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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, 1998 Commission File No. 1-9613
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PACIFIC PHARMACEUTICALS, 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)
6730 Mesa Ridge Rd., Suite A
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
(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 ___
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. [ ]
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 $8,935,000 on July 8, 1998, when the closing
price of such stock, as reported in the American Stock Exchange, was $0.50.
*(Market value includes value of Series A Convertible Preferred Stock
based upon conversion rate into Common Stock).
The number of shares outstanding of the registrant's Common Stock, $.02 par
value, as of July 8, 1998 was 11,257,021 shares.
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DOCUMENTS INCORPORATED BY REFERENCE
1. Certain portions of the Registrant's Proxy Statement for its Annual Meeting
of Stockholders held on August 13, 1998, which will be mailed on or about
July 13, 1998 are incorporated into Part III hereof.
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PART 1
ITEM 1. BUSINESS
SUMMARY
Pacific Pharmaceuticals, Inc. and Subsidiaries (collectively, the
"Company"), a development stage enterprise, 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.
O(6) BENZYLGUANINE
During the fiscal year ended March 31, 1998, the Company acquired a
worldwide exclusive license for O(6) Benzylguanine (BG), a series of related
compounds and a gene therapy which the Company believes to enhance the
effectiveness of a class of currently used chemotherapeutic agents (O(6)
alkylators). These technologies are licensed to the Company from Pennsylvania
State University, the National Institutes of Health (NIH), the University of
Chicago, and Case Western Reserve University. The Company, in turn, assigned
the License to its subsidiary, BG Development Corp. ("BGDC"). See--"BG
Development Corp.; Proprietary Rights; Research and Development".
BG and related compounds are small molecules for intravenous
administration in the treatment of cancer. The Company believes BG to be
capable of destroying the resistance of cancer cells to a class of
chemotherapeutic agents, O(6)-alkylating agents, which include carmustine
(BCNU), lomustine (CCNU), dacarbazine (DTIC), streptozotocin, procarbazine,
fomustine, and temozolomide. The Company believes that the effectiveness of
alkylating chemotherapeutic agents against various tumors such as brain,
prostate, colon cancers, melanoma and lymphoma is limited due to the ability
of tumor cells to repair the DNA damage caused by the alkylating agents,
because the DNA repair protein, AGT (O(6)-alkylguanine-DNA alkyltransferase),
protects tumor cells by repairing the tumor cell DNA. The Company believes
that BG inactivates the AGT protein in a variety of cancers thereby
overcoming resistance to the O(6)-alkylating agents.
A Phase I clinical trial of BG has been completed at Duke University
Medical Center, and two other Phase I trials are currently being conducted at
the University of Chicago and Case Western Reserve University, respectively.
A study in brain cancer patients has established the dose of BG at which the
levels of tumor AGT protein are depleted by more than 90%. The other studies
are currently examining the safety of a combination of BG and BCNU in a
variety of tumors. The Company plans to initiate a Phase II clinical trial
with a combination of BG and BCNU initially in brain cancer. The Company
intends to pursue clinical trials with BG in melanoma, lymphoma and colon
cancer and to pursue the use of BG in combination with alkylating agents in
cancer patients undergoing bone marrow transplantation.
O(6)-ALKYLATING CHEMOTHERAPEUTIC AGENTS. The treatments for most cancers
include surgery, chemotherapy and/or radiation therapy. O(6)-alkylators are
chemotherapeutic agents that are primarily used to treat brain cancer,
melanoma, lymphoma and certain gastrointestinal cancers. BCNU and DITC
remain important in the chemotherapeutic treatment of brain cancer and
advanced melanoma. Procarbazine has become an important agent in the
treatment of Hodgkin's disease and brain tumors. Temozolomide has shown
potential for the treatment of lymphomas, melanoma and brain tumors. In
general, although there is a small percentage of patients who have achieved
long-term remission, the O(6)-alkylators are generally not considered
curative. The critical factor contributing to the poor prognosis is the
resistance of cancers to the chemotherapeutic agents.
POTENTIAL ROLE OF BG IN ABROGATING CANCER DRUG RESISTANCE. Tumor cells
display a variety of mechanisms of resistance to many drugs. Alkylating
agents act by causing damage to the DNA by binding to the O(6)-position of
guanine on the DNA strand. AGT is believed to play a significant role in
cancer resistance to the O(6)-alkylators by removing this chemical bond. A
published study in 226 patients with
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brain cancer (high-grade astrocytoma) receiving BCNU therapy showed that the
patients with low levels of AGT responded better to treatment and had
increased survival relative to patients with high levels of AGT. Conversely,
the patients with high levels of tumor AGT protein had poor disease
prognosis. Since it appears that BG temporarily destroys AGT, the Company
believes that BG may reduce the resistance that is commonly observed in
cancer cells following treatment with O(6)-alkylating agents.
O(6)-alkylating agents such as BCNU and CCNU are believed to cause a
number of different damages to the tumor DNA, including an interstrand
cross-link between guanine and cytosine (building blocks of DNA) on the
opposite strand. The Company believes that there is a strong correlation
between the number of strand cross-links and tumor cells killed. AGT protein
protects tumor cells from damage by removing the damage from the
O(6)-position of guanine. The Company believes that there are no other
proteins involved in the repair process, and that the AGT protein is
inactivated in the repair process. The Company believes that BG binds to the
AGT protein, thereby blocking the tumor DNA repair and believes that
inactivation of the AGT protein in a variety of human tumors by non-toxic
doses of BG could render these tumors more sensitive to the cytotoxic effects
of O(6)-alkylating agents.
EFFICACY OF BG IN ANIMAL STUDIES. Results of in vitro testing have led
to an evaluation of O(6)-alkylating agents in animal tumor models. Upon
administration of BG to mice carrying two different human brain tumors prior
to the administration of BCNU, 80% and 100% tumor regression was observed
compared to 0% and 10% suppression in animals treated with BCNU alone.
Combinations of BG and BCNU were also found to be effective in mice bearing
human colon cancers, showing 96% tumor regression compared to 35% tumor
regression with BCNU alone. Growth inhibition was also observed in a rat
prostate model after treatment with BG and BCNU, which inhibition was not
observed in animals treated with BCNU alone.
HUMAN CLINICAL TRIALS WITH BG. To date BG has been entered into three
different Phase I dose escalation clinical trials. The Company believes that
a completed clinical study at the Duke University Medical Center has shown
that BG, injected intravenously, crosses the blood-brain barrier and
effectively blocks the activity of human brain tumor AGT protein. The Company
believes that the study at Duke University Medical Center has demonstrated BG
to be nontoxic when administered alone, and to be effective in inhibiting
over 90% of AGT activity in brain cancer specimens surgically removed from
patients 18 hours after the intravenous administration of BG. Clinical
studies at the University of Chicago and Case Western Reserve University are
examining the use of BG in combination with BCNU in brain, colon and renal
cancer. In these studies, BG is administered over a one-hour period by
intravenous infusion, followed by an infusion of BCNU one hour after
completion of the BG infusion. At the conclusion of these Phase I clinical
studies, the Company anticipates entering a Phase II efficacy study for BG in
brain cancer, followed by studies in other cancers. The Company plans to
pursue the use of BG in combination with the alkylating agents in cancer
patients undergoing bone marrow transplantation.
GENE THERAPY. Standard therapy with O(6)-alkylating chemotherapeutic
agents commonly results in bone marrow suppression. Through the BG license,
the Company has also acquired a proprietary gene therapy that may result in
the production of an altered AGT protein in bone marrow cells. A gene for an
altered AGT protein is introduced to the bone marrow hematopoietic stem cells
in vitro, followed by the introduction of the modified stem cells to the
host. The Company believes that the concomitant use of an O(6)-alkylating
agent plus BG in the presence of the altered AGT protein may result in
reduced resistance of the cancer cells with less toxicity to the bone marrow.
RELATED TECHNOLOGIES. In addition to BG, a considerable number of
additional compounds have been tested for AGT protein inactivation. The
Company believes that a number of next generation compounds have been found
to be effective in inhibiting the activity of tumor AGT protein. The Company
also believes that it has a proprietary interest in these compounds. The
Company believes that it is possible that these compounds will offer
complementary properties to that of BG in further abrogation of cancer
resistance to O(6)-alkylating agents.
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PATENTS AND PROPRIETARY TECHNOLOGIES. Four patents including the
composition of matter and use for BG and related compounds have been issued.
Four additional applications provide protection for the next generation
compounds. A patent application currently under prosecution is intended to
provide protection for the use of gene therapy to introduce AGT mutant into
the stem cells.
BG DEVELOPMENT CORP.; PROPRIETARY RIGHTS; RESEARCH AND DEVELOPMENT
The Company and Pennsylvania State University (the "Licensor") entered
into an exclusive, worldwide, royalty bearing license agreement (the
"License") with the right to grant sublicenses to certain patents and patent
applications relating to the manufacture and use of proposed products
incorporating BG. The Company, in turn, assigned the License to BGDC,
then a wholly owned subsidiary of the Company, pursuant to an Assignment
and Assumption Agreement dated April 20, 1998 (the "Assignment"). In
accordance with the Assignment, BGDC has assumed the obligations of the
Company under the License, including royalty and other payments more fully
described below, provided that the Company guarantees such payments.
The Company and BGDC are pursuing a private placement transaction (the
"Transaction") to fund the development of BG and to provide capital resources
for the Company to develop its other products. Any offer and sale of
securities in the Transaction would be made in reliance on an exemption from
registration under the Securities Act of 1933, as amended, and the rules and
regulations promulgated thereunder. Under the terms of the Transaction, the
Company and BGDC would sell up to $10.0 million of a class of Preferred Stock
of BGDC (the "BGDC Preferred Stock") convertible into shares of BGDC common
stock. The Company and BGDC closed on $2.9 million gross proceeds ($2.6
million net proceeds) on June 22, 1998. Following the closing, BGDC is no
longer a wholly owned subsidiary of the Company, but remains majority owned
by the Company. The Company cannot predict when or if any future closing of
the Transaction will occur.
Under the terms of the License, the Company has a six month evaluation
period ending on September 17, 1998. The Company may terminate the agreement
during the evaluation period and pay $75,000 to the Licensor.
The Company has had preliminary discussions with the N.I.H. with respect
to entering into a Cooperative Research and Development Agreement ("CRADA").
Pursuant to the CRADA the N.I.H. would, among other things, make available to
the Company (a) all N.I.H. clinical data relating to any potential products
incorporating BG ("Licensed Products") developed or generated by the N.I.H.
prior to the date of the CRADA and (b) all subsequent data developed under
such CRADA. The Company estimates that, pursuant to the CRADA, it would be
required to pay to the N.I.H. approximately $125,000 per year for four years.
If the Company elects to continue the License after the evaluation
period, the Company has agreed to pay to the Licensor a percentage of sales
of Licensed Products as well as certain performance-based milestones. In
accordance with the terms of such sales, the Company has agreed to pay to the
Licensor a non-refundable minimum annual royalty (the "Minimum Annual
Royalty") equal to $75,000 per year creditable against future milestone
payments and third party payments, subject to certain deferrals. The Company
must also pay to the Licensor $150,000 as an up-front licensing fee payable
in cash or equity at the discretion of the Company. The Company may fulfill
up to 75% of it's payment obligations resulting from Minimum Annual Royalties
or performance milestones through the issuance of a number of shares of the
Company's Common Stock equal to the cash value of such payments. The Company
is obligated to reimburse the Licensor approximately $200,000 for prior
patent costs in six monthly installments commencing in September 1998. In
accordance with the Assignment, BGDC has agreed to assume the above described
obligations of the Company. To the extent that the Company satisfies any of
the obligations through the issuance of shares of its Common Stock, BGDC has
agreed to reimburse the Company for fair market value of the Company's Common
Stock.
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PHOTODYNAMIC THERAPY (PDT) - BINARY THERAPEUTICS, INC.
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 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 cancerous cells while,
conversely, quickly clearing from normal cells.
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 at the specific wavelength required for absorption by the drug.
The light is non-thermal and, similar to the drug, 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.
- Controllable: 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.
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 close to nerves, major blood vessels or
other critical tissue). PDT may be integrated with the patient's total
treatment regimen, 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.
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.
BORONATED PROTOPORPHYRIN COMPOUND ("BOPP") FOR TREATMENT OF BRAIN AND
OTHER CANCERS. 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 other tumors.
BOPP is also suitable for use in another form of cancer treatment, Boron
Neutron Capture Therapy, in which a neutron radiation beam is used instead of
light as the activating energy source. However, in this case, the neutron
beam causes the disintegration of the boron atoms within BOPP and the release
of alpha particles which are lethal to the cancer cells.
OPTION TO ACQUIRE 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
and the holder of certain technologies in the area of PDT for cancer. The
agreement, as amended, gives the Company the right to acquire BTI by a
merger of BTI into a wholly-owned subsidiary of the Company. In February
1997, the Company and BTI agreed to extend the period during which the
Company may exercise its option to acquire BTI from April 30, 1997 until such
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time as BTI has completed human clinical trials of BOPP at an agreed upon
dose level (the "Option Period"). The Option Period was extended at the
Company's request to enable BTI to complete pre-clinical studies, to commence
clinical trials in humans and to demonstrate that a given dose level of BOPP
in humans would not cause certain adverse events. Accordingly, the Company
has deferred its election to exercise the option until all of the conditions
have been satisfied.
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, but not less than 1,000,000 nor more than 3,000,000 shares of its
common stock. The agreement has been approved by a majority of the
stockholders of BTI. The Board of Directors voted to approve the merger,
however the merger is also subject to shareholder approval for the issuance
of additional shares of common stock. One of the Company directors is also a
director of BTI.
Under the agreement, the Company will assist BTI during the option
period in preparing the PDT products for advancement into human clinical
trials. The Company pays substantially all of BTI's operating expenses which
are comprised primarily of product development costs. The Company is also
required to advance to BTI funds to repay $664,000 in indebtedness, including
accrued interest as part of the acquisition price of BTI. Certain holders of
such indebtedness are shareholders of the Company. In exchange for such
funding, BTI issues convertible notes to the Company which may be converted
into BTI equity at the Company's option if the merger is not consummated. The
Company has advanced $2,458,000 to BTI since the signing of the merger
agreement.
PATENTS. Patents encompassing the BOPP technology have been issued to
the Regents of the University of California in the United States and
Australia, Ireland and South Africa. Patent applications are pending in
Canada, the European Patent Organization, Japan, Norway and Israel. Rights
related to the above patents were licensed to BTI under an Exclusive License
Agreement dated July 1, 1992, as amended August 29, 1995, pursuant to which
BTI is obligated to make certain payments.
PRECLINICAL TESTING OF BOPP. Preclinical 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 (as much as 200 in tumors to 1 in healthy tissue) retention
of BOPP in brain tumor models, compared to a 30 to 1 or less for
existing known compounds.
- Intracellular localization in mitochondria (the energy center of the
cell) for more efficient tumor cell killing.
- Highly water soluble and stable under physiological conditions.
BOPP is selectively taken up in rapidly growing tissues and may find
applications in many hyperproliferative disorders, such as vascular and
coronary restenosis following angioplasty or bypass surgery, psoriasis and
rheumatoid arthritis. PDT therapy is being studied in academic centers for
conditions as diverse as acute macular degeneration of the retina, removing
microbial contaminants from blood and cleansing bone marrow of leukemic cells.
HUMAN CLINICAL STUDIES. BTI and the Company filed an Investigational New
Drug application ("IND") with the FDA in March 1998. Human clinical trials
began in May 1998 and BTI and the Company have agreed to target brain cancer
for the initial human clinical studies, which will be conducted at the Royal
Melbourne Hospital in Melbourne, Australia, in part because one of the
world's experts in PTD for the treatment of brain cancer will oversee the
clinical trials.
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CANCER IMMUNOTHERAPY
CANCER IMMUNOTHERAPY OVERVIEW. The Company's proprietary cancer
immunotherapy treatment is in preparation for human clinical trials and may
initially target breast cancer. Cancer immunotherapy 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. The Company believes that the potential of cancer
immunotherapy therapy to destroy metastatic tumors offers an improved
methodology for treatment of cancers such as breast, lung and prostate,
particularly when in the more advanced stages. Cancer immunotherapy therapy
is intended to produce tumor tissue destruction in the primary area of
treatment. An important distinction of cancer immunotherapy 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
concomitantly destroy any metastases.
Many experts believe that long-term control or elimination of cancer
requires the utilization of the patient's own immune surveillance and defense
systems. An optimal cancer treatment 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 immune
response in cancer patients is not fully stimulated or developed to the
extent necessary to halt the proliferation of malignant cells. Attempts have
been made using stimulants (immunoadjuvants) to activate the immune system to
activate the immune system. However, the use of a nonspecific immunoadjuvant
may only "activate" the body's immune system without specifically targeting
the cancer cells. Immunotherapy using an immunoadjuvant alone appears to
achieve only limited success in the treatment of cancer.
PRECLINICAL STUDIES OF CANCER IMMUNOTHERAPY TREATMENT. Preclinical
studies of cancer immunotherapy treatment conducted with animals indicate
that the therapy induces a specific immune response which appears to destroy
primary and metastatic tumors, and may provide longer-term protection against
recurrence of the cancer. As indicated above, cancer immunotherapy treatment
is initiated with the injection of a combination of an infrared absorbing dye
and an immuno-adjuvant directly into a tumor. The light absorbed by the dye
raises the temperature within the tumor and produces photothermal destruction
of tumor tissue. This photothermal destruction is only the precursor of what
is believed to be the more significant component of cancer immunotherapy
therapy, the immune response.
The hypothesis of the Company's scientific collaborators is that this
response proceeds as follows: The immuno-adjuvant 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. Even more significantly, a systemic immune response
can also stimulated, which may destroy tumors distant from the site of
treatment, namely metastases. The immune response appears to provide
long-term immunity toward the cancer and the prospect for a "true cure."
Preclinical testing of cancer immunotherapy therapy has included
treatment of rats inflicted with a sub-surface chemically-induced 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 tumors throughout the body.
Of the untreated rats, 99% die within 30 days of tumor implantation. The
model has proven to be unresponsive to traditional treatments including
surgery, chemotherapy, radiation and laser therapy.
With the application of what the principal researchers currently believe
to be optimal dosing, cancer immunotherapy treatment has generated success
(measured by both tumor eradication and long-term survival) in a proportion
of the animals treated. Importantly, tumor eradication appeared to be
achieved for both the primary tumor treated, and possibly the metastases
which were not directly subject to the injection treatment. This supports the
hypotheses that the regression of the metastases has been caused by
stimulation of an immune response. Upon rechallenge (reintroduction of tumor
cells to the animals
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subsequent to the original tumor eradication) the "second generation" tumors
are also eradicated, indicating the existence of longer-term immunity against
cancer.
HUMAN CLINICAL STUDIES. The Company has targeted breast cancer for the
initial human clinical studies, in part, because of the preclinical success
achieved with breast cancer studies in animals. The Company's current plan
is to commence a Phase 1 clinical study of breast cancer patients who have
been nonresponsive to other treatment methodologies.
EXCLUSIVE LICENSE TO CANCER IMMUNOTHERAPY FROM WOUND HEALING OF OKLAHOMA
("WHO"). The Company obtained an exclusive worldwide license to the cancer
immunotherapy technology in May 1996 under an agreement with WHO, a privately
held company. The agreement calls for the Company to pay WHO royalties based
on sales of products incorporating the cancer immunotherapy technology,
including a minimum royalty of $50,000 per year. The Company has also
entered into a research agreement (see - "Product Development Strategy") with
WHO under which the principal developers of the cancer immunotherapy
technology are assisting with the preparation of the IND application to the
FDA and performing additional studies to investigate the mechanism of action
of cancer immunotherapy.
PATENTS. WHO was assigned the rights by the holders thereof to patent
applications encompassing the cancer immunotherapy technology in the United
States and the countries covered by the Patent Cooperative Treaty ("PCT") by
the holders.
AST TECHNOLOGY - PERIODONTAL TISSUE MONITOR (PTM)
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
16 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. 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 PTM is an eye-readable, chairside
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 is 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
color if the active disease is present. This process takes approximately 8
to 12 minutes. Since the PTM has such a 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,
has a long shelf-life and is disposable. The most important benefits the
Company expects from use of the PTM are:
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- 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
and avoiding unnecessary extensive therapy.
- 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. It is anticipated that PTM will be used to
monitor patients 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, patents encompassing the PTM have been
issued in the United States, and in Australia, Canada, Hong Kong, Israel,
Japan, New Zealand, Singapore, South Africa, and with the European Patent
Organization. A patent application has been filed pursuant to the PCT.
On June 23, 1997, the Company received approval from the FDA to begin
commercial sales and distribution in the United States of the PTM product.
During the current year, the Company also signed two agreement with
Steri-Oss, Inc. for the exclusive five-year distribution of PTM worldwide,
except in Japan. To date, there have been no significant sales under the
license agreement. The Company's distribution agreement with Hawe Neos for
distribution of PTM in Europe terminated in November 1997. The company also
has an agreement with Shofu, Inc. covering distribution of the PTM in Japan.
The product is currently undergoing clinical trials in Japan and is in the
regulatory approval process.
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. The Company is not actively developing
opportunities to sell products using Kephra technology. The Company is,
however, trying to sell or license its photochromatic technology to others in
order to focus completely on development of its other products. The Company
is not expecting its Kephra technology to generate significant revenues.
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 for all of it's products under development. The
Company expects to increase its internal product development resources as its
efforts related to the BG, cancer immunotherapy and PDT areas, reflecting the
Company's refocus toward the development and commercialization of medical
products based on biopharmaceutical research regarding the treatment of
cancer. Product development efforts related to the PTM and Kephra
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technologies have previously been conducted primarily by the Company's
internal personnel. No further product development work is underway for PTM
and Kephra products. The Company incurred product development costs of
$2,196,000, $2,566,000 and $1,854,000 in the years ended March 31, 1998,
1997 and 1996, 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 - "Cancer Immunotherapy", "Photodynamic
Therapy (PDT)-Binary Therapeutics, Inc.--.," and "AST Technology -
Periodontal Tissue Monitor"("PTM").
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 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
licenser was the first creator of inventions covered by existing patents or
pending patent applications or that it or such licenser 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
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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 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 AND GOVERNMENT APPROVALS
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
cancer immunotherapy 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.
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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 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, effort and cost 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 was filed and approved by the FDA. See - PTM PATENTS AND
REGULATORY APPROVAL - for a description of the status of the FDA approval
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 cancer immunotherapy 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
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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 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.
RESEARCH AND DEVELOPMENT
The Company incurred product development costs of $2,196,000, $2,566,000
and $1,854,000 in the fiscal years ended March 31, 1998, 1997 and 1996 for
work on all products under development.
COMPLIANCE WITH ENVIRONMENTAL LAWS
The Company believes that it is in compliance with all federal, state
and local environmental laws and regulations. To the extent that the
Company's management can determine, there are no federal, state of local
provisions regulating the discharge of materials into the environment or
otherwise relating to the protection of the environment, with which
compliance by the Company has had or is expected to have a material effect
upon the capital expenditures, earnings or competitive position of the
Company.
PERSONNEL
As of March 31, 1998, the Company had 7 full-time employees, none of
whom were covered by a collective bargaining agreement.
YEAR 2000 COMPLIANCE
The Company recognizes the need to ensure its operations will not be
adversely impacted by the inability of the Company's systems to process data
having dates on or after January 1, 2000 ("Year 2000"). Processing errors due
to software failure arising from calculations using the Year 2000 date are
recognized as a risk. The Company is currently addressing the risk, with
respect to the availability and integrity of its financial systems and the
reliability of its operating systems, and is in the process of communicating
with suppliers, customers, financial institutions and others with whom it
conducts business to assess whether they are or will be Year 2000 compliant.
While the Company believes its planning efforts are adequate to address its
Year 2000 concerns, there can be no assurance that the systems of other
companies on which the Company's systems and operations rely will be
converted on a timely basis and will not have a material effect on the
Company. In addition, the potential impact of the Year 2000 on others with
whom the Company does business and any resulting effects on the Company
cannot be reasonably estimated at this
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time. The cost of the Company's Year 2000 initiatives is not expected to be
material to the Company's results of operations or financial position.
ADDITIONAL RISKS AND UNCERTAINTIES
IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS
Certain of the information provided by the Company in its reports and
registration statements filed with the Securities and Exchange Commission or
provided by its spokespersons from time to time, including information set
forth under the captions "Item 1 - Business" and "Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
elsewhere in this Report on Form 10-K for the Fiscal year ended March 31,
1998 constitute "Forward Looking Statements" within the meaning of Section
27A of the Securities Act of 1933, as amended, which are intended to be
covered by the safe harbors from liability created thereby. All such forward
looking statements involve risks and uncertainties, including those
statements regarding risks of new product development; the lengthy and
uncertain process for FDA and other regulatory approval of the PDT and cancer
immunotherapy; the dependence on the WHO license agreement; the Company's
option to acquire BTI pursuant to the BTI Agreement; and the dependence on
others for marketing and manufacturing. Many other important factors affect
the Company's ability to achieve the stated outcomes and to successfully
develop and commercialize its products, including those statements regarding
the Company's status as a development stage company; potential need for
substantial additional funds. and other factors. As a result, there can be
no assurance that the forward looking statements in this Report or made from
time to time will prove to be accurate. In light of the significant
uncertainties inherent in the forward looking statements included herein, the
inclusion of such information should not be regarded as a representation by
the Company or any other person that the objectives and plans of the Company
will be achieved.
DEVELOPMENT STAGE COMPANY. The Company has generated only limited
revenues from operations to date. As of March 31, 1998, the Company had an
accumulated deficit of $41,055,000, and expects substantial losses to
continue for the foreseeable future. The Company's operations are subject to
numerous risks associated with the establishment and development of new
products, particularly those based on innovative or novel technologies.
These risks include the possibility that any or all of the Company's
products will be found to be ineffective or unsafe, that the products, once
developed, although effective, are uneconomical to market, that third parties
hold proprietary rights that preclude the Company from marketing such
products or that third parties market a superior or equivalent product. The
Company's ability to generate significant revenues and profitability will
depend, among other factors, on the successful completion of product
development, obtaining regulatory approvals, establishing manufacturing and
marketing capabilities, gaining market acceptance for its products, and
obtaining adequate funds to finance operations. There can be no assurance
that the Company will generate any revenues or achieve profitability.
LIMITED CASH RESOURCES; POTENTIAL NEED FOR ADDITIONAL FUNDS. As of March
31, 1998, the Company had cash of approximately $3,290,000. The Company
estimates that its resources are sufficient through March 1999. The Company
may undertake to raise additional equity capital beyond the initial closing
of the Transaction or may generate revenues from product sales or marketing
and research alliances.
The Company has expended and intends to continue to expend substantial
funds to conduct research and development activities, including preclinical
and clinical testing of its cancer therapy technologies and its funding
commitments under its agreement with BTI. Accordingly, the Company will
require significant additional funds, either from marketing partners, product
sales, or additional equity or debt financing, to complete development and
commence commercial-scale manufacturing of its products. The actual date
through which the existing cash resources will be adequate to fund the
Company's operations, and the timing and magnitude of the need for additional
funds, may vary significantly based on numerous factors, including (i)
successful completion of Phase I safety study for the PDT cancer
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technology (ii) the timing and receipt of U.S. regulatory approval, if any,
to commence human clinical studies for BG technology (iii) the timing and
receipt of U.S. regulatory approval, if any, to commence human clinical
studies for cancer immunotherapy technology (iv) the timing of the
establishment of any marketing partnership(s) for the PTM and strategic
partnership(s) for the PDT and PDIT technologies, (v) the timing and the
amount, if any, of payments received from any such partner(s), (vi) the
timing and amount, if any, of revenues generated from sales of the PTM, and
(vii) the timing and the amount, if any, of proceeds available from the
exercise of the Class A Warrants, Settlement Warrants and stock options. The
Company and BGDC are pursuing a $10 million equity private placement
financing in which there was an initial closing of $2.9 million. The Company
has no other commitments for any additional funding.
SUBSTANTIAL DILUTION. The number of shares of common stock issuable upon
conversion of the preferred stock and upon exercise of outstanding warrants
and options, though subject to adjustment in certain events, is 25,853,000
shares of Common Stock, or nearly two and one-half times the 10,777,000
shares of Common Stock issued and outstanding on March 31, 1998. The
conversion of the convertible preferred stock and the exercise of the
warrants and the options, and the sale of the underlying shares of common
stock (or even the potential of such conversion, exercise or sale) may have a
depressive effect on the market price of the common stock. The conversion of
the convertible preferred stock and the exercise of the warrants and options
also may have a dilutive effect. Moreover, the ability of the Company to
obtain any needed capital on terms favorable to the Company may be adversely
affected. As a result of the convertible preferred stock, the warrants and
the options being outstanding, the Company may be deprived of favorable
opportunities to obtain additional equity capital, if it should then be
needed. It is also possible, that as long as the convertible preferred
stock, the warrants and options remain outstanding, their existence might
limit increases in the price of the Common Stock.
In the event the Company issues shares of common stock or otherwise
obtains any additional funding to complete development and commence
commercial-scale manufacturing of its products, the terms thereof may have a
dilutive effect on holders of the Company's securities.
The Company currently has 4,310,000 shares of Common Stock available for
issuance, and has granted to date options to purchase 2,032,500 shares of
common stock at a weighted average price of $2.24, to management, key
employees, directors, and consultants under various stock option plans or by
direct grant from the Board of Directors. Pursuant to such plans, directors,
key employees and consultants may be eligible to receive stock options
exercisable for common stock at exercise prices which may be lower than the
initial conversion price of the convertible preferred stock or the exercise
price of the Class A Warrants. Future option grants, if any, may dilute the
value of the common stock.
IMMINENT POSSIBILITY OF AMEX DELISTING; IMPACT OF POTENTIAL AMEX
DELISTING ON MARKETABILITY OF SECURITIES. On June 24, 1998, the Company
received notice from the American Stock Exchange ("AMEX") that Amex intends
to take action to remove the Company's Common Stock from the AMEX because the
Company no longer satisfies all of the financial guidelines of the AMEX for
continued listing. The Company notified the Board of Governors of AMEX that
it intends to appeal to the decision to remove the Company's Common Stock
from the AMEX. There can be no assurance that the appeal by the Company will
be successful, and that the listing will be continued. The Company is taking
measures to ensure that in the event of an unsuccessful appeal, an orderly
transition will occur and that its Common Stock will commence trading on the
NASD Electronic Bulletin Board. If delisting were to occur, it is possible
that it might be more difficult to dispose of the common stock or to obtain
as favorable a price for the common stock. Consequently, the liquidity of
the common stock could be impaired, not only in the number of shares of
common stock that could be bought and sold at a given price, but also through
delays in the timing of transactions and reduction in security analysts' and
the media's coverage of the Company, which could result in lower prices for
the common stock than might otherwise be attained and in a larger spread
between the bid and asked prices for the common stock. Accordingly, an
investor would find it more
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difficult to dispose of, or obtain accurate quotations as to the price of,
the Company's currently listed securities, resulting in a material adverse
effect on the Company and the prices of its securities.
RISK OF PENNY STOCK REGULATION. If the Company's Common Stock were
delisted from the AMEX the common stock would be deemed "penny stock", based
upon its current price range. The Commission has adopted regulations which
generally define " penny stock" to be any equity security that has a market
price ( as defined in the regulation) of less than $5.00 per share, subject
to certain exceptions. Such exceptions include any equity security listed on
AMEX. If the Common Stock is removed from listing on AMEX, the Common Stock
may become subject to Rules 15g-1 through 15g-6 promulgated under the
Exchange Act for non-exchange listed and non-NASDAQ securities. These rules
impose additional sales practice requirements on broker-dealers who sell such
securities to persons other than established customers and accredited
investors (generally, those persons with assets in excess of $1,000,000 or
annual incomes exceeding $200,000 individually or $300,000 together with
their spouse). For transactions covered by these rules, the broker-dealer
must make a special suitability determination for the purchase of the common
stock and have received the purchaser's written consent to the transaction
prior to the purchase. Additionally, for any transaction involving a penny
stock, unless exempt, the rules require a broker-dealer, prior to a
transaction in a penny stock not otherwise exempt from the rules, to (i)
deliver a standardized risk disclosure document prepared by the Commission
that provides information about penny stocks and the nature and level of
risks in the penny stock market and (ii) provide the customer with current
bid and offer quotations of the penny stock, the compensation of the
broker-dealer and its salesperson in the transaction, a monthly account
statement showing the market value of each penny stock held in the customer's
account, and if the broker-dealer is the sole market-maker, the broker-dealer
must disclose this fact and the broker-dealer's presumed control over the
market. These disclosures may restrict the ability of broker-dealers to sell
the Common Stock and may have the effect of reducing the level of trading
activity in the secondary market for a stock that becomes subject to the
penny stock rules. If the common stock becomes subject to the penny stock
rules, the holders thereof may find it difficult to sell their shares.
LIMITED TRADING VOLUME; POSSIBLE PRICE VOLATILITY. Historically, the
common stock has generally experienced relatively low daily trading volumes
in relation to number of shares outstanding. The market price of the common
stock also has been volatile and it may continue to be volatile as has been
the case with the securities of other public medical-technology companies.
Additionally, if the Company's Common Stock is removed from AMEX, the
volatility could increase. Factors such as announcements by the Company or
its competitors concerning technological innovations, results of clinical
trials, new commercial products or procedures, proposed government
regulations and developments or disputes relating to patents or proprietary
rights may have a significant effect on the market price of the Company's
securities. Changes in the market price of the common stock may bear no
relation to the Company's actual operations or financial results.
GOVERNMENT REGULATIONS; NEED FOR FDA AND OTHER REGULATORY APPROVAL.
