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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO ___________
COMMISSION FILE NO. 0-19591
EPIMMUNE INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 33-0245076
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION
NO.)
5820 NANCY RIDGE DRIVE, SAN DIEGO, CALIFORNIA 92121
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (858) 860-2500
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing 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 (Section 229.405 of this chapter) 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 Registrant's Common Stock held by
non-affiliates of the Registrant as of March 15, 2000 was approximately $77.0
million, based on the closing price on that date of Common Stock on the Nasdaq
National Stock Market.*
The number of shares outstanding of the Registrant's Common Stock, $.01
par value, was 7,323,988 as of March 15, 2000.
-------------------------------
* Excludes 2,276,069 shares of Common Stock held by directors and officers and
stockholders whose beneficial ownership exceeds 10% of the Common Stock
outstanding on March 15, 2000. Exclusion of shares held by any person should
not be construed to indicate that such person possesses the power, direct or
indirect, to direct or cause the direction of the management or policies of the
Registrant, or that such person is controlled by or under common control with
the Registrant.
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PART I
ITEM 1. BUSINESS
Except for the historical information contained herein, the following discussion
contains forward-looking statements that involve risks and uncertainties. Our
actual results could differ materially from those discussed here. Factors that
could cause or contribute to such differences include, without limitation, those
discussed in the description of our business below and the sections entitled
"Risk Factors" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations," as well as those discussed in any documents
incorporated herein by reference.
Unless otherwise indicated, all references to "Cytel" are to Cytel Corporation.
Epimmune Inc. was a majority-owned subsidiary of Cytel until July 1, 1999, at
which time Cytel and Epimmune Inc. merged. All references to "we," "us" or "our
company" are to the combined entity of Cytel and Epimmune Inc.
Epimmune(TM), EIS(TM), EpiGene(TM) and PADRE(TM) are trademarks of the Company.
GENERAL
We are developing novel vaccines for infectious diseases and cancer, building on
our expertise and intellectual property in the field of T-cell recognition and
activation. In the cancer field, we are collaborating with G.D. Searle & Co., a
wholly-owned subsidiary of Monsanto Co., to develop immune stimulating products
for the treatment of breast, colon, lung and prostate cancers. Our first product
candidate, which targets breast, colon and lung cancers, is due to enter human
clinical trials by the end of 2000. We are also in preclinical development with
therapeutic vaccines for hepatitis C, hepatitis B and HIV, and prophylactic
vaccines for hepatitis C, HIV and malaria.
Eliciting a strong cellular (T cell) immune response is crucial for treating and
preventing certain infectious diseases and tumors. Clinicians have shown that
the cellular immune response is associated with viral clearance and tumor
regression in the subset of patients who spontaneously clear chronic viral
infection and in cancer patients who respond to immunotherapy. This successful
cellular immune response includes cytotoxic T cells (CTL) and helper T cells
(HTL) which are directed toward specific antigen fragments, known as epitopes.
Our vaccines are based on proprietary technology, known as EIS(TM), which
enables the rapid identification of novel epitopes that can stimulate specific
CTL and HTL immune responses. These epitopes can be identified from any protein
or gene sequence and, to date, we have identified, evaluated and included in our
patent applications more than 10,000 such epitopes, and a small subset of these
epitopes are used in our candidate vaccines. Furthermore, EIS enables rapid
immunological evaluation of the vast quantities of genomic data generated,
making feasible the development of new vaccine candidates for such complex
diseases as tuberculosis, malaria, herpes simplex virus and chlamydia.
The use of epitopes in vaccine development offers several distinct advantages
over traditional vaccine approaches.
- - First, the epitopes are selected from conserved regions of viral or
tumor-associated antigens, reducing the likelihood of escape mutants. When
using whole antigens, there is evidence that the immune response is directed
largely toward variable regions of the antigen, allowing immune escape due
to mutations.
- - Second, the ability to combine selected epitopes (CTL and HTL) and to alter
their composition to enhance immunogenicity allows for manipulation of the
immune response, as appropriate, for the target disease. Similar engineering
of the response is not possible with traditional approaches.
- - Third, a major benefit of epitope-based, immune-stimulating vaccines is
their safety. The possible pathological side effects caused by infectious
agents or whole protein antigens, which might have their own intrinsic
biological activity, is eliminated.
- - Finally, in order to develop the most effective vaccines, multiple antigens
should be targeted. Combining multiple epitopes into a single vaccine offers
a simple alternative to traditional complex vaccines and enables the design
of a well-characterized product, which contains minimal extraneous
biological material.
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Based on our scientists' discoveries in the field, we believe we have
established a broad intellectual property position directed toward the methods
of epitope identification, epitope compositions and epitope uses in vaccines and
diagnostics products. Our scientists' research dates back more than ten years,
with Cytel's founding in 1987. Epimmune was formed in October 1997, as a
subsidiary of Cytel, to develop novel vaccines for the treatment and prevention
of infectious diseases and cancer. On July 1, 1999, Cytel and Epimmune merged.
Our core business is the development of vaccines to treat and prevent infectious
diseases and cancer. All non-vaccine operations of Cytel have been sold or
discontinued.
THE IMMUNE RESPONSE - GENERAL BACKGROUND
The immune system is the body's natural defense mechanism to prevent and combat
disease. The immune system differentiates between normal tissue, or "self,"
versus diseased tissue or "non-self." When a competent immune system recognizes
diseased cells, a series of steps ensues resulting in the elimination of these
cells. There are two types of immune response: antibody-based and cellular or T
cell-based.
The antibody immune response is primarily involved in the prevention of
diseases. Antibodies are proteins produced by the body in response to disease
causing agents known as pathogens. Antibodies bind to pathogens, including
viruses and bacteria, and block their ability to infect cells. Preventive
vaccines that trigger an antibody-based immune response have been very
successful in reducing the incidence of several deadly diseases, including
smallpox, polio and measles. These vaccines consist of weakened or attenuated
pathogens that stimulate the production of antibodies. However, these types of
vaccines have not been effective in the prevention or treatment of many serious
diseases, including cancer, hepatitis, HIV, herpes, tuberculosis and malaria.
The cellular, or T cell-based, immune response, on the other hand, is primarily
involved in combating diseases, such as cancers or infections. T cells are
specialized white blood cells that are normally produced by the body to kill
cancer cells and infected cells. The cellular immune response begins when
specialized immune cells called antigen presenting cells capture antigens, which
are identifying structural components of cancers and pathogens. Once inside
antigen presenting cells, antigens are broken down into small fragments, called
epitopes, that are subsequently displayed on the surface of the antigen
presenting cell. T cells continually scan the surface of antigen presenting
cells for epitopes bound to a cell surface receptor. If T cells recognize
displayed epitopes as foreign or non-self, they replicate rapidly and then
search for and kill other diseased cells displaying those same epitopes.
Significant scientific evidence suggests that cancers and infections trigger a T
cell-based immune response during the initial course of disease progression.
This immune response, however, is often not sufficient to eradicate the disease.
In individuals who do spontaneously clear chronic viral infection, and in cancer
patients who respond to immunotherapy, the effective cellular immune response
has been analyzed. This effective cellular response is comprised of activated
cytotoxic T cells (CTL) and helper T cells (HTL) which are directed toward
multiple discrete and specific antigen-specific epitopes. Recreating this
successful "multi-specific" CTL and HTL response is the vaccine objective.
To date, efforts to develop vaccines that sufficiently stimulate these
multi-specific T cells responses to selectively and accurately target and kill
diseased cells have failed due to one or both of the following:
- - the inability of drug developers to identify the appropriate antigens that
can induce the appropriate immune response
- - the inability to present these relevant antigens to activate potent enough T
cell responses or broad enough responses to selectively destroy diseased
cells.
We believe our technology and vaccine candidates specifically address these
issues.
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OUR TECHNOLOGY AND VACCINE DEVELOPMENT PLATFORMS
T cell Vaccines.
Our approach to T cell vaccine development is to create rationally a
multi-specific cellular response, causing the immune system to be stimulated
specifically against multiple, select epitopes, which meet stringent criteria.
Accordingly, we have developed our EIS to rapidly identify these
antigen-specific epitopes from the genetic information of tumor-associated
antigens or infectious agents (viruses, bacteria and parasites).
Epitope Identification System (EIS(TM)). Our EIS was developed and optimized by
our scientists based on extensive work over the past ten years in the field of T
cell recognition and stimulation. We own and license patent applications that
cover the methods employed by EIS, as well as the epitope compositions which
result from its use. With the genetic sequence of a tumor-associated antigen,
virus, bacteria or parasite as input, we use EIS to perform the following
analysis to rapidly identify the antigen-specific epitopes which meet
pre-determined criteria for conservancy, binding, population coverage and
immunogenicity.
- - We use computer algorithms to analyze the sequence of all known antigens
associated with the target indication for the presence of peptides which
contain epitope motifs and meet sequence conservancy requirements (epitopes
from variable regions of the antigen are avoided).
- - We synthesize peptides meeting the requirements of the computer screen and
perform in vitro HLA binding assays.
- - We evaluate peptides for superfamily binding (assessing their ability to
bind broadly within a family of HLA molecules). We identify epitopes, which
bind broadly within three superfamilies enabling broad population coverage
for the ultimate vaccine.
- - We then test peptides for immunogenicity, both in vivo in transgenic mice
which express human MHC and in vitro against infected or transfected cells.
Using EIS, we have already identified epitopes for a number of indications,
including breast, lung, colon and prostate cancers, as well as hepatitis C,
hepatitis B, human papilloma virus, HIV and malaria. The identified epitopes
include CTL epitopes that bind MHC Class I and are recognized by cytotoxic T
cells, and HTL epitopes that bind MHC Class II and are recognized by helper T
cells.
EpiGene(TM) Vaccines. Our candidate vaccines for each cancer and infectious
disease indication are comprised of the particular epitopes that can stimulate
the exact T cells needed to combat these specific viruses or cancers. Epitopes
for a target indication are selected using EIS and then combined to form an
EpiGene, a genetic (DNA) string of select epitopes from several antigens. In
animal models, EpiGene vaccines have elicited strong multi-specific T cell
responses that are both stronger and broader than the responses generated by a
"traditional" whole gene DNA vaccine.
We expect the first of our candidate vaccines to enter human clinical trials
will be a vaccine targeting breast, lung, and colon cancers. The vaccine
incorporates multiple CTL epitopes from four tumor associated antigens and
PADRE. We expect initial clinical studies, being conducted by our partner in the
cancer field, Searle, to be initiated by the end of 2000.
We are advancing EpiGene candidate vaccines for HCV and HIV in preclinical
development. To be effective in treating or preventing HCV and HIV, vaccines
must target multiple strains of the virus and must induce T cells directed to
conserved viral regional; otherwise, the virus will be able to mutate and escape
the immune system's attack. Our candidate vaccines incorporate epitopes which
are selected from highly conserved regions of the virus and from multiple viral
proteins.
Antibody Based Vaccines.
We are evaluating several antibody vaccine opportunities internally and in
collaboration with others. The vaccines being considered target cancers,
neurological diseases, bacteria and atherosclerosis. All of these vaccine
opportunities incorporate our PADRE technology with one or more target antigens.
The PADRE technology consists of a family of small (13 amino acid), synthetic
proprietary molecules that are potent immunostimulants. When combined with
disease-specific antigens, PADRE induces important "co-stimulatory" signals that
potentiate the antigen-specific immune response, driving the production of
long-lived, high-affinity IgG antibodies. We believe that PADRE offers several
advantages over proteins traditionally used to make antibody
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based conjugate vaccines:
- - PADRE can be easily synthesized and readily characterized when linked to the
antigen, whereas traditionally used proteins complicate manufacturing;
- - the antibody responses generated are primarily antibodies specific to the
disease-specific antigen (not antibodies to PADRE), whereas traditionally
used proteins generate high anti-protein responses which can render the
vaccine ineffective; and
- - PADRE could aid in the development of "combination vaccines" where it can be
difficult to combine effectively a number of different, much larger
protein-antigen conjugates.
VACCINE PRODUCT CANDIDATES
We believe we have a number of vaccine product opportunities as described in the
following table:
<TABLE>
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Indication Product Development Stage(1) Commercialization Rights
Cancer
Therapeutic Vaccines
Breast Preclinical Searle
Colon Preclinical Searle
Lung Preclinical Searle
Prostate Epitope/Antigen Identification Searle
Ex Vivo Preclinical Takara/Searle
Infectious Diseases
Therapeutic Vaccines
Hepatitis B Preclinical Epimmune
Hepatitis C Preclinical Epimmune
HIV Preclinical Epimmune
Papilloma virus Epitope/Antigen Identification Epimmune
Prophylactic Vaccines
Hepatitis C Preclinical Epimmune
HIV Preclinical Epimmune
Malaria Preclinical Epimmune
- -----------------------------------------------------------------------------------------------
</TABLE>
(1) Epitope/Antigen Identification - By using the term Epitope/Antigen
Identification, we mean we are discovering, evaluating and selecting
epitopes for inclusion in candidate vaccines that would be advanced to
preclinical development.
Preclinical - By using the term preclinical, we mean that we have
identified and selected specific epitope compositions for inclusion in a
vaccine. Preclinical testing is aimed at optimization of the vaccine
construct, formulation, manufacture and toxicology studies leading to an
Investigational New Drug Application with the FDA.
CORPORATE COLLABORATIONS
We expect to enter into research and development collaborations with multiple
pharmaceutical and biotechnology companies to commercialize therapeutic and
prophylactic vaccines in select infectious disease fields. Our unique
capabilities include expertise in identifying those epitopes from viral and
tumor-associated antigens which elicit the desired immune response and creating
and evaluating product candidates which elicit a potent immune response.
Our partners include:
G.D. Searle & Co. The scope of the collaboration, established in February 1998,
is the treatment of cancer worldwide, excluding ex vivo cellular therapy in
Japan. The parties are combining our proprietary cancer-specific epitope and
PADRE technologies with Searle's cytokine technology to develop a new class of
cancer therapies designed to induce highly specific immune responses. In
addition to the $15 million investment made to date in Epimmune and Cytel,
Searle will fund product development, make milestone payments upon achievement
of certain preclinical and clinical milestones which could exceed $100 million
and pay royalties on product sales.
Takara Shuzo Co., Ltd. ("Takara"). In 1994, Cytel established a collaboration
with Takara, focused on ex vivo cellular therapy for treatment of cancer.
Takara, who is collaborating with Japanese investigators on the evaluation and
optimization of ex vivo cellular therapies, has rights to our technology for ex
vivo treatment of cancer in Japan. Under the terms of the collaboration, we have
a license to any patents or know-how developed by Takara in the field. Takara
will make payments upon achievement of certain clinical milestones and pay us
royalties on sales of any products resulting from the collaboration.
PATENTS, PROPRIETARY RIGHTS AND LICENSES
Our success will depend in part on our ability to obtain patent protection for
our products, both in the United States and other countries. The patent position
of biotechnology and pharmaceutical companies is highly uncertain and
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involves complex legal and factual questions. We file patent applications as
appropriate covering our proprietary technology.
Epimmune was founded with the vaccine patent estate developed by Cytel over
approximately ten years. With 13 issued United States patents, 20 issued foreign
patents, approximately 150 pending applications worldwide, and licenses to other
intellectual property relevant to epitope discovery, we have established a broad
intellectual property position directed toward processes of epitope
identification, epitope compositions and uses. Our intellectual property covers
thousands of CTL and HTL epitopes relevant to stimulating a cellular immune
response to breast, lung, prostate, cervical and colorectal cancers and
melanoma, as well as HBV, HCV, HIV, malaria, HPV and tuberculosis. Covered in
the claims are peptide and nucleic acid compositions and related methods of use.
Our intellectual property also covers numerous processes of epitope
identification, including methods for identifying motif-bearing epitopes,
methods for modifying epitopes to increase population coverage and/or enhance
immunogenicity, in vitro MHC binding assays, methods of inducing CTL ex vivo,
methods for using transgenic animals and computer programs to identify epitopes
and generate analogs of motif-bearing molecules. Many of these methods,
developed by our scientists, have become standard practice in the field. We also
have issued patents and pending applications covering the PADRE family of
universal T helper epitopes.
These patent applications and patents are either owned by or are under exclusive
license to us. We cannot be certain that patents will issue from any of the
applications we have filed or licensed; or that if patents do issue, that claims
allowed will be sufficiently broad to protect our procedures and processes. In
addition, we cannot be certain that third parties will not challenge, invalidate
or circumvent any patents issued to us, or that the rights granted thereunder
will provide proprietary protection to us.
As is typical in the biotechnology industry, our commercial success will depend
in part on our ability to avoid infringing patents issued to competitors or
breaching the technology licenses upon which we might base our products. If we
fail to obtain a license to any technology that we require to commercialize our
products, or to develop an alternative compound and obtain FDA approval within
an acceptable period of time if required to do so, our business would be harmed.
Litigation, which could result in substantial costs to us, may also be necessary
to enforce any patents issued to us or to determine the scope and validity of
others' proprietary rights. In addition, we may have to participate in
interference proceedings declared by the United States Patent and Trademark
Office which could result in substantial costs to determine the priority of
inventions.
We also protect our proprietary technology and processes in part by
confidentiality agreements with our collaborative partners, employees and
consultants. There can be no assurance that these agreements will not be
breached, that we will have adequate remedies for any breach, or that our trade
secrets will not otherwise become known or be independently discovered by
competitors.
MANUFACTURING
To be successful, our products and the products of our partners must be
manufactured in commercial quantities in compliance with regulatory requirements
and at an acceptable cost. We have not commercialized any products, nor have we
demonstrated that we can manufacture commercial quantities of our product
candidates or our partners' product candidates in accordance with regulatory
requirements. If we cannot manufacture products in suitable quantities in
accordance with regulatory standards, either on our own our through contracts
with third parties, it may delay clinical trials, regulatory approvals and
marketing efforts for such products. Such delays could adversely affect our
competitive position and our chances of achieving profitability. We cannot be
sure that we can manufacture, either on our own our through contracts with third
parties, such products at a cost or in quantities which are commercially viable.
GOVERNMENT REGULATION
Our research and development activities and any future manufacturing and
marketing of products by are subject to regulation for safety and efficacy by
numerous governmental authorities in the United States and other countries. In
the United States, drugs are subject to rigorous regulation by FDA. 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 products. In addition to
FDA regulations, the Company is also subject to other federal and state
regulations such as the Occupational Safety and Health Act and the Environmental
Protection Act. Product development and approval within this regulatory
framework takes a number
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of years and involves the expenditure of substantial resources. In addition,
there can be no assurance that this regulatory framework will not change or that
additional regulation will not arise at any stage of our product development
which may affect approval or delay an application or require additional
expenditures.
The steps required before a pharmaceutical agent may be marketed in the United
States include: (i) preclinical laboratory and animal tests, (ii) the submission
to the FDA of an application for an Investigational New Drug Application
("IND"), which must become effective before human clinical trials may commence
in the United States, (iii) adequate and well-controlled human clinical trials
to establish the safety and efficacy of the drug, (iv) the submission of a New
Drug Application ("NDA") or Product License Application ("PLA") to the FDA and
(v) the FDA approval of the NDA or PLA 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, and approved
by, the FDA. Drug product manufacturing establishments located in California
also must be licensed by the State of California in compliance with separate
regulatory requirements.
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 subsequently when additional non-clinical work is completed), and unless
the FDA objects, the IND will become effective 30 days following its receipt by
the FDA.
Clinical trials involve the administration of the drug under the supervision of
a qualified principal investigator to healthy volunteers or to patients
identified as ones with the condition for which the drug is being tested.
Clinical trials are conducted in accordance with protocols that detail the
objectives of the study, the parameters to be used to monitor safety and the
efficacy criteria to be evaluated. Each protocol is submitted to the FDA as part
of the IND. Each clinical study is conducted under the auspices of an
independent Institutional Review Board ("IRB") at the institution at which the
study will be conducted. Prior to its approval for the study to be conducted,
the IRB will consider, among other things, ethical factors, the safety of human
subjects and the possible liability of the institution.
Clinical trials are typically conducted in three sequential phases prior to
product approval, but the phases may overlap. Phase I involves the initial
introduction of the drug into healthy human subjects and often into patients as
well. In Phase I, the drug is tested for safety (adverse effects), dosage
tolerance, metabolism, distribution, excretion and clinical pharmacology. Phase
II involves studies in a limited patient population to: (i) determine the
efficacy of the drug for specific targeted indications, (ii) determine dosage
tolerance and optimal dosage and regimen and (iii) identify possible adverse
side-effects and safety risks. When 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 test further for safety
within an expanded patient population at multiple clinical study sites. Even
after the NDA approval, the FDA may require additional Phase IV clinical trials.
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 tests and clinical trials are submitted to the
FDA in the form of an NDA or PLA for marketing approval. The testing and
approval process is likely to require substantial time and effort and we cannot
be certain 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 period and may delay marketing
approval. After FDA approval for the initial indications, further clinical
trials may be necessary to gain approval for the use of the product for
additional indications. The FDA mandates that adverse effects be reported to the
FDA and may also require post-marketing testing to monitor for adverse effects,
which can involve significant expense.
