<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 26, 1999.
REGISTRATION NO. 333-67599
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------------
ARONEX PHARMACEUTICALS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
DELAWARE 2834 76-0196535
<S> <C> <C>
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
8707 TECHNOLOGY FOREST PLACE
THE WOODLANDS, TEXAS 77381-1191
(281) 367-1666
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------------------
GEOFFREY F. COX
CHIEF EXECUTIVE OFFICER
8707 TECHNOLOGY FOREST PLACE
THE WOODLANDS, TEXAS 77381-1191
(281) 367-1666
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)
---------------------------
COPY:
JEFFREY R. HARDER
ANDREWS & KURTH L.L.P.
2170 BUCKTHORNE PLACE, SUITE 150
THE WOODLANDS, TEXAS 77380
(713) 220-4801
---------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as practicable after the Registration Statement becomes effective.
---------------------------
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box: [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering: [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering: [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box: [ ]
---------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a)
MAY DETERMINE
================================================================================
<PAGE> 2
SUBJECT TO COMPLETION, DATED JANUARY , 1999
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and is not soliciting an offer to buy these securities
in any state where the offer or sale is not permitted.
PROSPECTUS
4,500,000 SHARES
[ARONEX PHARMACEUTICALS, INC. LOGO]
COMMON STOCK
We are offering our common stock, par value $.001 per share, on an all
or none basis, to selected investors. The common stock is traded on the Nasdaq
National Market under the symbol "ARNX." On January 21, 1999, the last reported
sales price of our common stock on the Nasdaq National Market was $2.75 per
share. The price to the public will be determined through negotiations between
Aronex Pharmaceuticals, Inc. and the placement agent based upon the demand for
our common stock and its closing price on the Nasdaq National Market on the
effective date.
INVESTING IN THE COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 3.
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Public Offering Price........................... $ $
Commissions and Fees............................ $ $
Proceeds to ARNX ............................... $ $
</TABLE>
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
We have retained Paramount Capital, Inc. to act as our agent to arrange
this transaction. The agent will not accept investor funds until indications of
interest have been received for the full amount of the offering. Only after the
registration statement has been declared effective will the agent accept
investor funds, which will be placed in an escrow account. The agent will
distribute confirmation and definitive prospectuses to all investors as soon as
practicable after the price to the public is determined.
PARAMOUNT CAPITAL, INC.
The date of this prospectus is , 1999.
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<S> <C>
Table of Contents.......................................................................ii
Caution as to Forward-looking Statements............................................... ii
Prospectus Summary.......................................................................1
Risk Factors.............................................................................3
Use of Proceeds.........................................................................10
Dividend Policy.........................................................................10
Price Range of Common Stock.............................................................11
Dilution................................................................................12
Capitalization..........................................................................13
Selected Financial Data.................................................................14
Management's Discussion and Analysis of Financial Condition and Results of Operations...15
Business................................................................................22
Management..............................................................................39
Certain Transactions....................................................................43
Principal Stockholders..................................................................44
Description of Capital Stock............................................................46
Plan of Distribution....................................................................50
Legal Matters...........................................................................51
Experts.................................................................................51
Available Information...................................................................51
</TABLE>
CAUTION AS TO FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, including statements regarding our drug development
programs, clinical trials, receipt of regulatory approval, capital needs,
intellectual property, expectations and intentions. These statements can be
identified by the use of forward-looking terminology such as "may," "will,"
"expect," "anticipate," "continue," "estimate," "believe" or other similar
words. Forward-looking statements necessarily involve risks and uncertainties,
and our actual results could differ materially from those anticipated in the
forward-looking statements, including those listed below under "Prospectus
Summary," "Risk Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business" and elsewhere in this
prospectus. The factors set forth under "Risk Factors" and other cautionary
statements made in this prospectus should be read and understood as being
applicable to all related forward-looking statements wherever they appear in
this prospectus.
-ii-
<PAGE> 4
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this
prospectus. It may not contain all of the information that is important to you.
To understand this offering fully, you should read the entire prospectus
carefully, including the risk factors and financial statements.
ARONEX PHARMACEUTICALS, INC.
Aronex Pharmaceuticals, Inc. is a biopharmaceutical company engaged in
the identification and development of proprietary innovative medicines to treat
cancer and infectious diseases. Our strategy is to identify and develop
medicines based upon either refinements of existing therapies or new ways of
treating specific diseases. We intend to pursue this strategy by using the
following strengths:
o a clear focus on cancer and infectious disease;
o a well-defined and diverse group of products at various stages of
clinical development;
o technologies in drug development and delivery;
o a diverse group of corporate partners and academic affiliations;
o an experienced team of biopharmaceutical personnel able to identify
and develop new products, design and implement complex clinical
trials, manage regulatory issues, develop manufacturing processes
and negotiate distribution and licensing agreements for our
products.
We believe that our clinical products balance the risks of successful
development against the rewards from the practical commercial applications of
our products. See "Risk Factors."
We currently have five products in various stages of ongoing clinical
development, two of which, ATRAGEN(R) and NYOTRAN(R), are in late-stage
development. In December 1998, we submitted a new drug application to the U.S.
Food and Drug Administration for ATRAGEN(R) for the treatment of patients with
acute promyelocytic leukemia for whom therapy with the drug tretinoin is
necessary but for whom an intravenous administration is required. We are also
developing ATRAGEN(R) for the treatment of certain other cancers. ATRAGEN(R) is
a lipid-based, intravenous formulation of the drug all-trans retinoic acid, or
ATRA. We formulated ATRAGEN(R) to overcome certain adverse effects and
limitations of the currently available oral formulation of ATRA. We have entered
into a license agreement with Genzyme Corporation for ATRAGEN(R), which grants
to Genzyme an option to the worldwide marketing rights.
We are developing NYOTRAN(R) for the treatment of systemic (which
generally means internal) fungal infections that may threaten patients who have
suppressed immune systems. NYOTRAN(R) is a lipid-based, intravenous formulation
of the drug nystatin, an established, widely-used topical anti-fungal agent.
Nystatin has not previously been used in treating systemic fungal infections
because of its toxicity. We formulated NYOTRAN(R) to reduce the toxicity of
nystatin, allowing it to be administered at doses that we believe will be
effective in treating a broad spectrum of fungal infections. In November 1998,
we entered into a license agreement with Abbott Laboratories for exclusive
worldwide rights to market and sell NYOTRAN(R). To date, Abbott has paid us $8.4
million in up-front and milestone payments under the license agreement with an
aggregate potential of $40 million in clinical development and sales milestone
payments. In addition, Abbott purchased common stock valued at $3.0 million.
Abbott's payments provide funding for the continuing clinical development of
NYOTRAN(R) and are due as specified regulatory goals and sales targets are
achieved. Abbott will also pay us escalating royalties on all product sales of
NYOTRAN(R).
We are also developing Annamycin for the treatment of breast cancer and
Platar for the treatment of lung cancer. We are completing a Phase I/II clinical
trial for Zintevir(R) for the treatment of HIV infection, and intend to continue
development of such product only if third party funding is obtained.
Our corporate headquarters are located at 8707 Technology Forest Place,
The Woodlands, Texas 77381-1191, and our telephone number is (281) 367-1666.
<PAGE> 5
THE OFFERING
Securities offered................................ 4,500,000 shares of common
stock
Shares outstanding after the offering............. 20,915,664
Use of proceeds................................... To fund preclinical and
clinical testing of our
product candidates, continued
research and development and
capital expenditures and for
general corporate purposes
Nasdaq National Market symbol..................... ARNX
SUMMARY FINANCIAL INFORMATION
The following Summary Financial Information is adjusted as follows: (1)
the September 30, 1998 pro forma balance sheet information includes the
completion of the sale of 837,989 shares of common stock to Abbott Laboratories
for $3.0 million on November 30, 1998, and (2) the September 30, 1998 pro forma
as adjusted amounts include the common stock sold to Abbott Laboratories and the
sale of 4,500,000 shares of common stock offered through this prospectus at an
estimated price of $2.75 per share.
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT SHARE DATA)
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Research and development
grants and contracts ....................... $ 48 $ 197 $ 1,248 $ 2,670 $ 841 $ 591 $ 329
Interest income ............................... 217 534 452 1,692 2,059 1,632 1,013
-------- -------- -------- -------- -------- -------- --------
Total revenues ........................ 265 731 1,700 4,362 2,900 2,223 1,342
Expenses:
Research and development ...................... 4,491 7,637 8,347 10,357 13,993 9,864 15,399
Purchase of in-process
research and
development ................................ -- -- 8,383 242 3,000 3,000 --
General and administrative .................... 1,876 1,950 2,215 1,620 2,641 1,477 2,448
Interest expense and other .................... 123 196 184 173 257 160 41
-------- -------- -------- -------- -------- -------- --------
Total expenses ........................ 6,490 9,783 19,129 12,392 19,891 14,501 17,888
-------- -------- -------- -------- -------- -------- --------
Net loss ...................................... $ (6,225) $ (9,052) $(17,429) $ (8,030) $(16,991) $(12,278) $(16,546)
======== ======== ======== ======== ======== -------- ========
Basic and diluted loss per
share ...................................... $ (1.72) $ (1.76) $ (2.69) $ (0.62) $ (1.14) $ (0.83) $ (1.07)
======== ======== ======== ======== ======== ======== ========
Weighted average shares
used in computing basic
and diluted loss per
share ...................................... 3,602 5,153 6,488 13,048 14,896 14,714 15,475
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
--------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term and long-term investments...... $ 16,015 $ 19,015 $ 30,100
Total assets......................................................... 18,522 21,522 32,607
Total long-term obligations.......................................... 1,047 1,047 1,047
Deficit accumulated during development stage......................... (85,750) (85,750) (85,750)
Total stockholders' equity........................................... 11,353 14,353 25,438
</TABLE>
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<PAGE> 6
RISK FACTORS
INVESTING IN OUR COMMON STOCK INVOLVES SUBSTANTIAL RISKS. YOU SHOULD
CONSIDER CAREFULLY THE FOLLOWING RISK FACTORS, TOGETHER WITH ALL OF THE OTHER
INFORMATION INCLUDED IN THIS PROSPECTUS, IN DECIDING WHETHER TO INVEST IN THE
COMMON STOCK.
WE ARE IN AN EARLY STAGE OF DEVELOPMENT AND HAVE NOT YET GENERATED REVENUES FROM
PRODUCT SALES
Our business is at an early stage of development. We have not yet
generated any revenues from the commercial sale of our products. We cannot
assure you that we will ever generate revenues from product sales or that we
will ever become profitable due to the various risks inherent in our business
described in the following risk factors. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Results of
Operations" and "-- Liquidity and Capital Resources."
WE HAVE A HISTORY OF OPERATING LOSSES AND ANTICIPATE FUTURE LOSSES
We have incurred losses and have had negative cash flows from
operations since inception. We have funded our activities primarily from sales
of stock and, to a lesser extent, from revenues under research and development
agreements and grants. As of September 30, 1998, our accumulated deficit was
$85.8 million. To date, we have dedicated most of our financial resources to the
research and development of products, general and administrative expenses, and
the prosecution of patents and patent applications.
We expect to incur operating losses for at least the next several
years. This is primarily attributable to our plan to spend substantial amounts
on research and development of products, including preclinical studies and
clinical trials, and, if we obtain necessary regulatory approvals, on sales and
marketing efforts. We cannot assure you that we will ever become profitable or
that we will remain profitable if and when we become profitable. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations" and "-- Liquidity and Capital Resources."
WE WILL REQUIRE FUTURE CAPITAL AND ARE UNCERTAIN OF THE AVAILABILITY OF
ADDITIONAL FUNDING
We will continue to require substantial additional funds for our
operations. Excluding the proceeds of this offering and payments expected from
Abbott Laboratories, existing financial resources should be sufficient to fund
capital requirements into the fourth quarter of 1999. We expect that our
existing financial resources and the estimated proceeds of this offering should
be sufficient to fund capital and operating requirements into the second quarter
of 2000. During this period, we anticipate receiving further payments from
Abbott Laboratories under the license agreement for NYOTRAN(R), however these
payments are dependent upon performance and are not guaranteed. In the future,
we may need to raise substantial additional capital to fund operations. It is
possible that changes in research and development plans, acquisitions or other
events will require us to make unexpected large future expenditures. Our
independent public accountants have informed us that, if at the time of their
audit of the financial statements for the year ending December 31, 1998 our
existing financial resources continue to only be sufficient to fund capital
requirements into the fourth quarter of 1999, their report on those statements
will include an explanatory fourth paragraph expressing substantial doubt about
our ability to continue as a going concern. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Additional funding may be available in the public or private capital
markets and through collaboration agreements with partners. If, however, the
results of our clinical trials are not favorable, it will be much more difficult
for us to raise additional funds. We do not know if additional funding will be
available at all or on acceptable terms. If we are not able to obtain funding,
it may be necessary to curtail some or all research and development programs or
to obtain funds through arrangements that require us to relinquish rights to
some or all of our products or to declare bankruptcy. If we raise funds by
selling more stock, your share ownership in Aronex Pharmaceuticals will be
diluted. In addition, we may grant future investors rights which are superior to
those of the common stock that you are purchasing.
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<PAGE> 7
UNCERTAINTY OF CLINICAL TRIAL RESULTS MAY RESULT IN COMMERCIALLY IMPRACTICAL
PRODUCTS
Before approving a drug for commercial sale as a treatment for a
disease, the United States Food and Drug Administration, which we refer to as
the "FDA," and other regulatory authorities generally require that the safety
and efficacy of a drug be demonstrated in humans. This is provided by showing
results from adequate and well-controlled clinical trials in which the drug is
used to treat patients suffering from the disease. We cannot predict whether our
clinical trials will adequately demonstrate the drug's safety and efficacy or
whether the FDA or other regulatory authority will agree with the sufficiency of
the trial results. If our clinical trials do not demonstrate the safety or
efficacy of our products, or if we otherwise fail to obtain regulatory approval
for our products, we will not be able to generate revenues from the commercial
sale of our products. See "Business -- Government Regulation."
DELAYS IN PATIENT ENROLLMENT MAY RESULT IN INCREASED COSTS, PROGRAM DELAYS, OR
BOTH
Pivotal clinical trials are very costly and time-consuming. The speed
with which we are able to enroll patients in clinical trials is affected by
several factors, including the size of the patient population, competing trials,
the proximity of patients to clinical sites, and the eligibility criteria for
the study. These delays and complications can affect the cost of our clinical
trials as well as our ability to complete clinical trials on schedule. See
"Business -- Government Regulation."
THE FDA CAN IMPOSE RESTRICTIONS ON OUR OPERATIONS
The FDA and other regulatory authorities will continue to review our
products and periodically inspect the facilities used to manufacture those
products both before and after the grant of regulatory approvals. If the FDA or
other regulatory authorities identify problems with a product, manufacturer of
our products or its facility, they may impose restrictions that may include
warning letters, suspensions of regulatory approvals, operating restrictions,
delays in obtaining new product approvals, withdrawal of the product from the
market, product recalls, fines, injunctions and criminal prosecution. See
"Business -- Government Regulation."
OUR PRODUCTS MUST OBTAIN REGULATORY APPROVAL IN OTHER COUNTRIES WHICH CAN BE
COSTLY AND DIFFICULT
We and licensees of our products must obtain regulatory approvals in
countries other than the United States before marketing products in those
countries. The requirements governing the conduct of clinical trials, product
licensing, pricing and reimbursement vary widely from country to country. Some
countries require approval of the sale price of a drug before it can be
marketed. In many countries, the pricing review period begins after product
licensing approval is granted. As a result, we or our licensees may obtain
regulatory approval for a product in a particular country, but then be subject
to price regulation that prevents the sale of the product at satisfactory
prices. See "Business -- Government Regulation."
WE EXPERIENCE A SUBSTANTIAL DEGREE OF UNCERTAINTY RELATING TO PATENTS
Our success will depend to a large extent on our ability to (1) obtain
United States and foreign patent protection for drug candidates and processes,
(2) preserve trade secrets and (3) operate without infringing the proprietary
rights of third parties. Legal standards relating to the validity of patents
covering pharmaceutical and biotechnological inventions and the scope of claims
made under such patents are still developing. As a result, our ability to obtain
and enforce patents that protect our products is uncertain and involves complex
legal and factual questions.
We also cannot be completely sure that the inventors of subject matter
covered by our patents and patent applications were the first to invent or the
first to file patent applications for such inventions. Furthermore, we cannot
guarantee that any patents will issue from any pending or future patent
applications owned by or licensed to us. Existing or future patents may be
challenged, infringed upon, invalidated, found to be unenforceable or
circumvented by others. We cannot assure you that any of our rights under any
issued patents will provide sufficient protection against competitive products
or otherwise cover commercially valuable products or processes. We may not have
identified all United States and foreign patents that pose a risk of
infringement. See "Business -- Patents and Proprietary Rights."
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<PAGE> 8
WE MAY INCUR SUBSTANTIAL COSTS AND DELAYS AS A RESULT OF PROCEEDINGS AND
LITIGATION REGARDING PATENTS AND OTHER PROPRIETARY RIGHTS
Proceedings involving our patents or patent applications could result
in adverse decisions about:
o the patentability of our inventions and products and/or
o the enforceability, validity or scope of protection offered by our
patents.
The manufacture, use or sale of our products may infringe on the patent
rights of others. If we are unable to avoid infringement of the patent rights of
others, we may be required to seek a license, defend an infringement action or
challenge the validity of the patents in court. Patent litigation is costly and
time consuming. We may not have sufficient resources to bring these actions to a
successful conclusion. In addition, if we do not obtain a license, and fail
successfully to defend an infringement action or to have such patents declared
invalid, we may:
o incur substantial money damages,
o encounter significant delays in bringing products to market and/or
o be precluded from participating in the manufacture, use or sale of
products or methods of treatment requiring such licenses.
CONFIDENTIALITY AGREEMENTS WITH EMPLOYEES AND OTHERS MAY NOT ADEQUATELY PREVENT
DISCLOSURE OF TRADE SECRETS AND OTHER UNPATENTED PROPRIETARY INFORMATION
Because trade secrets and other unpatented proprietary information are
critical to our business, we seek protection through confidentiality agreements
with employees, consultants, advisors and collaborators. These agreements may
not effectively prevent disclosure of confidential information and may not
provide an adequate remedy in the event of unauthorized disclosure of such
information. In addition, others may independently discover trade secrets and
proprietary information. Costly and time-consuming litigation could be necessary
to enforce and determine the scope of our proprietary rights, and failure to
obtain or maintain trade secret protection could have a material adverse effect
on our business, results of operations and financial condition. See "Business --
Patents and Proprietary Rights."
WE DO NOT MANUFACTURE OUR OWN PRODUCTS AND MAY NOT BE ABLE TO OBTAIN ADEQUATE
SUPPLIES
We do not have the facilities necessary to manufacture products in
accordance with FDA good manufacturing practices. As a result, we use contract
manufacturers to produce quantities for clinical testing. We have not entered
into any agreement with our manufacturers except for (1) periodic purchase
orders and (2) Abbott Laboratories who holds an option to manufacture
NYOTRAN(R). We do not expect to establish any significant manufacturing capacity
in the near future. Instead, we intend to rely on corporate partners and
contract manufacturers for the manufacture and supply of our products.
Therefore, we may not be able to obtain supplies of products on acceptable terms
or in sufficient quantities, if at all. Our dependence on third parties for the
manufacture of products may also reduce our profit margins and ability to
develop and deliver products with sufficient speed. See "Business --
Manufacturing."
OUR PRODUCTS REQUIRE MATERIALS THAT MAY NOT BE READILY AVAILABLE OR COST
EFFECTIVE
Some of our products, such as Annamycin, are new syntheses and are not
yet available in commercial quantities. Raw materials necessary for the
manufacture of this and other of our products may not be available in sufficient
quantities or at a reasonable cost in the future. Complications or delays in
obtaining raw materials or in product manufacturing could delay the submission
of products for regulatory approval and the initiation of new development
programs, which could materially impair our competitive position and potential
profitability. See "Business -- Manufacturing."
-5-
<PAGE> 9
WE HAVE NO EXPERIENCE IN SALES, MARKETING AND DISTRIBUTION AND RELY ON THIRD
PARTIES
We anticipate relying on one or more pharmaceutical companies to market
our products to customers, and, wherever possible, to retain co-marketing rights
in certain markets such as the United States and Canada. Agreements have already
been entered into with Abbott Laboratories and Grupo Ferrer Internacional, S.A.
for distribution of NYOTRAN(R), and with Genzyme Corporation for distribution of
ATRAGEN(R). We have retained co-marketing rights under the Abbott and the
Genzyme agreements for a limited period of time. See "Business -- Collaboration
Agreements." To the extent that we use distribution arrangements with third
parties to market products, our ability to generate revenues and profits will
depend upon the efforts of these third parties.
We are developing our own sales and marketing capabilities that will
require us to make significant expenditures. We may not be successful in
establishing sales, marketing and distribution capabilities. In addition, our
ability to generate revenues and profits will be reduced or eliminated:
o if we fail to establish sales, marketing and/or distribution
capabilities or enter into arrangements with third parties,
o if we or new marketing partners fail to market a product
successfully,
o if physicians do not prescribe our products, or
o if patients do not accept such products.
OUR ABILITY TO ENTER INTO COLLABORATIVE ARRANGEMENTS IS CRITICAL TO OUR SUCCESS
We are a product development company with limited resources. We do not
conduct research and we are just beginning to create a marketing and sales
department. Therefore, our present strategy involves entering into arrangements
with corporate, government and academic collaborators, licensors, licensees and
others. As a consequence, our success may depend in large part on the success of
these other parties in performing their responsibilities. Also, we may not be
able to establish additional collaborative arrangements or license agreements
that are necessary to develop and commercialize products. Even if established,
these collaborative or license agreements may not be successful. Some of these
collaborative agreements and license agreements provide for milestone payments
to us, and others require us to pay milestone payments to others. We may not be
able to achieve the milestones that trigger payments to us. In addition,
payments by us may not result in the development of marketable products by our
collaborators. See "Business -- Collaborative Agreements."
THE BIOTECHNOLOGY AND PHARMACEUTICAL INDUSTRIES ARE INTENSELY COMPETITIVE
We believe that competition will be intense for all of our product
candidates. Our competitors include multinational pharmaceutical and chemical
companies, specialized biotechnology firms, and universities and other research
institutions. Many of these competitors have greater financial and other
resources than we do. These competitors may succeed in developing products that
are safer, more effective or less costly than our products. Even if our products
prove to be more effective than those developed by our competitors, our
competitors may be more successful because of greater financial resources,
greater experience in conducting preclinical and clinical trials and obtaining
regulatory approval, stronger sales and marketing efforts, earlier receipt of
approval for competing products and other factors.