Prior to marketing, each of the Company's proposed medical products,
including the BG technology and both the drug and light delivery components
of the proposed PDT and cancer immunotherapy treatment systems, must undergo
an extensive regulatory approval process conducted by the FDA and applicable
agencies in other countries. The process, which focuses on safety and
efficacy and includes a review by the FDA of preclinical testing and clinical
trials and investigation as to whether good laboratory and clinical practices
were maintained during testing, is likely to take many years and require the
expenditure of substantial resources. The Company is and will be dependent
on the external laboratories and medical institutions conducting its
preclinical testing and clinical trials to maintain both good laboratory
practices established by the FDA and good clinical practices. Data obtained
from preclinical and clinical testing are subject to varying interpretations
which could delay, limit or prevent regulatory approval. In addition,
delays, limitations or rejections may be encountered based upon changes in
FDA policy for drug or medical device approval during the period of
development and by the requirement for regulatory review of each IND and New
Drug Application ("NDA") relating to any pharmaceutical product proposed to
be introduced by the Company and an application for PMA relating to any
medical device proposed to be introduced by the Company. There can be no
assurance that, even after significant expenditures,
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regulatory approval will be obtained for any of the Company's product
candidates. Moreover, such approval may entail significant limitations on
the indicated uses for which a medical product may be marketed. Any denials
of or substantial delays in obtaining requisite approvals or limitations on
such approvals may have a material adverse effect on the Company. Such
denials, and delays in obtaining regulatory approvals and limitations on such
approvals could be experienced both domestically and abroad.
Even if such regulatory approval is obtained, a marketed medical product
and its manufacturer are subject to continual regulatory review, and later
discovery of previously unknown problems with a product or manufacturer may
result in restrictions on such product or the manufacturing thereof,
including withdrawal of such product from the market. Change in the
manufacturing procedures used by the Company for any of the Company's
approved medical products are subject to FDA review, which could have an
adverse effect upon the Company's ability to continue the commercialization
or sale of a product. The process of obtaining FDA approval is costly and
time consuming, and there can be no assurance that any of the Company's
products will be deemed to be safe and effective by the FDA. The Company will
not be permitted to market any of its medical products in any jurisdiction in
which the product does not receive regulatory approval.
UNCERTAINTY OF PRE-CLINICAL AND CLINICAL TRIALS RESULTS. The grant of
regulatory approvals for the commercial sale of the Company's proposed
products, if any, will depend in part on the Company or any collaborators
successfully conducting extensive preclinical and clinical testing to
demonstrate safety and efficacy in humans. The results of preclinical and
clinical testing may prove to be inconclusive. The results of preclinical
testing discussed in this report or otherwise presented by the Company for
its proposed products are subject to varying interpretations and may not be
indicative of results that will be obtained in humans. In addition, results
attained in early clinical trials may not be indicative of results that will
be obtained in later clinical trials. As results of particular preclinical
studies and clinical trials are received, the Company or its collaborators,
if any, may abandon projects that they might have otherwise believed to be
promising, some of which may be described in this report.
There can be no assurance that the Company's interpretation of results
will be accepted by governmental regulators. Even if the development of the
Company's proposed products in the preclinical phase advances to the clinical
stage, there can be no assurance that they will prove to be safe and
effective for human use. The products that are successfully developed, if
any, will be subject to requisite regulatory approval prior to their
commercial sale, and the approval, if obtainable, may take several years. A
number of companies in the pharmaceutical industry have suffered significant
setbacks in advanced clinical trials even after promising results in earlier
trials. Generally, only a very small percentage of the number of new
pharmaceutical products initially developed are approved for sale. Even if a
new pharmaceutical product is approved for sale, there can be no assurance
that it will be commercially successful. The Company may encounter
unanticipated problems relating to development, manufacturing, distribution
and marketing, some of which may be beyond the Company's financial and
technical capacity to resolve. The failure to address such problems
adequately could have a material adverse effect on such Company's businesses,
financial condition or results of operations. No assurance can be given that
the Company will succeed in the development and marketing of any new drug
products, or that such products will not be rendered obsolete by products of
competitors.
The rate of completion of clinical trials will depend upon, among
other factors, obtaining adequate clinical supplies and the rate of patient
enrollment. Patient enrollment is a function of many factors including the
size of patient population, the nature of the protocol, the proximity of
patients to clinical sites and the eligibility criteria for the study.
Delays in planned patient enrollment can result in increased costs or delays
or both, which could have a material adverse effect on the business of the
Company.
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DEPENDENCE ON BTI AGREEMENT AND LICENSE AGREEMENTS; RISK OF LOSS OF
TECHNOLOGY. The Company has the right to acquire rights to the PDT technology
derived from the option the Company has to acquire BTI pursuant to an
agreement between the Company and BTI (the "BTI Agreement) The Company and
BTI have agreed to extend the period during which the Company may exercise
its option to acquire BTI from April 30, 1997 until such time as BTI has
completed human clinical trials of the Boronated Porphyrin (BOPP) at an
agreed upon dose level (the "Option Period"). The Option Period was extended
at the Company's request to enable BTI to complete preclinical studies, to
commence clinical trials in humans and to demonstrate that a given dose level
of BOPP in humans would not cause certain adverse events. The Company
believes that the extension of the Option Period will give it greater
opportunity to access the preliminary data resulting from the BOPP Phase I
human clinical trials and to evaluate the possibility of adverse events in
human patients before determining whether to acquire BTI. Accordingly, the
Company has elected to defer exercise of the option. Under the terms of the
license agreement which BTI has with the Regents of the University of
California at San Francisco ("UCSF"), BTI must pay yearly minimum royalties
of $25,000 and make certain payments upon the achievement of certain
milestones in order to retain the license with UCSF.
In March 1998, the Company signed a license agreement (the "BG License
Agreement") for the BG compound with the Co-owners of the patents. Under the
terms of the agreement, the Company has a six month evaluation period ending
on September 17, 1998. The Company may terminate the agreement during the
evaluation period and pay $75,000 to the Co-Owners. If the Company elects to
continue to develop the BG technology, it would be obligated to make
additional milestone, royalty and patent reimbursement payments to the
Co-Owners during the term of the License Agreement. The agreement also has a
provision in which the Company may elect to make payments in common stock of
the Company.
The right of the Company to the PDIT technology is derived from the
Company's license agreement (the "WHO License Agreement") with WHO. The WHO
License Agreement requires the Company to pay royalties to WHO based on sales
of products incorporating the cancer immunotherapy technology, including a
minimum royalty of $50,000 per year.
If the Company does not meet its obligations under the BTI Agreement, as
amended, the BG License Agreement, or the WHO Agreement, the Company could
lose its right to any or all of the underlying technology which could have a
material adverse effect on the Company.
UNCERTAINTY OF PROTECTION OFFERED BY PATENTS AND TRADE SECRETS. The
medical industry, particularly the pharmaceutical segment, places
considerable importance on obtaining patent and trade secret protection for
new technologies, products and processes. The Company's success will depend,
in part, on its ability to enjoy or obtain protection for its products and
technologies under United States and foreign patent laws and other
intellectual property laws, to preserve its trade secrets and to operate
without infringing the proprietary rights of third parties. To date, the
Company has received a number of patents, and has filed a number of other
patent applications, relating to the Company's technologies in the United
States and internationally. BTI and the Company have each benefited as a
licensee from such issuances or filings of others.
The patent positions of pharmaceutical, medical and biotechnology firms,
including the Company, are uncertain and involve complex legal and factual
questions for which important legal principles are largely unresolved. To
date, no consistent policy has been developed by the U.S. Patent and
Trademark Office regarding the breadth of claims allowed in medical device or
biotechnology patents or the degree of protection afforded under such
patents. 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
17
<PAGE>
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 compete with the
Company's business. Some of these technologies, applications or patents may
conflict with the Company's technologies, applications or patents. Such
conflict could limit the scope of the patents 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 unpatented
confidential and proprietary technology and information. There can be no
assurance that others will not independently develop substantially equivalent
proprietary technology and information, gain access to the Company's trade
secrets or disclose such technology and information, or, in general, that the
Company can meaningfully protect its unpatented technology and information.
RISKS OF NEW PRODUCT DEVELOPMENT; MARKET UNCERTAINTY. The Company's
technology is new and emerging and only limited preclinical and clinical data
on its safety and efficacy exits. None of the products underlying these
technologies that the Company proposes to develop or is developing have been
approved for marketing by regulatory authorities in the United States or
elsewhere, and all will require significant research and development,
including lengthy clinical testing, prior to their commercialization. The
results of preclinical testing discussed in this report for the Company's
drug compounds and technologies are subject to varying interpretations.
Furthermore, studies conducted with alternative designs or on alternative
populations could produce results that vary from those discussed in this
report. Therefore, there can be no assurance that the results discussed in
this report or the Company's interpretation of them will be accepted by
governmental regulators or the medical community. Even if the development of
the Company's products in the preclinical phase advances to the clinical
stage, there can be no assurance that the products will prove to be safe and
effective. The products that are successfully developed, if any, will be
subject to requisite regulatory approval prior to their commercial sale, and
the approval, if obtainable, is likely to take several years. Generally,
only a very small percentage of the number of new pharmaceutical products
initially developed is approved for sale. Even if the Company's products are
approved for sale, there can be no assurance that they will be commercially
successful. The Company may encounter unanticipated problems relating to
development, manufacturing, distribution and marketing, some of which may be
beyond the Company's financial and technical capacity to solve. The failure
to address such problems adequately could have a material adverse effect on
the Company's business and prospects. No assurance can be given that the
Company will succeed in the development and marketing of any new drug
products, or that the products will not be rendered obsolete by products of
competitors.
There can be no assurance of the extent to which any of the Company's
products, if successfully developed, will actually be used by patients.
Furthermore, there can be no assurance that the Company's sales of its
products for such uses will be profitable even if patient use occurs.
COMPETITION. The biotechnology and medical device industries are
characterized by rapidly evolving technology and intense competition. Many of
the companies in these industries have substantially greater financial
resources and development capabilities than the Company, and many in the
biotechnology
18
<PAGE>
and medical device industries have substantially greater experience in
undertaking clinical testing of products, obtaining regulatory approvals and
manufacturing and marketing such products. There can be no assurance that
the Company's products will be more effective or achieve greater market
acceptance than any current or future competitive products, or that
competitors will not develop products that are more effective than the
Company's or that would render the Company's products and technologies less
competitive or obsolete.
DEPENDENCE ON OTHERS FOR DEVELOPMENT, MARKETING AND MANUFACTURING. The
Company expects to rely upon marketing partnerships with unaffiliated medical
product companies and strategic partners to develop and market all of its
medical products. Such reliance may limit the Company's ability to control
the commercialization of such products. Although the Company believes that
any such collaborative partners will have an economic motivation to
commercialize the products which they have the right and responsibility to
market, the amount and timing of resources devoted to these activities
generally will be controlled by each individual partner. There can be no
assurance that the Company will be successful in establishing any such
marketing partnerships, or that, if established, such future partners will be
successful in commercializing the products.
The Company also relies upon collaborative agreements with unaffiliated
companies for the manufacturing and distribution of the PTM product and
anticipates relying on such companies and partners for the development of its
drug compounds. The Company expects to continue to rely upon such
relationships at least in respect to production associated with initial
commercial sales, and perhaps beyond the initial stages of commercialization.
Such reliance may adversely affect profit margins on its products, and there
are no assurances that the Company can develop or maintain contract
manufacturing relationships in the future on acceptable terms, if at all. In
addition, manufacturers of the Company's products will be subject to
applicable current good manufacturing practices ("GMP") prescribed by the FDA
or other rules and regulations prescribed by foreign regulatory authorities.
The Company will be dependent on such manufacturers for continued compliance
with GMP and applicable foreign standards. Failure by a manufacturer of the
Company's products to comply with GMP or applicable foreign standards could
result in significant time delays or the inability of the Company to
commercialize a product and could have a material adverse effect on the
Company.
DEPENDENCE UPON KEY PERSONNEL. The Company is currently dependent on
certain executive officers, management and scientific personnel. The loss of
these individuals might have a material adverse effect on the research and
development programs and other operations of the Company. Competition for
qualified employees among medical companies is intense, and the loss of any
of such persons, or an inability to attract, retain and motivate additional
highly skilled employees, could adversely affect the Company's business and
prospects. There can be no assurance that the Company will be able to retain
its existing personnel or to attract additional qualified employees.
UNCERTAINTY OF PHARMACEUTICAL PRICING, REIMBURSEMENT AND RELATED
MATTERS. The Company's business, financial condition and results of
operations may be materially adversely affected by the continuing efforts of
government and third party payors to contain or reduce the costs of health
care through various means. For example, in certain foreign markets pricing
and profitability of prescription pharmaceuticals are subject to government
control. In the United States, the Company expects that there will continue
to be a number of federal and state proposals to implement similar government
control. In addition, increasing emphasis on managed care in the United
States will continue to put pressure on the pricing of pharmaceutical
products and diagnostic tests. Cost control initiatives could decrease the
price that the Company or any of its strategic partners receives for any
products in the future and have a material adverse effect on the Company's
business, financial condition and results of operations. Further, to the
extent that cost control initiatives have a material adverse effect on the
Company's strategic partners, the Company's ability to commercialize its
products and to realize royalties may be adversely affected.
19
<PAGE>
The ability of the Company and any strategic partner to commercialize
pharmaceutical or diagnostic products may depend in part on the extent to
which reimbursement for the products will be available from government and
health administration authorities, private health insurers and other third
party payors. Significant uncertainty exists as to the reimbursement status
of newly approved health care products. Third party payors, including
Medicare, increasingly are challenging the prices charged for medical
products and services. Government and other third party payors are
increasingly attempting to contain health care costs by limiting both
coverage and the level of reimbursement for new therapeutic products and by
refusing in some cases to provide coverage for uses of approved products for
disease indications for which the FDA has not granted labeling approval.
There can be no assurance that any third party insurance coverage will be
available to patients for any products discovered and developed by the
Company or its strategic partners. If adequate coverage and reimbursement
levels are not provided by government and other third party payors for the
Company's products, the market acceptance of these products may be reduced,
which may have a material adverse effect on the Company's business, financial
condition and results of operations.
PRODUCT LIABILITY; LIMITED INSURANCE COVERAGE. The Company faces an
inherent business risk of exposure to product liability claims in the event
that the use or misuse of its products and proposed products result in
adverse effects. The Company currently maintains $5 million of product
liability insurance coverage and $5 million of clinical trial insurance
coverage. There can be no assurance that such coverage is or in the future
will be adequate or that adequate insurance will be available in the future
at an acceptable cost, if at all. In addition, there can be no assurance
that a product liability claim, even if the Company has insurance coverage,
would not materially adversely affect the business or financial condition of
the Company.
ITEM 2. PROPERTIES
At March 31, 1998, the Company occupied approximately 3,400 square feet
of office and laboratory space in San Diego, California under a lease which
expires in February 1999. When the current lease expires, the Company may
need to relocate to a larger facility. The Company does not anticipate
difficulty in locating suitable space to meet its needs.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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.
<TABLE>
<CAPTION>
YEAR IN
WHICH HE
BECAME AN
NAME POSITION(S) AGE OFFICER
- ---- ----------- --- ----------
<S> <C> <C> <C>
Dr. H. Laurence Shaw Chairman, President and Chief 52 1996
Executive Officer
Anil Singhal, Ph.D. Vice President-Research and 46 1997
Development
</TABLE>
20
<PAGE>
The officers of the Company hold office at the discretion of the Board
of Directors of the Company. During Fiscal 1998, 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 1999.
From 1995 until joining the Company, Dr. Shaw served as Corporate Vice
President Research & Development of C.R. Bard. Prior to that, from
1993-1995, Dr. Shaw served as Chief Executive Officer, President and Director
of Atlantic Pharmaceuticals, Inc. and Chief Executive Officer of each of
Atlantic's operating companies from their inception in 1993. From 1984-1993,
he was Vice President, Medical and Regulatory Affairs and Advanced Research
at Abbott Laboratories. Previously, from 1981-1984, he was a board member of
Revlon Health Care, Ltd. (UK) and Director, Medical and Technical Affairs.
At Revlon, he was responsible for pharmaceutical formulation and development,
new business development and clinical research for Revlon's major research
unit outside of the USA. Prior to Revlon, he served as International Medical
Director for Meadox Medical Inc.; Medical Director for Merck in the U.K.;
and as Associate Director for SmithKline Corporation. Dr. Shaw is a graduate
of the University College Hospital Medical School, London, UK and has worked
in clinical practice in the UK and in the USA. He is a Fellow of the Faculty
of Pharmaceutical Medicine of the Royal College of Physicians, a Fellow of
the American College of Clinical Pharmacology and a member of many
professional associations. Dr. Shaw also serves on the Board of Directors of
Endorex Corporation.
Anil Singhal, Ph.D., was President, BioNexus Pharmaceuticals 1994 to
1997. From 1986 to 1994 Dr. Singhal was Chief Operating Officer at The
Biomembrane Institute. From 1979 to 1983, Dr. Singhal was Assistant Professor
at Mt. Sinai School of Medicine. Dr. Singhal received his Ph.D. from the
Wakemans Institute of Microbiology from Rutgers University, M. S. Degree from
St. John's University and an MBA at the University of Washington. Dr. Singhal
is the author of 40 published papers on oncology and inflammatory disorders.
21
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED MATTERS
The following 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. On June 24, 1998, the Company was notified by AMEX that it
intends to take action to remove the Company's Common Stock from the AMEX
because the Company fails to meet AMEX's financial guidelines for continued
listing. The Company has notified AMEX that intends to appeal AMEX's decision.
There can be no assurance that the Company will be able to maintain its AMEX
listing. If the Company is unable to maintain its AMEX listing, it anticipates
that its Common Stock will initially begin trading on the NASD Electronic
Bulletin Board following removal from AMEX.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Year ended March 31, 1997
----------------------------------------------------------------------------------
First Second Third Fourth Year
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997 Market price range of common stock
High $ 3.69 $ 2.50 $ 2.06 $ 1.75 $ 3.69
Low $ 1.63 $ 1.75 $ 1.06 $ 1.06 1.06
Shares traded 1,810,100 834,300 1,309,100 827,400 4,780,900
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Year ended March 31, 1998
----------------------------------------------------------------------------------
First Second Third Fourth Year
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998 Market price range of common stock
High $ 1.88 $ 2.13 $ 1.88 $ 1.00 $ 2.13
Low $ 1.00 1.13 0.75 .56 .56
Shares traded 952,600 2,060,700 1,150,100 657,800 4,821,200
</TABLE>
As of June 26, 1998, there were approximately 425 holders of record of the
Company's Common Stock.
22
<PAGE>
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE)
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Sept. 23,1983
Years ended March 31, (inception) to
---------------------------------------------------------------------------- March 31,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1998 1997 1996 1995 1994 1998
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(as restated)(1)
Total revenues $ 348 $ 275 $ 379 $ 1,201 $ 585 $ 6,000
Product development costs 2,196 2,566 1,854 2,118 1,218 17,161
Net loss (4,371) (3,897) (3,256) (3,755) (4,613) (36,562)
Net loss applicable to common stockholders (11,598) (5,594) (3,256) (3,755) (4,613) (45,485)
Net loss per share of common stock--basic
and diluted $ (1.25) $ (0.69) $ (0.52) $ (0.74) $ (1.10)
</TABLE>
<TABLE>
<CAPTION>
As of March 31,
---------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents, and
short-term investments $3,290 $6,766 $1,698 $1,820 $4,504
Total assets 3,591 7,234 2,174 2,305 5,168
Long-term liabilities 23 13 21 24 70
Stockholders' equity 2,702 6,331 1,548 1,884 3,942
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
*NO DIVIDENDS HAVE BEEN PAID ON THE COMPANY'S COMMON STOCK. CONVERTIBLE
PREFERRED STOCK DIVIDENDS ARE NON-CASH. SEE NOTE 2 TO THE CONSOLIDATED
FINANCIAL STATEMENTS.
(1) These items have been restated for the periods indicated to appropriately
reflect the value of the warrants issued in connection with the Private
Placement as described in Note 9 to the consolidated financial statements.
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
Year ended March 31, 1997
--------------------------------------------------------------------------------
1997 First Second Third Fourth Year
(as restated)(1) (as restated)(1) (as restated)(1)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total revenues $ 24,832 $31,098 $30,192 $189,058 $275,180
Net loss (1,059,395) (895,968) (745,288) (1,196,715) (3,897,366)
Convertible preferred dividends
(as previously reported) - - 138,259 1,027,002 1,165,261
Convertible preferred dividends
(as restated) - - 231,376 1,464,835 1,696,211
Net loss applicable to common stockholders
(as previously reported) (1,059,395) (895,968) (883,547) (2,223,717) (5,062,627)
Net loss applicable to common stockholders
(as restated) (1,059,395) (895,968) (976,664) (2,661,550) (5,593,577)
Net loss per share of common stock--basic
and diluted (as previously reported) $ (0.13) $ (0.11) $ (0.11) $ (0.27) $ (0.62)
Net loss per share of common stock--basic
and diluted (as restated) $ (0.13) $ (0.11) $ (0.12) $ (0.33) $ (0.69)
</TABLE>
<TABLE>
<CAPTION>
1998 Year ended March 31, 1998
---------------------------------------------------------------------------------
First Second Third Fourth Year
(as restated)(1) (as restated)(1) (as restated)(1)
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total revenues $ 101,283 $ 65,263 $ 128,130 $ 53,784 $ 348,460
Net loss (935,449) (1,330,201) (883,407) (1,222,406) (4,371,463)
Convertible preferred dividends
(as previously reported) 1,296,362 1,152,031 665,786 2,866,729 5,980,908
Convertible preferred dividends
(as restated) 1,815,050 1,612,908 932,170 2,866,729 4,360,128
Net loss applicable to common stockholders
(as previously reported) (2,231,811) (2,482,232) (1,549,193) - -
Net loss applicable to common stockholders
(as restated) (2,750,499) (2,943,109) (1,815,577) (4,089,135) (7,509,185)
Net loss per share of common stock--basic
and diluted (as previously reported) $ (0.27) $ (0.29) $ (0.16) - -
Net loss per share of common stock--basic
and diluted (as restated) $ (0.34) $ (0.34) $ (0.18) $ (0.39) $ (1.25)
</TABLE>
(1) These items have been restated for the periods indicated to appropriately
reflect the value of the warrants issued in connection with the Private
Placement as described in Note 9 to the consolidated financial statements.
23
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
RESULTS OF OPERATIONS.
YEAR ENDED MARCH 31, 1998 (FISCAL 1998) COMPARED TO YEAR ENDED MARCH 31, 1997
(FISCAL 1997)
Total revenue increased by $73,000, or 27% to $348,000 in Fiscal 1998. The
majority of the current year revenues relate to interest and other income.
Sales of the Company's Periodontal Tissue Monitor ("PTM") product were $70,000
in fiscal year 1998. The PTM product was approved during Fiscal 1998 for
commercial sales in the United States, and the Company signed two distribution
agreements during the year. The distributor is presently introducing the product
in various geographic regions around the world. Product sales in the prior year
were comprised primarily of sales of PTM materials. The Company had $5,000 of
Kephra related revenue in Fiscal 1998, compared to $45,000 during Fiscal 1997
for royalties, contract research and marketing rights revenue related to Kephra.
Interest and other revenue for Fiscal 1998 increased by $144,000 to $274,000
compared to Fiscal 1997. This increase was the result of invested cash and
short-term investments during Fiscal 1998 due to the completion of private
equity financing during March 1997.
Cost of product sales for Fiscal 1998 increased by $45,000 or 48% to
$140,000. The increase was primarily related to the sale of PTM kits under a
new distribution agreement and the additional cost of product validation
studies required by the FDA during the year in order to launch the product in
the United States.
As the Company entered its first human clinical trials, spending on product
development was concentrated on its Photodynamic Therapy (PDT) cancer
treatments, Boronated Prophyrin (BOPP) and Cancer Immunotherapy and the new
compound acquired during Fiscal 1998, O6 Benzlyguanine ("BG"). Product
development costs for Fiscal 1998 decreased by $369,000 or 14% to $2,196,000
compared to the prior year. The decrease related to the following areas: (i)
an increase of $8,000 in funding of product development expenses for BOPP;
(ii) a decrease of $104,000 in funding of a technology owned by BTI for which
the Company has suspended additional work; (iii) $18,000 decrease in expenses
related to Cancer Immunotherapy technology; (iv) acquisition costs of
$300,000 incurred during Fiscal 1998 for the BG compound; (v) a decrease of
$256,000 in expenses related to PTM product development, as the PTM product
was approved by the FDA during the current year and has moved out of the
product development phase; (vi) a decrease of $299,000 in product development
expenses related to the Company's Kephra product line and general product
development costs. The Company is not actively seeking licensing
opportunities or making product development expenditures for the Kephra
product line.
General and administrative expenses for Fiscal 1998 were $2,086,000, an
increase of $931,000 over Fiscal 1997. Such increase is primarily
attributable to the Company incurring approximately $271,000 in professional
fees related to the registration of securities issued in the March 1997
private placement. In addition, the Company recognized $374,000 of expenses
for financial advisory services performed by Paramount Capital, the Company's
placement agent. Such expense is recorded in connection with preferred stock
unit purchase options granted in exchange for financial advisory services.
The Company also incurred $182,000 in relocation expenses during the year in
connection with the relocation of its Chairman, President and Chief Executive
Officer from New Jersey to California. There were no such costs incurred
during the same period of the prior year.
For Fiscal 1998, business development and marketing expenses were $219,000, a
decline of $72,000 or 25%. The Company focused much effort during the current
fiscal year in securing strategic marketing and
24
<PAGE>
distribution partners for its various products under development. The Company
was successful in finding a marketing partner for its PTM product during
Fiscal 1998.
Interest and other expenses for Fiscal 1998 increased to $78,000 from $66,000.
The Company abandoned several patents relating to the Kephra technology and a
trademark during the year and recognized a loss on abandonment of $68,000.
During Fiscal 1997, the Company incurred $56,000 of interest expense from a
bridge loan prior to completion of its private equity financing in March 1997.
Net loss was $4,371,000 for the year ended March 31, 1998, an increase of
$474,000 over the prior year. Net loss applicable to common stockholders was
$11,193,000 for Fiscal 1998. Non-cash convertible preferred stock dividends
of $7,227,000 were recorded during the current fiscal year compared to
$1,696,000 in Fiscal 1997 (as restated-See Note 9 to the consolidated
financial statements), in conjunction with a private equity financing
completed during the prior year. The transaction is more fully described in
Note 2 of the Notes to the Consolidated Financial Statements.
YEAR ENDED MARCH 31, 1997 COMPARED TO YEAR ENDED MARCH 31, 1996 (FISCAL 1996)
Total revenue decreased by $104,000, or 27% to $275,000 in Fiscal 1997. The
majority of the Fiscal 1996 revenues related to marketing rights granted to a
U.S. soft drink company for the Company's Kephra technology. There were no
comparable revenues in Fiscal 1997.
Sales of the Company's PTM product comprised the majority of product sales in
Fiscal 1997. Product sales increased by $87,000 from Fiscal 1996. The prior
year sales were comprised primarily of sales of Kephra materials. Marketing
rights revenues for Fiscal 1997 decreased by $55,000, or 92%, to $5,000.
Fiscal 1996 marketing rights revenue is attributable to rights related to a
licensing agreement with a U.S. soft-drink company for the Company's Kephra
technology. Contract research revenue for Fiscal 1997 decreased by $6,000
from the prior year. Fiscal 1997 revenues related to work performed under a
joint venture agreement with an ophthalmic company for the use of the
Company's photochromatic technology.
Interest and other revenue for the Fiscal 1997 increased by $19,000, or 17%,
to $129,000 compared to Fiscal 1996. This increase was the result of more
cash and short-term investments due to the completion of private equity
financing during the year and a gain on the sale of assets.
Cost of product sales for Fiscal 1997 decreased by $29,000 or 24% to $95,000.
Such decrease was primarily related to the change in the nature of
products sold.
Product development costs for Fiscal 1997 increased substantially by $712,000
or 38% to $2,566,000 over the prior year. The majority of the increase
resulted from the initiation of work on two projects in the cancer therapy
area, including: funding of $1,317,000 in product development expenses for
BOPP and $323,000 in expenses related to the acquisition of Cancer
Immunotherapy technology, including expenses incurred in association with a
related research agreement and expenses incurred related to in-house product
development of the Cancer Immunotherapy. No such costs were incurred in the
prior year. The Company also incurred costs in Fiscal 1997 relating to the
filing of a Premarket Application in September 1996 for the Company's PTM
product. Product development costs for PTM decreased by $827,000 for the year
because the product development efforts were concluded during the year which
culminated with FDA approval for PTM in June 1997.
In Fiscal 1997, general and administrative costs decreased by $102,000 over
the prior year or 8% to $1,156,000. The decrease is due to continued cost
reduction measures implemented in the prior year, which includes reduced
staffing costs and insurance expense, offset by higher professional fees.
25
<PAGE>
For Fiscal 1997 business development and marketing expenses were $291,000, a
decline of $82,000 or 22%. The decline is due to lower consultant and travel
expenses offset by higher salary and benefit costs.
Interest and other expenses increased to $66,000 for Fiscal 1997, an increase
of $39,000. The Company required a bridge loan prior to completion of its
private equity financing in March 1997. Interest expense incurred on the loan
accounted for the increase.
Net loss was $3,897,000 in Fiscal 1997, an increase of $641,000 over the
prior year. The increased loss during the current fiscal year was primarily
due to increased product development expenses discussed above. Net loss
applicable to common stockholders was $5,594,000 (as restated-See Note 9 to
the consolidated financial statements) for Fiscal 1997. Non-cash convertible
preferred stock dividend were recorded during Fiscal 1997 of $1,696,000 (as
restated) in conjunction with a private equity financing completed during the
year and more fully described in Note 2 to the Consolidated Financial
Statements.
CAPITAL RESOURCES AND LIQUIDITY. As of March 31, 1998, cash, cash
equivalents, and short-term investments decreased by $3,476,000 to
$3,290,000, compared to March 31, 1997. Working capital decreased by
$3,557,000 and total assets decreased by $3,644,000. These decreases are
primarily a result of cash used in operations during Fiscal 1998.
Stockholders' equity decreased by $3,630,000 as a result of the
aforementioned net operating loss offset by additions to equity for
securities issued in exchange for services performed and exercise of warrants.
Since inception, the Company has experienced negative cash flow from
operations, and management considers it prudent to anticipate that negative
cash flow from operations will continue until such time as sales of its
products under development commence. The Company and its subsidiary, BG
Development Corp. ("BGDC") initiated a private placement equity financing to
raise a maximum of $10 million assuming exercise of over-allotment provision
by the placement agent as described in Note 8 to the consolidated financial
statements. On June 22, 1998, the Company and BGDC closed on gross proceeds
of $2.9 million ($2.6 net proceeds) for the aforementioned private placement.
The Company has also initiated contingency plans to defer certain research
and development expenditures and other non essential costs until the Company
has closed a more significant portion of the aforementioned financing.
Management believes the Company's financial resources will be adequate, based
on the assumption that no significant revenues are generated through March
1999.
The Company received notice from the American Stock Exchange ("AMEX") that
Amex intends to take action to remove the Company's Common Stock from the
AMEX because the Company no longer satisfies all of the financial guidelines
of the AMEX for continued listing. The Company notified the Board of
Governors of AMEX that it will appeal the decision to remove the Company's
Common Stock from the AMEX. There can be no assurance that the appeal by the
Company will be successful, and that the listing will be continued. The
Company is taking measures to ensure that in the event of an unsuccessful
appeal, an orderly transition will occur and that its Common Stock will
commence trading on the NASD Electronic Bulletin Board. If the Company were
to lose it's listing on the AMEX, the Company's ability to raise additional
capital might be impaired.
During Fiscal 1998, the Company received approval from the FDA for its PTM
product and signed two distribution agreements with Steri-Oss, Inc. for the
exclusive five-year distribution of PTM globally, excluding Japan. 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 the Company will enter into any new distribution
agreements, or that any of its marketing partners will order the PTM products
in significant quantities.
26
<PAGE>
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 Cancer Immunotherapy technology. The
Company incurred $305,000 and $323,000 in product development expenses during
Fiscal 1998 and 1997, respectively, and expects to continue funding such
efforts associated with the commercialization of the licensed technology,
including the commencement of human clinical trials, which will increase 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 for the PDT
treatment of cancer. Under the agreement as amended, the Company is currently
funding substantially all expenses of BTI, which consist primarily of product
development expenses. The Company incurred $1,405,000 and $1,501,000 in
product development expenses during Fiscal Years 1998 and 1997, respectively,
and expects to continue funding such expenses until the Company determines if
it will elect to exercise its option to acquire BTI. There can be no
assurance that the Company will exercise its option to acquire BTI.
In March 1998, the Company signed a license agreement for a drug compound
called O6 Benzylguanine ("BG") with the owners of the patents: Pennsylvania
State University, the National Institutes of Health (NIH), the University of
Chicago, and Case Western Reserve University, (collectively, the
"Co-Owners"), and in turn, assigned it to its subsidiary BGDC. Under the
terms of the agreement, the Company has a six month evaluation period ending
on September 17, 1998. The Company may terminate the agreement during the
evaluation period and pay $75,000 to the Co-Owners.
The Company may enter into a Cooperative Research and Development Agreement
("CRADA") with the NIH to fund studies and clinical trials. If the Company
were to enter into a CRADA with the NIH, it would be obligated to provide
funding of $125,000 each year for research. If the Company elects to continue
to develop the BG technology, it would be obligated to make additional
milestone, royalty and patent reimbursement payments to the Co-Owners during
the term of the License Agreement. The agreement also has a provision in
which the Company may make certain portions of the aforementioned payments in
common stock of the Company.
In connection with the license agreement for BG, the Company entered into an
introduction agreement with Paramount Capital Investments LLC. The agreement
provides for cash consideration of $100,000 plus reimbursement of expenses,
as well as milestone payments in the Company's common stock of up to
1,000,000 shares if the BG compound successfully reaches certain milestones.
The Company recorded $225,000 in product development expenses under this
agreement during Fiscal 1998.
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 Years 1998, 1997 and 1996 was not material.
