
(vii) Any other contracts not in the ordinary course of
business.
(B) All labor contracts, employment agreements and collective
bargaining agreements to which BTI is a party.
(C) All instruments evidencing any liens or security interest
securing any indebtedness of BTI covering any asset of BTI.
(D) All profit sharing, pension, stock option, severance pay,
retirement, bonus, deferred compensation, group life and health insurance or
other employee benefit plans, agreements, arrangements or commitments of any
nature whatsoever, whether or not legally binding, and all agreements with any
present or former officer, director or shareholder of the Corporation.
(E) Any and all documents, instruments and other writings not listed
in any other schedule hereto which are material to the business operations of
BTI.
All of such contracts, agreements, leases, licenses, plans,
arrangements and commitments and all other such items set forth above are valid,
binding and in full force and effect in accordance with their terms and
conditions, except as the enforceability thereof may be limited by bankruptcy,
insolvency, moratorium, fraudulent transfer, reorganization or other similar
laws affecting the enforcement of contracts generally, and there is no existing
material default thereunder or breach thereof by BTI, or to BTI's knowledge by
any party to such contracts, or any conditions which, with the passage of time
or the giving of notice or both, might constitute such a default by BTI or by
any other party to the contracts.
6.21 INSURANCE. BTI maintains in full force and effect insurance coverage
on its assets and business in such amounts and against such risks and losses as
set forth in Exhibit 6.21.
6.22 DISCLOSURE OF INFORMATION. That all statements, data and other
written information provided by BTI to any party hereto as well as their
respective consultants and representatives have been accurate copies or true
originals, and that, to its Best Knowledge,
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(i) there exists no material information concerning BTI which has been
requested but not been disclosed to or made available to the other parties
and their representatives or consultants and which would be material to a
decision to consummate the transactions provided for in this Agreement and
(ii) in the aggregate, such information does not contain any untrue statement
of a material fact or omit to state a material fact necessary in order to
make the statements made in them, in light of the circumstances under which
they are made, not misleading.
6.23 Exhibit 6.23 attached hereto contains a list of the stockholders of
BTI which is substantially and materially accurate as at the date of this
Agreement. Until the Effective Time, BTI undertakes to supply immediately XYX
with a revised Exhibit 6.23 if at any time BTI becomes aware of any additional
information regarding the completeness of the lists of stockholders, convertible
debt holders, and option and warrant holders and their respective holdings,
including any potential or threatened claim of an Ownership Interest in BTI
attached hereto.
7. COVENANTS OF BTI
7. CONDUCT OF BUSINESS PENDING THE MERGER.
7.1. CONDUCT OF BUSINESS BY BTI PENDING THE MERGER. Prior to the
Effective Time, unless required by this Agreement, the Budget or with the
express consent of XYX, such consent not to be unreasonably withheld (it being
understood and agreed that it shall not be unreasonable for XYX to withhold such
consent if it in good faith reasonably believes that any such actions or
inactions will materially and adversely affect BTI or the Merger):
(A) BTI shall use its reasonable best efforts to carry on its
business in the usual, regular and ordinary course in substantially the same
manner as heretofore conducted, and shall use its reasonable best efforts to
preserve intact its present business organization, maintain its current licenses
and permits, keep available the services of its present officers and key
employees and preserve its relationships with customers, suppliers and others
having business dealings with it to the end that its goodwill and on-going
business shall be unimpaired at the Effective Time, except such impairment as
would not have a material adverse effect on BTI. BTI shall use its reasonable
best efforts to, (i) maintain existing insurance coverages and its books,
accounts and records in the usual manner consistent with prior practices; (ii)
comply in all material respects with all laws, ordinances and regulations of
Governmental Authorities applicable to BTI; (iii) maintain and keep its
properties and equipment in good repair, working order and condition, normal
wear and tear excepted, and (iv) perform in all material respects its
obligations under all contracts and commitments to which it is a party or by
which it is bound;
(B) Except as required or permitted by this Agreement, or unless XYX
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shall otherwise agree in writing, BTI shall not and shall not propose to (i)
amend its Certificate of Incorporation or By-Laws or except as required by court
order hold any meeting of BTI stockholders or (other than in opposition to a
solicitation by a third party other than XYX); solicit any stockholder action by
written consent, (ii) split, combine or reclassify its outstanding capital stock
or issue or authorize or propose the issuance of any other securities in respect
of, in lieu of or in substitution for shares of capital stock of the Company, or
declare, set aside or pay any dividend or other distribution payable in cash,
stock or property or (iii) directly or indirectly redeem, purchase or otherwise
acquire or agree to redeem, purchase or otherwise acquire any shares of BTI
common stock, or except as provided herein any BTI Rights;
(C) BTI shall not, except as required or permitted by this Agreement
including, without limitation, as contemplated in Section 9.1 or Section 9.2, or
unless XYX shall otherwise agree in writing, (i) issue, deliver or sell or agree
to issue, deliver or sell any additional shares of, or rights of any kind to
acquire any shares of, its capital stock of any class or incur any liability in
respect of (a) borrowed money, (b) capitalized lease obligations, (c) deferred
purchase price of property or services (other than trade payables in the
ordinary course) and (d) guarantees of any of the foregoing ("Indebtedness")
(other than pursuant to existing lines of credit for use in the ordinary course
of business and consistent with past practices) or any option, rights or
warrants to acquire, or securities convertible into, shares of capital stock;
(ii) acquire, lease or dispose of any capital assets or any other assets other
than in the ordinary course of business; (iii) incur additional Indebtedness or
encumber or grant a security interest in any asset or enter into any other
transaction other than in each case in the ordinary course of business; (iv)
acquire or agree to acquire by merging or consolidating with, or by purchasing a
substantial equity interest in or by any other manner, any business or any
corporation, partnership, association or other business organization or division
thereof, except that the Company may create new wholly owned subsidiaries in the
ordinary course of business; or (v) enter into any contract, agreement,
commitment or arrangement with respect to any of the foregoing;
(D) BTI shall not (i) adopt, enter into, terminate or amend any
bonus, profit sharing, compensation, severance, termination, stock option,
pension, retirement, deferred compensation, employment or other BTI Plan,
agreement, trust, fund or other arrangement for the benefit or welfare of any
director, officer or current or former employee, (ii) increase in any manner the
compensation or fringe benefits of any director or officer or any employee
(except, with respect to employees, for normal increases in the ordinary course
of business that are consistent with past practice and that, in the aggregate,
do not result in a material increase in benefits or compensation expense to BTI
relative to the level in effect prior to such amendment), (iii) pay any benefit
not provided under any existing plan or arrangement, (iv) grant any awards under
any bonus, incentive, performance or other compensation plan or arrangement or
BTI Plan (including, without limitation, the grant of stock options, stock
appreciation rights, stock based or stock related awards, performance units or
restricted stock, or the removal of existing restrictions in any benefit plans
or agreements or awards may thereunder), (v) take any action to fund or in
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any other way secure the payment of compensation or benefits under any
employee plan, agreement, contract or arrangement BTI Plan other than in the
ordinary course of business consistent with past practice or (vi) adopt,
enter into, amend or terminate any contract, agreement, commitment or
arrangement to do any of the foregoing, provided, however, that nothing
contained herein shall prevent BTI from paying any bonus to or increasing the
compensation of any employee in accordance with the terms of any employment
agreement for such employee that was provided to XYX prior to the date
hereof; and
(E) Between the date hereof and the Effective Time, (i) BTI shall
provide to XYX within 25 days after the end of each month such financial
statements as are customarily prepared by BTI on a monthly basis; (ii) BTI shall
consult with on a regular basis with respect to all operating decisions with
could be expected to result in a material change in the business of BTI as
presently operated or which are not in the ordinary course of business; and
(iii) BTI shall permit representatives of XYX and prospective providers of
financing to have full and unrestricted access to such information, documents,
facilities and personnel as they may from time to time request.
7.2 NO SOLICITATION. (A) Except in connection with the transactions
contemplated by this Agreement, BTI shall not, nor shall it authorize or permit
any officer, director or employee of or any investment banker, attorney or other
advisor or representative of, BTI to, (i) solicit, initiate or encourage the
submission of, any takeover proposal, (ii) enter into any agreement with respect
to any takeover proposal or (iii) participate in any discussions or negotiations
regarding, or furnish to any person any information with respect to, or take any
other action to facilitate any inquiries or the making of any proposal that
constitutes, or may reasonably be expected to lead to, any takeover proposal.
Without limiting the foregoing, it is understood that any violation of the
restrictions set forth in the preceding sentence by any executive officer of BTI
or any investment banker, attorney or other advisor or representatives of BTI or
any of its subsidiaries or otherwise, shall be deemed to be a breach of this
Section by BTI. For purposes of this Agreement, "takeover proposal" means any
proposal for a merger, consolidation or reorganization or other business
combination involving BTI or any proposal or offer to acquire in any manner,
directly or indirectly, an equity interest in, any voting securities of, or
options, rights, warrants or other interests convertible or exercisable for or
into such voting securities, or a substantial or material portion of the assets
or business of BTI, other than the transactions contemplated by this Agreement.
(B) Except upon a material breach of this Agreement by XYX and or
Newco or following termination or expiration hereof, except for action permitted
or contemplated by this Agreement, including a party's right to terminate this
Agreement under certain circumstances, neither the Board of Directors of BTI nor
any committee thereof shall (i) withdraw or modify, or propose to withdraw or
modify, in a manner adverse to XYX and or Newco, the approval or recommendation
by such Board of Directors of any such committee of this Agreement or the Merger
or (ii) approve or recommend, or propose to approve or recommend, any takeover
proposal.
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(C) BTI promptly shall advise XYX and Newco orally and in writing of
any takeover proposal or any inquiry with respect to or which could lead to any
takeover proposal and the identity of the person making any such takeover
proposal or inquiry. BTI will keep XYX and Newco fully informed of the status
and details of any such takeover proposal or inquiry.
(D) The provisions of this Section 7.2 shall not be construed to
prevent any investment banker, attorney or other advisor or representative of
BTI to engage in discussions with third parties in the ordinary course of
business with respect to transactions not involving BTI.
7.3 BTI DEBT MODIFICATION. Notwithstanding any provision of this
Agreement to the contrary but subject to the participation of XYX, BTI shall
have the right prior to the Closing Date to enter into agreements to increase,
modify, refinance or otherwise restructure its current long-term and short-term
debt upon such terms and conditions as BTI and its advisors may deem necessary
or advisable, including the issuance of warrants, options or equity securities
in connection therewith; provided, however, the taxation consequences of any
such agreement or restructuring is covered by BTI's reserves.
7.4 BTI SHAREHOLDER APPROVAL. As promptly as practical after the date
hereof and, in any event, on or before June 30, 1996, BTI shall use reasonable
efforts to obtain the approval of this Agreement and the transactions
contemplated hereby, and shall obtain and deliver to XYX Investment
Representation, Registration Rights and Proxy Agreements from the holders of in
excess of 50% of the issued and outstanding shares of BTI voting stock.
Additionally, on or before July 30, 1996, BTI shall use reasonable efforts to
obtain the approval of the Agreement and the transactions contemplated hereby
and shall obtain and deliver to XYX Investment Representation, Registration
Rights and Proxy Agreements from the holders of 75% of the issued and
outstanding shares of BTI voting stock, and on or before August 31, 1996, BTI
shall obtain such approvals and shall obtain and deliver to XYX such Investment
Representation, Registration Rights and Proxy Agreements from the holders of 90%
of the issued and outstanding shares of BTI voting stock. In any event, BTI
shall use its reasonable efforts to obtain approvals and such Investment
Representation, Registration Rights and Proxy Agreements from all of the holders
of BTI Common Stock on or before August 31, 1996.
8. REPRESENTATIONS AND WARRANTIES OF XYX AND NEWCO
Each of XYX and Newco hereby represents and warrants to BTI as follows:
8.1 ORGANIZATION AND STANDING. Each of XYX and Newco is a corporation
duly organized, validly existing and in good standing under the law of the
jurisdiction of its incorporation.
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8.2 AUTHORITY, EXECUTION, DUE DELIVERY, NO CONFLICTS, ETC. XYX and Newco
have full corporate power and authority to execute and deliver this Agreement,
and the other agreements and instruments to be executed and delivered by XYX and
Newco pursuant hereto (including the issuance of the shares of XYX Common Stock
comprising the Purchase Price), subject to the approval by the shareholders of
XYX to consummate this Agreement and the transactions contemplated hereby and
thereby. All corporate acts and other proceedings required to be taken by or on
the part of XYX and Newco, to authorize such execution, delivery and
consummation, have been or will be duly and properly taken as of the Closing.
This Agreement has been duly executed and delivered by XYX and Newco and
constitutes, and such other agreements and instruments, such as the Agreement,
when duly executed and delivered by XYX and Newco will constitute, legal, valid
and binding obligations of XYX and Newco enforceable in accordance with their
respective terms except as such enforceability may be limited by applicable
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium or other
laws or equitable principles from time to time in effect relating to or
affecting the rights creditors generally. The execution and delivery by XYX and
Newco of this Agreement and the execution and delivery by XYX and Newco of such
other agreements and instruments, such as the Agreements, and consummation by
the XYX and Newco of the transactions contemplated hereby and thereby (including
the issuance of the shares of the XYX Common Stock comprising the Purchase
Price) will not violate any law, or conflict with, result in any breach of,
constitute a default (or an event which with notice or lapse of time or both
would become a default) under, or result in the creation of a lien or
encumbrance on any of the properties or assets of XYX and Newco pursuant to the
certificate of incorporation or by-laws of XYX and Newco, or any indenture,
mortgage, lease, agreement or other instrument to which XYX and Newco are
parties or by which XYX and Newco or their properties or assets, are bound.
Assuming compliance with State blue sky laws and the Securities Act, and filing
of an appropriate certificate of merger in accordance with the DGCL, to the best
knowledge of XYX and Newco, no approval, authorization, consent or other order
or action of or filing with any court, administrative agency or other
governmental authority in the United States of America is required for the
execution and delivery by XYX and Newco of this Agreement and the execution and
delivery by XYX and Newco of such other agreements and instruments, such as the
Agreement, or the consummation by XYX and Newco of each of the transactions
contemplated hereby or thereby (including the issuance of the shares of the XYX
Common Stock). Upon the issuance and delivery of the XYX Shares and the XYX
Common Stock to be issued upon exercise of the XYX Rights, the XYX Shares and
such XYX Common Stock will be validly issued fully paid and nonassessable.
8.3 COMPLIANCE WITH REPORTING REQUIREMENTS. XYX represents, warrants and
agrees that, as of the date of Closing, XYX has filed all forms, reports and
documents with the Securities and Exchange Commission (the "Commission") and the
Exchange (as defined in Section 9 herein) required to be filed by it pursuant to
the Securities Act and the Exchange Act, including, without limitation, all
reporting requirements of Section 13(a) of
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the Exchange Act, the rules and regulations of the Commission and the rules
of Exchange. The reports filed with the Commission and/or Exchange, to XYX's
Best Knowledge, do not, and did not as of their respective dates, contain any
untrue statement of a material fact or omit to state any 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.
8.4 CAPITALIZATION. (A) The authorized capital stock of XYX consists of
(i) 30,000,000 shares of Common Stock, $.02 par value, of which 8,088,529 shares
are issued and outstanding, and (ii) 300,000 shares of Preferred Stock, $25.00
par value, none of which is issued and outstanding.
9. COVENANTS OF XYX
9.1 XYX FUNDING OBLIGATION PENDING THE MERGER. XYX agrees to lend up to
$1,250,000 to BTI to fund BTI's operating expenses (the "Funding Obligation")
pursuant to the budget set forth in Exhibit 9.1 hereto (the "Budget"), of which
$156,258.69 (the "Pre-Signing Sum") has already been advanced to BTI by XYX.
XYX acknowledges and agrees that if at any time prior to delivery of the Closing
Notice a transaction or series of transactions occurs in which any Person or
Persons provides an unsecured loan to BTI, which transaction or series of
transactions may include the issuance of equity to such Person, in a proportion
and on other terms no less favorable to BTI than those of BTI's private
placement transactions effected on or about October 20, 1995, November 22, 1995
and January 16, 1996, and if the terms of such loan or loans shall provide, the
net proceeds thereof to BTI shall be used to promptly repay the Pre-Signing Sum
to XYX, in which case the amount of the Funding Obligation which has not yet
been lent by XYX pursuant to this Section 9.1 shall be increased by the amount
repaid to XYX. XYX will not be obligated to provide loans to fund expenses
outside the scope of the Budget, or in excess of $1,250,000, unless approved in
advance by XYX and solely at the discretion of XYX (the sum of (i) the Funding
Obligation plus (ii) any funding provided by XYX in excess of the Funding
Obligation, excluding any repayment of indebtedness under Section 9.2 herein,
shall be called the "Total Funding" for the purposes of this Agreement). Any
purchases, contractual obligations, and/or the incurring of any other
liabilities by BTI which are subject to the Funding Obligation will be subject
to XYX's approval. Disbursements for approved expenses and liabilities of BTI
will be made directly by XYX. Upon the request of BTI but subject to the
consent of XYX, which consent will not be unreasonably withheld, XYX will fund
expenses for specific line items included in the Budget beyond the amounts
stated in the Budget for such line item, it being understood that doing so will
be accomplished by a decrease to one or more other line items for the purpose of
ensuring that in no instance shall the amount of the Funding Obligation be
increased.
9.2 REPAYMENT OF INDEBTEDNESS. In addition to the Funding Obligation, XYX
will at the direction of BTI lend to BTI amounts sufficient to allow BTI to
repay (and solely for the purpose of such repayment) certain indebtedness of BTI
(but excluding all
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convertible debt of BTI) set forth in: (a) Exhibit 9.2(A) hereto, in
accordance with the terms of such indebtedness, in the event that XYX
receives net proceeds of at least $2,500,000 from its sale of additional
equity, and (b) Exhibits 9.2(A) and 9.2(B) hereto, in accordance with the
terms of such indebtedness, in the event that XYX receives net proceeds of at
least $5,000,000 from its sale of additional equity; (in each of cases (a)
and (b) above including the gross proceeds of any exercises of new or
previously issued warrants or stock options) during the period beginning on
the date hereof and ending on the Closing Date.
9.3 CONVERTIBLE NOTES. XYX's loans to BTI pursuant to Sections 9.1 and
9.2 shall be evidenced by Convertible Subordinated Notes issued by BTI from time
to time, at the request of XYX, in the form set forth as Exhibit 9.3 hereto (the
"Notes"). The Notes shall, among other things, be convertible into shares of
common stock of BTI, the number of shares so converted shall equal the quotient
obtained by dividing (a) the Total Funding paid by XYX by (b) the "BTI Per Share
Price." The "BTI Per Share Price" shall be equal to the quotient obtained by
dividing (i) the sum of $6,000,000 plus the net proceeds of any additional
equity issuances by BTI during the period beginning on the date hereof and
ending on the date of conversion of the Notes in question, by (ii) the number of
shares of common stock of BTI outstanding immediately prior to such conversion.