Among the conditions for NDA or PLA approval is the requirement that the
prospective manufacturer's quality control and manufacturing procedures conform
to good manufacturing practices prescribed by the FDA. Domestic manufacturing
facilities are subject to FDA inspections twice yearly and foreign manufacturing
facilities are subject to periodic FDA inspections or inspections by the foreign
regulatory authorities with reciprocal inspection agreements with the FDA.
The Prescription Drug Act of 1992 requires companies engaged in pharmaceutical
development, such as our company, to pay user fees in the amount of at least
$100,000 upon submission of an NDA. We do not believe that this requirement will
harm our business.
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For marketing outside the United States, we are also subject to foreign
regulatory requirements governing human clinical trials and marketing approval
for drugs. The requirements governing the conduct of clinical trials, product
licensing, pricing and reimbursement vary widely from country to country.
The time required for completing such testing and obtaining such approvals is
uncertain and approval itself may not be obtained. In addition, delays or
rejections may be encountered based upon changes in FDA policy during the period
of product development and FDA regulatory review of each submitted NDA or PLA.
Similar delays may also be encountered in foreign countries. There can be no
assurance that even after such time and expenditures regulatory approval will be
obtained for any drugs that we develop. Moreover, if regulatory approval of a
drug is granted, such approval may entail limitations on the indicated uses for
which the drug may be marketed. Further, even if such regulatory approval is
obtained, a marketed drug, its manufacturer and the facilities in which the drug
is manufactured are subject to continual review and periodic inspections. Later
discovery of previously unknown problems with a product, manufacturer or
facility may result in restrictions on such product or manufacturer, including
withdrawal of the product from the market.
COMPETITION
The biotechnology industry continues to undergo rapid change and competition is
intense and is expected to increase. Our competitors may succeed in developing
technologies and products that are more effective or affordable than any of the
products we are developing or which would render our technology and products
obsolete and noncompetitive. We compete with many public and private companies,
including pharmaceutical companies, chemical companies, specialized
biotechnology companies and academic institutions. Many of our competitors have
substantially greater experience, financial and technical resources and
production, marketing and development capabilities than us. In addition, many of
our competitors have significantly greater experience conducting preclinical
studies and clinical trials of new products, and in obtaining regulatory
approvals for such products. Accordingly, some of our competitors may succeed in
obtaining, developing and commercializing products more rapidly or effectively
than us, or in developing technology and products that would render our
technology and products obsolete or noncompetitive. We are aware of companies
that are pursuing the development of novel pharmaceuticals which target the same
diseases that we are targeting. These and other efforts by potential competitors
may be successful, and other technologies may be developed to compete with our
technologies. If we cannot successfully respond to technological change in a
timely manner, our commercialization efforts may be harmed.
Our products under development address a range of markets. Our competition will
be determined in part by the potential indications for which our compounds are
developed and ultimately approved by regulatory authorities. For certain of our
potential products, an important factor in competition may be the timing of
market introduction of our products and competitive products. Accordingly, the
relative speed with which we can develop products, complete the clinical trials
and approval processes and supply commercial quantities of the products to the
market are expected to be important competitive factors. We expect that
competition among products approved for sale will be based, among other things,
on product effectiveness, safety, reliability, availability, price and patent
position.
Our competitive position also depends upon our 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.
EMPLOYEES
As of March 15, 2000, we employed 41 individuals full-time, of whom 30 were
engaged in research and development, 11 of whom hold Ph.D. or M.D. degrees. A
significant number of our management and professional employees have had prior
experience with pharmaceutical, biotechnology or medical product companies. None
of our employees are covered by collective bargaining agreements, and management
considers relations with our employees to be good.
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EXECUTIVE OFFICERS
Our executive officers and their ages as of March 15, 2000 are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Deborah A. Schueren 36 President, Chief Executive Officer and Chief Financial Officer
Robert W. Chesnut, Ph.D. 56 Executive Vice President, R&D and Secretary
Alessandro D. Sette, Ph.D. 39 Vice President and Chief Scientific Officer
Stephen F. Keane 42 Vice President, Corporate Development
Mark J. Newman, Ph.D. 45 Vice President, Infectious Disease Program
</TABLE>
Ms. Schueren has served as our President, Chief Executive Officer and Chief
Financial Officer since July 1999. From October 1997 to July 1999, she served as
Vice President of Cytel Corporation and President of Epimmune Inc., which was
then a subsidiary of Cytel. She also served as Vice President, Finance and Chief
Financial Officer of Cytel from March 1997 to October 1997 and as Director,
Business Development of Cytel from 1994 to March 1997. Previously, Ms. Schueren
was employed by The Boston Consulting Group and Lehman Brothers Investment Bank.
Dr. Chesnut has served as our Vice President of Research and Development and
Secretary since July 1999. From October 1997 to July 1999, he served as Vice
President of Research and Development of Epimmune. Prior to joining Epimmune,
Dr. Chesnut was with Cytel from 1988 to October 1997. From 1977 to 1988, Dr.
Chesnut was a Member of the Department of Medicine, National Jewish Medical and
Research Center in Denver, Colorado. He also serves as an Associate Member of
the Department of Immunology, Scripps Clinic and Research Foundation.
Dr. Sette has served as our Vice President and Chief Scientific Officer since
July 1999. From October 1997 to July 1999, he served as Vice President and Chief
Scientific Officer of Epimmune. Dr. Sette was with Cytel from 1988 to October
1997 where he was most recently Director of Immunology. Before joining Cytel,
Dr. Sette completed a post-doctoral fellowship with Dr. Howard Grey at the
National Jewish Medical and Research Center in Denver, Colorado.
Mr. Keane has served as our Vice President, Corporate Development since November
1999. Mr. Keane was with SIBIA Neurosciences as Vice President, Corporate
Development from November 1998 to November 1999. Previous to this position, from
1994 to 1999, he was with Molecular Biosystems, Inc. as Director of Business
Development and Investor Relations. He also previously held a position with
Stoorza, Ziegaus & Metzger in the Bioscience Division.
Dr. Newman has served as our Vice President, Infectious Disease Program since
July 1999. From March 1999 to July 1999, he served as Vice President, Infectious
Disease Program of Epimmune. Prior to joining Epimmune, Dr. Newman served as
Vice President of Research and Development of Vaxcel, Inc. from January 1995 to
March 1999. Prior to joining Vaxcel, he was Associate Vice President, Research
and Development for Apollon, Inc. He also previously held the position of Senior
Director, Clinical Research, at Cambridge Biotech Corporation.
All officers are elected annually by the Board of Directors. Each officer serves
at the discretion of the Board of Directors. There are no family relationships
among any of our directors, officers or key employees.
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<PAGE> 10
RISK FACTORS
We wish to caution readers that the following important factors, among others,
in some cases have affected our results and in the future could cause our actual
results and needs to vary materially from forward-looking statements made from
time to time by us on the basis of management's then-current expectations. The
business in which we are engaged is in rapidly changing and competitive markets
and involves a high degree of risk, and accuracy with respect to forward-looking
projections is difficult.
WE ARE AT AN EARLY STAGE OF DEVELOPMENT. IF WE DO NOT SUCCESSFULLY DEVELOP AND
COMMERCIALIZE OUR PRODUCTS, WE MAY NEVER GENERATE SIGNIFICANT REVENUES.
We are a research and development focused company. In collaboration with our
corporate partner, Searle, we expect that Searle will initiate Phase I/II human
clinical trials by the end of 2000. There are many factors which are outside of
our control that may effect the timing of these trials and we cannot assure you
the trials will commence within the anticipated timeframe. We have not completed
the development of any product and, accordingly, have not begun to market or
generate revenues from the commercialization of any product. We do not expect to
market any of our therapeutic or prophylactic products for a number of years. If
we do not successfully develop and commercialize products we may never generate
significant revenues. Our potential therapies under development will require
time consuming and costly research and development efforts, preclinical studies,
clinical testing, regulatory approvals and additional investment prior to their
commercialization, which may never occur.
We cannot guarantee that our research and development programs will be
successful or that we can show that our products are safe and effective in
humans. For example, in March 1999, Cytel completed its Phase II/III clinical
trial of Cylexin, its lead cell adhesion inhibitor compound. Based on
disappointing results from this Phase II/III clinical trial, Cytel decided to
terminate the clinical trials of Cylexin and discontinue its therapeutic
anti-inflammatory business. Unacceptable toxicities or side effects may occur at
any time in the course of human clinical trials or during commercial use. Delays
in planned patient enrollment in our clinical trials may result in increased
costs, program delays or both. The appearance of any unacceptable toxicities or
side effects could interrupt, limit, delay or abort the development of any of
our products or, if previously approved, necessitate their withdrawal from the
market.
We may never obtain FDA or other necessary regulatory approvals to successfully
commercialize any of our products under development. Further, we may not be able
to manufacture any products in commercial quantities in compliance with
regulatory requirements at an acceptable cost. Even if we successfully develop
and obtain approval for our products, we may fail to achieve the necessary
market acceptance of these products. Our failure to address problems and delays
relating to research and development, regulatory approval, manufacturing and
marketing would harm our business.
IF SEARLE TERMINATES ITS COLLABORATION WITH US OR FAILS TO PERFORM AS EXPECTED
UNDER THE COLLABORATION AGREEMENT, IT WILL SIGNIFICANTLY HARM THE DEVELOPMENT OF
OUR CANCER EPITOPE PRODUCTS.
We have entered into a research and development collaboration with Searle with
respect to the production, use and sale of pharmaceutical products derived from
our cancer epitopes and the use thereof in therapeutic vaccines. This
collaboration is our only significant collaboration, and we are substantially
dependent upon it. The success of the collaboration will depend, in significant
part, on Searle's development, competitive marketing and strategic
considerations, including the relative advantages of alternative products being
developed or marketed by competitors. We expect that substantially all of our
revenues for the foreseeable future will result from payments under our
existing, and any future, collaborations, including royalties on product sales
and interest income. We cannot be certain that Searle will perform its
obligations under the collaboration or that we will receive any future milestone
payments or other amounts under the collaboration.
We do not directly control the amount or timing of resources that Searle will
devote to our collaboration, including the decision whether to proceed with
clinical trials. Searle may not commit sufficient resources to our research and
development programs or the commercialization of our products. If Searle fails
to conduct its activities in a timely manner, or at all, our preclinical or
clinical development related to our partnership with Searle could be delayed or
terminated. The suspension or termination of the our collaboration with Searle,
the failure of such collaboration to be successful or the delay in the
development or commercialization of pharmaceutical products pursuant to such
collaboration could harm our business.
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<PAGE> 11
IF WE CANNOT OBTAIN COLLABORATION OR LICENSE AGREEMENTS ON ACCEPTABLE TERMS IN
THE FUTURE, WE MAY NOT SUCCESSFULLY DEVELOP SOME OF OUR PRODUCTS.
We expect to rely on collaborative arrangements both to develop and
commercialize pharmaceutical products. We cannot be certain that we will be able
to enter into collaborative arrangements in the future, that any such
arrangements will be successful or that we will receive royalty revenues,
license fees or milestone payments from any such collaborative arrangements. In
addition, our collaborative partners may pursue alternative technologies or
develop alternative compounds either on their own or in collaboration with
others as a means of developing treatments for the disease targeted by any
collaborative program with us. In addition, we may be required to enter into
licenses or other collaborative agreements with third parties in order to access
technologies that are necessary to successfully develop certain of our products.
We cannot be certain that we will be able to successfully negotiate acceptable
licenses or other collaborative arrangements that will allow us to access such
technologies. In addition, we cannot be certain that any technologies accessed
through such licenses or other collaborations will successfully meet our
requirements.
OUR ADDITIONAL FINANCING REQUIREMENTS AND LIMITED ACCESS TO FINANCING MAY
ADVERSELY AFFECT OUR ABILITY TO DEVELOP PRODUCTS.
As of December 31, 1999, we had $8.7 million in cash, cash equivalents,
restricted cash and short-term investments. In February 2000, we received $4.3
million from the sale of 1,200,000 shares of our common stock in a private
placement. Our future capital requirements will depend on many factors,
including:
- - our ability to establish and maintain collaborative arrangements;
- - progress with preclinical testing and clinical trials;
- - the time and costs involved in obtaining regulatory approvals;
- - the costs involved in filing, prosecuting and enforcing patent claims;
- - competing technological and market developments;
- - changes in our existing research relationships;
- - continued scientific progress in our drug discovery programs;
- - the magnitude of our drug discovery programs;
- - the cost of manufacturing scale-up; and
- - effective commercialization activities and arrangements.
We intend to seek additional funding through collaborative arrangements or
equity or debt financings. If additional financing is not available, we
anticipate that our existing resources, will enable us to maintain our current
and planned operations through the end of 2001. We may not be able to obtain
financing on favorable terms, if at all, or enter additional collaborations to
reduce our funding requirements. If we acquire funds by issuing securities,
further dilution to existing stockholders may result. If we acquire funds
through additional collaborations, we will likely have to relinquish some or all
of the rights to products or technologies that we may have otherwise developed
ourselves.
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<PAGE> 12
OUR HISTORY OF OPERATING LOSSES AND OUR EXPECTATIONS OF CONTINUING LOSSES MAY
HURT OUR ABILITY TO CONTINUE OPERATIONS.
We have experienced significant operating losses since our inception in 1987. As
of December 31, 1999, we had an accumulated deficit of $137.0 million. We have
not generated revenues from the commercialization of any product. All of our
revenues to date have consisted of contract research and development revenues,
license and milestone payments, research grants, certain asset divestitures and
interest income. We expect to incur substantial net operating losses which may
imperil our ability to continue operations. To achieve profitable operations,
we, alone or with partners, must successfully identify, develop, register and
market proprietary products. We may not be able to generate sufficient product
revenue to become profitable on a sustained basis or at all.
IF WE CANNOT COST-EFFECTIVELY MANUFACTURE OUR PRODUCTS AND THE PRODUCTS OF OUR
PARTNERS IN COMMERCIAL QUANTITIES AND IN COMPLIANCE WITH REGULATORY
REQUIREMENTS, WE MAY NOT BE ABLE TO SUCCESSFULLY COMMERCIALIZE OUR PRODUCTS.
To be successful, our products and the products of our partners must be
manufactured in commercial quantities in compliance with regulatory requirements
and at an acceptable cost. We have not commercialized any products, nor have we
demonstrated that we can manufacture commercial quantities of our product
candidates or our partners' product candidates in accordance with regulatory
requirements. If we cannot manufacture products in suitable quantities in
accordance with regulatory standards, either on our own our through contracts
with third parties, it may delay clinical trials, regulatory approvals and
marketing efforts for such products. Such delays could adversely affect our
competitive position and our chances of achieving profitability. We cannot be
sure that we can manufacture, either on our own our through contracts with third
parties, such products at a cost or in quantities which are commercially viable.
THE LENGTHY APPROVAL PROCESS AND UNCERTAINTY OF GOVERNMENT REGULATORY
REQUIREMENTS MAY DELAY OR PREVENT US FROM COMMERCIALIZING PRODUCTS.
We cannot commercialize our products if we do not receive FDA or foreign
approval for our products. Clinical testing, manufacture, promotion and sale of
our products are subject to extensive regulation by numerous governmental
authorities in the United States, principally the FDA, and corresponding state
and foreign regulatory agencies. These regulations may delay or prevent us from
commercializing products. Noncompliance with applicable requirements can result
in, among other things, fines, injunctions, seizure of products, total or
partial suspension of product marketing, failure of the government to grant
premarket approval, withdrawal of marketing approvals and criminal prosecution.
The regulatory process for new therapeutic drug products, including the required
preclinical studies and clinical testing, is lengthy and expensive. We may not
receive necessary FDA or foreign clearances for any of our potential products in
a timely manner, or at all. The length of the clinical trial process and the
number of patients the FDA will require to be enrolled in the clinical trials in
order to establish the safety and efficacy of our products is uncertain. The FDA
or Epimmune and its collaborators may decide to discontinue or suspend clinical
trials at any time if the subjects or patients who are participating in such
trials are being exposed to unacceptable health risks or if the results show no
or limited benefit in patients treated with the drug compared to patients in the
control group.
We may encounter significant delays or excessive costs in our efforts to secure
necessary approvals. Regulatory requirements are evolving and uncertain. Future
United States or foreign legislative or administrative acts could also prevent
or delay regulatory approval of our products. We may not receive the necessary
approvals for clinical trials, manufacturing or marketing of any of our products
under development. Even if we obtain commercial regulatory approvals, the
approvals may significantly limit the indicated uses for which we may market our
products. In addition, the FDA may continually review a product after its
initial approval and commercialization. Later discovery of previously unknown
problems or failure to comply with the applicable regulatory requirements may
result in restrictions on the marketing of a product or withdrawal of the
product from the market, as well as possible civil or criminal sanctions.
To market any drug products outside of the United States, we are also subject to
numerous and varying foreign regulatory requirements, implemented by foreign
health authorities, governing the design and conduct of human clinical trials
and marketing approval. The approval procedure varies among countries and can
involve additional testing, and the time required to obtain approval may differ
from that required to obtain FDA approval. The foreign
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<PAGE> 13
regulatory approval process includes all of the risks associated with obtaining
FDA approval set forth above, and approval by the FDA does not ensure approval
by the health authorities of any other country, nor does the approval by foreign
health authorities ensure approval be the FDA.
Among the other requirements for regulatory approval is the requirement that
prospective manufacturers conform to the FDA's Good Manufacturing Practices,
GMP, requirements specifically for biological drugs, as well as for other drugs.
In complying with the FDA's GMP requirements, manufacturers must continue to
expend time, money and effort in production, record keeping and quality control
to assure that the product meets applicable specifications and other
requirements. Failure to comply with the FDA's GMP requirements subjects the
manufacturer to possible FDA regulatory action. If we or our contract
manufacturers, if any, fail to maintain compliance with the FDA's GMP
requirements on a continuing basis, it could materially adversely affect our
operations, commercialization efforts and profitability.
TECHNOLOGICAL CHANGE AND COMPETITION MAY RENDER OUR POTENTIAL PRODUCTS OBSOLETE.
The biotechnology industry continues to undergo rapid change and competition is
intense and is expected to increase. Our competitors may succeed in developing
technologies and products that are more effective or affordable than any of the
products we are developing or which would render our technology and products
obsolete and noncompetitive. We compete with many public and private companies,
including pharmaceutical companies, chemical companies, specialized
biotechnology companies and academic institutions. Many of our competitors have
substantially greater experience, financial and technical resources and
production, marketing and development capabilities than us. In addition, many of
our competitors have significantly greater experience conducting preclinical
studies and clinical trials of new products, and in obtaining regulatory
approvals for such products. Accordingly, some of our competitors may succeed in
obtaining developing and commercializing products more rapidly or effectively
than us, or in developing technology and products that would render our
technology and products obsolete or noncompetitive. We are aware of companies
that are pursuing the development of novel pharmaceuticals which target the same
diseases that we are targeting. These and other efforts by potential competitors
may be successful, and other technologies may be developed to compete with our
technologies. If we cannot successfully respond to technological change in a
timely manner, our commercialization efforts may be harmed.
Our products under development address a range of markets. Our competition will
be determined in part by the potential indications for which our compounds are
developed and ultimately approved by regulatory authorities. For certain of our
potential products, an important factor in competition may be the timing of
market introduction of our products and competitive products. Accordingly, the
relative speed with which we can develop products, compete the clinical trials
and approval processes and supply commercial quantities of the products to the
market are expected to be important competitive factors. We expect that
competition among products approved for sale will be based, among other things,
on product effectiveness, safety, reliability, availability, price and patent
position.
OUR FAILURE TO OBTAIN ISSUED PATENTS AND, CONSEQUENTLY, TO PROTECT OUR
PROPRIETARY TECHNOLOGY, COULD IMPAIR OUR COMPETITIVE POSITION.
Our success will depend in part on our ability to obtain patent protection for
our products and processes, both in the United States and other countries. The
patent position of biotechnology and pharmaceutical companies is highly
uncertain and involves complex legal and factual questions. There is no
consistent policy regarding the breadth of claims allowed in biotechnology
patents. We intend to file applications and pursue patent prosecution as
appropriate for patents covering both our products and processes. We cannot be
sure that patents will issue from any of the patent applications that we own or
license or that, if patents do issue, that claims allowed will be sufficiently
broad to protect our products and processes. In addition, we cannot be certain
that third parties will not challenge, invalidate or circumvent any patents
issued to us, or that the rights granted under the patents will provide
proprietary protection to us.
We also protect our proprietary technology and processes in part by
confidentiality agreements with our collaborative partners, employees and
consultants. We cannot be certain that our collaborative partners, employees and
consultants will not breach these agreements, that we will have adequate
remedies for any breach, or that our trade secrets will not otherwise become
known or be independently discovered by competitors.