Some of our competitors are active in the development of proprietary
liposomes and in liposomal research and product development to treat cancer and
certain fungal infections. Some of these companies' products have regulatory
approval in the United States and other countries. Any marketing of these and
other products that treat diseases targeted by us could reduce the market
acceptance of our products. The presence of directly competitive products could
also result in intense price competition, which could reduce our revenues and
profits. See "Business -- Competition."
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<PAGE> 10
WE MAY NOT BE ABLE TO KEEP UP WITH THE RAPID TECHNOLOGICAL CHANGE IN THE
BIOTECHNOLOGY AND PHARMACEUTICAL INDUSTRIES
Biotechnology and related pharmaceutical technologies have undergone
and continue to be subject to rapid and significant change. We expect that the
technologies associated with biotechnology research and development will
continue to develop rapidly. Our future will depend in large part on our ability
to maintain a competitive position with respect to these technologies. Any
compounds, products or processes that we develop may become obsolete before we
recover expenses incurred in developing those products.
OUR SUCCESS MAY DEPEND ON THIRD-PARTY REIMBURSEMENT OF PATIENTS' COSTS FOR OUR
PRODUCTS
Our ability to commercialize products successfully will depend in part
on the extent to which various third parties are willing to reimburse patients
for the costs of our products and related treatments. These third parties
include government authorities, private health insurers and other organizations,
such as health maintenance organizations. Third-party payors are increasingly
challenging the prices charged for medical products and services. Accordingly,
if less costly drugs are available, third-party payors may not authorize or may
limit reimbursement for our products, even if they are safer or more effective
than the alternatives. In addition, the trend toward managed healthcare and
government insurance programs could result in lower prices and reduced demand
for our products. Cost containment measures instituted by healthcare providers
and any general healthcare reform could affect our ability to sell products and
may have a material adverse effect on us.
We cannot predict what additional legislation or regulation relating to
the healthcare industry or third-party coverage and reimbursement may be enacted
in the future, or what effect such legislation or regulation might have on our
business.
OUR ACTIVITIES INVOLVE THE USE OF HAZARDOUS MATERIALS
Our activities involve the controlled use of hazardous materials,
chemicals, viruses and various radioactive compounds. Although we believe that
our procedures for handling and disposing of these materials comply with state
and federal regulations, the risk of accidental contamination or injury from
these materials cannot be eliminated. If such an accident occurs, we could be
held liable for resulting damages, which could be substantial. We are also
subject to numerous environmental, health and workplace safety laws and
regulations, including those governing laboratory procedures, exposure to
blood-borne pathogens and the handling of biohazardous materials. Additional
federal, state and local laws and regulations affecting our operations may be
adopted in the future. We may incur substantial costs to comply with and
substantial fines or penalties if we violate any of these laws or regulations.
OUR BUSINESS HAS A SUBSTANTIAL RISK OF PRODUCT LIABILITY CLAIMS AND INSURANCE
MAY BE EXPENSIVE OR UNAVAILABLE
We may be subject to product liability claims if the use of our
products is alleged to injure subjects or patients. This risk exists for
products tested in human clinical trials as well as products that are sold
commercially. Product liability claims could result in a recall of products or a
change in the indications for which they may be used. We presently have product
liability insurance coverage for claims arising from the use of our products in
clinical trials; however, this insurance may not be adequate to cover all
potential claims. Furthermore, product liability insurance is becoming
increasingly expensive. As a result, we may not be able to maintain current
amounts of insurance coverage, obtain additional insurance for clinical trials
or for commercial sales or obtain insurance at a reasonable cost or in
sufficient amounts to protect against losses that could have a material adverse
effect on us.
WE DEPEND ON KEY PERSONNEL AND COMPETITION FOR QUALIFIED PERSONNEL IS INTENSE
We believe that our ability to successfully implement our business
strategy is highly dependent on our management and scientific team. The loss of
services of one or more of our executive officers might hinder the achievement
of our development objectives. We are also highly dependent on our ability to
hire and retain qualified scientific and technical personnel. The competition
for these employees is intense. We may not be able to continue to
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<PAGE> 11
hire and retain the qualified personnel that we need for our business. Loss of
the services of or failure to recruit key scientific and technical personnel
could substantially hurt us and our product development efforts.
WE HAVE BROAD DISCRETION OVER THE PROCEEDS OF THE OFFERING
The net proceeds of this offering to be received by us have not been
allocated to any specific purpose and will be available to the board of
directors and management to use in their sole discretion to support our
operations. We may decide to use those proceeds for unspecified investments,
acquisitions and expenses, the terms of which will solely be subject to our
discretion. See "Use of Proceeds."
YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION; ABSENCE OF DIVIDENDS
Purchasers of common stock in the offering will experience immediate
and substantial dilution in the net tangible book value per share. At an assumed
public offering price of $2.75 per share, the dilution to purchasers of the
common stock in this offering would be $1.53 per share. These investors will
also experience additional dilution upon the exercise of outstanding options and
warrants. We do not anticipate paying cash dividends in the foreseeable future.
See "Dilution."
CONTINGENT STOCK RIGHTS COULD RESULT IN DILUTION
In addition, pursuant to the terms of our 1995 merger with Triplex
Pharmaceutical Corporation, we are obligated to issue shares of common stock to
certain former security holders of Triplex Pharmaceutical Corporation if we
obtain data from clinical trials of Zintevir(R) on or before September 11, 2000
that our board of directors determines to be sufficient to file an FDA new drug
application, which we refer to as an "NDA". If that event occurs, these rights
will result in the issuance of up to an aggregate of $5.0 million of common
stock, valued for such purpose at the current market value of the common stock
at the time the event requiring issuance of such shares occurs. As a result, you
would experience further dilution in the net tangible book value per share.
THE COMMON STOCK HAS LIMITED TRADING VOLUME AND A HISTORY OF VOLATILITY
The historical trading volume of our common stock has been limited. An
active public market for the common stock may not develop or be sustained. The
trading price of the common stock and the price at which we may sell securities
in the future could be subject to large fluctuations in response to a number of
factors. These factors could include announcements of research activities,
technological innovations or new products by us or our competitors, changes in
government regulations, developments concerning proprietary rights, quarterly
variations in operating results, litigation, clinical trials of products,
approval or denial of FDA new drug applications, general market conditions, our
liquidity, our ability to raise additional funds and other events. The market
price of the common stock, and the market prices for securities of emerging
biotechnology companies generally, has fluctuated dramatically in recent years.
These fluctuations have sometimes been unrelated to the operating performance of
the affected companies.
BOTH OUR CERTIFICATE OF INCORPORATION AND DELAWARE LAW HAVE ANTI-TAKEOVER
PROVISIONS
Our certificate of incorporation:
o provides for staggered terms of office for directors;
o requires certain procedures to be followed and time periods to be
met for any stockholder to propose matters to be considered at
annual meetings of stockholders, including nominating directors for
election at those meetings;
o prohibits stockholders from calling special meetings of
stockholders; and
o authorizes our board of directors to issue up to 5,000,000 shares
of preferred stock without stockholder approval and to set the
rights, preferences and other designations, including voting
rights, of those shares as the board of directors may determine.
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<PAGE> 12
These provisions, alone or in combination with each other, may discourage
transactions involving actual or potential changes of control, including
transactions that otherwise could involve payment of a premium over prevailing
market prices to holders of common stock.
In addition, we are subject to provisions of the Delaware General
Corporation Law that may make some business combinations more difficult.
Accordingly, transactions that otherwise could involve payment of a premium over
prevailing market prices to holders of common stock may be discouraged or more
difficult for our company than for other companies organized in other
jurisdictions. See "Description of Capital Stock."
YEAR 2000 ISSUES
Many currently installed systems and software products are coded to
accept only two digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, in less
than one year, computer systems and/or software used by many companies may need
to be upgraded to comply with these "Year 2000" requirements. We are in the
process of working with our software vendors to ensure that the software that we
have licensed from third parties will operate properly in the year 2000 and
beyond. In addition, we are working with our external suppliers, service
providers and corporate partners to ensure that they and their systems will be
able to support our needs and, where necessary, interoperate with our server and
networking hardware and software infrastructure in preparation for the year
2000. We do not anticipate that we will incur significant operating expenses or
be required to invest heavily in computer systems improvements to be year 2000
compliant. However, significant uncertainty exists concerning the potential
costs and effects associated with any year 2000 compliance. Any year 2000
compliance problems of ours, our customers or vendors could have a material
adverse effect on our business, results of operations and financial condition.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Year 2000."
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<PAGE> 13
USE OF PROCEEDS
The net proceeds to Aronex Pharmaceuticals, Inc. ("ARNX") from the sale
of the 4,500,000 shares of ARNX's common stock offered by this prospectus at an
assumed public offering price of $2.75 per share (the last sale price of the
common stock on January 21, 1999 was $2.75) are estimated to be approximately
$11.1 million.
ARNX anticipates that the net proceeds of this offering will be used to
fund the continued clinical and preclinical development of ARNX's existing
products (approximately $8.9 million), capital expenditures and other general
corporate purposes including selling, general and administrative expenses
(approximately $2.2 million). Exact allocation of the proceeds for such purposes
and timing of the expenditures will vary depending on numerous factors,
including the hiring of additional personnel, the progress of ARNX's research
and development programs, the results of clinical and preclinical trials of its
products, the cost and timing of regulatory approvals, technological advances,
the commercial potential of its products, the terms of any collaborative
arrangements entered into by ARNX and the status of competitive products. ARNX's
board of directors and management have significant discretion in the application
of such funds.
Based upon currently planned development activities and related costs,
ARNX anticipates that the net proceeds of this offering, together with existing
resources, should be sufficient to meet its capital and operating requirements
into the second quarter of 2000. During this period, ARNX anticipates receiving
further payments from Abbott Laboratories under the license agreement for
NYOTRAN(R); however, these payments are dependent upon performance and are not
guaranteed. In the event that ARNX does not receive the estimated gross proceeds
of $12.4 million from this offering, it is anticipated that the existing
financial resources will be applied to continue to fund the development of
ARNX's leading drug candidates, NYOTRAN(R) and ATRAGEN(R), and that the
development of ARNX's remaining products may be adversely delayed. Further, in
the future ARNX will need additional capital even if the entire estimated gross
proceeds of $12.4 million are raised in this offering, in order to successfully
complete development of its current products.
Pending application of the proceeds described above, ARNX intends to
invest the net proceeds in cash equivalents and short-term investments,
including United States government securities and high-grade corporate
investments, commercial paper and bankers acceptances. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources." ARNX intends to invest and use the net
proceeds so as not to be considered an investment company under the Investment
Company Act of 1940.
DIVIDEND POLICY
ARNX has never paid cash dividends on the common stock. ARNX currently
intends to retain earnings, if any, to support the development of ARNX's
business and does not anticipate paying dividends in the foreseeable future.
Payment of future dividends, if any, will be at the discretion of ARNX's board
of directors after taking into account various factors, including ARNX's
financial condition, operating results, current and anticipated cash needs and
plans for expansion.
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<PAGE> 14
PRICE RANGE OF COMMON STOCK
ARNX's common stock is traded on the Nasdaq National Market under the
symbol "ARNX." The following table sets forth the range of high and low sales
prices per share of common stock, as reported on the Nasdaq National Market,
during the periods presented. The information provided in the table gives effect
to a one-for-two reverse split of ARNX's common stock effected in July 1996.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996: HIGH LOW
------------------ -----------
<S> <C> <C>
1st Quarter............................... $ 13 1/2 $ 6 1/2
2nd Quarter............................... 15 7 7/8
3rd Quarter............................... 12 3/4 6 1/2
4th Quarter............................... 10 1/4 7 1/8
YEAR ENDED DECEMBER 31, 1997:
1st Quarter............................... $ 10 1/8 $ 5 1/8
2nd Quarter............................... 6 7/8 3
3rd Quarter............................... 7 5/8 3 5/8
4th Quarter............................... 7 1/4 3 11/16
YEAR ENDED DECEMBER 31, 1998:
1st Quarter............................... $ 4 3/4 3
2nd Quarter............................... 4 7/8 2 1/4
3rd Quarter............................... 4 2 1/32
4th Quarter .............................. 4 3/4 $ 1 11/16
YEAR ENDED DECEMBER 31, 1999:
1st Quarter (1)........................... $ 2 25/32 1 3/4
</TABLE>
- ---------------------------
(1) As of January 21, 1999.
The last sale price of the common stock as reported on the Nasdaq
National Market on January 21, 1999, was $2.75 per share. At December 31, 1998,
there were approximately 200 holders of record and approximately 4,400
beneficial owners of ARNX's common stock.
-11-
<PAGE> 15
DILUTION
Net tangible book value of ARNX's common stock as of September 30, 1998
was $11,353,000, or $0.73 per share. Net tangible book value per share
represents the total tangible assets of ARNX reduced by its total liabilities
and divided by the number of shares of common stock outstanding as of September
30, 1998. After giving effect to the sale of the common stock to Abbott
Laboratories in November 1998, and the stock offered by this prospectus at an
assumed public offering price of $2.75 per share and the deduction of the
commissions and estimated offering expenses payable by ARNX, the pro forma net
tangible book value of ARNX as of September 30, 1998, as adjusted, would have
been $25,438,000, or $1.22 per share. The issuance of common stock in this
offering represents an immediate increase in the net tangible book value of
$0.34 per share to existing stockholders and an immediate dilution of $1.53 per
share to new investors purchasing shares of common stock in this offering. The
dilution schedule assumes no exercise of any outstanding options or warrants to
purchase common stock or issuance of common stock under outstanding contingent
stock rights and no exercise of the warrants to purchase an aggregate of 450,000
shares of common stock to be issued to Paramount Capital, Inc. or its designees
in connection with this offering. See "Plan of Distribution," "Description of
Capital Stock -- Warrants," " -- Options," -- Contingent Stock Rights" and
ARNX's financial statements and related notes included elsewhere in this
prospectus.
The following table illustrates the per share dilution to new investors
purchasing common stock in this offering:
<TABLE>
<S> <C>
Assumed public offering price per share.................................... $ 2.75
Net tangible book value per share as of September 30, 1998............ 0.73
Pro forma increase resulting from sale of 837,989 shares for
$3.0 million to Abbott Laboratories on November 30, 1998 ......... 0.15
Increase per share attributable to new investors...................... 0.34
---------
Pro forma net tangible book value as adjusted for this offering............ $ 1.22
---------
Dilution per share to new investors........................................ $ 1.53
=========
</TABLE>
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<PAGE> 16
CAPITALIZATION
The following table describes (1) the actual capitalization of ARNX as
of September 30, 1998, (2) the pro forma capitalization of ARNX as of September
30, 1998 giving effect to the November 30, 1998, sale of 837,989 shares of
common stock to Abbott Laboratories for $3.0 million, and (3) the pro forma as
adjusted capitalization of ARNX as of September 30, 1998 giving effect to the
sale of common stock to Abbott Laboratories and the sale by ARNX of the shares
of common stock offered hereby and the application of the net proceeds as
described under "Use of Proceeds." This table assumes no exercise of any
outstanding options or warrants to purchase common stock or issuance of common
stock under outstanding contingent stock rights and no issuance of the 450,000
shares of common stock upon the exercise of warrants to be issued to Paramount
Capital, Inc. or its designees in connection with this offering. See "Plan of
Distribution," "Description of Capital Stock -- Warrants," " -- Options," --
Contingent Stock Rights," "Use of Proceeds," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and ARNX's financial
statements and related notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
----------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- --------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C>
Long-term obligations ............................................ $ 1,047 $ 1,047 $ 1,047
--------- --------- ---------
Stockholders' equity
Preferred stock $.001 par value, 5,000,000 shares authorized,
none issued and outstanding ................................. -- -- --
Common stock $.001 par value, 30,000,000 shares authorized,
16,341,734 and 22,341,734 shares issued and outstanding,
respectively ................................................ 15 16 21
Additional paid-in capital .................................... 97,660 100,659 111,739
Common stock warrants ......................................... 50 50 50
Treasury stock ................................................ (11) (11) (11)
Deferred compensation ......................................... (545) (545) (545)
Unrealized loss on securities available-for-sale .............. (66) (66) (66)
Deficit accumulated during development stage .................. (85,750) (85,750) (85,750)
--------- --------- ---------
Total stockholders' equity .................................... 11,353 14,353 25,438
--------- --------- ---------
Total capitalization ........................................ $ 12,400 $ 15,400 $ 26,485
========= ========= =========
</TABLE>
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<PAGE> 17
SELECTED FINANCIAL DATA
The selected financial data set forth below are derived from ARNX's
financial statements as of and for each of the years in the five-year period
ended December 31, 1997, and as of and for the nine month periods ending
September 30, 1997 and 1998. ARNX's financial statements as of and for each of
the years in the five year period ended December 31, 1997, have been audited by
Arthur Andersen LLP, independent public accountants. Arthur Andersen LLP has not
audited the following financial statements for the nine months ended September
30, 1997 and 1998. Arthur Andersen LLP has informed ARNX that, if the conditions
described in Note 1 of the Notes to Financial Statements continue to exist at
the time of their audit of the financial statements for the year ended December
31, 1998, their report on those statements will include an explanatory fourth
paragraph expressing substantial doubt about ARNX's ability to continue as a
going concern.
On September 11, 1995, ARNX acquired Triplex Pharmaceutical Corporation
and Oncologix Inc. This transaction was accounted for under the purchase method
of accounting. The selected financial data prior to September 11, 1995,
represent the operations and balance sheet data of ARNX, while the selected
financial data from and after September 11, 1995, represent the combined
operations and balance sheet data of the merged companies. The selected
financial data described below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
ARNX's financial statements and related notes included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Research and development
grants and contracts ........................ $ 48 $ 197 $ 1,248 $ 2,670 $ 841 $ 591 $ 329
Interest income ................................ 217 534 452 1,692 2,059 1,632 1,013
-------- -------- -------- -------- -------- -------- --------
Total revenues ........................ 265 731 1,700 4,362 2,900 2,223 1,342
Expenses:
Research and development ....................... 4,491 7,637 8,347 10,357 13,993 9,864 15,399
Purchase of in-process
research and development .................... -- -- 8,383 242 3,000 3,000 --
General and administrative ..................... 1,876 1,950 2,215 1,620 2,641 1,477 2,448
Interest expense and other ..................... 123 196 184 173 257 160 41
-------- -------- -------- -------- -------- -------- --------
Total expenses ........................ 6,490 9,783 19,129 12,392 19,891 14,501 17,888
-------- -------- -------- -------- -------- -------- --------
Net loss ....................................... $ (6,225) $ (9,052) $(17,429) $ (8,030) $(16,991) $(12,278) $(16,546)
-------- ======== ======== ======== -------- ======== ========
Basic and diluted loss per
share ....................................... $ (1.72) $ (1.76) $ (2.69) $ (0.62) $ (1.14) $ (0.83) $ (1.07)
-------- ======== ======== ======== ======== -------- ========
Weighted average shares
used in computing basic
and diluted loss per share .................. 3,602 5,153 6,488 13,048 14,896 14,714 15,475
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
-------------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and
short-term and long-term
investments ............... $ 19,642 $ 10,019 $ 12,015 $ 41,388 $ 29,954 $ 32,738 $ 16,015
Total assets ................. 21,187 12,958 15,530 44,281 32,125 $ 35,588 18,522
Total long-term obligations .. 913 1,218 1,574 146 6 13 1,047
Deficit accumulated during
development stage ......... (17,702) (26,754) (44,183) (52,213) (69,204) (64,491) (85,750)
Total stockholders' equity ... 19,471 10,660 11,994 40,477 27,379 31,810 11,353
</TABLE>
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<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Since its inception in 1986, ARNX has primarily devoted its resources
to fund research, drug discovery and development. ARNX has been unprofitable to
date and expects to incur substantial operating losses for the next several
years as it expends its resources for product research and development,
preclinical and clinical testing and regulatory compliance. ARNX has sustained
losses of approximately $85.8 million through September 30, 1998. ARNX has
financed its research and development activities and operations primarily
through public and private offerings of securities. ARNX's operating results
have fluctuated significantly during each quarter, and ARNX anticipates that
such fluctuations, largely attributable to varying commitments and expenditures
for clinical trials and research and development, will continue for the next
several years.
RESULTS OF OPERATIONS
Nine Month Periods Ended September 30, 1997 and 1998
Revenues from research and development grants and contracts decreased
44% to $329,000 for the nine months ended September 30, 1998, from $591,000 for
the nine months ended September 30, 1997. For the nine months ended September
30, 1997, research and development revenue was composed of (1) $150,000 in
revenue from the initiation of a license agreement with F. Hoffman-LaRoche Ltd.
(formerly Boehringer Mannheim GmbH) ("Roche"), (2) $166,000 in development
revenue from Targeted Genetics, Incorporated and (3) $250,000 in the third
quarter of 1997 from a gene therapy licensing agreement with Genzyme
Corporation. ARNX has not received any revenues in 1998 under the agreement with
Roche, which was terminated in September 1998. The three-year agreement with
Targeted Genetics ended in the second quarter of 1997. The majority of research
and development revenue for the nine months ended September 30, 1998 represents
Small Business Innovative Research ("SBIR") grant revenue relating to
Zintevir(R).
Interest income decreased 38% to $1.0 million for the nine months ended
September 30, 1998, from $1.6 million for the nine months ended September 30,
1997. The decrease in interest income resulted from a decrease of funds
available for investment.
Research and development expenses increased 56% to $15.4 million for
the nine months ended September 30, 1998, from $9.9 million for the nine months
ended September 30, 1997. The increase in research and development expenses
resulted primarily from an increase of $4.4 million in clinical investigation
costs for the nine months ended September 30, 1998. The majority of these
expenses relate to clinical trials of ARNX's lead products, NYOTRAN(R), which
increased $3.6 million, and ATRAGEN(R), which increased $389,000. The increase
in research and development expenses also reflects an increase of $1.3 million
in medical affairs and regulatory salaries and payroll costs for the nine months
ended September 30, 1998, as the number of personnel in these departments
increased significantly from the same period in 1997. The majority of the
increase in salaries and payroll costs was attributable to ARNX's development of
NYOTRAN(R).
The cost of $3.0 million incurred for the purchase of in-process
research and development in the third quarter of 1997 related to a non-cash
issuance of common stock under the contingent stock rights (the "Triplex
Contingent Stock Rights") issued in the merger with Triplex. ARNX issued an
aggregate of 686,472 shares of common stock with an aggregate value of $3.0
million under the Triplex Contingent Stock Rights because equity milestone
payments of $5.0 million were not received from Genzyme relating to ATRAGEN(R)
on or before September 11, 1997. See Note 4 of Notes to Financial Statements.