XYX may elect to have the Notes converted into shares of common stock of BTI
under the aforementioned formula, but such shares will be canceled in the event
that the Merger is consummated in accordance with this Agreement and will not be
entitled to any of the Merger Consideration.
9.4 TERMINATION. XYX's obligations under Sections 9.1 and 9.2 are subject
to the termination provisions under Section 10.1.
9.5 APPLICATION FOR LISTING APPROVAL. Within 30 business days following
the later of: (i) the date on which the Closing Notice is provided to BTI by
XYX, and (ii) the receipt by XYX from BTI of BTI's draft audited financial
statements for the periods ended as of the Financial Statement Date and pro
forma financial information prepared to give effect to the consummation of the
Merger described herein, at or prior to the Effective Time XYX agrees to use its
best efforts to prepare and file with the American Stock Exchange or NASDAQ as
the case may be (the "Exchange") such applications, notices, reports and other
information as may be reasonably required to obtain the approval by the Exchange
of the additional issuance of XYX's securities following consummation of the
transactions provided for herein. BTI agrees to provide XYX with such
documents, information and other materials as XYX may reasonably request in
connection with effecting such application and to otherwise cooperate with XYX
in its efforts to obtain such the Exchange's approval.
9.6 CONDUCT OF BUSINESS BY XYX PENDING THE MERGER. Prior to the Effective
Time, unless BTI shall otherwise agree in writing except as otherwise required
by this Agreement:
(A) XYX shall, and shall cause its subsidiaries to, use their
reasonable best efforts to preserve their relationships with customers,
suppliers and others having business dealings with them and maintain their
current licenses and permits to the end that their goodwill and on-going
businesses shall be unimpaired at the Effective Time, except
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such impairment as would not have a Material Adverse effect on XYX. XYX
shall, and shall cause its subsidiaries to use their reasonable best efforts
to (i) maintain insurance coverage and its books, accounts and records in the
usual manner consistent with prior practices; (ii) comply in all material
respects with all laws, ordinances and regulations of Governmental
Authorities applicable to XYX and its subsidiaries; (iii) maintain and keep
its properties and equipment in good repair, working order and condition,
ordinary wear and tear excepted; and (iv) perform in all material respects
its obligations under all contracts and commitments to which it is a party or
by which it is bound, in each case other than where the failure to so
maintain, comply or perform, either individually or in the aggregate, would
not result in a material adverse effect on XYX.
(B) XYX shall not take any action that would result in the failure to
maintain the trading of XYX Common Stock on either AMEX or NASDAQ, as the case
may be; provided, however, that it is understood and agreed that after the date
of this Agreement and prior to the Closing Date XYX may, in its sole discretion,
take such actions to delist from AMEX in connection with the initiation of the
quotation of XYX Common Stock on NASDAQ.
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10.TERMINATION
10.1 TERMINATION. This Agreement may be terminated and abandoned solely as
follows:
(A) At any time until the Effective Time by the mutual agreement of
XYX and Newco and BTI.
(B) At any time by XYX upon 90 days prior Notice to BTI, with no
obligation to BTI other than the completion of that part of the Funding
Obligation budgeted for such 90-day period and any other accrued and unperformed
obligations through the date of receipt of such Notice.
(C) If at least an amount in excess of 50% of the issued and
outstanding shares of BTI voting stock have not approved this Agreement and
entered into Investment Representation, Registration Rights and Proxy Agreements
by June 30, 1996, until such time as such approval has been obtained, XYX may
terminate upon Notice to BTI with no further obligation to BTI.
(D) If at least 75% of the issued and outstanding shares of BTI
voting stock have not approved this Agreement and entered into Investment
Representation, Registration Rights and Proxy Agreements by July 30, 1996, until
such time as such approval has been obtained, XYX may terminate upon Notice to
BTI with no further obligation to BTI.
(E) If at least 90% of the issued and outstanding shares of BTI
voting stock have not approved this Agreement and entered into Investment
Representation, Registration Rights and Proxy Agreements by August 31, 1996,
until such time as such approval has been obtained, XYX may terminate upon
Notice to BTI with no further obligation to BTI.
(F) If an "Event of Bankruptcy" occurs, XYX may terminate upon Notice
to BTI with no further obligation to BTI. As used herein, the term "Event of
Bankruptcy" means one or more of the following: (i) the institution by BTI of
proceedings to be adjudged a voluntary bankrupt; (ii) the filing by BTI of a
petition, answer or consent seeking reorganization under any bankruptcy act or
other similar applicable federal or state law; (iii) BTI's consent to the
appointment of a receiver or liquidator or trustee or assignee in bankruptcy or
insolvency of it or its property; (iv) the making by BTI of an assignment for
the benefit of creditors; (v) the entry of a decree or order by a federal
court adjudging BTI bankrupt or insolvent, or approving as properly filed a
petition seeking the reorganization of BTI under any bankruptcy act or other
similar applicable federal or state law; or (vi) the entry of a decree or
order of a court for appointment of a receiver or liquidator or trustee or
assignee in bankruptcy or insolvency of BTI or of its property or for the
winding-up or liquidation of its affairs.
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(G) By any party hereto, if the other party shall have breached any
material representation, warranty or covenant contained in this Agreement and
shall have failed to cure such breach within 10 days following Notice thereof by
the party seeking termination.
(H) By BTI if the Closing Notice shall not have been provided by XYX
to BTI on or before April 30, 1997, such date is extended by the written consent
of BTI.
In the event of any termination pursuant to this Section 10.1, written
notice setting forth the reasons therefor shall forthwith be given by the
terminating party to all of the other parties hereto.
10.2 EFFECT OF TERMINATION. If the Merger is terminated and abandoned as
provided for in this Section 10, this Agreement shall forthwith become wholly
void and of no effect without liability to any party to this Agreement;
provided, however, that no such termination shall terminate or limit the rights
of any such terminating party to enforce any remedy otherwise available for any
breach hereof; provided, however, that Sections 12.1 and 13 hereof shall
continue to apply as set forth herein.
11. INDEMNIFICATION AND REMEDIES FOR BREACH
11.1 SURVIVAL OF REPRESENTATIONS. All representations, warranties,
covenants and agreements made by the parties to this Agreement or pursuant
hereto shall survive the Closing. No warranty or representation shall be deemed
to be waived or otherwise diminished as a result of any due diligence
investigation by the party to whom the warranty or representation was made or as
a result of any constructive knowledge by such party with respect to any facts,
circumstances or claims or by constructive knowledge of such person that any
warranty or representation is false at the time Closing. All claims made by
virtue of such representations, warranties, covenants and agreements shall be
made under, and subject to the limitations set forth in, this Section 11.
11.2 INDEMNIFICATION BY XYX AND NEWCO. XYX and Newco shall defend,
indemnify and hold BTI, its officers, employees, directors, affiliates,
controlling persons, agents, advisors, consultants and other representatives
(all of such persons being deemed to be within the meaning of the term BTI for
purposes of BTI rights and remedies), harmless against and in respect of any
damage, loss, liability, cost or expense, including expert witness fees and
reasonable attorneys' fees and expenses, whether or not recoverable under
applicable state law, resulting or arising from or incurred in connection with:
(A) Any misrepresentation, breach of warranty, or nonfulfillment or
nonperformance of any agreement on the part of XYX and Newco under this
Agreement, or any misrepresentation or omission from any exhibit, schedule,
list, certificate or other
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instrument furnished or to be furnished by it under this Agreement, or any
noncompliance on the part of XYX and Newco with applicable law; and
(B) Any actions, suits, proceedings, damages, assessments, judgments,
costs or expenses incident to the foregoing.
Promptly after the receipt by BTI of notice of any claim asserted by a
third party that may give rise to XYX's and/or Newco's liability to BTI under
this Section, BTI shall give to XYX and Newco written notice of such claim (but
the failure to so give such notice shall not relieve XYX and Newco of any
obligation hereunder unless such failure shall proximately cause actual harm or
material prejudice to XYX and Newco in connection with any such claim), and XYX
and Newco shall be entitled to participate at its own expense in the defense of
any such claim. BTI shall not pay, acknowledge, compromise or settle any such
claim without the written consent of XYX and Newco, unless such payment,
acknowledgment, compromise or settlement results in a full and complete release
and discharge of XYX and Newco from any liability.
11.3 INDEMNIFICATION BY BTI. BTI shall defend, indemnify and hold XYX and
Newco, its officers, employees, directors, affiliates, controlling persons,
partners, shareholders, agents, advisors, consultants and other representatives
(all of such persons being deemed to be within the meaning of the term "XYX and
Newco" for purposes of XYX's and Newco's rights and remedies), harmless against
and in respect of any damage, loss, liability, cost or expense, including expert
witness fees and reasonable attorneys' fees, whether or not recoverable under
applicable state law, resulting or arising from or incurred in connection with:
(A) Any misrepresentation, material breach of warranty, or
nonfulfillment or nonperformance of any material agreement on the part of BTI
under this Agreement, or any misrepresentation or material omission from any
exhibit, schedule, list, certificate or other instrument furnished or to be
furnished by it under this Agreement; and
(B) Any actions, suits, proceedings, damages, assessments, judgments,
costs or expenses incident to the foregoing.
Promptly after the receipt by XYX and/or Newco of notice of any claim
asserted by a third party that may give rise to BTI liability to XYX and/or
Newco under this Section, XYX and/or Newco, as the case may be, shall give to
BTI written notice of such claim (but the failure to so give such notice shall
not relieve BTI of any obligation hereunder unless such failure shall
proximately cause actual harm or material prejudice to BTI in connection with
any such claim) and BTI shall be entitled to participate at its own expense in
the defense of any such claim. XYX or Newco shall not pay, acknowledge,
compromise or settle any such claim without the written consent of BTI, unless
such payment, acknowledgment, compromise or settlement results in a full and
complete release and discharge of BTI from any liability.
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11.4 ADDITIONAL NOTICE. Notwithstanding the provisions of Sections 11.2 or
11.3 above, promptly after the receipt by any party hereto of notice of any
claim asserted by a third party that may give rise to the liability of any party
for which the right to indemnification may be claimed under this Section, such
party shall give to each other party written notice of such claim as soon as
practicable (but the failure to so give such notice shall not relieve any party
of any obligation hereunder unless such failure shall proximately cause actual
harm or material prejudice to any party in connection with any such claim). The
provisions of this Section 11.4 in addition to and not in lieu of the covenants
of the parties contained in Sections 11.2 or 11.3 above.
11.5 DETERMINATION OF DAMAGES AND RELATED MATTERS. Upon the occurrence of
any event which would give rise to a claim by XYX and/or Newco against, or to a
right of defense and indemnity against BTI pursuant to this Section 11, or in
the event that any suit, action, investigation, claim or proceeding is begun,
made or instituted as a result of which BTI may become obligated to XYX and/or
Newco hereunder, XYX and/or Newco, as the case may be, shall give notice to BTI
of the occurrence of such event and shall identify XYX's and/or Newco's choice
of counsel to represent such investigation, claim or proceedings, provided that
the failure of XYX and/or Newco to give notice shall not affect the
indemnification obligations of BTI hereunder. XYX and/or Newco, as the case may
be, (i) shall have the exclusive right to so defend, contest or protect against
such matter utilizing the counsel of XYX's choice (who shall be reasonably
acceptable to a representative of BTI), and (ii) without further notice may set
off or apply against all amounts due BTI hereunder, or their affiliates, under
any instrument or pursuant to any obligation other than an obligation to pay BTI
compensation for services rendered on behalf of XYX and/or Newco, the full
amount for which indemnification hereunder is provided. BTI shall have the
right, but not the obligation, to participate, at its own expense, in the
defense thereof by counsel of their choice.
As XYX and/or Newco incurs expenses for which indemnification
hereunder is provided and after any final judgment or award shall have been
rendered by a court, arbitration board or administrative agency of competent
jurisdiction, and the expiration of the time in which to appeal therefrom, or a
settlement shall have been consummated, XYX and/or Newco shall forward to BTI
notice of any sums due and owing by them pursuant to this Agreement with respect
to such matter and they shall be required to pay all of the sums so due and
owing to XYX and/or Newco by certified or bank cashier's check within 10 days of
such notice.
Upon the occurrence of any event which would give rise to a claim by
BTI against, or to a right of defense and indemnity against, XYX and/or Newco
pursuant to this Section 11, or in the event that any suit, action,
investigation, claim or proceeding is begun, made or instituted as a result of
which XYX and/or Newco may become obligated to BTI hereunder, BTI shall give
notice to XYX and/or Newco of the occurrence of such event and shall identify
their choice of counsel to represent such investigation, claim or
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proceedings, provided that the failure of either or both of them to give
notice shall not affect the indemnification obligations of XYX and/or Newco
hereunder. BTI (i) shall have the exclusive right to so defend, contest or
protect against such matter utilizing the counsel of their choice (who shall
be reasonably acceptable to a representative of XYX and/or Newco), and (ii)
without further notice may set off or apply against all amounts due XYX
and/or Newco hereunder, or their affiliates, under any instrument or pursuant
to any obligation, the full amount for which indemnification hereunder is
provided. XYX and/or Newco shall have the right, but not the obligation, to
participate, at its own expense, in the defense thereof by counsel of its
choice.
As BTI incurs expenses for which indemnification hereunder is provided
and after any final judgment or award shall have been rendered by a court,
arbitration board or administrative agency of competent jurisdiction, and the
expiration of the time in which to appeal therefrom, or a settlement shall have
been consummated, BTI shall forward to XYX and/or Newco notice of any sums due
and owing by it pursuant to this Agreement with respect to such matter and shall
be required to pay all of the sums so due and owing to BTI by certified or bank
cashier's check within 10 days of such notice. XYX and/or Newco shall be
required to pay all of the sums due and owing to BTI within 10 days of such
notice.
11.6 REMEDIES FOR BREACH. In the event of any material breach of any of
the provisions of this Agreement, including but not limited to any breach of any
covenant, warranty or representation made by any party hereto, the breaching or
defaulting party shall be liable pursuant to the provisions of 11.1 or 11.2
above. In the event of any material breach by any party of any provision under
this Agreement, either party may file suit. Nothing contained in this Agreement
shall be deemed to preclude a party to sue for or seek specific performance of
the provisions of this Agreement in the appropriate circumstance. The
provisions of this Section 11 shall survive any termination hereof.
12. NONDISCLOSURE OF CONFIDENTIAL INFORMATION
12.1 NONDISCLOSURE OF CONFIDENTIAL INFORMATION. Each of the parties
hereto recognizes and acknowledges that it has and will have access to
certain nonpublic information of the others which shall be deemed the
"Confidential Information" of the other parties (including, but not limited
to, business plans, costs, trade secrets, licenses, research projects,
profits, markets, sales, customer lists, strategies, plans for future
development, financial information and any other information of a similar
nature) that after the consummation of the transactions contemplated hereby
will be valuable, special and unique property of the parties. Information
received by the other party or its representatives shall not be deemed
Confidential Information and afforded the protections of this Section 12 if,
on the Closing Date, such information has been (i) developed by the receiving
party independently of the disclosing party, (ii) rightfully obtained without
restriction by the receiving party from a third party, provided that the
third party had full
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legal authority to possess and disclose such information, (iii) publicly
available other than through the fault or negligence of the receiving party,
(iv) released without restriction by the disclosing party to anyone,
including the United States government, or (v) properly and lawfully known to
the receiving party at the time of its disclosure, as evidenced by written
documentation conclusively established to have been in the possession of the
receiving party on the date of such disclosure. Each of the parties hereto
agrees that it shall not disclose, and that it shall use its best efforts to
prevent disclosure by any other Person of, any such confidential information
to any Person for any purpose or reason whatsoever, except to authorized
representatives of the parties who agree to be bound by this confidentiality
agreement. Notwithstanding, a party may use and disclose any such
confidential information to the extent that a party may become compelled by
Legal Requirements to disclose any such information; provided, however, that
such party shall use all reasonable efforts and shall have afforded the other
parties the opportunity to obtain an appropriate protective order or other
satisfactory assurance of confidential treatment for any such information
compelled to be disclosed. In the event of termination of this Agreement,
each party shall use all reasonable efforts to cause to be delivered to the
other parties, any documents, work papers and other materials obtained by
such party or on such party's behalf during the conduct of the matters
provided for in this Agreement, whether so obtained before or after the
execution hereof; provided, however, that each of XYX and BTI may retain one
copy of such materials for archival purposes only which copy will only be
used in compliance with this Section 12.1. Each of the parties recognizes
and agrees that violation of any of the agreements contained in this Section
12 will cause irreparable damage or injury to the parties, the exact amount
of which may be impossible to ascertain, and that, for such reason, among
others, the parties shall be entitled to an injunction, without the necessity
of posting bond therefor, restraining any further violation of such
agreements. Such rights to any injunction shall be in addition to, and not
in limitation of, any other rights and remedies the parties may have against
each other. The provisions of this Section 12.1 shall survive any
termination of this Agreement.
12.2 NO PUBLICITY. Until the Closing or the termination of this Agreement
in accordance with its terms, neither XYX nor BTI shall, directly or indirectly,
issue any press release, or make any public statement, concerning the
transactions contemplated by this Agreement without the prior written consent of
XYX (in the case of such a release or statement by BTI) or of BTI (in the case
of such a release or statement by XYX). This Section 12.2 shall not, however,
preclude any party from making any disclosure required by applicable law, and in
the event any party, or any officer, director, employee, agent or representative
of a party, believes that any press release, public statement or other
disclosure is so required, such party will notify and consult with the other
parties with respect thereto as promptly as is practicable under the
circumstances.
12.3 INSIDER TRADING. The parties acknowledge that certain of the
information that they have and will be obtaining in connection with the
transactions contemplated by this Agreement may constitute material non-public
or "inside" information about XYX and that the use or misuse of such
information, might involve serious legal consequences, including,
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without limitation, under the Federal securities laws. The parties will not,
and will impose restrictions designed to cause its affiliates, officers,
directors and employees not to, directly or indirectly, through related
parties or otherwise, purchase, trade, offer, pledge, sell, contract to sell
or to purchase or sell or "short" or "short against the box" (as those terms
are generally understood in the securities markets), or otherwise dispose of
or acquire, any securities of XYX or options in respect of such securities
until after the Closing Date.