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<PAGE> 14
WE MAY NOT BE ABLE TO COMMERCIALIZE OUR OTHER PRODUCTS UNDER DEVELOPMENT IF THEY
INFRINGE EXISTING PATENTS OR PATENTS THAT HAVE NOT YET ISSUED, WHICH WOULD
MATERIALLY HARM OUR BUSINESS.
As is typical in the biotechnology industry, our commercial success will depend
in part on our ability to avoid infringing patents issued to competitors or
breaching the technology licenses upon which we might base our products. If we
fail to obtain a license to any technology that we require to commercialize our
products, or to develop an alternative compound and obtain FDA approval within
an acceptable period of time if required to do so, our business would be harmed.
Litigation, which could result in substantial costs to us, may also be necessary
to enforce any patents issued to us or to determine the scope and validity of
others' proprietary rights. In addition, we may have to participate in
interference proceedings declared by the United States Patent and Trademark
Office which could result in substantial costs to determine the priority of
inventions.
OUR FUTURE SUCCESS DEPENDS IN PART ON THE CONTINUED SERVICE OF OUR KEY
SCIENTIFIC AND MANAGEMENT PERSONNEL AND OUR ABILITY TO IDENTIFY, HIRE AND RETAIN
ADDITIONAL PERSONNEL.
We are highly dependent on the principal members of our scientific and
management staff. We do not maintain key person life insurance on the life of
any employee. Our future success also will depend in part on the continued
service of our key scientific and management personnel and our ability to
identify, hire and retain additional qualified personnel.
There is intense competition for qualified personnel in the areas of our
activities, and we cannot be sure that we will be able to continue to attract
and retain such personnel necessary for the development of our business. Because
of the intense competition, we cannot be sure that we will be successful in
adding technical personnel as needed to meet the staffing requirements of
additional collaborative relationships. Our failure to attract and retain key
personnel could be significantly detrimental to our product development programs
and could harm our business.
IF WE DO NOT DEVELOP A SUFFICIENT SALES AND MARKETING FORCE, WE MAY NOT BE ABLE
TO SUCCESSFULLY COMMERCIALIZE OUR PRODUCTS.
We have no experience in sales, marketing or distribution. Before we can market
any of our products directly, we must develop a substantial marketing and sales
force with technical expertise and supporting distribution capability.
Alternatively, we may obtain the assistance of a pharmaceutical company with a
large distribution system and a large direct sales force. Other than our
agreements with Searle and Takara, we do not have any existing distribution
arrangements with any pharmaceutical company for our products under development.
We cannot be sure that we can establish sales and distribution capabilities or
successfully gain market acceptance for our products. If we cannot develop sales
and distribution capabilities, we may not be able to successfully commercialize
our products.
ADVERSE DETERMINATIONS CONCERNING PRODUCT PRICING, REIMBURSEMENT AND RELATED
MATTERS COULD PREVENT US FROM SUCCESSFULLY COMMERCIALIZING PRODUCTS.
Our ability to successfully commercialize our products may depend in part on the
extent to which reimbursement for the cost of such products and related
treatment will be available from government health administration authorities,
private health insurers and other organizations. Third-party payors are
increasingly challenging the price of medical products and services. Significant
uncertainty exists as to the reimbursement status of newly approved health care
products, and we cannot be certain that adequate third-party coverage will be
available to enable us to maintain price levels sufficient to realize an
appropriate return on our investment in product development. If we cannot obtain
adequate third-party coverage for our products, it could harm our business.
PRODUCT LIABILITY RISKS MAY EXPOSE US TO SIGNIFICANT LIABILITY.
Our business exposes us to potential product liability risks which are inherent
in the testing, manufacturing and marketing of human therapeutic products. While
we currently have product liability insurance, we cannot be sure that we can
maintain such insurance on acceptable terms or that our insurance will provide
adequate coverage against potential liabilities.
OUR USE OF HAZARDOUS MATERIALS COULD EXPOSE US TO SIGNIFICANT COSTS.
Our research and development processes involve the controlled storage, use and
disposal of hazardous materials,
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<PAGE> 15
chemicals and radioactive compounds. We are subject to federal, state and local
laws and regulations governing the use, manufacture, storage, handling and
disposal of these materials and some waste products. Although we believe that
our safety procedures for handling and disposing of these materials comply with
the standards prescribed by these laws and regulations, the risk of accidental
contamination or injury from these materials cannot be completely eliminated. In
the event of an accident, we could be held liable for any damages that result,
and any liability could exceed our resources.
Although we believe that we are in compliance in all material respects with
applicable environmental laws and regulations and currently do not expect to
make material capital expenditures for environmental control facilities in the
near term, we cannot be sure that compliance with environmental laws and
regulations in the future will not entail significant costs, or that our
business will not be harmed by current or future environmental laws or
regulations.
THE VOLATILITY OF THE PRICE OF OUR COMMON STOCK AND OUR DIVIDEND POLICY MAY HURT
OUR STOCKHOLDERS.
The market prices for securities of biotechnology companies, including our
common stock, have historically been highly volatile and currently are of new
record levels, and the market from time to time has experienced significant
price and volume fluctuations that are unrelated to the operating performance of
such companies. The following factors may have a significant effect on the
market price of our common stock:
- - announcements of technological innovations or new commercial therapeutic
products by us or others;
- - governmental regulation;
- - developments in patent or other proprietary rights;
- - developments in our relationships with our collaborative partners;
- - public concern as to the clinical results and/or, the safety of drugs
developed by us or others; and
- - general market conditions.
Fluctuations in financial performance from period to period also may have a
significant impact on the market price of our common stock.
THE SUBORDINATION OF OUR COMMON STOCK TO OUR PREFERRED STOCK COULD HURT COMMON
STOCKHOLDERS.
Our common stock is expressly subordinate to our Series S and Series S-1
Preferred Stock in the event of our liquidation, dissolution or winding up. If
we were to cease operations and liquidate our assets, there may not be any
remaining value available for distribution to the holders of common stock after
providing for the Series S and Series S-1 Preferred Stock liquidation
preference.
THE EFFECT OF ANTI-TAKEOVER PROVISIONS COULD ADVERSELY AFFECT OUR COMMON
STOCKHOLDERS.
Our certificate of incorporation includes a provision that requires the approval
of holders of at least 66 2/3% of our voting stock as a condition to a merger or
certain other business transactions with, or proposed by, a holder of 15% or
more of our voting stock. This approval is not required in cases where certain
of our directors approve the transaction or where certain minimum price criteria
and other procedural requirements are met. Our certificate of incorporation also
requires the approvals of holders of at least 66 2/3% of our voting stock to
amend or change the provisions mentioned relating to the transaction approval.
Finally, our certificate of incorporation provides that any action required or
permitted to be taken by our stockholders must be effected at a duly called
annual or special meeting rather than by any consent in writing.
Further, pursuant to the terms of our stockholder rights plan, we have
distributed a dividend of one right for each outstanding share of common stock.
These rights will cause substantial dilution to the ownership of a person or
group that attempts to acquire us on terms not approved by the Board of
Directors and may have the effect of deterring hostile takeover attempts.
CONCENTRATION OF OWNERSHIP AMONG OUR EXISTING OFFICERS, DIRECTORS AND PRINCIPAL
STOCKHOLDERS MAY PREVENT OTHER STOCKHOLDERS FROM INFLUENCING SIGNIFICANT
CORPORATE DECISIONS AND DEPRESS OUR STOCK PRICE.
Our officers, directors and stockholders with at least 10% of our stock will
together control approximately 46% of our
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<PAGE> 16
outstanding common stock and preferred stock, on a combined, as-converted basis.
If these officers, directors and principal stockholders act together, they will
be able to exert a significant degree of influence over our management and
affairs and over matters requiring stockholder approval, including the election
of directors and approval of mergers or other business combination transactions.
The interests of this concentration of ownership may not always coincide with
our interests or the interests of other stockholders. For instance, officers,
directors and principal stockholders, acting together, could cause us to enter
into transactions or agreements that we would not otherwise consider. Similarly,
this concentration of ownership may have the effect of delaying or preventing a
change in control of our company otherwise favored by our other stockholders.
This concentration of ownership could depress our stock price.
WE HAVE NEVER PAID DIVIDENDS.
We have never paid any cash dividends and do not anticipate paying cash
dividends in the foreseeable future.
ITEM 2. PROPERTIES
We lease a 24,000 square foot administrative and research laboratory facility in
San Diego. The future minimum rental commitment for this lease will range from
approximately $519,000 to $658,000 per year over nine years, based upon
pre-established annual rent increases. We believe our existing facilities will
be adequate to meet our needs for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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<PAGE> 17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock (NASDAQ symbol "EPMN") is traded publicly through the National
Market System. The following table presents quarterly information on the price
range of our common stock. This information indicates the high and low sale
prices reported by the National Market System. These prices do not include
retail markups, markdowns or commissions. All information set forth below has
been adjusted to reflect a one-for-seven reverse stock split of common stock
effected on November 13, 1998.
<TABLE>
<CAPTION>
High Low
<S> <C> <C> <C>
2000 1st Quarter (through $ 21.13 $ 2.16
March 10)
1999 1st Quarter $ 7.38 $ 2.00
2nd Quarter $ 3.38 $ 1.75
3rd Quarter $ 4.69 $ 2.88
4th Quarter $ 3.63 $ 2.22
1998 1st Quarter $ 17.50 $ 8.75
2nd Quarter $ 15.47 $ 9.17
3rd Quarter $ 10.50 $ 2.66
4th Quarter $ 3.88 $ 2.25
</TABLE>
As of March 10, 2000, there were approximately 250 stockholders of record of our
common stock. We have never declared or paid dividends on our common stock and
does not anticipate the payment of dividends in the foreseeable future.
During the period covered by this Annual Report on Form 10-K, we sold and issued
the following securities which were not registered under the Securities Act of
1933, as amended (the "Securities Act"):
(1) In July 1999, we completed a series of transactions in which we issued: (i)
859,666 shares of Series S Preferred Stock and 549,622 shares of Series S-1
Preferred Stock to Searle in exchange for all outstanding shares of Epimmune's
Series B Preferred Stock and Series B-1 Preferred Stock held by Searle, and (ii)
issued a total of 1,027,082 shares of Common Stock to holders of Common Stock of
Epimmune in exchange for all outstanding shares of Epimmune's Common Stock.
(2) In July 1999, we issued warrants to purchase an aggregate of 241,004 shares
of Common Stock with an exercise price of $1.875 to Virgil Thompson, former
President and Chief Executive Officer of Cytel, and Robert L. Roe, former Chief
Operating Officer of Cytel. The warrants were issued in connection with
severance agreements with such former officers.
The sale and issuance of securities in the transaction described above was
deemed to be exempt from registration under the Securities Act by virtue of
Section 4(2) and/or Regulation D promulgated thereunder.
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ITEM 6. SELECTED FINANCIAL DATA
Statement of Operations Data:
- -----------------------------
(in millions except for net loss per share)
<TABLE>
<CAPTION>
Years Ended December 31, 1999 1998 1997 1996 1995
------ ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
Operating revenues $ 4.2 $ 3.7 $ 5.1 $ 10.9 $ 16.8
Net loss (8.3) (21.5) (14.4) (12.5) (8.0)
Net loss per share (1.56) (4.48) (3.92) (3.50) (2.52)
- basic and diluted
</TABLE>
Balance Sheet Data:
- -------------------
(in millions)
<TABLE>
<CAPTION>
As of December 31, 1999 1998 1997 1996 1995
------ ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
Working capital $ 6.9 $ 9.8 $ 17.8 $ 21.6 $ 34.6
Total assets 12.7 21.0 28.1 34.3 48.1
Long-term obligations 0.4 1.6 0.7 1.1 1.8
Stockholders' equity $ 10.4 $ 14.0 $ 24.4 $ 27.5 $ 38.5
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Except for the historical information contained herein, the following discussion
contains forward-looking statements that involve risks and uncertainties. Our
actual results could differ materially from those discussed here. Factors that
could cause or contribute to such differences include, without limitation, those
discussed below and in the section entitled "Risk Factors."
Unless otherwise indicated, all references to "Cytel" are to Cytel Corporation,
all references to "Epimmune" are to Epimmune Inc., a majority-owned subsidiary
of Cytel, until July 1, 1999, at which time Cytel and Epimmune merged, and all
references to the "we", "us" or "our company" are to the combined entity of
Cytel and Epimmune.
On July 1, 1999, we completed a series of transactions (the "Exchange
Transactions") in which we: (i) transferred all of the outstanding shares of
Epimmune's Series B-1 Preferred Stock then held by Cytel to G.D. Searle & Co.
("Searle") in exchange for all of the outstanding shares of Cytel's Series B
Preferred Stock, (ii) issued 859,666 shares of Cytel's Series S Preferred Stock
and 549,622 shares of Cytel's Series S-1 Preferred Stock to Searle in exchange
for all outstanding shares of Epimmune's Series B Preferred Stock and Series B-1
Preferred Stock and (iii) issued a total of 1,027,782 shares of Cytel's Common
Stock to the holders of Common Stock of Epimmune in exchange for all outstanding
shares of Epimmune's Common Stock. The acquisition of the minority interest in
Epimmune, through the exchange transaction, was accounted for as a purchase. We
recorded the acquisition of the minority interest at the fair market value of
the preferred and common stock issued, and determined that the excess of the
purchase price over the identifiable net assets of $3.2 million was in-process
technology based on a discounted cash flow analysis of that technology. The
analysis, with a discount rate of 50%, was based on estimated research and
development costs for nine years and product revenues beginning in year six,
after the assumed completion of clinical trials and product approval by the FDA.
The analysis also considered milestone payments based on scientific
accomplishments, and new collaborative revenues based on projected future
collaboration agreements. The value of the technology was charged to acquired
in-process technology because technological feasibility had not been achieved
nor had alternative future uses for the technology been identified. Following
the Exchange Transactions, Cytel merged with Epimmune and changed its name to
Epimmune Inc. As of December 31, 1999, Searle owned 5.25% of our outstanding
common stock and all of our outstanding preferred stock
Since Cytel's inception in July 1987, we have devoted substantially all of our
resources to the discovery and development of potential therapeutic and
prophylactic products. To date, we have not received any revenues from the sale
of products. We have funded our research and development primarily from
equity-derived working capital and through strategic alliances with other
companies. We have been unprofitable since our inception and expect to incur
substantial operating losses for the next several years. As of December 31,
1999, our accumulated deficit was approximately $137.0 million.
17
<PAGE> 19
In the first quarter of 1999, Cytel completed the sale of its Glytec
carbohydrate synthesis and manufacturing business resulting in net proceeds of
approximately $6.2 million (see Note 2 in the Consolidated Financial
Statements). In addition, Cytel announced the results from its Cylexin Phase
II/III clinical trial which indicated that Cylexin, Cytel's lead therapeutic
compound, showed no benefit over the placebo. Accordingly, Cytel terminated its
therapeutic anti-inflammatory business and, as a result, Cytel recorded a
restructuring charge of $3.7 million in the first quarter 1999, which was
subsequently reduced to $2.7 million in the fourth quarter 1999 (see Note 2 in
the Consolidated Financial Statements). We are now focused exclusively on the
development of therapeutic and prophylactic vaccines for cancer and infectious
diseases.
LIQUIDITY AND CAPITAL RESOURCES
The following discussion reflects historical financial information for both
Cytel and Epimmune on a combined basis.
We have financed operations since inception primarily through private placements
of equity securities, two public common stock offerings, revenues under
collaborative research and development agreements, grant revenues, certain asset
divestitures and interest income. Through December 1999, we had raised
approximately $145.1 million from the sale of equity securities. In February
2000, we completed a private placement of newly issued shares of common stock,
which raised net proceeds of $4.3 million.
We have financed our laboratory equipment and research and office facilities
primarily through operating lease arrangements and a note payable.
As of December 31, 1999, our cash, cash equivalents, restricted cash and
short-term investments decreased to $8.7 million as compared to $12.2 million at
December 31, 1998. The decrease was primarily due to cash used for Epimmune
operations and payment of liabilities associated with the wind-down of Cytel
operations, partially offset by net proceeds of $6.2 million from the sale of
Cytel's Glytec business discussed above, the sale of certain other Cytel assets
totaling $0.5 million and the receipt of a $2.0 million milestone payment from
Searle. We expect to continue to use our cash, cash equivalents and short-term
investments to fund our ongoing vaccine research programs. We had net working
capital of $6.9 million as of December 31, 1999 compared to $9.8 million as of
December 31, 1998.
For the year ended December 31, 1999, our capital expenditures totaled $0.7
million as compared to $2.3 million for the year ended December 31, 1998.
Capital expenditures made in 1999 were primarily for furniture and leasehold
improvements for our new laboratory and office facility, which was completed in
April 1999. Capital expenditures made in 1998 were primarily for manufacturing
and laboratory equipment additions for Cytel's Glytec carbohydrate manufacturing
facility. Cytel has since sold its Glytec carbohydrate synthesis and
manufacturing business, terminated its anti-inflammatory therapeutic business
and sold all remaining Cytel fixed assets in 1999. Future capital expenditures
will be in support of our vaccine business.
We expect to incur operating losses over the next several years due to
continuing expenses associated with our research and development programs,
including preclinical testing and clinical trials. Operating losses may
fluctuate from quarter to quarter as a result of differences in the timing of
revenues received and expenses incurred, and such fluctuations may be
substantial. We expect our existing resources, including funds raised in the
first quarter of 2000, will be sufficient to find operations through 2001.
We expect to incur substantial additional research and development expenditures,
including costs related to preclinical testing, clinical trials and
manufacturing, as well as marketing and distribution expenses. It is our
intention to seek additional collaborative research and development
relationships with suitable corporate partners. We cannot be certain that any
agreements that may result from these discussions will successfully reduce our
funding requirements. Additional equity or debt financing will be required, and
we cannot be certain that these funds will be available on favorable terms, if
at all. If adequate funds are not available, we may be required to delay, scale
back or eliminate one or more of our drug discovery or development programs or
obtain funds through arrangements with collaborative partners or others that may
require us to relinquish rights to certain of our technologies, product
candidates or products that we would not otherwise relinquish.
18
<PAGE> 20
Our future capital requirements will depend on many factors, including:
- - our ability to establish and maintain collaborative arrangements;
- - progress with preclinical testing and clinical trials;
- - the time and costs involved in obtaining regulatory approvals;
- - the costs involved in filing, prosecuting and enforcing patent claims;
- - competing technological and market developments;
- - changes in our existing research relationships;
- - continued scientific progress in our drug discovery programs;
- - the magnitude of our drug discovery programs;
- - the cost of manufacturing scale-up; and
- - effective commercialization activities and arrangements.
As is typical in the biotechnology industry, our commercial success will depend
in part on neither infringing patents issued to competitors nor breaching the
technology licenses upon which our products might be based. Our business is also
subject to other significant risks, including the uncertainties associated with
our current collaboration and our ability to enter new collaborations, and the
lengthy regulatory approval process and with potential competition from other
products. Even if our products appear promising at an early stage of
development, they may not reach the market for a number of reasons. Such reasons
include, but are not limited to our inability to fund clinical development of
such products, or the possibilities that the potential products will be found
ineffective during clinical trials, fail to receive necessary regulatory
approvals, be difficult to manufacture on a large scale or be uneconomical to
market.
RESULTS OF OPERATIONS
We had total revenues of $4.2 million for the year ended December 31, 1999,
compared to $3.7 million in 1998 and $5.1 million in 1997. Total revenues
increased 13% in 1999 from 1998, due to research revenues and milestone payments
received from our collaborative agreement with Searle. Total revenues decreased
27% in 1998 from 1997 due to the decline in revenues from Cytel's collaboration
agreements. Included in total revenues were research grant revenues of $1.7
million in 1999, $1.7 million in 1998, and $1.6 million in 1997.
Research and development expenses decreased 53% to $8.7 million in 1999 from
$18.4 million in 1998, due primarily to the discontinuation of research efforts
on Cylexin and other Cytel technologies. Research and development expenses
increased 11% to $18.4 million in 1998 from $16.5 million in 1997 due to
increased manufacturing expenses for Cytel and research activity performed by
Epimmune.
General and administrative expenses decreased 45% to $2.5 million in 1999 from
$4.6 million in 1998 due primarily to termination of Cytel operations. General
and administrative expenses increased 23% to $4.6 million in 1998 from $3.7
million in 1997 due primarily to the increase in general and administrative
personnel at Epimmune.
In March 1999, Cytel recorded a restructuring charge of $3.7 million for the
termination of its non-Epimmune operations. Subsequently, in the fourth quarter,
the restructuring charge was reduced to $2.7 million, primarily due to early
lease terminations and higher than projected proceeds received from the sale of
assets.
In 1999, we charged to operations $3.2 million for the write-off of in-process
technology related to the acquisition of the minority interest in Epimmune. We
issued common and preferred stock to outside investors in Epimmune to acquire
the minority interest in Epimmune.
In accordance with Statement of Financial Accounting Standards No. 121, we
recorded a $3.4 million loss on
19
<PAGE> 21
permanent impairment of intangible assets in 1998 based on the decision to
terminate Cytel's therapeutic anti-inflammatory business. The write down was
equal to the book value of Cytel's cell adhesion patent portfolio.