General and administrative expenses increased 60% to $2.4 million for
the nine months ended September 30, 1998, from $1.5 million for the nine months
ended September 30, 1997. The increase in general and administrative expenses
resulted primarily from: (1) an increase of $601,000 in salaries and payroll
costs; (2) an increase of $119,000 relating to business development activities;
(3) an increase of $64,000 in investor and public relations expenses and (4)
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<PAGE> 19
the addition of $159,000 in marketing expenses, relating primarily to
ATRAGEN(R), for the nine month period ended September 30, 1998. Several new
positions have been added since the first quarter of 1997 and a Chief Executive
Officer was added in the fourth quarter of 1997. Additionally, ARNX's former
President, who resigned in January 1998, is entitled to certain severance
payments in accordance with a termination and severance agreement with ARNX.
These severance payments, which continue through January 1999, were recorded as
compensation expense in the first quarter of 1998. See Note 11 of Notes to
Financial Statements.
Interest expense and other decreased 74% to $41,000 for the nine months
ended September 30, 1998, from $160,000 for the nine months ended September 30,
1997. The decrease in interest expense and other resulted primarily from a loss
of $107,000 in the quarter ended September 30, 1997, from the disposition of
equipment and leasehold improvements that had been used in research activities
eliminated in early 1997 and a decrease in interest expense for the first half
of 1998 resulting from a reduction in the average amount of capital lease
obligations and indebtedness used to fund the acquisition of laboratory
equipment.
Net loss increased 35% to $16.6 million for the nine months ended
September 30, 1998, from $12.3 million for the nine months ended September 30,
1997. The increase in net loss resulted primarily from the increase in research
and development expenses.
Years Ended December 31, 1996 and 1997
Research and development grants and contracts decreased 70% to $0.8
million in 1997, from $2.7 million in 1996. The decrease in 1997 research and
development grants and contracts was due primarily to the following factors: (1)
ARNX received no revenues from Hoechst Marion Roussel, Inc. ("Hoechst") in 1997
compared with $1.3 million in revenues from Hoechst in 1996, as a result of the
expiration of ARNX's research and development agreement with Hoechst at the end
of 1996; (2) ARNX received no revenues under its collaborative agreement with
Genzyme during 1997 as compared with $576,000 in revenues under the Genzyme
agreement in 1996, as a result of the termination of Genzyme's funding
obligations under the agreement; and (3) ARNX received $166,000 in revenues
under a research and development agreement with Targeted Genetics in 1997 as
compared with $597,000 in revenues from Targeted Genetics in 1996, as a result
of the expiration of the agreement with Targeted Genetics in the second quarter
of 1997. The decrease in research and development grants and contracts in 1997
was partially offset by ARNX's receipt in 1997 of $250,000 under ARNX's license
agreement with Roche and an additional $250,000 under a new license agreement
with Genzyme relating to gene therapy.
Interest income increased 24% to $2.1 million in 1997 from $1.7 million
in 1996, due primarily to an increase of funds available for investment during
the first half of 1997 resulting from cash received from a public offering of
common stock completed in May 1996.
Research and development expenses increased 35% to $14.0 million in
1997, from $10.4 million in 1996. This increase in research and development
expenses was due primarily to: (1) an increase of $1.2 million in clinical
investigation costs relating mostly to NYOTRAN(R); (2) an increase of $1.6
million in salaries and payroll costs, including costs relating to the hiring of
senior pharmaceutical development and medical affairs executives; (3) an
increase of $687,000 in drug materials and manufacturing costs, relating mainly
to NYOTRAN(R) and Zintevir(R); and (4) an increase of $678,000 in outside
pharmacology studies, relating mainly to ATRAGEN(R). These increases were
partially offset by a decrease of $1.2 million in research expenses resulting
from the elimination of the majority of ARNX's internal research efforts in the
second quarter of 1997, relating in part to the termination of research funding
from Hoechst.
The costs of $3.0 million incurred for the purchase of in-process
research and development in 1997 related to a non-cash research and development
charge incurred in the issuance of 686,472 shares of common stock, with an
aggregate fair market value at the time of issuance of $3.0 million, under the
Triplex Contingent Stock Rights issued in the Triplex merger. The issuance of
such shares under the Triplex Contingent Stock Rights was required because
equity milestone payments of $5.0 million were not received from Genzyme
relating to ATRAGEN(R) on or before September 11, 1997. See Note 4 of Notes to
Financial Statements. In-process research and development costs of $242,000 in
1996 represent charges incurred relating to ARNX's 1995 mergers with Triplex and
Oncologix, including
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<PAGE> 20
the non-cash settlement of a lawsuit filed by certain stockholders of Oncologix
as a result of the mergers in September 1995.
General and administrative expenses increased 63% to $2.6 million in
1997 from $1.6 million in 1996. The increase in general and administrative
expenses was primarily due to the following: (1) an increase of $721,000 in
salaries and payroll costs, including costs relating to the hiring of a new
Chief Executive Officer and a Vice President of Marketing and Business
Development; and (2) an increase of $195,000 in stock and stock option
compensation expense.
ARNX's net loss increased 111% to $16.9 million in 1997 from $8.0
million in 1996. The increase was primarily a result of the following: (1) an
increase of $3.6 million in research and development expenses due to increased
salaries and payroll costs and other expenses relating to advancing ARNX's
products; (2) a $3.0 million charge relating to the issuance of shares of common
stock under the Triplex Contingent Stock Rights (see Note 4 of Notes to
Financial Statements); (3) an increase of $1.0 million in general and
administrative expenses relating mainly to increased salaries and payroll costs,
including salary and hiring costs for several new positions; and (4) a decrease
of $1.9 million in research and development grants and contracts, attributable
primarily to the loss of revenues from the Hoechst agreement.
Years Ended December 31, 1995 and 1996
Research and development grants and revenues increased 125% to $2.7
million in 1996, from $1.2 million in 1995. The increase in research and
development grants and revenues was due primarily to: (1) ARNX's recognition of
$576,000 in revenues during the third and fourth quarters of 1996 relating to
pharmaceutical development work performed in connection with ARNX's
collaborative agreement with Genzyme; and (2) ARNX's recognition of revenues of
$1.3 million from Hoechst. ARNX did not recognize any revenue relating to the
Genzyme agreement in 1995, as all such amounts were being deferred in accordance
with the agreement, and recognized revenues of $350,000 in 1995 under the
Hoechst agreement, representing amounts received after its assumption of
Triplex's rights under that agreement in ARNX's 1995 merger with Triplex.
Interest income increased 276% to $1.7 million in 1996 from $452,000 in
1995, due primarily to an increase of funds available for investment resulting
from cash received from the exercise of warrants and a public offering of common
stock completed in May 1996.
Research and development expenses increased 25% to $10.4 million in
1996, from $8.3 million in 1995, due primarily to the addition of Triplex's
research department following the Triplex merger and increased clinical
investigation costs relating to ARNX's NYOTRAN(R) and Zintevir(R) products.
In-process research and development costs of $242,000 in 1996 and $8.4
million in 1995 were incurred in connection with the Triplex and Oncologix
mergers in September 1995 and represent the amount of the purchase price
allocated to acquired research and development. The charges in 1996 include the
non-cash settlement of a lawsuit filed by certain stockholders of Oncologix.
General and administrative expenses decreased 27% to $1.6 million in
1996 from $2.2 million in 1995, primarily due to: (1) non-recurring operating
expenses incurred on behalf of Oncologix and paid in 1995 by ARNX pursuant to
the terms of the Oncologix merger agreement; and (2) a decrease in salary and
personnel costs from 1995 due to severance payments made to ARNX's former
President in 1995.
ARNX's net loss decreased 54% to $8.0 million in 1996 from $17.4
million in 1995, due primarily to the $8.4 million charge in 1995 for in-process
research and development costs in the Triplex and Oncologix mergers.
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<PAGE> 21
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
On September 11, 1995, ARNX acquired two development stage companies,
Triplex Pharmaceutical Corporation and Oncologix, Inc. These acquisitions were
accounted for under the purchase method of accounting in which the aggregate
purchase price was allocated to tangible and intangible assets acquired based on
their relative fair values as of the date of the transaction. ARNX allocated
approximately $2.8 million of the purchase price for Triplex and $5.6 million of
the purchase price for Oncologix to in-process research and development. ARNX's
valuation of the research and development acquired considered (1) the current
scientific and development status of the projects; (2) the expected amount of
time and resources required to complete the projects; (3) the probability of
obtaining collaborators to help finance and develop such projects; and (4) the
potential market for such projects.
At the time of acquisition, Triplex's major focus was the development
of a new class of drugs to treat serious diseases where currently available
therapy was inadequate or non-existent. Triplex had, at that time, one compound,
Zintevir(R), that was at an advanced preclinical stage of development. Triplex
also had a number of other compounds in early stages of preclinical development.
Zintevir(R) was being developed for the treatment of HIV infection. At the time
of acquisition, laboratory tests had shown that Zintevir(R) inhibited the viral
replication of certain HIV-infected cells and Triplex was performing work to
determine its properties. Additional preclinical and manufacturing work was
required to enter clinical trials.
In order for Zintevir(R) to become a marketable product, it will be
necessary to conduct several clinical trials and to improve the manufacturing of
the product. ARNX anticipated that it would take 3 to 5 years to complete the
development of Zintevir(R). ARNX estimated it would cost several million dollars
to complete early-stage clinical trials and to manufacture the necessary drug
for these trials. If results from the early-stage clinical trial currently being
conducted are positive, ARNX expects the potential market value of Zintevir(R)
to be adequate to receive financial support through collaborators to complete
further development. ARNX began a Phase I clinical trial for Zintevir(R) in
October 1995 and expects to complete a Phase I/II trial in 1999. ARNX will
evaluate the results of the Phase I/II clinical trial and does not intend to
progress into additional development of Zintevir(R) unless another company
agrees to fund the additional development work. See "Business -- Infectious
Diseases -- Zintevir(R) for HIV Infection (Phase I/II)."
At the time of acquisition, Oncologix was engaged in the research and
development of drugs for the treatment of cancer. ARNX acquired the Oncologix
projects to complement the existing ARNX product portfolio. The Oncologix
compounds were licensed by Oncologix from other companies, and were at a
preclinical or early clinical stage. Additional clinical trials and laboratory
work were necessary to complete the development of these compounds. After the
acquisition, in order to determine the best way to complete development, ARNX
directed limited scientific resources to review the preclinical and clinical
data on these projects. The majority of effort expended by ARNX was to identify
other companies who would be interested in funding these projects. One
collaborative agreement was entered into relating to one of the projects
acquired from Oncologix. In 1996, ARNX entered into a license agreement with
Roche, related to the compound AR209, which was being developed for breast
cancer. Under the agreement, Roche was responsible for funding the costs of all
remaining preclinical and clinical development of AR209. Roche paid ARNX a
license fee when the agreement was entered into and an annual license fee in
1997. The agreement was terminated without cause by Roche in September 1998 when
Roche stopped development. Rights to AR209 have returned to ARNX.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, ARNX's primary source of cash has been from
financing activities, which have consisted primarily of sales of equity
securities. ARNX has raised an aggregate of approximately $75 million from the
sale of equity securities from its inception through September 30, 1998. In July
1992, ARNX raised net proceeds of approximately $10.7 million in the initial
public offering of its common stock. In September 1993, ARNX entered into a
collaborative agreement with Genzyme Corporation relating to the development and
commercialization of ATRAGEN(R), in which ARNX received net proceeds of
approximately $4.5 million from the sale of common stock to Genzyme. In November
1993, ARNX raised net proceeds of approximately $11.5 million and May 1996, ARNX
raised net proceeds of approximately $32.1 million in public offerings of common
stock. From October 1995 through September 30, 1998, ARNX received aggregate net
proceeds of approximately $6.5 million from the exercise of certain warrants
issued in its 1995 merger with Oncologix. In November 1998, ARNX entered into a
license agreement with Abbott Laboratories relating to NYOTRAN(R), in which
Abbott purchased 837,989 shares of ARNX's common stock for $3.0 million. An
additional $8.4 million has been received from Abbott in up-front and milestone
payments, all of which payments are non-refundable. From its inception until
September 30, 1998, ARNX also received an aggregate of $5.1 million cash from
other collaborative arrangements and SBIR grants.
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<PAGE> 22
In September 1996, Genzyme advanced ARNX $2.0 million relating to a
$5.0 million equity milestone under ARNX's collaborative agreement with Genzyme.
Early in 1997, Genzyme and ARNX entered into an amendment to the agreement under
which: (1) Genzyme was released from any further obligation to perform
development work for ATRAGEN(R) and (2) the license granted to Genzyme under the
agreement was converted to an option to acquire the right to market and sell
ATRAGEN(R) worldwide (with ARNX retaining co-promotion rights in the United
States). If Genzyme exercises its option, Genzyme will be required to pay ARNX
$3.0 million and product royalties and ARNX will be entitled to retain the $2.0
million advance. ARNX has the right to reacquire such marketing rights at any
time within six months following Genzyme's exercise of the option, by returning
to Genzyme the $3.0 million received in connection with Genzyme's exercise of
the option and repaying Genzyme the $2.0 million advance. If ARNX reacquires
such marketing rights, it will also be required to pay Genzyme product
royalties, including $500,000 in minimum royalties in the first year following
its reacquisition of such rights. If Genzyme does not exercise its option prior
to its expiration, ARNX will be required to repay Genzyme the $2.0 million
advance and to pay product royalties, including $500,000 in minimum royalties in
the first year following the expiration of the option. Genzyme's option to
acquire such rights expires on June 4, 1999, which is six months after the
filing of the NDA for ATRAGEN(R).
The majority of ARNX's development activities are committed on a
short-term, as-needed basis through contracts and purchase orders. These
arrangements can be changed based on ARNX's needs and development activities.
ARNX has contracted with certain clinical research organizations ("CROs") to
conduct its non-United States clinical trials for NYOTRAN in the following
indications: cryptococcal meningitis, presumed fungal infections and
Aspergillus. The remaining amount projected to be expended to complete the CROs'
activities with respect to those indications is approximately $2.0 million. The
agreements provide that ARNX can terminate them at any time, should either
ARNX's financial situation, or the results of the studies, require it.
Nonetheless, ARNX intends to continue to engage CROs in the future to monitor
its various clinical trials in non-United States countries.
ARNX's primary use of cash to date has been in operating activities to
fund research and development, including preclinical studies and clinical trials
and general and administrative expenses. Cash of $14.0 million and $8.1 million
was used in operating activities during the first nine months of 1998 and 1997.
ARNX had cash, cash- equivalents and short-term and long-term investments of
$16.0 million as of September 30, 1998, consisting primarily of cash and money
market accounts, and United States government securities and investment grade
commercial paper.
ARNX has experienced negative cash flows from operations since its
inception and has funded its activities to date primarily from equity
financings. ARNX has expended, and will continue to require, substantial funds
to continue research and development, including preclinical studies and clinical
trials of its products, and to commence sales and marketing efforts if FDA and
other regulatory approvals are obtained.
Excluding the proceeds of this offering and payments expected from
Abbott Laboratories, ARNX expects that its existing financial resources should
be sufficient to fund its capital requirements into the fourth quarter of 1999.
ARNX expects that its existing financial resources, together with the estimated
proceeds of this offering, should be sufficient to fund its capital requirements
into the second quarter of 2000. During this period, we anticipate receiving
further payments from Abbott Laboratories under the license agreement for
NYOTRAN(R), however these payments are dependent upon performance and are not
guaranteed. In the future, ARNX may need to raise substantial additional capital
to fund its operations. ARNX's independent public accountants have informed ARNX
that, if at the time of their audit of the financial statements for the year
ending December 31, 1998 ARNX's existing financial resources continue to only be
sufficient to fund capital requirements into the fourth quarter of 1999, their
report on those statements will include an explanatory fourth paragraph
expressing substantial doubt about ARNX's ability to continue as a going
concern.
ARNX has experienced significant increases in accounts payable and
accrued payroll since 1996, primarily as a result of the increased development
activities relating to ARNX's two late-stage products. ARNX anticipates that the
amounts expended for these items in the future will continue to correspond with
its development activities. If the volume of development activities decreases
there will be a decrease in outstanding payables and a decrease in ARNX's
liquidity position. ARNX expects that its expenses relating to development
activities will fluctuate from quarter to quarter over the next few years as
ARNX has not yet generated revenues from product sales. Also, ARNX has
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<PAGE> 23
typically obtained debt financing when necessary for equipment, furniture and
leasehold improvement requirements. In 1998, ARNX's capital requirements
increased with the move into new facilities. As a result, ARNX borrowed $1.4
million in 1998 to finance its requirements in connection with this move. It is
expected that ARNX will continue to incur additional debt to meet its capital
requirements from time to time in the future. Such borrowings will be based on
the Company's financial resources and needs.
ARNX's capital requirements will depend on many factors, including the
problems, delays, expenses and complications frequently encountered by
development stage companies; the progress of ARNX's research, development and
clinical trial programs; the extent and terms of any future collaborative
research, manufacturing, marketing or other funding arrangements; the costs and
timing of seeking regulatory approvals of ARNX's products; ARNX's ability to
obtain regulatory approvals; the success of ARNX's sales and marketing programs;
the costs of filing, prosecuting and defending and enforcing any patent claims
and other intellectual property rights; and changes in economic, regulatory or
competitive conditions of ARNX's planned business. Estimates about the adequacy
of funding for ARNX's activities are based on certain assumptions, including the
assumption that testing and regulatory procedures relating to ARNX's products
can be conducted at projected costs. There can be no assurance that changes in
ARNX's research and development plans, acquisitions, or other events will not
result in accelerated or unexpected expenditures. To satisfy its capital
requirements, ARNX may seek to raise additional funds in the public or private
capital markets. ARNX's ability to raise additional funds in the public or
private markets will be adversely affected if the results of its current or
future clinical trials are not favorable. ARNX may seek additional funding
through corporate collaborations and other financing vehicles. There can be no
assurance that any such funding will be available to ARNX on favorable terms or
at all. If adequate funds are not available, ARNX may be required to curtail
significantly one or more of its research or development programs, or it may be
required to obtain funds through arrangements with future collaborative partners
or others that may require ARNX to relinquish rights to some or all of its
technologies or products. If ARNX is successful in obtaining additional
financing, the terms of such financing may have the effect of diluting or
adversely affecting the holdings or the rights of the holders of ARNX's common
stock.
YEAR 2000
Year 2000 issues result from the inability of certain computer programs
or computerized equipment to accurately calculate, store or use a date
subsequent to December 31, 1999. The erroneous date can be interpreted in a
number of different ways; typically the year 2000 is represented as the year
1900. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices or engage in similar normal business.
ARNX is in the process of assessing all of its financial and
operational systems and equipment to ensure year 2000 compliance. ARNX has
completed its initial review of its financial and operational systems and
equipment, with the exception of certain personal computer and network hardware
which it is continuing to assess. Except for the personal computer and network
hardware that remains under assessment, ARNX has either obtained certifications
as to year 2000 compliance from vendors or has tested the year 2000 compliance
of substantially all its systems and equipment, and has taken the steps it
believes will be necessary to remediate year 2000 problems associated with the
systems and equipment that it determined not to be year 2000 compliant. ARNX
plans to complete its assessment of its financial and operational systems and
equipment in the first quarter of 1999. ARNX believes that the potential impact,
if any, of its systems not being year 2000 compliant could result in the loss of
data, which is available in hard-copy, that would have to be re-entered. ARNX
believes that any loss of computer data will not materially affect ARNX's
ability to continue its research and development activities or have a material
adverse effect on ARNX's business, results of operations or financial condition.
However, this potential loss of data could result in a material delay in
completing clinical studies of ARNX's products which could have a material
adverse effect on ARNX's business, results of operations and financial
condition.
ARNX is in the process of contacting its consultants and other
suppliers of goods and services, as well as its corporate partners, to assess
the possible impact of year 2000 compliance of their systems and equipment on
ARNX. ARNX plans to complete its assessment of such matters by July 31, 1999.
ARNX believes that the potential impact, if any, of the systems of its
consultants (including CROs and hospitals), suppliers and corporate partners not
being year
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<PAGE> 24
2000 compliant could result in the loss of data, which is available in
hard-copy, that would have to be re-entered. Any loss of computer data will not
materially affect ARNX's ability to continue its research and development
activities. However, this potential loss of data could result in a material
delay in completing clinical studies of ARNX's products which could have a
material adverse effect on ARNX's business, results of operations and financial
condition.
Based on its assessments and remediation efforts to date, ARNX does not
anticipate that it will incur any significant costs relating to the assessment
and remediation of year 2000 issues. To date, ARNX estimates that it has spent
less than $25,000 in reviewing and remediating year 2000 issues and that its
total expenditures incurred on completing its review and remediation efforts
will not exceed $100,000. However, there can be no assurance that planned
expenditures for these efforts will not exceed such amount should unforseen
complications arise during such review and assessment or as a result of ARNX's
remediation efforts or those of its vendors, consultants or partners. Such
expenditures are budgeted as part of ARNX's operating expenses. Also,
there can be no assurance that ARNX or its consultants, suppliers and corporate
partners will successfully be able to identify and remedy all potential year
2000 problems or that a system failure resulting from a failure to identify any
such problems would not have a material adverse effect on ARNX.
ARNX has developed and is implementing a contingency plan of
maintaining all data that is generated or collected by it or its collaborators,
including CROs, hospitals, physicians, consultants and others, in hard-copy. Any
loss of data due to year 2000 problems could be re-entered manually. ARNX also
maintains all of its accounting records in hard copy so that it can continue
to pay vendors, employees, consultants and collaborators in the event that its
accounting software or other computer programs or systems malfunction due to the
year 2000 issue. ARNX employees also have keys to the doors to enable them to
gain access to their laboratory and offices in the event that the building
security systems malfunction. ARNX is continuing to review these and related
operational requirements in order to complete its contingency plan for its
non-critical business functions.
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<PAGE> 25
BUSINESS
GENERAL
Aronex Pharmaceuticals, Inc. ("ARNX") is a biopharmaceutical company
engaged in the identification and development of proprietary innovative
medicines to treat cancer and infectious diseases. ARNX's strategy is to
identify and develop medicines based upon either refinements of proven therapies
or new ways of treating specific diseases. ARNX has a portfolio of clinical
products that it believes balances the risks encountered in development of
pharmaceutical products against the rewards from the practical commercial
applications of its products. ARNX believes its focus on medicines for cancer
and infectious diseases for which current therapy is inadequate will assist in
development and product marketing and will facilitate expedited
commercialization of its products.