13. EXPENSES
Each of the parties will pay all costs and expenses of its performance and
compliance with this Agreement except that the reasonable fees and expenses of
counsel to BTI in connection with this Agreement and the transactions
contemplated hereby performed after the date that XYX provides the Closing
Notice shall be paid at the Effective Time by XYX. Notwithstanding the
foregoing, if the Agreement is not consummated by reason of a default of one of
the parties provided for in Section 10.1(G), then the expenses of each of the
parties in connection with the transaction contemplated herein shall be paid by
such defaulting party. In no event will any party to this Agreement be liable
to any other party for incidental damages, lost profits, income tax
consequences, lost savings or any other consequential damages, even if such
party has been advised of the possibility of such damages, or for punitive
damages, resulting from the breach of any obligation under this Agreement. The
provisions of this Section 13 shall survive any termination hereof.
14. MISCELLANEOUS
14.1 ATTORNEY'S FEES. In any action at law or in equity or in any
arbitration proceeding, for declaratory relief or to enforce any of the
provisions or rights or obligations under this Agreement, the unsuccessful party
to such proceeding, shall pay the successful party or parties all statutorily
recoverable costs, expenses and reasonable attorneys' fees incurred by the
successful party or parties including without limitation costs, expenses, and
fees on any appeals and the enforcement of any award, judgment or settlement
obtained, such costs, expenses and attorneys' fees shall be included as part of
the judgment. The successful party shall be that party who obtained
substantially the relief or remedy sought, whether by judgment, compromise,
settlement or otherwise.
14.2 NO BROKERS. XYX represents and warrants to BTI and BTI represents and
warrants to XYX, neither it nor any party acting on its behalf has incurred any
liability, either express or implied, to any "broker," "finder," financial
advisor, employee or similar person in respect of any of the transactions
contemplated hereby. XYX agrees to indemnify BTI against, and hold it harmless
from, and BTI agrees to indemnify XYX against, and hold it harmless from, any
liability, cost or expense (including, but not limited to, fees and
disbursements of counsel) resulting from any agreement, arrangement or
understanding made by such party with any third party, including employees of
BTI, for
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brokerage, finders' or financial advisory fees or other commissions in
connection with this Agreement or the transactions contemplated hereby. The
provisions of this Section shall survive any termination of this Agreement.
14.3 SURVIVAL AND INCORPORATION OF REPRESENTATIONS. The representations,
warranties, covenants and agreements made herein or in any certificates or
documents executed in connection herewith shall survive the execution and
delivery thereof, and all statements contained in any certificate or other
document delivered by any party hereunder or in connection herewith shall be
deemed to constitute representations and warranties made by that party to this
Agreement.
14.4 INCORPORATION BY REFERENCE. All Exhibits to this Agreement and all
documents delivered pursuant to or referred to in this Agreement are herein
incorporated by reference and made a part hereof.
14.5 PARTIES IN INTEREST. Nothing in this Agreement, whether express or
implied, is intended to, or shall, confer any rights or remedies under, or by
reason of, this Agreement, on any person other than the parties hereto and their
respective and proper successors and assigns and indemnities pursuant to
Section 11. Nothing in this Agreement shall act to relieve or discharge the
obligation or liability of any third persons to any party to this Agreement.
14.6 AMENDMENTS AND WAIVERS. This Agreement may not be amended, nor may
compliance with any term, covenant, agreement, condition or provision set forth
herein be waived (either generally or in a particular instance and either
retroactively or prospectively) unless such amendment or waiver is agreed to in
writing by all parties hereto.
14.7 WAIVER. No waiver of any breach of any one of the agreements, terms,
conditions, or covenants of this Agreement by the parties shall be deemed to
imply or constitute a waiver of any other agreement, term, condition, or
covenant of this Agreement. The failure of any party to insist on strict
performance of any agreement, term, condition, or covenant, herein set forth,
shall not constitute or be construed as a waiver of the rights of either or the
other thereafter to enforce any other default of such agreement, term,
condition, or covenant; neither shall such failure to insist upon strict
performance be deemed sufficient grounds to enable either party hereto to forego
or subvert or otherwise disregard any other agreement, term, condition, or
covenants of this Agreement.
14.8 GOVERNING LAW - CONSTRUCTION. This Agreement, and the rights and
obligations of the respective parties, shall be governed by and construed in
accordance with the laws of the State of New York except to the extent the
corporate law of the State of Delaware is applicable, excluding conflict of law
provisions which would act to apply the laws of another state.
14.9 NOTICES. Any notice, communication, offer, acceptance, request,
consent,
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reply, or advice (herein severally and collectively, for convenience, called
"Notice"), in this Agreement provided or permitted to be given, served, made,
or accepted by any party or person to any other party or parties, person or
persons, hereunder must be in writing, addressed to the party to be notified
at the address set forth below, or such other address as to which one party
notifies the other in writing pursuant to the terms of this Section, and must
be served by (1) telefax or other similar electronic method, or (2)
depositing the same in the United States mail, certified, return receipt
requested and postage paid to the party or parties, person or persons to be
notified or entitled to receive same, or (3) delivering the same in person to
such party.
Notice shall be deemed to have been given immediately when sent by
telefax and confirmed received or other electronic method and seventy-two hours
after being deposited in the United States mail, or when personally delivered in
the manner hereinabove described. Notice provided in any manner not specified
above shall be effective only if and when received by the party or parties,
person or persons to be, or provided to be notified.
All notices, requests, demands and other communications required or
permitted under this Agreement shall be addressed as set forth below:
If XYX or Newco, to: Xytronyx, Inc.
6555 Nancy Ridge Drive, Suite 200
San Diego, CA 92121
Attention: Larry Bymaster
Chief Executive Officer
Fax: 619-550-3985
with a copy to: Donovan Leisure Newton & Irvine
30 Rockefeller Plaza
New York, New York 10112
Attention: Edward F. Cox
Fax: 212-632-3321
If BTI, to: Binary Therapeutics, Inc.
125 Partridge Drive
Westwood, MA 02090
Attention: Dr. Joseph Chang
Chief Executive Officer
Fax: 617-320-8235
Any party receiving a facsimile transmission shall be entitled to rely
upon a facsimile transmission to the same extent as if it were an original. Any
party may alter the address to which communications or copies are to be sent by
giving notice of such change of address in conformity with the provisions of
this Section for the giving of notice.
14.10 FAX/COUNTERPARTS. This Agreement may be executed by telex,
telecopy or other facsimile transmission, and such facsimile transmission shall
be valid and binding to
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the same extent as if it were an original. Further, this Agreement may be
signed in one or more counterparts, all of which when taken together shall
constitute the same documents. For all evidentiary purposes, any one
complete counter set of this Agreement shall be considered an original.
14.11 CAPTIONS. The caption and heading of various sections and
paragraphs of this Agreement are for convenience only and are not to be
construed as defining or limiting, in any way, the scope or intent of the
provisions hereof.
14.12 SEVERABILITY. Wherever there is any conflict between any
provision of this Agreement and any Governmental Requirement or judicial
precedent, the latter shall prevail, but in such event the provisions of this
Agreement thus affected shall be curtailed and limited only to the extent
necessary to bring it within the requirement of the law. In the event that any
part, section, paragraph or clause of this Agreement shall be held by a court of
proper jurisdiction to be invalid or unenforceable, the entire Agreement shall
not fail on account thereof, but the balance of the Agreement shall continue in
full force and effect unless such construction would clearly be contrary to the
intention of the parties or would result in unconscionable injustice.
14.13 GOOD FAITH COOPERATION AND ADDITIONAL DOCUMENTS. The parties
shall use their best good faith efforts to fulfill all of the conditions set
forth in this Agreement over which it has control or influence. Each party
covenants and agrees to cooperate in good faith and to enter into and deliver
such other documents and papers as the other party reasonably shall require in
order to consummate the transactions contemplated hereby, provided in each
instance, any such document is in form and substance approved by the parties and
their respective legal counsel.
14.14 SPECIFIC PERFORMANCE. The obligations of the parties under
Section 12 are unique. If either party should default in its obligations under
said Section, the parties each acknowledge that it would be extremely difficult
and impracticable to measure the resulting damages; accordingly, the non-
defaulting party, in addition to any other available rights and remedies, may
sue in equity for injunction (mandatory or prohibitive) or specific performance
(all without the need to post a bond or undertaking of any nature), and the
parties each expressly waive the defense that a remedy at law in damages is
adequate.
14.15 ASSIGNMENT. Neither party may directly or indirectly assign or
delegate, by operation of law or otherwise, all or any portion of its/their/his
rights, obligations or liabilities under this Agreement without the prior
written consent of all other parties, which consent may be withheld in their
respective sole and absolute discretion. Any purported assignment or delegation
without such consent shall be null and void.
For purposes of this Section, the term "Agreement" shall include this
Agreement and the Exhibits and other documents attached hereto or described in
this Section 14. This Agreement, and other documents delivered pursuant to this
Agreement,
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contain all of the terms and conditions agreed upon by the parties relating
to the subject matter of this Agreement and supersede all prior and
contemporaneous agreements, letters of intent, representations, warranties,
disclosures, negotiations, correspondence, undertakings and communications of
the parties, oral or written, respecting that subject matter.
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IN WITNESS WHEREOF, the parties have signed the Agreement the date and
year first above written.
XYTRONYX, INC., a Delaware corporation,
By: /s/ Dale A. Sander
---------------------------
Dale A. Sander
Chief Financial Officer
XYX ACQUISITION CORP., a Delaware corporation,
By: /s/ Dale A. Sander
---------------------------
Dale A. Sander
Chief Financial Officer
BINARY THERAPEUTICS, INC., a Delaware corporation,
By: /s/ Joseph Y. Chang
--------------------------
Joseph Y. Chang
President and Chief Executive Officer
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LICENSE AGREEMENT
THIS LICENSE AGREEMENT (the "License Agreement") made and entered into this
8th day of May, 1996 (the "Effective Date") by and between Wound Healing of
Oklahoma, an Oklahoma corporation ("WHO") and Xytronyx, Inc., a Delaware
corporation ("XYX").
WITNESSETH
WHEREAS, WHO is the owner of certain inventions and patent applications,
generally characterized as LASER/SENSITIZER ASSISTED IMMUNOTHERAPY, and
collectively referred to as the "Inventions;"
WHEREAS, XYX desires to obtain an exclusive license from WHO for the
commercial development, use, and sale of the Inventions, and WHO is willing to
grant such a license;
WHEREAS, WHO and XYX intend to enter into a research agreement (the
"Research Agreement"), the form of which in all substantial respects is intended
to be as set forth in Exhibit A attached hereto, under which XYX would agree to
support a research program to be conducted by WHO;
NOW THEREFORE, in consideration of the premises and mutual covenants
contained herein, WHO and XYX agree as follows:
1. DEFINITIONS
1.1 WHO'S PATENT RIGHTS. "WHO's Patent Rights" means patent rights owned
by the WHO to any and all of the following:
A. Pending U.S. Patent Application serial number 08/416,158,
entitled LASER/SENSITIZER ASSISTED IMMUNOTHERAPY, filed April 4, 1995 by Wound
Healing of Oklahoma, and a copy of which is included in Exhibit B attached
hereto;
B. International patent applications corresponding to the patent
application described in 1.1(A) filed by WHO March 19, 1996 via the Patent
Cooperation Treaty designating all member countries;
C. Any patent applications filed on inventions or discoveries
arising and/or first reduced to practice under the Research Agreement;
D. Any U.S. or international applications requested by XYX as
provided in Section 4.3 hereof;
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E. Continuing applications of the patent applications described in
Sections 1.1(A), 1.1(B), 1.1(C) and 1.1(D) above, including continuations,
divisions and substitutions thereof, and including continuing-in-part
applications; and
E. Any patents issued on patent applications described in Sections
1.1(A), 1.1(B), 1.1(C), 1.1(D) and 1.1(E) above, including reissues thereof.
1.2 LICENSED PRODUCT. "Licensed Product" means any and all of the
following:
A. Any material or method either that is covered by WHO's Patent
Rights, that is made through the use of a method covered by WHO's Patent Rights
or whose manufacture, practice, use, or sale by an unlicensed third party would
constitute an infringement of any pending or issued claim within WHO's Patent
Rights.
B. Any and all unpublished research and development information,
unpatented inventions, know-how, trade-secrets, technical data, proprietary
information, ideas, and the like, directly or indirectly relating to the
LASER/SENSITIZER ASSISTED IMMUNOTHERAPY technology and the Patent Rights.
C. Any and all unpublished research and development information,
unpatented inventions, know-how, trade-secrets, technical data, proprietary
information, ideas, and the like, discoveries arising and/or first reduced to
practice under the Research Agreement.
1.3 Affiliate. "Affiliate means any corporation or other business entity
in which either XYX or WHO, either directly or indirectly, owns or controls, is
owned or controlled by, or is under common ownership or control with XYX or WHO,
respectively, to the extent of at least 50% of the outstanding stock or other
voting rights entitled to elect directors.
1.4 NET REVENUES. "Net Revenues" shall mean the following:
A. Net Revenues shall equal the total of the gross invoice price
from revenues (including but not limited to product sales, royalties from
sublicenses, and/or proceeds from the sales of marketing rights) derived by XYX
or its Affiliates from Licensed Products (subject to the exclusions of Sections
1.4(B) and 1.3(C) below, and subject to adjustment in Section 1.4(D) below) less
the sum of the following deductions where applicable: (i) cash, trade, or
quantity discounts allowed and taken; (ii) sales, use, tariff, import/export
duties or other excise taxes imposed upon particular sales; (iii) transportation
and transportation shipping charges; and (iv) allowances or credits to customers
because of rejections or returns, to the extent allowed and taken.
B. Net Revenues shall exclude revenues derived from transactions
between XYX and its Affiliates.
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C. Net Revenues shall exclude revenues from Contract Research,
including but not limited to transactions in which XYX receives funding from
third parties to assist in the development and commercialization of the Licensed
Products. "Contract Research" shall exclude proceeds from the sales of
marketing rights and/or royalties or other fees derived the sublicense of XYX's
rights under this License Agreement, each of which shall be included in Net
Revenues.
D. In the event that the Licensed Products are sold as part of an
integrated system in which the Licensed Products are combined with a
product/products which is/are not Licensed Products, then Net Revenues shall
include a pro rata share of the total sales price of the integrated system,
calculated based on the relative stand-alone sales prices of each individual
product included within the integrated system. If such products are not
routinely sold separately and therefore do not have a stand-alone sales price,
then the Net Revenues attributable to the Licensed Products shall be calculated
based upon some other equitable allocation methodology, such as the relative
development costs incurred by XYX in the commercialization of said products, or
the relative manufacturing costs of said products, or a combination thereof.
1.5 FDA, IND AND NDA. "FDA" means the United States Food and Drug
Administration; "IND" means a Notice of Investigational New Drug Exemption or
equivalent FDA designation permitting the clinical testing of a product on
humans; "NDA" means New Drug Application or equivalent FDA approval permitting
commercials sales of a product.
1.6 CONTRACT YEAR. "Contract Year" shall mean the period commencing with
the Effective Date and ending December 31, 1996, and each calendar year
thereafter.
2. EXCLUSIVE LICENSE
2.1 EXCLUSIVE LICENSE. WHO hereby grants to XYX and its affiliates an
exclusive, worldwide license to make, have made for it, practice, use and sell
the Licensed Products (the "License").
2.2 TERM OF LICENSE. The term of the License shall be from the Effective
Date of this License Agreement until the expiration or abandonment of all of
WHO's Patent Rights, unless terminated earlier as provided under Section 10.
2.3 SUBLICENSES. WHO also grants to XYX the right to grant sublicences of
the License to third parties, however, such right to sublicense will in no way
relieve XYX of any of its responsibilities, nor WHO of any of its rights, under
this License Agreement. Sublicense revenue received by XYX shall be included in
Net Revenues as described in Section 1.4(A) above.
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2.4 KNOW HOW. WHO shall provide XYX with full disclosure regarding the
Licensed Products, including but not limited to such copies of documents, other
materials and trade secrets as XYX reasonably shall request in order to assist
with the further development, testing and commercialization of the Licensed
Products.
3. LICENSE FEES AND ROYALTIES
3.1 SIGNING FEE. XYX shall pay to WHO $25,000 upon the signing of this
License Agreement.
3.2 IND SUBMISSION FEE. XYX shall pay to WHO $25,000 upon the submission
of an IND to the FDA for a human clinical trial of the use of the Licensed
Products in photodynamic therapy.
3.3 THE WARRANT. Within 30 days of the Effective Date, XYX will grant WHO
a Warrant to purchase 100,000 shares of XYX common stock with an exercise price
equal to the market price as of the Effective Date (the "Warrant"), the form of
which will be substantially equivalent to that included as Exhibit C.
3.4 EARNED ROYALTIES. XYX shall pay to WHO a royalty of 8% of Net
Revenues until XYX has realized cumulative Net Revenues of $15 million; after
XYX has realized cumulative Net Revenues of $15 million, XYX shall pay to WHO a
royalty of 10% of all Net Revenues in excess of the cumulative $15 million. The
aforementioned royalties based on Net Revenues shall be called the "Earned
Royalties."
3.5 MINIMUM ROYALTY. XYX shall pay to WHO a minimum royalty of $50,000
per Contract Year for the remaining Term of this License Agreement (the Minimum
Royalty"), commencing with the 3rd Contract Year and each Contract Year
thereafter, due and payable $12,500 per quarter under Section 3.6 below, and
$37,500 for the 2nd Contract Year, due and payable $12,500 per quarter for each
of the last three quarters of the year. The Minimum Royalty shall be credited
against the Earned Royalty due and owing for the Contract Year in which said
Minimum Payment is due. Minimum Royalties in excess of Earned Royalties for any
Contract Year may be credited by XYX against Earned Royalties due and payable to
WHO in subsequent Contract Years.
3.6 PAYMENT OF ROYALTIES. Royalties accruing to WHO shall be payable
quarterly on or before the last day of the month immediately following the most
recently completed calendar quarter. Earned Royalties due and payable will be
those Earned royalties attributable to Net Revenues invoiced, or if not
invoiced, invoicable under the terms of the related sales or other agreement, by
XYX during the most recently completed quarter less any Minimum Royalties
credited. Minimum Royalties due and payable will be those detailed in Section
3.5 above.
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3.7 NO ISSUANCE OF PATENT. In the event that no patent within the WHO's
Patent Rights covering a Licensed Product has issued in a country by the end of
3 years following the commencement of the commercial sale of such Licensed
Product in said country, XYX's obligation to pay further Earned Royalties on
sales of such Licensed Product in said country shall be reduced by 50% from the
rates described in Section 3.4, and such obligation shall terminate 13 years
following said commencement of commercial sales. However, if a patent shall
subsequently issue in said country covering such Licensed Products, XYX shall be
obligated to pay the Earned Royalties on Net Sales at the standard rates
described in Section 3.4 from the date of such issuance.