Other income in 1999 includes $0.5 million from Elan International Services,
Ltd. ("Elan") in consideration of the buyout of certain future milestone
obligations by Elan.
In 1999, we recorded a gain of $3.2 million on sales and disposal of assets as
compared to a $0.2 million loss in 1998. The 1999 gain relates to the sale of
Cytel's Glytec carbohydrate synthesis and manufacturing business.
Net interest income was $0.4 million in 1999 compared to $0.9 million in 1998
and $0.8 million in 1997. The decrease in 1999 from 1998 was due to a lower
average cash balance. In 1998 and 1997, average cash balances were roughly
comparable, resulting in level net interest income year over year.
YEAR 2000
In prior years, we discussed the nature and progress of our plans to become Year
2000 ready. In late 1999, we completed our remediation and testing of systems.
As a result of those planning and implementation efforts, we experienced no
significant disruptions in mission critical information technology and
non-information technology systems and believe those systems successfully
responded to the Year 2000 date change. We incurred expenses of less than
$10,000 during 1999 in connection with remediating our systems. We are not aware
of any material problems resulting from Year 2000 issues, either with our
products, our internal systems, or the products and services of third parties.
We will continue to monitor our mission critical computer applications and those
of our suppliers and vendors throughout the year 2000 to ensure that we promptly
address any latent Year 2000 matters that may arise.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Our investment portfolio consists of money market funds and short-term, high
quality debt securities. These securities are subject to interest rate risk, and
will decline in value if interest rates increase. An immediate 10% change in
interest rates would not harm our business.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS
The Report of Ernst & Young LLP, Independent Auditors, the Consolidated
Financial Statements and Notes to Consolidated Financial Statements are included
in the report on pages F-1 through F-24.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
20
<PAGE> 22
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
IDENTIFICATION OF DIRECTORS
The information required by this item is incorporated by reference to the
information set forth in the section captioned "Election of Directors,"
contained in our definitive Proxy Statement for the 2000 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission within 120
days after the end of our fiscal year ended December 31, 1999 (the "Proxy
Statement").
IDENTIFICATION OF EXECUTIVE OFFICERS
The information required by this item is incorporated by reference to the
information set forth in the section entitled "Executive Officers of the
Company" in Part I, Item 1 of this Annual Report on Form 10-K.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
The information required by this item is incorporated by reference to the
information set forth in the section entitled "Compliance with the Reporting
Requirements of Section 16(a) of the Securities Exchange Act of 1934" contained
in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
information set forth in the section captioned "Executive Compensation"
contained in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
information set forth in the section captioned "Security Ownership of Certain
Beneficial Owners and Management" contained in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
information set forth in the section captioned "Certain Transactions" contained
in the Proxy Statement.
21
<PAGE> 23
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) INDEX TO FINANCIAL STATEMENTS
The consolidated financial statements required by this item are submitted in a
separate section beginning on page F-1 of this Report.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors..................................F-1
Consolidated Balance Sheets as of December 31, 1998 and 1997.......................F-2
Consolidated Statements of Operations for each of the three years in the period
ended December 31, 1998............................................................F-3
Consolidated Statement of Stockholders' Equity for each of the three years in
the period ended December 31, 1998.................................................F-4
Consolidated Statements of Cash Flows for each of the three years in the
period ended December 31, 1998......................................................F-5 - F-6
Notes to Consolidated Financial Statements.........................................F-7 - F-24
</TABLE>
(2) INDEX TO FINANCIAL STATEMENT SCHEDULES
The consolidated financial statement schedules required by this item are omitted
because they are not applicable or the required information is shown in the
Financial Statements or the notes thereto.
(3) LISTING OF EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Document Description
- ------- ---------------------------------------------------------------------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation.(A)
3.2 Bylaws of the Registrant.(A)
3.3 Preferred Share Purchase Rights Plan.(B)
3.4 Form of Certificate of Amendment to the Company's Amended and
Restated Certificate of Incorporation.(E)
3.5 Certificate of Designation of the Series B Convertible Preferred
Stock.(J)
3.6 Certificate of Amendment of Amended and Restated Certificate of
Incorporation.(L)
3.7 Certificate of Increase of Series A Junior Participating Preferred
Stock.(L)
3.8 Certificate of Amendment of Amended and Restated Certificate of
Incorporation.(M)
3.9 Certificate of Designations of the Series S and Series S-1 Preferred
Stock filed with the Secretary of State of the State of Delaware on
June 29, 1999.(P)
3.10 Certificate of Amendment of Amended and Restated Certificate of
Incorporation. (R)
3.11 Certificate of Decrease of Series A Junior Participating Preferred
Stock.(R)
4.1 Reference is made to Exhibits 3.1 through 3.11.
4.2 Specimen certificate of the Common stock.(A)
</TABLE>
22
<PAGE> 24
<TABLE>
<CAPTION>
Exhibit
Number Document Description
- ------- ---------------------------------------------------------------------
<S> <C>
10.1 Form of Indemnification Agreement entered into between the Registrant
and its directors and officers.(A)
10.5 Registrant's 1989 Stock Plan, as amended through June 12, 1998 (the
"1989 Plan").(L)
10.6 Forms of Incentive Stock Option Agreement under the 1989 Plan.(A)
10.7 Form of Nonstatutory Stock Option Agreement under the 1989 Plan.(A)
10.19 Research Agreement, between the Registrant and The Scripps Research
Institute, formerly Scripps Clinic and Research Foundation
("Scripps"), dated as of September 1, 1990, as amended August 5, 1991
(with certain confidential portions deleted).(A)(1)
10.24 License Agreement, between the Registrant and Scripps, dated as of
September 23, 1991 (with certain confidential portions
deleted).(A)(1)
10.25 Research and Option Agreement, between the Registrant and Scripps,
dated October 1, 1991 (with certain confidential portions
deleted).(A)(1)
10.35 Amendment to License Agreement between the Registrant and Scripps
dated as of June 17, 1992 (with certain confidential portions
deleted).(C)(2)
10.37 Registrant's Non-Employee Directors' Stock Option Plan, as amended
through June 12, 1998.(L)
10.48 Second Amendment to License Agreement between the Registrant and
Scripps dated as of June 17, 1992 (with certain confidential portions
deleted).(G)(2)
10.49 Letter Agreement, between the Registrant and Virgil D. Thompson,
dated December 19, 1995.(G)
10.50 Letter Agreement, between the Registrant and Robert L. Roe, M.D.,
F.A.C.P., dated January 18, 1996.(G)
</TABLE>
23
<PAGE> 25
<TABLE>
<CAPTION>
Exhibit
Number Document Description
- ------- ---------------------------------------------------------------------
<S> <C>
10.51 Directors' Deferred Compensation Plan, effective as of March 17,
1995, as amended September 20, 1996.(H)
10.54 Employment agreement between Registrant, Epimmune Inc. ("Epimmune")
and Deborah A. Schueren dated October 1, 1997.(J)
10.55 Form of Severance Benefit Agreement between Registrant and the
following executive officers: Virgil D. Thompson; Robert L. Roe,
M.D.; James C. Paulson, Ph.D; Edward C. Hall; Jennifer Lorenzen.(K)
10.56 License and Collaboration Agreement between Epimmune and Searle,
dated February 27, 1998 (with certain confidential portions
deleted).(K)(4)
10.61 Amended and Restated Sublicense and Option Agreement, between the
Registrant and Elan International Services Ltd. ("Elan"), dated
November 10, 1998 (the "Sublicense Agreement"), and side letter
entered between the Registrant and Elan, dated November 10, 1998
(with certain confidential portions of the Sublicense Agreement
deleted).(M)(5)
10.63 Lease Agreement between Epimmune, Inc. and Nexus Equity LLC VIII,
dated as of November 1, 1998, as amended February 1, 1999 (N)
10.64 Asset Purchase Agreement between the Company and Neose Technologies,
Inc., dated March 26, 1999.(O)
10.65 Escrow Agreement between the Company and Neose Technologies, Inc.
dated March 26, 1999.(O)
10.66 Form of Common Stock Exchange Agreement.(P)
10.67 Preferred Stock Exchange Agreement, dated July 1, 1999, by and
between the Company and G.D. Searle & Co.(P)
</TABLE>
24
<PAGE> 26
<TABLE>
<CAPTION>
Exhibit
Number Document Description
- ------- ---------------------------------------------------------------------
<S> <C>
10.68 Investor Rights Agreement, dated as of July 1, 1999 by and between
the Company and G.D. Searle & Co.(P)
10.69 Letter agreement between Epimmune and Dr. Robert W. Chesnut regarding
severance benefits dated February 5, 1998.(Q)
10.70 Letter agreement between Epimmune and Dr. Alessandro Sette regarding
severance benefits dated February 5, 1998.(Q)
10.71 Letter agreement between Epimmune and Dr. Robert L. Roe regarding
severance benefits dated June 2, 1999.(Q)
10.72 Letter agreement between Epimmune and Virgil Thompson regarding
severance benefits dated June 2, 1999.(Q)
10.73 Letter agreement between the registrant and Stephen F. Keane dated
October 1999.
10.74 Form of Common Stock Purchase agreement dated February 15, 2000.
21.1 Subsidiaries of the Registrant. (J)
23.1 Consent of Ernst & Young LLP, Independent Auditors.
25.1 Power of Attorney. Reference is made to the signature page of this
report on Form 10-K.
27.1 Financial Data Schedule
(4) EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
10.1 Form of Indemnification Agreement entered into between the Registrant
and its directors and officers.(A)
10.5 Registrant's 1989 Stock Plan, as amended through June 12, 1998 (the
"1989 Plan").(L)
10.6 Forms of Incentive Stock Option Agreement under the 1989 Plan.(A)
10.7 Form of Nonstatutory Stock Option Agreement under the 1989 Plan.(A)
10.37 Registrant's Non-Employee Directors' Stock Option Plan, as amended
through June 12, 1998.(L)
10.49 Letter Agreement, between the Registrant and Virgil D. Thompson,
dated December 19, 1995.(G)
10.50 Letter Agreement, between the Registrant and Robert L. Roe, M.D.,
F.A.C.P., dated January 18, 1996.(G)
10.51 Directors' Deferred Compensation Plan, effective as of March 17, 1995
as amended September 20, 1996.(H)
</TABLE>
25
<PAGE> 27
<TABLE>
<CAPTION>
Exhibit
Number Document Description
- ------- ---------------------------------------------------------------------
<S> <C>
10.54 Employment agreement between Registrant, Epimmune and Deborah A.
Schueren dated October 1, 1997.(J)
10.55 Form of Severance Benefit Agreement between Registrant and the
following executive officers: Virgil D. Thompson; Robert L. Roe,
M.D.; James C. Paulson, Ph.D.; Edward C. Hall; Jennifer Lorenzen.(K)
10.69 Letter Agreement between Epimmune and Dr. Robert W. Chesnut regarding
severance benefits dated February 5, 1998.(Q)
10.70 Letter Agreement between Epimmune and Dr. Alessandro Sette regarding
severance benefits dated February 5, 1998.(Q)
10.71 Letter Agreement between Epimmune and Dr. Robert L. Roe regarding
severance benefits dated June 2, 1999.(Q)
10.72 Letter Agreement between Epimmune and Virgil Thompson regarding
severance benefits dated June 2, 1999.(Q)
10.73 Letter Agreement between the registrant and Stephen F. Keane dated
October 1999.
(A) Incorporated by reference to the Company's Form S-1 Registration
Statement and Amendments thereto (File No. 33-43356)
(B) Incorporated by reference to the Company's Form 8-K, dated March 19,
1993.
(C) Incorporated by reference to the Company's Annual Report on Form
10-K, for the fiscal year ended December 31, 1992, filed on March 26,
1993.
(D) Incorporated by reference to the Company's Annual Report on Form
10-K, for the fiscal year ended December 31, 1993, filed on March 29,
1994.
(E) Incorporated by reference to the Company's Annual Report on Form
10-K, for the fiscal year ended December 31, 1994, filed on March 31,
1995.
(F) Incorporated by reference to the Company's Quarterly Report on Form
10-Q/A, Amendment No. 1, for the quarterly period ended March 31,
1995, filed on August 17, 1995.
(G) Incorporated by reference to the Company's Annual Report on Form
10-K, for the fiscal year ended December 31, 1995, filed on March 22,
1996.
(H) Incorporated by reference to the Company's Annual Report on Form
10-K, for the fiscal year ended December 31, 1996, filed on March 31,
1997.
(I) Incorporated by reference to the Company's Quarterly Report on Form
10-Q, for the quarterly period ended September 30, 1997, filed on
November 14, 1997.
(J) Incorporated by reference to the Company's Annual Report on Form
10-K, for the fiscal year ended December 31, 1997, filed on March 31,
1998.
</TABLE>
26
<PAGE> 28
<TABLE>
<CAPTION>
Exhibit
Number Document Description
- ------- ---------------------------------------------------------------------
<S> <C>
(K) Incorporated by reference to the Company's Quarterly Report on Form
10-Q, for the quarterly period ended March 31, 1998, filed on May 15,
1998.
(L) Incorporated by reference to the Company's Quarterly Report on Form
10-Q, for the quarterly period ended June 30, 1998, filed on August
14, 1998.
(M) Incorporated by reference to the Company's Quarterly Report on Form
10-Q, for the quarterly period ended September 30, 1998, filed on
November 16, 1998.
(N) Incorporated by reference to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1999, filed on April 15,
1999.
(O) Incorporated by reference to the Company's Quarterly Report on Form
10-Q, for the quarterly period ended March 31, 1999, filed on May 17,
1999.
(P) Incorporated by reference to the Company's Form 8-K, filed on July
16, 1999.
(Q) Incorporated by reference to the Company's Quarterly Report on Form
10-Q, for the quarterly period ended June 30, 1999, filed on August
16, 1999.
(R) Incorporated by reference to the Company's Quarterly Report on Form
10-Q, for the quarterly period ended September 30, 1999, filed on
November 15, 1999.
(1) Certain confidential portions deleted pursuant to Order Granting
Application Under the Securities Act of 1933 and Rule 406 Thereunder
Respecting Confidential Treatment dated November 21, 1991.
(2) Certain confidential portions deleted pursuant to Order Granting
Application Under the Securities Exchange Act of 1934 and Rule 24b-2
Thereunder Respecting Confidential Treatment dated May 15, 1996.
(3) Certain confidential portions deleted pursuant to Order Granting
Application Under the Securities Exchange Act of 1934 and Rule 24b-2
Thereunder Respecting Confidential Treatment dated December 17, 1997.
(4) Certain confidential portions deleted pursuant to Order Granting
Application Under the Securities Exchange Act of 1934 and Rule 24b-2
Thereunder Respecting Confidential Treatment dated July 15, 1998.
(5) Certain confidential portions deleted pursuant to Order Granting
Application Under the Securities Exchange Act of 1934 and Rule 24b-2
Thereunder Respecting Confidential Treatment dated December 17, 1998.
(b) REPORT ON FORM 8-K
None.
(C) EXHIBITS
The response to this portion of Item 14 is submitted as
Item 14(a)(3).
(D) FINANCIAL STATEMENT SCHEDULES
The consolidated financial statement schedules required by this Item
are listed under Item 14(a)(2).
</TABLE>
27
<PAGE> 29
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on this 17th day of March,
2000.
Epimmune Incorporated
By /s/ Deborah A. Schueren
--------------------------------------
Deborah A. Schueren
President, Chief Executive Officer and
Chief Financial Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Deborah A. Schueren and Howard E. Greene, Jr., and each
of them, his attorney-in-fact, with the full power of substitution, for him in
any and all capacities, to sign any amendments to this Report, and to file the
same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorneys-in-fact, or his or her substitute or substitutes, may do
or cause to be done by virtue hereof.
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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ DEBORAH A. SCHUEREN President, Chief Executive Officer March 17, 2000
- -------------------------- Chief Financial Officer and Director
Deborah A. Schueren (Principal Executive Officer and Principal
Financial and Accounting Officer)
/s/ HOWARD E. GREENE, JR. Chairman of the Board and Director March 17, 2000
- --------------------------
Howard E. Greene, Jr.
/s/ WILLIAM T. COMER Director March 17, 2000
- --------------------------
William T. Comer, Ph.D.
/s/ MICHAEL G. GREY Director March 17, 2000
- --------------------------
Michael G. Grey
/s/ NANCY D. RASMUSSEN Director March 17, 2000
- --------------------------
Nancy D. Rasmussen
/s/ NICOLE VITULLO Director March 17, 2000
- --------------------------
Nicole Vitullo
</TABLE>
<PAGE> 30
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Stockholders
Epimmune Inc.
We have audited the accompanying consolidated balance sheets of Epimmune Inc. as
of December 31, 1999 and 1998, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1999. 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 auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Epimmune Inc. at
December 31, 1999 and 1998, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
1999, in conformity with accounting principles generally accepted in the United
States.
ERNST & YOUNG LLP
San Diego, California
January 21, 2000, except for Note 11,
as to which the date is March 7, 2000
F-1
<PAGE> 31
Epimmune Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,843,000 $ 2,476,000
Short-term investments 6,412,000 9,217,000
Prepaids and other current assets 460,000 1,775,000
------------- -------------
Total current assets 8,715,000 13,468,000
Restricted cash 472,000 472,000
Property and equipment, net 817,000 2,879,000
Patents, net 2,700,000 4,055,000
Deposits and other assets 1,000 156,000
------------- -------------
$ 12,705,000 $ 21,030,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 970,000 $ 2,289,000
Deferred contract revenues 38,000 515,000
Accrued restructuring cost 342,000 --
Accrued payroll and related expenses 212,000 416,000
Current portion of notes payable 230,000 493,000
------------- -------------
Total current liabilities 1,792,000 3,713,000
Deferred rent 55,000 --
Notes payable, less current portion 436,000 1,606,000
Commitments
Minority interest in consolidated subsidiary -- 1,735,000
Stockholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares
authorized, 1,409,288 and 659,898 shares issued and
outstanding at December 31, 1999 and 1998, 14,000 7,000
respectively
Common stock, $.01 par value, 25,000,000 and 75,000,000 shares
authorized at December 31, 1999 and 1998, respectively;
6,048,945 and 4,987,453 shares issued and outstanding at
December 31, 1999 and 1998, respectively 60,000 50,000
Additional paid-in capital 147,393,000 142,642,000
Accumulated deficit (136,988,000) (128,723,000)
Unrealized loss on available-for-sale securities (57,000) --
------------- -------------
Total stockholders' equity 10,422,000 13,976,000
------------- -------------
$ 12,705,000 $ 21,030,000
============= =============
</TABLE>
See accompanying notes
F-2
<PAGE> 32
Epimmune Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES:
Research and development $ 2,500,000 $ 2,005,000 $ 3,428,000
Research grants and other income 1,668,000 1,692,000 1,623,000
------------ ------------ ------------
Total revenues 4,168,000 3,697,000 5,051,000
COSTS AND EXPENSES:
Research and development 8,716,000 18,352,000 16,537,000
General and administrative 2,508,000 4,587,000 3,735,000
Restructuring costs 2,707,000 -- --
Write-off of in-process
technology 3,154,000 -- --
Loss on permanent impairment
of intangible assets -- 3,400,000 --
------------ ------------ ------------
Total costs and expenses 17,085,000 26,339,000 20,272,000
------------ ------------ ------------
Loss from operations (12,917,000) (22,642,000) (15,221,000)
Minority interest in net loss of
consolidated subsidiary 523,000 441,000 --
Interest income, net 367,000 860,000 825,000
Other income, net 544,000 -- --
Gain (loss) on sales and
disposal of assets 3,218,000 (194,000) --
------------ ------------ ------------
Net loss $ (8,265,000) $(21,535,000) $(14,396,000)
============ ============ ============
Net loss per share-basic and
diluted $ (1.56) $ (4.48) $ (3.92)
============ ============ ============
Shares used in computing net
loss per share-basic and
diluted 5,289,547 4,801,872 3,668,221
============ ============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE> 33
Epimmune Inc.