Aronex Pharmaceuticals currently has five products in various stages of
ongoing clinical development:
o NYOTRAN(R) for the treatment of systemic fungal infections,
o ATRAGEN(R) for the treatment of cancer,
o Annamycin for the treatment of cancers with multi-drug resistance,
o Platar for the treatment of lung cancer and
o Zintevir(R) for the treatment of human immunodeficiency virus
("HIV") infection.
ARNX has strategic alliances and collaboration arrangements with
leading corporations and academic institutions, including alliances with Abbott
Laboratories and Genzyme Corporation and a collaboration with The University of
Texas M.D. Anderson Cancer Center.
BUSINESS STRATEGY
ARNX has implemented a comprehensive strategy to become a commercial
biopharmaceutical company involved in the identification, development and
commercialization of novel medicines for treating cancer and infectious
diseases. ARNX's strategy encompasses five key elements:
Therapeutic Focus. ARNX has adopted a clear therapeutic focus aimed at
identifying and developing novel medicines to satisfy clearly defined,
unsatisfied needs in the treatment of cancer and infectious diseases. ARNX
believes that this focus provides synergies in the development of its products
as a result of common patient populations, and will provide synergies in the
marketing and commercialization of its products as a result of the common
hospital-based sales and distribution channels and concentrated customer base
associated with such products. In addition, ARNX believes its focus on medicines
for cancer and infectious diseases for which current therapy is inadequate may
facilitate expedited commercialization of its products.
Balanced Product Portfolio. ARNX has a portfolio of clinical products
that it believes provides a balanced development and commercialization risk
profile. Three of ARNX's products are liposomal formulations of drugs that are
currently on the market, designed to improve effectiveness and reduce adverse
side effects. ARNX believes that this should contribute to a reduction in the
development risks associated with such products. Two of ARNX's products are new
compounds with novel mechanisms of action against a specific disease target.
While these products are associated with a greater degree of development risk,
ARNX believes that these products may have a substantial impact against the
diseases they are intended to treat. ARNX believes that this balanced
development and commercialization risk profile limits its dependence on a single
product.
Expedited Drug Development Programs. ARNX believes that it has created
an effective pharmaceutical development infrastructure. With expertise in
preclinical development, drug formulation and delivery, quality assurance,
quality control and analytical chemistry, drug manufacturing, regulatory and
clinical affairs, ARNX believes that it has the ability to effectively advance
preclinical and clinical products through the development pipeline.
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<PAGE> 26
Leveraged Research and Technological Resources. ARNX relies on several
sources to provide potential opportunities to expand its pipeline of products
for commercialization. Using its academic and corporate collaborations, ARNX
seeks late-stage preclinical products for advancement into ARNX's clinical
pipeline as well as early-stage clinical products with prospects for rapid
clinical development. Additional opportunities are available through ARNX's
existing capabilities in drug formulation and delivery.
Marketing and Commercialization Strategy. ARNX's marketing and
commercialization effort is designed to create a revenue stream utilizing two
diverse methods. ARNX intends to market products in the United States through
its own sales and marketing efforts or through co-marketing, and to market
products overseas through licensing arrangements with corporate partners. ARNX
also intends to market those products requiring broader marketing and
distribution efforts through licensing arrangements with corporate partners.
CLINICAL AND SCIENTIFIC BACKGROUND
ARNX's development programs are aimed at the identification and
development of innovative medicines to treat cancer and infectious diseases for
which current therapy is inadequate. The effectiveness of the current generation
of anti-cancer and anti-infective drugs is limited because of two significant
factors. First, cancer cells frequently become resistant to commonly used
anti-cancer drugs, and organisms responsible for infectious diseases may also
acquire resistance to anti-infective drugs. This resistance results in the
ultimate progression of many cancers and some infections, such as HIV. Second,
these drugs, particularly cancer drugs, are generally toxic because their lack
of selectivity results in significant side effects on normal cells. ARNX is
targeting the development of drugs for cancer and infectious diseases that are
selective in their actions, with specific mechanisms of action and more
favorable safety profiles.
Infectious Diseases
The immune system, the major line of defense against infection, may be
weakened by diseases, such as HIV and diabetes, or by drugs or agents used for
the treatment of other medical conditions, such as chemotherapy in cancer
patients or immunosuppressive (anti-rejection) therapy in patients receiving
organ transplants. A weak immune system predisposes patients to opportunistic
infections caused by otherwise harmless microbes. These microbes may be fungi
such as Aspergillus and Candida, viruses or bacteria. Some of these
"opportunist" microbes can be or become resistant to existing therapies. Drugs
with new mechanisms of action and/or improved safety profiles are needed to
treat fungal, viral and bacterial diseases and to overcome the toxicity
limitations associated with certain existing drugs.
Cancer
The American Cancer Society estimates that more than 1.2 million new
cases of cancer will be diagnosed and more than 500,000 people will die of
cancer in 1998 in the United States. According to the American Cancer Society,
major classes of cancer include: (1) solid tumors, the most common of which are
breast cancer (approximately 179,000 new cases in the United States annually)
and cancers of the lung (approximately 171,000 new cases in the United States
annually), (2) cancers of the lymphoid system (approximately 62,000 new cases of
lymphoma in the United States annually) and (3) cancers of the blood
(approximately 29,000 new cases of leukemia in the United States annually).
Chemotherapy, surgery and radiation are the major components in the treatment of
cancer. Chemotherapy is usually the primary treatment for cancers, such as
hematologic malignancies, which cannot be excised by surgery. In addition,
chemotherapy is increasingly being used as an adjunct to radiation and surgery
to improve efficacy and reduce the incidence of metastasis (the spread of
cancer), and as primary therapy for some solid tumors. The standard strategy for
chemotherapy is to destroy the malignant cells by exposing them to as much drug
as the patient can tolerate. Clinicians attempt to design a combination of
drugs, dosing schedule and method of administration that increases the
probability that malignant cells will be destroyed, while minimizing the harm to
healthy cells.
Most current anti-cancer drugs have significant limitations. Certain
cancers, such as colon, lung, kidney and pancreatic cancers, are inherently
unresponsive to chemotherapeutic agents. Certain other cancers may initially
respond to a chemotherapeutic agent, but cease to respond as the cancer cells
acquire resistance to the drug during the course
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<PAGE> 27
of therapy. As such cancer cells develop resistance to a specific
chemotherapeutic agent, they often simultaneously become resistant to a wide
variety of structurally unrelated agents through a phenomenon known as
"multi-drug resistance." Finally, current anti-cancer drugs are generally highly
toxic, with effects including bone marrow suppression and irreversible
cardiotoxicity, which can prevent their administration in therapeutic doses.
ARNX's Approach to the Treatment of Cancer and Infectious Diseases
ARNX has a focused effort aimed at identifying highly-specific, novel
medicines for the treatment of cancer and infectious diseases. ARNX's research
and development strategy is to augment its pipeline by partnering with academic
centers such as The University of Texas M.D. Anderson Cancer Center. These
relationships are intended to permit ARNX to identify opportunities which have
already been validated in preclinical and, in some instances, clinical studies
before ARNX allocates resources for further evaluation and development. ARNX
also anticipates expansion of its product pipeline through acquisitions,
licenses and joint ventures with corporate partners. This strategy is further
intended to allow ARNX to bypass the lengthy and uncertain drug discovery and
screening process and to proceed quickly to product development and clinical
evaluation. ARNX believes that utilizing this strategy will allow it to maintain
a full pipeline of innovative products for the treatment of cancer and
infectious diseases. See "-- Collaborative Agreements."
PRODUCTS IN CLINICAL AND PRECLINICAL DEVELOPMENT
The following table lists ARNX's clinical products, along with their
initial indications and clinical status:
<TABLE>
<CAPTION>
PRODUCT INDICATIONS CLINICAL STATUS
------- ----------- ---------------
<S> <C> <C>
INFECTIOUS DISEASES
NYOTRAN(R)....................... Presumed Fungal Infections Phase III completed
Cryptococcal Meningitis Phase III
Candidemia Phase II completed
Aspergillus Salvage Phase II
Zintevir(R)...................... HIV Infection Phase I/II
CANCER
ATRAGEN(R)....................... Acute Promyelocytic Leukemia Phase II (pivotal)
Non-Hodgkin's Lymphoma Phase II
Prostate Cancer Phase II
Renal Cell Carcinoma Phase I/II
Kaposi's Sarcoma Phase II completed
Annamycin........................ Breast Cancer Phase II
Platar........................... Lung Cancer Phase II
</TABLE>
"Phase I" indicates that the first phase of human clinical studies is
being conducted with a small number of subjects in order to gain evidence of
safety, establish the maximum dose of the drug which may be safely administered
to patients and to characterize the distribution of a drug in a human patient.
"Phase I/II" indicates that a product is being tested in humans primarily for
safety and drug distribution, while preliminary measures of efficacy are also
observed. "Phase II" indicates that a product is being tested in humans for
safety and preliminary evidence of efficacy. "Phase III" indicates that a
product is being tested in multi-center studies generally designed to provide
evidence of efficacy and further safety of the product in a large number of
patients. A "Pivotal" clinical trial is defined as a clinical trial that
produces data sufficient for submission of an NDA.
ARNX can give no assurance that the results of any of its clinical
trials will be favorable or that its products will obtain regulatory approval
for commercialization. See "Risk Factors -- Uncertainty of Clinical Trial
Results May Result in Commercially Impractical Products."
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<PAGE> 28
INFECTIOUS DISEASES
ARNX's infectious disease program centers on the development of new
agents for the treatment of infectious diseases, including those that occur in
patients with weakened immune systems. The clinical program presently focuses on
the development of NYOTRAN(R) for life-threatening systemic (generally meaning
internal) fungal infections and Zintevir(R) for the treatment of HIV infection.
NYOTRAN(R) for Presumed Fungal Infections (Phase III completed),
Candidemia (Phase II completed), Aspergillus Salvage (Phase II) and
Cryptococcal Meningitis (Phase III)
Systemic fungal infections are generally serious and may result in
death. Most systemic fungal infections are caused by Candida (yeasts) and
Aspergillus (molds) species. These life-threatening infections occur most often
in patients with impaired immune defense mechanisms as a result of an underlying
disease, such as HIV or diabetes, or the effects of treatments for other medical
conditions, such as chemotherapy in cancer patients or immunosuppressive
(anti-rejection) therapy in patients receiving organ transplants. The population
of patients who become candidates for anti-fungal treatment is increasing
because of a number of factors, including more aggressive use of chemotherapy in
cancer patients, increases in organ and bone marrow transplants, increased use
of in-dwelling catheters for prolonged periods and the spread of HIV.
ARNX believes that the drugs that are currently used to treat systemic
fungal infections, including fluconazole, itraconazole, amphotericin B and
liposomal formulations of amphotericin B, have limitations that present a need
for new therapies. Data from recent in vitro studies as well as ARNX's clinical
trial data indicate that a number of fungal strains are becoming increasingly
resistant to known therapies. Fluconazole and itraconazole are relatively safe
and are effective in inhibiting fungal growth in Candida, but are not effective
in inhibiting fungal growth in Aspergillus and are generally not effective in
treating fungal infections in patients who are seriously ill and
immunocompromised. Amphotericin B is very active against both Candida and
Aspergillus but is highly toxic. Several companies have developed liposomal
versions of amphotericin B that are designed to reduce the potential toxicity of
amphotericin B.
NYOTRAN(R) is a lipid-based, intravenous formulation of the drug
nystatin, an established, widely-used topical anti-fungal agent. Although
nystatin has proven to be a potent anti-fungal against a broad spectrum of
fungi, including Candida, Cryptococcus, Histoplasma, Blastomyces and
Aspergillus, its poor solubility and toxicity have previously precluded its
systemic administration as a therapy for such fungal infections. ARNX has
developed a proprietary formulation of NYOTRAN(R) that reduces the toxicity of
nystatin. In addition, ARNX believes that NYOTRAN(R)'s lipid-based formulation
addresses the solubility problem of nystatin. ARNX believes NYOTRAN(R) offers
potential advantages over current systemic anti-fungal therapies. ARNX's in
vitro studies indicate that it is active against a range of fungal strains,
including Candida, Aspergillus, Cryptococcus and Fusarium species, some of which
are resistant to currently available anti-fungal therapies. While final clinical
efficacy trials have not been completed, ARNX believes that its Phase I and
Phase II clinical trials suggest that NYOTRAN(R) can be administered at doses
that are effective in treating Aspergillus, Candida and Cryptococcus infections.
The strategy for the development of NYOTRAN(R) has involved several
stages. ARNX has conducted three Phase I clinical studies which demonstrated a
favorable safety profile. ARNX completed a Phase II open label study in patients
with Candidemia evaluating NYOTRAN(R) at multiple doses. Although this Phase II
study has been completed, it remains open on a compassionate basis to enroll
patients for whom other therapies have not been effective. Results from this
study indicate that a dose of one-third the tolerated dose established in Phase
I appears to be efficacious. Based upon data from this study, ARNX initiated
Phase III comparative multicenter trials in the United States and in Europe of
NYOTRAN(R) against amphotericin B in patients with presumed fungal infections.
Most frequently, in a hospital environment, a patient with a fever of unknown
origin will be treated with an antibiotic. When this treatment proves
ineffective, the physician then presumes that the patient has a fungal infection
(usually Candida or Aspergillus) and begins treatment with an anti-fungal agent.
The diagnosis of a confirmed fungal infection may occur several days after
anti-fungal therapy has begun. ARNX completed the clinical trials for presumed
fungal infections in late 1998.
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To expand the potential indications for NYOTRAN(R), ARNX commenced
Phase II/III trials for patients with cryptococcal meningitis and Phase II
Aspergillus salvage trials. Aspergillus salvage trials are designed to treat
patients with Aspergillus who have failed treatment with current products. ARNX
plans to file an NDA for NYOTRAN(R) with the FDA in 1999 for an indication in
presumed systemic fungal infections. Following the United States submission,
Abbott Laboratories, the exclusive licensee for NYOTRAN(R), is expected to begin
to file additional international regulatory submissions. See "-- Government
Regulation," "-- Collaborative Agreements -- Collaborative Agreement with Abbott
Laboratories" and "Risk Factors -- Uncertainty of Clinical Trial Results May
Result in Commercially Impractical Products."
The active ingredient of NYOTRAN(R), nystatin, is available
commercially. ARNX has contracted for the manufacture of its clinical
requirements of NYOTRAN(R) by a contract manufacturer who ARNX believes to be
capable of satisfying the quantities required for clinical trials and
anticipated quantities for initial commercial sales. ARNX expects Abbott to
manufacture the quantities of NYOTRAN(R) necessary to conduct its remaining
clinical trials and, following regulatory approval, to manufacture NYOTRAN(R)
for commercial sale.
ARNX estimates that each year over 300,000 patients worldwide develop
systemic fungal infections. The current systemic anti-fungal market is estimated
at more than $1.5 billion on an annual basis. The number of patients developing
systemic fungal infections continues to increase because of the aging
population, more aggressive use of chemotherapy, advances in medical therapies
and the development of resistant fungal strains.
Current treatment for systemic fungal infection is largely limited to
amphotericin B, several liposomal formulations of amphotericin B and
fluconazole. Amphotericin B has been a common choice for the treatment of
systemic fungal infections. The clinical usefulness of amphotericin B is
limited, however, because serious toxicity can occur at doses that are only
marginally effective. Liposomal formulations of amphotericin B have been
developed by several companies, including The Liposome Company, Inc., NeXstar
Pharmaceuticals, Inc. and SEQUUS Pharmaceuticals, Inc. Each of these companies'
products have regulatory approval in the United States and other countries. Each
of these liposomal formulations shows a reduction in toxicity as compared to
amphotericin B. Pfizer Inc.'s fluconazole, the world's largest selling
anti-fungal product, is an oral formulation used for a wide range of less
serious Candida indications. ARNX is aware of other anti-fungal agents currently
in clinical development.
In November 1998, ARNX entered into a license agreement with Abbott
Laboratories for NYOTRAN(R). The license agreement provides Abbott with
exclusive worldwide rights to market and sell NYOTRAN(R), subject to rights
previously granted to Grupo Ferrer Internacional, S.A. in Spain and Portugal and
certain co-promotion rights retained by ARNX in the United States and Canada.
Abbott has paid ARNX milestone and up-front payments of $8.4 million under the
license agreement and purchased common stock for $3.0 million under a related
stock purchase agreement. Abbott has also agreed to provide funding for the
continuing clinical development of NYOTRAN(R) and to make subsequent milestone
payments as specified regulatory goals and sales targets are achieved. Abbott
has agreed to pay to ARNX escalating royalties on all product sales of
NYOTRAN(R). See "-- Collaborative Agreements -- Collaborative Agreement with
Abbott Laboratories."
M.D. Anderson has granted ARNX the worldwide exclusive license to an
issued patent directed to the use of a liposomal formulation of nystatin in the
treatment of systemic fungal infections. A process which is of substantial
pharmaceutical utility for making NYOTRAN(R) is protected by another issued
patent. A continuation of this process patent is currently being prosecuted
seeking additional claims in this area. See "-- Patents and Proprietary Rights."
Zintevir(R) for HIV Infection (Phase I/II)
ARNX is developing Zintevir(R) for the treatment of human
immunodeficiency virus infection. The drugs currently approved in the United
States for treatment of HIV infection consist of reverse transcriptase
inhibitors, such as AZT, ddI, ddC, d4T and 3TC, and protease inhibitors, such as
saquinavir, ritinovir and indinavir. By contrast, ARNX believes Zintevir(R)
inhibits HIV-1 integrase, a key enzyme in catalyzing the integration of HIV
within human cells.
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Two Phase I trials on Zintevir(R) have been completed. A Phase I single
dose study of Zintevir(R) was initiated at San Francisco General Hospital in
October 1995, and a Phase I multiple dose study was initiated at Harris
Laboratories, Inc., a clinical research organization, in May 1996. The primary
objectives of these studies were to determine the safety and distribution of
Zintevir(R) in HIV infected patients. In November 1997, ARNX began a Phase I/II
clinical trial designed to determine Zintevir(R)'s ability to reduce viral load
as well as to gather additional data on the product's safety and
pharmacokinetics. ARNX expects to complete the Phase I/II clinical trial in
1999. ARNX will evaluate the results of the Phase I/II clinical trials but does
not intend to progress into additional development of Zintevir(R) unless a third
party agrees to fund such additional development work. See "Risk Factors --
Uncertainty of Clinical Trial Results May Result in Commercially Impractical
Products."
The use and composition of a group of compounds including Zintevir(R)
are the subject of one issued patent and four United States patent applications
and eight foreign patent applications. These applications are either assigned
wholly to ARNX, or jointly to ARNX and Baylor College of Medicine, in which case
ARNX has exclusively licensed Baylor's rights. The issued patent covers the
inhibition of HIV production in cultured cells by a group of compounds including
Zintevir(R). See "-- Patents and Proprietary Rights."
CANCER
ARNX's programs in cancer focus on developing medicines based upon
either refinements of proven therapies or new approaches to the treatment of
specific disease targets. The clinical program currently focuses on development
of ATRAGEN(R) for hematological malignancies and solid tumors and Annamycin for
breast cancer.
ATRAGEN(R) for Acute Promyelocytic Leukemia (pivotal Phase II),
Non-Hodgkin's Lymphoma (Phase II), Prostate Cancer (Phase II), Renal
Cell Carcinoma (Phase I/II) and Kaposi's Sarcoma (Phase II completed)
In December 1998, ARNX submitted an NDA to the FDA for ATRAGEN(R) for
the treatment of patients with acute promyelocytic leukemia ("APL"), for whom
therapy with tretinoin is necessary but for whom an intravenous administration
is required. This indication represents a therapeutic area where new therapies
are needed. Established chemotherapeutic agents have been effective in treating
some cases of APL, but have been associated with serious side effects and
frequent relapse. All-trans retinoic acid ("ATRA" or tretinoin) has been
approved as an oral formulation by the FDA as a treatment for APL. ATRA and
other retinoids (a family of molecules comprising both natural and synthetic
derivatives of retinol, otherwise known as vitamin A) cause cell differentiation
in contrast to most conventional chemotherapeutic agents. However, ARNX believes
the effectiveness of the oral formulation of ATRA may be reduced by the rate at
which it is metabolized, which lowers the amount of drug that reaches the cancer
target.
ATRAGEN(R) is a lipid-based, intravenous formulation of ATRA which has
been studied in patients with APL and Kaposi's sarcoma. ARNX's lipid formulation
has been developed to change certain aspects of the drug's behavior in the body
to overcome the known deficiencies of oral retinoids, such as the oral
formulation of ATRA. ATRAGEN(R) has a different pharmacokinetics and
distribution profile, so that there may be a decrease in the proportion of the
drug metabolized and an increase in the proportion that reaches the cancer
target. Following ATRAGEN(R) treatment, higher plasma concentrations of the drug
are achieved than after oral ATRA therapy. Unlike oral administration, these
drug levels are maintained throughout the course of therapy. These
characteristics may provide more effective delivery of the drug to the bone
marrow, liver and spleen, where most leukemic cells are found, and a better
safety profile.
ARNX completed a Phase I clinical trial of ATRAGEN(R) in 1995 in
patients with cancers of the blood. Phase I data presented in the journal Blood
during 1996 indicated that ATRAGEN(R) sustains levels in the blood after
prolonged dosing, is well tolerated, and shows evidence of activity against
certain leukemias and lymphomas. ARNX recently completed patient enrollment for
the pivotal Phase II clinical evaluation of ATRAGEN(R) for its potential to
induce remission and prevent relapse of APL in patients that have experienced a
recurrence of the cancer. Interim results from one of these trials, presented at
the American Society for Hematology meeting in December 1997, demonstrated that
ATRAGEN(R) has activity against APL. ARNX completed patient enrollment of the
Phase II clinical trials in the third quarter of 1998. Based on the pivotal
Phase II data, ARNX submitted an NDA for ATRAGEN(R) for the treatment of
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patients with APL for whom therapy with the drug tretinoin is necessary but for
whom an intravenous administration is required.
ATRAGEN(R) has also been assessed in Phase II clinical trials in
collaboration with Genzyme Corporation for the treatment of Kaposi's sarcoma.
Results from this trial indicated that ATRAGEN(R) was generally well tolerated,
with headaches and dry skin being the primary reported adverse events. ARNX is
not presently pursuing this indication, although it may do so in the future.