3.8 EXPIRATION OF PATENTS. Upon expiration or abandonment of any patent
or any claim thereof included within the WHO's Patent Rights, all obligation of
XYX to pay Earned Royalties to WHO based on such patent or claim or any claim
patentable indistinct therefrom shall cease as of the date of such expiration or
abandonment.
4. PATENTS
4.1 PAYMENT OF FEES BY XYX FOR EXISTING PATENT APPLICATIONS. After
submission of the IND described in Section 3.2, XYX agrees to pay the cost of
preparing, filing, prosecuting and maintaining all existing and future patent
applications for Pending U.S. Patent Application serial number 08/416,158 and
for the international patents described in Section 1.1(B) (collectively the
"Existing Patent Applications"), incurred on or after said submission date.
4.2 MAINTENANCE OF EXISTING PATENTS APPLICATIONS BY WHO. Prior to the IND
submission described Section 3.2, WHO shall diligently prosecute and maintain
the applications comprising the Existing Patent Applications. If prior to the
IND submission WHO elects not to proceed with the prosecution of the Existing
Patent Applications, WHO will promptly notify XYX of such election, and XYX
will have the option, but not the obligation, to pay the cost to complete such
prosecution and to credit any such costs against Minimum Royalties due WHO under
Sections 3.5 above.
4.3 PROSECUTION OF NEW PATENT APPLICATIONS. XYX shall have to right, but
not the obligation, to obtain (at its own cost) patent protection in the United
States or in any foreign country for any inventions encompassed by Sections 1.1
or 1.2(B) not encompassed by the Existing Patent Applications. XYX agrees to
pay the cost of preparing, filing, prosecuting and maintaining all such patent
applications. WHO agrees to assist XYX with the preparation, filing, and
prosecution of such patents, such assistance to including but not limited to
providing XYX access to documents and other WHO property necessary to assist in
the filings.
4.4 PROTECTION OF WHO'S RIGHTS. WHO will take all necessary steps
(including without limitation entering into appropriate confidentiality,
assignment of rights and non-competition agreements with all officers,
directors, employees and consultants of WHO
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and others with access to or knowledge of the Licensed Products) to safeguard
and maintain the secrecy and confidentiality of, and its proprietary rights in,
the Licensed Products and all related documentation and intellectual property
rights therein.
5. PATENT INFRINGEMENT AND PATENT DEFENSE
5.1 INFRINGEMENT OF PATENT RIGHTS. In the event that either party shall
learn of the substantial infringement of any of WHO's Patent Rights, said party
shall call the other party's attention thereto in writing. Both parties to this
agreement will use their best efforts in cooperation with each other to
terminate such infringement without litigation.
5.2 LEGAL ACTIONS. XYX may request that WHO take legal action against the
infringement of WHO's Patent Rights (whether or not such infringement was
brought to XYX's attention by WHO or by XYX on its own. If the infringing
activity has not been abated within 90 days following the effective date of such
request, XYX shall have the right, but not the obligation, to commence suite on
its own account at its own expense. In the event XYX elects to bring suit in
accordance with this paragraph, WHO may (but is not obligated to) thereafter
join such suit, with expenses to be shared 92% by XYX and 8% by WHO, or as
otherwise agreed upon by XYX and WHO. Each party agrees to cooperate with each
other in any litigation proceedings instituted hereunder but at the expense of
the party on account of whom suit is brought. Such litigation shall be
controlled by the party bringing the suit.
5.3 RECOVERIES. All recoveries recovered under legal actions brought
under Section 5.2 shall belong to such party bringing the suit, provided,
however, that legal action brought jointly by XYX and WHO shall be shared
between both parties, 92% to XYX and 8% to WHO or, if a different expense
sharing arrangement was agreed upon under Section 5.2 above, in proportion to
their respective actual out-of-pocket expenses.
5.4 INVALIDATION OF WHO'S PATENT RIGHTS. In the event that any patent or
any claim thereof included within the WHO's Patent Rights shall be held invalid
or unenforceable by a court of competent jurisdiction, all obligation to pay
royalties based on such patent or claim patentable indistinct therefrom shall be
reduced by 50% as of the date of such decision unless and until such action is
reversed on appeal by a court of competent jurisdiction, and said obligation to
pay the 50%-reduced royalty shall terminate 13 years following commencement of
commercial sales of the product using said patent or claim. XYX shall not,
however, be relieved from paying any royalties which accrued before such
decision or that are based on another patent or claim not involved in such
decision.
5.5 DEFENSE OF INFRINGEMENT SUITS. In the event of the institution of any
suit against XYX, its Affiliates or sublicensees for patent infringement in the
manufacture, use, sale, distribution or marketing of the Licensed Products, WHO
will cooperate fully with XYX, at XYX's expense, in defense against said suits.
Any and all expenses incurred by
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XYX in the defense of said suits may be credited against royalty payments due
from XYX to WHO.
5.6 THIRD PARTY LICENSES. If, during the term of this License Agreement,
XYX deems it necessary by reason of the absence of any commercially reasonable
alternative to seek a license from any third party under any patent in order to
avoid infringement in the manufacture, use or sale of Licensed Products, then
XYX may negotiate a license under such patent. 8%, or a percentage agreed-upon
by XYX and WHO, of any payments to such party may be credited against royalty
payments due from XYX to WHO for sales in the country issuing such patent.
6. REPRESENTATIONS AND WARRANTIES OF WHO
WHO represents and warrants to, and agrees with, XYX that:
6.1 CORPORATE STANDING AND APPROVAL. It is a corporation duly organized,
validly existing and in good standing under the law of the jurisdiction of its
incorporation and has full power to enter into and perform this License
Agreement and the transactions contemplated hereby and thereby.
6.2 PATENT APPLICATIONS. The Existing Patent Applications have been filed
in the good-faith belief that patent protection on the inventions sought and
claimed therein is obtainable.
6.3 PROPRIETARY RIGHTS. WHO owns, has and holds exclusively all right,
title and interest in the Licensed Products, free and clear of all liens,
encumbrances, restrictions, claims and equities of any kind whatsoever, has and
shall have the exclusive right to use, sell, license or dispose of, and has and
shall have the exclusive right to bring action for the infringement of the
Patent Rights. The marketing, promotion, distribution or sale by XYX of the
Licensed Products shall not constitute an infringement of any patent or
violation of any other party's proprietary rights or a violation of any license
or agreement by WHO. To the knowledge of WHO, after due inquiry, no facts or
circumstances exist that could result in the invalidation of any of the Patent
Rights. WHO is not obligated or under any liability whatever to make any
payments by way of royalties, fees or otherwise to any owner or licensor of, or
other claimant to, any of the Licensed Products with respect to the use thereof
in the conduct of its business or otherwise.
6.4 PROTECTION OF PROPRIETARY RIGHTS. WHO has taken all necessary steps
(including without limitation entering into appropriate confidentiality,
assignment of rights and non-competition agreements with all officers,
directors, employees and consultants of the WHO and others with access to or
knowledge of the Licensed Products) to safeguard and maintain the secrecy and
confidentiality of, and its proprietary rights in, the Licensed Products and all
related documentation and intellectual property rights therein.
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6.5 NO IMPAIRMENT OF XYX'S EXCLUSIVITY. WHO has not sold, transferred,
assigned, licensed or subjected to any right, lien, encumbrance or claim of
others, any of the Licensed Products, including without limitation any
invention, or any interest therein, related to or required for the design,
development, manufacture, operation, sale or use of any such Licensed Products.
There are no claims or demands of any person pertaining to, or any proceedings
that are pending or threatened, which challenge the rights of WHO with respect
to any Licensed Products.
6.6 NO ACTIONS, PROCEEDINGS, ETC.. There is no action or proceeding
(whether or not purportedly on behalf of WHO) pending or to its knowledge
threatened by or against WHO which might result in any material adverse change
in the condition, financial or otherwise, of Licensed Products. No order, writ
or injunction or decree has been issued by, or requested of any court or
governmental agency which does nor may result in any material adverse change in
the Licensed Products.
7. REPRESENTATIONS AND WARRANTIES OF XYX
XYX represents and warrants to WHO that it is a corporation duly organized,
validly existing and in good standing under the law of the jurisdiction of its
incorporation and has full power to enter into and perform this License
Agreement and the transactions contemplated hereby and thereby.
8. INDEMNIFICATION
8.1 INDEMNIFICATION BY XYX. XYX shall defend, indemnify and hold WHO, its
officers, employees, directors, affiliates, controlling persons, agents,
advisors, consultants and other representatives (all of such persons being
deemed to be within the meaning of the term WHO for purposes of the WHO rights
and remedies), harmless against and in respect of any damage, loss, liability,
cost or expense, including expert witness fees and reasonable attorneys' fees
and expenses, whether or not recoverable under applicable state law, resulting
or arising from or incurred in connection with:
A. Any misrepresentation, breach of warranty, or nonfulfillment or
nonperformance of any agreement on the part of XYX under this License Agreement
or any noncompliance on the part of XYX with applicable law;
B. Any product liability claim arising out of the sale by XYX of
Licensed Products.
8.2 INDEMNIFICATION BY WHO. WHO shall defend, indemnify and hold XYX, its
officers, employees, directors, affiliates, controlling persons, agents,
advisors, consultants and other representatives (all of such persons being
deemed to be within the meaning of the term XYX for purposes of the XYX rights
and remedies), harmless against
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and in respect of any damage, loss, liability, cost or expense, including expert
witness fees and reasonable attorneys' fees and expenses, whether or not
recoverable under applicable state law, resulting or arising from or incurred in
connection with any misrepresentation, breach of warranty, or nonfulfillment or
nonperformance of any agreement on the part of WHO under this License Agreement
or any noncompliance on the part of WHO with applicable law.
9. NONDISCLOSURE OF CONFIDENTIAL INFORMATION
9.1 NONDISCLOSURE OF CONFIDENTIAL INFORMATION. Each of the parties hereto
recognizes and acknowledges that it has and will have access to certain
nonpublic information of the others which shall be deemed the confidential
information of the other parties (including, but not limited to, memoranda,
notes, drawings, sketches, plans, specifications, letters, business plans,
costs, trade secrets, licenses, research projects, profits, markets, sales,
customer lists, strategies, plans for future development, financial information
and any other information of a similar nature) that after the consummation of
the transactions contemplated hereby will be valuable, special and unique
property of the parties (collectively, the "Confidential Information").
Information received by the other party or its representatives shall
not be deemed Confidential Information and afforded the protections of this
Section 9 if, on the Closing Date, such information has been (i) developed by
the receiving party independently of the disclosing party, (ii) rightfully
obtained without restriction by the receiving party from a third party, provided
that the third party had full legal authority to possess and disclose such
information, (iii) publicly available other than through the fault or negligence
of the receiving party, (iv) released without restriction by the disclosing
party to anyone, including the United States government, or (v) properly and
lawfully known to the receiving party at the time of its disclosure, as
evidenced by written documentation conclusively established to have been in the
possession of the receiving party on the date of such disclosure.
Each of the parties hereto agrees that it shall not disclose, and that
it shall use its best efforts to prevent disclosure by any other person of, any
such confidential information to any person for any purpose or reason whatsoever
for a period of 3 years after receipt of such information, except to authorized
representatives of the parties who agree to be bound by this confidentiality
agreement. Notwithstanding, a party may use and disclose any such confidential
information to the extent that a party may become compelled by legal
requirements to disclose any such information; provided, however, that such
party shall use all reasonable efforts and shall have afforded the other parties
the opportunity to obtain an appropriate protective order or other satisfactory
assurance of confidential treatment for any such information compelled to be
disclosed.
In the event of termination of this License Agreement, each party
shall use all reasonable efforts to cause to be delivered to the other parties,
and to retain no copies
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of, any documents, work papers and other materials obtained by such party or on
such party's behalf during the conduct of the matters provided for in this
License Agreement, whether so obtained before or after the execution hereof.
Each of the parties recognizes and agrees that violation of any of the
agreements contained in this Section 9 will cause irreparable damage or injury
to the parties, the exact amount of which may be impossible to ascertain, and
that, for such reason, among others, the parties shall be entitled to an
injunction, without the necessity of posting bond therefor, restraining any
further violation of such agreements. Such rights to any injunction shall be in
addition to, and not in limitation of, any other rights and remedies the parties
may have against each other. The provisions of this Section 9.1 shall survive
any termination of this License Agreement.
9.2 NO PUBLICITY. Both parties shall not, directly or indirectly, issue
any press release, or make any public statement, concerning this License
Agreement or the Licensed Products (i) without the prior written consent of the
other party, or (ii) unless under the publishing rights provisions of Section
9.3. This Section 9.2 shall not, however, preclude either party from making any
disclosure required by applicable law. In the event that either party believes
that disclosure is so required, such party will notify and consult with the
other party with respect thereto as promptly as is practicable under the
circumstances.
9.3 WHO PUBLISHING RIGHTS. Notwithstanding the provisions of Section 9.2
above, WHO shall have the right to copyright, publish, disclose, disseminate and
use, in whole and in part, any data and information comprising the Licensed
Products, subject to prior review by XYX. For the purposes of identifying and
protecting patentable inventions, WHO shall submit all proposed publication,
papers and any other oral or written disclosure of any such data or information
to XYX at least 30 days prior to (i) submission for publication, or (ii)
disclosure to a third party. In the event that XYX believes patentable subject
matter is disclosed in such data or information, it shall, within 15 days of its
receipt thereof, notify WHO, and publication and/or disclosure will be withheld
for a period of up to 90 days until XYX files a patent application thereon or
determines that no patentable invention exists, whichever is shorter.
9.4 INSIDER TRADING. WHO acknowledges that certain of the information
that it has and will be obtaining in connection with the transactions
contemplated by this License Agreement may constitute material non-public or
"inside" information about XYX and that the use or misuse of such information,
might involve serious legal consequences, including, without limitation, under
the Federal securities laws. WHO will not, and will impose restrictions
designed to cause its affiliates, officers, directors and employees not to,
directly or indirectly, through related parties or otherwise, purchase, trade,
offer, pledge, sell, contract to sell or to purchase or sell or "short" or
"short against the box" (as those terms are generally understood in the
securities markets), or otherwise dispose of or acquire, any securities of XYX
or options in respect of such securities while in possession of material non-
public information about XYX.
10. TERMINATION
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10.1 The term of this License Agreement shall expire upon the expiration or
abandonment of all patents included within the WHO's Patent Rights.
10.2 This License Agreement may be terminated by WHO or XYX in the event
that the other substantially fails to perform or otherwise substantially
breeches any of its obligations under this License Agreement by giving notice of
its intent to terminate and stating the grounds therefore. The party receiving
the notice shall have 60 days from the date off receipt thereto to cure failure
of the breech. In the event the failure is cured, notice shall be of no effect.
In the event failure is not cured this License Agreement then shall, without
further notice, terminate at the end of said 60-day period.
10.3 Termination of this License Agreement for any reason shall not affect
rights and obligations of the parties accrued through the effective date of
termination, including without limitation provisions relating to confidential
information as described in Section 9, and the XYX's responsibility to pay WHO
any royalties due at the time of termination under Section 3.
11. MISCELLANEOUS
11.1 SURVIVAL AND INCORPORATION OF REPRESENTATIONS. The representations,
warranties, covenants and agreements made herein or in any certificates or
documents executed in connection herewith shall survive the execution and
delivery thereof, and all statements contained in any certificate or other
document delivered by any party hereunder or in connection herewith shall be
deemed to constitute representations and warranties made by that party to this
License Agreement.
11.2 INCORPORATION BY REFERENCE. All Exhibits to this License Agreement
and all documents delivered pursuant to or referred to in this License Agreement
are herein incorporated by reference and made a part hereof.
11.3 AMENDMENTS AND WAIVERS. This License Agreement may not be amended,
nor may compliance with any term, covenant, agreement, condition or provision
set forth herein be waived (either generally or in a particular instance and
either retroactively or prospectively) unless such amendment or waiver is agreed
to in writing by all parties hereto.
11.4 WAIVER. No waiver of any breach of any one of the agreements, terms,
conditions, or covenants of this License Agreement by the parties shall be
deemed to imply or constitute a waiver of any other agreement, term, condition,
or covenant of this License Agreement. The failure of any party to insist on
strict performance of any agreement, term, condition, or covenant, herein set
forth, shall not constitute or be construed as a waiver of the rights of either
or the other thereafter to enforce any other default of such agreement, term,
condition, or covenant; neither shall such failure to insist upon strict
performance be
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deemed sufficient grounds to enable either party hereto to forego or subvert or
otherwise disregard any other agreement, term, condition, or covenants of this
License Agreement.
11.5 GOVERNING LAW - CONSTRUCTION. This License Agreement, and the rights
and obligations of the respective parties, shall be governed by and construed in
accordance with the laws of the State of California, excluding conflict of law
provisions which would act to apply the laws of another state.
11.6 NOTICES. Any notice, communication, offer, acceptance, request,
consent, reply, or advice (herein severally and collectively, for convenience,
called "Notice"), in this License Agreement provided or permitted to be given,
served, made, or accepted by any party or person to any other party or parties,
person or persons, hereunder must be in writing, addressed to the party to be
notified at the address set forth below, or such other address as to which one
party notifies the other in writing pursuant to the terms of this Section, and
must be served by (1) telefax or other similar electronic method, or
(2) depositing the same in the United States mail, certified, return receipt
requested and postage paid to the party or parties, person or persons to be
notified or entitled to receive same, or (3) delivering the same in person to
such party.
Notice shall be deemed to have been given immediately when sent by
telefax and confirmed received or other electronic method and seventy-two hours
after being deposited in the United States mail, or when personally delivered in
the manner hereinabove described. Notice provided in any manner not specified
above shall be effective only if and when received by the party or parties,
person or persons to be, or provided to be notified.
All notices, requests, demands and other communications required or permitted
under this License Agreement shall be addressed as set forth below:
If WHO: Wound Healing of Oklahoma
P.O. Box 770438
Oklahoma City, Oklahoma 73177
Fax: 405-942-1635
Attention: Dr. Robert E. Nordquist
President
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If XYX: Xytronyx, Inc.
6555 Nancy Ridge Drive, Suite 200
San Diego, California 92121
Fax: 619-550-3985
Attention: Larry Bymaster
Chief Executive Officer
Any party receiving a facsimile transmission shall be entitled to rely
upon a facsimile transmission to the same extent as if it were an original. Any
party may alter the address to which communications or copies are to be sent by
giving notice of such change of address in conformity with the provisions of
this Section for the giving of notice.