Consolidated Statement of Stockholders' Equity
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
-------------------- -------------------- Paid-in
Shares Amount Shares Amount Capital
--------- ------- --------- ------- ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 -- $ -- 3,584,473 $36,000 $120,310,000
Issuance of common stock -- -- 1,018,741 10,000 11,254,000
Unrealized gains on available-
for-sale securities -- -- -- -- --
Net loss -- -- -- -- --
--------- ------- --------- ------- ------------
Balance at December 31, 1997 -- -- 4,603,214 46,000 131,564,000
Issuance of common stock
for cash -- -- 299,764 3,000 2,692,000
Issuance of common stock for
technology -- -- 84,475 1,000 899,000
Issuance of Cytel Series B
preferred stock, net of
issuance costs 659,898 7,000 -- -- 3,593,000
Investment by Searle in
Epimmune -- -- -- -- 3,894,000
Unrealized gains on available-
for-sale securities -- -- -- -- --
Net loss -- -- -- -- --
--------- ------- --------- ------- ------------
Balance at December 31, 1998 659,898 7,000 4,987,453 50,000 142,642,000
Issuance of common stock
for cash -- -- 33,910 1,000 202,000
Issuance of common stock in
exchange for Epimmune
common stock -- -- 1,027,582 9,000 1,792,000
Issuance of Cytel Series S and
S-1 preferred stock net of
retirement of Series B 749,390 7,000 -- -- 2,499,000
Issuance of warrants to former
employees as part of
separation agreements -- -- -- -- 258,000
Unrealized gains on available-
for-sale securities -- -- -- -- --
Net loss -- -- -- -- --
--------- ------- --------- ------- ------------
Balance at December 31, 1999 1,409,288 $14,000 6,048,945 $60,000 $147,393,000
========= ======= ========= ======= ============
</TABLE>
<TABLE>
<CAPTION>
Unrealized
Gains (Losses)
on Available- Total
Accumulated for-sale Stockholders' Comprehensive
Deficit Securities Equity Income
------------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 $ (92,792,000) $(64,000) $ 27,490,000
Issuance of common stock -- -- 11,264,000
Unrealized gains on available-
for-sale securities -- 34,000 34,000 34,000
Net loss (14,396,000) -- (14,396,000) (14,396,000)
------------- -------- ------------ ------------
Balance at December 31, 1997 (107,188,000) (30,000) 24,392,000 $(14,362,000)
============
Issuance of common stock
for cash -- -- 2,695,000
Issuance of common stock for
technology -- -- 900,000
Issuance of Cytel Series B
preferred stock, net of
issuance costs -- -- 3,600,000
Investment by Searle in
Epimmune -- -- 3,894,000
Unrealized gains on available-
for-sale securities -- 30,000 30,000 30,000
Net loss (21,535,000) -- (21,535,000) (21,535,000)
------------- -------- ------------ ------------
Balance at December 31, 1998 (128,723,000) -- 13,976,000 $(21,505,000)
============
Issuance of common stock
for cash -- -- 203,000
Issuance of common stock in
exchange for Epimmune
common stock -- -- 1,801,000
Issuance of Cytel Series S and
S-1 preferred stock net of
retirement of Series B -- -- 2,506,000
Issuance of warrants to former
employees as part of
separation agreements -- -- 258,000
Unrealized gains on available-
for-sale securities -- (57,000) (57,000) (57,000)
Net loss (8,265,000) -- (8,265,000) (8,265,000)
------------- -------- ------------ ------------
Balance at December 31, 1999 $(136,988,000) $(57,000) $ 10,422,000 $ (8,322,000)
============= ======== ============ ============
</TABLE>
See accompanying notes.
F-4
<PAGE> 34
Epimmune Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1999 1998 1997
----------- ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(8,265,000) $(21,535,000) $(14,396,000)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 577,000 811,000 786,000
Deferred rent 56,000 (225,000) (252,000)
Deferred revenue (477,000) 437,000 (654,000)
Loss on permanent impairment of intangible assets -- 3,400,000 --
Minority interest in consolidated subsidiary (523,000) (441,000) --
(Gain) loss on disposal of assets (3,218,000) 194,000 --
Accrued restructuring 2,707,000 -- --
Restructuring operating expenses (1,792,000) -- --
Write-off of in-process technology 3,154,000 -- --
Changes in operating assets and liabilities:
Other current assets 697,000 (493,000) 110,000
Accounts payable and accrued liabilities (1,451,000) 1,534,000 (1,236,000)
Accrued payroll and related expense (205,000) (47,000) (187,000)
----------- ------------ ------------
Net cash used in operating activities (8,740,000) (16,365,000) (15,829,000)
INVESTING ACTIVITIES
Purchases of available-for-sale securities (2,470,000) (18,909,000) (33,612,000)
Maturities of available-for-sale securities 1,085,000 14,145,000 21,875,000
Sales of available-for-sale securities 4,133,000 7,193,000 20,800,000
Proceeds from the sale of equipment 3,687,000 109,000 55,000
Proceeds from the sale of assets of subsidiary -- -- 161,000
Proceeds from the sale of patents (net of fees) 3,035,000 -- --
Principal payments on note receivable -- 100,000 50,000
Purchases of property and equipment (739,000) (2,274,000) (644,000)
Assets transferred to subsidiary at net book value -- -- 84,000
Expenditures related to early lease termination -- (226,000) --
Patents (878,000) (1,320,000) (878,000)
Deposits and other assets 23,000 574,000 (29,000)
Repayment of note 519,000 -- --
----------- ------------ ------------
Net cash provided by (used in) investing activities 8,395,000 (608,000) 7,862,000
FINANCING ACTIVITIES
Principal payments under equipment notes payable and
note payable to bank (1,001,000) (1,207,000) (716,000)
Restricted cash released as note payable
collateral -- 1,031,000 375,000
Restricted cash for building lease agreement -- (472,000) --
Proceeds from the issuance of equipment notes
payable 510,000 1,515,000 --
Net proceeds from issuance of Cytel Series B
preferred stock -- 3,600,000 --
Net proceeds from Searle investment in Epimmune -- 6,100,000 --
Net proceeds from issuance of common stock 203,000 2,695,000 11,264,000
----------- ------------ ------------
Net cash (used in) provided by financing activities (288,000) 13,262,000 10,923,000
----------- ------------ ------------
Increase (decrease) in cash and cash equivalents (633,000) (3,711,000) 2,956,000
Cash and cash equivalents at beginning of year 2,476,000 6,187,000 3,231,000
----------- ------------ ------------
Cash and cash equivalents at end of year $ 1,843,000 $ 2,476,000 $ 6,187,000
=========== ============ ============
</TABLE>
F-5
<PAGE> 35
Epimmune Inc.
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1999 1998 1997
---------- -------- --------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 111,000 $122,000 $119,000
========== ======== ========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Early lease termination - net debt extinguishment
and asset abandonment $ -- $153,000 $ --
========== ======== ========
Asset write down in accrued restructuring $ 593,000 $ -- $ --
========== ======== ========
Assumption of debt by Nextran $ 838,000 $ -- $ --
========== ======== ========
Issuance of common stock for patent rights $ -- $900,000 $ --
========== ======== ========
Exchange of common and preferred stock, for minority
interest in Epimmune $4,307,000 $ -- $ --
========== ======== ========
Promissory note and stock received for sale of
assets of subsidiary $ -- $ -- $800,000
========== ======== ========
</TABLE>
See accompanying notes.
F-6
<PAGE> 36
Epimmune Inc.
Notes to Consolidated Financial Statements
December 31, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS ACTIVITY
Cytel Corporation was incorporated in Delaware on July 10, 1987. On July 1,
1999, Cytel merged with its majority-owned subsidiary, Epimmune Inc., and
changed its name from Cytel Corporation to Epimmune Inc. The Company's mission
is to develop novel vaccines for the treatment and prevention of infectious
diseases and cancer.
Unless otherwise indicated, all references to "Cytel" are to predecessor Cytel
Corporation, all references to "Epimmune" are to Epimmune Inc., a majority-owned
subsidiary of Cytel until July 1, 1999. All references to the "Company" are to
the combined entity of Cytel and Epimmune.
PRINCIPLES OF CONSOLIDATION
On July 1, 1999, the Company completed a series of transactions (the "Exchange
Transactions") in which it: (i) transferred all of the outstanding shares of
Epimmune's Series B-1 Preferred Stock then held by Cytel to G.D.Searle & Co.
("Searle") in exchange for all of the outstanding shares of Cytel's Series B
Preferred Stock, (ii) issued 859,666 shares of Cytel's Series S Preferred Stock
and 549,622 shares of Cytel's Series S-1 Preferred Stock to Searle in exchange
for all outstanding shares of Epimmune's Series B Preferred Stock and Series B-1
Preferred Stock and (iii) issued a total of 1,027,782 shares of Cytel's Common
Stock to the holders of Common Stock of Epimmune in exchange for all outstanding
shares of Epimmune's Common Stock. The acquisition of the minority interest in
Epimmune, through the exchange transaction, was accounted for as a purchase. The
Company recorded the acquisition of the minority interest at the fair market
value of the preferred and common stock issued, and determined that the excess
of the purchase price over the identifiable net assets of $3.2 million was
in-process technology based on a discounted cash flow analysis of that
technology. The analysis, with a discount rate of 50%, was based on estimated
research and development costs for nine years and product revenues beginning in
year six, after the assumed completion of clinical trials and product approval
by the FDA. The analysis also considered milestone payments based on scientific
accomplishments and new collaborative revenues based on projected future
collaboration agreements. The value of the technology was charged to acquired
in-process technology because technological feasibility had not been achieved
nor had alternative future uses for the technology been identified. Following
the Exchange Transactions, Cytel merged with Epimmune and changed its name to
Epimmune Inc. As of December 31, 1999, Searle owned 5.25% of the Company's
outstanding common stock and all of the Company's outstanding preferred stock.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist primarily of cash, certificates of deposit,
treasury securities and repurchase agreements with original maturities at the
date of acquisition of less than three months.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SHORT-TERM INVESTMENTS
F-7
<PAGE> 37
Epimmune Inc.
Notes to Consolidated Financial Statements
December 31, 1999
The Company has classified its investments as available-for-sale and accordingly
carries them at fair value. Unrealized holding gains or losses on these
securities are included in comprehensive income. The amortized cost of debt
securities in this category is adjusted for amortization of premiums and
accretion of discounts to maturity. Such amortization is included in interest
income. Realized gains and losses are also included in interest income. The cost
of securities sold is based on the specific identification method.
CONCENTRATION OF CREDIT RISK
The Company invests its excess cash in U.S. government securities and debt
instruments of financial institutions and corporations with strong credit
ratings. The Company has established guidelines relative to diversification and
maturities that maintain safety and liquidity. These guidelines are periodically
reviewed and modified to take advantage of trends in yields and interest rates.
Management attempts to schedule the maturities of the Company's investments to
coincide with the Company's expected cash requirements.
PROPERTY AND EQUIPMENT
Furniture and equipment is stated at cost and depreciation is computed using the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are amortized using the straight-line method over the shorter of
the estimated useful life of the assets or the lease term.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standards No. 121 (SFAS No.
121), Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of, if indicators of impairment exist, the Company
assesses the recoverability of the affected long-lived assets by determining
whether the carrying value of such assets can be recovered through undiscounted
future operating cash flows. If impairment is indicated, the Company values the
asset at fair value. As described fully under Note 2 - Discontinuance of Cytel
operations, management determined that the cell adhesion patent assets were
impaired, and recorded a $3.4 million loss on permanent impairment of these
assets in 1998.
PATENT COSTS
Patent costs are amortized on a straight-line basis over ten years. The patent
costs are shown net of accumulated amortization of $246,000 at December 31,
1999.
DEFERRED RENT
Rent expense is recognized on a straight-line basis over the terms of the
leases. Accordingly, rent expense incurred in excess of rent paid is reflected
as deferred rent.
F-8
<PAGE> 38
Epimmune Inc.
Notes to Consolidated Financial Statements
December 31, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options because the
alternative fair value accounting provided for under SFAS No. 123, "Accounting
for Stock-Based Compensation" ("SFAS 123") requires use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
Deferred compensation for options granted to non-employees has been determined
in accordance with SFAS 123 and Emerging Issues Task Force No. 96-18 as the fair
value of the consideration received or the fair value of the equity instruments
issued, whichever is more reliably measured. Deferred charges for options
granted to non-employees are periodically remeasured as the underlying options
vest.
RESEARCH AND DEVELOPMENT REVENUES AND EXPENSES
Collaboration revenues are earned and recognized as research costs are incurred
in accordance with the provisions of each agreement. Fees paid to initiate
research projects are deferred and recognized over the project period. Milestone
payments are recognized as revenue upon the completion of the milestone. Revenue
from grants is recognized on a percentage of completion basis as related costs
are incurred. The Company recognizes revenue only on payments that are
non-refundable, and defers revenue recognition until performance obligations
have been completed. Research and development costs are expensed as incurred.
Expenses under research grants and contracts, which are included in research and
development, were approximately $4,900,000, $4,500,000 and $3,500,000 for 1999,
1998 and 1997, respectively.
RESEARCH GRANTS
Research grants represent research and development revenues primarily from
National Institutes of Health.
NET LOSS PER SHARE
Basic and diluted net loss per share is computed using the weighted average
number of common shares outstanding during the period. All potential common
shares have been excluded from the diluted net loss per share calculations as
they are antidilutive to net loss.
COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted the SFAS No. 130, "Reporting
Comprehensive Income". SFAS No. 130 establishes new rules for the reporting and
display of comprehensive income (loss) and its components; the Company has
disclosed its comprehensive income (loss) in the statement of stockholders'
equity (deficit).
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the current
year presentation.
F-9
<PAGE> 39
Epimmune Inc.
Notes to Consolidated Financial Statements
December 31, 1999
2. DISCONTINUANCE OF CYTEL OPERATIONS AND SALE OF CERTAIN RELATED ASSETS
DISCONTINUANCE OF CYTEL OPERATIONS
On March 29, 1999, Cytel announced the results from Phase II/III clinical trials
of its lead therapeutic compound, Cylexin, showing no benefit over placebo.
Accordingly, Cytel terminated its therapeutic anti-inflammatory business and
recorded a charge of $3.4 million as of December 31, 1998, representing the book
value of its cell adhesion patent portfolio. This charge was recorded in
accordance with SFAS 121 after Cytel determined that its intangible assets were
permanently impaired.
Based on the determination to terminate Cytel's businesses and focus future
operations on Epimmune, Cytel recorded a restructuring charge of $3.7 million in
the first quarter 1999. This restructuring charge was reduced to $2.7 million in
the fourth quarter 1999, primarily due to early terminations and subsequent
subleasing of facility leases and auction proceeds received for sale of assets.
The accrued restructuring cost includes the following:
<TABLE>
<CAPTION>
December 31, March 31,
1999 1999
------------ ----------
<S> <C> <C>
Minimum commitments for lease facilities $ 56,000 $1,200,000
Employee severance 10,000 827,000
Exit cost of operations -- 628,000
Write-down to fair value for certain assets -- 575,000
held for sale
Other loss contingencies 276,000 470,000
-------- ----------
Accrued restructuring costs $342,000 $3,700,000
======== ==========
</TABLE>
SALE OF THE GLYTEC CARBOHYDRATE SYNTHESIS AND MANUFACTURING BUSINESS
On February 28, 1999, Cytel licensed its proprietary carbohydrate synthesis and
manufacturing intellectual property assets to Baxter Healthcare Corporation's
Nextran unit ("Nextran") for exclusive use in xenotransplantation. Cytel
received total consideration of $4.0 million, of which $3.2 million was cash and
$0.8 million was assignment of certain liabilities to Nextran. Additionally,
Nextran assumed the facility lease and certain personnel and fixed assets
related to this manufacturing operation. On March 26, 1999, Cytel sold the
remainder of its Glytec carbohydrate synthesis and manufacturing intellectual
property assets to Neose Technologies, Inc. ("Neose"). Neose paid Cytel $3.5
million cash and paid an additional $1.5 million into escrow, the release of
which is conditioned on the Company's satisfaction of certain matters relating
to the patents and licenses acquired by Neose. Neose may pay the Company up to
an additional $1.6 million contingent on potential payments and revenues
realized by Neose in connection with certain future corporate collaborations.
The Company has recorded the gain relating to the initial cash consideration and
will record subsequent gains as they are realized, if at all. As a result of
these transactions, Cytel recorded a gain of approximately $3.2 million.
F-10
<PAGE> 40
Epimmune Inc.
Notes to Consolidated Financial Statements
December 31, 1999
3. SHORT-TERM INVESTMENTS
The following tables summarize available-for-sale securities:
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE SECURITIES
-----------------------------------------------------------
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- -------- ----------- ----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1999
U.S. Government Securities $ 500,000 $ -- $ (5,000) $ 495,000
Corporate Obligations 5,969,000 -- (52,000) 5,917,000
---------- -------- ----------- ----------
$6,469,000 $ -- $ (57,000) $6,412,000
========== ====== =========== ==========
</TABLE>
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE SECURITIES
-----------------------------------------------------------
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- -------- ----------- ----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1998
U.S. Government Securities $2,018,000 $ 2,000 $ (1,000) $2,019,000
Corporate Obligations 7,199,000 5,000 (6,000) 7,198,000
---------- -------- ----------- ----------
$9,217,000 $ 7,000 $ (7,000) $9,217,000
========== ======== =========== ==========
</TABLE>
The above tables exclude an aggregate of $599,000 and $1,000,000 in U.S.
government securities and corporate obligations which are classified as cash
equivalents in the accompanying balance sheets at December 31, 1999 and 1998,
respectively, due to the contractual maturity of these assets.
The amortized cost and estimated fair value of debt securities at December 31,
1999, by contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because the issuers of the securities may have the
right to prepay obligations without prepayment penalties.
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
-------------------------- --------------------------
ESTIMATED ESTIMATED
COST FAIR VALUE COST FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Due in one year or less $3,642,000 $3,618,000 $4,037,000 $4,037,000
Due after one to four years 2,827,000 2,794,000 5,180,000 5,180,000
---------- ---------- ---------- ----------
$6,469,000 $6,412,000 $9,217,000 $9,217,000
========== ========== ========== ==========
</TABLE>
F-11
<PAGE> 41
Epimmune Inc.
Notes to Consolidated Financial Statements
December 31, 1999
4. BALANCE SHEET INFORMATION
Other current assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
----------- -----------
<S> <C> <C>
Investment income and grant revenue receivable $ 368,000 $ 982,000
Prepaid expenses 56,000 268,000
Reimbursement for incurred license costs 36,000 --
Note receivable - current portion -- 525,000
----------- -----------
$ 460,000 $ 1,775,000
=========== ===========
</TABLE>
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
----------- -----------
<S> <C> <C>
Furniture and equipment $ 826,000 $ 7,344,000
Leasehold improvements 215,000 1,451,000
Construction in progress -- 23,000
----------- -----------
1,041,000 8,818,000
Less accumulated depreciation and amortization (224,000) (5,939,000)
----------- -----------
$ 817,000 $ 2,879,000
=========== ===========
</TABLE>
Accounts payable and accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
----------- -----------
<S> <C> <C>
Trade accounts payable $ 821,000 $ 1,817,000
Directors deferred compensation 64,000 33,000
Miscellaneous accrued liabilities 85,000 439,000
----------- -----------
$ 970,000 $ 2,289,000
=========== ===========
</TABLE>
F-12
<PAGE> 42
Epimmune Inc.
Notes to Consolidated Financial Statements
December 31, 1999
5. ADDITIONAL STATEMENT OF OPERATIONS INFORMATION
As a result of the events described in Note 1, the Company is presenting
additional information related to the operations of Cytel and Epimmune. As of
July 1, 1999, Cytel and Epimmune merged.
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
CYTEL CONSOLIDATING
CORPORATION EPIMMUNE INC. ENTRIES TOTAL
----------- ------------ -------- ------------
<S> <C> <C> <C> <C>
REVENUES:
Research and development $ 500,000 $ 2,000,000 $ -- $ 2,500,000
Research grants and other income 25,000 1,643,000 -- 1,668,000
----------- ------------ -------- ------------
Total revenues 525,000 3,643,000 -- 4,168,000
COSTS AND EXPENSES:
Research and development 3,042,000 5,674,000 -- 8,716,000
General and administrative 870,000 1,638,000 -- 2,508,000
Restructuring costs 2,707,000 -- -- 2,707,000
Write-off of in-process technology -- 3,154,000 -- 3,154,000
----------- ------------ -------- ------------
Total costs and expenses 6,619,000 10,466,000 -- 17,085,000
----------- ------------ -------- ------------
Loss from operations (6,094,000) (6,823,000) -- (12,917,000)
Minority interest in net loss of
consolidated subsidiary -- -- 523,000 523,000
Interest income (expense) (44,000) 411,000 -- 367,000
Other income (expense), net 550,000 (6,000) -- 544,000
Gain (loss) on sales and disposal of assets 3,296,000 (78,000) -- 3,218,000
----------- ------------ -------- ------------
Net loss $(2,292,000) $ (6,496,000) $523,000 $ (8,265,000)
=========== ============ ======== ============
</TABLE>
F-13
<PAGE> 43
Epimmune Inc.
Notes to Consolidated Financial Statements
December 31, 1999
6. STOCKHOLDERS' EQUITY
STOCK WARRANTS
In June 1999 and September 1999, the Company issued warrants to purchase 235,200
shares and 5,804 shares, respectively, of Common Stock with an exercise price of
$1.875 to former officers of Cytel. The warrants were issued in connection with
severance agreements and were recorded at their fair value on the date of grant.
The expense associated with the issuance of the warrants was included as part of
the restructuring charge. The warrants expire June 2003.
EMPLOYEE STOCK PURCHASE PLAN
In October 1991, Cytel adopted an Employee Stock Purchase Plan ("ESPP") whereby
employees, at their option, could purchase shares of Cytel common stock through
payroll deductions at the lower of 85% of the fair market value on the plan
offering date or 85% of the fair market value of the common stock at the
purchase date. The Stock Plan was terminated in July 1999. As of the termination
date of the ESPP, 85,558 shares of common stock have been issued under the Stock
Plan.