ARNX believes that ATRAGEN(R) may also be useful in treating other
types of cancer, and is evaluating the efficacy of ATRAGEN(R) in other
hematologic malignancies and solid tumors. In 1998, ARNX initiated a Phase II
clinical trial in non-Hodgkin's lymphoma and a Phase II clinical trial in
hormone-refractory prostate cancer. In early 1999, a Phase I/II clinical trial
in combination with interferon alpha in renal cell carcinoma was initiated at
New York Presbyterian Hospital and the Weill Medical College of Cornell
University under an institutional Investigational New Drug application ("IND").
ARNX plans to expand the initiation of clinical trials in other indications in
the near future. ATRAGEN(R) has been designated an orphan drug for the treatment
of acute and chronic leukemia by the FDA. See "-- Government Regulation" and
"Risk Factors -- Uncertainty of Clinical Trial Results May Result in
Commercially Impractical Products."
According to the American Cancer Society, approximately 2,000 new cases
of APL in the United States are diagnosed annually, and each year approximately
500,000 patients in the United States develop the various types of cancer
identified as potential indications for ATRAGEN(R).
In 1993, ARNX entered into a collaborative agreement with Genzyme
Corporation to develop and commercialize ATRAGEN(R) for the treatment of cancer.
This agreement has subsequently been modified, with the result that: (1) ARNX
retains responsibility for the further clinical development of ATRAGEN(R) and
(2) Genzyme has an option to acquire marketing rights to ATRAGEN(R), subject to
the right of ARNX to retain or reacquire such marketing rights and subject to
certain other rights retained by ARNX. See "-- Collaborative Agreements --
Collaborative Agreement with Genzyme Corporation."
The composition and method of use of ATRAGEN(R) (liposomal tretinoin)
is the subject of a patent application, assigned to The University of Texas M.D.
Anderson Cancer Center, as to which the rights of M.D. Anderson are exclusively
licensed to ARNX. These rights are subject to certain options held by Genzyme
related to development of ATRAGEN(R). Claims to the ATRAGEN(R) formulation have
been allowed in the European Patent Office. See "-- Patents and Proprietary
Rights."
Annamycin for Breast Cancer (Phase II)
Annamycin is a new chemical entity belonging to the class of widely
prescribed anti-cancer agents known as anthracyclines. This class of drug, which
includes doxorubicin, daunorubicin and idarubicin, has been shown to be
effective, either alone or in combination, against proliferating cancer cells.
Anthracyclines currently on the market, however, suffer from two primary
limitations. (1) Cancer cells often develop a resistance to them, rendering the
treatment ineffective. This resistance, once developed by cancer cells,
generally extends to include resistance to a variety of other chemotherapeutic
agents, a phenomenon commonly referred to as multi-drug resistance. The best
understood mnechanism behind multi-drug resistance involves an increase in the
production of P-glycoprotein, a trans-cell membrane pump. This pump transports
drugs, including most types of anti-cancer drugs, out of tumor cells. (2)
Currently available anthracyclines also frequently result in severe toxic
effects, including irreversible cardiotoxicity.
Annamycin was designed to overcome these two major limitations. In
contrast to conventional chemotherapeutic agents, Annamycin is structured so
that it avoids the mechanism of operation of the trans-cell membrane pump
believed to be one of the mechanisms responsible for multi-drug resistance.
ARNX's preclinical studies have shown that Annamycin, which is a lipid-based
formulation of a novel anthracycline, may be active against multi-drug resistant
tumor cells that over-express at least two of the pumps that are believed to be,
at least in part, responsible for tumor cells becoming resistant to treatment.
ARNX's preclinical studies of Annamycin in animals
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bearing human tumors also indicate that Annamycin may be less cardiotoxic than
doxorubicin. A Phase I dose- escalating clinical trial of Annamycin was
completed in August 1997. Data from this trial were presented at the American
Society of Clinical Oncology meeting in May 1997. Annamycin is currently being
evaluated in Phase II multi-center clinical trials in breast cancer patients
whose tumors are resistant to conventional therapies. ARNX expects to complete
Phase II clinical trials in 1999. Clinical trials to assess the efficacy of
Annamycin in patients with other solid tumors and with various hematological
malignancies are being planned. See "Risk Factors -- Uncertainty of Clinical
Trial Results May Result in Commercially Impractical Products."
ARNX believes that there would be a substantial market for an agent
which is active against multi-drug resistance and exhibits an improved safety
profile over doxorubicin. The American Cancer Society estimates that each year
there are approximately 179,000 new cases of breast cancer in the United States.
Annamycin also may be useful in treating other varieties of solid tumors,
leukemias and lymphomas.
While there are a range of chemotherapeutic agents used alone and in
combination to treat breast cancer and other solid tumors, including
doxorubicin, daunorubicin, liposomal formulations of doxorubicin and
daunorubicin, taxol, platinum and cyclophosphamide, ARNX does not believe that
there are any medicines available that are active against multi-drug resistant
tumors. ARNX is aware of some agents currently in Phase II clinical trials that
are designed to modulate multi-drug resistance, but for which no efficacy data
are yet available. These agents would potentially be used in combination with
chemotherapeutic agents.
ARNX's liposomal formulation of Annamycin is the subject of an issued
patent, licensed exclusively to ARNX by The University of Texas M.D. Anderson
Cancer Center, that claims liposomal Annamycin and a method using liposomal
Annamycin in treating cancer. In addition, a patent application has been filed
with respect to an improved process for preparing Annamycin. Patent protection
is also being sought for a specific formulation of liposomal Annamycin with
improved processing characteristics. This patent application is also licensed to
ARNX under the exclusive license between MD Anderson and ARNX. Annamycin itself
is the subject of a patent that has been non-exclusively sublicensed to ARNX by
M.D. Anderson, which M.D. Anderson licensed from Ohio State University. See "--
Patents and Proprietary Rights."
Platar for Lung Cancer (Institutional Phase II)
ARNX, in conjunction with The University of Texas M.D. Anderson Cancer
Center, is developing the novel platinum analogue, Platar, for the treatment of
solid tumors. Platar has been designed to overcome the toxicity and resistance
that currently limits the usefulness of platinum, a chemotherapeutic agent
widely used in the treatment of solid tumors.
Platar is currently being evaluated in a Phase II clinical trial, under
an institutional IND at M.D. Anderson Cancer Center, for the treatment of
mesothelioma, a type of lung cancer. This trial is funded by the Office of
Orphan Drug Products at the FDA. A Phase I clinical trial was previously
conducted under a physician's IND at M.D. Anderson Cancer Center.
Platar is covered by a series of patents and a patent application,
licensed exclusively to ARNX by M.D. Anderson, relating to hydrophobic
cis-platinum complexes and to stable liposomal formulations of the lipophilic
platinum compounds. The claims of these patents are drawn to novel cis-platinum
complexes having hydrophobic properties and possessing branched or
unbranched-chain hydrocarbon substituents. Formulations containing the novel
platinum complexes entrapped in liposomes and exhibiting improved drug stability
are included. Anti-tumor compositions containing these stable cis-platinum
containing liposomes and methods of using them to treat tumors are also covered.
Claims to the product have been allowed by the European Patent Office. A patent
application filed in the United States that may overlap claims included in the
United States patents licensed to ARNX is the subject of an ongoing interference
proceeding in the United States Patent and Trademark Office. ARNX cannot
currently predict the outcome of this matter. See "-- Patents and Proprietary
Rights."
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AR209: erbB-2 Targeted Therapy for Solid Tumors (Preclinical)
AR209 is an innovative cancer therapy that ARNX believes has potential
for additional solid tumor indications, including lung, ovarian and stomach
cancers. ARNX believes the design of this product improves upon conventional
cancer therapy by targeting specific cancer cells that contain the oncoprotein
erbB-2. The erbB-2 protein occurs at high levels only in tumors and not in
normal tissues. AR209 is an antibody-toxin complex composed of a targeting
ligand and a fragment of the Pseudomonas exotoxin. This novel product is
designed to bind to cancer cells that contain the erbB-2 oncoprotein and to be
transported inside (internalized) where it kills the cancer cell. Preclinical
studies indicate that AR209 causes regression of solid human tumors and is well
tolerated.
ARNX has a worldwide license from the NIH to the Pseudomonas exotoxin
used in the design of AR209. ARNX also has an exclusive license to a United
States government patent application covering antibodies targeting the erbB-2
oncoprotein. Patent applications covering the sequences of the e23 antibody used
in the formulation of AR209 have also been filed. See "-- Patents and
Proprietary Rights."
In 1996, ARNX entered into a license agreement with Boehringer Mannheim
GmbH (subsequently acquired by Roche) to develop and commercialize AR209. Under
the agreement, Roche was responsible for funding the costs of all remaining
preclinical and clinical development of AR209 and for manufacturing the product.
Both parties had the right to terminate the agreement without cause, with all
rights reverting to the non-terminating party. The agreement was terminated
without cause by Roche in September 1998 with the result that rights to AR209
have reverted to ARNX.
RESEARCH PIPELINE
ARNX's goal is to establish an effective and efficient pharmaceutical
development infrastructure and capability to provide a continuing pipeline of
products for commercialization. ARNX's research and development strategy is to
augment its pipeline by partnering with academic centers such as The University
of Texas M.D. Anderson Cancer Center, as well as with private research
foundations. Such partnering will allow ARNX to identify opportunities which
have already been validated in preclinical and, in some instances, clinical
studies before allocating resources for further evaluation and development. This
approach will allow ARNX to bypass the lengthy and uncertain drug discovery and
screening process and to proceed quickly to product development and clinical
evaluation. ARNX believes that using this strategy will allow it to maintain a
full pipeline of innovative products for the treatment of cancer and infectious
diseases. See "-- Collaborative Agreements."
COLLABORATIVE AGREEMENTS
ARNX's development strategy involves entering into selected development
and licensing agreements with corporate partners to provide working capital to
ARNX as well as assist in the efficient development and marketing of certain of
its products. See "Risk Factors -- Our Ability to Enter into Collaborative
Agreements is Critical to Our Success."
Collaborative Agreement with Abbott Laboratories
In November 1998, ARNX entered into a license agreement with Abbott
Laboratories for NYOTRAN(R). The license agreement provides Abbott with
exclusive worldwide rights to market and sell NYOTRAN(R), subject to rights
previously granted to Grupo Ferrer Internacional, S.A. in Spain and Portugal and
co-promotion rights retained by ARNX in the United States and Canada for an
initial two year period. These co-promotion rights will renew annually
thereafter for successive one year periods unless cancelled by either party. To
date, Abbott has paid ARNX up-front and milestone payments of $8.4 million under
the license agreement with an aggregate potential of $40 million in clinical
development and sales milestone payments. In addition, Abbott purchased common
stock for $3.0 million. Abbott's payments to ARNX provide funding for the
continuing clinical development of NYOTRAN(R), and are due as specified
regulatory goals and sales targets are achieved. However, there can be no
assurance that these milestone payments will be made. The research and
development payments are subject to reduction in the event that the completion
of the
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applicable activity is delayed beyond various dates. Once paid, all such
payments are non-refundable. Abbott will also pay to ARNX escalating royalties
on all product sales of NYOTRAN(R).
The licenses granted under the NYOTRAN(R) agreement terminate on a
country-by-country basis on the expiration of the last patent relating to that
product in that country. The agreement is terminable by Abbott in the event
certain regulatory milestone goals are not met or other specified events occur,
such as adverse safety and efficacy issues, and are terminable by either party
on the occurrence of a breach that is not cured by the breaching party within a
certain time period after notice has been given to that breaching party. In the
event the agreement is terminated by Abbott due to a regulatory milestone not
being met on time or other specified cause no further payments by Abbott are
due.
Relationship with Grupo Ferrer Internacional, S.A.
In 1997, ARNX entered into a supply and distribution agreement with
Grupo Ferrer Internacional, S.A. ("Ferrer") to commercialize and market
NYOTRAN(R), under which Ferrer received the exclusive right to distribute and
sell NYOTRAN(R) in Spain and Portugal. ARNX and Ferrer subsequently amended
their agreement to enable Abbott to pursue an optimal registration and
commercialization strategy in all international markets. Abbott, ARNX and Ferrer
have agreed to commence three-way discussions to decide on the best way to
proceed.
Collaborative Agreement with Genzyme Corporation
In 1993, ARNX entered into a license and development agreement with
Genzyme Corporation to develop and commercialize ATRAGEN(R). The initial focus
of the collaboration was the development of ATRAGEN(R) for the treatment of
myelogenous leukemias and certain non-hematologic cancers. ARNX and Genzyme
shared clinical development responsibilities and research program funding
through the end of 1996. Under the agreement, Genzyme was required to make up to
$1.5 million in milestone payments to ARNX upon the occurrence of certain events
and to pay ARNX royalties on sales of the product. Genzyme had the right to
terminate the agreement in the event of a third party claim of infringement by
products subject to the agreement. ARNX had the right to terminate the agreement
if Genzyme failed to satisfy certain milestones. Under the collaborative
agreement, Genzyme made a net $4.5 million equity investment in ARNX and agreed
to make an additional $5.0 million equity investment in ARNX if certain
developmental goals were achieved.
In September 1996, Genzyme advanced ARNX $2.0 million relating to the
$5.0 million equity milestone. Early in 1997, Genzyme and ARNX entered into an
amendment to the agreement under which (1) Genzyme was released from any further
obligation to perform development work for ATRAGEN(R) and (2) the license
granted to Genzyme under the agreement was converted to an option to acquire the
right to market and sell ATRAGEN(R) worldwide (with ARNX retaining co-promotion
rights in the United States). If Genzyme exercises its option, Genzyme will be
required to pay ARNX $3.0 million and product royalties and ARNX will be
entitled to retain the $2.0 million advance. ARNX has the right to reacquire
such marketing rights at any time within six months following Genzyme's exercise
of the option by returning to Genzyme the $3.0 million received as a result of
Genzyme's exercise of the option and repaying Genzyme the $2.0 million advance.
If ARNX reacquires such marketing rights, it will also be required to pay
Genzyme product royalties, including $500,000 in minimum royalties in the first
year following its reacquisition of such rights. If Genzyme does not exercise
its option prior to its expiration, ARNX will be required to repay Genzyme the
$2.0 million advance and to pay product royalties, including $500,000 in minimum
royalties in the first year following the expiration of the option. Genzyme's
option to acquire such rights expires on June 4, 1999, which is six months after
ARNX's filing of an NDA for ATRAGEN(R).
Relationship with The University of Texas M.D. Anderson Cancer Center
ARNX has two license agreements with The University of Texas M.D.
Anderson Cancer Center which grant it exclusive rights to manufacture, use,
market and sell products based upon certain technology developed at M.D.
Anderson relating to the development of human monocyte or murine
macrophage-derived cytotoxins which inhibit or destroy the proliferation of
tumor cells, liposomal-encapsulated polyene antibiotics (except amphotericin B),
liposomal-encapsulated anthracyclines, liposomal-encapsulated platinum
derivatives and liposomal-encapsulated retinoids.
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NYOTRAN(R), ATRAGEN(R), Annamycin and Platar are products derived from ARNX's
relationship with M.D. Anderson.
The license agreements with M.D. Anderson require ARNX to pay royalties
for licensed technology based on specified percentages of cumulative net sales
and royalties from sublicensees. ARNX is also obligated to pay a milestone
payment of $200,000 upon the filing of an NDA for each licensed product. Because
it has not sold any products or processes to date, ARNX has not paid any
royalties under the license agreements. M.D. Anderson is responsible for the
preparation, filing and prosecution of all patent applications, foreign and
domestic, relating to technology developed at M.D. Anderson, and ARNX reimburses
M.D. Anderson for expenses incurred during these activities.
The license agreements generally remain in force until the expiration
of the last patent subject to such agreements. Either party may terminate the
license agreements after 60 days notice to the other party in the event of a
material breach of the terms of that agreement. M.D. Anderson has the right to
terminate either license agreement with 90 days notice for failure to convert
the licensed subject matter to a commercial form; however, ARNX believes its
ongoing and active research and development efforts directed at commercial
marketing of the licensed products currently satisfies this obligation.
ARNX and M.D. Anderson have entered into research and development
contracts in conjunction with the license agreements which obligate ARNX to fund
research and development expenses incurred by the M.D. Anderson scientists that
relate to the technology licensed by ARNX. Such contracts grant ARNX an
exclusive worldwide license to technology related to the technology licensed
under the license agreements and developed as a result of research funded by
ARNX. Such contracts also grant ARNX a right of first refusal to acquire an
exclusive worldwide license to certain technology developed at M.D. Anderson
which is not the result of projects funded by ARNX. Aronex Pharmaceuticals and
M.D. Anderson agreed to the funding commitments for research projects under
these contracts through November 15, 1999. The amount of funding committed for
1999 is $117,333, and subsequent periods are expected to be negotiated on an
annual basis, based upon a variety of factors including the number and cost of
projects to be funded, the staffing requirements associated with these projects,
and other related matters. If ARNX defaults in the payment of research and
development funding commitments due M.D. Anderson under such contracts, M.D.
Anderson may suspend the related research and development projects or, if ARNX's
default continues for a period of 60 days, M.D. Anderson may terminate the
related contract upon 60 days notice to ARNX If the research and development
contract with M.D. Anderson is terminated, no further inventions or improvements
developed at M.D. Anderson relating to the products licensed to ARNX would be
transferred or licensed to ARNX.
Relationship with Baylor College of Medicine
ARNX had collaborative arrangements with Baylor College of Medicine,
under licensing, consulting and research and development arrangements entered
into by Triplex beginning in 1989. ARNX has an exclusive, worldwide,
royalty-free license from Baylor to certain technology developed by Baylor,
including the product Zintevir(R). The collaboration arrangements terminated in
1996. The license agreement terminates on the expiration of the last patent to
expire that is licensed thereunder, which is projected to be October 22, 2013.
MANUFACTURING
ARNX does not have the facilities necessary to manufacture its products
in accordance with the good manufacturing practices ("GMP") guidelines
established by the FDA for companies manufacturing pharmaceutical products. ARNX
does have the capability to develop formulations, analytical methods, process
controls and manufacturing technology for its products. ARNX generally uses
contract manufacturers to produce GMP batches of its products for clinical
testing, although it expects Abbott Laboratories to supply the quantities of
NYOTRAN(R) necessary to conduct its remaining clinical trials of that product.
ARNX and the manufacturers of its products (other than Abbott) have not entered
into any written agreements other than periodic purchase orders for the supply
of the products they manufacture on its behalf. Contract manufacturers are
closely supervised to ensure adherence to established production methods and
compliance with ARNX's rigorous quality control and quality assurance standards.
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ARNX does not expect to establish any significant manufacturing capacity in the
near future. ARNX does not operate, and does not currently plan to operate,
manufacturing facilities for the production of its products in commercial
quantities, and it intends to contract with third parties for the manufacture
and supply of its products. There can be no assurance that ARNX will be able to
obtain supplies of its products from third-party suppliers on terms or in
quantities acceptable to ARNX. Also, ARNX depends on third parties for the
manufacture of its products. This may adversely affect ARNX's product margins
and its ability to develop and deliver products on a timely basis. Any
third-party suppliers of this kind or any manufacturing facility ARNX
establishes will be required to meet FDA GMP requirements. FDA inspection and
approval of manufacturing facilities and quality procedures for a drug are a
prerequisite to approval of an NDA for that drug. ARNX may encounter significant
delays in obtaining supplies from third-party manufacturers or experience
interruptions in its supplies. If ARNX is unable to obtain adequate supplies,
its business would be materially adversely affected.
The raw materials required for the majority of ARNX's products are
currently available in quantities sufficient to conduct ARNX's research,
development, preclinical safety and clinical development activities. Certain of
ARNX's products, such as Annamycin, are new syntheses and, therefore, are not
yet available in commercial quantities. ARNX cannot give assurance that the raw
materials necessary for the manufacture of ARNX's products will be available in
sufficient quantities or at a reasonable cost. Complications or delays in
obtaining raw materials or in product manufacturing could delay the submission
of products for regulatory approval and the initiation of new development
programs, which could materially impair ARNX's competitive position and
potential profitability.
SALES AND MARKETING
ARNX presently intends to market its products in North America through
its own sales and marketing infrastructure or under co-promotion arrangements,
and will build its sales and marketing infrastructure in accordance with
regulatory submissions. ARNX currently plans to market selected products
directly to oncologists, hematologists and infectious disease specialists
through a niche sales and marketing force in the United States. Where large
market opportunities require large sales forces, ARNX may enter into
co-marketing arrangements with, or license marketing rights to, third parties.
ARNX's international strategy is to negotiate marketing agreements with
pharmaceutical manufacturers and distributors which will entitle ARNX to receive
a percentage of net product sales.
ARNX does not have any experience in sales, marketing or distribution.
To market any of its products, ARNX must develop a sales and marketing force
with supporting distribution capability or enter into marketing and distribution
arrangements with a company that has an established capability. Significant
additional expenditures will be required for ARNX to develop such capabilities.
ARNX has entered into agreements with Abbott Laboratories and Grupo Ferrer
Internacional, S.A. with respect to the marketing and sale of NYOTRAN(R). In
addition, ARNX has entered into an agreement with Genzyme Corporation under
which Genzyme may acquire the right to market and sell ATRAGEN(R), subject to
certain conditions and certain rights of ARNX. To the extent that Genzyme does
not acquire or ARNX reacquires such marketing rights, ARNX may enter into
marketing agreements with one or more other pharmaceutical companies to market
ATRAGEN(R). In addition, ARNX may enter into marketing agreements with one or
more pharmaceutical companies to market other products that it may develop. To
the extent ARNX relies upon licensing, marketing or distribution arrangements
with others, any revenues ARNX receives will depend upon the efforts of third
parties. ARNX cannot assure that any third party will market ARNX's products
successfully or that any third-party collaboration will be on terms favorable to
ARNX. If any marketing partner does not market a product successfully, ARNX's
business would be materially adversely affected. ARNX cannot assure that it will
be able to establish sales, marketing and distribution capabilities or that it
or its collaborators will be successful in gaining market acceptance for any
products that ARNX may develop. ARNX's failure to establish marketing
capabilities or to enter into marketing arrangements with third parties would
have a material adverse effect on ARNX.
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PATENTS AND PROPRIETARY RIGHTS
ARNX's ability to commercialize any products will depend, in part, upon
its or its licensors' ability to obtain patents, enforce those patents, preserve
trade secrets, and operate without infringing upon the proprietary rights of
third parties. The patent positions of biotechnology and pharmaceutical
companies are highly uncertain and involve complex legal and factual questions.