11.7 FAX/COUNTERPARTS. This License Agreement may be executed by telex,
telecopy or other facsimile transmission, and such facsimile transmission shall
be valid and binding to the same extent as if it were an original. Further,
this License Agreement may be signed in one or more counterparts, all of which
when taken together shall constitute the same documents. For all evidentiary
purposes, any one complete counter set of this License Agreement shall be
considered an original.
11.8 CAPTIONS. The caption and heading of various sections and paragraphs
of this License Agreement are for convenience only and are not to be construed
as defining or limiting, in any way, the scope or intent of the provisions
hereof.
11.9 SEVERABILITY. Wherever there is any conflict between any provision of
this License Agreement and any governmental requirement or judicial precedent,
the latter shall prevail, but in such event the provisions of this License
Agreement thus affected shall be curtailed and limited only to the extent
necessary to bring it within the requirement of the law. In the event that any
part, section, paragraph or clause of this License Agreement shall be held by a
court of proper jurisdiction to be invalid or unenforceable, the entire License
Agreement shall not fail on account thereof, but the balance of the License
Agreement shall continue in full force and effect unless such construction would
clearly be contrary to the intention of the parties or would result in
unconscionable injustice.
11.10 GOOD FAITH COOPERATION AND ADDITIONAL DOCUMENTS. The parties shall
use their best good faith efforts to fulfill all of the conditions set forth in
this License Agreement over which it has control or influence. Each party
covenants and agrees to cooperate in good faith and to enter into and deliver
such other documents and papers as the other party reasonably shall require in
order to consummate the transactions contemplated hereby, provided in each
instance, any such document is in form and substance approved by the parties and
their respective legal counsel.
11.11 ASSIGNMENT. Either party may directly or indirectly assign or
delegate, by operation of law or otherwise, all or any portion of its/their/his
rights, obligations or liabilities under this License Agreement to an Affiliate,
provided that such affiliate agrees in writing to assume all obligation of said
party, and that executed copies of such assumption
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and/or guarantee are provided to the other party. Any purported assignment or
delegation without such valid assumption and/or guarantee shall be null and
void.
11.12 LICENSE AGREEMENT. For purposes of this Section, the term "License
Agreement" shall include this License Agreement and the Exhibits and other
documents attached hereto. This License Agreement, and other documents
delivered pursuant to this License Agreement, contain all of the terms and
conditions agreed upon by the parties relating to the subject matter of this
License Agreement and supersede all prior and contemporaneous agreements,
letters of intent, representations, warranties, disclosures, negotiations,
correspondence, undertakings and communications of the parties, oral or written,
respecting that subject matter.
11.13 PARTIES IN INTEREST. Nothing in this License Agreement, whether
express or implied, is intended to, or shall, confer any rights or remedies
under, or by reason of, this License Agreement, on any person other than the
parties hereto and their respective and proper successors and assigns.
IN WITNESS WHEREOF, the parties have signed the License Agreement the
date and year first above written.
XYTRONYX, INC., a Delaware corporation,
By: /S/ LARRY O. BYMASTER
-------------------------------
Larry O. Bymaster,
Chief Executive Officer
WOUND HEALING OF OKLAHOMA,
an Oklahoma corporation,
By: /S/ DR. ROBERT E. NORDQUIST
--------------------------------
Dr. Robert E. Nordquist, President
14
<PAGE>
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT ("this Agreement") entered into as of January 1,
1995 by and between XYTRONYX, INC., a Delaware corporation (the "Company"),
and LARRY BYMASTER (the "Employee").
WHEREAS, the Company wishes to procure certain services of the Employee
and the Employee is willing to render such services, all on the terms and
conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements hereinafter set forth, the parties hereto agree as follows:
1. ENGAGEMENT; DUTIES. The Company hereby employs the Employee pursuant
to the terms and conditions set forth herein, and the Employee hereby accepts
such employment. The Employee agrees that during the Term (as hereinafter
defined) he will faithfully perform in a competent and professional manner,
and devote his full-time and best efforts to, his duties hereunder, subject to
the direction of the Board of Directors of the Company (the "Board"). The
services to be performed by the Employee shall be those generally performed
by chairmen and chief executive officers of companies similarly situated and
shall include, without limitation, all duties, responsibilities and authority
which the Employee had prior to the date hereof as chief executive officer of
the Company. The Employee agrees to serve as a member of the Board of the
Company, for no additional compensation, if so elected.
2. TERM. The term of Employee's employment by the Company hereunder (the
"Term") shall commence on the date hereof and shall continue until December
31, 1996, except as may otherwise be provided in Section 4 hereof or as may
be extended by the mutual agreement of the parties.
3. COMPENSATION. The Company agrees to provide the Employee, and the
Employee agrees to accept as full compensation for the services to be
rendered to the Company and as compensation for the other obligations
undertaken by the Employee hereunder, the compensation set forth below.
(a) BASE SALARY. During the Term, the Company shall pay the Employee an
annual base salary at the rate of $187,000, payable in accordance with the
Company's policies in effect from time to time during the Term (the "Base
<PAGE>
Salary"). The Base Salary shall be reviewed by the Board or a committee
thereof annually and, in such connection, may be adjusted upward, but not
downward.
(b) BONUS. The Board may, in its sole discretion, grant the Employee an
annual bonus in an amount to be determined by the Board, but in no event more
than 50% of the Base Salary as in effect for that Fiscal Year.
(c) REIMBURSEMENT OF EXPENSES. During the Term, the Company shall
reimburse the Employee for travel and other business expenses reasonably
incurred in connection with the performance of services hereunder, consistent
with the policies of the Company with respect thereto in effect from time to
time, upon presentation by the Employee of substantiating evidence of such
expenses.
(d) ADDITIONAL BENEFITS. During the Term, the Employee shall be entitled
to participate in or receive benefits (including, but not limited to, medical
and insurance benefits) under all employee benefit plans and arrangements of
the Company in effect from time to time during the Term and which are
applicable to other employees of the Company. Additionally, the Company shall:
(i) pay on behalf of Employee the premiums of a term life insurance
policy written by an insurer which agrees to pay the principal
amount equal to twice the Base Salary (currently, $374,000 and
to be adjusted in accordance with the Base Salary in Section 3(a)
above) should Employee die during the Term of this Agreement; and
(ii) pay to Employee each year an amount equal to 10% of the Base
Salary for that year (currently $18,700 and to be adjusted in
accordance with the Base Salary in Section 3(a)) in lieu of a
pension plan for Employee's benefit; PROVIDED, HOWEVER, that
should the Company adopt a pension plan, the amount of the
payment shall be reduced by an amount commensurate with Employee's
benefits under such plan.
4. TERMINATION; DEATH; DISABILITY. (a) The Term will continue until the
earlier of (i) such time as provided in Section 2 above, (ii) the Employee's
death, (iii) the Employee's disability, which shall be deemed to occur in the
event the Employee is substantially unable to perform his services hereunder
for (x) a period of six consecutive
-2-
<PAGE>
months, or (y) shorter periods aggregating six months during any twelve month
period, (iv) Employee's termination by the Company for "Cause" (as defined
below), (v) Employee's resignation in the event of a "Demotion" after a
"Change in Control" (as such terms are defined below), (vi) Employee's
voluntary resignation, or (vii) termination of this Agreement by the mutual
agreement of the parties. For purposes of this Agreement, "Cause" shall mean
the Employee's willful refusal or unreasonable failure to perform his
obligations under this Agreement, acts or omissions by the Employee
constituting gross neglect or dereliction of duties, fraud or dishonesty, or
conviction of the Employee of a felony.
(b) The Employee shall have the right to terminate this Agreement if
there is a Demotion after a Change in Control, in which case the Company (or
its successor) shall continue to pay the Employee the Base Salary and shall
continue to provide the benefits available to the Employee at the time of
termination, including, without limitation, those set forth in Section
3(d)(i) and (ii), for the longer of (i) the duration of the Term (as it may
be extended in accordance with Section 2), or (ii) a 24 month period from the
date of Termination.
For purposes of this Agreement, a "Change in Control" shall be deemed to
occur upon (x) any person or entity purchasing 40% of the Company's common
stock as determined pursuant to Section 13(d) and (g) of the Securities Act
of 1934, as amended, (y) the Company merging or consolidating with one or
more corporations where the Company's common stock is exchanged for less than
50% of the voting stock of the surviving corporation, or (z) the sale,
assignment, transfer, or other disposition of assets of the Company having a
value, as determined by the Board, in excess of 33-1/3% of the total assets
of the Company.
A "Demotion" shall occur if the nature of the Employee's duties or the
scope of his responsibilities are materially decreased in scope or
significance without the Employee's written consent. A Demotion shall
include, without limitation, a change in Employee's reporting
responsibilities, any removal of him from or any failure to reelect him to
his existing position, or a relocation of the office at which he regularly
performs his duties that requires him to be based anywhere other than in San
Diego, California.
5. ASSIGNMENT; BINDING EFFECT. This Agreement shall not be assignable
by the Employee. The Company may assign its rights under this Agreement;
PROVIDED, HOWEVER,
-3-
<PAGE>
that any such assignment shall be subject to all of the terms and conditions
hereof. All of the terms and provisions of this Agreement shall be binding
upon and shall inure to the benefit of and be enforceable by the parties
hereto and their respective successors, permitted assigns heirs, or
beneficiaries.
6. MISCELLANEOUS. The Company and the Employee have previously entered
into that certain Confidentiality Agreement dated September 1, 1990 (the
"Confidentiality Agreement") the terms of which are in full force and effect.
This Agreement and the Confidentiality Agreement constitute the entire
understanding between the parties with respect to the subject matter hereof.
This Agreement shall not be altered, waived, modified or amended except by a
written instrument executed by the parties hereto. This Agreement shall be
governed by and construed and enforced in accordance with the local laws of
the State of California applicable to agreements made and to be performed
entirely in California. All notices under this Agreement shall be in writing,
and may be delivered by hand or sent by registered or certified mail, return
receipt requested, or by confirmed facsimile transmission to the address or
facsimile number presently designated by the parties or as may be changed
from time to time by written notice from such party to the other party at
least ten days prior to the effective date of such address and facsimile
number.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement
as of the day and year first above written.
EMPLOYEE:
/s/ Larry Bymaster
---------------------------------------
Name: Larry Bymaster
COMPANY:
XYTRONYX, INC.
By: /s/ Dale A. Sander
------------------------------------
Name: Dale A. Sander
Title: CFO
---------------------------------
-4-
<PAGE>
1996
ANNUAL REPORT
XYTRONYX, INC.
[LOGO]
<PAGE>
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL DATA (UNAUDITED)
XYTRONYX, INC. AND SUBSIDIARY (A DEVELOPMENT STAGE ENTERPRISE)
Sept. 23, 1983
Years ended March 31 (inception) to
---------------------------------------------------------------- March 31,
(IN THOUSANDS, EXCEPT PER SHARE 1996 1995 1994 1993 1992 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total revenues $379 $1,201 $585 $536 $567 $5,376
Product development costs 1,854 2,118 1,218 657 750 12,399
Net loss (3,256) (3,755) (4,613) (3,738) (3,157) (28,294)
Net loss per share of common stock (0.52) (0.74) (1.10) (1.01) (0.92)
As of March 31
----------------------------------------------------------------
1996 1995 1994 1993 1992
----------------------------------------------------------------
Cash, cash equivalents, and
short-term investments $1,698 $1,820 $4,504 $2,540 $3,542
Total assets 2,174 2,305 5,168 3,668 4,342
Long-term liabilities 21 24 70 609 644
Stockholders' equity* 1,548 1,884 3,942 2,441 3,268
- ---------------------------------------------------------------------------------------------------
*NO DIVIDENDS HAVE BEEN PAID ON THE COMPANY'S COMMON STOCK.
</TABLE>
INDEX
SHAREHOLDER LETTER . . . . . . . . . . . . . . . . . 1
MANAGEMENT'S DISCUSSION AND ANALYSIS . . . . . . . . 4
STATEMENTS OF OPERATIONS . . . . . . . . . . . . . . 7
BALANCE SHEETS . . . . . . . . . . . . . . . . . . . 8
STATEMENTS OF STOCKHOLDERS' EQUITY . . . . . . . . . 9
STATEMENTS OF CASH FLOW. . . . . . . . . . . . . . . 10
NOTES TO FINANCIAL STATEMENTS. . . . . . . . . . . . 11
AUDITORS' REPORTS. . . . . . . . . . . . . . . . . . 21
<PAGE>
TO OUR SHAREHOLDERS AND ASSOCIATES:
We are pleased to report that during the past year the Company completed two
transactions under which it acquired or otherwise gained rights to proprietary
technologies in the areas of cancer therapy. First was the acquisition of an
exclusive license to the Photodynamic Immunotherapy-TM- ("PDIT-TM-") technology
for the treatment of cancer. Second was an agreement which granted Xytronyx an
option to acquire Binary Therapeutics, Inc., the holder of certain proprietary
technologies in the Photodynamic Therapy ("PDT") area, also for the treatment of
cancer. These two opportunities complement each other and offer the Company
efficiencies and other strategic benefits due to their similar development
requirements and expected uses.
Management believes that these transactions represent the most important
opportunities ever undertaken by Xytronyx, Inc. This annual report gives an
overview of these developments and provides an update of the significant
progress made in commercializing our Periodontal Tissue Monitor and the Kephra-
TM- products.
PHOTODYNAMIC IMMUNOTHERAPY-TM- (PDIT-TM-) TECHNOLOGY
In May 1996 we acquired an exclusive worldwide license to a new technology,
Photodynamic Immunotherapy-TM- (PDIT-TM-) treatment for cancer. PDIT treatment
consists of the co-injection of an infrared absorbing dye (photosensitizing
drug) and an immunoadjuvant directly into a tumor followed by illumination with
an infrared laser. Similar to traditional Photodynamic Therapy, PDIT treatment
is intended to produce tumor tissue destruction in the primary area of therapy.
An important distinction of PDIT therapy, however, is that this treatment is
also intended to trigger an immune reaction in the patient to complete the
destruction of the primary tumor and to also destroy metastatic tumors. The
Company believes that the potential of PDIT therapy to destroy metastatic tumors
offers an improved methodology for treatment of cancers such as breast, lung and
prostate, particularly at more advanced stages of disease.
Encouraging results in the form of high response rates have been achieved with
this therapy in conjunction with a very challenging animal breast tumor model.
Xytronyx expects initially to target breast cancer with PDIT treatment, although
the therapy is also expected to be beneficial in treating lung and prostate
cancer as well. It should be noted that this technology has only been tested in
animal models to date and there is no assurance that it will prove effective in
humans. Our objective is to commence human clinical studies with breast cancer
patients around the end of 1996. Patent applications encompassing PDIT
treatment have been filed in the United States and in international markets.
PHOTODYNAMIC THERAPY (PDT);
OPTION TO ACQUIRE BINARY THERAPEUTICS, INC.
In June 1996 we entered into an agreement which granted Xytronyx the option to
purchase Binary Therapeutics, Inc. ("BTI"), a privately held company. BTI holds
certain proprietary technologies in the areas of both Photodynamic Therapy (PDT)
and a related area, Boron Neutron Capture Therapy ("BNCT"). Photodynamic
Therapy is an emerging mode of treatment for cancer which uses the combination
of light-activated drugs and nonthermal light to achieve selective,
photochemical destruction of cancer cells with minimal effect on surrounding
normal tissues. BTI's technologies may offer advantages over other existing PDT
technologies in terms of selectivity (the ability to specifically target tumors)
and the potential to target deeper seated
1
<PAGE>
tumors. One drug, BTI's Boronated Porphyrin compound ("BOPP"), is currently
undergoing preparation for human clinical trials as a photosensitizing drug
for PDT treatment of brain cancer. The Company believes, based upon the
results of preclinical studies, that BOPP may also be useful as a
photosensitizing drug for PDT treatment of pancreatic tumors. Under the
terms of the agreement, Xytronyx will assist BTI with certain product
development efforts and in exchange has received an option to acquire the
company.
THE PERIODONTAL TISSUE MONITOR (PTM)
Over the past year-and-a-half, Xytronyx has faced challenges resulting from
changes in strategic focus from two successive multi-national corporate
partners (most recently the Procter & Gamble Company) with whom we had
marketing relationships for the Periodontal Tissue Monitor ("PTM"). Based on
our experience with world-wide marketing partners, and to accelerate the
launch of the PTM into the marketplace, we elected to target a separate
marketing partner for Europe to take advantage of the fact that the PTM
already has regulatory approval in most of Western Europe. In May 1996 we
announced that Xytronyx had entered into an agreement with Hawe-Neos Dental
to distribute the PTM in Europe. Under the agreement, Hawe-Neos, which is
headquartered in Bioggio, Switzerland, will market the product on an
exclusive basis in Europe for a period of 18 months, and has the option to
extend the term of its distribution rights for an additional 5 years subject
to certain minimum purchase quantities. Hawe-Neos, has over 60 years
experience in manufacturing and marketing dental products in Europe and has
indicated that its goal is to launch the PTM in Europe as early as the fall
of 1996.
In March 1996 Xytronyx completed U.S. clinical trials of the PTM required for a
premarket approval ("PMA") application to the FDA for clearance to market the
product in the United States. Xytronyx expects to complete the analysis of the
clinical data and the development of the related application materials in time
to allow for a submission of the PMA to the FDA during this summer. We are
currently evaluating marketing alternatives for the product for the United
States market and expect to move closer to selecting a strategy by the time a
response to the PMA application is received from the FDA.
PHOTOCHROMIC TECHNOLOGY ("KEPHRA-TM-")
During the year we achieved several milestones in the commercialization of our
Kephra photochromic reversible color-change technology, including: (1) the
granting of an exclusive 18-month license (in exchange for a fee) to a major
consumer products company for use of the technology in the U.S. and Canadian
soft-drink market; (2) the market introduction, by a major watch company, of
watches produced with Kephra inks; and (3) significant progress in the
development of a major consumer product application which has a long-term
revenue opportunity for Xytronyx. The ultimate revenues obtained from these and
other Kephra commercialization efforts will be dependent upon the magnitude of
actual product sales and promotions by our marketing partners and the ultimate
success of technical development projects. We are pleased with the progress
made to date and will continue to look for ways to maximize the revenue and
licensing potential from this product.
2
<PAGE>
* * * * *
This past year has been a major transitional period for Xytronyx which
included a major expansion of our new product opportunities. Furthermore, we
have made significant progress in the commercialization of our traditional
products. We are very encouraged by the events transpiring at Xytronyx and
are excited about the future prospects for the Company.