STOCK PLANS
1989 STOCK PLAN
In November 1989, Cytel adopted a Stock Plan ("the Plan"), under which options
may be granted to employees, directors, consultants or advisors of Cytel. The
Plan provides for the grant of both incentive stock options and nonstatutory
stock options. The exercise price of an incentive stock option is not less than
the fair market value of the common stock on the date of grant. The exercise
price of nonstatutory options is not less than 85% of the fair market value of
the common stock on the date of grant. No options granted under the Plan have a
term in excess of ten years from the date of grant. Shares and options issued
under the Plan vest over varying periods of one to six years. As of December 31,
1999, 693,025 options to purchase common stock were outstanding and 138,214
options were available for future grant.
1997 STOCK PLAN
In December 1997, Epimmune Inc. adopted a Stock Plan ("Epimmune Stock Plan"),
under which options were granted to employees, directors, and consultants of
Epimmune Inc. The Epimmune Stock Plan provides for the grant of both incentive
stock options and nonstatutory stock options. The exercise price of an incentive
stock option was not less than the fair market value of the common stock on the
date of grant. The exercise price of nonstatutory options was not less than 85%
of the fair market value of the common stock on the date of grant. No options
granted under the Plan have a term in excess of ten years from the date of
grant. Options issued under the Plan vest over varying periods of one to four
years. Effective with the Exchange Transaction, the Company assumed 423,283
options granted under the Epimmune Stock Plan. Options that terminate will not
be available for future grant. As of December 31, 1999, 361,337 options were
outstanding.
F-14
<PAGE> 44
Epimmune Inc.
Notes to Consolidated Financial Statements
December 31, 1999
6. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTION REPRICING
In June 1998, the stockholders approved an Option Exchange Program for certain
options under the 1989 Plan. These options vest over a six year period in
accordance with a schedule developed by management, in conjunction with the
State of Wisconsin Investment Board, a major stockholder of the Company. On the
date of approval, all current employees were eligible to participate; however,
options granted to outside directors and consultants to the Company were
excluded from the exchange. There were 546,962 options eligible for
participation, of which 303,145 options were repriced. The effective exchange
price was $10.7188. Eligible employees who elected to participate forfeited a
total of 42,879 shares. These shares were permanently canceled and not returned
to the 1989 Plan for future grant. The Option Exchange Program imposes
restrictive vesting provisions. If the holder exercises vested options before
the sixth year, then the remaining unvested options do not vest until the end of
the sixth year, at which time all remaining shares will be fully vested.
The following table summarizes stock option activity under all stock option
plans for the three years ended December 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED
SHARES AVERAGE PRICE
--------- -------------
<S> <C> <C>
Balance at December 31, 1996 588,780 32.55
Granted 133,788 19.95
Exercised (1,931) 2.10
Cancelled (180,044) 27.79
--------- ------
Balance at December 31, 1997 540,593 30.94
Granted 437,671 10.82
Exercised (1,997) 1.50
Cancelled (418,009) 32.84
--------- ------
Balance at December 31, 1998 558,258 13.88
Granted 453,754 3.38
Assumed from Epimmune 423,283 0.27
Exercised (25,023) 0.40
Cancelled (355,910) 12.36
--------- ------
Balance at December 31, 1999 1,054,362 $ 4.76
========= ======
</TABLE>
As of December 31, 1999, 138,214 shares are available for future issuance under
these option plans. The following is a summary of the options outstanding as of
December 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
AVERAGE WEIGHTED AVERAGE
REMAINING AVERAGE EXERCISE PRICE OF
RANGE OF EXERCISE OPTIONS LIFE IN EXERCISE OPTIONS OPTIONS
PRICES OUTSTANDING YEARS PRICE EXERCISABLE EXERCISABLE
- ----------------- ----------- --------- -------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
$01.16 - $02.25 366,721 8.31 $ 0.35 365,113 $ 0.34
$03.18 - $03.18 355,500 9.95 3.19 4,192 3.19
$03.75 - $10.72 257,172 6.45 8.36 147,382 10.72
$11.16 - $42.88 74,969 4.06 21.41 70,429 21.58
--------- -------
Total 1,054,362 587,116
========= =======
Weighted averages 8.11 $ 4.76 5.32
</TABLE>
F-15
<PAGE> 45
Epimmune Inc.
Notes to Consolidated Financial Statements
December 31, 1999
6. STOCKHOLDERS' EQUITY (CONTINUED)
Adjusted pro forma information regarding net income or loss is required by SFAS
123, and has been determined as if the Company had accounted for its employee
stock options under the fair value method of that Statement. The fair value for
these options was estimated at the date of grant using the "Black-Scholes"
method for option pricing with the following weighted average assumptions for
1999, 1998, and 1997: risk-free interest rates of 6%; dividend yield of 0; and a
weighted average expected life for all options of six years. The volatility
factor assumptions of the expected market price the Company's common stock were
135%, 105% and 105% for 1999, 1998 and 1997, respectively.
For purposes of adjusted pro forma disclosures, the estimated fair value of the
option is amortized to expense over the option's vesting period. The Company's
adjusted pro forma information is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Pro forma net loss $(11,225,000) $(23,895,000) $(17,273,000)
Pro forma net loss per share $ (2.12) $ (4.98) $ (4.69)
</TABLE>
The weighted average fair value of options granted during 1999, 1998 and 1997
was $3.02, $8.11 and $14.49, respectively.
In March 1993, the Company adopted a Stockholder Rights Plan. The Plan provides
for the distribution of a preferred stock purchase right (Rights) as a dividend
for each share of the Company's common stock held as of the record date at the
close of business on April 8, 1993. Under certain conditions involving an
acquisition by any person or group of 15% or more of the common stock, the
Rights permit the holders (other than the 15% holder) to purchase one
one-hundredth of a share of Series A Preferred Stock at a price of $80 per one
one-hundredth of a preferred share per Right. Each one one-hundredth of a share
of preferred stock has rights, privileges and preferences which make its value
approximately equal to the value of a common share. In addition, in the event of
certain business combinations, the Rights permit the purchase of the common
stock of an acquirer at a 50% discount. Under certain conditions, the Rights may
be redeemed by the Board of Directors at a price of $.01 per Right. The Rights
have no voting privileges and are attached to and automatically trade with the
Company's common stock. The Rights will expire on March 19, 2003.
F-16
<PAGE> 46
Epimmune Inc.
Notes to Consolidated Financial Statements
December 31, 1999
7. EQUIPMENT LOANS AND NOTES PAYABLE
In August 1998, Epimmune entered into a $750,000 loan and security agreement for
capital equipment purchases and certain tenant improvements. Total advances
under the credit line total $750,000 and $240,000 at December 31, 1999 and 1998,
respectively. The capital equipment financed secures all borrowings. The terms
of the credit line contain a financial covenant requiring the Company to
maintain minimum liquidity equal to nine months cash burn, which the Company was
in compliance with at December 31, 1999.
Equipment loans and notes payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1999 1998
---------- ----------
<S> <C> <C>
Equipment loan payable in monthly installments of
principal and interest of $23,600, at 9.25% interest,
due August 2002 $ 666,000 $ 240,000
Equipment loan payable in monthly installments of
principal and interest of $28,900, due 2002,
balance of loan assumed by Nextran in February 1999 -- 1,202,000
Unsecured note payable in monthly installments of
principal and 10% imputed interest of $24,900,
due June 2001, paid in June 1999 -- 657,000
---------- ----------
$ 666,000 $2,099,000
========== ==========
</TABLE>
Future annual principal payments on equipment loans and notes payable are as
follows at December 31, 1999:
<TABLE>
<CAPTION>
<S> <C>
2000 $ 230,000
2001 253,000
2002 183,000
---------
$ 666,000
=========
</TABLE>
F-17
<PAGE> 47
Epimmune Inc.
Notes to Consolidated Financial Statements
December 31, 1999
8. COMMITMENTS
The Company leases its offices and research facilities under operating leases
which expire at various dates through March 2009. Under these operating leases,
the Company pays taxes, insurance and maintenance expenses related to the
premises. Epimmune's facility lease requires a letter of credit of $472,000 to
secure the performance of the Company's lease obligation and is reflected as
restricted cash. Included in deposits and other assets is $113,000 deposited
under these agreements at December 31, 1998.
Rent expense for 1999, 1998 and 1997 was $1,690,000, $1,772,000 and $1,783,000,
respectively.
Future minimum lease payments under operating leases at December 31, 1999 are as
follows:
<TABLE>
<CAPTION>
OPERATING
YEAR LEASES
--------- -----------
<S> <C>
2000 $ 627,000
2001 546,000
2002 558,000
2003 567,000
2004 585,000
Thereafter 2,685,000
-----------
Total minimum lease payments $ 5,568,000
===========
</TABLE>
The Company subleased certain of its existing office and research facilities.
Rental income from the subleases for year 2000 will be approximately $45,000.
F-18
<PAGE> 48
Epimmune Inc.
Notes to Consolidated Financial Statements
December 31, 1999
9. REVENUES UNDER COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENTS
G.D. SEARLE & CO.
In September 1997, Searle purchased 317,460 shares of Cytel common stock for
$5.0 million. Cytel transferred $6.5 million in cash and $1.5 million in other
assets to capitalize Epimmune.
In February 1998, Epimmune entered into a collaborative research and development
agreement with Searle to develop immune-stimulating products for the treatment
of cancer. Under the terms of the agreement, Epimmune has granted Searle
exclusive worldwide rights to its epitope and PADRE technologies in the cancer
field, excluding rights previously granted to Takara Shuzo Co., Ltd. Biomedical
Group (Takara) for the ex vivo treatment of cancer in Japan. As part of the
February 1998 agreement, Searle purchased 1,032,149 shares of Epimmune's Series
B convertible preferred stock for $6.1 million and 659,898 shares of Cytel's
Series B convertible preferred stock for $3.9 million. Cytel simultaneously
purchased 659,898 shares of Epimmune's Series B-1 convertible preferred stock
for $3.9 million.
In July 1999, as a result of the Exchange Transaction, the Company transferred
all of the outstanding shares of Epimmune's Series B-1 Preferred Stock then held
by Cytel to Searle in exchange for all of the outstanding shares of Cytel's
Series B Preferred Stock, and issued 859,666 shares of Cytel's Series S
Preferred Stock and 549,622 shares of Cytel's Series S-1 Preferred Stock to
Searle in exchange for all outstanding shares of Epimmune's Series B Preferred
Stock and Series B-1 Preferred Stock.
In addition to the $15 million investment made to date, Searle will make
milestone payments to Epimmune upon achievement of certain preclinical and
clinical milestones, and will pay royalties on product sales. Searle has an
option to deliver shares of convertible preferred stock in lieu of up to 50% of
certain milestone payments. In addition, Searle has rights of first refusal with
respect to newly-issued securities of the Company, enabling Searle to maintain
its percentage ownership in the Company.
In August 1999, the Company received a $2.0 million milestone payment as a
result of Searle's acceptance of a lead product candidate for breast, lung and
colon cancers.
TAKARA SHUZO CO., LTD
Under two agreements with Takara, which were assigned to Epimmune in October
1997, Epimmune's technology is being applied to fungal disease targets and
ex-vivo cellular therapy for the treatment of cancer. Under the anti-fungal
collaboration initiated in June 1994, Takara obtained rights to any anti-fungal
products resulting from the collaboration for commercialization in Japan.
Epimmune has the right to develop products in North America, and the companies
share rights in the rest of the world. Research in the anti-fungal field, using
Epimmune technology is now being conducted independently by Takara in Japan.
Under the ex-vivo cellular therapy collaboration initiated in October 1994,
Takara obtained rights to Epimmune's technology relevant to the development of
ex vivo cellular therapies for the treatment of cancer in Japan. Takara will
make payments upon achievement of certain clinical milestones and pay royalties
to Epimmune on sales from products resulting from the collaboration under both
agreements.
ELAN CORPORATION, PLC.
In July 1998, Cytel entered into an exclusive sublicense and option agreement
with Elan International Services Ltd. (Elan), a subsidiary of Elan Corporation,
plc., granting Elan rights to patents involving use of antibodies that bind
VLA-4 integrin for the treatment of inflammatory conditions. In connection with
this agreement, which included the grant of an exclusive sublicense, Elan made a
$4.0 million equity investment in Cytel, based on the fair value of the stock,
of which $2.6 million was allocated to the purchase price of 285,714 shares of
the Company's common stock and $1.4 million was allocated to the rights granted
under the exclusive sublicense and option agreement. In addition, Elan has an
option to enter into a nonexclusive sublicense for patent rights to other VLA-4
blocking
F-19
<PAGE> 49
Epimmune Inc.
Notes to Consolidated Financial Statements
December 31, 1999
In June 1999, Cytel entered a further agreement eliminating milestone
obligations under the July 1998 agreement. Under the terms of the agreement,
Cytel received $0.5 million, which was recorded as other income.
10. INCOME TAXES
Significant components of the Company's deferred tax assets as of December 31,
1999 and 1998 are shown below. At December 31, 1999, a valuation allowance of
$61,374,000 of which $54,291,000 is related to 1998, has been recognized to
offset the deferred tax assets as realization of such assets is uncertain.
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Deferred tax liabilities:
Patents expensed for tax $ 900,000 $ 2,586,000
------------ ------------
Total deferred tax liabilities 900,000 2,586,000
Deferred tax assets:
Capitalized research expenses 3,691,000 3,376,000
Net operating loss carryforwards 49,179,000 44,849,000
Research and development credits 8,692,000 8,574,000
Other, net 712,000 78,000
------------ ------------
Total deferred tax assets 61,374,000 54,291,000
Valuation allowance for deferred tax assets (61,374,000) (54,291,000)
------------ ------------
Net deferred tax assets $ -- $ --
============ ============
</TABLE>
At December 31, 1999, the Company has federal and California net operating loss
carryforwards of approximately $127,766,000 and $74,344,000, respectively. The
difference between the federal and California tax loss carryforwards is
primarily attributable to the capitalization of research and development
expenses for California tax purposes and the fifty percent limitation on
California loss carryforwards prior to 1999. The federal tax loss carryforwards
will begin expiring in 2002, unless previously utilized. The California tax loss
carryforwards will continue to expire in 2000. The Company also has federal and
California research and development tax credit carryforwards of $6,610,000 and
$3,204,000, respectively, which will begin expiring in 2002 unless previously
utilized.
Pursuant to Internal Revenue Code Sections 382 and 383, the annual use of the
Company's net operating loss and credit carryforwards will be limited because of
greater than 50% cumulative changes in ownership which occurred during 1989 and
1994. However, the Company believes that these limitations will not have a
material impact on the financial statements.
11. SUBSEQUENT EVENTS
On February 16, 2000, the Company completed a private placement of 1,200,000
newly issued shares of common stock at $3.60 per share, based on a 15% discount
to the prior 30-day trading average. Net proceeds totaled $4.3 million.
On March 7, 2000, the Company received a $0.5 million payment from Elan for the
assignment of a license agreement to which Cytel was a party. The Company
retained an option for a non-exclusive license to certain technology.
F-20
<PAGE> 1
EXHIBIT 10.73
[EPIMMUNE LETTERHEAD]
October 6, 1999
Stephen F. Keane
2780 Angell Avenue
San Diego, California 92122
Dear Steve,
This letter defines the benefits to which you will be entitled upon termination
of your employment with Epimmune Inc. (the "Company") under the circumstances
described in this Agreement.
We agree that you are employed by the Company as an "at-will" employee and that
either you or the Company has the right at any time to terminate your employment
with the Company, with or without cause or advance notice, for any reason or for
no reason.
For purposes of this Agreement, the following terms will have the meanings set
forth below:
"BASE SALARY" means your salary (excluding bonus, any other incentive or
other payments and stock option exercises) paid by the Company in
consideration for your service during the 12 months prior to the
termination of your employment which is includable in your gross income
for federal income tax purposes or which would have been includable in
gross income except for an election either under Section 125 or
402(e)(3) of the Internal Revenue Code of 1986, as amended (the "Code"),
or under the terms of a nonqualified deferred compensation arrangement
sponsored by the Company.
"BENEFIT" means any payment received or to be received by you pursuant
to this Agreement.
"CAUSE" means (i) your material breach of any provision of this
Agreement; or (ii) your engaging or in any manner participating in any
activity which is directly competitive with or intentionally injurious
to the Company or which violates any provision of any confidential
information agreement or nonsolicitation agreement between you and the
Company; or (iii) your commission any fraud against the Company; or (iv)
your intentional improper use or appropriation for your personal use or
benefit of any funds or properties of the Company not authorized by the
Board of Directors of the Company or an authorized committee of such
Board of Directors to be so used or appropriated; or (v) your conviction
of any crime involving dishonesty or moral turpitude.
<PAGE> 2
Stephen F. Keane
October 6, 1999
Page 2
"CHANGE IN CONTROL" of the Company will be deemed to have occurred if
and when (i) any person or entity (other than the Company) or group of
persons and/or entities acting in concert acquires, directly or
indirectly, beneficial ownership of more than 50% of the outstanding
shares of voting stock of the Company; or (ii) the Company is a
participant in a merger or consolidation in which it does not survive as
an independent company; or (iii) the business or businesses of the
Company for which your services are principally performed are disposed
of by the Company pursuant to a partial or complete liquidation of the
Company.
"COMPANY" for the purposes of this Agreement shall include the Company's
successor if a Change in Control occurs.
"EXCISE TAX" means the excise tax imposed by Section 4999 of the Code.
"GOOD REASON" means (i) reduction of your rate of compensation as in
effect immediately prior to the effective date of this Agreement; or
(ii) the Company's failure to provide to you a package of welfare
benefit plans which, taken as a whole, provide substantially similar
benefits to those in which you are entitled to participate immediately
prior to the occurrence of the termination of your employment (except
that employee contributions may be raised to the extent of any cost
increases imposed by third parties) or any action by the Company which
would adversely affect your participation or reduce your benefits under
any of such plans; or (iii) a change in your responsibilities,
authority, title or office resulting in diminution of your position,
excluding for this purpose an isolated, insubstantial and inadvertent
action not taken in bad faith which is remedied by the Company promptly
after written notice thereof is given by you; or (iv) a request that you
relocate to a worksite that is more than 35 miles from your prior
worksite, unless you accept such relocation opportunity; or (v) a
material reduction in your duties; or (vi) a failure or refusal of a
successor to the Company to assume the Company's obligations under this
Agreement; or (vii) a material breach by the Company or any successor to
the Company of any of the material provisions of this Agreement.
Although the Company has no policy or procedure for providing severance
benefits, in exchange for the promises and covenants set forth herein, and in
consideration thereof, the Company agrees that if, within 365 days following the
occurrence of a Change in Control, your employment is terminated without Cause
by the Company or you terminate your employment for Good Reason, then upon your
furnishing to the Company an executed waiver and release of claims (a form of
which is attached hereto as Exhibit A) ("Release") and subject to your ongoing
obligations under the Company's Proprietary Information and Inventions
Agreement, (1) within 30 days of the Effective Date of the Release you will
receive a lump-sum payment equal to six
<PAGE> 3
Stephen F. Keane
October 6, 1999
Page 3
months of Base Salary subject to any applicable withholding of federal, state or
local taxes and (2) the vesting of any stock option granted to you for Company
common stock and the time during which such stock option may be exercised
immediately will be accelerated as to 50% of the then unvested stock options,
such that you will have the right to immediately exercise such stock options on
the date of termination.
If any Benefit received or to be received by you pursuant to this Agreement
would constitute a "parachute payment" within the meaning of Section 280G of the
Code and but for this paragraph be subject to the Excise Tax, then, upon written
request to the Commune by you, such Benefit shall be reduced to the extent
necessary so that no portion of the Benefit would be subject to the Excise Tax,
as determined in good faith by the Company; provided, however, that if, in the
absence of any such reduction (or after such reduction), you believe that the
Benefit or any portion thereof (as reduced, if applicable) would be subject to
the Excise Tax, the Benefit shall be reduced (or further reduced) to the extent
determined by you in your discretion so that the Excise Tax would not apply.
Your determination of any required reduction pursuant to this paragraph shall be
conclusive and binding on the Company. If, notwithstanding any such reduction
(or in the absence of such reduction), the Internal Revenue Service determines
that you are liable for the Excise Tax as a result of the Benefit, you shall be
obligated to return to the Company, within 30 days of such determination by the
Internal Revenue Service, a portion of the Benefit sufficient such that none of
the Benefit retained by you constitutes a "parachute payment" within the meaning
of Code Section 280G that is subject to the Excise Tax (the "Repayment Amount").
The Repayment Amount shall be the smallest such amount, if any, as shall be
required to be paid to the Company so that your net proceeds with respect to the
Benefit (after taking into account the payment of the Excise Tax imposed on such
Benefit) shall be maximized. Notwithstanding the foregoing, the Repayment Amount
with respect to the Benefit shall be zero if a Repayment Amount of more than
zero would not eliminate the Excise Tax imposed on such Benefit. If the Excise
Tax is not eliminated pursuant to your compliance with this paragraph, you agree
to pay the Excise Tax.