YEAR 2000 COMPLIANCE. The Company recognizes the need to ensure its
operations will not be adversely impacted by the inability of the Company's
systems to process data having dates on or after January 1, 2000 ("Year
2000"). Processing errors due to software failure arising from calculations
using the Year 2000 date are recognized as a risk. The Company is currently
addressing the risk, with respect to the availability and integrity of its
financial systems and the reliability of its operating systems, and is in the
process of communicating with suppliers, customers, financial institutions
and others with whom it conducts business to assess whether they are or will
be Year 2000 compliant. While the Company believes its
27
<PAGE>
planning efforts are adequate to address its Year 2000 concerns, there can be
no assurance that the systems of other companies on which the Company's
systems and operations rely will be converted on a timely basis and will not
have a material effect on the Company. In addition, the potential impact of
the Year 2000 on others with whom the Company does business and any resulting
effects on the Company cannot be reasonably estimated at this time. The cost
of the Company's Year 2000 initiatives is not expected to be material to the
Company's results of operations or financial position.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable
28
<PAGE>
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE)
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CONSOLIDATED FINANCIAL STATEMENTS: PAGE
<S> <C>
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Consolidated Balance Sheets as of March 31, 1998 and 1997 (as restated) . . . . . . . . . . . . . 31
Consolidated Statements of Operations for the years ended March 31, 1998, March 31, 1997
(as restated), March 31, 1996 and September 23, 1983 (inception) to March 31, 1998. . . . . . . . 32
Consolidated Statements of Stockholders' Equity from September 23, 1983 (inception) to
March 31, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Consolidated Statements of Cash Flow for the years ended March 31, 1998, March 31, 1997,
March 31, 1996 and September 23, 1983 (inception) to March 31, 1998. . . . . . . . . . . . . . 35
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
</TABLE>
29
<PAGE>
INDEPENDENT AUDITORS' REPORT
Pacific Pharmaceuticals, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Pacific
Pharmaceuticals, Inc. and Subsidiaries (collectively, the "Company", a
development stage enterprise) as of March 31, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows
for each of the three years in the period ended March 31, 1998 and the period
from September 23, 1983 (date of incorporation of Pacific Pharmaceuticals,
Inc.) to March 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform 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 Pacific Pharmaceuticals, Inc.
and Subsidiaries at March 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period
ended March 31, 1998, and for the period from September 23, 1983 (date of
incorporation of Pacific Pharmaceuticals, Inc.) to March 31, 1998 in
conformity with generally accepted accounting principles.
The Company is in the development stage as of March 31, 1998. As discussed in
Note 1 to the consolidated financial statements, the Company's activities
since inception have been directed primarily toward the development and
commercialization of products based on biotechnological research.
As discussed in Note 9, the accompanying fiscal 1997 financial statements
have been restated.
DELOITTE & TOUCHE LLP
July 8, 1998
San Diego, California
30
<PAGE>
CONSOLIDATED BALANCE SHEETS
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE)
<TABLE>
<CAPTION>
As of March 31,
--------------------------------------------
1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS (as restated,
CURRENT ASSETS: see Note 9)
Cash and cash equivalents $3,290,176 $1,784,599
Short-term investments - 4,981,435
Accounts receivable, net - 99,066
Inventory 38,637 41,677
Prepaid expenses 85,053 87,311
- -------------------------------------------------------------------------------------------------------------------------
Total current assets 3,413,866 6,994,088
- -------------------------------------------------------------------------------------------------------------------------
Property and equipment, net 71,840 82,563
Patent costs, net 104,981 157,597
- -------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $3,590,687 $7,234,248
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
<S> <C> <C>
Accounts payable $661,371 $723,523
Accrued expenses 201,125 161,574
Current portion of capital leases 4,066 4,670
- -------------------------------------------------------------------------------------------------------------------------
Total current liabilities 866,562 889,767
- -------------------------------------------------------------------------------------------------------------------------
Capital leases 22,584 13,072
- -------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Note 4)
STOCKHOLDERS' EQUITY:
Convertible preferred stock, $25 par value, 2,000,000 shares authorized 40,090
and 50,000 issued and outstanding at March 31, 1998 and 1997,
respectively
(liquidating preference $10,423,400) 1,002,288 1,250,038
Common stock, $.02 par value, 100,000,000 shares authorized;
10,777,234 and 8,151,029 shares issued and
outstanding at March 31, 1998 and 1997, respectively 215,545 163,021
Capital in excess of par value 46,969,197 38,805,489
Deficit accumulated during the development stage (45,485,489) (33,887,139)
- -------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 2,701,541 6,331,409
- -------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $3,590,687 $7,234,248
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
31
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE)
<TABLE>
<CAPTION>
Years Ended March 31, September 23, 1983
-------------------------------------------------------------- (inception) to
1998 1997 1996 March 31, 1998
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES (as restated,
see Note 9)
Product sales $69,510 $100,485 $13,657 $2,019,741
License fees and royalties 5,405 1,207 150,000 486,612
Contract research - 39,172 45,000 268,063
Marketing rights - 5,000 60,000 1,311,500
Interest and other 273,545 129,316 110,159 1,913,658
- ---------------------------------------------------------------------------------------------------------------
Total revenues 348,460 275,180 378,816 5,999,574
- ---------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES
Cost of product sales 140,460 95,200 124,530 3,138,395
Product development 2,196,433 2,565,664 1,853,899 17,160,961
General and administrative 2,086,249 1,155,515 1,257,722 17,851,747
Business development
and marketing 218,603 290,603 372,316 3,776,889
Interest and other 78,178 65,564 26,252 633,973
- ---------------------------------------------------------------------------------------------------------------
Total costs and expenses 4,719,923 4,172,546 3,634,719 42,561,965
- ---------------------------------------------------------------------------------------------------------------
Net loss (4,371,463) (3,897,366) (3,255,903) (36,562,391)
Convertible preferred stock
dividends 7,226,887 1,696,211 - 8,923,098
- ---------------------------------------------------------------------------------------------------------------
Net loss applicable to
common stockholders $(11,598,350) $ (5,593,577) $ (3,255,903) $ (45,485,489)
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
Net loss per share
of common stock--basic and
diluted ($1.25) ($0.69) ($0.52)
- -------------------------------------------------------------------------------------------
Weighted average common
stock outstanding 9,273,717 8,115,139 6,222,832
- -------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
32
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE)
<TABLE>
<CAPTION>
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
</TABLE>
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
CAPITAL DURING THE
IN EXCESS DEVELOPMENT
OF PAR VALUE STAGE
- ----------------------------------------------------------------------------------
<S> <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
Net loss (137,937)
- ----------------------------------------------------------------------------------
BALANCE AT MARCH 31, 1984 1,434,717 (137,937)
Purchase of treasury stock (267)
Adjustment to capital in excess
of par value 5,600
Net loss (692,070)
- ----------------------------------------------------------------------------------
BALANCE AT MARCH 31, 1985 1,440,050 (830,007)
Purchase of treasury stock (83)
Initial public offering, October 1985
at $6.00 per share 2,392,536
Net loss (994,767)
- ----------------------------------------------------------------------------------
BALANCE AT MARCH 31, 1986 3,832,503 (1,824,774)
Purchase of treasury stock (5)
Preferred stock subscribed:
Series A 450,000
Net loss (1,445,191)
- ----------------------------------------------------------------------------------
BALANCE AT MARCH 31, 1987 4,282,498 (3,269,965)
Issuance of 8.5% convertible
subordinated notes warrants 62,500
Retirement of treasury stock 350
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)
</TABLE>
33
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES(A DEVELOPMENT STAGE ENTERPRISE)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
----------------------------------------------------------------------
SHARES PAR VALUE SHARES PAR VALUE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
Private placement of convertible preferred stock 50,000 $1,250,038
Warrants exercised 100,000 2,000
Issuance of warrants for services
Convertible preferred stock dividend (as restated, see Note 9)
Net loss
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 1997 (AS RESTATED) 50,000 1,250,038 8,151,029 163,021
- ---------------------------------------------------------------------------------------------------------------------------------
Warrants exercised 423,437 8,469
Issuance of common stock for services 13,110 262
Conversion of preferred stock into common stock (9,910) (247,750) 2,189,658 43,793
Preferred stock unit purchase options as compensation
for financial advisory services
Convertible preferred stock dividend
Net loss
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 1998 40,090 $1,002,288 10,777,234 $215,545
- ---------------------------------------------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
<TABLE>
<CAPTION> DEFICIT
ACCUMULATED
CAPITAL DURING THE
IN EXCESS DEVELOPMENT
OF PAR VALUE STAGE
- -------------------------------------------------------------------------------------------
<S> <C> <C>
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)
Private placement of convertible preferred stock 7,291,688
Warrants exercised 92,000
Issuance of warrants for services 45,000
Convertible preferred stock dividend (as restated,
see Note 9) 1,696,211 (1,696,211)
Net loss (3,897,366)
- -------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 1997 (AS RESTATED) 38,805,489 (33,887,139)
- -------------------------------------------------------------------------------------------
Warrants exercised 389,562
Issuance of common stock for services 11,737
Conversion of preferred stock into common stock 203,957
Preferred stock unit purchase options as compensation
for financial advisory services 331,565
Convertible preferred stock dividend 7,226,887 (7,226,887)
Net loss (4,371,463)
- -------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 1998 $46,969,197 ($45,485,489)
- -------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
34
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOW
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE)
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31, SEPTEMBER 23, 1983
----------------------------------------- (INCEPTION) TO
1998 1997 1996 MARCH 31, 1998
- -------------------------------------------------------------------------------------------------------- -------------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss ($4,371,463) ($3,897,366) ($3,255,903) ($36,562,391)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization 81,257 109,731 123,427 1,665,001
Non-cash compensation expense upon issuance
of common stock, stock options and warrants 331,565 45,000 - 851,861
Net book value of asset disposals 76,376 17,064 5,506 241,692
Option income from retirement of stock
or amounts previously advanced by customer - - - (400,000)
Changes in assets and liabilities:
Accounts receivable 99,066 (96,398) 6,405 -
Inventory 3,040 (770) 7,060 (38,640)
Prepaid expenses and other assets 2,258 8,634 3,349 (96,028)
Accounts payable (62,152) 509,214 (2,505) 661,371
Accrued expenses 39,551 (217,353) 263,486 57,102
Customer advances - - (30,888) 140,863
Other liabilities - (7,842) (11,895) (4,866)
- -------------------------------------------------------------------------------------------------------- -------------------
Net cash used by operating activities (3,800,502) (3,530,086) (2,891,958) (33,484,036)
- -------------------------------------------------------------------------------------------------------- -------------------
INVESTING ACTIVITIES
Purchases of short-term investments - (4,981,435) (1,288,106) (10,461,867)
Maturities of short-term investments 4,981,435 1,288,106 992,326 10,461,867
Capital expenditures (16,502) (9,764) (51,596) (847,929)
Patent costs (64,945) (31,799) (61,823) (977,372)
Other - 8,825 - 7,829
- -------------------------------------------------------------------------------------------------------- -------------------
Net cash provided by (used in) investing activities 4,899,988 (3,726,067) (409,199) (1,817,472)
- -------------------------------------------------------------------------------------------------------- -------------------
FINANCING ACTIVITIES
Issuance of notes payable - 524,467 325,426 2,183,867
Repayment of notes payable - (524,467) (325,426) (1,965,124)
Repayment of capital lease obligations (3,940) (4,625) (37,087) (183,547)
Long-term customer advances - - - 100,000
Issuance of common stock, convertible preferred
stock and stock warrants 410,031 8,635,726 2,920,143 38,456,487
- -------------------------------------------------------------------------------------------------------- -------------------
Net cash provided by financing activities 406,091 8,631,101 2,883,056 38,591,684
- -------------------------------------------------------------------------------------------------------- -------------------
Net increase (decrease) in cash
and cash equivalents 1,505,577 1,374,948 (418,101) 3,290,176
Cash and cash equivalents at beginning of period 1,784,599 409,651 827,752 -
- -------------------------------------------------------------------------------------------------------- -------------------
Cash and cash equivalents at end of period $3,290,176 $1,784,599 $409,651 $3,290,176
- -------------------------------------------------------------------------------------------------------- -------------------
Cash paid for interest $2,682 $36,210 $18,804 $497,742
- -------------------------------------------------------------------------------------------------------- -------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PACIFIC PHARMACEUTICALS, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS - The Consolidated Financial Statements include the
accounts of Pacific Pharmaceuticals, Inc. and its wholly owned subsidiaries,
Perio Test, Inc., XYX Acquisition Corp. and BG Development Corp.
(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 biopharmaceutical
research. On August 7, 1997, the Company's stockholders approved an amendment
to the Certificate of Incorporation to change the name of the Company to
Pacific Pharmaceuticals, Inc. The Company was formerly known as Xytronyx, Inc.
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 ("FAS 7"). Among the
disclosures required by FAS 7 are that the Company's financial statements be
identified as those of a development stage enterprise, and that the
consolidated statements of operations, stockholders' equity and cash flows
disclose activity since the date of the Company's inception.
Since inception, the Company has experienced negative cash flow from
operations, and management considers it prudent to anticipate that negative
cash flow from operations will continue until such time as sales of its
products under development commence. The Company has initiated a private
placement equity financing to raise a maximum of $10 million assuming
exercise of over-allotment provision by the placement agent as described in
Note 8. On June 22, 1998, the Company closed on gross proceeds of $2.9
million ($2.6 net proceeds), for the aforementioned private placement. The
Company has also initiated contingency plans to defer certain research and
development expenditures and other non essential costs until the Company has
closed a more significant portion of the aforementioned financing. Management
believes the Company's financial resources will be adequate, based on the
assumption that no significant revenues are generated through March 1999.
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 - Cash equivalents consist of money market instruments
purchased with an original maturity of three months or less.
SHORT-TERM INVESTMENTS - Short term investments represent marketable debt
securities and are carried at fair value in accordance with FAS 115.
Unrealized holding gains or losses have not been material.
36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ACCOUNTS RECEIVABLE, NET - Accounts receivable consists of sales of products
to customers, net of allowances for doubtful accounts.
INVENTORY - Inventory, which consists principally of raw materials and work
in process, is valued at the lower of cost (determined by the first-in,
first-out method) or market.
PROPERTY AND EQUIPMENT - 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:
<TABLE>
<CAPTION>
March 31
1998 1997
--------------- --------------
<S> <C> <C>
Laboratory equipment $118,343 $357,139
Office furniture and equipment 166,860 157,966
Leasehold improvements 3,799 3,799
--------------- --------------
Total property and equipment 289,002 518,904
Less accumulated depreciation and amortization (217,162) (436,341)
--------------- --------------
Total $ 71,840 $ 82,563
--------------- --------------
--------------- --------------
</TABLE>
PATENT 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
impairment in value occurs. As a result of the Company's annual evaluation of
its capitalized patent costs, the Company wrote off patent and trademark
costs during Fiscal 1998 with a net book value of $68,000 which related
primarily to the Kephra technology. Patent costs are net of accumulated
amortization of $335,844 and $360,969 at March 31, 1998 and 1997,
respectively.
ACCRUED EXPENSES - Accrued expenses consist of the following:
<TABLE>
<CAPTION>
March 31
1998 1997
--------------- ---------------
<S> <C> <C>
Accrued compensation $ 67,687 $ 25,185
Accrued clinical trial expense 133,438 133,438
Other - 2,951
--------------- ---------------
Total $ 201,125 $ 161,574
--------------- ---------------
--------------- ---------------
</TABLE>
REVENUE RECOGNITION - Product sales revenue is generally recognized at the
time of product shipment. License fees and royalties, contract research, and
marketing rights income are all recognized as earned in accordance with their
respective agreements. Payments received in advance of shipments or prior to
the completion of the earnings process are recorded as deferred revenue.
LOSS PER SHARE OF COMMON STOCK - Basic loss per share of common stock is
computed by dividing the net loss applicable to common stockholders by the
weighted average number of shares of common stock outstanding during the
period.
37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
128, EARNINGS PER SHARE (EPS) during the current fiscal year. This statement
requires the presentation of earnings per share to reflect both "Basic EPS"
as well as "Diluted EPS" on the face of the statement of operations. In
general, Basic EPS is a function of weighted average number of common shares
outstanding for the periods. Diluted EPS does reflect the potential dilution
created by stock issuable pursuant to outstanding options, warrants,
convertible debt or equity securities and other contingently issuable shares.
The requirements of SFAS 128 have been applied retroactively to all periods
presented. There was no impact on reported net loss per common share as a
result of the adoption of this SFAS.
CONCENTRATION OF CREDIT RISK - The Company invests its excess cash in money
market accounts and short-term investments, primarily in U. S. Treasury
securities. The Company has not experienced any significant losses on its
cash accounts or short-term investments.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The Company's carrying amounts of its
financial assets and liabilities approximate their fair value due to the
short-term nature of the assets and liabilities.
MAJOR CUSTOMERS -One customer accounted for 98% and 75% of product sales for
the years ended March 31, 1998 and 1997, respectively. Three customers
individually accounted for 21%, 26% and 46%, respectively, of fiscal year
1996 product sales. Export sales, which accounted for 2% in the current
fiscal year, were to one customer in Japan, and 81% of product sales for the
year ended March 31, 1997 were primarily to one customer in Europe. Export
sales, all of which were to Japan, accounted for 51% of product sales in
fiscal year 1996.
SUPPLEMENTAL CASH FLOW INFORMATION - The Company had the following noncash
financing and investing activities for the period September 23, 1983
(inception) through March 31, 1998: Common Stock issued upon the conversion
of $720,000 of Series B preferred stock during fiscal year 1990; Common Stock
issued upon the conversion of long-term debt in the amount of $250,000 in
fiscal year 1996; option income of $100,000 recognized from an amount
previously classified as a customer advance during fiscal year 1996; capital
lease obligations incurred totaling $229,000, of which $24,000 was incurred
in fiscal year 1996 and $29,000 was incurred in fiscal year 1998, and;
non-cash convertible preferred stock dividends of $6,822,000 and $1,696,000
in fiscal years 1998 and 1997, respectively.
RECLASSIFICATIONS - Certain items in prior years' consolidated financial
statements have been reclassified to conform to the current year's
presentation.
2. STOCKHOLDERS' EQUITY
PRIVATE PLACEMENTS OF EQUITY SECURITIES - In fiscal year 1997, the Company
completed a private equity financing ("1997 Private Placement") in two stages
with the initial closing completed on December 19, 1996 (the "Initial
Closing") and the final closing completed on March 7, 1997 (the "Final
Closing") in which it raised $8,542,000, net of offering expenses.
The Company sold 100 Premium Preferred Units ("Units") at a price per Unit of
$100,000, each Unit consisting of 500 shares of Convertible Preferred Stock
("Preferred Stock"), par value $25 per share, and 50,000 Common Stock
Purchase Warrants ("Warrants"), to accredited individuals and institutional
investors pursuant to Regulation D under the Securities Act of 1933, as
amended. Each Warrant entitles the holder to purchase one share of Common
Stock at a price of $1 per share and may be exercised until March 7, 2007.
38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The initial conversion ratio for the Preferred Stock was 208.33 shares of
Common Stock for each share of Preferred Stock. The 1997 Private Placement
contained an adjustment provision to reset the conversion ratio under certain
conditions. For Preferred Stock converted after March 7, 1998, the new
conversion ratio is 290.89 shares of common stock for each share of Preferred
Stock.
The subscribers to the Private Placement purchased the Units at a discount
from the closing prices of the Company's common stock on the Initial Closing
date of 23% and the Final Closing date of 36%. The detachable stock purchase
warrants issued as part of the Units and had a fair value at the date of
issuance of $1,967,000. The aggregate value of the beneficial conversion
feature and warrants at the date of issuance was $6,721,000 and has been
recognized as a return to the Preferred Stockholders from the date of
issuance of the Preferred Stock to the date in which the Preferred Stock was
eligible for conversion into Common Stock. The reset of the conversion ratio
during March 1998 generated an additional non-cash dividend of $2,576,000.
Accordingly, non-cash dividends to preferred stockholders totaled $9,297,000,
of which $7,227,000 and $1,696,000 were recognized during the years ended
March 31, 1998 and 1997, respectively.
Holders of the Preferred Stock will be entitled to receive dividends, when
and if declared by the Board of Directors. The Company does not intend to pay
cash dividends on the Preferred Stock or the underlying Common Stock for the
foreseeable future. Liquidating rights for preferred stockholders are $260
per share plus accrued, but unpaid dividends.
Certain of the subscribers to the Private Placement entered into a Lock-up
Agreement ("Lock-up") with the Company. In the Lock-up, each subscriber
agreed not to sell or exercise any of the securities contained in the Units
until the underlying common stock is registered with the Securities and
Exchange Commission. The Company filed a registration statement with respect
to resale of the securities to be offered and the registration statement was
effective on September 4, 1997. As of March 31, 1998, 25% of the securities
remain subject to the Lock-up.
The placement agent, Paramount Capital Inc. ("Paramount"), who is affiliated
with certain significant shareholders of the Company, received an aggregate
dollar commission of $900,000 and a non-accountable expense allowance of
$410,753. The Company will also pay a commission to Paramount of 6% of the gross
proceeds received upon any exercise of the Warrants. Additionally, in connection
with the 1997 Private Placement and in connection with its provision of
financial advisory services to the Company, Paramount received a Unit Purchase
Option and an Advisory Option (the "Options") which, in the aggregate, entitle
Paramount to purchase 25 Units at $110,000 per unit. Accordingly, the Options
would entitle the holders thereof, upon exercise, to receive (i) 12,500 shares
of Preferred Stock, convertible into 3,636,125 shares of Common Stock, and (ii)
Warrants to purchase 1,250,000 shares of Common Stock.
Under the terms of the Placement Agency agreement the Company signed with
Paramount, Paramount will provide financial advisory services to the Company
for an 18 month period beginning after the final closing. The Company will
pay Paramount $2,500 per month and has agreed to sell 2.5 Units at $110,000
per unit to Paramount. The convertible Preferred Stock contained in the Units
convert into 363,613 shares of the Company's common stock ("Advisory Stock").
There are also warrants ("Advisory Warrants") to purchase 125,000 shares of
the Company's common stock at $1 per share attached to the Units, which are
exercisable until March 7, 2007. The Company valued the Advisory Stock at
approximately $335,000 and the Advisory Warrants at approximately $162,000
using a valuation program in accordance with SFAS 123. The Company is
amortizing these advisory services over 18 months beginning in April 1997.
39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 $2,920,000 after issuance costs
of $565,000 Included among the issuance costs was the payment of $314,000 in
commissions and a non-accountable expense allowance of $139,000 to Paramount.
The Company will also pay a commission to Paramount of 6% of the gross
proceeds received upon any exercise of the warrants. Additionally, Paramount
received 4.35625 unit purchase warrants at an exercise price $110,000 per
unit, to purchase up to 784,125 shares of common stock.
WARRANTS AND PLACEMENT AGENT'S UNIT PURCHASE OPTIONS - The table below
summarizes the number of the Company's outstanding warrants and unit purchase
options at March 31, 1998:
<TABLE>
<CAPTION>
Placement
Agent's Other
Class A Class B Options and Compensation
Description Warrants Warrants Warrants Warrants Total
- ------------------------------------ -------------- ------------ ------------------ ------------------ ---------------
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1997 8,385,150 309,734 4,638,408 403,600 13,736,892
Issued 1,031,880 1,031,880
Exercised 423,437 423,437
Cancelled/Expired 153,600 153,600
-------------- ------------ ------------------ ------------------ ---------------
Balance at March 31, 1998 7,961,713 309,734 5,670,288 250,000 14,191,735
-------------- ------------ ------------------ ------------------ ---------------
-------------- ------------ ------------------ ------------------ ---------------
Weighted Average Exercise Price $ 1.00 $ 22.00 $ 1.06 $ 1.48 $ 1.49
-------------- ------------ ------------------ ------------------ ---------------
</TABLE>
The Company may redeem the warrants if the market price of the Company's
Common Stock for the 20-day period exceeds $4 per share. 3,010,000 of the
Class A Warrants expire in November 2005 and 4,952,000 expire in March 2007.
As described in Note 4, a stipulated settlement agreement was completed in
June 1994 under which the Company issued Class B warrants to purchase 309,734
shares of common stock at an exercise price of $22 per share, exercisable for
a period of five years from date of issuance. The settlement warrants were
issued on August 11, 1996 and expire in August 2001. The Company valued the
Class B warrants using a generally accepted valuation program and determined
that the value was immaterial.
In May 1996, the Company entered into an agreement with Wound Healing of
Oklahoma ("WHO"), under which the Company acquired an exclusive world-wide
license to a certain Cancer Immunotherapy technology. 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 valued at
$50,000, and must pay a minimum royalty of $50,000 per year. The value of the
warrant was based upon the negotiated terms of the agreement. The first year
royalty is payable in two stages, 1) $25,000 due upon execution of the
agreement and 2) $25,000 due upon submission of an Investigational New Drug
("IND") application to the U. S. Food and Drug Administration ("FDA"). The
initial $25,000 was recognized as an expense upon execution of the agreement.
The Company will record the balance of the expense related to the issuance of
the warrant and pay the contingent portion of the minimum royalty if and when
an IND is filed with the FDA concerning this technology.
40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In September 1996, the Company entered into a line of credit agreement with
two of its stockholders under which the Company may borrow up to $500,000.
The agreement called for interest at the rate of 12% per annum. In connection
with the line of credit agreement, the Company granted the stockholders
five-year warrants to purchase a total of 150,000 shares of the Company's
common stock at an exercise price of $0.96. The warrants, which expire in
October 2001, are valued at $20,000, which was recorded as interest during
the period the line of credit facility was outstanding. The fair market value
of the warrants was determined based upon rates for lines of credit with
similar terms available to the Company at the date of grant. The line of
credit was subsequently paid back in March 1997.
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 Paramount (and its 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 and was additionally amended on December 17, 1996 to
provide that Paramount (and its affiliates) would not be considered an
Acquiring Party under the plan. 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 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 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 Common Stock.
COMMON STOCK OPTIONS - The Company is authorized to issue options of up to
6,418,000 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 and non-qualified stock options are granted at prices
not less than the fair market value at the date of grant. There were no
options granted below fair market value during fiscal years 1998, 1997 and
1996. However, during fiscal year 1998, two employees were issued 75,000
shares of restricted stock at a fair market value of $0.875 per share which
vest over a two year period. Options become exercisable in various increments
over two through five years. Options expire if not exercised within 5-10
years from the date of grant.
41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes stock option activity for the fiscal years ended
March 31, 1996, 1997 and 1998:
<TABLE>
<CAPTION>
Number Weighted Average
of Shares Exercise Price
-------- --------------
<S> <C> <C>
Outstanding April 1, 1995 1,051,640 $ 8.87
Granted 182,000 $ 2.21
Exercised - -
Canceled (320,340) $11.51
-------
Outstanding March 31, 1996 913,300 $ 6.59
Granted 1,054,000 $ 1.15
Exercised - -
Canceled (257,300) $ 5.10
---------
Outstanding March 31, 1997 1,710,000 $ 3.08
Granted 920,000 $ 1.17
Exercised - -
Canceled (597,500) $ 1.48
--------
Outstanding March 31, 1998 2,032,500 $ 2.24
---------
---------
</TABLE>
As of March 31, 1998, 4,310,000 shares remained available for grant under all
plans. At March 31, 1998, options for 888,225 shares of common stock were
exercisable at a weighted average exercise price of $3.45 per share and the
remaining 1,144,275 become exercisable through 2002. At March 31, 1997,
options for 489,725 common shares were exercisable at a weighted average
exercise price of $6.78 per share.
The Company has adopted the disclosure only provisions of SFAS 123 and
continues to account for its stock-based awards using the intrinsic value
method in accordance with APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES and its related interpretations. Accordingly, no compensation
expense has been recognized during fiscal years 1998, 1997 and 1996 for
employee stock option and purchase plan arrangements. In fiscal year 1998,
$5,000 of compensation expense was recognized related to restricted stock
awards.
Under SFAS 123, the fair value of stock-based awards to employees is
calculated through the use of option pricing models, even though such models
were developed to estimate the fair value of freely tradable, fully
transferable options without vesting restrictions, which significantly differ
from the Company's stock option awards. These models also require subjective
assumptions, including future stock price volatility and expected life of
options. A change in those assumptions could result in a significant change
in the calculated values. Pro forma disclosures as if the Company adopted the
cost recognition requirements under SFAS 123 in fiscal years 1998 and 1997
are presented below.
If the computed fair values of the fiscal year 1998, 1997 and 1996 awards had
been amortized to expense over the vesting period of the awards, the proforma
effect would have been an increase to compensation expense and net loss of
$383,000 or ($.04) per share, $113,000 or ($.01) per share and $40,000 or
($.01) per share for the years ended March 31, 1998, 1997 and 1996,
respectively. The program effect on net loss for fiscal years 1998, 1997 and
1996 is not representative of the proforma effect on net income or loss in
future years because it does not take into consideration proforma
compensation expense related to grants awarded prior to April 1, 1995.
42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes significant ranges of outstanding and exercisable
options at March 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
WEIGHTED AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISES PRICES OF SHARES LIFE (YRS) PRICE EXERCISABLE PRICE
---------------- -------- ---------- ----- ----------- -----
<S> <C> <C> <C> <C> <C>
$ 0.75-$1.13 1,525,000 8.9 $ 1.05 528,125 $ 1.11
1.75-2.50 183,500 7.9 2.04 95,200 2.03
3.50-5.13 197,000 6.4 4.91 137,900 4.91
6.25-10.00 67,000 5.1 9.09 67,000 9.09
15.00-16.88 60,000 2.7 16.57 60,000 16.57
--------- -------
$ 0.75-16.88 2,032,500 8.3 $ 2.24 888,225 $ 3.45
--------- -------
--------- -------
</TABLE>
The weighted average fair value of options granted during fiscal years 1998,
1997 and 1996 was estimated at $0.58, $0.57 and $1.42 respectively. The
Company's calculations were made using the Black Scholes option pricing model
recognizing forfeitures as they occur with the following weighted average
assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Expected Life 2.6 2.6 4.0
Interest Rate 5.8% 6.0% 6.0%
Volatility 75% 75% 84%
Dividend Yield 0% 0% 0%
</TABLE>
3. DISTRIBUTION AND MARKETING AGREEMENTS
In May 1996, the Company entered into a distribution agreement with a
European dental company for it to become the exclusive European distributor
for the Company's Periodontal Tissue Monitor ("the PTM") product. The Company
made an initial shipment to the distributor and recorded revenue of $76,000
during the year ended March 31, 1997. No revenues were recorded in the
current fiscal year under this agreement and the agreement terminated in
November 1997.
On June 23, 1997, the Company received approval from the United States Food
and Drug Administration ("FDA") to begin commercial sales and distribution in
the United States of its PTM product. During the current fiscal year, the
Company signed two agreements with an international dental company for the
exclusive five-year distribution of PTM worldwide, except in Japan. The
company recorded $68,000 in revenues under the agreements during the current
fiscal year.
43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During the year ended March 31, 1996 the Company entered into an agreement
under which it granted exclusive rights relating to its Kephra(TM)
photochromic technology. The agreement relates to the exclusive use of Kephra
in the U.S. and Canadian soft-drink markets and expired in June 1997. The
Company recorded $150,000 of revenues during fiscal 1996 under this agreement.
In January 1996 the Company entered into an agreement under which it licensed
its Sun Alert technology for exclusive worldwide use. The Sun Alert license
is renewable each year with a minimum royalty payment of $5,000.
4. COMMITMENTS AND CONTINGENCIES
TECHNOLOGY LICENSE AGREEMENTS - The Company enters 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 March 1998, the Company signed a license agreement for a compound called
O6 Benzylguanine ("BG") with the owners of the patents: Pennsylvania State
University, the National Institutes of Health (NIH), the University of
Chicago, and Case Western Reserve University, (collectively, the
"Co-Owners"). Under the terms of the agreement, the Company has a six month
evaluation period ending on September 17, 1998. The Company may terminate the
agreement during the evaluation period and pay $75,000 to the Co-Owners.
Accordingly, the Company recorded $75,000 in product development expenses
under this agreement during Fiscal 1998.
The Company may enter into a Cooperative Research and Development Agreement
("CRADA") with the NIH to fund studies and clinical trials. If the Company
were to enter into a CRADA with the NIH, it would be obligated to provide
funding of $125,000 each year for five years for research. If the Company
elects to continue to develop the BG technology, it would be obligated to
make additional milestone, royalty and patent reimbursement payments to the
Co-Owners during the term of the License Agreement. The agreement also has a
provision in which the Company may elect to make payments in common stock of
the Company.
In connection with the license agreement for BG, the Company entered into an
introduction agreement with Paramount. The agreement provides for cash
consideration of $100,000 plus reimbursement of expenses, as well as
milestone payments in the Company's common stock of up to 1,000,000 shares if
the BG compound successfully reaches certain milestones. The Company recorded
$225,000 in product development expenses under this agreement during the
current fiscal year. Paramount is affiliated with certain significant
shareholders of the Company and a Paramount employee is a member of the
Company's Board of Directors.
In May 1996 the Company entered into an agreement with Wound Healing of
Oklahoma ("WHO") under which it acquired an exclusive worldwide license to
Cancer Immunotherapy technology. 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. The Company also entered into a research agreement for one year,
plus renewal options, with WHO. During fiscal years 1998 and 1997, the
Company incurred research and deveolopment expense of $305,000 and $322,000,
on developing this technology.
The Company has an agreement with the Board of Trustees of the University of
Illinois ("U of I") which grants 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. No royalties were recorded under the agreement in
fiscal year 1998.
44
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
LEASES - The capitalized cost and accumulated depreciation of property under
capital lease obligations included in property and equipment is as follows:
<TABLE>
<CAPTION>
March 31
1998 1997
---- ----
<S> <C> <C>
Office furniture and equipment $28,393 $23,918
Less accumulated depreciation (3,155) (6,176)
------- -------
Net property under capital lease obligations $25,238 $17,742
------- -------
------- -------
</TABLE>
Future minimum lease commitments and rental payments are summarized as follows
for the year ending March 31:
<TABLE>
<CAPTION>
Capital Operating
Leases Lease
------ ------
<S> <C> <C>
1999 $ 6,519 $34,078
2000 6,519 -------
2001 6,519 -------
2002 6,519
2003 6,519
Thereafter 1,630
-------
34,225
Less imputed interest (7,575)
-------
Present value of minimum future lease payments $26,650
-------
-------
</TABLE>
At March 31, 1998, the Company occupied approximately 3,400 square feet of
office and laboratory space in San Diego, California under a lease which expires
in February 1999. The lease has no renewal options. Total rent expense for the
fiscal years ended March 31, 1998, 1997 and 1996, and the period September 23,
1983 to March 31, 1998 was $45,472, $136,831, $132,766 and $1,559,483,
respectively.