Xytronyx thanks its shareholders for their continued support. We will keep
you informed as your Company moves toward what we believe is a very positive
future.
Larry O. Bymaster
Chairman and Chief Executive Officer
3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS. Total revenue decreased by $822,000, or 68% to
$379,000 in Fiscal 1996 (the year ended March 31, 1996). The majority of the
prior year revenues related to an agreement with Coors Brewing Company for
use of the Company's Kephra-TM- photochromic technology in a summer 1994
promotion. The Coors Brewing Company's rights with respect to the technology
terminated on March 6, 1995 and, accordingly, no such revenues were earned in
the current year.
Product sales of $14,000 for Fiscal 1996 decreased by $603,000 or 98%, from
the prior year; the prior year sales were comprised primarily of sales of
Kephra materials to Coors Brewing Company. Product sales of $616,000 for
Fiscal 1995 increased by $178,000, or 41% over the prior year due to sales of
the aforementioned Kephra materials. Product sales of $438,000 for Fiscal
1994 were comprised primarily of sales of the Company's Sun Alert-TM- product
and of a single shipment of the Periodontal Tissue Monitor (the "PTM") to
Colgate-Palmolive Company. License fee revenues for Fiscal 1996 decreased by
$180,000, or 55%, to $150,000. Fiscal 1996 revenue is attributable to rights
related to a licensing agreement with a U.S. soft-drink company for the
Company's Kephra technology. Fiscal 1995 revenue from license fees related
to the March 1994 agreement with Coors Brewing Company; no such revenue was
earned in Fiscal 1994. Contract research revenue decreased by $54,000 from
the prior year due to the completion of the Coors Brewing Company project,
and in both years was comprised of research related to the Company's Kephra
process. Fiscal 1995 contract research revenue increased by $64,000 over the
prior year as a result of an agreement with Coors Brewing Company and work
performed for Colgate-Palmolive Company. Fiscal 1994 revenue from contract
research related to the Company's Kephra technology. Marketing rights income
for Fiscal 1996 increased by $40,000 over the prior year to $60,000 with the
increase primarily attributable to rights related to the Company's PTM
product.
Interest and other revenue for the current fiscal year decreased by $26,000,
or 19%, to $110,000. This decrease was the result of a decrease in the
average balance of invested funds offset by a higher interest rate yield on
invested Company funds. Fiscal 1995 interest and other revenue increased
$50,000, primarily due to a higher interest rate yield on invested funds.
During the fiscal year ended March 31, 1996, cost of product sales decreased
$295,000 or 70% from the prior year. Fiscal 1995 cost of product sales
included costs related to the sales to Coors Brewing Company; no such sales
were made in the current fiscal year. Fiscal 1995 cost of product sales
decreased $279,000 or 40% from the prior year yielding a positive gross
margin of $197,000, or 32% of product sales. Fiscal 1994 cost of product
sales included the write off of approximately $200,000 in inventory as the
result of the write off of certain assets relating to the Sun Alert-TM-
product line. Due principally to limited sales volume and the write off
described above, gross margins on product sales were negative in Fiscal 1996
and Fiscal 1994.
Product development costs for Fiscal 1996 decreased $264,000 or 12%, to
$1,854,000. This decrease is the result of the cessation of certain projects
offset by an increase in costs associated with U.S. clinical trials of the
PTM kit. Product development costs for Fiscal 1995 increased $900,000, or
74%, to $2,118,000 over the prior year primarily due to costs associated with
U.S. clinical trials of the PTM kit; no such costs were incurred in the prior
two fiscal years.
4
<PAGE>
During the fiscal year ended March 31, 1996, general and administrative costs
decreased $313,000 or 20%, to $1,258,000 from the prior year. This decrease
is a result of cost savings measures implemented in March 1995 which include
reduced staffing and a reduction in other administrative costs. For the
fiscal year ended March 31, 1995, general and administrative costs decreased
$1,053,000, or 40%, to $1,571,000 from the prior year. In Fiscal 1994,
general and administrative expenses included a $469,000 accounting entry
relating to employee stock options. No such accounting entry was required in
Fiscal 1995. Fiscal 1995 administrative expenses were further reduced by the
settlement of the stockholders' lawsuit in the first quarter of 1995.
Business development and marketing costs for Fiscal 1996 decreased $418,000
or 53%, to $372,000 versus $790,000 in Fiscal 1995. Prior year amounts
include costs incurred related to gaining approval of the PTM in the Peoples
Republic of China and sales commissions incurred relating to the agreement
with Coors Brewing Company discussed above. No such costs were incurred in
the current fiscal year. During Fiscal 1995, business development and
marketing costs increased $212,000, or 37%, to $790,000 versus $579,000 in
Fiscal 1994 as a result of the increased efforts related to the PTM kit and
Kephra described above.
Interest expense in Fiscal 1996 totaled $19,000, a $15,000 decrease from the
prior year. Interest expense in Fiscal 1995 decreased by $46,000 from the
prior year to $39,000 as a result of the repayment of the $500,000 customer
advance to Colgate-Palmolive in June 1994. Fiscal 1994 results include one
full year, or $60,000, of interest expense related to this debt.
The Fiscal 1996 net loss decreased by $499,000, or 13%, to $3,256,000 versus
the prior year. This decrease is attributable to a reduction of expenditures
in all major classifications for the fiscal year, partially offset by the
fact that revenues from Kephra recognized in Fiscal 1995, were not repeated
in the current year. The Fiscal 1995 net loss decreased by $858,000, or 19%,
to $3,755,000 versus the prior year. This decrease is attributable to the
increased revenues from Coors Brewing Company and the reduction in general
and administrative expenses, partially offset by higher product development
costs associated with the U.S. clinical trials. The Fiscal 1996 loss per
share of common stock decreased by $0.22 to $0.52 per share due principally
to the decrease in net loss and the increase of 1,116,000, or 22%, to
6,223,000, in weighted average common shares outstanding. The Fiscal 1995
loss per share of common stock decreased by $0.36 to $0.74 per share versus
the prior year due principally to the decrease in net loss and the increase
of 927,000, or 22%, to 5,106,000, in weighted average common shares
outstanding.
CAPITAL RESOURCES AND LIQUIDITY. As of March 31, 1996, cash, cash
equivalents, and short-term investments decreased by $122,000, or 7%, to
$1,698,000, compared to March 31, 1995, and working capital decreased by
$348,000. These decreases are attributable to the net loss for Fiscal 1996
partially offset by net proceeds of $2,864,000 from a private placement of
the Company's common stock. Total assets decreased by $130,000, primarily due
to the decrease in cash, cash equivalents, and short-term investments
described above. Stockholders' equity decreased by $336,000 primarily as a
result of the aforementioned net loss offset by the private placement
proceeds.
Since inception, the Company has experienced negative cash flow from
operations, and the Company considers it prudent to anticipate that negative
cash flow from operations will continue for the foreseeable future, and that
outside sources of funding will continue to be required. The Company's
financial resources are anticipated to be adequate, based on the assumption
that no significant revenues are received, through September 1996, and
possibly beyond that date, based
5
<PAGE>
on a continuation of the pattern of expenses which prevailed during Fiscal
1996. Unanticipated expenses could, however, shorten that period.
The Company completed a 12-month clinical trial of the PTM held at three
universities in March 1996. The Company is currently compiling and analyzing
the data generated from the clinical studies for preparation of a submission
of a Premarket Approval application ("PMA") to the FDA. The completion of
the clinical studies will result in the reduction in or elimination of
certain product development expenses.
The Company is in the process of identifying potential marketing partners for
the PTM product and is holding discussions with such companies. In the event
the Company begins selling material quantities of the PTM, the Company may
need additional working capital, and additional personnel and space, both of
which may cause an increase in the net utilization of cash. However, there
can be no assurance that FDA PMA approval or any other required regulatory
approvals will be forthcoming, or that the Company will complete any new
marketing agreements, or that any of its existing or future marketing
partners will order the PTM products in significant quantities.
In May 1996 the Company entered into an agreement with Wound Healing of
Oklahoma ("WHO"), a privately held corporation, under which it acquired an
exclusive license to certain proprietary technology in the Photodynamic
Immunotherapy ("PDIT") treatment of cancer. The Company expects to perform
certain product development efforts associated with the commercialization of
the licensed technology, including the commencement of human clinical trials,
increasing the Company's net utilization of cash. However, there can be no
assurance that FDA and other regulatory approval required to commence such
trials will be forthcoming.
In June 1996 the Company entered into an agreement which granted the Company
the option to acquire Binary Therapeutics, Inc. ("BTI"). BTI is a privately
held development stage enterprise holding certain technologies in the area of
Photodynamic Therapy ("PDT") treatment of cancer. Under the agreement
anticipated by the letter of understanding the Company expects to fund
certain product development expenses incurred by BTI, increasing the
Company's net utilization of cash.
The Company continues to be engaged in efforts to obtain additional financing
and to seek strategic partners to aid in the development and marketing of its
products. The continued existence of the Company is dependent upon receiving
additional financing from time-to-time until it begins to generate positive
cash flow from operations. If and as orders for the Company's products are
placed in increasing quantities, the Company expects to seek working capital
debt and/or equity financing as a function of availability and cost. No
assurance can be given that the Company will be successful in obtaining
additional debt and/or equity financing or locating new strategic partners,
or that it will be able to generate positive cash flow from operations.
The Company has never paid a cash dividend and does not contemplate the
payment of cash dividends in the foreseeable future.
IMPACT OF INFLATION. The impact of inflation on the operations of the
Company during Fiscal 1996, Fiscal 1995 and Fiscal 1994 was not material.
6
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
XYTRONYX, INC. AND SUBSIDIARY (A DEVELOPMENT STAGE ENTERPRISE)
Years ended March 31 September 23, 1983
-------------------------------------------------- (inception) to
1996 1995 1994 March 31, 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES
Product sales $13,657 $616,200 $438,186 $1,849,746
License fees and royalties 150,000 330,000 - 480,000
Contract research 45,000 99,151 35,000 228,891
Marketing rights 60,000 20,000 26,500 1,306,500
Interest and other 110,159 135,804 85,381 1,510,797
- ----------------------------------------------------------------------------------------------------------------
Total revenues 378,816 1,201,155 585,067 5,375,934
- ----------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES
Cost of product sales 124,530 419,032 698,003 2,902,735
Product development 1,853,899 2,118,247 1,217,924 12,398,864
General and administrative 1,257,722 1,570,768 2,623,562 14,609,983
Business development
and marketing 372,316 790,233 578,501 3,267,683
Interest and other 26,252 57,843 80,119 490,231
- ----------------------------------------------------------------------------------------------------------------
Total costs and expenses 3,634,719 4,956,123 5,198,109 33,669,496
- ----------------------------------------------------------------------------------------------------------------
Net loss ($3,255,903) ($3,754,968) ($4,613,042) ($28,293,562)
- ----------------------------------------------------------------------------------------------------------------
Net loss per share
of common stock ($0.52) ($0.74) ($1.10)
- ------------------------------------------------------------------------------------------
Weighted average
shares outstanding 6,222,832 5,106,454 4,179,890
- ------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
XYTRONYX, INC. AND SUBSIDIARY (A DEVELOPMENT STAGE ENTERPRISE)
As of March 31
--------------------------------
1996 1995
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $409,651 $827,752
Short-term investments 1,288,106 992,326
Accounts receivable 2,668 9,073
Inventory 40,907 47,967
Prepaid expenses 95,945 99,306
- -------------------------------------------------------------------------------------------------
Total current assets 1,837,277 1,976,424
Property and equipment, net 135,234 120,154
Patent application costs, net 190,159 196,573
Other assets 11,798 11,786
- -------------------------------------------------------------------------------------------------
TOTAL ASSETS $2,174,468 $2,304,937
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $214,310 $216,815
Accrued expenses 378,927 115,441
Customer advances - 30,888
Current portion of capitalized leases 12,512 33,631
- -------------------------------------------------------------------------------------------------
Total current liabilities 605,749 396,775
Other liabilities 20,670 24,353
Commitments and contingencies (Note 4)
STOCKHOLDERS' EQUITY:
Preferred stock, $25.00 par value, 300,000 shares authorized - -
Common stock, $.02 par value, 30,000,000 shares authorized;
8,051,029 and 5,263,029 shares issued and
outstanding at March 31, 1996 and 1995, respectively 161,021 105,261
Capital in excess of par value 29,680,590 26,816,207
Deficit accumulated during the development stage (28,293,562) (25,037,659)
- -------------------------------------------------------------------------------------------------
Total stockholders' equity 1,548,049 1,883,809
- -------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $2,174,468 $2,304,937
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
XYTRONYX, INC. AND SUBSIDIARY (A DEVELOPMENT STAGE ENTERPRISE)
PREFERRED STOCK COMMON STOCK
------------------------------------- --------------------------------
SHARES PAR VALUE SHARES PAR VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at September 23, 1983 - $ - - $ -
Original issuance of common stock:
October 1983 at $.02 per share 597,500 11,950
October 1983 at $2.00 per share 55,000 1,100
Issuance for cash, January 1984
at $4.00 per share 383,625 7,672
Net loss
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1984 - - 1,036,125 20,722
Purchase of treasury stock
Adjustment to capital in excess
of par value
Net loss
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1985 - - 1,036,125 20,722
Purchase of treasury stock
Initial public offering, October 1985
at $6.00 per share 500,000 10,000
Net loss
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1986 - - 1,536,125 30,722
Purchase of treasury stock
Preferred stock subscribed:
Series A 6,000 150,000
Net loss
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1987 6,000 150,000 1,536,125 30,722
issuance of 8.5% convertible
subordinated notes warrants
Retirement of treasury stock (17,500) (350)
Preferred stock subscribed/(returned):
Series A (3,000) (75,000)
Series B 1,600 40,000
Net loss
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1988 4,600 115,000 1,518,625 30,372
Conversion of 8.5% convertible
subordinated notes 39,999 800
Consultant's compensation 1,073 22
Preferred stock subscribed/(converted):
Series A (3,000) (75,000) 35,002 700
Series B 27,180 679,500
Dividends accrued - Series B
Net loss
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1989 28,780 719,500 1,594,699 31,894
Private placement, November 1989
at $8.00 per share 75,000 1,500
Exercise of common stock options 3,500 70
Preferred stock subscribed/(converted):
Series B (28,780) (719,500) 719,500 14,390
Dividends accrued - Series B
Reverse accrued dividends - Series B
Exercise of Series B warrants 463,088 9,262
Exercise of other warrants 2,000 40
Net loss
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1990 - - 2,857,787 57,156
Exercise of common stock options 7,100 142
Exercise of other warrants 98,000 1,960
Consultant's compensation 338 7
Private placement, October 1990
at $12.00 per share 257,500 5,150
Net loss
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1991 - - 3,220,725 64,415
Exercise of common stock options 10,950 218
Exercise of other warrants 10,000 200
Private placement, April 1991
at $17.50 per share 214,188 4,284
Net loss
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1992 - - 3,455,863 69,117
Exercise of common stock options 4,300 86
Private placement, May 1992
at $11.625 per share 277,100 5,542
Net loss
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1993 - - 3,737,263 74,745
Exercise of common stock options 70,227 1,405
Common stock retired as payment
for common stock options exercised (12,903) (258)
Grant of stock option below fair market value
Private placements:
July 1993 at $5.50 per share 317,093 6,342
December 1993 at average of $6.12 per share 427,275 8,546
January 1994 at average of $6.24 per share 222,100 4,442
March 1994 at $5.30 per share 51,000 1,020
Common stock issued in payment of offering expenses 974 19
Net loss
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1994 - - 4,813,029 96,261
Private placements:
April 1994 at $4.00 per share 100,000 2,000
August 1994 at $4.485 per share 100,000 2,000
September 1994 at $3.80 per share 250,000 5,000
Net loss
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1995 - - 5,263,029 $105,261
Private placements:
November 1995 at $1.25 per share 2,788,000 $55,760
Net Loss
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1996 8,051,029 $161,021
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Deficit
Accumulated
Capital During the Treasury Stock
in Excess Development ------------------------
of Par Value Stage Shares Amount
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at September 23, 1983 $ - $ - - $ -
Original issuance of common stock:
October 1983 at $.02 per share
October 1983 at $2.00 per share 108,900
Issuance for cash, January 1984
at $4.00 per share 1,325,817 (137,937)
Net loss
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1984 1,434,717 (137,937) - -
Purchase of treasury stock (13,333) (267)
Adjustment to capital in excess
of par value 5,600
Net loss (692,070)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1985 1,440,317 (830,007) (13,333) (267)
Purchase of treasury stock (4,167) (83)
Initial public offering, October 1985
at $6.00 per share 2,392,536
Net loss (994,767)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1986 3,832,853 (1,824,774) (17,500) (350)
Purchase of treasury stock (5)
Preferred stock subscribed:
Series A 450,000
Net loss (1,445,191)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1987 4,282,853 (3,269,965) (17,500) (355)
issuance of 8.5% convertible
subordinated notes warrants 62,500
Retirement of treasury stock (5) 17,500 355
Preferred stock subscribed/(returned):
Series A (225,000)
Series B 120,000
Net loss (1,327,934)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1988 4,240,348 (4,597,899) - -
Conversion of 8.5% convertible
subordinated notes 249,193
Consultant's compensation 6,524
Preferred stock subscribed/(converted):
Series A 74,296
Series B 1,556,444
Dividends accrued - Series B (221,955)
Net loss (1,553,240)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1989 5,904,850 (6,151,139) - -
Private placement, November 1989
at $8.00 per share 538,500
Exercise of common stock options 13,930
Preferred stock subscribed/(converted):
Series B 705,111
Dividends accrued - Series B (141,158)
Reverse accrued dividends - Series B 363,113
Exercise of Series B warrants 1,611,546
Exercise of other warrants 14,360
Net loss (1,512,343)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1990 9,010,252 (7,663,482) - -
Exercise of common stock options 28,258
Exercise of other warrants 743,640
Consultant's compensation 2,894
Private placement, October 1990
at $12.00 per share 2,765,446
Net loss (2,111,267)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1991 12,550,490 (9,774,749) - -
Exercise of common stock options 40,932
Exercise of other warrants 104,800
Private placement, April 1991
at $17.50 per share 3,433,816
Net loss (3,156,803)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1992 16,130,038 (12,931,552) - -
Exercise of common stock options 16,139
Private placement, May 1992
at $11.625 per share 2,889,461
Net loss (3,738,097)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1993 19,035,638 (16,669,649) - -
Exercise of common stock options 292,406
Common stock retired as payment
for common stock options exercised (99,740)
Grant of stock option below fair market value 468,750
Private placements:
July 1993 at $5.50 per share 1,531,879
December 1993 at average of $6.12 per share 2,386,770
January 1994 at average of $6.24 per share 1,259,545
March 1994 at $5.30 per share 244,088
Common stock issued in payment of offering expenses 8,868
Net loss (4,613,042)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1994 25,128,204 (21,282,691) - -
Private placements:
April 1994 at $4.00 per share 378,000
August 1994 at $4.485 per share 423,575
September 1994 at $3.80 per share 886,428
Net loss (3,754,968)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1995 $26,816,207 ($25,037,659) - -
Private placements:
November 1995 at $1.25 per share $2,864,383
Net Loss ($3,255,903)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1996 $29,680,590 ($28,293,562)
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
9
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOW
XYTRONYX, INC. AND SUBSIDIARY (A DEVELOPMENT STAGE ENTERPRISE)
<TABLE>
<CAPTION>
Years ended March 31 September 23, 1983
------------------------------------------------ (inception) to
1996 1995 1994 March 31, 1996
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss ($3,255,903) ($3,754,968) ($4,613,042) ($28,293,562)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 123,427 171,135 184,847 1,474,013
Non-cash compensation expense upon issuance
of common stock options and common stock - - 468,750 475,013
Net book value of disposals 5,506 8,783 131,704 148,252
Option income from retirement of stock
or amounts previously advanced by customer - - - (400,000)
Changes in assets and liabilities:
Accounts receivable 6,405 219,505 34,331 (2,669)
Inventory 7,060 (38,890) 354,285 (40,910)
Prepaid expenses and other assets 3,349 (35,744) 8,981 (106,920)
Accounts payable (2,505) (37,937) (80,126) 214,309
Accrued expenses 263,486 (216,845) 129,923 234,904
Customer advances (30,888) (11,012) (16,447) 140,863
Other liabilities (11,895) (11,895) (11,894) 2,976
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash used by operating activities (2,891,958) (3,707,868) (3,408,688) (26,153,448)
INVESTING ACTIVITIES
Purchases of short-term investments (1,288,106) (992,326) (3,200,000) (5,480,432)
Maturities of short-term investments 992,326 3,200,000 - 4,192,326
Capital expenditures (51,596) (33,399) (57,678) (821,663)
Patent application costs (61,823) (112,027) (192,360) (880,628)
Other - - - (996)
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (409,199) 2,062,248 (3,450,038) (2,991,393)
FINANCING ACTIVITIES
Issuance of notes payable 325,426 318,172 188,117 1,659,401
Repayment of notes payable (325,426) (318,172) (188,117) (1,440,657)
Repayment of capitalized lease obligations (37,087) (27,641) (22,115) (174,982)
Long-term customer advances - (500,000) - 100,000
Issuance of common and preferred stock 2,920,143 1,697,003 5,645,332 29,348,230
Issuance of stock warrants - - - 62,500
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 2,883,056 1,169,362 5,623,217 29,554,492
- ----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash
and cash equivalents (418,101) (476,258) (1,235,509) 409,651
Cash and cash equivalents at beginning of period 827,752 1,304,010 2,539,519 -
- ----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $409,651 $827,752 $1,304,010 $409,651
- ----------------------------------------------------------------------------------------------------------------------------------
Cash paid for interest $18,804 $143,909 $20,120 $458,850
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
XYTRONYX, INC. AND SUBSIDIARY (A DEVELOPMENT STAGE ENTERPRISE)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS - The consolidated financial statements include the
accounts of Xytronyx, Inc., and its wholly owned subsidiary, Perio Test, Inc.