This Agreement may be changed or terminated only upon the mutual written consent
of the Company and you. Nothing in this Agreement will prevent or limit your
continuing or future participation in any benefit, bonus, incentive or other
plans, programs, policies or practices provided by the Company and for which you
may otherwise qualify, nor will anything herein limit or otherwise affect such
rights as you may have under any stock option or other agreements with the
Company.
If either party hereto brings any action to enforce such party's rights
hereunder, the prevailing party in any such action will be entitled to recover
such party's reasonable attorneys' fees and costs incurred in connection with
such action.
<PAGE> 4
This Agreement constitutes the entire agreement between you and the Company
regarding the subject matter herein. It is entered into without reliance on any
promise or representation other than those expressly contained herein. All
questions concerning the construction, validity and interpretation of this
Agreement will be governed by the law of the State of California.
Very truly yours,
Deborah A. Schueren
President and CEO
DAS/dw
Agreed and Accepted:
/s/ Stephen F. Keane
- -------------------------------
Stephen F. Keane
Dated: October 8, 1999
<PAGE> 5
EXHIBIT A
RELEASE AND WAIVER OF CLAIMS
In exchange for consideration provided to me in the Agreement to which
this form is attached, I hereby furnish Epimmune Inc. (the "Company") with the
following release and waiver.
I hereby release, and forever discharge the Company, its officers,
directors, agents, employees, stockholders, successors, assigns and affiliates,
of and from any and all claims, liabilities, demands, causes of action, costs,
expenses, attorneys fees, damages, indemnities and obligations of every kind and
nature, in law, equity, or otherwise, known and unknown, suspected and
unsuspected, disclosed and undisclosed, arising at any time prior to and
including my employment termination date with respect to any claims relating to
my employment and the termination of my employment, including but not limited
to, claims pursuant to any federal, state or local law relating to employment,
including, but not limited to, discrimination claims, claims under the
California Fair Employment and Housing Act, and the Federal Age Discrimination
in Employment Act of 1967, as amended (ADEA), or claims for wrongful
termination, breach of the covenant of good faith, contract claims, tort claims,
and wage or benefit claims, including but not limited to, claims for salary,
bonuses, commissions, stock, stock options, vacation pay, fringe benefits,
severance pay or any form of compensation (other than the obligations under the
Agreement.)
I also acknowledge that I have read and understand Section 1542 of the
California Civil Code which reads as follows: "A general release does not extend
to claims which the creditor does not know or suspect to exist in his favor at
the time of executing the release, which if known by him must have materially
affected his settlement with the debtor." I hereby expressly waive and
relinquish all rights and benefits under that section and any law of any
jurisdiction of similar effect with respect to any claims I may have against the
Company.
I acknowledge that, among other rights, I am waiving and releasing any
rights I may have under ADEA, that this waiver and release is knowing and
voluntary, and that the consideration given for this waiver and release is in
addition to anything of value to which I was already entitled as an employee of
the Company. I further acknowledge that I have been advised, as required by the
Older Workers Benefit Protection Act, that: (a) the waiver and release granted
herein does not relate to claims which may arise after this agreement is
executed; (b) I have the right to consult with an attorney prior to executing
this agreement (although I may choose voluntarily not to do so); (c) I have
twenty-one (21) days from the date I receive this agreement in which to consider
this agreement (although I may choose voluntarily to execute this agreement
earlier); (d) I have seven (7) days following the execution of this agreement to
revoke my consent to the agreement; and (e) this agreement shall not be
effective until the seven (7) day revocation period has expired.
Dated: By:
------------------------------- ---------------------------------
<PAGE> 1
EXHIBIT 10.74
EPIMMUNE INC.
COMMON STOCK
PURCHASE AGREEMENT
FEBRUARY ___, 2000
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
1. AUTHORIZATION OF SALE OF THE SECURITIES............................................. 1
2. AGREEMENT TO SELL AND PURCHASE THE SHARES........................................... 1
2.1 Sale of Shares............................................................... 1
2.2 Separate Agreements.......................................................... 1
2.3 Acceptance of Proposed Purchase of Shares.................................... 1
3. CLOSING AND DELIVERY................................................................ 1
3.1 Closing...................................................................... 1
3.2 Delivery of the Shares at the Closing........................................ 2
4. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY............................ 2
4.1 Organization and Standing.................................................... 2
4.2 Corporate Power; Authorization............................................... 2
4.3 Issuance and Delivery of the Shares.......................................... 3
4.4 SEC Documents; Financial Statements.......................................... 3
4.5 Intellectual Property........................................................ 3
4.6 Capitalization............................................................... 3
4.7 Litigation................................................................... 4
4.8 Governmental Consents........................................................ 4
4.9 No Material Adverse Change................................................... 4
5. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE PURCHASER.......................... 4
6. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS.............................. 6
7. CONDITIONS TO COMPANY'S OBLIGATIONS AT THE CLOSING.................................. 6
7.1 Receipt of Payment........................................................... 6
7.2 Representations and Warranties Correct....................................... 6
8. CONDITIONS TO PURCHASERS' OBLIGATIONS AT THE CLOSING................................ 6
8.1 Representations and Warranties Correct....................................... 6
8.2 Legal Opinion................................................................ 6
9. REGISTRATION OF THE SHARES; COMPLIANCE WITH THE SECURITIES ACT...................... 6
9.1 Registration Procedures and Expenses......................................... 6
9.2 Transfer of Securities After Registration.................................... 8
9.3 Legends...................................................................... 8
</TABLE>
i.
<PAGE> 3
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
9.4 Indemnification.............................................................. 9
9.5 Termination of Conditions and Obligations.................................... 10
9.6 Information Available........................................................ 10
9.7 Changes in Purchaser Information............................................. 11
10. BROKER'S FEE........................................................................ 11
11. NOTICES............................................................................. 11
12. MISCELLANEOUS....................................................................... 11
12.1 Waivers and Amendments....................................................... 11
12.2 Headings..................................................................... 12
12.3 Severability................................................................. 12
12.4 Governing Law................................................................ 12
12.5 Counterparts................................................................. 12
12.6 Successors and Assigns....................................................... 12
12.7 Entire Agreement............................................................. 12
12.8 Payment of Fees and Expenses................................................. 12
</TABLE>
ii.
<PAGE> 4
COMMON STOCK
PURCHASE AGREEMENT
THIS AGREEMENT ("Agreement") is made as of February ___, 2000 (the
"Effective Date"), by and between Epimmune Inc., a Delaware corporation with its
principal place of business at 5820 Nancy Ridge Drive, Suite 100, San Diego,
California 92121 (the "Company"), and the purchaser whose name and address is
set forth on the signature page hereof (the "Purchaser").
AGREEMENT
In consideration of the mutual covenants contained in this Agreement,
and for other good and valuable consideration, the receipt of which is hereby
acknowledged, the Company and the Purchaser hereby agree as follows:
1. AUTHORIZATION OF SALE OF THE SECURITIES. Subject to the terms
and conditions of this Agreement, the Company has, or before the Closing (as
defined below) will have, authorized the sale and issuance of up to ____________
shares of its Common Stock (the "Common Stock") pursuant to the Agreements (as
defined below). The shares of Common Stock sold to the Purchaser hereunder shall
be referred to herein as the "Shares."
2. AGREEMENT TO SELL AND PURCHASE THE SHARES.
2.1 SALE OF SHARES. At the Closing (as defined in Section 3), the
Company will sell to the Purchaser, and the Purchaser will purchase from the
Company, at a purchase price of $3.60 per Share, the number of Shares set forth
below:
<TABLE>
<CAPTION>
NUMBER OF SHARES AGGREGATE
TO BE PURCHASED PURCHASE PRICE
--------------- --------------
<S> <C>
</TABLE>
2.2 SEPARATE AGREEMENTS. The Company proposes to enter the same
form of purchase agreement with certain other investors (the "Other Purchasers")
and expects to complete sales of Shares to them. The Purchaser and the Other
Purchasers are hereinafter sometimes collectively referred to as the
"Purchasers," and this Agreement and the agreements executed by the Other
Purchasers are hereinafter sometimes collectively referred to as the
"Agreements."
2.3 ACCEPTANCE OF PROPOSED PURCHASE OF SHARES. The Company shall
have no obligation hereunder with respect to the Purchaser until the Company
shall execute and deliver to the Purchaser an executed copy of this Agreement.
If this Agreement is not executed and delivered by the Company, this Agreement
shall be of no further force and effect.
3. CLOSING AND DELIVERY.
3.1 CLOSING. The Closing of the purchase and sale of the Shares
pursuant to this Agreement (the "Closing") shall be held as soon as practicable
after the satisfaction or
1.
<PAGE> 5
waiver of all conditions to Closing set forth in Sections 7 and 8 hereof, at the
offices of Cooley Godward LLP, 4365 Executive Drive, Suite 1100, California
92121, or on such other date and place as may be agreed to by the Company and
the Purchaser. At or prior to the Closing, the Purchaser shall execute any
related agreements or other documents required to be executed hereunder, dated
as of the date of the Closing (the "Closing Date").
3.2 DELIVERY OF THE SHARES AT THE CLOSING. At the Closing, the
Company shall deliver to the Purchaser stock certificates registered in the name
of the Purchaser, and/or in such nominee name(s) as designated by the Purchaser,
representing the number of Shares to be purchased by the Purchaser at the
Closing as set forth in Section 2.1 against payment of the purchase price for
such Shares. The name(s) in which the stock certificates are to be issued to the
Purchaser are set forth in the Questionnaire in the form attached hereto as
Appendix I, as completed by the Purchaser.
4. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY.
Except as set forth on the Schedule of Exceptions attached hereto as
Exhibit A, the Company hereby represents and warrants as of the date hereof to,
and covenants with, the Purchaser as follows:
4.1 ORGANIZATION AND STANDING. The Company has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of the State of Delaware, has full corporate power and authority to own or
lease its properties and conduct its business as presently conducted (as defined
below), and is duly qualified as a foreign corporation and in good standing in
all jurisdictions in which the character of the property owned or leased or the
nature of the business transacted by it makes qualification necessary (except
where the failure to be so qualified would not have a material adverse effect on
the business, properties, financial condition or results or operations of the
Company).
4.2 CORPORATE POWER; AUTHORIZATION. The Company has all requisite
corporate power, and has taken all requisite corporate action, to execute and
deliver this Agreement, sell and issue the Shares and carry out and perform all
of its obligations under this Agreement. This Agreement constitutes the legal,
valid and binding obligation of the Company, enforceable in accordance with its
terms, except (i) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws relating to or affecting the
enforcement of creditors' rights generally, (ii) as limited by equitable
principles generally, including any specific performance, and (iii) as to those
provisions of Section 9.4 relating to indemnity or contribution. The execution
and delivery of this Agreement does not, and the performance of this Agreement
and the compliance with the provisions hereof and the issuance, sale and
delivery of the Shares by the Company will not, conflict with, or result in a
breach or violation of the terms, conditions or provisions of, or constitute a
default under, or result in the creation or imposition of any lien pursuant to
the terms of, the Certificate of Incorporation or Bylaws of the Company or any
statute, law, rule or regulation applicable to the Company or any state or
federal order, judgment or decree applicable to the Company or any indenture,
mortgage, lease or other agreement or instrument to which the Company or any of
its properties is subject, where such conflict, breach or violation would have a
material adverse effect on the Company.
2.
<PAGE> 6
4.3 ISSUANCE AND DELIVERY OF THE SHARES. The Shares, when issued
and paid for in compliance with the provisions of this Agreement, will be
validly issued, fully paid and nonassessable and will not be issued in violation
of any preemptive right.
4.4 SEC DOCUMENTS; FINANCIAL STATEMENTS. Each complete or partial
statement or report included as an appendix to the SEC Documents is a true and
complete copy of or excerpt from such document as filed by the Company with the
United States Securities and Exchange Commission (the "SEC"). The Company has
filed in a timely manner all documents that the Company was required to file
with the SEC under Sections 13, 14(a) and 15(d) of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), during the twelve (12) months
preceding the date of this Agreement. As of their respective filing dates (or,
if amended, when amended), all documents filed by the Company with the SEC (the
"SEC Documents") complied in all material respects with the requirements of the
Exchange Act. None of the SEC Documents as of their respective dates contained
any untrue statement of material fact or omitted to state a material fact
required (under the federal securities laws in connection with the sale of the
Shares) to be stated therein or necessary to make the statements made therein,
in light of the circumstances under which they were made, not misleading. The
financial statements of the Company included in the SEC Documents (the
"Financial Statements") comply as to form in all material respects with
applicable accounting requirements and with the published rules and regulations
of the SEC with respect thereto. The Financial Statements have been prepared in
accordance with generally accepted accounting principles consistently applied
and fairly present the financial position of the Company at the dates thereof
and the results of its operations and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal, recurring
adjustments).
4.5 INTELLECTUAL PROPERTY. The Company owns or possesses adequate
rights to use all material patents, patent rights, inventions, trade secrets and
know-how that are necessary for the conduct of its business as presently
conducted and as described in the SEC Documents. Except as set forth in the SEC
Documents, the Company has not received any notice of, nor has any knowledge of,
any infringement of or conflict with asserted rights of others with respect to
any patent, patent right, invention, trade secret or know-how that, individually
or in the aggregate, if the subject of an unfavorable decision, ruling or
finding, would have a material adverse effect on the business, properties,
financial condition or results or operations of the Company.
4.6 CAPITALIZATION. The capitalization of the Company is
described in the Company's SEC Documents. The Company has not issued any capital
stock since September 30, 1999 other than pursuant to employee benefit plans
disclosed in the Company's SEC Documents. The Shares to be sold pursuant to this
Agreement have been duly authorized, and when issued and paid for in accordance
with the terms of this Agreement, will be duly and validly issued, fully paid
and nonassessable. The outstanding shares of capital stock of the Company have
been duly and validly issued and are fully paid and nonassessable, have been
issued in compliance with all federal and state securities laws, and were not
issued in violation of any preemptive rights or similar rights to subscribe for
or purchase securities. Except as set forth in or contemplated by the Company's
SEC Documents or as otherwise described in this Agreement, there are no
outstanding rights (including, without limitation, preemptive rights), warrants
or options to acquire, or instruments convertible into or exchangeable for, any
unissued
3.
<PAGE> 7
shares of capital stock or other equity interest in the Company, or any
contract, commitment, agreement, understanding or arrangement of any kind to
which the Company is a party and relating to the issuance or sale of any capital
stock of the Company, any such convertible or exchangeable securities or any
such rights, warrants or options.
4.7 LITIGATION. There is no pending or, to the Company's
knowledge, threatened, action, suit or other proceeding to which the Company is
a party or to which its property or assets are subject that is not disclosed in
the SEC Documents that is required to be so disclosed.
4.8 GOVERNMENTAL CONSENTS. No consent, approval, order or
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, state, or local governmental authority on the part of
the Company is required in connection with the consummation of the transactions
contemplated by this Agreement except for (a) compliance with the securities and
blue sky laws in the states and other jurisdictions in which shares of Common
Stock are offered and/or sold, which compliance will be effected in accordance
with such laws, and (b) the filing of a registration statement and all
amendments thereto with the SEC as contemplated by Section 9.1 of this
Agreement.
4.9 NO MATERIAL ADVERSE CHANGE. Except as otherwise disclosed
herein, since September 30, 1999, there have not been any changes in the assets,
liabilities, financial condition or operations of the Company from that
reflected in the Company's Form 10-Q for the period ended September 30, 1999
except changes in the ordinary course of business or which have not been, either
individually or in the aggregate, materially adverse.
4.10 SECURITIES VIOLATIONS. The Company represents and warrants
that none of its directors or officers is or has within the last five years,
been the subject of, or a defendant in: (i) an enforcement action or prosecution
(or settlement in lieu thereof) brought by a governmental authority relating to
a violation of securities, tax, fiduciary or criminal laws, or (ii) a civil
action (or settlement in lieu thereof) brought by shareholders or investors in a
common investment vehicle for violation of duties owed to the shareholders or
investors.
4.11 NASDAQ. The Company's Common Stock is listed on the Nasdaq
National Market and the Company shall use its commercially reasonable efforts to
maintain such listing.
4.12 NO CONFLICTS OF INTEREST REPRESENTATION. The Company
represents, warrants and covenants that, to the best of its knowledge, no
officer or employee of the Purchaser has or will receive, directly or
indirectly, a personal interest in the Company or its property or anything of
substantial economic value for his or her private benefit from the Company, or
anyone acting on its behalf, in connection with the investment made by the
Purchaser pursuant to this Agreement.
4.13 FUTURE ISSUANCES OF COMMON STOCK. The Company covenants that
during the ninety (90) days following the Closing it will not issue additional
shares of Common Stock at a price per share of less than $3.60, other than stock
issued upon exercise of (i) outstanding warrants to purchase the Company's
Common Stock, (ii) warrants to purchase the Company's Common Stock to be issued
to certain former executive officers of the Company in
4.
<PAGE> 8
connection with severance agreements with such individuals, (iii) options to
purchase the Company's Common Stock issued to employees, directors and
consultants of the Company.
5. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE PURCHASER.
5.1 The Purchaser represents and warrants to and covenants with
the Company that:
(a) The Purchaser, taking into account the personnel and
resources it can practically bring to bear on the purchase of the Shares
contemplated hereby, either alone or together with the advice of the Purchaser's
representative, is knowledgeable, sophisticated and experienced in making, and
is qualified to make, decisions with respect to investments in shares presenting
an investment decision like that involved in the purchase of the Shares,
including investments in securities issued by the Company, and has requested,
received, reviewed and considered, either alone or with the Purchaser's
representative, all information the Purchaser deems relevant (including the SEC
Documents) in making an informed decision to purchase the Shares.
(b) The Purchaser is acquiring the Shares being acquired
by the Purchaser pursuant to this Agreement in the ordinary course of its
business and for its own account for investment only and with no present
intention of distributing any of such Shares or any arrangement or understanding
with any other persons regarding the distribution of such Shares, except in
compliance with Section 5.1(c).
(c) The Purchaser will not, directly or indirectly, offer,
sell, pledge, transfer or otherwise dispose of (or solicit any offers to buy,
purchase or otherwise acquire or take a pledge of) any of the securities
purchased hereunder except in compliance with the Securities Act of 1933, as
amended (the "Securities Act"), applicable blue sky laws, and the rules and
regulations promulgated thereunder.
(d) The Purchaser has completed or caused to be completed
the subscription documents enclosed with this Agreement, including the
Registration Questionnaire, for use in preparation of the Registration Statement
to be filed by the Company, and the answers thereto are true and correct as of
the date hereof and will be true and correct as of the effective date of the
applicable Registration Statement (provided that the Purchaser shall be entitled
to update such information by providing notice thereof to the Company prior to
the effective date of such Registration Statement).
(e) The Purchaser has, in connection with its decision to
purchase the Securities, relied with respect to the Company and its affairs
solely upon the SEC Documents and the other information delivered to the
Purchaser by the Company as described in Sections 4.4 and 5.1(a) above and the
representations and warranties of the Company contained herein.
(f) The Purchaser is an "accredited investor" within the
meaning of Rule 501 of Regulation D promulgated under the Securities Act or a
Qualified Institutional Buyer within the meaning of Rule 144A promulgated under
the Securities Act.
5.
<PAGE> 9
(g) The Purchaser has full right, power, authority and
capacity to enter into this Agreement and to consummate the transactions
contemplated hereby and has taken all necessary action to authorize the
execution, delivery and performance of this Agreement. Upon the execution and
delivery of this Agreement by the Purchaser, this Agreement shall constitute a
valid and binding obligation of the Purchaser, enforceable in accordance with
its terms, except (i) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws relating to or affecting the
enforcement of creditors' rights generally, (ii) as limited by equitable
principles generally, including any specific performance, and (iii) as to those
provisions of Section 9.4 relating to indemnity or contribution.
5.2 The Purchaser represents and warrants to and covenants with
the Company that it has not engaged and will not engage in any short sales of
the Company's Common Stock prior to the effectiveness of the Registration
Statement and for so long as such Purchaser holds such Shares.
5.3 The Purchaser understands that nothing in the SEC Documents,
this Agreement or any other materials presented to the Purchaser in connection
with the purchase and sale of the Shares constitutes legal, tax or investment
advice and that no independent legal counsel has reviewed these documents and
materials on the Purchaser's behalf. The Purchaser has consulted such legal, tax
and investment advisors as it, in its sole discretion, has deemed necessary or
appropriate in connection with its purchase of the Shares.
6. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS.
Notwithstanding any investigation made by any party to this Agreement, all
covenants, agreements, representations and warranties made by the Company and
the Purchaser herein and in the certificates for the securities delivered
pursuant hereto shall survive the execution of this Agreement, the delivery to
the Purchaser of the Shares being purchased and the payment therefor.