Some of the United States patents and patent applications owned by or licensed
to ARNX are method-of-use patents that cover the use of certain compounds to
treat specified conditions, and composition-of-matter patents are not available
for some of ARNX's product candidates. ARNX cannot assure that:
o the patent applications licensed to or owned by ARNX will result in
issued patents
o that patent protection will be secured for any particular
technology
o that any patents that have been or may be issued to ARNX or its
licensors will be valid or enforceable
o that any patents will provide meaningful protection to ARNX
o that others will not be able to design around the patents, or
o that ARNX's patents will provide a competitive advantage or have
commercial application.
ARNX cannot assure that patents owned by or licensed to ARNX will not
be challenged by others. ARNX could incur substantial costs in proceedings
before the United States Patent and Trademark Office and other regulatory
authorities, including interference proceedings. These proceedings could result
in adverse decisions about the patentability of ARNX's inventions and products
as well as about the enforceability, validity or scope of protection afforded by
the patents. ARNX is currently involved in an interference proceeding against
Sumitomo Pharmaceuticals before the United States Patent and Trademark Office
regarding the drug NDDP used in the formula of Platar. Platar consists of the
liposomal formulation of the NDDP molecule. Both of the parties claim sole right
to the invention. Sumitomo Pharmaceuticals is relying on a Japanese patent. The
interference was declared by an examiner to be between a currently pending
United States patent application owned by Sumitomo Pharmaceuticals and certain
issued patents licensed by ARNX from the University of Texas M.D. Anderson
Cancer Center. Should the Patent Office deem the Sumitomo Pharmaceuticals
Japanese patent to be first in time over the date relating to the issued ARNX
patents, such patents may be revoked. Under such circumstances, ARNX would need
to enter into a license agreement to obtain rights to NDDP in order to
commercialize the product in the United States. There can be no assurance that
ARNX will be able to enter into such license on acceptable terms, if at all. See
"-- Cancer -- Platar for Lung Cancer (Institutional Phase II)."
ARNX cannot assure that the manufacture, use or sale of ARNX's product
candidates will not infringe patent rights of others. ARNX may be unable to
avoid infringement of those patents and may be required to seek a license,
defend an infringement action, or challenge the validity of the patents in
court. ARNX cannot assure that a license will be available to ARNX, if at all,
upon terms and conditions acceptable to it or that ARNX will prevail in any
patent litigation. Patent litigation is costly and time consuming, and ARNX
cannot assure that it will have sufficient resources to bring such litigation to
a successful conclusion. If ARNX does not obtain a license under such patents,
is found liable for infringement, or is not able to have such patents declared
invalid, ARNX may be liable for significant money damages, may encounter
significant delays in bringing products to market, or may be precluded from
participating in the manufacture, use or sale of products or methods of
treatment requiring such licenses. ARNX does not believe that the
commercialization of its products will infringe upon the patent rights of
others. However, ARNX cannot assure that it has identified all or any United
States and foreign patents that pose a risk of infringement.
ARNX also relies upon trade secrets and other unpatented proprietary
information in its product development activities. To the extent ARNX relies on
trade secrets and unpatented know-how to maintain its competitive technological
position, it cannot assure that others may not independently develop the same or
similar technologies. ARNX seeks to protect trade secrets and proprietary
knowledge, in part through confidentiality agreements with its employees,
consultants, advisors and collaborators. Nevertheless, these agreements may not
effectively prevent disclosure of ARNX's confidential information and may not
provide ARNX with an adequate remedy in the event of unauthorized disclosure of
such information. If ARNX's employees, scientific consultants or collaborators
develop inventions or processes independently that may be applicable to ARNX's
products, disputes may arise about ownership of proprietary rights to those
inventions and processes. These inventions and processes will not necessarily
become ARNX's property, but may remain the property of those persons or their
employers. Protracted and costly litigation
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could be necessary to enforce and determine the scope of ARNX's proprietary
rights. Failure to obtain or maintain patent and trade secret protection, for
any reason, would have a material adverse effect on ARNX.
ARNX engages in collaborations, sponsored research agreements,
licensing and other arrangements with academic researchers and institutions that
have received and may receive funding from United States government agencies. As
a result of these arrangements, the United States government or certain third
parties have rights in certain inventions developed during the course of the
performance of these collaborations and agreements as required by law or the
agreements. These rights typically allow the government to use the invention for
free on an internal basis and for research and development purposes. None of
ARNX's inventions are subject to these rights, except for AR209.
Several bills affecting patent rights have been introduced in the
United States Congress. These bills address various aspects of patent law,
including publication, patent term, reexamination, subject matter and
enforceability. It is not certain whether any of these bills will be enacted
into law or what form new laws may take. Accordingly, the effect of legislative
change on ARNX's intellectual property estate is uncertain.
GOVERNMENT REGULATION
ARNX's research and development activities, preclinical studies and
clinical trials, and ultimately the manufacturing, marketing and labeling of its
products, are subject to extensive regulation by the FDA and other regulatory
authorities in the United States and other countries. The United States Federal
Food, Drug and Cosmetic Act and the regulations promulgated thereunder and other
federal and state statutes and regulations govern, among other things, the
testing, manufacture, safety, efficacy, labeling, storage, record keeping,
approval, advertising and promotion of ARNX's products. Preclinical study and
clinical trial requirements and the regulatory approval process take years and
require the expenditure of substantial resources. Additional government
regulation may be established that could prevent or delay regulatory approval of
ARNX's products. Delays or rejections in obtaining regulatory approvals would
adversely affect ARNX's ability to commercialize any product ARNX develops and
ARNX's ability to receive product revenues or royalties. If regulatory approval
of a product is granted, the approval may include significant limitations on the
indicated uses for which the product may be marketed.
The FDA and other regulatory authorities require that the safety and
efficacy of ARNX's therapeutic products must be supported through adequate and
well-controlled clinical trials. If the results of these clinical trials do not
establish the safety and efficacy of ARNX's products to the satisfaction of the
FDA and other regulatory authorities, ARNX will not receive the approvals
necessary to market its products, which would have a material adverse effect on
ARNX.
The standard process required by the FDA before a pharmaceutical agent
may be marketed in the United States includes: (1) preclinical tests; (2)
submission to the FDA of an IND which must become effective before human
clinical trials may commence; (3) adequate and well-controlled human clinical
trials to establish the safety and efficacy of the drug in its intended
application; (4) submission of an NDA to the FDA; and (5) FDA approval of the
NDA prior to any commercial sale or shipment of the drug. In addition to
obtaining FDA approval for each product, each drug manufacturing establishment
must be inspected and approved by the FDA. All manufacturing establishments are
subject to inspections by the FDA and by other federal, state and local agencies
and must comply with current GMP requirements.
Preclinical tests include laboratory evaluation of product chemistry,
formulation and stability, as well as animal studies to assess the potential
safety and efficacy of each product. Preclinical safety tests must be conducted
by laboratories that comply with the good laboratory practices ("GLP")
guidelines established by the FDA for companies conducting research and
development on proposed pharmaceutical products. The results of the preclinical
tests are submitted to the FDA as part of an IND and are reviewed by the FDA
before the commencement of human clinical trials. Unless the FDA objects to an
IND, the IND will become effective 30 days following its receipt by the FDA.
There can be no assurance that submission of an IND will result in the FDA
authorization to commence clinical trials or that the lack of an objection means
that the FDA will ultimately approve an NDA.
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Clinical trials involve the administration of the investigational new
drug to humans under the supervision of a qualified principal investigator.
Clinical trials must be conducted in accordance with Good Clinical Practices
under protocols that detail the objectives of the study, the parameters to be
used to monitor safety, and efficacy criteria to be evaluated. Each protocol
must be submitted to the FDA as part of the IND. Also, each clinical trial must
be approved and conducted under the auspices of an Institutional Review Board
("IRB"). The IRB will consider, among other things, ethical factors, the safety
of human subjects, and the possible liability of the institution conducting the
clinical trials.
Clinical trials are typically conducted in three sequential phases
which may overlap. In Phase I, the initial introduction of the drug to humans,
the drug is tested for safety (adverse effects), dosage tolerance, metabolism,
distribution, excretion and pharmacodynamics (clinical pharmacology). Phase II
involves studies of a limited patient population to gather evidence about the
efficacy of the drug for specific targeted indications, dosage tolerance and
optimal dosage, and to identify possible adverse effects and safety risks. When
a product has shown evidence of efficacy and has an acceptable safety profile in
a Phase II evaluation, Phase III clinical trials are undertaken to evaluate
clinical efficacy and to test for safety in an expanded patient population at
geographically dispersed clinical trial sites. Phase III clinical trials are not
always required, however, where the data obtained in Phase II trials is
determined to be "pivotal." There can be no assurance that any of ARNX's
clinical trials will be completed successfully or within any specified time
period. ARNX or the FDA may suspend clinical trials at any time.
ARNX has designed the protocols for its pivotal clinical trials based
on its analysis of its research, including various parts of its Phase I and
Phase II clinical trials. Although copies of its pivotal clinical trial
protocols have been submitted to the FDA, there can be no assurance that the
FDA, after the results of the pivotal clinical trials have been announced, will
not disagree with the design of the pivotal clinical trial protocols. In
addition, the FDA inspects and reviews clinical trial sites, informed consent
forms, data from the clinical trial sites, including case report forms and
record keeping procedures, and the performance of the protocols by clinical
trial personnel to determine compliance with good clinical practice guidelines
established by the FDA. The FDA also looks to determine that there was no bias
in the conduct of clinical trials. The conduct of clinical trials in general and
the performance of the pivotal clinical trial protocols is complex and
difficult. There can be no assurance that the design or the performance of the
pivotal clinical trial protocols will be successful.
The results of preclinical studies and clinical trials, if successful,
are submitted in an NDA to seek FDA approval to market and commercialize the
drug product for a specified use. The testing and approval process will require
substantial time and effort, and there can be no assurance that any approval
will be granted for any product or that approval will be granted according to
any schedule. The FDA may deny an NDA if it believes that applicable regulatory
criteria are not satisfied. The FDA may also require additional testing for
safety and efficacy of the drug. Moreover, if regulatory approval of a drug
product is granted, the approval will be limited to specific indications. There
can be no assurance that any of ARNX's product candidates will receive
regulatory approvals for commercialization.
The FDA has implemented an accelerated review process for
pharmaceutical agents that treat serious or life-threatening diseases and
conditions, subject to payment of user fees. When appropriate, ARNX intends to
pursue opportunities for accelerated review of its products. ARNX cannot predict
the ultimate effect of this review process on the timing or likelihood of FDA
review of any of its products.
Even if regulatory approvals for ARNX's products are obtained, ARNX,
its products, and the facilities manufacturing ARNX's products are subject to
continual review and periodic inspection. The FDA will require post-marketing
reporting to monitor the safety of ARNX's products. Each drug manufacturing
establishment must be inspected and approved by the FDA. All manufacturing
establishments are subject to biennial inspections by the FDA and must comply
with the FDA's GMP requirements. To supply drug products for use in the United
States, foreign manufacturing establishments must comply with the FDA's GMP
requirements and are subject to periodic inspection by the FDA or by regulatory
authorities in those countries under reciprocal agreements with the FDA. In
complying with GMP requirements, manufacturers must expend funds, time and
effort in the area of production and quality control to ensure full technical
compliance. ARNX does not have any drug manufacturing capability and must rely
on outside firms for this capability. See "-- Manufacturing." The FDA
stringently applies regulatory standards for manufacturing. Identification of
previously unknown problems with respect to a product, manufacturer or facility
may result in
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<PAGE> 40
restrictions on the product, manufacturer or facility, including warning
letters, suspensions of regulatory approvals, operating restrictions, delays in
obtaining new product approvals, withdrawal of the product from the market,
product recalls, fines, injunctions and criminal prosecution.
Before ARNX's products can be marketed outside of the United States,
they are subject to regulatory approval similar to FDA requirements in the
United States, although the requirements governing the conduct of clinical
trials, product licensing, pricing, and reimbursement vary widely from country
to country. No action can be taken to market any drug product in a country until
an appropriate application has been approved by the regulatory authorities in
that country. FDA approval does not assure approval by other regulatory
authorities. The current approval process varies from country to country, and
the time spent in gaining approval varies from that required for FDA approval.
In some countries, the sale price of a drug product must also be approved. The
pricing review period often begins after market approval is granted. Even if a
foreign regulatory authority approves any of ARNX's products, no assurance can
be given that it will approve satisfactory prices for the products.
ARNX's research and development involves the controlled use of
hazardous materials, chemicals, viruses, and various radioactive compounds.
Although ARNX believes that its procedures for handling and disposing of those
materials comply with state and federal regulations, the risk of accidental
contamination or injury from these materials cannot be eliminated. If an
accident of this type occurs, ARNX could be held liable for resulting damages,
which could be material to ARNX's financial condition and business. ARNX is also
subject to numerous environmental, health and workplace safety laws and
regulations, including those governing laboratory procedures, exposure to
blood-borne pathogens, and the handling of biohazardous materials. Additional
federal, state and local laws and regulations affecting ARNX may be adopted in
the future. Any violation of, and the cost of compliance with, these laws and
regulations could materially and adversely affect ARNX.
Under the Orphan Drug Act, the FDA may grant "orphan drug" status to
therapeutic agents intended to treat a "rare disease or condition," defined as a
disease or condition that affects less than 200,000 persons in the United
States. Orphan drug status grants the sponsor tax credits for the amounts
expended on clinical trials, provided that certain conditions are met, as well
as potential marketing exclusivity for four to seven years following approval of
the pertinent NDA. ARNX received orphan drug status for ATRAGEN(R) in 1993 for
the treatment of acute and chronic leukemia and may request this status for more
of its products as part of its overall regulatory strategy. There is no
assurance, however, that any of its other products will receive orphan drug
status or that the benefits of protection currently afforded by orphan drug
status will remain in effect. In addition, any party may obtain orphan drug
status with respect to products for which patent protection has expired or is
otherwise unavailable. The first party granted marketing approval could prevent
other persons from commercializing that product during the period for which
exclusivity was granted to that party (i.e., four to seven years).
COMPETITION
ARNX believes that its products, because of their unique pharmacologic
profiles and novel mechanisms of action, will become useful new treatments for
cancers and infectious diseases, either as alternatives to or in combination
with other pharmaceuticals. ARNX is engaged in pharmaceutical product
development characterized by rapid technological progress. Many established
biotechnology and pharmaceutical companies, universities and other research
institutions with resources significantly greater than those of ARNX may develop
products that directly compete with ARNX's products. Those entities may succeed
in developing products, including liposomes and liposomal products, that are
safer, more effective or less costly than ARNX's products. Even if ARNX's
products should prove to be more effective than those developed by other
companies, other companies may be more successful than ARNX because of greater
financial resources, greater experience in conducting preclinical and clinical
trials and obtaining regulatory approval, stronger sales and marketing efforts,
earlier receipt of approval for competing products and other factors. If ARNX
commences significant commercial sales of its products, it or its collaborators
will compete in areas in which ARNX has little or no experience such as
manufacturing and marketing. There can be no assurance that ARNX's products, if
commercialized, will be accepted and prescribed by healthcare professionals.
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Some of ARNX's competitors are active in the development of proprietary
liposomes and in liposomal research and product development to treat cancer and
certain fungal infections. Those competitors include The Liposome Company, Inc.,
NeXstar Pharmaceuticals, Inc., and SEQUUS Pharmaceuticals, Inc. Each of these
companies' products have regulatory approval in the United States and other
countries. Any marketing of these and other products that treat disease
indications targeted by ARNX could adversely affect the market acceptance of
ARNX's products as a result of the established market recognition and physician
familiarity with the competing product. The presence of directly competitive
products could also result in more intense price competition than might
otherwise exist, which could have a material adverse effect on ARNX's financial
condition and results of operations. ARNX believes that competition will be
intense for all of its product candidates.
EMPLOYEES
As of September 30, 1998, ARNX had 92 full time employees, 74 of whom
were engaged in research, development, clinical and regulatory affairs and 18 of
whom were engaged in marketing, business development and administration. ARNX's
employees include two M.D.s, sixteen Ph.D.s, one Pharm.D and two R.N.s. ARNX has
not experienced any work stoppages and considers relations with its employees to
be good.
LEGAL PROCEEDINGS
ARNX is not currently a party to any material legal proceedings.
PROPERTIES
ARNX's corporate offices and laboratories are located in a 30,000
square foot leased building located at 8707 Technology Forest Place in The
Woodlands, a suburb of Houston, Texas. The lease for this facility expires in
2008, and ARNX has renewal options to extend the lease to 2018. ARNX's lease
provides an option to add 40,000 square feet at the then-current market rate.
ARNX considers that the current facilities will be suitable for its needs for
the foreseeable future. ARNX does not intend to develop any internal
manufacturing facilities in the near future.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of ARNX are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Geoffrey F. Cox, Ph.D.(3)............... 55 Chairman of the Board of Directors (Class II)
and Chief Executive Officer
David S. Gordon, M.D.................... 57 Senior Vice President of Medical Affairs and
Chief Medical Officer
Paul A. Cossum, Ph.D.................... 46 Vice President, Preclinical Development
Praveen Tyle, Ph.D...................... 38 Senior Vice-President, Development and
Operations & Chief Technical Officer
Janet M. Walter......................... 36 Vice President, Marketing and Business
Development
Terance A. Murnane...................... 48 Controller and Secretary
Gabriel Lopez-Berestein, M.D.(1)........ 51 Director (Class II) and Chief Scientific
Advisor
Ronald J. Brenner, Ph.D................. 65 Director (Class I)
James R. Butler(1)(3)................... 58 Director (Class III)
Phyllis I. Gardner, M.D................. 48 Director (Class II)
Martin P. Sutter(2)(3).................. 43 Director (Class I)
Gregory F. Zaic(2)...................... 51 Director (Class III)
</TABLE>
- ---------------------------
(1) Member of the audit committee of the board of directors
(2) Member of the compensation committee of the board of directors
(3) Member of the nominating committee of the board of directors
Geoffrey F. Cox, Ph.D. joined ARNX as Chairman of the Board and Chief
Executive Officer in November 1997 and has served as a member of the board of
directors since January 1994. Dr. Cox joined Genzyme Corporation in 1984, was
appointed Managing Director of Genzyme, Ltd. (U.K.) in 1986, Senior Vice
President of worldwide manufacturing operations in May 1988 and Executive Vice
President in 1996, with responsibility for manufacturing operations and the
Pharmaceuticals, Diagnostic Products and Genetic Diagnostic Products units of
Genzyme.
David S. Gordon, M.D. joined ARNX in April 1997 as its Senior Vice
President of Medical Affairs and Chief Medical Officer. Dr. Gordon has over 20
years experience in internal medicine, oncology and hematology, clinical
research and the pharmaceutical industry. From 1995 to 1997, Dr. Gordon was a
consultant to several pharmaceutical companies. From 1990 to 1995, he held
clinical and administrative positions with The Liposome Company and the RW
Johnson Pharmaceutical Research Institute of Johnson & Johnson. Prior to
positions in the pharmaceutical industry, Dr. Gordon held a number of academic
positions, including Professor of Medicine (Hematology & Oncology) at Emory
University School of Medicine and Director, Division of Immunology at the
Centers for Disease Control, both in Atlanta, Georgia. Dr. Gordon currently
serves as a director of Hycor Biomedical, Inc. Dr. Gordon is board certified in
internal medicine and medical oncology. He has published over 100 articles and
abstracts in the fields of cancer, infectious disease and immunology.
Paul A. Cossum, Ph.D. joined Triplex as Vice President of Preclinical
Development in 1993 and assumed the position of Vice President of Preclinical
Development of ARNX in September 1995 upon consummation of ARNX's mergers with
Triplex and Oncologix. From 1992 to 1993, he was the Director of Preclinical
Development at Isis Pharmaceuticals. While at Isis, he implemented preclinical
programs to support the development INDs for two anti-viral
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oligonucleotide compounds. Prior to his employment at Isis, Dr. Cossum worked in
the Department of Pharmacological Sciences at Genentech, Inc., where he
participated in the filing of several INDs and NDAs for certain endocrine,
cardiovascular and neurologic therapeutic proteins. He has published widely in
the fields of metabolism and toxicology of oligonucleotides, recombinant
proteins and conventional drugs.
Praveen Tyle, Ph.D. is currently Senior Vice President, Development and
Operations and Chief Technical Officer. Dr. Tyle joined the company in February
1997 as its Vice President of Pharmaceutical Development and Operations. Dr.
Tyle has more than 15 years of worldwide pharmaceutical industry experience,
serving most recently (1991-97) as Senior Director, Pharmaceutical Development
at Agouron Pharmaceuticals, Inc., where he was responsible for the development
of preclinical and clinical products and their preparation toward
commercialization. From 1984 to 1991, Dr. Tyle held product development
positions at American Cyanamid Company and Novartis (formerly Sandoz
Pharmaceuticals Corporation). Dr. Tyle serves as a member of the Board of
Directors of Lipomed, Inc. and of the Scientific Advisory Board of a French
biotechnology company, Biovector Therapeutics, S.A., and is a scientific advisor
to Merck KGaA Biopharmaceuticals, Germany. Dr. Tyle also serves as an adjunct
Professor of Pharmaceutical Sciences at the University of Houston. He holds
several U.S. patents in the areas of drug development and delivery systems.
Janet M. Walter joined ARNX in August 1997 as Vice President of
Marketing and Business Development. Ms. Walter, has more than ten years of
oncology marketing experience. From 1995-1997, she served as Director, Global
Marketing at Schering-Plough Pharmaceuticals, Inc. where she was responsible for
the worldwide development of INTRON A(R). From 1993 to 1995, she served as
Senior Product Manager for Bristol-Myers Squibb Oncology Division, where she was
responsible for the launch of TAXOL(R) in several different markets, and Product
manager at U.S. Bioscience. In addition, Ms. Walter has several years of prior
experience in oncology clinical research and field sales.
Terance A. Murnane joined ARNX in May 1990 as its Controller and was
appointed Secretary in January 1992. Mr. Murnane was a self-employed accountant
from February 1988 until April 1990. From October 1987 to February 1988, he
served as the Controller for a privately-held wholesale company. Prior to that
time, he spent ten years in the Private Business/Audit Department at KPMG Peat
Marwick, an international accounting firm, serving most recently as Senior
Manager. Mr. Murnane is a Certified Public Accountant.