(collectively, the "Company"). The Company was incorporated under the laws of
the State of Delaware on September 23, 1983. For the period of inception to
date, the Company's activities have been directed primarily toward the
development and commercialization of products based on biotechnological
research.
PRINCIPLES OF CONSOLIDATION - All significant intercompany balances and
transactions have been eliminated in consolidation.
DEVELOPMENT STAGE - The Company has not earned significant revenues from planned
principal operations. Accordingly, the Company's activities have been accounted
for as those of a "Development Stage Enterprise" as set forth in Financial
Accounting Standards Board Statement No. 7.
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the financial
statements, during the year ended March 31, 1996, the Company incurred a net
loss of $3,255,903. This factor, among others, may indicate that the Company
will be unable to continue as a going concern. The financial statements do not
include any adjustments relating to the recoverability and classification of
recorded asset amounts or the amount and classification of liabilities that
might be necessary should the Company be unable to continue as a going concern.
The Company's continuation as a going concern is dependent upon its ability to
generate sufficient cash flow to meet its obligations on a timely basis, to
comply with the terms and covenants of its financing agreements and business
contracts, to obtain additional financing or refinancing as may be required, and
ultimately to attain successful operations. Based on the assumption that no
significant revenues are received, management anticipates that the Company's
current resources will allow planned operations to continue through September
1996 and possibly beyond that date. Unanticipated expenses, however, could
shorten that period. Accordingly, the Company will most probably require
additional financing from time-to-time until it begins to generate positive cash
flow from operations. There can be no assurance that the Company will be
successful in obtaining financing, or that it will attain positive cash flow
from operations.
ACCOUNTING ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results may differ from those estimates.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS - Cash equivalents consist of money
market instruments purchased with an original maturity of three months or less.
Short-term investments are investments with original maturities of less than one
year but greater than three months. The
11
<PAGE>
Notes to Consolidated Financial Statements (continued)
Company's short-term investments consist of marketable debt securities that
are considered to be held to maturity and recorded at amortized cost, which
approximates market.
INVENTORY - Inventory is valued at the lower of cost (determined by the first-
in, first-out method) or market and consists of the following:
March 31
1996 1995
---- ---
Raw materials $33,867 $22,407
Work-in-process 3,963 25,560
Finished goods 3,077 --
------- -------
Total $40,907 $47,967
------- -------
PROPERTY AND EQUIPMENT, DEPRECIATION AND AMORTIZATION - Depreciation and
amortization of property and equipment are provided using the straight-line
method over the estimated useful lives of the related assets, which are
principally five and ten years. Property and equipment are summarized as
follows:
March 31
1996 1995
---- ----
Laboratory equipment $ 602,613 $ 586,369
Office furniture and equipment 169,627 154,722
Leasehold improvements 29,186 29,186
--------- ---------
Total property and equipment 801,426 770,277
Less accumulated
depreciation and amortization (666,192) (650,123)
--------- ---------
$ 135,234 $ 120,154
--------- ---------
--------- ---------
PATENT APPLICATION COSTS - Legal expenses incurred in connection with
applications for patents on research and development projects are capitalized.
The costs are amortized using the straight-line method over five years. Patent
costs which have no further economic value are written off in the period in
which such diminution in value occurs. Patent application costs are net of
accumulated amortization of $296,628 and $236,833 at March 31, 1996 and 1995,
respectively.
ACCRUED EXPENSES - Accrued expenses consist of the following:
March 31
1996 1995
---- ----
Accrued compensation $ 67,925 $115,194
Accrued clinical trial expenses 306,674 --
Other 4,328 247
-------- --------
Total $378,927 $115,441
-------- --------
-------- --------
REVENUE RECOGNITION - Revenue is generally recognized at the time of product
shipment or when the earnings process is complete. Payments received in advance
of performance are recorded as deferred revenue.
LOSS PER SHARE OF COMMON STOCK - Loss per share of common stock is computed by
dividing the net loss by the weighted average number of shares of common stock
outstanding during the period. Common stock equivalents have not been included
as they are antidilutive.
12
<PAGE>
CONCENTRATION OF CREDIT RISK - The Company invests its excess cash in money
market accounts and short-term investments. The Company has not experienced any
losses on its cash accounts or short-term investments.
MAJOR CUSTOMERS - Export sales, all of which were to Japan, accounted for 51% of
product sales in fiscal year 1996. Product sales for fiscal year 1995 were
virtually all to domestic customers while export sales, primarily to Europe,
accounted for 50% of product sales in fiscal year 1994. Three customers
individually accounted for 21%, 26% and 46%, respectively, of fiscal year 1996
product sales. One customer individually accounted for 93% and 45% of product
sales for fiscal years 1995 and 1994, respectively.
SUPPLEMENTAL CASH FLOW INFORMATION - The Company had the following noncash
financing and investing activities for the period September 23, 1983 (inception)
through March 31, 1996: Common stock issued upon the conversion of long-term
debt in the amount of $249,994; common stock issued upon the conversion of
$719,500 of Series B preferred stock; option income of $100,000 recognized from
an amount previously classified as a customer advance, and; capital lease
obligations incurred totaling $199,709, of which $24,180 was incurred in Fiscal
1996.
2. STOCKHOLDERS' EQUITY
PRIVATE PLACEMENTS OF COMMON STOCK - During November 1995 the Company completed
a private placement of 34.85 units at $100,000 per unit to "accredited"
investors as defined by federal securities regulations. Each unit was comprised
of 80,000 shares of the Company's common stock and 100,000 warrants to purchase
one share of common stock per warrant at an exercise price of $1.00 per share
for a period of ten years. The Company received net proceeds of $2,920,143
after issuance costs of $564,857. Included among the issuance costs was the
payment of $313,650 in commissions and a nonaccountable expense allowance of
$139,400 to a placement agent. The Company will also pay a commission to the
placement agent of 6% of the gross proceeds received upon any exercise of the
warrants. Additionally, the placement agent received 4.35625 unit purchase
warrants at an exercise price equal to 110% of the price per unit paid by the
investors in the private placement, to purchase up to 784,125 shares of common
stock.
During April 1994 the Company completed a private placement of 100,000 shares of
its common stock to international investors for $4.00 per share which resulted
in net proceeds of $380,000 to the Company after issuance costs of $20,000.
During August 1994 the Company completed a private placement of 100,000 shares
of its common stock to international investors for $4.485 per share which
resulted in net proceeds of $425,575 to the Company after issuance costs of
$22,925. During September 1994 the Company completed a private placement of
250,000 shares of its common stock to international investors for $3.80 per
share which resulted in net proceeds of $891,428 after issuance costs of
$58,572.
In July 1993 the Company completed a private placement of 317,093 shares of
common stock to sophisticated investors for $5.50 per share which resulted in
$1,538,221 of net proceeds to the Company. During December 1993 the Company
completed private placements of 427,275 shares of common stock to international
investors at prices averaging $6.12 per share which resulted in $2,395,316 of
net proceeds to the Company. In January 1994 the Company completed private
placements of 222,100 shares of common stock to international investors at an
average price of $6.24 per share which resulted in $1,263,987 of net proceeds to
the Company. In March 1994 the
13
<PAGE>
Notes to Consolidated Financial Statements (continued)
Company completed a private placement of 51,000 shares of common stock to
international investors at a price per share of $5.30 which resulted in
$245,108 of net proceeds to the Company. In connection with the July 1993
private placement, the Company entered into an agreement with a placement
agent under which the Company agreed to the payment of a cash fee of 10% of
the gross proceeds of placements completed by the agent, and the issuance of
warrants to purchase up to 259,998 shares of common stock. The warrants were
subject to partial cancellation in the event that the agent was unable to
complete placements within specified periods of time. The agreement was
terminated on February 9, 1994, and the agent has a vested right to purchase
153,600 shares of the Company's common stock at $6.50 per share as a result
of placements completed under the agreement.
WARRANTS - At March 31, 1996, warrants to purchase 4,510,725 shares of the
Company's common stock at a weighted average exercise price of $1.55 per share
were exercisable and expire at various dates through November 26, 2005. Of
these warrants, 3,920,625 warrants with an exercise price of $1.00 are subject
to redemption by the Company at $0.10 per warrant on 60 days prior written
notice if the market price for the Company's common stock exceeds $6.00 for a
20-day period ending three days prior to redemption. After November 27, 1996,
the Company may redeem the warrants if the market price of the Company's common
stock for the 20-day period exceeds $4.00 per share. As described in Note 4, a
stipulated settlement agreement was completed in June 1994 under which the
Company will issue warrants to purchase 309,734 of common stock at an exercise
price of $22.00 per share, exercisable for a period of five years from date of
issuance. As described in Note 7, subsequent to March 31, 1996 the Company
granted a warrant to a corporation with which it entered into a license
agreement. Such warrant enables the grantee to purchase 100,000 shares of
common stock at an exercise price of $2.25 per share, exercisable for a period
of ten years.
STOCKHOLDERS' RIGHTS PLAN - In April 1991, the Company's Board of Directors
adopted a stockholders' rights plan. The plan provides for the distribution of
preferred stock purchase rights to common stockholders which separate from the
common stock ten business days following: (a) an announcement of an acquisition
by a person (or group) ("Acquiring Party") of 15% or more of the outstanding
common shares of the Company, (b) the commencement of a tender offer or exchange
offer for 15% or more of the common shares, or (c) a merger or asset sale as
defined in the agreement. Under the agreement, certain related parties are not
considered to be an Acquiring Party. In addition, the plan was amended in
November 1995 to allow the placement agent (and affiliates) associated with the
November 1995 private placement to acquire up to 30% of the outstanding common
shares of the Company without being characterized as an Acquiring Party. One
right attached to each share of common stock outstanding as of April 15, 1991
and attaches to all shares issued thereafter. Each right entitles the holder to
purchase one one-hundredth of one share of Series R junior participating
cumulative preferred stock, par value $25.00 per share ("unit of preferred
stock"), at an exercise price of $120 per unit of preferred stock. The units of
preferred stock are non redeemable, voting and are entitled to certain
preferential dividend and liquidation rights. The exercise price and the number
of units of preferred stock issuable are subject to adjustment to prevent
dilution.
If, after the rights have been distributed, the Company is a party to a business
combination or other specifically defined transaction, each right (other than
those held by the Acquiring Party) will entitle the holder to receive, upon
exercise, units of preferred stock or shares of common stock of the surviving
company with a value equal to two times the exercise price of the right.
Alternatively, a majority of the independent Directors of the Company may direct
the Company to exchange all of
14
<PAGE>
the then outstanding rights for common stock at an exchange ratio of one
common share per right. The rights expire April 15, 2001 and are redeemable
(at the option of a majority of the independent Directors of the Company) at
$.01 per right at any time until the tenth day following an announcement of
the acquisition of 15% or more of the Company's shares.
STOCK OPTIONS - The Company is authorized to issue options on up to 1,014,500
common shares to directors, consultants and key employees under various stock
option plans or by direct grant by the Company's Board of Directors. Incentive
stock options are granted at prices not less than the fair market value at the
date of grant. Non-qualified stock options may be granted at prices below 100%
(but not less than 85%) of the fair market value at the date of grant. The
options become exercisable in various increments over four or five years.
Options are terminated if not exercised within 5-10 years from the date of
grant.
As of March 31, 1996, 130,100 shares remained available for grant under all
plans. The following table summarizes stock option activity for the fiscal
years ended March 31, 1994, 1995 and 1996:
Number Price
of Shares Per Share
--------- ---------
Outstanding March 31, 1993 641,080 $3.25-27.375
Granted 271,000 $4.00-10.00
Exercised (70,227) $3.25-4.40
Canceled (203,500) $4.00-22.00
---------
Outstanding March 31, 1994 638,353 $4.00-27.375
Granted 435,000 $3.125-5.875
Exercised -- --
Canceled (21,713) $5.125-27.375
---------
Outstanding March 31, 1995 1,051,640 $3.125-22.50
Granted 182,000 $1.75-2.50
Exercised -- --
Canceled (320,340) $2.50-22.50
---------
Outstanding March 31, 1996 913,300
---------
At March 31, 1996, options for 479,900 shares of common stock were exercisable
and the remaining 433,400 become exercisable through 1999. The weighted average
exercise price of these options is $6.59 per share and they expire from May 1996
to December 2005.
An option held by an officer of the Company to purchase 125,000 shares of common
stock at an exercise price of $4.00 per share was scheduled to expire January
20, 1994 if not exercised. The pending expiration created a possible situation
where the officer would be forced to exercise the option and immediately sell a
significant number of shares to cover the expenses of the exercise, potentially
impairing the Company's fundraising efforts in process at that time.
Accordingly, in advance of this expiration date, the Board of Directors of the
Company decided that it was in the best interest of the Company to grant a
replacement option, contingent upon the expiration of the original option, to
purchase 125,000 shares at the same exercise price of $4.00 per share. This
grant effectively extended the term of the expiring option to January 20, 1997.
The replacement option transaction resulted in no current or future outlay of
cash by the Company, however, Accounting Principles Board Opinion Number 25
required that the Company recognize compensation expense equal to the difference
between the exercise price of the option, and the market value of the Company's
common stock as of the date the replacement option was granted.
15
<PAGE>
Notes to Consolidated Financial Statements (continued)
Accordingly, the Company recorded compensation expense of $468,750, included
in general and administrative expense, during Fiscal 1994 related to the
grant of this replacement option.
3. DISTRIBUTION AND MARKETING AGREEMENTS
AGREEMENTS IN EFFECT AT MARCH 31, 1996 - During the year ended March 31, 1996
the Company entered into two agreements under which it has granted exclusive
rights relating to its Kephra-TM- photochromic technology. One agreement
related to the exclusive use of Kephra in the U.S. and Canadian soft-drink
markets, and the second related to the exclusive worldwide use of Kephra in the
production of watches. In January 1996 the Company entered into an agreement
under which it licensed its Sun Alert technology for exclusive worldwide use.
AGREEMENTS WITH COLGATE-PALMOLIVE COMPANY - During 1987 the Company entered
into two agreements with Colgate (collectively, the "Distribution
Agreements") which, as subsequently amended, granted Colgate the exclusive
right to market the Company's Periodontal Tissue Monitor kit (the "PTM")
throughout most of the world. As consideration for the marketing rights
Colgate paid an aggregate of $1,200,000 in option and exclusivity fees which
were recorded by the Company as Marketing Rights revenue during the period
September 23, 1983 to March 31, 1996. No such revenues were recorded during
any of the years ended March 31, 1996, 1995 and 1994. Under the Distribution
Agreements the Company also issued 35,002 shares of common stock to Colgate
for cash consideration of $300,000. On May 11, 1995, the Company and Colgate
entered into an agreement to terminate the Distribution Agreements. No
financial consideration was exchanged under the termination agreement, and
all marketing rights held by Colgate were returned to the Company.
AGREEMENT WITH PURELY HAWAIIAN LICENSING, INC. - On April 30, 1994 the Company
entered into a Purchase Agreement (the "Agreement") to sell certain assets
relating to its Sun Alert-TM- technology to Purely Hawaiian Licensing, Inc. Due
to the fact that certain of the assets were sold on a consignment basis, and
that other uncertainties existed regarding the ultimate realization of any
consideration from the sale, at March 31, 1994 approximately $127,000 in patent,
trademark and other assets related to the product line was written off and
included in product development expense, and approximately $200,000 in inventory
was written off and included in cost of product sales. Purely Hawaiian failed
to make certain minimum payments required under the agreement and, in January
1996, the Company terminated the agreement.