EMPLOYMENT AGREEMENT - The Company entered into an employment agreement with
Dr. H. Laurence Shaw, its Chairman, President and Chief Executive Officer for
an initial two year period beginning December 17, 1996, subject to renewal
upon mutual agreement. Pursuant to the agreement, the Company has agreed to
pay Dr. Shaw an initial base salary, subject to certain annual increases. Dr.
Shaw will also be entitled to receive a minimum annual bonus with an
additional annual milestone-based bonus at the discretion of the Board of
Directors of up to an additional 50% of base salary. In connection with the
execution of the agreement, Dr. Shaw was paid a signing bonus. Pursuant to
the terms of agreement, Dr. Shaw was granted qualified incentive stock
options to purchase 675,000 shares of the common stock of the Company,
exercisable for a period of ten years, at an exercise price equal to the fair
market value on the date of issuance, with vesting ratably over a three year
period from the date of grant.
Under the terms of Dr. Shaw's employment agreement, the Company is required
to pay all of Dr. Shaw's relocation expenses. The Board of Directors approved
an interest free bridge loan of $300,000 to Dr. Shaw for the purpose of
acquiring a new residence in California prior to the sale of his New Jersey
residence. The loan, which was made on May 1997, was paid back in September
1997. The Company paid $182,000 in relocation expenses under the employment
agreement during fiscal year 1998.
CONSULTING AGREEMENTS - As compensation for services rendered, the Company
paid annual consulting fees to its former Chairman of $37,500 and $87,500 for
fiscal years 1997 and 1996, respectively.
45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In December 1996, Dr. Jerry Weisbach was appointed to the Board of Directors
of the Company. The Company also entered into a consulting agreement with
Dr. Weisbach to provide advisory services to the Company. Dr. Weisbach was
paid $30,600 and $9,000 during the fiscal years 1998 and 1997, respectively.
Dr. Weisbach resigned from the Board of Directors in January 1998 and the
consulting agreement was terminated.
LITIGATION - During 1992, the Company was the target of a consolidated
stockholder class action complaint. Although management believed the claim to
be without merit, the Company concluded that it was in the best interest of
the Company to settle the matter. Such action was ultimately settled during
fiscal 1995 with a cash payment of $2,800,000 to the plaintiff class, all of
which was paid by the Company's insurers. Additionally, in fiscal year 1997,
the Company issued to the plaintiff class five year Class B Warrants to
purchase 309,734 shares of Common Stock at an exercise price of $22 per
share. The Class B Warrants were issued on August 11, 1997 and expire in
August 2001. The Company valued the Class B warrants using a generally
accepted valuation model and determined that the value was immaterial.
5. INCOME TAXES
Significant components of the Company's deferred tax assets and liabilities are
as follows:
<TABLE>
<CAPTION>
March 31
1998 1997
-------------------- --------------------
<S> <C> <C>
Deferred tax assets:
Capitalized research expense $ 226,000 $ 276,000
Accruals not currently deductible 53,000 41,000
Net operating loss carryforwards 12,388,000 11,647,000
Capitalized technology 646,000 -
Research and development and other credits 577,000 634,000
-------------------- --------------------
Total deferred tax credits 13,890,000 12,598,000
Deferred tax liabilities-patent expense (44,000) (65,000)
-------------------- --------------------
Total net deferred tax assets 13,846,000 12,533,000
Valuation allowance for deferred tax assets (13,846,000) (12,533,000)
-------------------- --------------------
Net deferred tax assets $ - $ -
-------------------- --------------------
-------------------- --------------------
</TABLE>
A valuation allowance of $13,846,000 and $12,533,000 at March 31, 1998 and
1997, respectively, has been recognized as an offset to the deferred tax
assets as realization of such assets is uncertain. At March 31, 1998, the
Company has federal and California tax net operating loss carryforwards of
approximately $33,077,000 and $9,175,000, respectively. The Company also has
federal and California research and other credit carryforwards of
approximately $442,000 and $135,000, respectively. The difference between the
tax loss and credit 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 tax loss carryforwards. The federal and California tax loss
carryforwards and the credit carryforwards expire beginning in Fiscal 1999
through 2013, unless previously utilized.
The Internal Revenue Code ("the Code") includes provisions which
significantly limit potential use of net operating losses in situations where
there is a change in ownership of more than 50% during a three-year
46
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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 of November 27, 1995 as defined in the Code.
Accordingly, the Company has federal and California net operating losses in
the amount of $25,175,000 and $6,526,000 respectively that are currently
subject to the annual limitation. Approximately $605,000 of these net
operating losses become available for use each year. The remaining federal
and California net operating losses of approximately $7,902,000 and
$2,649,000, respectively, are not subject to the annual limitation since
these losses occurred after the ownership changes.
6. OPTION TO ACQUIRE 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, as amended,
gives the Company the right to acquire BTI by a merger of BTI into a
wholly-owned subsidiary of the Company. In February 1997, the Company and BTI
agreed to extend the period during which the Company may exercise its option
to acquire BTI from April 30, 1997 until such time as BTI has completed human
clinical trials of Boronated Porphyrin Compound ("BOPP") at an agreed upon
dose level (the "Option Period"). The Option Period was extended at the
Company's request to enable BTI to complete preclinical studies, to commence
clinical trials in humans and to demonstrate that a given dose level of BOPP
in humans would not cause certain adverse events. Accordingly, the Company
has deferred its election to exercise the 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 ranges from 1,000,000 to
3,000,000 shares, and is to be determined based upon the market price of the
Company's common stock prior to the date of exercise. The agreement has been
approved by a majority of the stockholders of BTI. The Company's Board of
Directors voted to approve the merger, however the merger is also subject to
shareholder approval for the issuance of additional shares of common stock.
One of the Company directors is also a director of BTI.
Under the agreement, the Company will assist BTI during the option period in
preparing the PDT products for advancement into human clinical trials. The
Company pays substantially all of BTI's operating expenses which are
comprised primarily of product development costs. The Company is also
required to advance to BTI funds to repay $664,000 of indebtedness, including
accrued interest as part of the acquisition price of BTI. Certain holders of
such indebtedness are shareholders of the Company. In exchange for such
funding, BTI will issue convertible notes to the Company which may be
converted into BTI equity at the Company's option or if the merger is not
consummated. The Company has elected to record all advances to BTI as product
development expense in the period incurred due to uncertainties regarding the
ultimate value to be realized from the convertible notes. During the fiscal
years ended March 31, 1998 and 1997, the Company advanced $1,176,000 and
$1,282,000, respectively to BTI.
7. OTHER RELATED PARTY TRANSACTIONS
For the period September 23, 1983 to March 31, 1995, the Company incurred
expenses, principally for financial consulting services inclusive of finder's
fees on Company financing of $861,928 to related entities.
47
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. SUBSEQUENT EVENTS
POTENTIAL DELISTING FROM THE AMERICAN STOCK EXCHANGE
On June 24, 1998, the Company received notice from the American Stock
Exchange ("AMEX") that Amex intends to take action to remove the Company's
Common Stock from the AMEX because the Company no longer satisfies all of the
financial guidelines of the AMEX for continued listing. The Company notified
the Board of Governors of AMEX that intends to appeal the decision to remove
the Company's Common Stock from the AMEX. There can be no assurance that the
appeal by the Company will be successful, and that the listing will be
continued. The Company is taking measures to ensure that in the event of an
unsuccessful appeal, an orderly transition will occur and that its Common
Stock will commence trading on the NASD Electronic Bulletin Board.
SECURITY PRIVATE PLACEMENT FINANCING
The Company entered into a Placement Agency agreement with Paramount to do an
additional private placement financing ("Private Placement"). Under the terms
of the agreement, the placement agent will use its best efforts to sell 60
Units for $100,000 each, which consist of 50,000 shares of Series A
Convertible Preferred Stock ("Units"), valued at $2.00 per share of BG
Development Corp. ("BGDC"), a wholly-owned subsidiary of the Company. The
Units are redeemable in cash or common stock of the Company under certain
circumstances. The Private Placement, as presently structured, would raise
minimum gross proceeds of $1,000,000 and maximum gross proceeds of $6,000,000
with a provision for the placement agent to sell an additional 40 Units as an
over-allotment of up to $4,000,000. Seventy-five percent of the net proceeds
of the Private Placement will be used by BGDC for development costs
associated with BG technology acquired during fiscal 1998 (Note 4).
Twenty-five percent of the net proceeds of the Private Placement will go to
the Company to be used for general purposes.
At all times while the Units remain outstanding, the preferred stock shall
accrue dividends as follows:
<TABLE>
<CAPTION>
Dividend Date Dividend Amount
------------- ---------------
<S> <C>
From final closing to 30 months $1.99 per share
30-36 months after closing $0.82 per share
36-42 months after closing $0.82 per share
42-48 months after closing $1.16 per share
42-60 months after closing $1.16 per share
After 60 months Compounded rate of 35%
</TABLE>
On June 22, 1998, the Company did an initial closing on 29 Units of the
private placement described above for gross proceeds of $2,900,000 (net
proceeds of $2,600,000).
48
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. 1997 RESTATEMENT
Subsequent to the issuance of the Company's 1997 financial statements, the
Company's management determined that the accounting for the convertible
preferred stock issued, as originally reported in the fiscal 1997, did not
reflect the value of the detachable stock purchase warrants issued in
connection with the 1997 Private Placement described in Note 2. The fair
value of such warrants, as calculated by an independent valuation consulting
firm was $1,967,000 and is being recorded as a return to the preferred
stockholders from the date of issue of the Preferred Stock to the date in
which the Preferred Stock was eligible for conversion into Common Stock. As a
result, net loss applicable to common shareholders and net loss per share for
Fiscal 1997 have been restated from the amounts previously reported. Such
restatement also resulted in a $530,950 increase in both capital in excess of
par value and the deficit accumulated in development stage.
A summary of the effect of the restatement is as follows:
<TABLE>
<CAPTION>
September 23,
1983 (inception) September 23,
Fiscal 1997 Fiscal 1997 To March 31, 1997 1983 (inception)
As Previously As As Previously to March 31, 1997
Reported Restated Reported As Restated
---------------- ------------------- ---------------------------- -------------------------
<S> <C> <C> <C> <C>
Convertible
preferred stock
dividends $ 1,165,261 $ 1,696,211 $ 1,165,261 $ 1,696,211
---------------- ------------------- ---------------------------- -------------------------
Net loss applicable
to common
shareholders $ (5,062,627) $ (5,593,577) $ (33,356,189) $ (33,887,139)
---------------- ------------------- ---------------------------- -------------------------
Net loss per share of
common stock--basic
and diluted $ (0.62) $ (0.69)
---------------- -------------------
</TABLE>
49
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGERS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by Items 10, 11, 12 and 13 is incorporated
herein by reference to the information under the captions "Election of
Directors" and "Executive Compensation" and "Beneficial and Record Ownership
of Securities", respectively, set forth in the Company's definitive Proxy
Statement to be filed with the Securities and Exchange Commission within 120
days after March 31, 1998, for its Annual Meeting of Stockholders to be held
on August 13, 1998. Information concerning executive officers is incorporated
herein by reference to the information included in Part I, Item 4A of this
report under the caption "Executive Officers of the Registrant."
50
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES
AND REPORTS ON FORM 8-K
(a) (1) The following documents are filed as a part of this Report:
Financial Statements--See Index to Consolidated Financial
Statements as Item 8 on page 28 of this Report.
Exhibits
--------
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
2.1 Agreement and Plan of Merger between the Registrant, XYX
Acquisition Corp., and Binary Therapeutics, Inc. dated June 4,
1996. (20)
2.2 Letter Agreement dated February 27, 1997 amending the Agreement
and Plan of Merger. (25)
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 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)
3.9 Bylaws of the Registrant amended and restated as of November 6,
1992. (16)
3.10 Certificate of Amendment of Certificate of Incorporation filed
with the Delaware Secretary of State on April 8, 1996. (20)
*Management contract, compensatory plan or arrangement
51
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
3.11 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)
4.5 Warrant Agreement for "Class B Warrants." (22)
4.6 Certificate of Designations of Series A Convertible Preferred
Stock of Xytronyx, Inc. (23)
4.7 Warrant Agreement for "Class B" Warrants including Form of Class
B Warrant. (24)
4.8 Amendment No. 2 to Rights Agreement among Xytronyx, Inc., First
Chicago Trust Company of New York and American Stock Transfer &
Trust Company dated August 15, 1996. (25)
4.9 Amendment No. 3 To Rights Agreement between Xytronyx, Inc. and
American Stock Transfer & Trust Company dated December 17, 1996.
(25)
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)
10.5 Advice to Holders of the Company Common Stock Issued January 31,
1984. (1)
10.6 Research Agreement dated January 28, 1986 between the Company and
the University of Washington. (8)
*Management contract, compensatory plan or arrangement
52
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
10.7 Research Agreement dated March 4, 1987 between the Registrant
and the University of Washington. (3)
10.8* Nonqualified Stock Option Plan of the Registrant, as amended.
(8)
10.9* Incentive Stock Option Plan of the Registrant, as amended. (8)
10.10* Stock Option Plan for Nonemployee and Non-Consultant Directors
of the Registrant. (8)
10.11* Stock Option Agreement between the Registrant and Morris Weeden.
(8)
10.12* Stock Option Agreement between the Registrant and William
Jorgenson. (8)
10.13 Form of Indemnity Agreement between the Registrant and its
directors and executive officers. (8)
10.14* Amendment dated May 8, 1987 to the Incentive Stock Option Plan
of the Registrant. (4)
10.15* 1988 Stock Option Plan of the Registrant. (11)
10.16* Key Executive Stock Option Plan of the Registrant. (10)
10.17* 1991 Stock Option Plan for Employees and Consultants of the
Registrant. (14)
10.18* 1991 Stock Option Plan for Non-Employee and Non-Consultant
Directors of the Registrant. (14)
10.19 April 29, 1992, Unit Purchase Agreement. (15)
10.20 Ladenburg, Thalmann & Co., Inc. Warrant. (15)
10.21 Payne Financial Group, Inc. Stock Subscription Warrant. (15)
10.22* Stock Option Agreement between the Registrant and Dr. Peter
Baram. (17)
10.23* Stock Option Agreement between the Registrant and Larry O.
Bymaster. (18)
10.24* Stock Option Agreement between the Registrant and Rand P.
Mulford. (18)
10.25 License Agreement Between the Registrant and Wound Healing of
Oklahoma dated May 8, 1996. (20)
10.26* Xytronyx, Inc. Equity Incentive Plan. (23)
10.27* Xytronyx, Inc. Stock Option Plan for Non-Employee
Directors. (23)
*Management contract, compensatory plan or arrangement
53
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
10.28* Employment Agreement between Xytronyx, Inc. and H. Laurence Shaw
dated December 16, 1996. (23)
10.29 Form of Placement Agency Agreement between Company and Paramount
Capital, Inc. (24)
10.30 Form of Amendment No. 1 to Placement Agency Agreement between
Company and Paramount Capital, Inc. (24)
10.31 Form of Subscription Agreement between Company and certain
Selling Stockholders. (24)
10.32* Employment Agreement dated January 1, 1997 between the Company
and Larry O. Bymaster. (25)
10.33* Consulting Agreement dated June 1, 1997 between the Company and
Donna Shaw, Ph.D. (25)
10.34* Employment Agreement dated April 18, 1997 between the Company
and Anil Singhal, Ph.D. (25)
10.35* Promissory Note dated May 9, 1997 between the Company and Dr. H.
Laurence Shaw. (25)
10.36* Exclusive Distribution Agreement dated August 12, 1997 between
Pacific Pharmaceuticals, Inc. and Steri-Oss, Inc.(26)
10.37* Exclusive Distribution Agreement for European Territory dated
December 1, 1997 between Pacific Pharmaceuticals, Inc. and
Steri-Oss, Inc. Portions of this exhibit have been omitted
pursuant to request for confidential treatment. (27)
10.38* Consulting Agreement dated November 14, 1997 between Pacific
Pharmaceuticals, Inc. and Frank Barnes. (27)
10.39* License Agreement dated March 17, 1998 between the Company and
Pennsylvania State University. Portions of the Exhibit have been
omitted pursuant to a request for confidential treatment. (28)
10.40* Introduction Agreement dated February 12, 1998 between Paramount
Capital Investments LLC the Company. Portions of the Exhibit
have been omitted pursuant to a request for confidential
treatment. (28)
10.41* Form of Placement Agency Agreement dated as of April 1, 1998,
among the Company, BG Development Corp. and Paramount Capital,
Inc. (5)
10.42* Form of Subscription Agreement among the Company, BG Development
Corp. and Paramount Capital, Inc. (5)
*Management contract, compensatory plan or arrangement
54
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
23. Independent Auditors' Consent. (5)
27. Financial Data Schedule. (5)
- ---------------------
(1) Previously filed together with the Registrant's Registration
Statement on Form S-18 dated May 30, 1985.
(2) Previously filed together with Amendment No. 1 to the Registrant's
Registration Statement on Form S-18 dated July 29, 1985.
(3) Previously filed together with the Registrant's Annual Report on
Form 10-K filed June 29, 1987.
(4) Previously filed together with the Registrant's Annual Report on
Form 10-K filed June 17, 1988.
(5) Filed herewith.
(6) Previously filed together with the Registrant's Current Report on
Form 8-K on April 3, 1991.
(7) Incorporated by reference to the Registrants Registration Statement
on Form 8-A declared effective Sept. 23, 1986.
(8) Previously filed together with the Registrant's Annual Report on Form
10-K dated March 31, 1986.
(9) Previously filed together with Amendment No. 2 to the Registrant's
Registration Statement on Form S-18 dated July 29, 1985.
(10) Previously filed together with the Registrant's Annual Report on Form
10-K on June 29, 1989.
(11) Previously filed together with the Registrant's Proxy Statement 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 dated March 31, 1990.
(13) Previously filed together with Registrant's Annual Report on Form
10-K dated March 31, 1991.
(14) Previously filed together with the Registrant's Registration
Statement on Form S-8 dated January 13, 1992.
(15) Previously filed together with the Registrant's Annual Report on Form
10-K dated March 31, 1992.
(16) Previously filed together with the Registrant's Annual Report on Form
10-K dated March 31, 1993.
55
<PAGE>
(17) Previously filed together with the Registrant's Annual Report on Form
10-K dated March 31, 1994.
(18) Previously filed together with the Registrant's Annual Report on Form
10-K dated March 31, 1995.
(19) Previously filed together with the Registrant's Current Report on
Form 8-K on November 10, 1995.
(20) Previously filed together with the Registrant's Annual Report on Form
10-K dated March 31, 1996.
(21) Previously filed together with the Registrant's Current Report on
Form 8-K) on April 1, 1996.
(22) Previously filed together with the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1996.
(23) Previously filed together with the Registrant's Quarterly Report
on Form 10-Q for the quarter ended December 31, 1996.
(24) Previously filed together with the Registrant's Registration
Statement on Form S-3 dated April 28, 1997.
(25) Previously filed together with the Registrant's Annual Report on Form
10-K dated March 31, 1997.
(26) Previously filed together with the Registrant's Current Report on
Form 8-K on September 24, 1997.
(27) Previously filed together with the Registrant's Quarterly Report on
Form 10-Q for the quarter ended December 31, 1997.
(28) Previously filed together with the Registrant's Current Report on
Form 8-K on March 23, 1998.
(b) Reports on Form 8-K.
A report on Form 8-K, dated June 26, 1998 was filed under item 5
of Form 8-K with respect to the announcement that the Company received notice
from the American Stock Exchange ("AMEX") that Amex intends to take action to
remove the Company's Common Stock from the AMEX because the Company no longer
satisfies all of the financial guidelines of the AMEX for continued listing.
The Company will exercise its right to appeal to the Board of Governors of
AMEX the decision to remove the Company's Common Stock from the AMEX. The
Company is taking measures to ensure that in the event of an unsuccessful
appeal, an orderly transition will occur and that its Common Stock will
commence trading on the NASD Electronic Bulletin Board.
56
<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.
PACIFIC PHARMACEUTICALS, INC.
By: /s/ JAMES HERTZOG
-----------------
James Hertzog,
Controller and
Principal Financial Officer
Date: July 13, 1998
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/ H. LAURENCE SHAW Chairman of the Board July 13, 1998
- --------------------- Director, President and
H. Laurence Shaw Chief Executive Officer
(Principal Executive Officer)
/s/ JAMES HERTZOG Controller July 13, 1998
- --------------------- (Principal Accounting Officer and
James Hertzog Principal Financial Officer)
/s/ JACK H. HALPERIN Director July 13, 1998
- ---------------------
Jack H. Halperin
/s/ JOHN G. KRINGEL Director July 13, 1998
- ---------------------
John G. Kringel
/s/ ELLIOTT H. VERNON Director July 13, 1998
- ---------------------
Elliott H. Vernon
/s/ ROBERT A. VUKOVICH Director July 13, 1998
- ---------------------
Robert A. Vukovich
/s/ MICHAEL S. WEISS Director July 13, 1998
- ---------------------
Michael S. Weiss
57
<PAGE>
Exhibit 10.41
B-G DEVELOPMENT CORPORATION
AND
PACIFIC PHARMACEUTICALS, INC.
PLACEMENT AGENCY AGREEMENT
April 1, 1998
Paramount Capital, Inc.
787 Seventh Avenue, 48th Fl.
New York, New York 10019
Dear Sirs:
B-G Development Corporation, a Delaware corporation ("BGDC") and
Pacific Pharmaceuticals, Inc., a Delaware Corporation ("Pacific" and
collectively with BGDC sometimes collectively referred to as the "Companies"),
hereby confirms its agreement to retain Paramount Capital, Inc. (the "Placement
Agent") on an exclusive basis to introduce the Companies to and to procure
subscriptions from certain "accredited investors" (as defined in Regulation D
under the Securities Act of 1933, as amended) as prospective purchasers
(collectively "Purchasers") of a minimum of 10 Units (the "Minimum Offering")
and a maximum of 60 Units (the "Maximum Offering"), with an option in favor of
the Placement Agent to offer up to an additional 40 Units to cover
over-allotments at a purchase price of $100,000 per Unit, with each "Unit"
consisting of 50,000 shares of Series A Convertible Exchangeable Preferred
Stock, stated value $2.00 per share (the "Preferred Stock"). Each share of
Preferred Stock is convertible at the option of the holder thereof into one
share of common stock of BGDC, par value $.001 per share (the "BGDC Common
Stock"), initially at a conversion price (the "Conversion Price") equal to $2.00
per share of Preferred Stock. In addition, under certain circumstances more
fully described in the Offering Documents (as defined below), the Preferred
Stock may be put to Pacific.
The sale to such Purchasers (the "Offering") will be made through a
private placement by the Placement Agent (or its designated selected dealers) on
a "best efforts" basis pursuant to the Confidential Term Sheet dated April 22,
1998, and all supplements, amendments and exhibits thereto, all of which
constitute an integral part thereof (the "Term Sheet"), separate subscription
agreements (the "Subscription Agreements") between the Companies and each
purchaser of Units in the Offering and related documents in accordance with
Section 4(2) of the Securities Act of 1933, as amended (the "Act") and
Regulation D promulgated thereunder.
The Term Sheet, the Subscription Agreements, any exhibits to the Term
Sheet, the Escrow Agreement, dated April 13, 1998 (the "Escrow Agreement"), the
Financial Advisory Agreement (as defined in Section 5(j) below), the Placement
Warrants (as defined in Section 4(d) below), the Advisory Warrants (as defined
in Section 5(j) below) and this Placement Agency
<PAGE>
Agreement (this "Agreement"), are collectively referred to herein as the
"Offering Documents."
The Companies, at their sole cost, shall prepare and deliver to the
Placement Agent a reasonable number of copies of the Offering Documents in form
and substance satisfactory to the Placement Agent.
Each prospective Purchaser subscribing to purchase Units shall be
required to deliver, among other things, a Subscription Agreement, which shall
include a Confidential Investor Questionnaire (the "Questionnaire"). The
Companies shall make available to each prospective Purchaser, at a reasonable
time prior to the purchase of the Units, the opportunity to ask questions of and
receive answers from the Companies concerning the terms and conditions of the
Offering and the opportunity to obtain additional information necessary to
verify the accuracy of the documents delivered in connection with the purchase
of the Units to the extent it possesses such information or can acquire it
without unreasonable effort or expense. After the prospective Purchasers have
had an opportunity to review the Offering Documents, and to address all
inquiries to the Companies, separate Subscription Agreements shall be completed
by each prospective Purchaser. The Companies, with the consent of the Placement
Agent and the Placement Agent, in its sole discretion, shall have the right to
reject subscriptions in whole or in part. The Companies shall evidence its
acceptance of a subscription by countersigning a copy of the applicable
Subscription Agreement and returning the same to the Placement Agent.
Capitalized terms used in this Agreement, unless otherwise defined
herein or unless the context otherwise indicates, shall have the same meanings
provided in the Offering Documents.
1. APPOINTMENT OF PLACEMENT AGENT.
(a) The Placement Agent is hereby appointed exclusive placement
agent of the Companies (subject to the Placement Agent's right to have Selected
Dealers, as defined in Section 1(c) hereof, participate in the Offering) during
the Offering period herein specified for the purposes of assisting the Companies
in finding qualified subscribers pursuant to the Offering described in the
Offering Documents. The Placement Agent shall not be deemed an agent of the
Companies for any other purpose. The Offering period shall commence on the day
the Offering Documents are first made available to the Placement Agent by the
Companies for delivery in connection with the offering for the sale of the Units
(the "Commencement Date"). Upon receipt of the Minimum Offering amount, the
Placement Agent may conduct a closing (the "Initial Closing Date") and may
conduct subsequent closings on an interim basis until the Maximum Offering
amount (and any over-allotment) has been reached (the "Final Closing Date").
Each
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such closing may be referred to herein as a "Closing." If not terminated
earlier pursuant to this Agreement, the Offering period shall terminate at 11:59
p.m. New York City Time on the date that is 60 days following the Commencement
Date, subject to an extension, at the option of the Placement Agent, for an
additional 60 days (the "Termination Date"). Accordingly, the Offering period
shall terminate on the Final Closing Date or the Termination Date, as the case
may be. If subscriptions for the minimum 10 Units have not been received prior
to the end of the Offering Period, then the Offering will be terminated and all
funds received from subscribers will be returned with interest and without any
deduction.
(b) Subject to the performance by the Companies of all of their
obligations to be performed under this Agreement and to the completeness and
accuracy of all representations and warranties of the Companies contained in
this Agreement, the Placement Agent hereby accepts such agency and agrees to use
its best efforts to assist the Companies in finding qualified subscribers
pursuant to the Offering described in the Offering Documents and to keep the
Companies or their counsel reasonably well informed of subscriptions received.
It is understood that the Placement Agent has no commitment to sell the Units.
The Placement Agent's agency hereunder is not terminable by either Company prior
to the Termination Date, except as set forth in Section 8(g).
(c) The Placement Agent may engage other persons, selected by it
in its sole discretion, who are members of the National Association of
Securities Dealers, Inc., ("NASD") or who are located outside the United States
and who have executed a Selected Dealers Agreement (each such person being
hereinafter referred to as a "Selected Dealer") and the Placement Agent may
allow such persons to receive such part of the compensation and payment of
expenses payable to the Placement Agent hereunder as the Placement Agent shall
determine in its discretion; provided, however, that any such compensation shall
be received pursuant to Section 4(d) hereof.
(d) Subscriptions for Units shall be evidenced by the execution
by qualified subscribers of a Subscription Agreement. No Subscription Agreement
shall be effective unless and until it is accepted by the Companies. Until a
Closing is held, all subscription funds received shall be held as described in
the Escrow Agreement. The Placement Agent shall not have any independent
obligation to verify the accuracy or completeness of any information contained
in any Subscription Agreement or the authenticity, sufficiency, or validity of
any check delivered by any prospective Purchaser in payment for Units nor shall
the Placement Agent incur any liability with respect to any such check.
(e) COMPANY INSIDERS. Officers, directors or principal
stockholders
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of each of the Companies may invest in the Offering. Any such investments will
be included in calculating whether the 10 Units have been sold in the Minimum
Offering, whether the 60 Units have been sold in the Maximum Offering, and
whether the 40 Units have been sold pursuant to the over-allotment option.
(f) PLACEMENT AGENT INSIDERS. Certain affiliates of the
Placement Agent may purchase Units in the Offering. Affiliates of the Placement
Agent will invest net of cash commissions and expenses. Accordingly, the
Placement Agent will not receive a commission on the Units purchased by its
affiliates, and the Companies will receive net proceeds equivalent to the net
proceeds received from the purchase of Units by persons not affiliated with the
Placement Agent. The aggregate offering price of any such investments will be
included in calculating whether the 10 Units have been sold in the Minimum
Offering, whether the 60 Units have been sold in the Maximum Offering, and
whether the 40 Units have been sold pursuant to the over-allotment option.
(g) SUBSCRIPTION CHECKS. All subscription checks and funds
shall be promptly and directly delivered without offset or deduction to the bank
account at the State Street Bank and Trust Company, N.A. (the "Escrow Agent")
described in the Escrow Agreement.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANIES. The Companies
represent, covenant and warrant to the Placement Agent and each Selected Dealer,
if any, as follows:
(a) SECURITIES LAW COMPLIANCE. The Offering Documents, as of
their respective dates, do and shall, as of the date of the Term Sheet and each
Closing, describe the material aspects of an investment in the Companies and
conform in all material respects with the requirements of Section 4(2) of the
Act and Regulation D promulgated thereunder and with the requirements of all
other published rules and regulations of the Securities and Exchange Commission
(the "SEC") currently in effect relating to "private offerings" to "accredited
investors" as that term is defined in Regulation D under the Act. The Offering
Documents will not, as of the date of the Term Sheet and each Closing, contain
any untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading; provided, however, that no
representation is made with respect to information relating to the Placement
Agent that is provided in writing by the Placement Agent to the Companies
specifically for inclusion in the Offering Documents. If at any time prior to
the completion of the Offering or other termination of this Agreement any event
shall occur as a result of which it might become necessary to amend or
supplement the Offering Documents so that they do not include any untrue
statement of any
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material fact or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances then existing, not
misleading, the Companies will promptly notify the Placement Agent and will
supply the Placement Agent (or the prospective Purchasers designated by the
Placement Agent) with amendments or supplements correcting such statement or
omission. The Companies will also provide the Placement Agent for delivery to
all offerees and Purchasers and their representatives, if any, with any
information, documents and instruments which the Placement Agent and the
Companies' counsel reasonably deem necessary to comply with applicable state and
federal law.
The Companies acknowledge that the Placement Agent (i) has not
supplied any information for inclusion in the Offering Documents other than
information relating to the Placement Agent furnished in writing to the
Companies by the Placement Agent specifically for inclusion in the Offering
Documents; (ii) has no obligation to independently verify any of the information
in the Offering Documents and (iii) has no responsibility for the accuracy or
completeness of the Offering Documents, except for the information relating to
the Placement Agent furnished in writing by the Placement Agent to the Companies
specifically for inclusion in the Offering Documents.
(b) ORGANIZATION. BGDC is a corporation duly incorporated,
validly existing and in good standing under the laws of the State of Delaware
and has all requisite corporate power and authority to own and lease its
properties, to conduct its business as proposed in the Term Sheet, to execute
and deliver this Agreement and to carry out the transactions contemplated by
this Agreement. Pacific is a corporation duly incorporated, validly existing
and in good standing under the laws of the State of Delaware and has all
requisite corporate power and authority to own and lease its properties, to
conduct its business as proposed in the Term Sheet, to execute and deliver this
Agreement and to carry out the transactions contemplated by this Agreement. As
of the Date of the Term Sheet, the Companies shall be duly qualified to conduct
business as a foreign corporation and in good standing in each jurisdiction in
which the conduct of its business or ownership or leasing of its properties
requires it to be so qualified, except where the failure to be so qualified
would not have a material adverse effect on the business, financial condition or
prospects of each of the Companies.
(c) CAPITALIZATION. The authorized, issued and outstanding
capital stock of BGDC prior to the consummation of the transactions contemplated
hereby is as set forth in the Offering Documents. The authorized, issued and
outstanding capital stock of Pacific is as set forth in Exhibit D to the Term
Sheet as of the date of the report reflected thereby. All issued and outstanding
shares of the Companies are validly issued, fully paid and nonassessable and
have not been issued in violation of the preemptive rights of any stockholder of
the Companies. The
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Preferred Stock, when issued, shall have the rights, preferences and privileges
substantially as set forth in the Certificate of Designations attached as an
exhibit to the Term Sheet. All prior sales of securities of the Companies were
either registered under the Act and applicable state securities laws or exempt
from such registration, and no security holder has any rescission rights with
respect thereto. Except as set forth in the Term Sheet, there are no
outstanding options, warrants, agreements, convertible securities, preemptive
rights or other rights to subscribe for or to purchase any shares of capital
stock of either of the Companies. Except as set forth in the Term Sheet and as
otherwise required by law, there are no restrictions upon the voting or transfer
of any shares of the Companies' respective capital stock pursuant to each
Companies' Certificate of Incorporation, By-Laws or other governing documents or
any agreement or other instruments to which either of the Companies is a party
or by which either of the Companies is bound.
(d) WARRANTS, PREEMPTIVE RIGHTS, ETC. Except as set forth in or
contemplated by the Term Sheet or any amendments thereto, there are not now, nor
will there be immediately after any Closing, any outstanding warrants, options,
agreements, convertible securities, rights of first refusal, rights of first
offer, preemptive rights or other rights to subscribe for or to purchase or
other commitments pursuant to which either Company is, or may become, obligated
to issue any shares of its capital stock or other securities of either Company
and this Offering will not cause any anti-dilution adjustments to such
securities or commitments except as reflected in the Term Sheet. There is not
now, nor will there be immediately after any Closing, a requirement for any
anti-dilution adjustments to any outstanding warrants, options, agreements,
convertible securities, rights of first refusal, rights of first offer,
preemptive rights or other rights to subscribe for or to purchase or other
commitments of Pacific, due to the existence of the Exchange Right (as defined
below) providing for the potential future issuance of shares of Pacific Common
Stock (as defined below).