Gabriel Lopez-Berestein, M.D., a co-founder of ARNX, has served as a
member of the board of directors and ARNX's Chief Scientific Advisor since
January 1988. Dr. Lopez-Berestein is Professor of Medicine and Chief of the
Immunobiology and Drug Carriers Section at The University of Texas M.D. Anderson
Cancer Center, with which he has been affiliated since 1979. Dr. Lopez-Berestein
is the author of over 125 publications in the areas of macrophage research and
drug carrier technology. Dr. Lopez-Berestein is also the recipient of a number
of grants and awards, including a Scholar Award of the Leukemia Society of
America and various NIH awards.
Ronald J. Brenner, Ph.D. has served as a member of the board of
directors since September 1995. Since 1988, Dr. Brenner has been a Vice
President of Hillman Medical Ventures, Inc., a venture capital firm, and a
general partner of several Hillman investment partnerships. From 1984 to 1988,
Dr. Brenner was President and Chief Executive Officer of Cytogen Corporation, a
biotechnology company. Prior to 1984, he was Vice President, Corporate External
Research, at Johnson & Johnson, a major pharmaceutical company, and also served
as a Chairman of McNeil Pharmaceutical, Ortho Pharmaceutical Corp. and the Cilag
Companies, all subsidiaries of Johnson & Johnson. Dr. Brenner is a director of
Cytogen Corporation.
James R. Butler has served as a member of the board of directors since
June 1997. Mr. Butler is Senior Vice President, Sales and Marketing for ALZA
Corporation, a California-based pharmaceutical company developing therapeutics
using its proprietary drug delivery systems. Mr. Butler has overseen ALZA
Pharmaceuticals since August 1993. ALZA Pharmaceuticals has responsibility for
domestic sales and marketing, government affairs, ex-U.S. commercialization of
ALZA products, new product planning, and ALZA scientific. ALZA scientific is
responsible for all aspects of the ALZA product line. Prior to joining ALZA in
1993, Mr. Butler was Vice President and General Manager of Glaxo Inc.'s
Corporate Division. Mr. Butler held numerous sales and marketing positions
during his 23-year tenure at Glaxo.
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<PAGE> 44
Phyllis I. Gardner, M.D. has served as a member of the board of
directors since September 1998. Dr. Gardner is the Senior Associate Dean for
Education and Student Affairs at Stanford University School of medicine, and has
been a tenured associate professor in the departments of molecular pharmacology
and medicine at Stanford since 1984. Since 1994, Dr. Gardner has worked closely
with ALZA Corporation in the areas of drug formulation and drug delivery. From
1996 to 1998, she was Vice President of Research and Head of the ALZA Technology
Institute. Dr. Gardner is also a consultant or advisor to a number of companies
and serves as a member of the board of directors of Health Hero Network and Elim
Biopharmaceuticals, Inc.
Martin P. Sutter, a co-founder of ARNX, has served as a director of
ARNX since June 1986 and served as Chairman of the Board of Directors of ARNX
from 1986 to 1997. Since July 1988, Mr. Sutter has been the managing General
Partner of The Woodlands Venture Partners, L.P., a venture capital firm based in
The Woodlands, Texas, and the General Partner of The Woodlands Venture Fund,
L.P., one of ARNX's principal stockholders. In addition, Mr. Sutter has been a
General Partner of Essex Woodlands Health Ventures, L.P. since September 1994.
From January 1985 to July 1988, he served as President of The Woodlands Venture
Capital Company. Mr. Sutter is the Chairman of the Board of Directors of
Zonagen, Inc., a biotechnology company based in The Woodlands, Texas, and a
director of Targeted Genetics and several privately held healthcare and
biotechnology companies.
Gregory F. Zaic has served as a member of the board of directors since
September 1995. Mr. Zaic has been an investor primarily focused on medical and
life science investment opportunities since 1983. He currently is a General
Partner of Prince Ventures and has served as acting president and director of
many private and public companies, including GenVec, Inc., Thiktillos, Inc. and
Xylos Corporation. Before his investment career, Mr. Zaic served in several
financial, technical, and operational capacities, including heading the Special
Products Division of Baxter, a manufacturer of custom medical devices for the
cardiopulmonary and intravenous solution administration markets.
COMPENSATION OF EXECUTIVE OFFICERS
Summary Compensation Table
The following table provides certain summary information concerning
compensation paid or accrued during the last three years to ARNX's Chief
Executive Officer and to each of the other executive officers of ARNX,
determined as of the end of the last fiscal year, whose annual compensation
exceeded $100,000 (the "Named Executive Officers"), and excludes any information
relating to 1998 bonuses which have not yet been determined.
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
---------------------------------------- ---------------------------
RESTRICTED SECURITIES
STOCK UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS AWARDS OPTIONS (#) COMPENSATION
- --------------------------------------- ---------- ---------- ---------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Geoffrey F. Cox, Ph.D ................. 1998 $ 300,000 -- -- -- $ 27,475(1)
Chief Executive Officer 1997 $ 50,000(2) $ 110,000(3) $ 93,992(4) 500,000 $ 134(5)
David S. Gordon, M.D .................. 1998 $ 213,000 80,000 $ 22,486(6)
Senior Vice President of Medical 1997 $ 146,208(7) $ 28,400 -- 125,000 $ 21,360(8)
Affairs and Chief Medical Officer
Paul A. Cossum, Ph.D .................. 1998 $ 168,000 -- -- 80,000 $ 1,373(10)
Vice President, Preclinical 1997 $ 168,000 $ 33,600 -- 41,000 $ 1,302(10)
Development 1996 $ 163,000(9) $ 2,000 -- 44,800 $ 1,292(10)
Praveen Tyle, Ph.D .................... 1998 $ 180,600 -- -- 80,000 $ 1,376(14)
Senior Vice President, Development 1997 $ 147,377(11) $ 30,100 $ 36,250(12) 125,000 $ 77,956(13)
and Operations & Chief Technical
Officer
Janet M. Walter ....................... 1998 $ 160,000 -- -- 50,000 $ 1,353(17)
Vice President, Marketing and 1997 $ 60,000(15) $ 12,000 -- 100,000 $ 8,974(16)
Business Development
</TABLE>
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<PAGE> 45
- ---------------------------
(1) Represents $26,004 in relocation costs (ARNX will pay the income tax
related to this amount in 1998) (ii) $471 in taxable life insurance and
(iii) $1,000 in matching contribution to ARNX's 401(k) savings plan.
(2) Dr. Cox joined ARNX in November 1997 at an annual base salary of
$300,000.
(3) Represents a cash bonus paid upon commencement of employment.
(4) Represents a stock bonus of 17,278 shares of common stock issued upon
commencement of employment and recorded at fair market value at the
time of issuance.
(5) Represents taxable life insurance.
(6) Represents $21,000 in housing allowance, (ii) $486 in taxable life
insurance and (iii) $1,000 in matching contributions to ARNX's 401(k)
savings plan.
(7) Dr. Gordon joined ARNX in April 1997 at an annual base salary of
$213,000.
(8) Represents (i) $6,952 in relocation costs, (ii) $12,250 in housing
allowance, (iii) $1,158 in taxable life insurance and (iv) $1,000 in
matching contributions to ARNX's 401(k) savings plan.
(9) Dr. Cossum joined ARNX in September 1995 at an annual base salary of
$160,000. Dr. Cossum's current annual base salary is $176,400.
(10) Represents (i) $1,000 in matching contributions to ARNX's 401(k)
savings plan in 1996, 1997 and 1998, respectively, and (ii) taxable
life insurance of $292, $302 and $373 in 1996, 1997 and 1998
respectively.
(11) Dr. Tyle joined ARNX in February 1997 at an annual base salary of
$168,000. Dr. Tyle's current annual base salary is $210,000.
(12) Represents a stock bonus of 5,000 shares of common stock issued upon
commencement of employment and recorded at fair market value at the
time of issuance.
(13) Represents (i) $46,386 in relocation costs, (ii) $30,397 in estimated
federal income taxes relating to such relocation costs, which were
reimbursed by ARNX in 1998, (iii) $173 in taxable life insurance and
(iv) $1,000 in matching contributions to ARNX's 401(k) savings plan.
(14) Represents (i) $376 in taxable life insurance and (ii) $1,000 in
matching contribution to ARNX'S 401(k) savings plan.
(15) Janet M. Walter joined ARNX in August 1997 at an annual base salary of
$160,000.
(16) Represents (i) $7,924 in relocation costs, (ii) $50 in taxable life
insurance and (iii) $1,000 in matching contributions to ARNX's 401(k)
savings plan.
(17) Represents (i) in taxable life insurance and (ii) $1,000 in matching
contributions to the Company's 401(k) savings plan.
Option Grants in 1998
The following table provides certain information with respect to
options granted to the Chief Executive Officer and to each of the Named
Executive Officers during the fiscal year ended December 31, 1998, under ARNX's
Employee Option Plan:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------------------- ----------------------------------
NUMBER OF PERCENT OF POTENTIAL REALIZABLE VALUE AT
SECURITIES TOTAL OPTIONS MARKET ASSUMED ANNUAL RATES OF
UNDERLYING GRANTED TO EXERCISE PRICE ON EXPIRATION STOCK PRICE APPRECIATION
OPTIONS EMPLOYEES IN PRICE PER DATE OF DATE FOR OPTION TERM(1)
NAME GRANTED (#) FISCAL YEAR SHARE GRANT 5% 10%
- ----------------- ----------- -------------- ------------- --------------- ---------- ----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Geoffrey F. Cox -- -- $ -- $ -- -- $ -- $ --
David S. Gordon 80,000 11.7% $ 3.88 $ 3.88 03/19/08 $ 126,364 $ 290,184
Paul A. Cossum 80,000 11.7% $ 3.88 $ 3.88 03/19/08 $ 126,364 $ 290,184
Praveen Tyle 80,000 11.7% $ 3.88 $ 3.88 03/19/08 $ 126,364 $ 290,184
Janet M. Walter 50,000 7.3% $ 2.44 $ 2.44 12/10/08 $ 49,666 $ 114,054
</TABLE>
- ---------------------------
(1) The Securities and Exchange Commission requires disclosure of the
potential realizable value or present value of each grant. The
disclosure assumes the options will be held for the full seven-year
term prior to exercise. Such options may be exercised prior to the end
of such seven-year term. The actual value, if any, an executive officer
may realize will depend
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<PAGE> 46
upon the excess of the stock price over the exercise price on the date
the option is exercised. There can be no assurance that the stock price
will appreciate at the rates shown in the table.
Year-End Option Values
The following table sets forth certain information regarding (1) the
number of shares of common stock underlying unexercised options held by the
Chief Executive Officer and each Named Executive Officer as of December 31,
1998, and (2) the value, at December 31, 1998, of exercisable and unexercisable
"in-the-money" stock options held by the Chief Executive Officer and each Named
Executive Officer. Neither the Chief Executive Officer nor any other Named
Executive Officer exercised any stock options during the year ended December 31,
1998.
1998 OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR END(1)
------------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------------- ------------- ---------------- -------------- --------------
<S> <C> <C> <C> <C>
GEOFFREY F. COX, PH.D............ 249,157 283,343 $ -- $ --
DAVID S. GORDON, M.D............. 67,500 137,500 $ -- $ --
PAUL A. COSSUM, PH.D............. 72,200 133,100 $ 15,833 $ --
PRAVEEN TYLE, PH.D............... 63,735 86,265 $ -- $ --
JANET M. WALTER.................. 71,226 126,569 $ -- $ --
</TABLE>
- ---------------------------
(1) A stock option is "in-the-money" if the closing market price of ARNX'S
common stock exceeds the exercise price of such stock option. The value
of "in-the-money" unexercised stock options set forth in the foregoing
table represents the difference between the exercise price of such
options and the closing sales price of ARNX'S common stock on December
31, 1998, as reported by the Nasdaq Stock Market, $2.00 per share.
EMPLOYMENT AGREEMENTS
ARNX has entered into employment agreements with Dr. Cox, Dr. Gordon,
Dr. Cossum, Dr. Tyle, Ms. Walter and Mr. Murnane that establish their annual
salaries and provide for the payment of such bonus compensation as may be
awarded by the Board of Directors and for their participation in all employee
benefit plans sponsored by ARNX. The employment agreement for Dr. Cox has a
primary term ending in 2000, with automatic monthly renewals starting in May
1999 for an on-going eighteen months unless terminated by either party. All
other employment agreements are for a one year period and renew automatically
for one year periods unless terminated by either party. These agreements provide
that if the employee is terminated for any reason other than cause, ARNX is
obligated to pay to the employee an amount equal to one year's annual base
salary and continue the provision of employment benefits for one year following
termination.
CERTAIN TRANSACTIONS
In February 1998, ARNX amended its consulting agreement with ARNX's
chief scientific advisor and board member, Dr. Gabriel Lopez-Berestein, for a
three-year period ending December 31, 2000, whereby ARNX is committed to pay
consulting fees of $156,000 per year through December 31, 2000. One-half of the
amount to be paid over the next three years will be paid in cash and one-half
will be paid in common stock. ARNX paid cash of $132,000, $144,000, and $156,000
for the years ended December 31, 1995, 1996 and 1997, respectively, pursuant to
this agreement.
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<PAGE> 47
PRINCIPAL STOCKHOLDERS
The following table presents certain information regarding the
beneficial ownership of ARNX's equity securities at December 31, 1998, and as
adjusted to reflect the sale of the shares offered hereby, by:
o each person who is known by ARNX to own beneficially more than five
percent of the outstanding shares of common stock,
o each director of ARNX,
o ARNX's chief executive officer and each of the other executive
officers of ARNX with annual compensation in excess of $100,000 and
o all directors and officers as a group, including all stock options
vested through February 28, 1999.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED
-----------------------
NUMBER OF SHARES OF
COMMON STOCK PRIOR TO AFTER
NAME BENEFICIALLY OWNED OFFERING OFFERING
---- ------------------ -------- --------
<S> <C> <C> <C>
Paragon Associates and Paragon Associates II
Joint Venture and the Bradbury Dyer Foundation(1)
500 Crescent Court, Suite 260
Dallas, Texas 75201......................................... 1,351,000 8.2% 6.5%
Hillman Medical Venture Partnerships(2)
824 Market Street, Suite 900
Wilmington, Delaware 19801.................................. 1,187,925 7.3% 5.7%
Abbott Laboratories
100 Abbott Park Road
Abbott Park, Illinois 60064................................ 837,989 5.1% 4.0%
Geoffrey F. Cox(3).......................................... 307,485 1.8% 1.5%
Martin P. Sutter(4)......................................... 561,383 3.4% 2.7%
Gabriel Lopez-Berestein(5).................................. 168,741 1.0% *
Ronald J. Brenner(6)........................................ 1,245,513 7.6% 6.0%
Gregory F. Zaic(7).......................................... 452,739 2.8% 2.2%
James R. Butler(8).......................................... 38,000 * *
Phyllis I. Gardner(9)....................................... 25,000 * *
Paul A. Cossum(10).......................................... 81,119 * *
Praveen Tyle(11)............................................ 91,288 * *
David S. Gordon(12)......................................... 79,613 * *
Janet M. Walter(9).......................................... 61,719 * *
All directors and officers as a group (11 persons)(5)-(13).. 3,158,981 19.2% 15.1%
</TABLE>
- ---------------------------
* Less than one percent.
(1) Consists of 1,331,000 shares beneficially owned by Paragon Associates
II Joint Venture ("Paragon JV"), which includes ownership of Paragon
Associates and Paragon Associates II, and 20,000 shares owned by the
Bradbury Dyer Foundation ("Foundation"). The sole general partner of
Paragon Associates and Paragon JV, Bradbury Dyer III, may be deemed to
be the beneficial owners of 1,351,000 shares.
(2) Consists of 141,232 shares owned by Hillman Medical Ventures 1989 L.P.,
441,383 shares owned by Hillman Medical Ventures 1990 L.P. and 605,310
shares owned by Hillman Medical Ventures 1991 L.P. (collectively, the
"Hillman Medical Venture Partnership"). The general partners of the
Hillman Medical Venture Partnerships are Cashon Biomedical Associates,
L.P. and Hillman/Dover Limited Partnership. The general partner of
Hillman/Dover Limited Partnership is a wholly-owned subsidiary of The
Hillman Company, a firm engaged in diversified investments and
operations. The Hillman Company is controlled by Henry L. Hillman,
Elsie Hilliard Hillman and C.G. Grefenstette, Trustees of the Henry L.
Hillman Trust, which Trustees may be deemed the beneficial owners of
the 1,187,925 shares owned by the
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<PAGE> 48
Hillman Medical Venture Partnerships. Dr. Brenner, a director of ARNX,
is the managing partner of Cashon Biomedical Associates, L.P., of
which the other general partners are Hal S. Broderson, M.D. and
Charles G. Hadley. Dr. Brenner, Dr. Broderson and Mr. Hadley may be
deemed to beneficially own such shares.
(3) Includes 265,825 shares that may be acquired on the exercise of stock
options. Also includes 17,278 shares owned by Dr. Cox's spouse which
may be considered to be beneficially owned.
(4) Includes 463,883 shares owned by The Woodlands Venture Fund, L.P. Mr.
Sutter is a general partner of The Woodlands Venture Partners, L.P.,
which is the general partner of The Woodlands Venture Fund, L.P. Mr.
Sutter disclaims beneficial ownership of the 463,883 shares owned by
The Woodlands Venture Fund, L.P. Also includes 96,250 shares which may
be acquired on the exercise of the currently vested portion of stock
options.
(5) Includes 72,500 shares that may be acquired on the exercise of stock
options. Excludes 19,697 shares held by a relative of Dr.
Lopez-Berestein, to which he disclaims beneficial ownership.
(6) Includes 1,187,925 shares owned by the Hillman Medical Venture
Partnerships, of which Dr. Brenner is the managing general partner of
one of the general partners. Also includes 47,500 shares which may be
acquired on the exercise of the currently vested portion of stock
options.
(7) Includes 403,539 shares owned by Prince Venture Partners III, L.P. Mr.
Zaic is the general partner of Prince Ventures, L.P., which is a
general partner of Prince Venture Partners III, L.P. Mr. Zaic disclaims
beneficial ownership of the shares held by Prince Venture Partners III,
L.P. Also includes 47,500 shares which may be acquired on the exercise
of the currently vested portion of stock options.
(8) Includes 32,500 shares that may be acquired on the exercise of
currently vested stock options. Also includes 3,000 shares owned
through The Butler Living Trust and 2,500 shares owned by the spouse of
Mr. Butler which may be considered to be beneficially owned.
(9) Represents shares that may be acquired on the exercise of currently
vested stock options.
(10) Includes 74,711 shares that may be acquired on the exercise of the
currently vested portion of stock options. Also includes 1,000 shares
owned by two daughters of Dr. Cossum which may be considered to be
beneficially owned.
(11) Includes 75,633 shares that may be acquired on the exercise of the
currently vested portion of stock options.
(12) Includes 71,750 shares that may be acquired on the exercise of the
currently vested portion of stock options. Also includes 3,000 shares
owned by Gordon Strategic, Inc. which is wholly owned by Dr. Gordon and
500 shares owned by Dr. Gordon's spouse which may be considered to be
beneficially owned.
(13) Includes 910,889 shares that may be acquired on the exercise of the
currently vested portion of stock options.
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<PAGE> 49
DESCRIPTION OF CAPITAL STOCK
ARNX's Certificate of Incorporation (the "Certificate of
Incorporation") provides for authorized capital stock of 35,000,000 shares,
consisting of 30,000,000 shares of common stock, par value $0.001 per share, and
5,000,000 shares of preferred stock, par value $0.001 per share. A copy of the
Certificate of Incorporation is filed as an exhibit to the registration
statement of which this prospectus is a part.
COMMON STOCK
Holders of common stock are entitled to one vote per share in the
election of directors and on all other matters on which stockholders are
entitled or permitted to vote. Holders of common stock are not entitled to
cumulative voting rights. Therefore, holders of a majority of the shares voting
for the election of directors can elect all the directors. Subject to the terms
of any outstanding series of preferred stock, the holders of common stock are
entitled to dividends in such amounts and at such times as may be declared by
ARNX's board of directors out of funds legally available therefor. See "Dividend
Policy." Upon liquidation or dissolution, holders of common stock are entitled
to share ratably in all net assets available for distribution to stockholders
after payment of any liquidation preferences to holders of preferred stock.
Holders of common stock have no redemption, conversion or preemptive rights.
PREFERRED STOCK
The board of directors has the authority to cause ARNX to issue up to
the authorized number of shares of preferred stock in one or more series, to
designate the number of shares constituting any series, and to fix the rights,
preferences, privileges and restrictions of these shares, including dividend
rights, voting rights, redemption and conversion rights and liquidation
preferences of that series, without further action by the stockholders. The
issuance of preferred stock with voting and conversion rights may adversely
affect the voting power of the holders of the common stock. ARNX has no present
plan to issue any shares of preferred stock.
OPTIONS
At September 30, 1998, ARNX had outstanding options issued to purchase
2,624,776 shares of common stock at an average purchase price of $5.25 per
share.
WARRANTS
ARNX currently has outstanding warrants issued in financing
transactions to purchase an aggregate of 17,951 shares of common stock and
outstanding warrants issued in the September 1995 merger with Oncologix (the
"Oncologix Warrants") to purchase an aggregate of 158,990 shares of common
stock. The Oncologix Warrants have an exercise price of $12.00 per share and
expire on December 11, 1999. At September 30, 1998, ARNX had outstanding
warrants issued to purchase an aggregate of 176,941 shares of common stock at
a weighted average purchase price of $11.53 per share.
CONTINGENT STOCK RIGHTS
In the Triplex merger, ARNX issued contingent stock rights (the
"Triplex Contingent Stock Rights") to the former holders of Triplex stock and
options entitling them to receive additional shares of common stock upon the
occurrence of certain events. The Triplex Contingent Stock Rights entitle the
former Triplex stock and option holders to receive shares of common stock with
an aggregate fair market value at the time of issuance of $5.0 million (subject
to certain adjustments) if ARNX obtains data from clinical trials of Zintevir(R)
on or before September 11, 2000 that ARNX's board of directors determines to be
sufficient to file an NDA.
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<PAGE> 50
CERTAIN PROVISIONS OF ARNX'S CHARTER AND BYLAWS AND DELAWARE LAW
Certain provisions of the Certificate of Incorporation and ARNX's
Bylaws (the "Bylaws") are intended to enhance the likelihood of continuity and
stability in the board of directors of ARNX and in its policies, but might have
the effect of delaying or preventing a change in control of ARNX and may make
more difficult the removal of incumbent management even if such transactions
could be beneficial to the interests of stockholders. A summary description of
such provisions is below:
Authority to Issue Preferred Stock. The Certificate of Incorporation
authorizes the Board, without stockholder approval, to establish and to issue
shares of one or more series of preferred stock, each such series having the
voting rights, divided rates, liquidation, redemption, conversion and other
rights as may be fixed by the Board.