4. COMMITMENTS AND CONTINGENCIES
TECHNOLOGY LICENSE AGREEMENTS - The Company has entered into agreements relating
to certain technologies which obligate the Company to pay royalties based on any
sales of products incorporating such technologies and upon achievement of
certain other milestones. In 1984 the Company entered into an agreement with
the Board of Trustees of the University of Illinois ("U of I") which granted the
Company an exclusive license to certain technologies used in the PTM product and
requires the Company to pay a royalty, subject to reduction under certain
circumstances, to U of I equal to 5% of any sales of PTM. In addition, as
described in Note 7 below, on May 8, 1996 the Company entered into an agreement
with Wound Healing of Oklahoma ("WHO") under which it acquired an exclusive
worldwide license to a certain technology,
16
<PAGE>
Photodynamic Immunotherapy-TM- treatment for cancer. The agreement requires
the Company to pay WHO a royalty ranging from 8% to 10% on any sales of
products using the licensed technology, or from the sale of marketing rights
associated with the technology.
LEASES - The capitalized cost and accumulated depreciation of property under
capital lease obligations included in property and equipment is as follows:
March 31
1996 1995
---- ----
Laboratory equipment $ 135,156 $ 135,156
Office furniture and equipment 23,918 19,550
Less accumulated depreciation (137,548) (149,167)
--------- ---------
$ 21,526 $ 5,539
--------- ---------
--------- ---------
Future minimum lease commitments and rental payments are summarized as follows
for the year ending March 31:
Capital Operating
Leases Leases
------- ---------
1997 $14,055 $29,353
1998 5,640 -------
1999 5,640 -------
2000 5,640
2001 2,820
-------
33,795
Less imputed interest (3,587)
-------
Present value of minimum future
lease payments $30,208
-------
-------
Total rent expense for the fiscal years ended March 31, 1996, 1995 and 1994, and
the period September 23, 1983 to March 31, 1996 were $132,766, $144,279,
$137,424, and $1,377,180, respectively.
EMPLOYMENT AGREEMENT - Effective January 1, 1995, the Company entered into an
employment agreement to engage Larry O. Bymaster to serve in the capacity of
Chairman of the Board and Chief Executive Officer of the Company. The agreement
provides for a guaranteed base salary and an annual bonus of up to 50% of
salary, such bonus amount to be determined by the Board of Directors. It also
provides for payment in lieu of pension coverage of up to 10% of Mr. Bymaster's
cash salary compensation, and payment of premiums, on behalf of Mr. Bymaster,
for a term life insurance policy with coverage in an amount equal to twice the
base salary earned by Mr. Bymaster. The agreement is effective for a period of
24 months and expires on December 31, 1996.
CONSULTING AGREEMENT - Effective January 1, 1995, the Company entered into a
consulting agreement with its former Chairman covering a period of 33 months,
commencing on the effective date and ending on September 30, 1997. As
compensation for services rendered, the Company will pay an annual consulting
fee payable in equal monthly installments, in the amount of $100,000 for the
calendar year 1995 and $50,000 for the calendar year 1996. Payments for the
fiscal years ended March 31, 1996 and 1995 were $87,500 and $25,000
respectively.
17
<PAGE>
Notes to Consolidated Financial Statements (continued)
LITIGATION - On February 4, 1992, the Company received service of a putative
stockholder class action complaint against it and certain former officers of the
Company. The complaint alleged various claims, under the antifraud provisions
of the Securities Exchange Act of 1934 and other law, on behalf of persons who
purchased the Company's common stock on the open market between May 18, 1990 and
November 14, 1991, including the claim that the Company failed to disclose
information regarding the prospects for U.S. Food and Drug Administration
approval of the Periodontal Tissue Monitor Kit. Additional similar complaints
were thereafter filed by other individuals. A single complaint consolidating
all of these complaints was filed on May 4, 1992. This consolidated complaint
alleged similar claims on behalf of a shorter putative class period extending
from February 1, 1991 through November 14, 1991. The Company's motion to
dismiss the consolidated complaint was granted with respect to the state law
claims but denied with respect to the federal securities claims.
On March 11, 1994 the Company's Board of Directors approved an agreement-in-
principle to settle the litigation, and on June 16, 1994 the U.S. District Court
approved a Stipulation of Settlement of the litigation. The settlement expanded
the class to include all persons who purchased the Company's stock from October
4, 1990 through and including November 14, 1991. The settlement included a cash
payment of $2,800,000 to the plaintiff class, all of which was paid by the
insurers providing liability coverage for the Company's directors and officers.
Additionally, upon distribution of the settlement by the plaintiffs' attorneys,
the Company will issue to the plaintiff class five-year warrants to purchase
309,734 shares of common stock at an exercise price of $22.00 per share. The
Company believed the claims to be without merit but concluded that it was in its
best interest to settle the matter to avoid the expenses and risks of continued
litigation.
18
<PAGE>
5. INCOME TAXES
The Company adopted Financial Accounting Standards Board (FASB) Statement No.
109, Accounting for Income Taxes, as of April 1, 1993. FASB Statement No. 109
is an asset and liability approach that requires the recognition of deferred
assets and liabilities for the expected future tax consequences of events that
have been recognized in the Company's financial statements or tax returns.
Significant components of the Company's deferred tax assets as of March 31 are
shown below. A valuation allowance of $10,982,000 and $9,695,000 at March 31,
1996 and 1995, respectively, has been recognized as an offset to the deferred
tax assets as realization of such assets is uncertain.
March 31
1996 1995
---- ----
Deferred tax assets:
Capitalized research expense $ 202,000 $ 170,000
Accruals not currently deductible 179,000 79,000
Net operating loss carryforwards 10,207,000 9,102,000
Research and development and other credits 472,000 425,000
------------ ------------
Total deferred tax assets 11,060,000 9,776,000
Deferred tax liabilities - patent expense (78,000) (81,000)
------------ ------------
Total net deferred tax assets 10,982,000 9,695,000
Valuation allowance for deferred tax assets (10,982,000) (9,695,000)
------------ ------------
Net deferred tax assets $ 0 $ 0
------------ ------------
------------ ------------
At March 31, 1996, the Company has federal and California tax net operating
carryforwards of approximately $27,374,000 and $10,360,000, respectively. The
Company also has federal and California research and other credit carryforwards
of approximately $361,000 and $97,000, respectively. The difference between the
tax loss carryforwards for federal and California purposes is attributable to
the capitalization of research and development expenses for California tax
purposes and a required 50% limitation in the utilization of California loss
carryforwards. The federal tax loss carryforward and the credit carryforwards
will begin expiring in 1999 unless previously utilized. The California tax loss
carryforward and credit carryforwards began expiring in 1995.
The Internal Revenue Code ("IRC") includes provisions which significantly limit
potential use of net operating losses in situations where there is a change in
ownership, as defined in IRC Section 382, of more than 50% during a three-year
period. Accordingly, if a change in ownership occurs, the ultimate benefit
realized from these carryovers may be significantly reduced in total, and the
amount that may be utilized in any given year may be significantly limited. The
limitation is computed based upon the fair market value of the Company at the
time of the ownership change multiplied by the federal long-term tax-exempt
borrowing rate. The State of California has enacted similar legislation. The
common stock issuance of November 27, 1995 in combination with other stock
issuances completed by the Company during the past three years have resulted in
a change in ownership as defined in IRC Section 382. Accordingly, the Company
is currently subject to an annual limitation of approximately $605,000 on
accumulated federal and California net operating loss carryforwards of
approximately $26,000,000 and $10,000,000 respectively.
19
<PAGE>
Notes to Consolidated Financial Statements (continued)
6. RELATED PARTY TRANSACTIONS
For the period September 23, 1983 to March 31, 1996, the Company incurred
expenses principally for financial consulting services inclusive of finder's
fees on Company financing of $861,928 to related entities. No such expenses to
related entities were incurred during the fiscal years ended March 31, 1996,
1995, and 1994.
7. SUBSEQUENT EVENTS
LICENSE AGREEMENT WITH WOUND HEALING OF OKLAHOMA - On May 8, 1996 the Company
entered into an agreement with WHO, a privately held corporation, under which it
acquired an exclusive license to a certain technology, Photodynamic
Immunotherapy-TM- ("PDIT-TM-") treatment for cancer. Under the agreement, the
Company granted WHO a ten-year warrant to purchase 100,000 shares of the
Company's common stock at an exercise price of $2.25 per share.
OPTION TO ACQUIRE WITH BINARY THERAPEUTICS, INC. - On June 4, 1996 the
Company entered into an agreement with Binary Therapeutics, Inc. ("BTI")
under which the Company was granted an option to acquire BTI, a development
stage company with certain technologies in the area of Photodynamic Therapy
("PDT") for cancer. The agreement gives the Company the right to acquire BTI
at anytime prior to April 30, 1997 by a merger of BTI into a wholly owned
subsidiary of the Company. If the Company elects to exercise its option, the
agreement calls for the Company to issue common stock to the BTI stockholders
with an aggregate acquisition value of $6,000,000. The number of shares of
the Company's common stock to be issued will be determined based upon the
market value of the Company's common stock prior to the date of exercise,
although the value of the common stock cannot be less than $2.00 or more than
$6.00 per share. Under the agreement, the Company will assist BTI during the
option period with the advancement of certain PDT products into human
clinical trials. In order for the merger to be effected, the agreement will
require approval by a majority of the stockholders of BTI, and BTI is
currently in the process of seeking such approval. The Company may elect to,
or under certain circumstances may be required to, obtain the approval of its
stockholders prior to effecting the merger. Additionally, in order to
exercise its rights to consummate the merger under the agreement, the Company
will have to satisfy certain conditions, including funding up to $1,250,000
of product development expenses incurred by BTI during the option period. In
the event that the Company terminates the agreement, the Company would remain
obligated to continue funding of such product development expenses incurred
during the period ending 90 days from such termination.
20
<PAGE>
INDEPENDENT AUDITORS' REPORT
Xytronyx, Inc. and Subsidiary:
We have audited the accompanying consolidated balance sheets of Xytronyx, Inc.
and Subsidiary (the "Company", a development stage enterprise) as of March 31,
1996 and 1995, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended March 31, 1996 and the period from September 23, 1983 (date of
incorporation of Xytronyx, Inc.) to March 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan or 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, such consolidated financial statements present fairly, in all
material respects, the financial position of Xytronyx, Inc. and Subsidiary at
March 31, 1996 and 1995, and the results of their operations and their cash
flows for each of the three years in the period ended March 31, 1996, and for
the period from September 23, 1983 (date of incorporation of Xytronyx, Inc.) to
March 31, 1996 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. The Company is a development
stage enterprise engaged in developing and commercializing medical products
based on biotechnological research. As discussed in Note 1 to the consolidated
financial statements, the fact that the Company has incurred recurring operating
losses and operating cash flow deficiencies since inception raises substantial
doubt about its ability to continue as a going concern. Management's plans
concerning these matters are also described in Note 1. The consolidated
financial statements do not include any adjustments that might result from the
outcome of these uncertainties.
/s/ DELOITTE & TOUCHE LLP
San Diego, California
May 8, 1996 (June 4, 1996 as to Note 7)
21
<PAGE>
CONSOLIDATED QUARTERLY FINANCIAL SUMMARIES (UNAUDITED)
XYTRONYX, INC. AND SUBSIDIARY (A DEVELOPMENT STAGE ENTERPRISE)
<TABLE>
<CAPTION>
Year ended March 31, 1995
-----------------------------------------------------------------------------
First Second Third Fourth Year
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1995 Total revenues $955,199 $145,774 $51,465 $48,718 $1,201,156
Net loss (688,584) (901,711) (912,974) (1,251,699) (3,754,968)
Loss per share of common stock (0.15) (0.18) (0.17) (0.24) (0.74)
Market price range of common stock*
High 5.50 6.50 4.94 4.13 6.50
Low 3.31 3.38 2.56 1.50 1.50
Shares traded 661,500 1,110,300 1,037,700 648,100 3,457,600
- --------------------------------------------------------------------------------------------------------------------------------
Year ended March 31, 1996
-----------------------------------------------------------------------------
First Second Third Fourth Year
- --------------------------------------------------------------------------------------------------------------------------------
1996 Total revenues $94,901 $50,200 $201,755 $31,960 $378,816
Net loss (707,952) (877,728) (655,574) (1,014,649) (3,255,903)
Loss per share of common stock (0.13) (0.17) (0.10) (0.12) (0.52)
Market price range of common stock*
High 1.94 3.00 3.38 2.75 3.38
Low 1.25 1.38 1.25 1.38 1.25
Shares traded 487,300 970,900 1,075,000 899,800 3,433,000
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*THIS PRESENTS THE HIGH AND LOW CLOSING PRICES AND TRADING VOLUMES FOR THE
PERIODS INDICATED AS REPORTED BY AMEX. THE COMPANY HAS NEVER PAID ANY CASH
DIVIDENDS AND DOES NOT CONTEMPLATE THE PAYMENT OF CASH DIVIDENDS IN THE
FORESEEABLE FUTURE.
22
<PAGE>
<TABLE>
<S><C>
CORPORATE INFORMATION
XYTRONYX, INC.
EXECUTIVE OFFICERS
LARRY O. BYMASTER HEADQUARTERS
Chairman of the Board, Xytronyx, Inc.
President and Chief 6555 Nancy Ridge Drive, Suite 200
Executive Officer San Diego, CA 92121
DALE A. SANDER
Vice President of Finance, TRANSFER AGENT
Chief Financial Officer First Chicago Trust Company of New York
and Secretary Mail Suite 4691
P.O. Box 2533
Jersey City, NJ 07303-2533
DIRECTORS
LARRY O. BYMASTER CORPORATE COUNSEL
Chairman of the Board, Donovan Leisure Newton & Irvine
President and Chief 30 Rockefeller Plaza
Executive Officer New York, NY 10112
H. LAWRENCE GARRETT, III
Senior Vice President INDEPENDENT AUDITORS
Rolls-Royce, Inc. Deloitte & Touche LLP
701 B Street, Suite 1900
San Diego, CA 92101-8198
JACK HALPERIN
Attorney NOTICE OF ANNUAL MEETING
The Annual Meeting of Stockholders will
WILLIAM L. JORGENSON be held at 9:00 a.m. on Friday, August 9,
Managing Principal 1996, at the Company's headquarters.
Senechal, Jorgenson, Hale & Co., Inc.
10-K AVAILABILITY
JOHN M. KOLBAS A copy of the Company's annual report to
Retired President the Securities and Exchange Commission on
Norwich Eaton Pharmaceuticals, Inc. Form 10-K for the fiscal year ended March
31, 1996, without exhibits, will be made
ELLIOTT H. VERNON available free of charge to any
Chairman of the Board and Stockholder upon written request to the
Chief Executive Officer Corporate Secretary, Xytronyx, Inc., 6555
Healthcare Imaging Services, Inc. Nancy Ridge Drive, Suite 200, San Diego,
CA 92121
MORRIS S. WEEDEN
Retired Vice Chairman of the STOCK LISTING (XYX)
Board of Directors The shares of common stock of Xytronyx,
Morton Thiokol, Inc. Inc. are traded on the American Stock Ex-
change under the symbol "XYX". Trading
MICHAEL S. WEISS activity in the Company s shares is
Senior Managing Director reported daily (when trading occurs) in
Paramount Capital, Inc. the Wall Street Journal.
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Annual Report on Form 10-K
for the year ended March 31, 1996 of Xytronyx, Inc. and Subsidiary (the Company,
a development stage enterprise) of our report dated May 8, 1996 (June 4, 1996 as
to Note 7; which report contains an explanatory paragraph referring to the
Company's activities as those of a development stage enterprise and to the
Company's ability to continue as a going concern) appearing in the Company's
1996 Annual Report to Stockholders.
We also consent to the incorporation by reference of the aforementioned report
in the Company's Amendment No. 1 to Registration Statement No. 33-27427 and
Registration Statement No. 33-45013 on Form S-8; and, Amendment No. 3 to
Registration Statement 33-40630, Amendment No. 2 to Registration Statement No.
33-30853, Amendment No. 1 to Registration Statement No. 33-70006, and
Registration Statement No. 33-65063 on Form S-3.
/s/ DELOITTE & TOUCHE LLP
San Diego, California
June 19, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED MARCH 31, 1996 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> APR-01-1995
<PERIOD-END> MAR-31-1996
<CASH> 409,651
<SECURITIES> 1,288,106
<RECEIVABLES> 2,668
<ALLOWANCES> 0
<INVENTORY> 40,907
<CURRENT-ASSETS> 1,837,277
<PP&E> 801,426
<DEPRECIATION> 666,192
<TOTAL-ASSETS> 2,174,468
<CURRENT-LIABILITIES> 605,749
<BONDS> 20,670
0
0
<COMMON> 161,021
<OTHER-SE> 1,387,028
<TOTAL-LIABILITY-AND-EQUITY> 2,174,468
<SALES> 13,657
<TOTAL-REVENUES> 378,816
<CGS> 124,530
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,853,899
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 26,252
<INCOME-PRETAX> (3,255,903)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,255,903)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,255,903)
<EPS-PRIMARY> (.52)
<EPS-DILUTED> (.52)
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
Xytronyx, Inc. and Subsidiary:
We have audited the accompanying consolidated balance sheets of Xytronyx, Inc.
and Subsidiary (the "Company", a development stage enterprise) as of March 31,
1996 and 1995, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended March 31, 1996 and the period from September 23, 1983 (date of
incorporation of Xytronyx, Inc.) to March 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan or 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, such consolidated financial statements present fairly, in all
material respects, the financial position of Xytronyx, Inc. and Subsidiary at
March 31, 1996 and 1995, and the results of their operations and their cash
flows for each of the three years in the period ended March 31, 1996, and for
the period from September 23, 1983 (date of incorporation of Xytronyx, Inc.) to
March 31, 1996 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. The Company is a development
stage enterprise engaged in developing and commercializing products based on
biotechnological research. As discussed in Note 1 to the consolidated financial
statements, the fact that the Company has incurred recurring operating losses
and operating cash flow deficiencies since inception raises substantial doubt
about its ability to continue as a going concern. Management's plans concerning
these matters are also described in Note 1. The consolidated financial
statements do not include any adjustments that might result from the outcome of
these uncertainties.
/s/ DELOITTE & TOUCHE LLP
San Diego, California
May 8, 1996 (June 4, 1996 as to Note 7)