(e) SUBSIDIARIES AND INVESTMENTS. Other than as disclosed in
the Term Sheet, neither of the Companies own, directly or indirectly, capital
stock or other equity ownership or proprietary interests in any other
corporation, association, trust, partnership, joint venture or other entity.
(f) FINANCIAL STATEMENTS. The financial information of BGDC, if
any, contained in the Offering Documents is accurate in all material respects.
Pacific's financial statements as set forth in the exhibits to the Term Sheet
have been prepared in conformity with generally accepted accounting principles
consistently applied and show all material liabilities, absolute or contingent,
of Pacific required to be recorded thereon and present fairly the financial
position and results of operations of Pacific on the dates and for the periods
indicated.
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(g) ABSENCE OF CHANGES. From the date of the Term Sheet, except
as has been or will be reflected in the Term Sheet prior to any Closing, neither
of the Companies has incurred any liabilities or obligations, direct or
contingent, other than those in the ordinary course of business, nor has either
of the Companies entered into any transaction that were not in the ordinary
course of business, which are material to the business of either of the
Companies, and there has been no change in the capital stock of, or any
incurrence of long-term debt by, either of the Companies, or any issuance of
options, warrants or other rights to purchase the capital stock of either of the
Companies, or any adverse change or any development involving a prospective
adverse change in the condition (financial or otherwise), net worth, results of
operations, business, key personnel or properties which would be material to the
business or financial condition of either the Companies, and neither of the
Companies have become a party to, and neither the business nor the property of
either of the Companies has become the subject of, any material litigation
whether or not in the ordinary course of business.
(h) TITLE. Each of the Companies has good and marketable title
to all tangible properties and assets owned by it, free and clear of all liens,
charges, encumbrances or restrictions, except such as are not materially
significant or important in relation to each of the Companies' respective
businesses. Except as has been or will be reflected in the Term Sheet prior to
each Closing, all of the material leases and subleases under which either of the
Companies is a lessor or sublessor of properties or assets or under which either
of the Companies holds properties or assets as lessee or sublessee are in full
force and effect, and neither of the Companies is in default in any material
respect with respect to any of the terms or provisions of any of such leases or
subleases, and no claim has been asserted by anyone adverse to rights of the
Companies as lessor, sublessor, lessee or sublessee under any of the leases or
subleases mentioned above, or affecting or questioning the right of the
Companies to continued possession of the leased or subleased premises or assets
under any such lease or sublease. Each of the Companies owns or leases all such
tangible properties as are necessary to its operations as now conducted and
proposed to be conducted and except to the extent described in the Term Sheet,
neither of the Companies presently anticipates the need for any capital
expenditures.
(i) PROPRIETARY RIGHTS. To the best of each of the Companies'
respective knowledge, except as has been or will be reflected in the Term Sheet
prior to each Closing, each of the Companies owns or possesses adequate and
enforceable rights to use all patents, patent applications, trademarks, trade
names, corporate names, copyrights, trade secrets, licenses, inventions,
formulations, technology and know-how and other intangible property used or
proposed to be used in the conduct of its business as described in or
contemplated by the Term Sheet (the "Proprietary Rights"). To the best of each
of the Companies' respective knowledge, except as has been, or will be,
reflected in the Term Sheet prior to each Closing, each of the
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<PAGE>
Companies or the entities from whom the Companies have acquired rights has taken
all necessary action to protect each of the Companies' respective Proprietary
Rights. Except as set forth in the Term Sheet or otherwise disclosed to the
Placement Agent, neither of the Companies has received any notice of, and there
are no facts known to the Companies that indicate the existence of (i) any
infringement or misappropriation by any third party of any of the Proprietary
Rights or (ii) any claim by a third party contesting the validity of any of the
Proprietary Rights. Neither of the Companies has received any notice of any
infringement, misappropriation or violation by either of the Companies or any of
their respective employees of any Proprietary Rights of third parties, and, to
the best of each of each of the Companies' respective knowledge, neither of the
Companies nor any of their employees has infringed, misappropriated or otherwise
violated any Proprietary Rights of any third parties. To the best of each of
the Companies' respective knowledge, no infringement, illicit copying,
misappropriation or violation of any intellectual property rights of any third
party has occurred or will occur with respect to any products currently being
sold by the Companies or with respect to any products currently under
development by either of the Companies or with respect to the conduct of the
Companies' respective businesses as currently contemplated. Except as described
in the Term Sheet, neither of the Companies is aware that any of its employees
are obligated under any contract (including licenses, covenants or commitments
of any nature) or other agreement, or subject to any judgment, decree or order
of any court or administrative agency, that would interfere with the use of the
employee's best efforts to promote the interests of the Companies or that would
conflict with the Companies' respective businesses as presently conducted or as
proposed to be conducted. To the best of the Companies' knowledge, neither the
execution nor delivery of this Agreement, nor the carrying on of the Companies'
respective businesses by the employees of either of the Companies, nor the
conduct of the Companies' respective businesses, as presently conducted or as
proposed to be conducted with or result in a breach of the terms, conditions or
provisions of, or constitute a default under, any contract, covenant or
instrument under which any such employee is now obligated. In addition, all
employees are or shall be required to assign Proprietary Rights developed by any
of them in connection with their employment to either BGDC or Pacific, as
appropriate.
(j) LITIGATION. Except as set forth in the Term Sheet, there is
no material action, suit, claim or proceeding at law or in equity, or to each of
the Companies' respective knowledge, investigation or customer complaint, by or
before any arbitrator, governmental instrumentality or other agency now pending
or, to the knowledge of the respective Companies, threatened against either of
the Companies (or basis therefor known to the either of Companies which the
Companies believe may result in the foregoing) the adverse outcome of which
could reasonably be expected to have a material adverse effect on the Companies'
respective businesses, prospects or financial condition. Neither of the
Companies is subject to any judgment, order, writ, injunction or decree of any
Federal, state, municipal or other
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governmental department, commission, board, bureau, agency or instrumentality,
domestic or foreign which would materially adversely affect the Companies'
respective businesses, prospects or financial condition.
(k) NON-DEFAULTS, NON-CONTRAVENTION. Neither of the Companies
is in violation of or default under, nor will the execution or delivery or
performance of this Agreement and any of the Offering Documents, and
consummation of the transactions contemplated herein or therein, result in a
violation of, or constitute a default in the performance or observance of, any
obligation (i) under its Certificate of Incorporation, as amended, or its
By-laws, or any indenture, mortgage, contract, material purchase order or other
agreement or instrument to which either of the Companies is a party or by which
it or its property is bound or affected, or (ii) with respect to any material
order, writ, injunction or decree of any court of any Federal, state, municipal
or other governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, and there is no existing condition, event
or act which constitutes, nor which after notice, the lapse of time or both,
could constitute a default under any of the foregoing, which in either case
(except in respect of the execution and delivery and performance of this
Agreement) would have a material adverse effect on the business, financial
condition or prospects of each of the Companies.
(l) TAXES. The Companies have each filed all Federal, state,
local and foreign tax returns that are required to be filed by each and all such
returns are true and correct in all respects. Each of the Companies has paid
all taxes pursuant to such returns or pursuant to any assessments received by it
or which it is obligated to withhold from amounts owing to any employee,
creditor or third party. The Companies have properly accrued all taxes required
to be accrued. The tax returns of each of the Companies have never been audited
by any state, local or Federal authorities. Neither of the Companies has waived
any statute of limitations with respect to taxes or agreed to any extension of
time with respect to any tax assessment or deficiency.
(m) COMPLIANCE WITH LAWS, LICENSES, ETC. Neither of the
Companies has received notice of any violation of, or non-compliance with, any
Federal, state, local or foreign, laws, ordinances, regulations and orders
applicable to its business, the violation of, or noncompliance with which, could
reasonably be expected to have a material adverse effect on the business,
operations or financial condition of each of the Companies. Each of the
Companies has all governmental licenses and permits and other governmental
certificates, authorizations and permits and approvals (collectively,
"Licenses") required by every Federal, state and local government or regulatory
body for the operation of its business as currently conducted and the use of its
properties, except where the failure to be licensed would not have a material
adverse effect
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on the business, operations, financial condition, or prospects of it. Each of
the Companies' respective Licenses are in full force and effect and no
violations are or have been recorded in respect of any License and no proceeding
is pending or, to the best knowledge of the each of the Companies, threatened to
revoke or limit any License.
(n) AUTHORIZATION OF DOCUMENTS AND UNITS. Each of the Offering
Documents has been, or prior to any Closing will be, duly and validly
authorized, executed and delivered by the Companies and the execution, delivery
and performance by the Companies of the Offering Documents, has been duly
authorized by all requisite corporate action on the part of each of the
Companies and when delivered constitute, or will constitute, the legal, valid
and binding obligations of each of the Companies, enforceable in accordance with
their respective terms, subject to the availability and enforceability of
equitable remedies and to applicable bankruptcy and other laws relating to the
rights of creditors generally and except as the enforcement of the rights to
indemnification and contribution hereunder and under any other Offering
Documents may be limited by federal or state securities laws or public policy.
BGDC has full corporate power and lawful authority to authorize, issue and sell
the Units and the Preferred Stock underlying the Units to be sold to the
Purchasers. Pacific has full corporate power and authority to provide the
Purchasers with the Initial Exchange Right and the Exchange Right (each as
defined in the Subscription Agreement) and Pacific's performance of such
obligation does not constitute a fraudulent transfer or fraudulent conveyance
under Federal or state law. No consent is required by either of the Companies
from stockholders or any third party to perform any of their respective
obligations under this Agreement or any of the Offering Documents
(o) EXEMPTION FROM REGISTRATION. Assuming (i) the accuracy of
the information provided by the respective Purchasers in the Subscription
Agreements, (ii) the timely filing of a Form D by the Companies and (iii) the
accuracy of the representations and warranties of the Placement Agent contained
herein, the offer and sale of the Units and the granting of the Placement
Warrants and Advisory Warrants (as hereinafter defined) pursuant to the terms of
this Agreement are exempt from the registration requirements of the Act and the
rules and regulations promulgated thereunder (the "Regulations"). The Companies
are not disqualified from the exemption under Regulation D by virtue of the
disqualifications contained in Rule 505(b)(2)(iii) or Rule 507 promulgated
thereunder. There exists no fact or set of facts which may cause the Offering
to be integrated with any other offering of either of the Companies' securities
nor which would cause this Offering to lose its exemption under Regulation D.
(p) REGISTRATION RIGHTS. Except as set forth in the Term Sheet
or in Article V of the Subscription Agreement, no person has any right to cause
either of the Companies to effect the registration under the Act of any of
securities of either of the Companies.
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(q) BROKERS. Neither the Companies nor any of their respective
officers, directors, employees or stockholders has employed any broker or finder
in connection with the transactions contemplated by this Agreement other than
the Placement Agent.
(r) TITLE TO UNITS. When certificates representing the
Preferred Stock shall have been duly delivered to the Purchasers and payment
shall have been made for the Units, the several Purchasers shall have good and
valid title to the Preferred Stock, and upon conversion of such Preferred Stock,
will have good and valid title to the Common Stock issuable upon such conversion
(the "Conversion Shares"), in each case, free and clear of all liens,
encumbrances and claims and adverse claims with the exception of claims arising
from the acts of the Purchasers themselves, whatsoever (except as arising from
applicable Federal and state securities laws), and BGDC shall have paid all
taxes, if any, in respect of the original issuance thereof. Upon exercise by a
Purchaser of the Initial Exchange Right or the Exchange Right (each as defined
in the Term Sheet), as applicable, if payment thereof is made by Pacific through
the issuance of shares of common stock of Pacific, par value $.02 per share
("Pacific Common Stock"), each such Purchaser will have good and valid title to
the Pacific Common Stock issuable upon such exercise (the "Exchange Shares"), in
each case, free and clear of all liens, encumbrances and claims and adverse
claims with the exception of claims arising from the acts of the Purchasers
themselves, whatsoever (except as arising from applicable Federal and state
securities laws), and Pacific shall have paid all taxes, if any, in respect of
the original issuance thereof. When certificates representing the Placement and
Advisory Warrants shall have been duly delivered to the Placement Agent and
payment shall have been made for the Placement and Advisory Warrants, the
Placement Agent or its designees shall have good and valid title to the
Placement and Advisory Warrants, and upon exercise of such Placement or Advisory
Warrants, in accordance with their respective terms, will have good and valid
title to the Preferred Stock issuable upon such exercise, and upon conversion of
the Preferred Stock issuable upon exercise of such Placement and Advisory
Warrants, will have good and valid title to the Common Stock into which such
Preferred Stock is converted, in each case, free and clear of all liens,
encumbrances and adverse claims with the exception of claims arising from the
acts of the Purchasers themselves, whatsoever (except as arising from applicable
Federal and state securities laws), and BGDC shall have paid all taxes, if any,
in respect of the original issuance thereof. The Preferred Stock issuable upon
exercise of the Placement and Advisory Warrants, will be entitled to the Initial
Exchange Right and/or the Exchange Right and upon exercise of either the Initial
Exchange Right or the Exchange Right, as applicable, the holders of the
Placement and Advisory Warrants shall have good and valid title to the Exchange
Shares issuable upon such exercise, in each case, free and clear of all liens,
encumbrances and adverse claims with the exception of claims arising from the
acts of the Purchasers themselves, whatsoever (except as arising from applicable
Federal and state securities laws), and Pacific shall have paid all taxes, if
any, in respect of the original issuance thereof.
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(s) ACCURACY OF REPORTS. All material reports required to be
filed by Pacific within the two years prior to the date of this Agreement under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), have been
duly filed with the SEC, complied at the time of filing in all material respects
with the requirements of their respective forms and, except to the extent
updated or superseded by the Term Sheet or any subsequently filed report, were
complete and correct in all material respects as of the dates at which the
information was furnished, and contained (as of such dates) no untrue statement
of a material fact or omitted to state a material fact necessary in order to
make the statements contained therein, in light of the circumstances under which
they were made, not misleading.
3. REPRESENTATIONS AND WARRANTIES OF PLACEMENT AGENT. The Placement
Agent represents and warrants as follows:
(a) The Placement Agent is duly organized, validly existing and
in good standing as a corporation under the laws of the State of New York with
full power and authority to enter into and perform this Agreement.
(b) In offering the Units, the Placement Agent shall deliver (or
direct the Companies to deliver) to each prospective purchaser, prior to the
Companies' acceptance of any subscription from such prospective purchaser, the
appropriate Offering Documents. The Placement Agent will not engage in a
general solicitation or employ general advertising in connection with the
Offering.
(c) The Placement Agent shall use its reasonable efforts to
conduct the Offering in material compliance with applicable federal and state
securities laws so as to preserve the exemption provided in Section 4(2) and
Regulation D of the Act and any applicable rules or regulations promulgated
thereunder or under such state securities laws or regulations. The Placement
Agent shall use reasonable efforts to make offers only to persons with whom the
Placement Agent has reasonable grounds to believe are "accredited investors" (as
defined in Regulation D under the Act). The final acceptance of any
subscription shall be made only after each of the Companies has reviewed the
Subscription Agreement and agreed to such final acceptance and determination as
to the status of such subscriber which shall remain solely the responsibility of
the Companies.
(d) The Placement Agent is, and at each Closing will be, (i) a
securities broker-dealer registered with the SEC and any jurisdiction where
broker-dealer registration is required in order for the Companies to sell the
Units in such jurisdiction and (ii) a member in good standing of the NASD.
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4. CLOSING; PLACEMENT AND FEES.
(a) CLOSING. Provided that the Placement Agent has received
subscriptions for the Minimum Offering amount, the Placement Agent may conduct,
in its sole discretion, Closings (the date of each a "Closing Date") at the
offices of the Placement Agent, located at 787 Seventh Avenue, New York, New
York, until the Final Closing Date. On each Closing Date, payment for the Units
issued and sold by the Companies shall be made to the Companies in immediately
available funds against delivery of certificates evidencing the Preferred Stock
comprising such Units.
(b) CONDITIONS TO PLACEMENT AGENT'S OBLIGATIONS. The
obligations of the Placement Agent hereunder are subject to the accuracy of the
representations and warranties of each of the Companies herein contained as of
the date hereof and as of each Closing Date, to the performance by each of the
Companies of their obligations hereunder and to the following additional
conditions:
(i) DUE QUALIFICATION OR EXEMPTION. (A) The Offering
contemplated by this Agreement shall become qualified or be exempt from
qualification under the securities laws of the several states pursuant to
paragraph 4(c) below not later than the Closing Date, subject to any filings to
be made thereafter and (B) at the applicable Closing Date no stop order
suspending the sale of the Units shall have been issued, and no proceeding for
that purpose shall have been initiated or threatened;
(ii) NO MATERIAL MISSTATEMENTS. Neither the Blue Sky
qualification materials, the Offering Documents, nor any attachment or
supplement thereto, will contain an untrue statement of a fact, which in the
opinion of the Placement Agent, is material, or omit to state a fact, which, in
the opinion of the Placement Agent, is material and is required to be stated
therein, or is, in the opinion of the Placement Agent, necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading;
(iii) COMPLIANCE WITH AGREEMENTS. Each of the Companies
shall have complied with all agreements and satisfied all conditions on their
respective parts to be performed or satisfied hereunder and under the
Subscription Agreements at or prior to each Closing;
(iv) CORPORATE ACTION. Each of the Companies shall have
taken all corporate action necessary in order to permit the valid execution,
delivery and performance of
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the Offering Documents by the Companies, including, without limitation,
obtaining the approval of the Companies' respective boards of directors, for the
execution and delivery of the Offering Documents, the performance by each of the
Companies of their obligations hereunder and the Offering contemplated hereby;
(v) OPINION OF COUNSEL TO THE COMPANIES. The Placement
Agent shall receive the opinion of counsel to the Companies (stating that each
of the Purchasers may rely thereon as though addressed directly to such
Purchaser), dated as of each Closing Date, substantially to the effect that:
(A) each of the Companies is duly incorporated and
validly existing and in good standing under the laws of the State of Delaware,
has all requisite corporate power and authority necessary to own or hold its
properties and conduct its business as described in the Term Sheet and Pacific
is duly qualified or licensed to do business as a foreign corporation and is in
good standing in the State of California and each of the Companies is duly
qualified in each jurisdiction in which the nature of the business conducted, or
as proposed to be conducted in the Term Sheet, by it or the properties owned,
leased or operated by it, makes such qualification or licensing necessary and
where the failure to be so qualified or licensed would have a material adverse
effect upon such Company. To such counsel's best knowledge, except as set forth
in the Term Sheet or otherwise disclosed in filings made by Pacific with the
SEC, neither Company has any subsidiaries and neither Company owns, directly or
indirectly, any capital stock or other equity ownership or proprietary interests
in any other corporation, association, trust, partnership, joint venture or
other entity;
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(B) the execution, delivery and performance of each of
the Offering Documents to which either Company is a signatory, and the issuance
of (I) the Units, the Preferred Stock comprising the Units, the Placement
Warrants, the Advisory Warrants, (II) the Preferred Stock issuable upon exercise
of the Placement and Advisory Warrants, (III) the Conversion Shares (including
the Conversion Shares underlying the Preferred Stock issuable upon exercise of
the Placement and Advisory Warrants), (IV) the Initial Exchange Shares and/or
Exchange Shares (including the Initial Exchange Shares and/or the Exchange
Shares issuable upon exchange of the Preferred Stock underlying the Placement
and Advisory Warrants), have been duly authorized by all necessary corporate
action on the part of Pacific and no stockholder approval is required for the
issuance of the Initial Exchange Shares or the Exchange Shares. Each of the
Offering Documents to which either of the Companies is a signatory has been duly
executed and delivered by such Companies and constitutes a legal, valid and
binding obligation of such Company enforceable in accordance with its terms,
except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium, fraudulent conveyance, receivership or
other laws of general application relating to or affecting generally the
enforcement of creditors' rights and the application of equitable principles in
any action, legal or equitable, and except as rights to indemnity or
contribution may be limited by applicable law.
(C) the authorized, issued and outstanding capital
stock of each of the Companies as of the date hereof (before giving effect to
the transactions contemplated by this Agreement) is as set forth in the Term
Sheet. To the best knowledge of such counsel, there are no outstanding
warrants, options, agreements, convertible securities, preemptive rights or
other commitments pursuant to which either of the Companies is, or may become,
obligated to issue any shares of its capital stock or other securities other
than as set forth in the Term Sheet. All of the issued shares of capital stock
of each of the Companies have been duly and validly authorized and issued, are
fully paid and nonassessable and have not been issued in violation of the
preemptive rights of any security holder;
(D) assuming (x) the accuracy of the information
provided by the Purchasers in the Subscription Documents and (y) the timely
filing with the SEC and any applicable state securities authority of a Form D
and amendments thereto containing accurate and complete information, the
issuance and sale of the Units is exempt from registration under the Securities
Act and Rule 506 of Regulation D promulgated thereunder and is not subject to
integration with any prior or current offering of the Companies's securities;
(E) neither the execution and delivery of the Offering
Documents nor compliance with the terms hereof or thereof, nor the consummation
of the transactions herein or therein contemplated, has, nor will, conflict
with, result in a breach of, or
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constitute a default under the Certificate of Incorporation or By-laws of either
of the Companies, or any material contract, instrument or document known to such
counsel to which either of the Companies is a party, or by which it or any of
its properties is bound or, to the best knowledge of such counsel, after due
inquiry, violate any applicable order or decree of any governmental agency or
court having jurisdiction over either the Companies or any of its properties or
business;
(F) except as disclosed in the Term Sheet, to such
counsel's best knowledge, there are no claims, actions, suits, investigations or
proceedings before or by any arbitrator, court, governmental authority or
instrumentality pending or threatened against either of the Companies which
could, if adversely determined, materially and adversely affect the business,
properties or financial condition of either of the Companies, the transactions
or other acts contemplated by the Offering Documents or the validity or
enforceability of the Offering Documents. Except as disclosed in the Term
Sheet, to such counsel's knowledge, neither of the Companies is a party or
subject to the provisions of any order, writ, injunction, judgment or decree of
any court or government agency or instrumentality naming such Company;
(G) upon the issuance of the Units, the Preferred
Stock (including the shares of Preferred Stock issuable upon exercise of the
Placement and Advisory Warrants), the Placement and Advisory Warrants, the
Conversion Shares (including the Conversion Shares underlying the Preferred
Stock issuable upon exercise of Placement and Advisory Warrants) and the
Exchange Shares (including the Exchange Shares underlying the Preferred Stock
issuable upon exercise of Placement and Advisory Warrants), each of the
Purchasers or the Placement Agent and its designees, as the case may be, shall
acquire such securities, free and clear of all pledges, liens, claims,
encumbrances, preemptive rights, rights of first offer or right of first refusal
and restrictions known to such counsel after due inquiry, and imposed by or
through each of the Companies, except for the transfer restrictions set forth in
the Subscription Agreements and any action taken to encumber such securities by
the holders thereof;
(H) the Placement Warrants and the Advisory Warrants,
when issued in accordance with the terms of this Agreement and/or the
Subscription Agreement, as applicable, for the consideration expressed therein,
will have been validly issued and will constitute legal, valid and binding
obligations of the Companies enforceable against the Companies in accordance
with their respective terms, except as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other laws of
general application relating or affecting generally the enforcement of
creditors' rights and the application of equitable principles in any action,
legal or equitable. The Units and the Preferred Stock to be issued as of the
date of such opinion, when issued in accordance with the terms of this Agreement
and the Subscription Agreement for the consideration expressed therein, will
have been validly
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issued and such Preferred Stock will be fully paid and nonassessable. The
Preferred Stock issuable upon exercise of the Placement and Advisory Warrants,
when issued in accordance with the terms thereof for the consideration expressed
therein, will have been duly issued; such Preferred Stock will be fully paid and
nonassessable and will constitute legal, valid and binding obligations of the
Companies enforceable against the Companies in accordance with their terms,
except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other laws of general application
relating or affecting generally the enforcement of creditors' rights and the
application of equitable principles in any action, legal or equitable and shall
be entitled to the rights, preferences and privileges as set forth in the
Certificate of Designations and Article VI of the Subscription Agreement. The
Conversion Shares (including the Conversion Shares underlying the Preferred
Stock issuable upon exercise of the Placement and Advisory Warrants), have been
duly authorized and reserved for issuance and, when issued in accordance with
the terms of the Preferred Stock, will have been validly issued and will be
fully paid and nonassessable.
(I) each of the Companies' respective By-laws and/or
Certificate of Incorporation, as in effect as of the date of such opinion,
contain provisions indemnifying all directors against liability and absolving
all directors from liability to the Companies and its stockholders to the
maximum extent permitted under the laws of the State of Delaware;
(J) the issuance of shares of Pacific Common Stock (as
defined below) in satisfaction of the Exchange Right (as defined below) will not
cause any anti-dilution adjustments to any outstanding warrants, options,
agreements, convertible securities, rights of first refusal, rights of first
offer, preemptive rights or other rights to subscribe for or to purchase or
other commitments of Pacific.
Such counsel shall state that, in opining on any matter
stated to be subject to the knowledge of such counsel, such counsel has made
appropriate inquiries of officers of each of the Companies with respect to the
subject matter of such opinion and has reviewed all documents the existence of
which is disclosed by such inquiries or of which such counsel otherwise is aware
of as a result of its representation of the Companies.
In addition, such counsel shall state that in course of
the preparation of the Offering Documents, which involved, among other things,
discussions and inquiries concerning the various legal matters and the review of
certain corporate records, documents and proceedings, counsel participated in
conferences with certain officers and other representatives of each of the
Companies and the Placement Agent during which the contents of
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the Offering Documents and related matters were discussed. Such counsel shall
advise the Placement Agent in the form of an opinion of counsel that such
counsel has no reason to believe that as of each Closing Date, the Term Sheet or
any document incorporated by reference therein contained any untrue statement of
a material fact relating to either of the Companies or omitted to state a
material fact relating to either of the Companies required to be stated therein
or necessary to make the statements therein not misleading in the light of the
circumstances under which they were made.
(vi) OPINION OF PATENT COUNSEL. If requested by the
Placement Agent, the Placement Agent shall receive the opinion of patent counsel
to the Companies (which counsel shall be satisfactory to the Placement Agent),
dated the Closing Date in the form and substance satisfactory to counsel for the
Placement Agent;
(vii) OFFICER'S CERTIFICATE. The Placement Agent shall
receive an Officer's Certificate substantially in the form of Exhibit A hereto,
signed by the appropriate parties of each of BGDC and Pacific and dated as of
each Closing Date. These certificates shall state, among other things, that the
representations and warranties contained in Section 2 hereof are true and
accurate in all material respects at such Closing Date with the same effect as
though expressly made at such Closing Date;
(viii) ESCROW AGREEMENT. The Placement Agent shall receive a
copy of a duly executed Escrow Agreement with the Escrow Agent dated April 13,
1998; and
(ix) TRANSMITTAL LETTERS. The Placement Agent shall receive
copies of all letters from the Companies to the Purchasers transmitting the
Preferred Stock and shall receive a letter from the Companies confirming
transmittal of the securities to the Purchasers.
(c) BLUE SKY. A summary blue sky survey, at the sole cost of
the Companies (including, without limitation, the legal fees and disbursements
in connection therewith), shall be prepared by counsel to the Placement Agent
stating the extent to which and the conditions upon which offers and sales of
the Units may be made in certain jurisdictions. It is understood that such
survey may be based on or rely upon (i) the representations of each Purchaser
set forth in the Subscription Agreement delivered by such Purchaser, (ii) the
representations, warranties and agreements of each of the Companies set forth in
Section 2 of this Agreement, (iii) the representations and warranties of the
Placement Agent, and (iv) the representations of each of the Companies set forth
in the certificate to be delivered at each Closing pursuant to paragraph (viii)
of Section 4(b).
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(d) PLACEMENT FEES AND EXPENSES. Simultaneously with payment
for, and delivery of, the Units at each Closing as provided in paragraph 4(a)
above, the Companies shall at such Closing pay to the Placement Agent (i) a
commission (the "Cash Commission") equal to 9% of the gross proceeds from the
sale of the Units and (ii) a non-accountable expense allowance (the "Expense
Allowance") equal to 4% of the gross proceeds from the sale of the Units. The
Companies shall also pay all expenses in connection with the qualification of
the Units under the securities or Blue Sky laws of the states which the
Placement Agent shall designate. In addition, upon each Closing of the sale of
the Units being offered, the Companies will sell to the Placement Agent and/or
its designees warrants (the "Placement Warrants") to acquire a number of newly
issued Units equal to 10% of the Units issued in the Offering, for $.001 per
warrant, exercisable for a period of 10 years commencing six months after the
Final Closing Date at an exercise price equal to 110% of the initial offering
price of the Units. The Preferred Stock underlying the Placement Warrants shall
be entitled to (A) the rights, preferences and privileges set forth in the
Certificate of Designation attached to the Term Sheet as Exhibit B, (B) the
rights set forth in Article VI of the Subscription Agreement and shall accrue
dividends from the date of initial issuance of the Preferred Stock regardless of
the date on which the Placement Warrants are exercised. In addition, the
Conversion Shares issuable upon conversion of the Preferred Stock underlying the
Placement Warrants shall be entitled to the registration rights as described in
Article V of the Subscription Agreement. The securities underlying the
Placement Warrants shall not be subject to redemption by BGDC nor shall they be
callable or mandatorily convertible by BGDC. The Placement Warrants shall not
be transferred, sold, assigned or hypothecated for a period of six months;
provided, however, that the Placement Agent may assign in whole or in part
during such period to any NASD member participating in the Offering, any officer
or employee of the Placement Agent, or any such NASD member. The Placement
Warrants shall contain a cashless exercise feature, a promissory note exercise
feature and antidilution provisions.
(ii) The Companies shall pay to the Placement Agent with
respect to any investment by any Purchasers introduced to either of the
Companies by the Placement Agent ("Covered Investors") for any purchase of
securities by such Covered Investor from either of the Companies during the 12
months following the Final Closing Date of the Offering: (A) a cash commission
equal to 9% of the aggregate amount of any such investment; (B) a
non-accountable expense allowance equal to 4% of the aggregate amount of any
such investment; and (C) warrants to acquire a number of securities of even
class with the securities purchased by any such Covered Investor equal to 10% of
the number of securities purchased by such Covered Investor.
(e) NO ADVERSE CHANGES. There shall not have occurred, at any
time prior to each Closing (i) any domestic or international event, act or other
similar occurrence which
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has disrupted, or in the Placement Agent's determination, will materially
disrupt, the securities markets; (ii) a general suspension of, or a general
limitation on prices for, trading in securities on the New York Stock Exchange,
the American Stock Exchange, the National Association of Securities Dealers
Automated Quotation System ("NASDAQ") National Market, the NASDAQ SmallCap
Market, or on the OTC Bulletin Board; (iii) any outbreak of major hostilities or
other national or international calamity not having a material effect on the
performance of this Agreement; (iv) any banking moratorium declared by a state
or federal authority; (v) any moratorium declared in foreign exchange trading by
major international banks or other persons; (vi) any material interruption in
the mail service or other means of communication within the United States;
(vii) any materially adverse change in the business, properties, assets, results
of operations, prospects or financial condition of either of the Companies; or
(viii) any change in the market for securities in general or in political,
financial, or economic conditions which, in the Placement Agent's reasonable
judgment, makes it inadvisable to proceed with the offering, sale, and delivery
of the Units.
5. COVENANTS OF THE COMPANIES.
(a) USE OF PROCEEDS. The net proceeds of the Offering shall be
used by each of the Companies substantially as set forth in the Term Sheet.
Except as set forth in the Term Sheet, neither of the Companies shall use any
proceeds from the Offering to repay any indebtedness (other than capital lease
obligations), including but not limited to any indebtedness to current executive
officers or principal stockholders of either of the Companies, but excluding
accounts payable to non-affiliates incurred in the ordinary course of business.
(b) EXPENSES OF OFFERING. BGDC shall be responsible for and
shall bear all expenses incurred in connection with the proposed Offering,
including but not limited to, the costs of preparing and duplicating the Term
Sheet and all exhibits thereto; the costs of preparing, printing and filing with
the SEC any registration statement described in Article V of the Subscription
Agreement (a "BGDC Registration Statement") and any amendments, post-effective
amendments and supplements thereto; preparing, duplicating and delivering
exhibits thereto and copies of the preliminary, final and supplemental
prospectus; preparing, duplicating and delivering (including by facsimile) all
selling documents, including but not limited to the Term Sheet, the Placement
Agency Agreement, Subscription Agreements, blue sky memorandum and stock
certificates; blue sky fees, filing fees and legal fees and disbursements of the
Placement Agent's counsel in connection with blue sky matters; fees and
disbursements of the transfer; the cost of a total of two sets of bound closing
volumes for the Placement Agent and its counsel; and the cost of three
tombstone advertisements, at least one of which shall appear in a national
business newspaper and one of which shall appear in a major New York newspaper
(or, at the option of
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the Placement Agent, 40 lucite deal mementos) (collectively, the "Companies
Expenses"). Pacific shall be responsible for and shall bear all expenses
incurred in connection preparing, printing and filing with the SEC any
registration statement for the Exchange Shares described in Article V of the
Subscription Agreement (a "Pacific Registration Statement") and any amendments,
post-effective amendments and supplements thereto; preparing, duplicating and
delivering exhibits thereto and copies of the preliminary, final and
supplemental prospectus. The Companies agrees to use a printer designated by
the Placement Agent and which is reasonably acceptable to the Companies. BGDC
shall pay to the Placement Agent a non-accountable expense allowance equal to 4%
of the gross proceeds from the sale of Units to cover the cost of the Placement
Agent's mailing, telephone, telecopy, travel, due diligence meetings and other
similar expenses including legal fees of the Placement Agent's counsel (other
than legal fees in connection with blue sky matters as to which fees BGDC shall
be responsible and any items designated above as Companies Expenses). If the
proposed financing is not completed for any reason, then the Companies shall be
responsible for and shall reimburse the Placement Agent a fee equal to $100,000
in addition to all reasonable costs incurred in connection with the preparation
of the Offering Documents (including, without limitation, attorney's fees,
expenses and disbursements).