7. CONDITIONS TO COMPANY'S OBLIGATIONS AT THE CLOSING. The
Company's obligation to complete the sale and issuance of the Shares and deliver
the Shares to the Purchaser shall be subject to the following conditions to the
extent not waived by the Company:
7.1 RECEIPT OF PAYMENT. The Company shall have received payment,
by check or wire transfer of immediately available funds, in the full amount of
the purchase price for the number of Shares being purchased by the Purchaser at
the Closing as set forth in Section 2.1.
7.2 REPRESENTATIONS AND WARRANTIES CORRECT. The representations
and warranties made by the Purchaser in Section 5 hereof shall be true and
correct when made, and shall be true and correct on the Closing Date.
8. CONDITIONS TO PURCHASERS' OBLIGATIONS AT THE CLOSING. The
Purchaser's obligation to accept delivery of the Shares and to pay for the
Shares shall be subject to the following conditions to the extent not waived by
such Purchaser:
8.1 REPRESENTATIONS AND WARRANTIES CORRECT. The representations
and warranties made by the Company in Section 4 hereof shall be true and correct
when made. At
6.
<PAGE> 10
the Closing, the President of the Company shall deliver a certificate certifying
that the representations and warranties made by the Company in Section 4 are
true and correct as of the date of the Closing.
8.2 LEGAL OPINION. Purchasers shall have received from Cooley
Godward LLP, counsel to the Company, an opinion letter addressed to the
Purchasers, dated as of the Closing Date, in the form attached hereto as Exhibit
B.
9. REGISTRATION OF THE SHARES; COMPLIANCE WITH THE SECURITIES ACT
9.1 REGISTRATION PROCEDURES AND EXPENSES. The Company is
obligated to do the following:
(a) As soon as practicable following the Closing and in
any event no later than fifteen (15) business days following the Closing, the
Company shall prepare and file with the SEC one or more registration statements
in order to register with the SEC the resale by the Purchasers, from time to
time, of the Shares through Nasdaq or the facilities of any national securities
exchange on which the Company's Common Stock is then traded, or in privately
negotiated transactions (a "Registration Statement"). The Company shall use its
best efforts to cause such Registration Statement to be declared effective as
soon thereafter as reasonably possible. The Company shall promptly notify the
Purchaser of the effectiveness of such Registration Statement.
(b) The Company shall prepare and file with the SEC (i)
such amendments and supplements to the Registration Statement and the prospectus
used in connection therewith, (ii) such SEC Documents and (iii) such other
filings required by the SEC, in each case as may be necessary to keep the
Registration Statement continuously effective and not misleading until the
earliest of (A) the second anniversary date of the Closing, (B) such date as all
of the Shares held by all of the Purchasers have been resold or (C) such time as
all of the Shares held by the Purchasers can be sold within a given three-month
period pursuant to Rule 144 under the Securities Act. Notwithstanding the
foregoing, if, at any time following the effectiveness of the Registration
Statement, the Company shall have determined that the Company may be required to
disclose any material corporate development, the Company may suspend the
effectiveness of the Registration Statement until such time as an amendment to
the Registration Statement has been filed by the Company and declared effective
by the SEC or until such time as the Company has filed an appropriate report
with the SEC pursuant to the Exchange Act, which suspension shall endure for
such period as deemed necessary by the Company upon advice of counsel (a
"Suspension Period"), by giving notice to the Purchasers. The Company will use
commercially reasonable efforts to limit the length of any Suspension Periods to
less than 60 days in any twelve month period. The Purchaser agrees that, upon
receipt of any notice from the Company of a Suspension Period, the Purchaser
will not sell any Shares pursuant to the Registration Statement until (i) the
Purchaser is advised in writing by the Company that the use of the applicable
prospectus may be resumed, (ii) the Purchaser has received copies of any
additional or supplemental or amended prospectus, if applicable, and (iii) the
Purchaser has received copies of any additional or supplemental filings which
are incorporated or deemed to be incorporated by reference in such prospectus.
7.
<PAGE> 11
(c) In order to facilitate the public sale or other
disposition of all or any of the shares by the Purchaser, the Company shall
furnish to the Purchaser with respect to the Shares registered under the
Registration Statement such number of copies of prospectuses, prospectus
supplements and preliminary prospectuses as the Purchaser reasonably requests in
conformity with the requirements of the Securities Act.
(d) The Company shall file any documents required of the
Company for normal blue sky clearance in states specified in writing by the
Purchaser; provided, however, that the Company shall not be required to qualify
to do business or consent to service of process in any jurisdiction in which it
is not now so qualified or has not so consented.
(e) Other than fees and expenses, if any, of counsel or
other advisers to the Purchasers, which fees and expenses shall be borne by the
Purchasers except as referred to in Section 12.8 below, the Company shall bear
all expenses (exclusive of any brokerage fees, underwriting discounts and
commissions) in connection with the procedures in paragraphs (a) through (d) of
this Section 9.1 and if requested by holders of at least a majority of the
Shares, the fees and expenses, if any, of one counsel to the Selling
Stockholders (as defined in Section 9.4) in an amount not exceeding $10,000.
(f) With a view to making available to the Purchasers the
benefits of Rule 144 promulgated under the Securities Act ("Rule 144") and any
other rule or regulation of the SEC that may at any time permit a Purchaser to
sell Shares to the public without registration or pursuant to registration, the
Company covenants and agrees to: (i) make and keep public information available,
as those terms are understood and defined in Rule 144, until the earlier of (A)
the second anniversary of the Closing Date or (B) such date as all of the Shares
shall have been resold; (ii) file with the SEC in a timely manner all reports
and other documents required of the Company under the Exchange Act; and (iii)
furnish to any Purchaser upon request, as long as the Purchaser owns any Shares,
(A) a written statement by the Company that it has complied with the reporting
requirements of the Exchange Act, (B) a copy of the most recent annual or
quarterly report of the Company, and (C) such other information as may be
reasonably requested in order to avail any Purchaser of any rule or regulation
of the SEC that permits the selling of any such Shares without registration
under the Securities Act.
9.2 TRANSFER OF SECURITIES AFTER REGISTRATION. The Purchaser
agrees that it will not effect any disposition of the Shares that would
constitute a sale within the meaning of the Securities Act, except:
(a) pursuant to the Registration Statement, in which case
the Purchaser shall submit the certificates evidencing the Shares to the
Company's transfer agent, accompanied by a separate "Purchaser's Certificate"
(i) in the form of Appendix II attached hereto, (ii) executed by such Purchaser
or by an officer of, or other authorized person designated by, such Purchaser,
and (iii) to the effect that (A) the Shares have been sold in accordance with
the Registration Statement and (B) the requirement of delivering a current
prospectus has been satisfied; or
(b) the Purchaser shall have notified the Company of the
proposed disposition and shall have furnished the Company with a detailed
statement of the circumstances
8.
<PAGE> 12
surrounding the proposed disposition, and if reasonably requested by the
Company, the Purchaser shall have furnished the Company with an opinion of
counsel, reasonably satisfactory to the Company, that such disposition will not
require registration of such Shares under the Securities Act. It is agreed that
the Company will not require opinions of counsel for transactions made pursuant
to Rule 144 except in unusual circumstances.
9.3 LEGENDS. Each certificate representing Shares shall (unless
otherwise permitted by the provisions of the Agreement) be stamped or otherwise
imprinted with a legend substantially similar to the following (in addition to
any legend required under applicable state securities laws or as provided
elsewhere in this Agreement):
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT") AND MAY NOT BE
OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS
AND UNTIL REGISTERED UNDER THE ACT OR, IN THE OPINION OF COUNSEL OR
BASED ON OTHER WRITTEN EVIDENCE IN THE FORM AND SUBSTANCE SATISFACTORY
TO THE ISSUER OF THESE SECURITIES, SUCH OFFER, SALE OR TRANSFER, PLEDGE
OR HYPOTHECATION IS IN COMPLIANCE THEREWITH.
9.4 INDEMNIFICATION. As used in this Section 9.4 the following
terms shall have the following respective meanings:
(a) "SELLING STOCKHOLDER" shall mean the Purchaser and any
transferee of the Purchaser who is entitled to resell Shares pursuant to the
Registration Statement;
(b) "REGISTRATION STATEMENT" shall include any final
prospectus, exhibit, supplement or amendment included in or relating to the
Registration Statement referred to in Section 9.1; and
(c) "UNTRUE STATEMENT" shall include any untrue statement
or alleged untrue statement, or any omission or alleged omission to state in the
Registration Statement a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading.
The Company agrees to indemnify and hold harmless each Selling Stockholder from
and against any losses, claims, damages or liabilities to which such Selling
Stockholder may become subject (under the Securities Act or otherwise) insofar
as such losses, claims, damages or liabilities (or actions or proceedings in
respect thereof) arise out of, or are based upon, any failure to comply with the
covenants and agreements contained in Section 9.1 or 9.2 hereof, or any Untrue
Statement on or after the effective date of the Registration Statement, or on or
after the date of any prospectus or prospectus supplement or the date of any
sale by Purchaser thereunder, or arise out of any failure by the Company to
fulfill any undertaking included in the Registration Statement and the Company
will reimburse such Selling Stockholder for any reasonable legal or other
expenses reasonably incurred in investigating, defending or preparing to defend
any such action, proceeding or claim; provided, however, that the Company shall
not
9.
<PAGE> 13
be liable to such Selling Stockholder in any such case to the extent that such
loss, claim, damage or liability arises out of, or is based upon, an Untrue
Statement made in such Registration Statement in reliance upon and in conformity
with written information furnished to the Company by or on behalf of such
Selling Stockholder specifically for use in preparation of the Registration
Statement, or the failure of such Selling Stockholder to comply with the
covenants and agreements contained in Section 9.1 or 9.2 hereof respecting sale
of the Shares or any statement or omission in any Prospectus that is corrected
in any subsequent prospectus that was delivered to the Selling Stockholder prior
to the pertinent sale or sales by the Selling Stockholder.
The Purchaser agrees to indemnify and hold harmless the Company (and
each person, if any, who controls the Company within the meaning of Section 15
of the Securities Act, each officer of the Company who signs the Registration
Statement and each director of the Company) from and against any losses, claims,
damages or liabilities to which the Company (or any such officer, director or
controlling person) may become subject (under the Securities Act or otherwise),
insofar as such losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) arise out of, or are based upon, any failure to
comply with the covenants and agreements contained in Section 9.1 or 9.2 hereof
respecting sale of the Shares, or any Untrue Statement contained in the
Registration Statement on or after the effective date thereof, or in any
prospectus supplement as of its issue date or date of any sale by the Purchaser
thereunder, if such Untrue Statement was made in reliance upon and in conformity
with written information furnished by or on behalf of the Purchaser specifically
for use in preparation of the Registration Statement, and the Purchaser will
reimburse the Company (or such officer, director or controlling person), as the
case may be, for any legal or other expenses reasonably incurred in
investigating, defending or preparing to defend any such action, proceeding or
claim; provided that in no event shall any indemnity by the Purchaser under this
Section 9.4 exceed the gross proceeds received by the Purchaser from the sale of
Shares covered by such Registration Statement.
Promptly after receipt by any indemnified person of a notice of a claim
or the beginning of any action in respect of which indemnity is to be sought
against an indemnifying person pursuant to this Section 9.4, such indemnified
person shall notify the indemnifying person in writing of such claim or of the
commencement of such action, and, subject to the provisions hereinafter stated,
in case any such action shall be brought against an indemnified person and such
indemnifying person shall have been notified thereof, such indemnifying person
shall be entitled to participate therein, and, to the extent it shall wish, to
assume the defense thereof, with counsel reasonably satisfactory to such
indemnified person. After notice from the indemnifying person to such
indemnified person of its election to assume the defense thereof, such
indemnifying person shall not be liable to such indemnified person for any legal
expenses subsequently incurred by such indemnified person in connection with the
defense thereof; provided, however, that if there exists or shall exist a
conflict of interest that would make it inappropriate, in the opinion of counsel
to the indemnified person, for the same counsel to represent both the
indemnified person and such indemnifying person or any affiliate or associate
thereof, the indemnified person shall be entitled to retain its own counsel at
the expense of such indemnifying person; provided, however, that no indemnifying
person shall be responsible for the fees and expenses of more than one separate
counsel for all indemnified parties.
10.
<PAGE> 14
9.5 TERMINATION OF CONDITIONS AND OBLIGATIONS. The conditions
precedent imposed by Section 4, Section 5 or this Section 9 upon the
transferability of the Shares shall cease and terminate as to any particular
number of the Shares when such Shares shall have been sold or otherwise disposed
of in accordance with the intended method of disposition set forth in the
Registration Statement covering such Shares or at such time as an opinion of
counsel satisfactory to the Company shall have been rendered to the effect that
such conditions are not necessary in order to comply with the Securities Act.
9.6 INFORMATION AVAILABLE. So long as the Registration Statement
is effective covering the resale of Shares owned by the Purchaser, the Company
will furnish to the Purchaser:
(a) as soon as practicable after available (but in the
case of the Company's Annual Report to Stockholders, within 120 days after the
end of each fiscal year of the Company), one copy of (i) its Annual Report to
Stockholders (which Annual Report shall contain financial statements audited in
accordance with generally accepted auditing standards certified by a national
firm of certified public accountants); (ii) its Annual Report on Form 10-K;
(iii) its quarterly reports on Form 10-Q (the foregoing, in each case, excluding
exhibits); (iv) its Proxy Statement; and (v) its current reports on Form 8-K, if
any;
(b) upon the request of any Purchaser, all exhibits
excluded by the parenthetical in subparagraph (a)(iii) of this Section 9.6, in
the form generally available to the public; and
(c) upon the reasonable request of any Purchaser, an
adequate number of copies of the prospectuses and supplements to supply to any
other party requiring such prospectuses.
9.7 CHANGES IN PURCHASER INFORMATION. The Purchaser agrees to
promptly notify the Company of any changes in the information set forth in the
Registration Statement regarding the Purchaser or its plan of distribution set
forth in such Registration Statement.
10. BROKER'S FEE. The Company and the Purchaser hereby represent that,
there are no brokers or finders entitled to compensation in connection with the
sale of the Shares, and shall indemnify each other for any such fees for which
they are responsible.
11. NOTICES. All notices, requests, consents and other communications
hereunder shall be in writing, shall be sent by confirmed facsimile or mailed by
first-class registered or certified airmail, or nationally recognized overnight
express courier, postage prepaid, and shall be deemed given when so sent in the
case of facsimile transmission, or when so received in the case of mail or
courier, and addressed as follows:
(a) if to the Company, to:
Epimmune Inc.
5820 Nancy Ridge Drive, Suite 100
San Diego, CA 92121
Attention: President and Chief Executive Officer
11.
<PAGE> 15
with a copy so mailed to:
Cooley Godward LLP
4365 Executive Drive, Suite 1100
San Diego, CA 92121
Attention: Frederick T. Muto, Esq.
or to such other person at such other place as the Company shall designate to
the Purchasers in writing; and
(b) if to the Purchaser, at the address as set forth at the end
of this Agreement, or at such other address or addresses as may have been
furnished to the Company in writing.
12. MISCELLANEOUS.
12.1 WAIVERS AND AMENDMENTS. Neither this Agreement nor any
provision hereof may be changed, waived, discharged, terminated, modified or
amended except upon the written consent of the Company and the Purchaser.
12.2 HEADINGS. The headings of the various sections of this
Agreement have been inserted for convenience of reference only and shall not be
deemed to be part of this Agreement.
12.3 SEVERABILITY. In case any provision contained in this
Agreement should be invalid, illegal or unenforceable in any respect, the
validity, legality and enforceability of the remaining provisions contained
herein shall not in any way be affected or impaired thereby.
12.4 GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of California as applied to
contracts entered into and performed entirely in California by California
residents, without regard to conflicts of law principles.
12.5 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall constitute an original, but all of which, when
taken together, shall constitute but one instrument, and shall become effective
when one or more counterparts have been signed by each party hereto and
delivered to the other parties.
12.6 SUCCESSORS AND ASSIGNS. Except as otherwise expressly
provided herein, the provisions hereof shall inure to the benefit of, and be
binding upon, the successors, assigns, heirs, executors and administrators of
the parties hereto.
12.7 ENTIRE AGREEMENT. This Agreement and other documents
delivered pursuant hereto, including the exhibits, constitute the full and
entire understanding and agreement between the parties with regard to the
subjects hereof and thereof.
12.8 PAYMENT OF FEES AND EXPENSES. Each of the Company and the
Purchaser shall bear its own expenses and legal fees incurred on its behalf with
respect to this Agreement
12.
<PAGE> 16
and the transactions contemplated hereby (the "Offering"). If any action at law
or in equity is necessary to enforce or interpret the terms of this Agreement,
the prevailing party shall be entitled to reasonable attorney's fees, costs and
necessary disbursements in addition to any other relief to which such party may
be entitled.
13.
<PAGE> 17
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized representatives as of the day and year first
above written.
EPIMMUNE INC.
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
PURCHASER
Purchaser Name:
------------------------
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
Address:
-------------------------------
-------------------------------
-------------------------------
Facsimile:
-----------------------------
COMMON STOCK PURCHASE AGREEMENT
<PAGE> 18
APPENDIX I
EPIMMUNE CORPORATION
QUESTIONNAIRE
In connection with the issuance of stock certificates and preparation of
the Registration Statement, please provide us with the following information:
1. Please state you or your organization's name exactly as it
should appear on the stock certificate representing your Shares
in the Registration Statement:
2. Please provide the following information, as of February ___,
2000:
<TABLE>
<S> <C>
Number of Shares that you are Number of shares of Common
purchasing and seek to include in the Stock that you already beneficially
Registration Statement: own or that you are purchasing and do
NOT seek to include in the
__________________ Registration Statement:
______________________
</TABLE>
3. Have you or your organization had any position, office or other
material relationship within the past three years with the Company or its
affiliates other than as disclosed in the Proxy Statement in connection with the
Company's 1999 Annual Meeting of Stockholders?
Yes [ ] No [ ]
If yes, please indicate the nature of any such relationships:___________
________________________________________________________________________________
Signature:
------------------------
Print Name:
-----------------------
Title:
----------------------------
<PAGE> 19
APPENDIX II
PURCHASER'S CERTIFICATE OF RESALE OF THE SHARES
The undersigned, an officer of, or other person duly authorized by
hereby certifies that
- ----------------------------------------------------
[fill in official name of individual or institution]
he/she [said institution] is the Purchaser of the Shares evidenced by the
attached stock certificate(s) and as such, sold such Shares on
in accordance with registration statement number
- -------------------------------
[date]
and the
- --------------------------------------------------------------------
[fill in the number of or otherwise identify registration statement]
requirement of delivering a current prospectus and current annual, quarterly and
reports (Forms 10-K, 10-Q, and 8-K) by the Company has been complied with in
connection with such sale.
Print or Type:
Name of Purchaser (Individual or Institution):
---------------------------------
Name of Individual representing Purchaser
(if an Institution):
-----------------------------
Title of Individual representing Purchaser
(if an Institution):
-----------------------------
Signature by:
Individual Purchaser or Individual
representing Purchaser:
-------------------------------------------------------
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to incorporation by reference in the Registration Statement (Form S-3
and Form S-8) of Epimmune Inc. of our report dated January 21, except for Note
11, as to which the date is March 7, 2000, with respect to the consolidated
financial statements of Epimmune Inc. included in its Annual Report (Form 10-K)
for the year ended December 31, 1999, filed with the Securities and Exchange
Commission.
ERNST & YOUNG LLP
San Diego, California
March 16, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEC FORM
10-K FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. (IN THOUSANDS EXCEPT
EARNINGS PER SHARE)
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,843
<SECURITIES> 6,884<F4>
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 460
<PP&E> 1,041
<DEPRECIATION> 224
<TOTAL-ASSETS> 12,705
<CURRENT-LIABILITIES> 1,792
<BONDS> 436<F1>
0
14
<COMMON> 60
<OTHER-SE> 10,405<F2>
<TOTAL-LIABILITY-AND-EQUITY> 12,705
<SALES> 0
<TOTAL-REVENUES> 4,168
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 8,716<F3>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 114
<INCOME-PRETAX> (8,265)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,265)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,265)
<EPS-BASIC> (1.56)
<EPS-DILUTED> (1.56)
<FN>
<F4>INCLUDES RESTRICTED CASH.
<F1>INCLUDES BONDS, MORTGAGES AND OTHER LONG-TERM DEBT, INCLUDING CAPITALIZED
LEASES.
<F2>INCLUDES ADDITIONAL PAID IN CAPITAL, OTHER ADDITIONAL CAPITAL AND RETAINED
EARNINGS, APPROPRIATED AND UNAPPROPRIATED. (EXCLUDES UNREALIZED LOSS ON
SECURITIES)
<F3>PER CHIEF ACCOUNTANT AT SEC, THIS AMOUNT EXCLUDES SALES AND G&A EXPENSES,
INCLUDES COSTS AND EXPENSES APPLICABLE TO SALES AND REVENUES, AND TANGIBLE
COSTS OF GOODS SOLD.
</FN>
</TABLE>