(c) NOTIFICATION. The Companies shall notify the Placement
Agent immediately, and in writing, (i) when any event shall have occurred during
the period commencing on the date hereof and ending on the Final Closing Date as
a result of which the Offering Documents would include 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 not misleading in light of the
circumstances under which they were made, and (ii) of the receipt of any
notification with respect to the modification, rescission, withdrawal or
suspension of the qualification or registration of the Units, or of any
exemption from such registration or qualification, in any jurisdiction. The
Companies will use their best efforts to prevent the issuance of any such
modification, rescission, withdrawal or suspension and, if any such
modification, rescission, withdrawal or suspension is issued and the Placement
Agent so requests, to obtain the lifting thereof as promptly as possible.
(d) BLUE SKY. The Companies shall use their best efforts to
qualify the Units for offering and sale under exemptions from qualification or
registration requirements under the securities or "blue sky" laws of such
jurisdictions as the Placement Agent may reasonably request; provided however,
that neither of the Companies will be obligated to qualify as a dealer in
securities in any jurisdiction in which it is not so qualified. The Companies
will not consummate any sale of Units in any jurisdiction in which both
Companies are not so qualified or in any manner in which such sale may not be
lawfully made.
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(e) REGISTRATION STATEMENT FILING. (i) BGDC agrees that if, at
any time, and from time to time, after the earlier of (A) the initial public
offering of BGDC Common Stock (the "IPO") and (B) the first date (the "Trading
Date") on which BGDC Common Stock (or securities received in exchange for BGDC
Common Stock) trades on a national securities exchange or on the National
Association of Securities Dealers, Inc. Automated Quotation System (collectively
"NASDAQ") (a "Trading Event"), and ending on the date that is five years from
the Final Closing Date, the Board of Directors of BGDC shall authorize the
filing of a registration statement (a "BGDC Registration Statement") under the
Securities Act (other than the initial public offering of the BGDC Common Stock,
or other than a registration statement on Form S-8, Form S-4 or any other form
that does not include substantially the same information as would be required in
a form for the general registration of securities) in connection with the
proposed offer of any of its securities by it or any of its stockholders, BGDC
will (1) promptly notify each holder of Preferred Stock that such registration
statement will be filed and that the Conversion Shares then held by such holder
of Preferred Stock will be included in such registration statement at such
holder's request, (2) cause such BGDC Registration Statement to cover all of
such Conversion Shares owned by the holder requesting inclusion, (3) use its
reasonable best efforts to cause such BGDC Registration Statement to become
effective as soon as practicable and (4) take all other action necessary under
any Federal or state law or regulation of any governmental authority to permit
all such Conversion Shares owned by the Purchaser to be sold or otherwise
disposed of, and will maintain such compliance with each such Federal and state
law and regulation of any governmental authority for the period necessary for
the Purchaser to effect the proposed sale or other disposition.
(x) Notwithstanding the foregoing, BGDC may at any
time, abandon or delay any BGDC Registration Statement commenced by BGDC. In
the event of such an abandonment by BGDC, BGDC shall not be required to continue
registration of shares requested by the Purchaser for inclusion and the
Purchaser shall retain the right to request inclusion of shares as set forth
above.
(y) Each Purchaser shall have the right to request
inclusion of any of their Conversion Shares in a BGDC Registration Statement up
to three times. In the event any BGDC Registration Statement is stopped or
delayed prior to the completion of the distribution contemplated by said BGDC
Registration Statement, then the Purchaser shall retain the right to request
inclusion of shares as set forth above in subsequent BGDC Registration
Statements.
(ii) Pacific agrees that in the event that the Exchange
Right is exercised and Pacific elects to pay all or a portion of the Exchange
Purchase Price (as
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defined in the Term Sheet) through the issuance of Exchange Shares, Pacific
shall file a Pacific Registration Statement including the Exchange Shares then
held by the Purchaser and use its best efforts to effect the registration,
qualifications or compliances (including, without limitation, the execution of
any required undertaking to file post-effective amendments, appropriate
qualifications or exemptions under applicable blue sky or other state securities
laws and appropriate compliance with applicable securities laws, requirements or
regulations) as may be so reasonably requested and as would permit or facilitate
the sale and distribution of all Exchange Shares and will maintain such
compliance with each such Federal and state law and regulation of any
governmental authority for the period necessary for the holder to effect the
proposed sale or other disposition. Notwithstanding the foregoing, Pacific will
not be obligated to enter into any underwriting agreement for the sale of any of
the Exchange Shares.
(f) FORM D FILING. The Companies shall file five copies of a
Notice of Sales of Securities on Form D with the SEC no later than 15 days after
the first Closing Date. The Companies shall file promptly such amendments to
such Notices on Form D as shall become necessary and shall also comply with any
filing requirement imposed by the laws of any state or jurisdiction in which
offers and sales are made. The Companies shall furnish the Placement Agent with
copies of all such filings.
(g) PRESS RELEASES, ETC. Except as otherwise required by
applicable law or the rules of a regulatory body, neither of the Companies
shall, during the period commencing on the date hereof and ending 30 days after
the Final Closing Date, issue any press release or other communication, make any
written or oral statement to any media organization or publication or hold any
press conference, presentation or seminar, or engage in any other publicity with
respect to either of the Companies, its financial condition, results of
operations, business, properties, assets, or liabilities, or the Offering,
without the prior written consent of the Placement Agent. Upon the request of
the Placement Agent, which consent shall not be unreasonably withheld, the
Companies shall make a Rule 135c (under the Act) announcement with respect to
the commencement of the Offering.
(h) PUBLIC DOCUMENTS. If applicable, following the Final
Closing Date of the Offering, and for a period of five years thereafter, both
Companies will furnish to the Placement Agent: (i) as soon as practicable (but
in the case of the annual report of the Companies to its stockholders, within
120 days after the end of each fiscal year of the Companies) one copy of: (A)
its annual report to its stockholders (which annual report shall contain
financial statements audited in accordance with generally accepted accounting
principles in the United States of America by a firm of certified public
accountants of recognized standing), (B) if not included in substance in its
annual report to stockholders, its annual report on Form 10-K, (C) each of its
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quarterly reports to its stockholders, and if not included in substance in its
quarterly reports to stockholders, its quarterly report on Form 10-Q, (D) each
of its current reports on Form 8-K, and (E) a copy of any BGDC or Pacific
Registration Statement described in Article V of the Subscription Agreement,
(the foregoing, in each case, excluding exhibits); and (ii) upon reasonable
request, all exhibits excluded by the parenthetical to the immediately preceding
clause 5(h)(i)(E) and all other information that is generally available to the
public. In addition, upon reasonable request the Companies will meet with the
Placement Agent or its representatives to discuss all information relevant for
disclosure in any Registration Statement covering shares purchased by Purchasers
from the Companies and offered by them for resale and will cooperate in any
reasonable investigation undertaken by the Placement Agent for the purpose of
confirming the accuracy of the Registration Statement, including the production
of information at the Companies' offices.
(i) RESTRICTIONS ON SECURITIES. During the 18 months following
the Final Closing Date, neither of the Companies shall, without the prior
written consent of the Placement Agent, offer or sell any of its securities in
reliance on Regulation S of the Act. During the 18-month period following the
date hereof, the Placement Agent shall have the right of first refusal to act as
placement agent for the offering of any securities of either of the Companies
other than through employee benefit plans. Except as otherwise contemplated
hereby, during the 18-month period following the completion of the Offering,
neither of the Companies will extend the expiration date or lower the exercise
or the conversion price of any options, warrants, convertible securities or
other security purchase rights without the prior written consent of the
Placement Agent.
(j) FINANCIAL ADVISORY AGREEMENT. Upon the Final Closing Date,
BGDC and the Placement Agent will enter into an engagement agreement (the
"Financial Advisory Agreement") whereby the Placement Agent will act as BGDC's
financial advisor. Such engagement will provide that the Placement Agent (i)
receive a retainer commencing upon the Final Closing Date, in an amount equal to
three thousand dollars ($3,000) per month (minimum engagement of 24 months),
(ii) out-of-pocket expenses and (iii) standard cash and equity success fees in
the event that the Placement Agent or any of its affiliates assists the
Companies in connection with financings, business combinations, technology
acquisitions and/or strategic transactions. In addition, pursuant to the
Financial Advisory Agreement, BGDC will sell to the Placement Agent and/or its
designees, for $.001 per warrant, warrants (the "Advisory Warrants") to acquire
a number of newly issued Units equal to 15% of the Units issued in the Offering,
exercisable for a period of 10 years commencing six months after the Closing
Date at an exercise price equal to 110% of the initial offering price of the
Units. The Preferred Stock underlying the Placement Warrants shall be entitled
to (A) the rights, preferences and privileges set forth in the
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Certificate of Designation attached to the Term Sheet as Exhibit B, (B) the
rights set forth in Article VI of the Subscription Agreement and shall accrue
dividends from the date of initial issuance of the Preferred Stock regardless of
the date on which the Advisory Warrants are exercised. In addition, the
Conversion Shares issuable upon conversion of the Preferred Stock underlying the
Placement Warrants shall be entitled to the registration rights as described in
Article V of the Subscription Agreement. The securities underlying the Placement
Warrants shall not be subject to redemption by BGDC nor shall they be callable
or mandatorily convertible by BGDC. The Advisory Warrants shall not be
transferred, sold, assigned or hypothecated for a period of six months;
provided, however, that the Placement Agent may assign in whole or in part
during such period to any NASD member participating in the Offering, any officer
or employee of the Placement Agent, or any such NASD member. The Advisory
Warrants shall contain a cashless exercise feature, a promissory note exercise
feature and antidilution provisions.
(k) NO OFFERINGS. Pending completion or termination of the
Offering in accordance with the terms of this Agreement, the Companies agree not
to enter into an agreement (whether binding or not) with any other person or
entity relating to a possible public or private offering or placement of its
securities (other than in connection with a corporate partnership, strategic
alliance or government funding) or any other transaction which would prevent the
consummation of the Offering.
(l) LOCK-UP AGREEMENT. If requested by the Placement Agent,
each of the Companies will use their best efforts to obtain from its directors
and executive officers, as well as from beneficial owners of five percent (5%)
or more of the each Companies' respective common stock, an agreement that, for a
period of 12 months from the Final Closing Date in the case of Pacific and 12
months from an IPO or a Trading Event (as defined in the Term Sheet) in the case
of BGDC (or such longer period of time as may be requested by the managing
underwriter), they will not sell, assign or transfer any of their shares of the
Companies' respective securities without the Placement Agent's prior written
consent.
(m) NO STATEMENTS. The Companies shall not use the name of the
Placement Agent or any officer, director, employee or shareholder thereof
without the express written consent of the Placement Agent and such person.
6. INDEMNIFICATION.
(a) Each of the Companies agrees to indemnify and hold harmless
the Placement Agent and each Selected Dealer, if any, and their respective
partners, affiliates,
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shareholders, directors, officers, agents, advisors, representatives, employees,
counsel and controlling persons within the meaning of the Act (a "Paramount
Indemnified Party") from and against any and all losses, liabilities, claims,
damages and expenses whatsoever (and all actions in respect thereof), and to
reimburse such Paramount Indemnified Party for legal fees and related expenses
as incurred (including, but not limited to the costs of giving testimony or
furnishing documents in response to a subpoena or otherwise, the costs of
investigating, preparing, pursuing or defending any such action or claim whether
or not pending or threatened, whether or not resulting in any liability, and
whether or not the Placement Agent or any Paramount Indemnified Party is a party
thereto), insofar as such losses, liabilities, claims, damages or expenses arise
out of, relate to, whether or not resulting in any liability, are in incurred in
connection with or are in any way a result of (i) the engagement of the
Placement Agent pursuant to this Agreement and in connection with the
transactions contemplated by this Agreement and the other Offering Documents
(the "Engagement"), including any modifications or future additions to such
Engagement and related activities prior to the date hereof, (ii) any act by the
Placement Agent or any Paramount Indemnified Party taken in connection with the
Engagement, (iii) a breach of any representation, warranty, covenant, or
agreement of the Companies contained in this Agreement, (iv) the employment by
either of the Companies of any device, scheme or artifice to defraud, or the
engaging by either of the Companies in any act, practice or course of business
which operates or would operate as a fraud or deceit, or any conspiracy with
respect thereto, in connection with the sale of the Units, or (v) any untrue
statement or alleged untrue statement of a material fact contained in the
Offering Documents or the omission or alleged omission therefrom of a material
fact necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, provided, however,
that neither of the Companies will be liable in any such case if and to the
extent that any such loss, claim, damage, liability or expense arises out of or
is based upon an untrue statement or alleged untrue statement or omission or
alleged omission so made in conformity with information furnished by any such
Paramount Indemnified Party in writing specifically for use in the Offering
Documents;
(b) Each of the Companies agrees to indemnify and hold harmless
a Paramount Indemnified Party to the same extent as the foregoing indemnity, and
subject to the limitations set forth therein, against any and all loss,
liability, claim, damage and expense whatsoever directly arising out of the
exercise by any person of any right under the Act or the Exchange Act or the
securities or Blue Sky laws of any state on account of violations of the
representations, warranties or agreements set forth in Section 2 hereof.
(c) The Placement Agent agrees to indemnify and hold harmless
each of the Companies, each of the Companies' respective directors, officers,
employees, counsel,
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advisors, representatives and agents and controlling persons within the meaning
of the Act (a "Company Indemnified Party") and each and all of them, to the same
extent as set forth in Section 6(a)(v) of the foregoing indemnity from the
Companies to the Placement Agent, but only with reference to information,
relating to the Placement Agent, furnished in writing to the Companies by the
Placement Agent specifically for inclusion in the Offering Documents and only to
the extent that any losses, claims, damages, and liabilities in respect of which
indemnification is claimed are finally judicially determined to have resulted
primarily and directly from the bad faith or gross negligence of the Placement
Agent.
(d) Promptly after receipt by a person entitled to
indemnification pursuant to subsection (a), (b), or (c) (an "indemnified party")
of this Section of notice of the commencement of any action, the indemnified
party will, if a claim in respect thereof is to be made against a person
granting indemnification (an "indemnifying party") under this Section, notify in
writing the indemnifying party of the commencement thereof; but the omission so
to notify the indemnifying party will not relieve it from any liability which it
may have to the indemnified party otherwise than under this Section. In case
any such action is brought against an indemnified party, and it notifies the
indemnifying party of the commencement thereof, the indemnifying party will be
entitled to participate in, and, to the extent that it may wish, jointly with
any other indemnifying party similarly notified, to assume the defense thereof,
subject to the provisions herein stated, with counsel reasonably satisfactory to
the indemnified party, and after notice from the indemnifying party to the
indemnified party of its election so to assume the defense thereof, the
indemnifying party will not be liable to the indemnified party for any legal or
other expenses subsequently incurred by the indemnified party in connection with
the defense thereof other than reasonable costs of investigation. The
indemnified party shall have the right to employ separate counsel in any such
action and to participate in the defense thereof, but the fees and expenses of
such counsel shall not be at the expense of the indemnifying party if the
indemnifying party has assumed the defense of the action with counsel reasonably
satisfactory to the indemnified party; provided that the fees and expenses of
such counsel shall be at the expense of the indemnifying party if (i) the
employment of such counsel has been specifically authorized in writing by the
indemnifying party or (ii) the named parties to any such action (including any
impleaded parties) include both the indemnified party or parties and the
indemnifying party and, in the judgment of the indemnified party, it is
advisable for the indemnified party or parties to be represented by separate
counsel in which case the indemnifying party shall not have the right to assume
the defense of such action on behalf of the indemnified party or parties, it
being understood, however, that the indemnifying party shall not, in connection
with any one such action or separate but substantially similar or related
actions in the same jurisdiction arising out of the same general allegations or
circumstances, be liable for the reasonable fees and expenses
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of more than one separate firm of attorneys for the indemnified party or parties
(plus local counsel). No settlement, compromise, consent to entry of judgment
or other termination of any action (collectively, "Terminations") in respect of
which a Paramount Indemnified Party may seek indemnification hereunder (whether
or not any Paramount Indemnified Party is a party thereto) shall be made without
the prior written consent of the Paramount Indemnified Party, which such consent
may be withheld at the sole discretion of such Paramount Indemnified Party,
provided, however, that the foregoing requirement of prior written consent for
Terminations shall not apply to the Placement Agent who may agree to such
Terminations on behalf of a Paramount Indemnified Party without the prior
written consent of any Paramount Indemnified Party.
(e) Notwithstanding any of the provisions of this Agreement, the
aggregate indemnification or contribution of the Placement Agent for or on
account of any losses, claims, damages, liabilities or actions under this
Section 6, Section 7 or any other applicable section of this Agreement, SHALL
NOT exceed the Cash Commissions actually paid to the Placement Agent. The
respective indemnity and contribution agreements by each of the Companies and
the Placement Agent contained in subsections (a), (b), (c) and (d) of this
Section 6 and Section 7, and the covenants, representations and warranties of
each of the Companies and the Placement Agent set forth in Sections 1, 2, 3, 4
and 5 shall remain operative and in full force and effect regardless of (i) any
investigation made by the Placement Agent, on the Placement Agent's behalf or by
or on behalf of any person who controls the Placement Agent, the Companies or
any controlling person of either of the Companies or any director or officer of
either of the Companies, (ii) acceptance of any of the Units and payment
therefor or (iii) any termination of this Agreement, and shall survive the
delivery of the Units, and any successor of the Placement Agent or of either of
the Companies or of any person who controls the Placement Agent or either of the
Companies, as the case may be, shall be entitled to the benefit of such
respective indemnity and contribution agreements. The respective indemnity and
contribution agreements by each of the Companies and the Placement Agent
contained in subsections (a), (b) and (c) of this Section 6 and Section 7 shall
be in addition to any liability which the Companies and the Placement Agent may
otherwise have.
7. CONTRIBUTION.
(a) To provide for just and equitable contribution, if (i) an
indemnified party makes a claim for indemnification pursuant to Section 6 but it
is found in a final judicial determination, by a court of competent
jurisdiction, not subject to further appeal, that such indemnification may not
be enforced in such case, even though this Agreement expressly provides for
indemnification in such case, or (ii) any indemnified or indemnifying party
seeks contribution under the Act, the Exchange Act, or otherwise, then each of
the Companies (including for this
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purpose any contribution made by or on behalf of any officer, director, employee
or agent for each of the Companies, or any controlling person of either of the
Companies), on the one hand, and the Placement Agent and any Selected Dealers
(including for this purpose any contribution by or on behalf of an indemnified
party), on the other hand, shall contribute to the losses, liabilities, claims,
damages, and expenses whatsoever to which any of them may be subject, in such
proportions as are appropriate to reflect the relative benefits received by the
Companies, on the one hand, and the Placement Agent and the Selected Dealers, on
the other hand; provided, however, that if applicable law does not permit such
allocation, then other relevant equitable considerations such as the relative
fault of the Companies and the Placement Agent and the Selected Dealers in
connection with the facts which resulted in such losses, liabilities, claims,
damages, and expenses shall also be considered. In no case shall the Placement
Agent or a Selected Dealer be responsible for a portion of the contribution
obligation in excess of the compensation received by it pursuant to Section 4
hereof or the Selected Dealer Agreement, as the case may be. No person guilty
of a fraudulent misrepresentation shall be entitled to contribution from any
person who is not guilty of such fraudulent misrepresentation. For purposes of
this Section 7, each person, if any, who controls the Placement Agent or a
Selected Dealer within the meaning of Section 15 of the Act or Section 20(a) of
the Exchange Act and each officer, director, stockholder, employee and agent of
the Placement Agent or a Selected Dealer, shall have the same rights to
contribution as the Placement Agent or the Selected Dealer, and each person, if
any who controls either of the Companies within the meaning of Section 15 of the
Act or Section 20(a) of the Exchange Act and each officer, director, employee
and agent of either of the Companies, shall have the same rights to contribution
as the Companies, subject in each case to the provisions of this Section 7.
Anything in this Section 7 to the contrary notwithstanding, no party shall be
liable for contribution with respect to the settlement of any claim or action
effected without its written consent. This Section 7 is intended to supersede
any right to contribution under the Act, the Exchange Act, or otherwise.
8. MISCELLANEOUS.
(a) SURVIVAL. Any termination of the Offering without any
Closing shall be without obligation on the part of any party except that the
provisions regarding fees and expenses contained in Section 5(b), the
indemnification provided in Section 6 hereof and the contribution provided in
Section 7 hereof shall survive any termination and shall survive any Closing.
(b) REPRESENTATIONS, WARRANTIES AND COVENANTS TO SURVIVE
DELIVERY. Except as provided in Section 8(a), the respective representations,
warranties, indemnities,
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agreements, covenants and other statements of either of the Companies and the
Placement Agent as of the date hereof shall survive execution of this Agreement
and delivery of the Units and the termination of this Agreement.
(c) NO OTHER BENEFICIARIES. This Agreement is intended for the
sole and exclusive benefit of the parties hereto and their respective successors
and controlling persons, and no other person, firm or corporation shall have any
third-party beneficiary or other rights hereunder.
(d) GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the law of the State of New York without regard to
conflict of law provisions. Any disputes between the parties hereto shall be
settled by binding arbitration in New York, New York.
(e) COUNTERPARTS. This Agreement may be signed in counterparts
with the same effect as if both parties had signed one and the same instrument.
(f) NOTICES. Any communications specifically required hereunder
to be in writing, if sent to the Placement Agent, shall be mailed, delivered and
confirmed to it at Paramount Capital, Inc., 787 Seventh Avenue, New York,
New York, 10019, Attn: Michael S. Weiss and if sent to BGDC or Pacific, shall be
mailed, delivered or telegraphed and confirmed to it at 6730 Mesa Ridge Road,
San Diego, California 92121 Attn: H. Laurence Shaw, M.D.
(g) TERMINATION. Subject to the general survival provisions
contained in Sections 8(a) and 8(b) and payment of all amounts due to the
Placement Agent, this Agreement may be terminated by either party prior to any
Closing upon written notice to the other party.
(h) ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement of the parties with respect to the matters herein referred and
supersedes all prior agreements and understandings, written and oral, between
the parties with respect to the subject matter hereof. Neither this Agreement
nor any term hereof may be changed, waived or terminated orally, but only by an
instrument in writing signed by the party against which enforcement of the
change, waiver or termination is sought.
(i) INDEPENDENT CONTRACTOR. The Placement Agent shall act as an
independent contractor and nothing contained herein or otherwise shall be
construed to create any partnership or joint venture between the Placement Agent
and each of the Companies.
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(j) HEADINGS. The headings and captions of the various
subdivisions of this Agreement are for convenience or reference only and shall
in no way modify or affect the meaning or construction of any of the terms or
provisions hereof.
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If you find the foregoing is in accordance with our understanding,
kindly sign and return to us a counterpart hereof, whereupon this instrument
along with all counterparts will become a binding agreement between us.
Very truly yours,
B-G Development Corporation
By: /s/ H. LAURENCE SHAW, M.D.
------------------------------
Name: H. Laurence Shaw, M.D.
Title: Chief Executive Officer
Pacific Pharmaceuticals, Inc.
By: /s/ H. LAURENCE SHAW, M.D.
------------------------------
Name: H. Laurence Shaw, M.D.
Title: Chief Executive Officer
Agreed to by:
PARAMOUNT CAPITAL, INC.
By: /s/ LINDSAY A. ROSENWALD, M.D.
--------------------------------
Name: Lindsay A. Rosenwald, M.D.
Title: Chairman
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EXHIBIT A
[ ]
OFFICERS' CERTIFICATE
[Month] __, 1997
I, H. Laurence Shaw, M.D. certify that I am the Chief Executive
Officer of both B-G Development Corporation ("BGDC") and Pacific
Pharmaceuticals, Inc. ("Pacific"), each a Delaware corporation (the
"Companies"), and that, as such, I am authorized to execute this certificate on
behalf of the Companies. All capitalized terms used herein but not otherwise
defined herein shall the meanings ascribed to such terms in the Placement Agency
Agreement (as defined below). Reference is made herein to the closing held on
[DATE] (the "Closing Date"). In connection with the offering and sale of up to
60 units (the "Units") with an option in favor of the Placement Agent to offer
up to an additional 40 Units to cover over-allotments at a purchase price equal
to $100,000 per Unit, with each Unit consisting of 50,000 shares of Series A
Convertible Exchangeable Preferred Stock of the BGDC, stated value $2.00 per
share. I do hereby certify that I have carefully examined all of the Offering
Documents (as defined in the Placement Agency Agreement dated as of March __,
1998 (the "Placement Agency Agreement") between each of the Companies and
Paramount Capital, Inc. ("Paramount"), and do hereby further certify that:
1. All of the representations and warranties of each of the
Companies contained in the subscription agreements (the "Subscription
Agreements") between the Companies and the purchasers (the "Purchasers") of the
Units of Series A Convertible Exchangeable Preferred Stock (the "Preferred
Stock") of BGDC contemplated by the Companies's Confidential Term Sheet, dated
March __, 1998, as supplemented and amended, (the "Term Sheet") are true and
correct in all respects on the Closing Date with the same force and effect as if
made on and as of the Closing Date, and each of the Companies has performed all
covenants and agreements and has satisfied all conditions in the Subscription
Agreements to be performed or satisfied on its part before the Closing Date in
all respects.
2. The Term Sheet does not contain any untrue statement of a fact
or omit to state any fact required to be stated in order to make the statements
therein not misleading as of the Closing Date. Since the date of the Term
Sheet, no event has occurred concerning which information is required to be
contained in an amended or supplemented Term Sheet concerning which such
information is not contained therein.
3. All of the representations and warranties of each of the
Companies contained in the Placement Agency Agreement are true and correct in
all respects on the Closing Date, and
A-i
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each of the Companies has performed all covenants and agreements and has
satisfied all conditions contained in the Agency Agreement to be performed and
satisfied on its part at or prior to the Closing Date in all respects.
4. All of the representations and warranties of each of the
Companies contained in each of the other Offering Documents are true and correct
in all respects on the Closing Date, and each of the Companies has performed all
covenants and agreements and has satisfied all conditions contained in such
Offering Documents to be performed and satisfied on its part at or prior to the
Closing Date in all respects.
5. Since the date of the Term Sheet, there has been no material
adverse change in the condition (financial or other), earnings, business,
prospects or properties of either of the Companies and their subsidiaries, if
any, taken as a whole, whether or not arising from transactions in the ordinary
course of business, nor has there occurred any event required to be set forth in
the Term Sheet, including, without limitation, in accordance with Section 1(b)
of the Placement Agency Agreement.
6. There is no litigation pending or threatened by or against either
of the Companies, except as disclosed in the Term Sheet.
7. Since [MONTH] __, 1997, Pacific has not offered to sell to, or
solicited any offers to buy from any person, shares of capital stock of Pacific,
except in connection with the Offering contemplated by the Term Sheet. Since
its inception, BGDC has not offered to sell to, or solicited any offers to buy
from any person other than Pacific, shares of capital stock of BGDC, except in
connection with the Offering contemplated by the Term Sheet.
8. Attached hereto as Exhibit A is a true, correct and complete copy
of the each of the Companies' Certificates of Incorporation, as amended (the
"Certificates"), which are in full force and effect and, except as otherwise
provided herein, no amendment to such certificate has been approved by the Board
of Directors or stockholders of either of the Companies or filed with the
Delaware Secretary of State since [DATE]. As of the Closing Date, both of the
Companies are duly incorporated and in good standing in the State of Delaware
and have paid all fees and taxes due and payable on or prior to the Closing Date
necessary for the maintenance or continuation of its corporate existence. As of
the Closing Date, there are no proceedings or actions contemplated by either of
the Companies, relating to the merger, liquidation, consolidation, or sale of
all or substantially all of the assets or business of either of the Companies or
which would otherwise threaten or impair either of the Companies' corporate
existence.
A-ii
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9. Attached hereto as Exhibit B is a true, correct and complete copy
of the Bylaws of each of the Companies, as in full force and effect on the
Closing Date and at all times from [__] through the Closing Date.
10. As of the Closing Date, each of the Offering Documents is in the
form authorized by the respective board of directors of the Companies pursuant
to the resolutions set forth in Exhibit C.
11. Attached hereto as Exhibit D is a true, correct and complete copy
of the resolutions duly adopted by the unanimous approval of all of the members
of the Board of Directors, including the independent members of each of the
Companies' respective board of directors, which resolutions authorize the
issuance and sale of the Units, the Preferred Stock underlying the Units, the
Placement Warrants and Advisory Warrants and the Preferred Stock underlying the
Placement Warrants and Advisory Warrants in accordance with the requirements of
Delaware law, the Certificate and Bylaws of each of the Companies, which are the
only resolutions adopted by the respective board of directors of each of the
Companies or any committee thereof with respect to the offering and sale of the
Units and the transactions relating thereto, and which have not been revoked,
modified and amended or rescinded and are in full force and effect on the
Closing Date.
12. Attached hereto as Exhibit E are true, correct and complete
specimens of the certificates representing the Preferred Stock heretofore
approved and adopted by the board of directors of BGDC. Each of the
certificates representing Preferred Stock delivered on the Closing Date to each
of the Purchasers pursuant to the Subscription Agreements has been executed by
the genuine or facsimile signature of officers of BGDC who have been duly
elected or appointed, qualified and acting as such officers on the date such
certificates were executed and delivered, all in accordance with the Certificate
and Bylaws of BGDC and the requirements of applicable law.
13. Attached hereto as Exhibit F is a true, correct and complete copy
of the form of Placement Warrant and Advisory Warrant heretofore approved and
adopted by the Board of Directors of BGDC. Each Placement Warrant and Advisory
Warrant delivered on the date hereof to each of the holders pursuant to the
Placement Agency Agreement, respectively, has been executed by the genuine or
facsimile signature of officers of BGDC who have been duly elected or appointed,
qualified and acting as such officers on the date such certificates were
executed and delivered, all in accordance with the Certificate and Bylaws of
BGDC and the requirements of applicable law.
A-iii
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14. The minute books and records of each of the Companies, relating
to all proceedings of the stockholders, the Board of Directors of each of the
Companies and the Compensation Committee, the Audit Committee and the Nominating
Committee of such Boards have been made available to Kramer, Levin, Naftalis &
Frankel, counsel to Paramount, and, in such form, are the original minute books
and records of each of the Companies. There have been no changes, alterations
or additions in such minutes or records since their examination by counsel on
behalf of Paramount.
15. Each person who, as an officer or director of either of the
Companies, signed any of the Offering Documents or any other document in
connection with the offering and sale of the Preferred Stock, the Placement
Warrants, the Advisory Warrants and the closing relating thereto was duly
elected or appointed, qualified and acting as such officer or director at the
respective times of the signing and delivery thereof and was duly authorized to
sign such document on behalf of the Companies, and the signature of each such
person appearing on each such document is the genuine signature of such officer,
director or person duly appointed for the purpose of executing such documents
under valid powers of attorney, and each individual who signed such signature
pages, personally or by an attorney-in-fact, was then duly elected, qualified
and acting as an officer or director of the Companies as stated therein.
16. The following persons are, and have been at all times since
[DATE], duly qualified and acting officers of either of the Companies, duly
elected or appointed to the offices set forth opposite their respective names,
and the signature opposite the name of each such officer is his or her, or a
facsimile of his or her, authentic signature, and the seal affixed hereto is the
duly adopted seal of the Companies:
NAME OFFICE SIGNATURE
[ ] Interim CEO ___________________
[ ] Secretary ___________________
[__] [__] ___________________
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This certificate is made for the benefit of, and may be relied upon
by, Paramount, Kramer, Levin, Naftalis & Frankel, as counsel to Paramount, and
each of the Purchasers.
IN WITNESS WHEREOF, I have hereunto set forth my hand this __ day of
[MONTH], 1998.
[SEAL]
By /s/ H. LAURENCE SHAW, M.D.
------------------------------------
Name: Dr. H. Laurence Shaw
Title: Chief Executive Officer
B-G Development Corporation
Pacific Pharmaceuticals, Inc.
EX10-41.WPD
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EXHIBIT 10.42
SUBSCRIPTION AGREEMENT
SUBSCRIPTION AGREEMENT (this "Agreement") made as of the date set
forth on the signature page hereof between B-G Development Corporation ("BGDC")
Pacific Pharmaceuticals, Inc. ("Pacific" and collectively with BGDC sometimes
referred to as the "Companies"), and the undersigned (the "Subscriber").
W I T N E S S E T H:
WHEREAS, the Companies have retained Paramount Capital, Inc. (the
"Placement Agent") to act as Placement Agent, on a "best efforts" basis, in a
private offering (the "Offering") of units (the "Units") of BGDC and Pacific;
WHEREAS, the Companies desire to issue a minimum of 10 Units (the
"Minimum Offering") and a maximum of 60 Units (the "Maximum Offering") with an
option in favor of the Placement Agent to offer up to an additional 40 Units to
cover over-allotments (the "Over-allotment"), each Unit consisting of 50,000
shares of Series A Convertible Preferred Stock (the "Preferred Stock") of BGDC,
par value $.001 per share, stated value $2.00 per share as more fully described
in the Term Sheet (terms used herein but not defined herein shall have the
meanings set forth in the Term Sheet). Each share of Preferred Stock is
convertible at the option of the holder thereof into one share of common stock
of BGDC, par value $.001 per share (the "BGDC Common Stock"), initially at a
conversion price (the "Conversion Price") equal to $2.00 per share of Common
Stock. In addition, the Preferred Stock will automatically convert into BGDC
Common Stock upon the occurrence of a Qualified IPO or a Trading Event (each as
defined below). To the extent that any shares of Preferred Stock are outstanding
on the date that is two years following the Final Closing Date (the "Exchange
Date"), then, for the 60-day period thereafter, the holders of Preferred Stock
will have the right (the "Exchange Right") to put their shares of Preferred
Stock, if any, to Pacific for $3.99 per share (the "Exchange Purchase Price").
The Exchange Purchase Price may be paid in cash, shares of common stock of
Pacific, par value $.02 per share ("Pacific Common Stock") or any combination
thereof, at Pacific's sole discretion, within 60 days after the exercise of the
Exchange Right (the Preferred Stock, BGDC Common Stock issuable upon conversion
of the Preferred Stock and the Pacific Common Stock receivable upon exercise of
the Exchange Right are sometimes hereinafter referred to as the "Securities").
The Companies expect the closing of the Offering to occur on or before June 1,
1998 subject to subject to an extension of this Offering for up to an additional
60 days at the option of BGDC, with the consent of the Placement Agent and the
Placement Agent, in its sole discretion (such date, as may be extended, the
"Final Closing Date");
WHEREAS, the Subscriber desires to purchase that number of Units set
forth on the signature page hereof on the terms and conditions hereinafter set
forth;
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NOW, THEREFORE, in consideration of the premises and the mutual
representations and covenants hereinafter set forth, the parties hereto do
hereby agree as follows:
I. SUBSCRIPTION FOR UNITS AND REPRESENTATIONS BY SUBSCRIBER
1.1 Subject to the terms and conditions hereinafter set forth, the
Subscriber hereby subscribes for and agrees to purchase from the Companies such
number of Units, or fractions thereof, and the Companies agree to sell such
Units to the Subscriber as is set forth on the signature page hereof at a price
equal to $100,000 per Unit (the "Initial Offering Price"). The purchase price
is payable by personal or business check, wire transfer of immediately available
funds or money order made payable to "Fleet Bank, N.A., Escrow Agent, F/B/O B-G
Development Corp. and Pacific Pharmaceuticals, Inc." contemporaneously with the
execution and delivery of this Agreement by the Subscriber. The certificates
representing the shares of Preferred Stock shall be delivered by the BGDC within
10 business days following the consummation of the Offering. The Subscriber
understands, however, that this purchase of Units is contingent upon the
Companies making sales of the Minimum Offering amount prior to the Final Closing
Date of the Offering.
1.2 The Subscriber recognizes that the purchase of Units involves a
high degree of risk including, but not limited to, the following: (a) each of
the Companies remains a development stage business with limited operating
history and requires substantial funds in addition to the proceeds of the
Offering; (b) an investment, each of in the Companies is highly speculative, and
only investors who can afford the loss of their entire investment should
consider purchasing Units; (c) the Subscriber may not be able to liquidate its
investment; (d) transferability of the Securities is extremely limited; (e) in
the event of a disposition, the Subscriber could sustain the loss of its entire
investment; and (f) neither of the Companies have paid any dividends since their
respective inceptions and neither of the Companies anticipates paying any
dividends, even if declared by the Companies' respective Board of Directors.
Such risks are more fully set forth in the Confidential Term Sheet dated April
22, 1998 as supplemented and amended, and the attachments and exhibits thereto,
all of which constitute an integral part thereof furnished by the Company to the
Subscriber (the "Term Sheet").
1.3 The Subscriber represents that the Subscriber is an "accredited
investor" as such term is defined in Rule 501 of Regulation D ("Regulation D")
promulgated under the Securities Act of 1933, as amended (the "Securities Act"),
as indicated by the Subscriber's responses to the questions contained in Article
VIII hereof, and that the Subscriber is able to bear the economic risk of an
investment in the Units.
1.4 The Subscriber hereby acknowledges and represents that (a) the
Subscriber has knowledge and experience in business and financial matters, prior
<PAGE>
investment experience, including investment in securities that are non-listed,
unregistered and/or not traded on a national securities exchange nor on the
National Association of Securities Dealers (the "NASD") automated quotation
system, or the Subscriber has employed the services of a "purchaser
representative" (as defined in Rule 501 of Regulation D) to read all of the
documents furnished or made available by each of the Companies both to the
Subscriber and to all other prospective investors in the Units and to evaluate
the merits and risks of such an investment on the Subscriber's behalf; (b) the
Subscriber recognizes the highly speculative nature of this investment; and (c)
the Subscriber is able to bear the economic risk that the Subscriber hereby
assumes.
1.5 The Subscriber hereby acknowledges receipt and careful review of
the Term Sheet and all attachments thereto, including, without limitation,
Exhibit A entitled "Risk Factors" and this Agreement, (collectively referred to
as the "Offering Materials") and hereby represents that it has been furnished by
each of BGDC and Pacific during the course of the Offering with all information
regarding the respective Companies that the Subscriber has requested or desired
to know, has been afforded the opportunity to ask questions of and receive
answers from duly authorized officers or other representatives of each of BGDC
and Pacific, respectively, concerning the terms and conditions of the Offering
and has received any additional information that the Subscriber has requested.
1.6 (a) In making the decision to invest in the Units the Subscriber
has relied solely upon the information provided by the Companies in the Term
Sheet and all attachments thereto and in this Agreement. To the extent
necessary, the Subscriber has retained, at its own expense, and relied upon
appropriate professional advice regarding the investment, tax and legal merits
and consequences of this Agreement and its purchase of the Units hereunder. The
Subscriber disclaims reliance on any statements made or information provided by
any person or entity in the course of Subscriber's consideration of an
investment in the Units other than the Offering Materials. The Subscriber
acknowledges and agrees that (i) the Companies have prepared the Term Sheet and
that no other person, including without limitation, the Placement Agent, has
supplied any information for inclusion in the Term Sheet other than information
furnished in writing to the Companies by the Placement Agent specifically for
inclusion in the Term Sheet relating to the Placement Agent, (ii) the Placement
Agent has no responsibility for the accuracy or completeness of the Term Sheet
and (iii) the Subscriber has not relied upon the independent investigation or
verification, if any, that may have been undertaken by the Placement Agent.
(b) The Subscriber represents that (i) the Subscriber was
contacted regarding the sale of the Units by the Placement Agent (or an
authorized agent or representative thereof) with whom the Subscriber had a
prior substantial pre-existing relationship and (ii) no Units were offered or
sold to it by means of any form of general solicitation or general
advertising, and in connection therewith the Subscriber did not (A) receive
or review any advertisement, article, notice or other communication
<PAGE>
published in a newspaper or magazine or similar media or broadcast over
television or radio, whether closed circuit, or generally available; or (B)
attend any seminar meeting or industry investor conference whose attendees
were invited by any general solicitation or general advertising.
1.7 The Subscriber hereby represents that the Subscriber, either by
reason of the Subscriber's business or financial experience or the business or
financial experience of the Subscriber's professional advisors (who are
unaffiliated with and not compensated by BGDC, Pacific or any affiliate or
selling agent of BGDC or Pacific, including the Placement Agent, directly or
indirectly), has the capacity to protect the Subscriber's own interests in
connection with the transaction contemplated hereby.
1.8 The Subscriber hereby acknowledges that the Offering has not been
reviewed by the United States Securities and Exchange Commission (the "SEC") nor
any state regulatory authority since the Offering is intended to be exempt from
the registration requirements of Section 5 of the Securities Act pursuant to
Regulation D promulgated thereunder. The Subscriber understands that the
Securities have not been registered under the Securities Act and agrees not to
sell or otherwise transfer the Securities unless they are registered under the
Securities Act or unless an exemption from such registration is available.
1.9 The Subscriber understands that the Securities comprising the
Units have not been registered under the Securities Act by reason of a claimed
exemption thereunder that depends, in part, upon the Subscriber's investment
intention. In this connection, the Subscriber hereby represents that the
Subscriber is purchasing the Securities comprising the Units for the
Subscriber's own account for investment and not with a view toward the resale or
distribution to others. The Subscriber, if an entity, further represents that
it was not formed for the purpose of purchasing the Securities.
1.10 The Subscriber understands that there is no public market for the
Units or the Securities comprising the Units and that no market may develop for
any of such Securities. The Subscriber understands that even if a public market
develops for such securities Rule 144 ("Rule 144") promulgated under the
Securities Act requires for non-affiliates, among other conditions, a one-year
holding period prior to the resale (in limited amounts) of securities acquired
in a non-public offering without having to satisfy the registration requirements
under the Securities Act. The Subscriber understands and hereby acknowledges
that neither BGDC nor Pacific is under any obligation to register any of the
Units or any of the Securities comprising the Units under the Securities Act or
any state securities or "blue sky" laws other than as set forth in Article V
hereof. The Subscriber agrees to hold BGDC, Pacific and their respective
directors, officers, employees, affiliates, controlling persons and agents
(including the Placement Agent and its officers, directors, employees, counsel,
controlling persons and agents) and their respective heirs, representatives,
successors and assigns harmless and to indemnify them against all liabilities,
costs and expenses incurred by them as a result of, (a) any misrepresentation
made by the Subscriber contained in this Agreement
<PAGE>
(including the Confidential Investor Questionnaire contained in Article VIII
herein), (b) any sale or distribution by the Subscriber in violation of the
Securities Act or any applicable state securities or "blue sky" laws or (c)
any untrue statement of a material fact made by the Subscriber and contained
herein.
1.11 The Subscriber consents to the placement of a legend on any
certificate or other document evidencing the Securities that such Securities
have not been registered under the Securities Act or any state securities or
"blue sky" laws and setting forth or referring to the restrictions on
transferability and sale thereof contained in this Agreement. The Subscriber is
aware that BGDC will make a notation in its appropriate records with respect to
the restrictions on the transferability of the Preferred Stock and BGDC Common
Stock issued or issuable upon conversion of the Preferred Stock (the "Conversion
Shares") and that Pacific will make a notation in its appropriate records with
respect to the restrictions on the transferability of the Pacific Common Stock
issuable upon exercise of the Exchange Right (the "Exchange Shares").
1.12 The Subscriber understands that each of the Companies will review
this Agreement and are hereby given authority by the Subscriber to call
Subscriber's bank or place of employment or otherwise review the financial
standing of the Subscriber; and it is further agreed that each of the Companies
(with the consent of the Placement Agent) and the Placement Agent, at its sole
discretion, reserves the unrestricted right, without further documentation or
agreement on the part of the Subscriber, to reject or limit any subscription, to
accept subscriptions for fractional Units and to close the Offering to the
Subscriber at any time and will issue stop transfer instructions to its transfer
agent with respect to such Securities.
1.13 The Subscriber hereby represents that the address of the
Subscriber furnished by Subscriber on the signature page hereof is the
Subscriber's principal residence if Subscriber is an individual or its principal
business address if it is a corporation or other entity.
1.14 The Subscriber represents that the Subscriber has full power and
authority (corporate, statutory and otherwise) to execute and deliver this
Agreement and to purchase the Units and the Securities underlying the Units.
This Agreement constitutes the legal, valid and binding obligation of the
Subscriber, enforceable against the Subscriber in accordance with its terms.
1.15 If the Subscriber is a corporation, partnership, limited
liability company, trust, employee benefit plan, individual retirement account,
Keogh Plan, or other tax-exempt entity, it is authorized and qualified to become
an investor in each of the Companies and the person signing this Agreement on
behalf of such entity has been duly authorized by such entity to do so.
1.16 The Subscriber acknowledges that if he or she is a Registered
Representative of an NASD member firm, he or she must give such firm the notice
<PAGE>
required by the NASDs Rules of Fair Practice, receipt of which must be
acknowledged by such firm in Section 8.4 below.
1.17 The Subscriber acknowledges that at such time, if ever, as the
Securities are registered, sales of the Securities will be subject to state
securities laws.
1.18 The Subscriber acknowledges that it has received all reports
filed by Pacific with the SEC under the Exchange Act of 1934 during the 1998
fiscal year or which are incorporated by reference in the Term Sheet.
1.19 (a) Subscriber agrees that:
(i) from the earlier to occur of (A) the initial public
offering of BGDC Common Stock (the "IPO") and (B) the first date (the "Trading
Date") on which BGDC Common Stock (or securities received by all holders of BGDC
Common Stock in exchange for BGDC Common Stock) trades a national securities
exchange or on the National Association of Securities Dealers, Inc. Automated
Quotation System (collectively "NASDAQ") (a "Trading Event"), and continuing for
a period of nine months thereafter, Subscriber will not, without the prior
written consent of the Placement Agent, offer, pledge, sell, contract to sell,
grant any option for the sale of, or otherwise dispose of, directly or
indirectly, 75% of the Conversion Shares held by each Subscriber; provided,
however, that, following each three month period after the Trading Date, an
amount of Conversion Shares equal to 25% of the number of Conversion Shares held
by the Subscriber shall become exempt from the lock-up provisions contained in
this sentence. For the sake of clarity, 25% of the Conversion Shares will not
be subject to any lock-up. In addition, the Subscriber agrees that while it
holds any Preferred Stock, Conversion Shares or Exchange Shares, it will not
directly or indirectly, through related parties, affiliates or otherwise sell
any of the Companies' securities "short" or "short against the box" (as those
terms are generally understood). In addition, in connection with the IPO, the
Subscriber agrees to be subject to a lock-up for a period of 180 days following
the IPO or such longer period as may be required by the underwriter or
underwriters of such IPO.
(ii) in the event that the Initial Exchange Right (as
defined below) is exercised by Subscriber, 50% of Subscriber's Initial Exchange
Shares shall be subject to a "lock-up" for the first 90 days following the
effective date of a Pacific Registration Statement that includes such Initial
Exchange Shares. For the sake of clarity, 50% percent of Subscriber's Initial
Exchange Shares will not be subject to any contractual lock-up.
(iii) in the event that the Exchange Right is exercised by
Subscriber, 50% of each Subscriber's Exchange Shares, shall be subject to a
"lock-up" for the first 90 days following the Effective Date (as defined below)
of a Pacific Registration Statement (as defined below) that includes such
Exchange Shares of
<PAGE>
the Subscriber. For the sake of clarity, 50% percent of the Exchange
Shares will not be subject to any contractual lock-up.
(iv) in connection with any public offering of Pacific
Common Stock, Subscriber, if a holder of Exchange Shares at such time, agrees to
be subject to a lock-up for a period of 60 days following such public offering
or such longer period as may be required by the underwriter or underwriters of
such public offering.
(b) In order to enforce the foregoing covenant, the Companies
may impose stop-transfer instructions with respect to the Registrable Securities
(as defined below) of each Holder (as defined below) (and the shares or
securities of every other person subject to the foregoing restriction) until the
end of such period.
1.20 (a) The Subscriber agrees not to issue any public statement with
respect to the Subscriber's investment or proposed investment in the Companies
or the terms of any agreement or covenant between them and each of the Companies
without each of the Companies' prior written consent, except such disclosures as
may be required under applicable law or under any applicable order, rule or
regulation.
(b) The Companies agree not to disclose the names, addresses or
any other information about the Subscribers, except as required by law;
provided, that the Companies may use the name (but not the address) of the
Subscriber in any registration statement filed pursuant to Article V in which
the Subscriber's shares are included and may disclose the names on a
confidential basis to the American Stock Exchange ("AMEX"), if requested.
1.21 The Subscriber represents and warrants that it has not engaged,
consented to or authorized any broker, finder or intermediary to act on its
behalf, directly or indirectly, as a broker, finder or intermediary in
connection with the transactions contemplated by this Agreement. The Subscriber
hereby agrees to indemnify and hold harmless BGDC and Pacific from and against
all fees, commissions or other payments owing to any such person or firm acting
on behalf of such Subscriber hereunder.
II. REPRESENTATIONS BY AND COVENANTS OF THE COMPANY
Each of BGDC and Pacific hereby represents, warrants and covenants to the
Subscriber that:
2.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION.
(a) Pacific is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware and has full
corporate
<PAGE>
power and authority to conduct its business as described in the Exhibits to
the Term Sheet. Pacific is duly qualified to do business as a foreign
corporation and is in good standing in the State of California and Pacific
and its subsidiaries are duly qualified and authorized to do business as a
foreign corporation and are in good standing in each jurisdiction in which
the laws require the Pacific or its subsidiaries to be so qualified and/or
authorized to do business. If required, prior to the any closing, BGDC will
be duly qualified to and authorized to do business as a foreign corporation
in California.
(b) BGDC is a corporation duly organized, validly existing and
in good standing under the laws of the State of Delaware and has full corporate
power and authority to conduct its business as described in the Term Sheet.
2.2 CAPITALIZATION AND VOTING RIGHTS. The authorized, issued and
outstanding capital stock of BGDC is as set forth in the Term Sheet; all issued
and outstanding shares of BGDC are validly issued, fully paid and nonassessable.
The authorized, issued and outstanding capital stock of Pacific is as set forth
in the Exhibits to the Term Sheet; all issued and outstanding shares of Pacific
are validly issued, fully paid and nonassessable. The Preferred Stock underlying
the Units (including the Preferred Stock issuable upon exercise of the Placement
and Advisory Warrants (as defined in the Term Sheet)), when issued and paid for
in accordance with the terms of this Agreement, will be validly issued, fully
paid and nonassessable. BGDC shall at all times during the period that any of
the shares of Preferred Stock remain outstanding and unexercised have authorized
and reserved for issuance a sufficient number of shares of BGDC Common Stock to
provide for conversion of the Preferred Stock. Pacific shall at all times
during the period that any of the shares of Preferred Stock remain outstanding
and unexercised have authorized and reserved for issuance a sufficient number of
shares of Pacific Common Stock to provide for the Exchange Right. Except as set
forth in the Term Sheet, there are no outstanding options, warrants, agreements,
convertible securities, preemptive rights or other rights to subscribe for or to
purchase any shares of capital stock of BGDC. Except as set forth in the Term
Sheet, in this Agreement and as otherwise required by law, there are no
restrictions upon the voting or transfer of any of the shares of capital stock
of BGDC pursuant to BGDC's Certificate of Incorporation, as amended (the
"Certificate of Incorporation"), By-Laws or other governing documents or any
agreement or other instruments to which BGDC is a party or by which BGDC is
bound.
2.3 AUTHORIZATION; ENFORCEABILITY. BGDC and Pacific each have
corporate right, power and authority to enter into this Agreement and to
consummate the transactions contemplated hereby. All corporate action on the
part of BGDC or Pacific and their respective directors and stockholders that is
necessary for the authorization, execution, delivery and performance of this
Agreement by the Companies, the authorization, sale, issuance and delivery of
the Securities contemplated hereby and the performance of the Companies'
respective obligations hereunder has been taken. This Agreement has been duly
executed and delivered by each of the Companies and constitutes a legal, valid
and binding obligation of both BGDC and
<PAGE>
Pacific, enforceable against each Company in accordance with its terms,
subject to laws of general application relating to bankruptcy, insolvency and
the relief of debtors and rules of law governing specific performance,
injunctive relief or other equitable remedies, and to limitations of public
policy. Upon the issuance and delivery of the Preferred Stock as
contemplated by this Agreement, such Securities will be validly issued, fully
paid and nonassessable. Upon the issuance and delivery of the Conversion
Shares or Exchange Shares, if applicable (including the Conversion Shares or
Exchange Shares issuable upon conversion of the Preferred Stock underlying
the Placement and Advisory Warrants (as defined in the Term Sheet)), and upon
compliance by the Subscriber with the terms hereof, the Conversion Shares or
Exchange Shares will be validly issued, fully paid and nonassessable. The
issuance and sale of the Preferred Stock contemplated hereby and the issuance
and sale of the Conversion Shares or Exchange Shares (including the Preferred
Stock issuable upon exercise of the Placement and Advisory Warrants and the
Conversion Shares or Exchange Shares issuable upon conversion or exchange of
the Preferred Stock underlying the Placement and Advisory Warrants), will not
give rise to any preemptive rights or rights of first refusal on behalf of
any person.
2.4 CERTIFICATE OF DESIGNATIONS OF PREFERRED STOCK. The Preferred
Stock shall have all of the rights, preferences and privileges substantially as
set forth in the Form of Certificate of Designations attached as Exhibit B to
the Term Sheet.
2.5 NO CONFLICT; GOVERNMENTAL CONSENTS.
(a) The execution and delivery by the Companies of this Agreement
and the consummation of the transactions contemplated hereby will not result
in the violation of any law, statute, rule, regulation, order, writ,
injunction, judgment or decree of any court or governmental authority to or
by which BGDC or Pacific is bound, or of any provision of the Certificate of
Incorporation or By-Laws of BGDC or Pacific, and will not conflict with, or
result in a breach or violation of, any of the terms or provisions of, or
constitute (with due notice or lapse of time or both) a default under, any
lease, loan agreement, mortgage, security agreement, trust indenture or other
agreement or instrument to which BGDC or Pacific is a party or by which it is
bound or to which any of its properties or assets is subject, nor result in
the creation or imposition of any lien upon any of the properties or assets
of BGDC or Pacific.
(b) No consent, approval, authorization or other order of any
governmental authority is required to be obtained by the Companies in connection
with the authorization, execution and delivery of this Agreement or with the
authorization, issue and sale of the Units or the Securities comprising the
Units, except such filings as may be required to be made with the SEC, the AMEX,
the NASD and/or NASDAQ and with any state or foreign blue sky or securities
regulatory authority.
2.6 LICENSES. Except as otherwise set forth in the Term Sheet, each
of the Companies has sufficient licenses, permits and other governmental
authorizations
<PAGE>
currently required for the conduct of its business or ownership of properties
and is in all material respects complying therewith.
2.7 EXCHANGE RIGHT. (a) If necessary, Pacific covenants and
agrees to use its best efforts in all respects to cause the approval of the
Exchange Right described in Article VI hereof.
(b) Pacific covenants and agrees not to enter into any agreement
that would interfere with or otherwise adversely affect the rights granted to
the Subscriber in Article VI.
2.8 LITIGATION. BGDC knows of no pending or threatened legal or
governmental proceedings against BGDC that would materially adversely affect the
business, property, financial condition or operations of BGDC. Similarly,
Pacific knows of no pending or threatened legal or governmental proceedings
against Pacific that would materially adversely affect the business, property,
financial condition or operations of Pacific.
2.9 TERM SHEET; DISCLOSURE. The information set forth in the Term
Sheet contains no untrue statement of a material fact nor omits to state a
material fact necessary in order to make the statements contained therein, in
light of the circumstances under which they were made, not misleading.
2.10 INVESTMENT COMPANY. Neither of the Companies is an "investment
company" within the meaning of such term under the Investment Company Act of
1940, as amended, and the rules and regulations of the SEC thereunder.
2.11 PLACEMENT AGENT. The Companies have engaged, consented to and
authorized the Placement Agent to act as placement agent in connection with the
transactions contemplated by this Agreement. The Companies hereby agree to pay
the Placement Agent a commission as set forth in the Term Sheet and to reimburse
expenses, and the Companies agree to indemnify and hold harmless the Subscribers
from and against all fees, commissions or other payments owing by the Companies
to the Placement Agent or any other person or firm acting on behalf of the
Companies hereunder.
III. TERMS OF SUBSCRIPTION
3.1 The Companies shall issue a minimum of 10 Units (the "Minimum
Offering") and a maximum of 60 Units (the "Maximum Offering") with an option in
favor of the Placement Agent to offer up to an additional 40 Units to cover
over-allotments (the "Over-allotment"), each Unit consisting of 50,000 shares of
Preferred Stock. Each share of Preferred Stock is convertible at the option of
the holder thereof into one share of BGDC Common Stock, initially at a
Conversion Price
<PAGE>
equal to $2.00 per share of Preferred Stock and is exchangeable for Pacific
Common Stock as provided in Article VI. The Units will be offered on a "best
efforts" basis. The purchase price is payable by personal or business check,
wire transfer of immediately available funds or money order made payable to
"Fleet Bank, N.A., Escrow Agent, F/B/O B-G Development Corporation and
Pacific Pharmaceuticals, Inc." as set forth in section 1.1 hereof.
3.2 Placement of the Units will be made by the Placement Agent, who
will receive certain compensation as described in the Term Sheet.
3.3 Pending the sale of the Units, all funds paid hereunder shall be
deposited in escrow with Fleet Bank, N.A., having a branch at 345 Park Avenue,
New York, New York, 10022. If the Companies shall not have obtained
subscriptions (including this subscription) for purchases of the Minimum
Offering amount on or before the Final Closing Date, then this subscription
shall be void and all funds paid hereunder by the Subscriber shall be promptly
returned to the Subscriber, with interest, subject to Section 3.5 hereof.
3.4 The Subscriber hereby authorizes and directs BGDC to deliver the
certificates representing the shares of Preferred Stock to be issued to the
Subscriber pursuant to this Agreement directly to the Subscriber's account
maintained by the Placement Agent, if any, or, if no such account exists, to the
residential or business address indicated on the signature page hereto.
3.5 The Subscriber hereby authorizes and directs the Companies to
return any funds for unaccepted subscriptions to the same account from which the
funds were drawn, including any customer account maintained with the Placement
Agent.
IV. CONDITIONS TO OBLIGATIONS OF THE SUBSCRIBERS
4.1 The Subscriber's obligation to purchase the Units at the closings
(each, a "Closing") is subject to the fulfillment on or prior to each Closing of
the following conditions, which conditions may be waived at the option of each
Subscriber to the extent permitted by law:
(a) REPRESENTATIONS AND WARRANTIES CORRECT. The representations
and warranties made by each of the Companies in Article II hereof shall be true
and correct in all material respects when made, and shall be true and correct in
all material respects on each Closing with the same force and effect as if they
had been made on and as of said date.
(b) COVENANTS. All covenants, agreements and conditions
contained in this Agreement to be performed by each of the Companies on or prior
to such purchase shall have been performed or complied with in all material
respects.
<PAGE>
(c) NO LEGAL ORDER PENDING. There shall not then be in
effect any legal or other order enjoining or restraining the transactions
contemplated by this Agreement.
(d) NO LAW PROHIBITING OR RESTRICTING SUCH SALE. There shall
not be in effect any law, rule or regulation prohibiting or restricting such
sale or requiring any consent or approval of any person, which shall not have
been obtained, to issue the Securities (except as otherwise provided in this
Agreement).
(e) MINIMUM SUBSCRIPTIONS. The Companies shall have received
binding subscriptions for at least the Minimum Offering amount.
V. REGISTRATION RIGHTS
5.1 As used in this Agreement, the following terms shall have the
following meanings:
(a) The term "Holder" shall mean any person owning or having the
right to acquire Registrable Securities or any permitted transferee of a
Holder.
(b) The terms "register", "registered" and "registration" shall
refer to a registration effected by preparing and filing a registration
statement or similar document in compliance with the Securities Act, and the
declaration or order of effectiveness of such registration statement or
document.
(c) The term "REGISTRABLE SECURITIES" shall mean (i) the
Conversion Shares (including the Conversion Shares issuable upon conversion
of the Preferred Stock underlying the Placement and Advisory Warrants), (ii)
any Exchange Shares and (iii) any shares of BGDC or Pacific Common Stock
issued as (or issuable upon the conversion or exercise of any warrant, right
or other security that is issued as) a dividend or other distribution with
respect to or in replacement of the Preferred Stock or BGDC Common Stock;
provided, however, that securities shall only be treated as Registrable
Securities if and only for so long as they (A) have not been disposed of
pursuant to a registration statement declared effective by the SEC, (B) have
not been sold in a transaction exempt from the registration and prospectus
delivery requirements of the Securities Act so that all transfer restrictions
and restrictive legends with respect thereto are removed upon the
consummation of such sale and (C) are held by a Holder or a permitted
transferee of a Holder pursuant to Section 5.10.
5.2 "PIGGY-BACK" REGISTRATION RIGHTS. Subject to Section 5.7 hereof,
BGDC agrees that if, at any time, and from time to time, after the earliest
to occur of (i) the IPO and (ii) a Trading Event, and ending on the date that
is five (5) years from the Final Closing Date, the Board of Directors of BGDC
shall authorize the filing of a
<PAGE>
registration statement (a "BGDC Registration Statement") under the Securities
Act (other than the initial public offering of the BGDC Common Stock, or
other than a registration statement on Form S-8, Form S-4 or any other form
that does not include substantially the same information as would be required
in a form for the general registration of securities) in connection with the
proposed offer of any of its securities by it or any of its stockholders,
BGDC will (A) promptly notify each holder of Preferred Stock and/or
Conversion Shares that such registration statement will be filed and that the
Conversion Shares then held by such holder of Preferred Stock will be
included in such registration statement at such holder's request, (B) cause
such BGDC Registration Statement to cover all of such Conversion Shares owned
by the holder requesting inclusion, (C) use its reasonable best efforts to
cause such BGDC Registration Statement to become effective as soon as
practicable and (D) take all other action necessary under any Federal or
state law or regulation of any governmental authority to permit all such
Conversion Shares owned by the Holder to be sold or otherwise disposed of,
and will maintain such compliance with each such Federal and state law and
regulation of any governmental authority for the period necessary for the
Holder to effect the proposed sale or other disposition.
Notwithstanding the foregoing, BGDC may at any time, abandon or
delay any BGDC Registration Statement commenced by BGDC. In the event of
such an abandonment by BGDC, BGDC shall not be required to continue
registration of shares requested by the Holder for inclusion and the Holder
shall retain the right to request inclusion of shares as set forth above.
Each Subscriber shall have the right to request inclusion of any of
their Conversion Shares in a registration statement pursuant to this section
5.2(a) up to three times. In the event any BGDC Registration Statement is
stopped or delayed prior to the completion of the distribution contemplated
by said BGDC Registration Statement, then the Holder shall retain the right
to request inclusion of shares as set forth above in subsequent BGDC
Registration Statements.
5.3 PACIFIC REGISTRATION STATEMENT. (a) Pacific agrees that in
the event that the Initial Exchange Right is exercised by holders of more
than 20% of the Preferred Stock then outstanding and elects to pay all or a
portion of the Initial Exchange Price through the issuance of shares of
Initial Exchange Shares, then within 15 days from the expiration of the
Initial Exchange Period, Pacific shall file a shelf-registration statement (a
"Pacific Registration Statement") including the Initial Exchange Shares and
use its best efforts to effect the registration, qualifications or
compliances (including, without limitation, the execution of any required
undertaking to file post-effective amendments, appropriate qualifications or
exemptions under applicable blue sky or other state securities laws and
appropriate compliance with applicable securities laws, requirements or
regulations) as may be so reasonably requested and as would permit or
facilitate the sale and distribution of all of the Initial Exchange Shares
and will maintain such compliance with each such Federal and state law and
regulation of any governmental authority for the period necessary for the
<PAGE>
holder to effect the proposed sale or other disposition. Notwithstanding the
foregoing, the Company will not be obligated to enter into any underwriting
agreement for the sale of any of the Initial Exchange Shares.
(b) Pacific agrees that in the event that the Exchange Right
is exercised, Pacific receives shareholder approval, if necessary, and elects
to pay all or a portion of the Exchange Purchase Price (as defined below)
through the issuance of shares of Pacific Common Stock, Pacific shall file a
Pacific Registration Statement within 15 days from the expiration of the
Exchange Period (as defined below) of the Exchange Date (as defined below)
including the Exchange Shares then held by the Holder and use its best
efforts to effect the registration, qualifications or compliances (including,
without limitation, the execution of any required undertaking to file
post-effective amendments, appropriate qualifications or exemptions under
applicable blue sky or other state securities laws and appropriate compliance
with applicable securities laws, requirements or regulations) as may be so
reasonably requested and as would permit or facilitate the sale and
distribution of all Exchange Shares and will maintain such compliance with
each such Federal and state law and regulation of any governmental authority
for the period necessary for the holder to effect the proposed sale or other
disposition. Notwithstanding the foregoing, Pacific will not be obligated to
enter into any underwriting agreement for the sale of any of the Exchange
Shares.
5.4 OBLIGATIONS OF THE COMPANIES. Whenever required under this Article
V to include Registrable Securities in a registration statement, BGDC or
Pacific, as the case may be, shall, as expeditiously as reasonably possible:
(a) Use its reasonable best efforts to cause any such BGDC
Registration Statement or Pacific Registration Statement to become effective,
and, upon the request of the Holders of a majority of the Registrable
Securities registered thereunder, keep such BGDC Registration Statement or
Pacific Registration Statement effective for a period necessary for the
Subscriber to effect the proposed sale or other distribution contemplated in
the respective registration statement, during the period that such
registration statement is required to be maintained hereunder, file such
post-effective amendments and supplements thereto as may be required by the
Securities Act and the rules and regulations thereunder or otherwise to
ensure that the prospectus included therein does not contain any untrue
statement of material fact or omit to state a fact required to be stated
therein or necessary in order to make the statements contained therein, in
light of the circumstances under which they are made, not misleading;
provided, however, that such period shall be extended for a period of time
equal to the period that the Holder refrains from selling any securities
included in such registration at the request of an underwriter of Common
Stock (or other securities) of BGDC or Pacific, respectively, and provided
further that if applicable rules under the Securities Act governing the
obligation to file a post-effective amendment permits, in lieu of filing a
post-effective amendment that (i) includes any prospectus required by Section
10(a)(3) of the Securities Act or (ii) reflects facts or events representing
a material or fundamental change in the information set forth in the
respective registration statement,
<PAGE>
BGDC or Pacific, as the case may be, may incorporate by reference information
required to be included in (i) and (ii) above to the extent such information
is contained in periodic reports filed pursuant to Section 13 or 15(d) of the
Exchange Act in the registration statement.
(b) Prepare and file with the SEC such amendments and supplements
to such BGDC Registration Statement or Pacific Registration Statement, and
the respective prospectus used in connection with such registration
statement, as may be necessary to comply with the provisions of the
Securities Act with respect to the disposition of all securities covered by
such registration statement.
(c) Furnish to the Holders such numbers of copies of a prospectus,
including a preliminary prospectus as amended or supplemented from time to
time, in conformity with the requirements of the Securities Act, and such
other documents as they may reasonably request in order to facilitate the
disposition of Registrable Securities owned by them.
(d) Use its reasonable best efforts to register and qualify the
securities covered by such BGDC Registration Statement or Pacific
Registration Statement, as applicable, under such other federal or state
securities laws of such jurisdictions as shall be reasonably requested by the
Holders; provided, however, that BGDC or Pacific, as the case may be, shall
not be required in connection therewith or as a condition thereto to qualify
to do business or to file a general consent to service of process in any such
states or jurisdictions, unless BGDC or Pacific, as applicable, is already
subject to service in such jurisdiction and except as may be required by the
Securities Act.
(e) In the event of any underwritten public offering by BGDC,
enter into and perform its obligations under an underwriting agreement, in
usual and customary form, with the managing underwriter of such offering.
Each Holder participating in such underwriting shall also enter into and
perform its obligations under such an agreement.
(f) Notify each Holder of Registrable Securities covered by such
BGDC Registration Statement or Pacific Registration Statement, as applicable,
at any time when a prospectus relating thereto is required to be delivered
under the Securities Act, (i) when the registration statement or any
post-effective amendment and supplement thereto has become effective; (ii) of
the issuance by the SEC of any stop order or the initiation of proceedings
for that purpose (in which event BGDC or Pacific, as the case may be, shall
make every effort to obtain the withdrawal of any order suspending
effectiveness of the registration statement at the earliest possible time or
prevent the entry thereof); of the receipt by BGDC or Pacific, as applicable,
of any notification with respect to the suspension of the qualification of
the Registrable Securities for sale in any jurisdiction or the initiation of
any proceeding for such purpose; and (iv) of the happening of any event as a
result of which the prospectus
<PAGE>
included in such BGDC Registration Statement or Pacific Registration
Statement, as then in effect, includes an untrue statement of a material fact
or omits to state a material fact required to be stated therein or necessary
to make the statements therein not misleading in the light of the
circumstances then existing.
(g) Cause all such Registrable Securities registered pursuant to
section 5.2 and/or 5.3 hereof to be listed on each securities exchange or
quotation service on which similar securities issued by BGDC or Pacific are
then listed or quoted.
(h) Provide a transfer agent and registrar for all Registrable
Securities registered pursuant hereunder and CUSIP number for all such
Registrable Securities, in each case not later than the effective date of
such registration.
5.5 FURNISH INFORMATION. It shall be a condition precedent to the
obligation of each of the Companies to take any action pursuant to this
Article V with respect to the Registrable Securities of any selling Holder
that such Holder shall furnish to each of the Companies such information
regarding the Holder, the Registrable Securities held by the Holder, and the
intended method of disposition of such securities as shall be reasonably
required by each of the Companies to effect the registration of such Holder's
Registrable Securities.
5.6 EXPENSES OF REGISTRATION. BGDC and Pacific shall bear and pay all
expenses incurred in connection with any respective registration, filing or
qualification of Registrable Securities with respect to the registrations
pursuant to Article 5.2 and/or 5.3 for each Holder, including (without
limitation) all registration, filing, and qualification fees, printers and
accounting fees relating or apportionable thereto, but excluding underwriting
discounts and commissions relating to Registrable Securities; provided,
however, that neither of the Companies shall bear the cost of any
professional fees or costs of accounting, financial or legal advisors to any
of the Holders. Notwithstanding the foregoing, each Holder shall pay all
registration expenses that such Holder is required to pay under applicable
law.
5.7 UNDERWRITING REQUIREMENTS. In connection with any offering
involving an underwriting of shares of the capital stock of BGDC, BGDC shall
not be required under Section 5.2 to include any of the Holders' Registrable
Securities in such underwriting unless they accept the terms of the
underwriting as agreed upon between BGDC and the underwriters selected (or by
other persons entitled to select the underwriters), and then only in such
quantity as the underwriters determine in their sole discretion will not
jeopardize the success of the offering by BGDC. If the total amount of
securities, including Registrable Securities, requested by stockholders to be
included in such offering exceeds the amount of securities that, when added
to the amount of securities to be sold on the issuer's behalf, the
underwriters determine in their sole discretion is compatible with the
success of the offering then BGDC shall be required to include in the
offering only that number of such securities, including Registrable
Securities, which the underwriters determine in their sole discretion will
not jeopardize
<PAGE>
the success of the offering (the securities so included to be apportioned pro
rata among the selling stockholders according to the total amount of
securities entitled to be included therein owned by each selling stockholder
or in such other proportions as shall mutually be agreed to by such selling
stockholders, it being understood that BGDC will be entitled to include all
shares it desires to sell on its own behalf in a primary registration without
cutback). For purposes of the preceding parenthetical concerning
apportionment, for any selling stockholder who is a holder of Registrable
Securities and is a partnership or corporation, the partners, retired
partners and stockholders of such holder, or the estates and family members
of any such partners and retired partners and any trusts for the benefit of
any of the foregoing persons shall be deemed to be a single "selling
stockholder", and any pro-rata reduction with respect to such "selling
stockholder" shall be based upon the aggregate amount of shares carrying
registration rights owned by all entities and individuals included in such
"selling stockholder", as defined in this sentence.
5.8 DELAY OF REGISTRATION. No Holder shall have any right to obtain or
seek an injunction restraining or otherwise delaying any such registration as
the result of any controversy that might arise with respect to the
interpretation or implementation of this Article V.
5.9 INDEMNIFICATION. In the event that any Registrable Securities are
included in a registration statement under this Article V:
(a) To the extent permitted by law, BGDC or Pacific, as
applicable, will indemnify and hold harmless each Holder, any underwriter (as
defined in the Securities Act) for such Holder and each person, if any, who
controls such Holder or underwriter within the meaning of the Securities Act
or the Exchange Act, against any losses, claims, damages, or liabilities
(joint or several) to which they may become subject under the Securities Act,
or the Exchange Act, insofar as such losses, claims, damages, or liabilities
(or actions in respect thereof) arise out of or are based upon any of the
following statements, omissions or violations (collectively a "Violation"):
(i) any untrue statement or alleged untrue statement of a material fact
contained in such registration statement, including any preliminary
prospectus or final prospectus contained therein or any amendments or
supplements thereto, (ii) the omission or alleged omission to state therein a
material fact required to be stated therein, or necessary to make the
statements therein not misleading, or (iii) any violation or alleged
violation by BGDC or Pacific, as the case may be, of the Securities Act, the
Exchange Act, or any rule or regulation promulgated under the Securities Act,
or the Exchange Act, and BGDC or Pacific, as the case may be, will pay to
each such Holder, underwriter or controlling person, as incurred, any legal
or other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability, or
action; provided, however, that the indemnity agreement contained in this
Section 5.9(a) shall not apply to amounts paid in settlement of any such
loss, claim, damage, liability, or action if such settlement is effected
without the consent of BGDC or Pacific, as applicable, (which consent shall
not be unreasonably withheld),
<PAGE>
nor shall BGDC or Pacific, as applicable, be liable in any such case for any
such loss, claim, damage, liability, or action to the extent that it arises
out of or is based upon a Violation that occurs in reliance upon and in
conformity with written information furnished expressly for use in connection
with such registration by any such Holder, underwriter or controlling person;
and provided further, that the indemnity contained in this Section 5.9(a)
with respect to any prospectus that shall be subsequently amended prior to
the written confirmation of the sale of any such Registrable Securities shall
not inure to the benefit of any Holder or underwriter or other person from
whom the person asserting any such loss, claim damage or liability purchased
the Registrable Securities that are the subject thereof, if such Holder or
underwriter or other person failed to provide a copy of the prospectus as
amended to such person at or prior to the written confirmation of the sale.
(b) To the extent permitted by law, each selling Holder will
indemnify and hold harmless BGDC or Pacific, as the case may be, each of its
directors, each of its officers who has signed the registration statement,
each person, if any, who controls BGDC or Pacific, as the case may be, within
the meaning of the Securities Act, any underwriter, any other Holder selling
securities in such registration statement and any controlling person of any
such underwriter or other Holder, against any losses, claims, damages, or
liabilities (joint or several) to which any of the foregoing persons may
become subject, under the Securities Act, or the Exchange Act, insofar as
such losses, claims, damages, or liabilities (or actions in respect thereto)
arise out of or are based upon any Violation, in each case to the extent (and
only to the extent) that such Violation occurs in reliance upon and in
conformity with written information furnished by such Holder expressly for
use in connection with such registration; and each such Holder will pay, as
incurred, any legal or other expenses reasonably incurred by any person
intended to be indemnified pursuant to this Section 5.9(b), in connection
with investigating or defending any such loss, claim, damage, liability, or
action; provided, however, that the indemnity agreement contained in this
Section 5.9(b) shall not apply to amounts paid in settlement of any such
loss, claim, damage, liability or action if such settlement is effected
without the consent of the Holder, which consent shall not be unreasonably
withheld; provided, that, in no event shall any indemnity under this Section
5.9(b) exceed the gross proceeds from the offering received by such Holder.
(c) Promptly after receipt by an indemnified party under this
Section 5.9 of notice of the commencement of any action (including any
governmental action), such indemnified party shall, if a claim in respect
thereof is to be made against any indemnifying party under this Article 5.9,
deliver to the indemnifying party a written notice of the commencement
thereof and the indemnifying party shall have the right to participate in,
and, to the extent the indemnifying party so desires, jointly with any other
indemnifying party similarly notified, to assume the defense thereof with
counsel selected by the indemnifying party and approved by the indemnified
party (whose approval shall not be unreasonably withheld); provided, however,
that an indemnified party (together with all other indemnified parties which
may be represented without
<PAGE>
conflict by one counsel) shall have the right to retain one separate counsel,
with the fees and expenses to be paid by the indemnifying party, if
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential
differing interests between such indemnified party and any other party
represented by such counsel in such proceeding. The failure to deliver
written notice to the indemnifying party within a reasonable time of the
commencement of any such action, if prejudicial to its ability to defend such
action, shall relieve such indemnifying party of any liability to the
indemnified party under this Article 5.9, but the omission so to deliver
written notice to the indemnifying party will not relieve it of any liability
that it may have to any indemnified party otherwise than under this Section
5.9.
(d) If the indemnification provided for in this Section 5.9 is
held by a court of competent jurisdiction to be unavailable to an indemnified
party with respect to any loss, liability, claim, damage, or expense referred
to therein, then the indemnifying party, in lieu of indemnifying such
indemnified party hereunder, shall contribute to the amount paid or payable
by such indemnified party as a result of such loss, liability, claim, damage,
or expense in such proportion as is appropriate to reflect the relative fault
of the indemnifying party on the one hand and of the indemnified party on the
other in connection with the statements or omissions that resulted in such
loss, liability, claim, damage, or expense as well as any other relevant
equitable considerations. The relative fault of the indemnifying party and
of the indemnified party shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or
the omission to state a material fact relates to information supplied by the
indemnifying party or by the indemnified party and the parties' relative
intent, knowledge, access to information, and opportunity to correct or
prevent such statement or omission.
(e) Notwithstanding the foregoing, to the extent that the
provisions on indemnification and contribution contained in the underwriting
agreement entered into in connection with the underwritten public offering
are in conflict with the foregoing provisions, the provisions in the
underwriting agreement shall control.
(f) The obligations of BGDC or Pacific, as applicable, and Holders
under this Section 5.9 shall survive the completion of any offering of
Registrable Securities in a registration statement under this Article V, and
otherwise.
5.10 REPORTS UNDER SECURITIES EXCHANGE ACT OF 1934. With a view towards
making available to the Holders the benefits of Rule 144 and any other rule
or regulation of the SEC that may at any time permit a Holder to sell
securities of BGDC or Pacific, as the case may be, to the public without
registration, each of the Companies agrees to:
(a) make and keep public information available, as those terms are
understood and defined in Rule 144, at all times in the case of Pacific and
at all times
<PAGE>
from the effective date of the registration statement filed in connection
with an IPO of BGDC Common Stock;
(b) file with the SEC in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange
Act; and
(c) furnish to any Holder, so long as the Holder owns any
Registrable Securities, forthwith upon request (i) a copy of the most recent
annual or quarterly report of the BGDC or Pacific, as the case may be, and
such other reports and documents so filed by the BGDC or Pacific, as the case
may be, and (ii) such other information as may be reasonably requested in
availing any Holder of any rule or regulation of the SEC which permits the
selling of any such securities without registration or pursuant to such form.
5.11 PERMITTED TRANSFEREES. The rights to cause BGDC and Pacific to
register Registrable Securities granted to the Holders by BGDC and Pacific
under this Article V may be assigned in full by a Holder in connection with a
transfer by such Holder of its Registrable Securities if: (a) such Holder
gives prior written notice to BGDC or Pacific, as applicable; (b) such
transferee agrees to comply with the terms and provisions of this Agreement;
(c) such transfer is otherwise in compliance with this Agreement and (d) such
transfer is otherwise effected in accordance with applicable securities laws.
Except as specifically permitted by this Section 5.11, the rights of a Holder
with respect to Registrable Securities as set out herein shall not be
transferable to any other person, and any attempted transfer shall cause all
rights of such Holder therein to be forfeited.
5.12 TERMINATION OF REGISTRATION RIGHTS. In addition, the right of any
Holder to request inclusion in any registration pursuant to Section 5.2
and/or 5.3 shall terminate if all shares of Registrable Securities held by
such Holder may immediately be sold under Rule 144.
VI. ADDITIONAL CONTRACTUAL RIGHT
6.1 INITIAL EXCHANGE RIGHT. (a) To the extent that any shares of
Preferred Stock are outstanding on the date that is one year following the
Final Closing Date (the "Initial Exchange Date"), then for the 60-day period
thereafter (the "Initial Exchange Period"), the holders of Preferred Stock
will have the right (the "Initial Exchange Right") to put their shares of
Preferred Stock, if any, to Pacific for $2.00 per share (subject to
adjustments for stock splits dividends and other similar adjustments) (the
"Initial Exchange Price").
(b) The Initial Exchange Price may be paid in cash, Pacific Common
Stock or any combination thereof, at Pacific's sole discretion, within 60
days after the exercise of the Initial Exchange Right. If necessary, Pacific
will seek shareholder
<PAGE>
approval for the use of Pacific Common Stock at its next annual meeting of
stockholders.
(c) In the event that Pacific elects to pay the Initial Exchange
Price in shares of Pacific Common Stock (the "Initial Exchange Shares"), the
number of shares of Pacific Common Stock to be delivered will be determined
by dividing (a) that portion of the Initial Exchange Price to be paid in
Pacific Common Stock by (b) the average closing price of the Pacific Common
Stock for the 30 consecutive trading days immediately preceding the Initial
Exchange Date on the principal national securities exchange on which the
Pacific Common Stock is admitted to trading or listed, or if not listed or
admitted to trading on any such exchange, the closing bid price of the
Pacific Common Stock as reported by the NASDAQ, or other similar organization
if NASDAQ is no longer reporting such information, or, if the Pacific Common
Stock is not reported on NASDAQ, the closing bid price for the Pacific Common
Stock in the over-the-counter market as reported by the National Quotation
Bureau or similar organization, or if not so available, the fair market value
of the Pacific Common Stock as determined in good faith between the Board of
Directors of Pacific and the holders of a majority of the Preferred Stock
then outstanding.
(d) In addition, in order for the holders of Preferred Stock to
exercise the Initial Exchange Right, each such holder will be required to
represent to Pacific that, at the time of such exercise, it is an "accredited
investor" as that term is defined in Regulation D under the Securities Act.
6.2 EXCHANGE RIGHT. (a) To the extent that any shares of Preferred
Stock are outstanding on the date that is two years following the Final
Closing Date (the "Exchange Date"), then for the 60-day period thereafter
(the "Exchange Period"), the holders of Preferred Stock will have the right
(the "Exchange Right") to put their shares of Preferred Stock, if any, to
Pacific for $3.99 per share (subject to adjustments for stock splits,
dividends and other similar adjustments) (the "Exchange Purchase Price").
(b) The Exchange Purchase Price may be paid in cash, Pacific
Common Stock (subject to shareholder approval, if necessary) or any
combination thereof, at Pacific's sole discretion, generally within 60 days
after the exercise of the Exchange Right.
(c) In the event that Pacific elects to pay the Exchange Purchase
Price in shares of Pacific Common Stock ("Exchange Shares"), the number of
Exchange Shares to be delivered will be determined by dividing (a) that
portion of the Exchange Purchase Price to be paid in Exchange Shares by (b)
the average closing price of the Pacific Common Stock for the 30 consecutive
trading days immediately preceding the Exchange Date on the principal
national securities exchange on which the Pacific Common Stock is admitted to
trading or listed, or if not listed or admitted to trading on any such
exchange, the closing bid price of the Pacific Common Stock as
<PAGE>
reported by the NASDAQ, or other similar organization if NASDAQ is no longer
reporting such information, or, if the Pacific Common Stock is not reported
on NASDAQ, the closing bid price for the Pacific Common Stock in the
over-the-counter market as reported by the National Quotation Bureau or
similar organization, or if not so available, the fair market value of the
Pacific Common Stock as determined in good faith between the Board of
Directors of Pacific and the holders of a majority of the Preferred Stock
then outstanding.
(d) In addition, in order for the holders of Preferred Stock to
exercise the Exchange Right, each such holder will be required to represent
to Pacific that, at the time of such exercise, it is an "accredited investor"
as that term is defined in Regulation D under the Securities Act.
VII. MISCELLANEOUS
7.1 Any notice or other communication given hereunder shall be
deemed sufficient if in writing and sent by registered or certified mail,
return receipt requested, or delivered by hand against written receipt
therefor, addressed to: B-G Development Corporation and/or Pacific
Pharmaceuticals, Inc., 6730 Mesa Ridge Road, San Diego, CA, 92121, Attn: Dr.
H. Laurence Shaw, with a copy to c/o Paramount Capital, Inc., 787 Seventh
Avenue, 48th Floor, New York, New York 10019, Attn: Michael S. Weiss, and to
the Subscriber at the Subscriber's address indicated on the signature page of
this Agreement. Notices shall be deemed to have been given or delivered on
the date of mailing, except notices of change of address, which shall be
deemed to have been given or delivered when received.
7.2 Except as otherwise provided herein, this Agreement shall not
be changed, modified or amended except by a writing signed by the parties to
be charged, and this Agreement may not be discharged except by performance in
accordance with its terms or by a writing signed by the party to be charged.
7.3 Subject to the provisions of Section 5.11, this Agreement
shall be binding upon and inure to the benefit of the parties hereto and to
their respective heirs, legal representatives, successors and assigns. This
Agreement sets forth the entire agreement and understanding between the
parties as to the subject matter hereof and merges and supersedes all prior
discussions, agreements and understandings of any and every nature among them.
7.4 Upon the execution and delivery of this Agreement by the
Subscriber, this Agreement shall become a binding obligation of the
Subscriber with respect to the purchase of Units as herein provided, subject,
however, to the right hereby reserved by BGDC and Pacific to enter into the
same agreements with other subscribers and to add and/or delete other persons
as subscribers.
<PAGE>
7.5 NOTWITHSTANDING THE PLACE WHERE THIS AGREEMENT MAY BE EXECUTED
BY ANY OF THE PARTIES HERETO, THE PARTIES EXPRESSLY AGREE THAT ALL THE TERMS
AND PROVISIONS HEREOF SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY
THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES OF CONFLICTS
OF LAW. IN THE EVENT THAT A JUDICIAL PROCEEDING IS NECESSARY, THE SOLE FORUM
FOR RESOLVING DISPUTES ARISING OUT OF OR RELATING TO THIS AGREEMENT IS THE
SUPREME COURT OF THE STATE OF NEW YORK IN AND FOR THE COUNTY OF NEW YORK OR
THE FEDERAL COURTS FOR SUCH STATE AND COUNTY, AND ALL RELATED APPELLATE
COURTS, THE PARTIES HEREBY IRREVOCABLY CONSENT TO THE JURISDICTION OF SUCH
COURTS AND AGREE TO SAID VENUE.
7.6 In order to discourage frivolous claims the parties agree that
unless a claimant in any proceeding arising out of this Agreement succeeds in
establishing his claim and recovering a judgment against another party
(regardless of whether such claimant succeeds against one of the other
parties to the action), then the other party shall be entitled to recover
from such claimant all of its/their reasonable legal costs and expenses
relating to such proceeding and/or incurred in preparation therefor.
7.7 The holding of any provision of this Agreement to be invalid
or unenforceable by a court of competent jurisdiction shall not affect any
other provision of this Agreement, which shall remain in full force and
effect. If any provision of this Agreement shall be declared by a court of
competent jurisdiction to be invalid, illegal or incapable of being enforced
in whole or in part, such provision shall be interpreted so as to remain
enforceable to the maximum extent permissible consistent with applicable law
and the remaining conditions and provisions or portions thereof shall
nevertheless remain in full force and effect and enforceable to the extent
they are valid, legal and enforceable, and no provisions shall be deemed
dependent upon any other covenant or provision unless so expressed herein.
7.8 It is agreed that a waiver by either party of a breach of any
provision of this Agreement shall not operate, or be construed, as a waiver
of any subsequent breach by that same party.
7.9 The parties agree to execute and deliver all such further
documents, agreements and instruments and take such other and further action
as may be necessary or appropriate to carry out the purposes and intent of
this Agreement.
7.10 This Agreement may be executed in two or more counterparts
each of which shall be deemed an original, but all of which shall together
constitute one and the same instrument.
7.12 Nothing in this Agreement shall create or be deemed to create
any rights in any person or entity not a party to this Agreement, except (a)
for the holders of Registrable Securities and (b) for the Placement Agent
pursuant to Sections 1.6(a) and 2.11 hereof.
<PAGE>
EXHIBIT 10.42
VIII CONFIDENTIAL INVESTOR QUESTIONNAIRE
8.1 The Subscriber represents and warrants that he, she or it
comes within one category marked below, and that for any category marked, he,
she or it has truthfully set forth, where applicable, the factual basis or
reason the Subscriber comes within that category. ALL INFORMATION IN
RESPONSE TO THIS SECTION WILL BE KEPT STRICTLY CONFIDENTIAL. The undersigned
agrees to furnish any additional information which the Company deems
necessary in order to verify the answers set forth below.
Category A _____ The undersigned is an individual (not a partnership,
corporation, etc.) whose individual net worth, or joint net
worth with his or her spouse, presently exceeds $1,000,000.
Explanation. In calculating net worth you may
include equity in personal property and real
estate, including your principal residence, cash,
short-term investments, stock and securities.
Equity in personal property and real estate should
be based on the fair market value of such property
less debt secured by such property.
Category B _____ The undersigned is an individual (not a partnership,
corporation, etc.) who had an individual income in excess of
$200,000 in each of the two most recent years, or joint
income with his or her spouse in excess of $300,000 in each
of those years (in each case including foreign income, tax
exempt income and full amount of capital gains and losses
but excluding any income of other family members and any
unrealized capital appreciation) and has a reasonable
expectation of reaching the same income level in the current
year.
Category C _____ The undersigned is a director or executive officer of the
Company which is issuing and selling the Units.
Category D _____ The undersigned is a bank; a savings and loan association;
insurance company; registered investment company; registered
business development company; licensed small business
investment company ("SBIC"); or employee benefit plan within
the meaning of Title 1 of ERISA and (a) the investment
decision is made by a plan fiduciary which is either a bank,
savings and loan association, insurance company or
registered investment advisor, or (b) the plan has total
assets in excess of $5,000,000 or is a self
25
<PAGE>
directed plan with investment decisions made solely by
persons that are accredited investors.
- ---------------------------------
(describe entity)
Category E _____ The undersigned is a private business development company as
defined in section 202(a)(22) of the Investment Advisors Act
of 1940.
- ---------------------------------
(describe entity)
Category F _____ The undersigned is either a corporation, partnership,
Massachusetts business trust, or non-profit organization
within the meaning of Section 501(c)(3) of the Internal
Revenue Code, in each case not formed for the specific
purpose of acquiring the Units and with total assets in
excess of $5,000,000.
- ---------------------------------
(describe entity)
Category G _____ The undersigned is a trust with total assets in excess of
$5,000,000, not formed for the specific purpose of acquiring
the Units, where the purchase is directed by a
"sophisticated person" as defined in Regulation
506(b)(2)(ii) under the Securities Act.
Category H _____ The undersigned is an entity (other than a trust) all the
equity owners of which are "accredited investors" within one
or more of the above categories. If relying upon this
Category alone, each equity owner must complete a separate
copy of this Agreement.
- ---------------------------------
(describe entity)
Category I _____ The undersigned is not within any of the categories above
and is therefore not an accredited investor.
The undersigned agrees that the undersigned will notify the Company at any time
on or prior to the Final Closing Date in the event that the representations and
warranties in this Agreement shall cease to be true, accurate and complete.
<PAGE>
8.2 SUITABILITY (please answer each question)
(a) For an individual Subscriber, please describe your current employment,
including the company by which you are employed and its principal business:
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(b) For an individual Subscriber, please describe any college or graduate
degrees held by you:
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(c) For all Subscribers, please list types of prior investments:
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(d) For all Subscribers, please state whether you have participated in other
PRIVATE PLACEMENTS before:
YES_______ NO_______
(e) If your answer to question (d) above was "YES", please indicate frequency of
such prior participation in PRIVATE PLACEMENTS of:
Public Private Public or Private
Companies Companies Biotechnology Companies
--------- --------- -----------------------
Frequently _________________________________
Occasionally _________________________________
Never _________________________________
(f) For individual Subscribers, do you expect your current level of income to
significantly decrease in the foreseeable future:
<PAGE>
YES_______ NO_______
(g) For trust, corporate, partnership and other institutional Subscribers,
do you expect your total assets to significantly decrease in the foreseeable
future:
YES_______ NO_______
(h) For all Subscribers, do you have any other investments or contingent
liabilities which you reasonably anticipate could cause you to need sudden
cash requirements in excess of cash readily available to you:
YES_______ NO_______
(i) For all Subscribers, are you familiar with the risk aspects and the
non-liquidity of investments such as the securities for which you seek to
subscribe?
YES_______ NO_______
(j) For all Subscribers, do you understand that there is no guarantee of
financial return on this investment and that you run the risk of losing your
entire investment?
YES_______ NO_______
8.3 MANNER IN WHICH TITLE IS TO BE HELD. (circle one)
(a) Individual Ownership
(b) Community Property
(c) Joint Tenant with Right of
Survivorship (both parties
must sign)
(d) Partnership*
(e) Tenants in Common
(f) Company*
(g) Trust*
(h) Other
*If Units are being subscribed for by an entity, the attached
Certificate of Signatory must also be completed.
<PAGE>
8.4 NASD AFFILIATION.
Are you affiliated or associated with an NASD member firm (please check one):
Yes _________ No __________
If Yes, please describe:
_________________________________________________________
_________________________________________________________
_________________________________________________________
*If Subscriber is a Registered Representative with an NASD member firm, have
the following acknowledgment signed by the appropriate party:
The undersigned NASD member firm acknowledges receipt of the notice required
by Article 3, Sections 28(a) and (b) of the Rules of Fair Practice.
_________________________________
Name of NASD Member Firm
By: ______________________________
Authorized Officer
Date: ____________________________
8.5 The undersigned is informed of the significance to the
Companies of the foregoing representations and answers contained in the
Confidential Investor Questionnaire contained in this Section 8 and such
answers have been provided under the assumption that the Companies will rely
on them.
<PAGE>
EXHIBIT 10.42
[SIGNATURE PAGE]
NUMBER OF UNITS _________ X $100,000 = __________ (THE "PURCHASE PRICE")
Signature Signature (if purchasing jointly)
Name Typed or Printed Name Typed or Printed
Entity Name Entity Name
Address Address
City, State and Zip Code City, State and Zip Code
Telephone-Business Telephone--Business
Telephone-Residence Telephone--Residence
Facsimile-Business Facsimile--Business
Facsimile-Residence Facsimile--Residence
Tax ID # or Social Security # Tax ID # or Social Security #
Name in which securities should be issued:
CHECK THE BOX MARKED YES IF YOU WOULD LIKE THE SECURITIES
TO BE DELIVERED TO YOUR ACCOUNT WITH PARAMOUNT CAPITAL, INC. YES ___ NO ___
(IF YOU CHECK "NO", SECURITIES WILL BE DELIVERED TO YOU AT THE ADDRESS
PROVIDED ABOVE)
Dated: , 1998
This Subscription Agreement is agreed to and accepted as of
___________________________ , 1998.
B-G DEVELOPMENT CORPORATION PACIFIC PHARMACEUTICALS, INC.
By: /s/ Dr. H. Laurence Shaw By: /s/ Dr. H. Laurence Shaw
------------------------------ ------------------------------
Name: Dr. H. Laurence Shaw Name: Dr. H. Laurence Shaw
Title: Chief Executive Officer Title: Chief Executive Officer
31
<PAGE>
CERTIFICATE OF SIGNATORY
(To be completed if Units are
being subscribed for by an entity)
I,______________________________, am the______________________________
of _____________________________________________ (the "Entity").
I certify that I am empowered and duly authorized by the Entity to
execute and carry out the terms of the Subscription Agreement and to purchase
and hold the Units, and certify further that the Subscription Agreement has
been duly and validly executed on behalf of the Entity and constitutes a
legal and binding obligation of the Entity.
IN WITNESS WHEREOF, I have set my hand this________day of
_________________, 1998.
_______________________________________
(Signature)
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in 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 No. 33-40630,
Amendment No. 2 to Registration Statement No. 33-30853, Amendment No. 1 to
Registration Statement No. 33-70006, and Registration Statement No. 333-26109
on Form S-3 of Pacific Pharmaceuticals (formerly Xytronyx, Inc.) and
Subsidiaries (collectively, the "Company", a development stage enterprise) of
our report dated July 8, 1998 (which expresses an unqualified opinion and
includes an explanatory paragraph referring to the Company's activities as
those of a development stage enterprise and an explanatory paragraph
referring to the restatement of the fiscal 1997 financial statements),
appearing in this Annual Report on Form 10-K of the Company for the year
ended March 31, 1998.
DELOITTE & TOUCHE LLP
San Diego, California
July 10, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE FINANCIAL STATEMENTS FOR THE YEAR
ENDED MARCH 31, 1998.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 3,290,176
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 38,637
<CURRENT-ASSETS> 3,413,866
<PP&E> 789,827
<DEPRECIATION> (553,006)
<TOTAL-ASSETS> 3,590,687
<CURRENT-LIABILITIES> 866,562
<BONDS> 22,584
0
1,002,288
<COMMON> 215,545
<OTHER-SE> 1,483,708
<TOTAL-LIABILITY-AND-EQUITY> 3,590,687
<SALES> 69,510
<TOTAL-REVENUES> 348,460
<CGS> 140,460
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,579,463
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,371,463)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,371,463)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 7,226,887<F1>
<NET-INCOME> (11,598,350)
<EPS-PRIMARY> (1.25)
<EPS-DILUTED> (1.25)
<FN>
<F1>INCLUDES CONVERTIBLE PREFERRED STOCK DIVIDENDS.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AMENEDED
DECEMBER 31, 1991 INTERIM FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,932,616
<SECURITIES> 0
<RECEIVABLES> 2,615
<ALLOWANCES> 0
<INVENTORY> 72,195
<CURRENT-ASSETS> 3,282,312
<PP&E> 803,223
<DEPRECIATION> (700,641)
<TOTAL-ASSETS> 3,550,698
<CURRENT-LIABILITIES> 1,657,508
<BONDS> 14,267
0
418,125
<COMMON> 162,646
<OTHER-SE> 1,298,152
<TOTAL-LIABILITY-AND-EQUITY> 3,550,698
<SALES> 20,991
<TOTAL-REVENUES> 86,122
<CGS> 50,810
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,772,293
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 50,393
<INCOME-PRETAX> (2,700,651)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,700,651)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 231,376<F1>
<NET-INCOME> (2,932,027)
<EPS-PRIMARY> (.36)
<EPS-DILUTED> (.36)
<FN>
<F1>INCLUDES CONVERTIBLE PREFERRED STOCK DIVIDENDS
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AMENDED
MARCH 31, 1997 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-03-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 1,784,599
<SECURITIES> 4,981,435
<RECEIVABLES> 99,066
<ALLOWANCES> 0
<INVENTORY> 41,677
<CURRENT-ASSETS> 6,994,088
<PP&E> 518,904
<DEPRECIATION> (436,341)
<TOTAL-ASSETS> 7,234,248
<CURRENT-LIABILITIES> 889,767
<BONDS> 13,072
0
1,250,038
<COMMON> 162,021
<OTHER-SE> 4,918,350
<TOTAL-LIABILITY-AND-EQUITY> 7,234,248
<SALES> 100,485
<TOTAL-REVENUES> 275,180
<CGS> 95,200
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,565,664
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 65,564
<INCOME-PRETAX> (3,897,366)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,897,366)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 1,696,211<F1>
<NET-INCOME> (5,593,577)
<EPS-PRIMARY> (0.69)
<EPS-DILUTED> (0.69)
<FN>
<F1> INCLUDES CONVERTIBLE PREFERRED STOCK DIVIDENDS.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINACIAL INFORMATION EXTRACTED FROM THE RESTATED
JUNE 30, 1997, DECEMBER 31, 1997, AND SEPTEMBER 30, 1997 FINANCIAL STATEMENTS
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS 6-MOS
<FISCAL-YEAR-END> MAR-31-1998 MAR-31-1998 MAR-31-1998
<PERIOD-START> APR-01-1997 APR-01-1997 APR-01-1997
<PERIOD-END> JUN-30-1997 DEC-31-1997 SEP-30-1997
<CASH> 475,471 416,942 1,406,511
<SECURITIES> 4,986,064 3,496,647 3,493,220
<RECEIVABLES> 372,308 75,070 14,187
<ALLOWANCES> 0 0 0
<INVENTORY> 42,403 38,637 69,572
<CURRENT-ASSETS> 6,097,807 4,134,918 5,144,871
<PP&E> 685,422 289,003 285,141
<DEPRECIATION> (508,028) (210,010) (201,954)
<TOTAL-ASSETS> 6,275,201 4,340,664 5,352,869
<CURRENT-LIABILITIES> 745,753 489,960 761,769
<BONDS> 11,813 23,593 24,666
0 0 0
1,250,038 1,040,188 1,102,988
<COMMON> 163,846 206,422 194,654
<OTHER-SE> 4,103,751 2,580,501 3,268,792
<TOTAL-LIABILITY-AND-EQUITY> 6,275,201 4,340,664 5,232,869
<SALES> 700 69,510 700
<TOTAL-REVENUES> 101,283 294,671 166,546
<CGS> 14,002 122,762 35,321
<TOTAL-COSTS> 0 0 0
<OTHER-EXPENSES> 1,002,730 3,443,733 2,396,875
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 0 0 0
<INCOME-PRETAX> (935,449) (3,149,057) (2,265,650)
<INCOME-TAX> 0 0 0
<INCOME-CONTINUING> (935,449) (3,149,057) (2,265,650)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 1,815,050<F1> 4,360,128<F1> 3,427,958<F1>
<NET-INCOME> (2,750,499) (7,509,185) (5,693,608)
<EPS-PRIMARY> (0.34) (0.84) (0.68)
<EPS-DILUTED> (0.34) (0.84) (0.68)
<FN>
<F1>INCLUDES CONVERTIBLE PREFERRED STOCK DIVIDENDS.
</FN>
</TABLE>