Stockholder Actions and Meetings. ARNX's Bylaws direct that special
meetings of the stockholders may only be called by a majority of the members of
the board of directors, the Chairman of the board of directors, the President of
ARNX or the holders of not less than 30 percent of the total voting power of all
shares of ARNX's capital stock entitled to vote in the election of directors.
The Bylaws further provide that stockholders' nominations to the Board of
Directors and other stockholder business proposed to be transacted at
stockholder meetings must be timely received by ARNX in a proper written form
which meets the prescribed content requirements. The Certificate of
Incorporation and Bylaws prohibit stockholders from taking any action by written
consent.
Classification of Directors. The Certificate of Incorporation and
Bylaws provide that the directors of ARNX shall be divided into three classes as
equal in number as possible serving three-year terms.
Limitation of Director Liability. Section 102(b)(7) of the Delaware
General Corporation Law ("Section 102(b)") authorizes corporations to limit or
eliminate the personal liability of directors to corporations and their
stockholders for monetary damages for breach of directors' fiduciary duty of
care. Although Section 102(b) does not change directors' duty of care it enables
corporations to limit available relief to equitable remedies such as injunction
or rescission. The Certificate of Incorporation limits the liability of
directors to ARNX or its stockholders (in their capacity as directors but not in
their capacity as officers) to the fullest extent permitted by Section 102(b).
Specifically, directors of ARNX will not be personally liable for monetary
damages for breach of a director's fiduciary duty as a director, except for
liability:
o for any breach of the director's duty of loyalty to ARNX or its
stockholders,
o for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law,
o for unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General
Corporation Law or
o for any transaction from which the director derived an improper
personal benefit.
Indemnification. To the maximum extent permitted by law, the
Certificate of Incorporation and Bylaws provide for mandatory indemnification of
directors and permit indemnification of officers, employees and agents of ARNX
against all expense, liability and loss to which they may become subject or
which they may incur as a result of being or having been a director, officer,
employee or agent of ARNX. In addition, ARNX must advance or reimburse
directors, and may advance or reimburse officers, employees and agents for
expenses incurred by them as a result of indemnifiable claims.
Section 203 of the Delaware General Corporation Law ("Section 203")
generally provides that a stockholder acquiring more than 15 percent of the
outstanding voting stock of a corporation subject to the statute (an "Interested
Stockholder") but less than 85 percent of such stock may not engage in certain
"Business Combinations" with the corporation for a period of three years after
the date on which the stockholder became an Interested Stockholder unless:
o prior to such date, the corporation's board of directors approved
either the Business Combination or the transaction in which the
stockholder became an Interested Stockholder or
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<PAGE> 51
o the Business Combination is approved by the corporation's board of
directors and authorized at a stockholders' meeting by a vote of at
least two-thirds of the corporation's outstanding voting stock not
owned by the Interested Stockholder.
Under Section 203, these restrictions will not apply to certain Business
Combinations proposed by an Interested Stockholder following the earlier of the
announcement or notification of one of certain extraordinary transactions
involving the corporation and a person who was not an Interested Stockholder
during the previous three years or who became an Interested Stockholder with the
approval of the corporation's board of directors, if such extraordinary
transaction is approved or not opposed by a majority of the directors who were
directors prior to any person becoming an Interested Stockholder during the
previous three years or were recommended for election or elected to succeed
those directors by a majority of those directors.
Section 203 defines the term "Business Combination" to encompass a wide
variety of transactions with or caused by an Interested Stockholder, including
transactions in which the Interested Stockholder receives or could receive a
benefit on other than a pro rata basis with other stockholders, such as mergers,
certain asset sales, certain issuances of additional shares to the Interested
Stockholder, transactions with the corporation which increase the proportionate
interest in the corporation directly or indirectly owned by the Interested
Stockholder or transactions in which the Interested Stockholder receives certain
other benefits.
The provisions of Section 203, together with the ability of ARNX's
board of directors to issue Preferred Stock without further stockholder action,
could delay or frustrate the removal of incumbent directors or a change in
control of ARNX. The provisions also could discourage, impede or prevent a
merger, tender offer or proxy contest, even if such event would be favorable to
the interests of stockholders. ARNX's stockholders, by adopting an amendment to
the Certificate of Incorporation or Bylaws may elect not to be governed by
Section 203 effective 12 months after such adoption. Neither ARNX's Certificate
of Incorporation nor Bylaws currently exclude ARNX from the restrictions imposed
by Section 203.
REGISTRATION RIGHTS
Under a registration rights agreement dated August 2, 1989, holders of
approximately 1,011,790 shares of common stock and of warrants to purchase
17,951 shares of common stock have the right to demand up to three registrations
of certain registrable securities under the Securities Act of 1933, as amended
(the "Securities Act"). These demand registration rights are subject to certain
conditions and limitations, including the right of the underwriters to limit the
number of shares offered in such registration and to require a lock-up of shares
not included in such registration and the right of ARNX to refuse a registration
under certain conditions, such as the six-month period immediately following
effectiveness of a registration statement and the ninety-day period preceding an
expected filing of a registration statement. If ARNX proposes an offering of
registrable securities, either for its own account or for other stockholders
exercising such registration rights, the other holders of these rights are
entitled to notice of the contemplated registration and an opportunity to
include their securities ("piggyback") in that registration. ARNX must use its
best efforts to effect such registration, with certain limitations. Furthermore,
ARNX is required to pay the associated registration expenses, excluding the
underwriting discounts and sales commissions, for the holders exercising demand
or piggyback registration rights. In addition, Genzyme Corporation has one
demand registration right, which requires ARNX to register all shares of common
stock that Genzyme currently holds or may acquire in the future.
ARNX entered into registration rights agreements dated September 1,
1986, with Dr. Jim Klostergaard and Dr. Gabriel Lopez-Berestein. Under these
agreements, Drs. Klostergaard and Lopez-Berestein have piggyback registration
rights to include the shares of common stock owned by them in any ARNX sponsored
registration, including this offering. These registration rights are subject to
the right of the Company or its underwriters to determine the size of the
offering and limit the number of shares offered by such individuals in a
registration.
In the Triplex merger, ARNX granted the former stockholders of Triplex
unlimited piggyback registration rights that provide that, if ARNX proposes an
offering of common stock, either for its own account or for other stockholders
exercising registration rights, the holders of the rights are entitled to notice
of the contemplated registration and an opportunity to include their common
stock in such registration, subject to certain limitations. ARNX has notified
the holders of those rights, of this offering, and such rights have been waived
or expired.
-48-
<PAGE> 52
In addition, Paramount Capital has been granted demand and piggyback
registration rights for the shares of common stock which may be acquired upon
exercise of their Warrants. The rights commence on the expiration of nine
months from the effective date of the registration statement of which this
prospectus is a part and expire five years from the effective date, in the
case of the demand rights, and seven years from the effective date, in the
case of the piggyback rights, or the date on which the shares can be sold
without restriction under Rule 144.
TRANSFER AGENT
The transfer agent and registrar for the common stock is American Stock
Transfer & Trust Company.
-49-
<PAGE> 53
PLAN OF DISTRIBUTION
ARNX is offering the shares of common stock offered by this prospectus,
on a best efforts, all or nothing basis, principally to selected investors.
Paramount Capital, Inc. (the "Placement Agent") has been retained to act as the
exclusive agent for ARNX in the arrangement of these offers and sales on a best
efforts basis. The Placement Agent is not obligated to and does not intend to
itself take (or purchase) any of the shares offered by this prospectus. However,
certain affiliates of the Placement Agent may invest in the offering net of
commissions. The Placement Agent will obtain indications of interest from
potential investors for the amount of the offering. ARNX will not request
effectiveness of the registration statement and no investor funds will be
accepted until indications of interest have been received for the full amount of
the offering. The Placement Agent will distribute confirmation and definitive
prospectuses to all investors as soon as practicable after pricing, informing
investors of the closing date, which will be scheduled for three business days
after pricing.
Neither ARNX nor the Placement Agent will accept investor funds prior
to effectiveness of the Registration Statement. Prior to the closing date, the
Placement Agent will promptly place all investor funds in escrow with State
Street Bank and Trust, as escrow agent (the "Escrow Agent"), in an escrow
account established for the benefit of the investors. All checks shall be made
payable to the Escrow Agent. Upon receipt by the Placement Agent of any such
checks, the Placement Agent shall transmit such checks to the Escrow Agent by
noon of the first business day following such receipt. The escrow agent will
invest such funds in accordance with Rule 15c2-4 promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). Prior to the
closing date, the Escrow Agent will advise ARNX that payment for the purchase of
the shares of common stock offered by this prospectus has been affirmed by the
investors and that the investors have deposited the requisite funds in the
escrow account at the Escrow Agent. Upon receipt of such notice, ARNX will
deposit the shares with The Depositary Trust Company to be credited to the
respective accounts of the investors. ARNX will collect investor funds, together
with interest on those funds, if any, through the facilities of the Escrow Agent
on the scheduled closing date. The offering will not continue after the closing
date. In the event that investor funds are not received in the full amount
necessary to satisfy the requirements of the offering, all funds deposited in
the Escrow Agent escrow account will promptly be returned.
The following table sets out the nature of the compensation and the
amounts of commissions and fees to be paid to the Placement Agent for each share
and in total.
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Public Offering Price........................... $ $
Commissions and Fees............................ $ $
Proceeds to ARNX................................ $ $
</TABLE>
ARNX has agreed, among other things: (1) to pay the Placement Agent a
fee in connection with the arrangement of this financing of 8% of the Price to
Public for shares sold to purchasers who are not affiliates of ARNX and 5% for
shares sold to purchasers who are affiliates of ARNX, (2) to indemnify the
Placement Agent against certain liabilities including liabilities under the
Securities Act, (3) to reimburse the Placement Agent for out-of-pocket expenses
and (4) to issue to the Placement Agent, upon the closing of the offering,
warrants to purchase 450,000 shares of Common Stock. The warrants may be
exercised at 150% of the price at which shares of common stock are sold in this
offering, for a period of four years commencing 12 months after the closing. The
warrants will have a cashless exercise feature and demand and piggyback
registration rights. The warrants may not be sold, transferred, assigned or
hypothecated by the Placement Agent for a period of 12 months from the effective
date of the registration statement, except in accordance with Rule 2710(c)(7)(A)
of the NASD Conduct Rules.
ARNX estimates that its expenses associated with the offering will be
$300,000.
Certain officers, directors and owners of 5% of the capital stock of
ARNX have agreed that they will not, directly or indirectly, offer, sell or
otherwise dispose of any shares of common stock or any securities convertible
into or exercisable for, or any rights to purchase or acquire, common stock for
a period of 180 days after the date of this
-50-
<PAGE> 54
prospectus, without the prior written consent of the Placement Agent (which
consent may be given without notice to ARNX's stockholders or other public
announcement).
LEGAL MATTERS
The validity of the shares to be offered by this prospectus will be
passed upon for ARNX by Andrews & Kurth L.L.P., The Woodlands, Texas.
EXPERTS
The audited financial statements included in this prospectus and
elsewhere in the registration statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm
as experts in giving said report.
AVAILABLE INFORMATION
ARNX is subject to the informational requirements of the Exchange Act,
and, accordingly, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "SEC"). These reports, proxy statements
and other information filed with the SEC are available for inspection and
copying at the public reference facilities maintained by the SEC at Judiciary
Plaza, 450 Fifth Street, N.W., Washington, DC 20549. The public may obtain
information on the operation of the public reference room by calling the SEC at
1-800-SEC-0330. The SEC maintains a site on the World Wide Web at
"http://www.sec.gov" that contains reports, proxy statements and other
information regarding registrants that file electronically with the SEC. In
addition, such materials and other information concerning ARNX can be inspected
at the National Association of Securities Dealers, Inc., 1735 K Street, N.W.,
Washington, DC 20006.
ARNX has filed with the SEC a registration statement under the
Securities Act, on Form S-1 to register with the SEC the securities offered by
ARNX using this prospectus. This prospectus is a part of that registration
statement. As allowed by SEC rules, this prospectus does not contain all of the
information contained in the registration statement or the exhibits to that
registration statement.
-51-
<PAGE> 55
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants...................................................... F-2
Balance Sheets as of December 31, 1996 and 1997 and September 30, 1998 (unaudited)............ F-3
Statements of Operations for the Years ended December 31, 1995, 1996 and 1997, and for
the Nine Months Ended September 30, 1997 and 1998 (unaudited) and the Period
from Inception (June 13, 1986) through September 30, 1998 (unaudited)............... F-4
Statements of Stockholders' Equity for the Period from Inception (June 13, 1986) through
September 30, 1998 (unaudited)...................................................... F-5
Statements of Cash Flows for the Years ended December 31, 1995, 1996 and 1997, and for the
Nine Months Ended September 30, 1997 and 1998 (unaudited) and the Period from
Inception (June 13, 1986) through September 30, 1998 (unaudited).................... F-11
Notes to Financial Statements................................................................. F-12
</TABLE>
F-1
<PAGE> 56
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Aronex Pharmaceuticals, Inc.:
We have audited the accompanying balance sheets of Aronex
Pharmaceuticals, Inc. (a Delaware corporation in the development stage), as of
December 31, 1996 and 1997, and the related statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1997 and for the period from inception (June 13, 1986)
through December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Aronex
Pharmaceuticals, Inc. as of December 31, 1996 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997 and for the period from inception (June 13, 1986) through
December 31, 1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
The Woodlands, Texas
February 17, 1998
F-2
<PAGE> 57
ARONEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31
-------------------- SEPTEMBER 30,
1996 1997 1998
-------- -------- ------------
(UNAUDITED)
Current assets:
<S> <C> <C> <C>
Cash and cash equivalents ........................................ $ 4,179 $ 2,029 $ 3,791
Short-term investments ........................................... 30,414 17,783 10,936
Accounts receivable .............................................. 78 100 --
Prepaid expenses and other assets ................................ 663 474 384
-------- -------- --------
Total current assets ......................................... 35,334 20,386 15,111
Long-term investments ................................................ 6,795 10,142 1,288
Furniture, equipment and leasehold improvements, net of accumulated
depreciation of $2,869, $3,660, and $2,781, respectively ......... 2,152 1,107 2,123
Deposits ............................................................. -- 490 --
-------- -------- --------
Total assets ................................................. $ 44,281 $ 32,125 $ 18,522
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ............................ $ 1,191 $ 1,977 $ 2,959
Accrued payroll .................................................. 126 554 933
Advance from Genzyme ............................................. 2,000 2,000 2,000
Current portion of notes payable ................................. 325 191 217
Current portion of obligations under capital leases .............. 16 18 13
-------- -------- --------
Total current liabilities .................................... 3,658 4,740 6,122
Long-term liabilities:
Notes payable, net of current portion ............................ 121 -- 1,047
Obligations under capital leases, net of current portion ......... 25 6 --
-------- -------- --------
Total long-term obligations .................................. 146 6 1,047
Commitments and Contingencies
Stockholders' equity:
Preferred stock $.001 par value, 5,000,000 shares authorized,
none issued and outstanding .................................. -- -- --
Common stock $.001 par value, 30,000,000 shares authorized,
14,597,247, 15,459,166 and 15,503,745 shares issued
and outstanding, respectively ................................ 15 15 15
Additional paid-in capital ....................................... 93,742 96,606 97,660
Common stock warrants ............................................ 968 967 50
Treasury stock ................................................... (11) (11) (11)
Deferred compensation ............................................ (1,949) (907) (545)
Unrealized loss on securities available-for-sale ................. (75) (87) (66)
Deficit accumulated during development stage ..................... (52,213) (69,204) (85,750)
-------- -------- --------
Total stockholders' equity ................................... 40,477 27,379 11,353
-------- -------- --------
Total liabilities and stockholders' equity ....................... $ 44,281 $ 32,125 $ 18,522
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 58
ARONEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
(ALL AMOUNTS IN THOUSANDS, EXCEPT LOSS PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
NINE MONTHS ENDED (JUNE 13, 1986)
YEARS ENDED DECEMBER 31, SEPTEMBER 30, THROUGH
----------------------------------------- -------------------------- SEPTEMBER 30,
1995 1996 1997 1997 1998 1998
----------- ----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Interest income ................. $ 452 $ 1,692 $ 2,059 $ 1,632 $ 1,013 $ 6,594
Research and development
grants and contracts ............ 1,248 2,670 841 591 329 5,379
----------- ----------- ----------- ----------- ----------- -----------
Total revenues ......... 1,700 4,362 2,900 2,223 1,342 11,973
----------- ----------- ----------- ----------- ----------- -----------
Expenses:
Research and development ........ 8,347 10,357 13,993 9,864 15,399 68,534
Purchase of in-process research
and development ............ 8,383 242 3,000 3,000 -- 11,625
General and administrative ...... 2,215 1,620 2,641 1,477 2,448 16,252
Interest expense and other ...... 184 173 257 160 41 1,312
----------- ----------- ----------- ----------- ----------- -----------
Total expenses ......... 19,129 12,392 19,891 14,501 17,888 97,723
----------- ----------- ----------- ----------- ----------- -----------
Net loss ............................ $ (17,429) $ (8,030) $ (16,991) $ (12,278) $ (16,546) $ (85,750)
=========== =========== =========== ----------- =========== ===========
Basic and diluted loss per share .... $ (2.69) $ (0.62) $ (1.14) $ (0.83) $ (1.07)
=========== =========== =========== =========== ===========
Weighted average shares used in
computing basic and diluted
loss per share .................. 6,488 13,048 14,896 14,714 15,475
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 59
ARONEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (JUNE 13, 1986) THROUGH SEPTEMBER 30, 1998
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL COMMON
--------------------------- PAID-IN STOCK DEFERRED
SHARES AMOUNT CAPITAL WARRANTS COMPENSATION
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Sale of Common Stock for cash, August
through December 1986
($1.6396 per share) ........................ 183,334 $ -- $ 301 $ -- $
Issuance of Common Stock for license
agreement rights, October 1986 ($.006
per share) ................................. 60,606 -- 1 -- --
Net loss ...................................... -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1986 .................. 243,940 -- 302 -- --
Issuance of Common Stock in exchange for
8% convertible notes, May 1987 ($3.30
per share) ................................. 90,909 1 299 --
Net loss ...................................... -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1987 .................. 334,849 1 601 -- --
Warrants issued to purchase 11,364 shares
of Common Stock ............................ -- -- -- -- --
Issuance of Common Stock for cash, September
and December 1988 ($.066 per share) ........ 130,303 -- 8 -- --
Net loss ...................................... -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1988 .................. 465,152 1 609 -- --
Issuance of Common Stock for cash, July
and August 1989 ($.066 per share) .......... 158,182 -- 10 -- --
Issuance of Common Stock for cash, August
1989 ($3.63 per share) ..................... 1,220,386 1 4,429 -- --
Issuance of Common Stock for key man life
insurance policies, December 1989 ($3.63) .. 3,862 -- 14 -- --
Net loss ...................................... -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1989 .................. 1,847,582 $ 2 $ 5,062 $ -- $ --
<CAPTION>
UNREALIZED DEFICIT
LOSS ON ACCUMULATED
SECURITIES DURING TOTAL
AVAILABLE DEVELOPMENT TREASURY STOCKHOLDERS'
FOR SALE STAGE STOCK EQUITY
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sale of Common Stock for cash, August
through December 1986
($1.6396 per share) ........................ $ -- $ -- $ -- $ 301
Issuance of Common Stock for license
agreement rights, October 1986 ($.006
per share) ................................. -- -- -- 1
Net loss ...................................... -- (40) -- (40)
------------ ------------ ------------ ------------
Balance at December 31, 1986 .................. -- (40) -- 262
Issuance of Common Stock in exchange for
8% convertible notes, May 1987 ($3.30
per share) ................................. -- -- -- 300
Net loss ...................................... -- (216) -- (216)
------------ ------------ ------------ ------------
Balance at December 31, 1987 .................. -- (256) -- 346
Warrants issued to purchase 11,364 shares
of Common Stock ............................ -- -- -- --
Issuance of Common Stock for cash, September
and December 1988 ($.066 per share) ........ -- -- -- 8
Net loss ...................................... -- (832) -- (832)
------------ ------------ ------------ ------------
Balance at December 31, 1988 .................. -- (1,088) -- (478)
Issuance of Common Stock for cash, July
and August 1989 ($.066 per share) .......... -- -- -- 10
Issuance of Common Stock for cash, August
1989 ($3.63 per share) ..................... -- -- -- 4,430
Issuance of Common Stock for key man life
insurance policies, December 1989 ($3.63) .. -- -- -- 14
Net loss ...................................... -- (942) -- (942)
------------ ------------ ------------ ------------
Balance at December 31, 1989 .................. $ -- $ (2,030) $ -- $ 3,034
</TABLE>
(continued on next page)
F-5
<PAGE> 60
ARONEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (JUNE 13, 1986) THROUGH SEPTEMBER 30, 1998
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL COMMON
--------------------------- PAID-IN STOCK DEFERRED
SHARES AMOUNT CAPITAL WARRANTS COMPENSATION
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1989 ..................... 1,847,582 $ 2 $ 5,062 $ -- $ --
Stock options exercised January 1990 ($.66
per share) ................................... 30 -- -- -- --
Warrants issued to purchase 9,914 shares
of Common Stock ............................... -- -- -- -- --
Net loss ......................................... -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1990 ..................... 1,847,612 2 5,062 -- --
Stock options exercised, May 1991 ($.66
per share) .................................... 75 -- -- -- --
Issuance of Common Stock for cash and notes
payable including accrued interest of
$96,505, October 1991 ($7.26 per share) ...... 596,095 -- 4,328 -- --
Deferred compensation relating to certain
stock options ................................. -- -- 326 -- (326)
Compensation expense related to stock options .... -- -- -- -- 138
Net loss ......................................... -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1991 ..................... 2,443,782 2 9,716 -- (188)
Stock options exercised, January, April, May,
October and December 1992 ($.66 per
share) ........................................ 37,198 -- 24 -- --
Stock warrants exercised April, May and
August 1992 ($3.63 per share) ................. 11,364 -- 41 -- --
Issuance of Common Stock for cash in initial
public offering, July 1992 ($14.00 per
share) ........................................ 850,000 1 10,659 -- --
Deferred compensation relating to certain
stock options ................................. -- -- 1,644 -- (1,644)
Compensation expense related to stock options .... -- -- -- -- 460
Net loss ......................................... -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1992 ..................... 3,342,344 $ 3 $ 22,084 $ -- $ (1,372)
<CAPTION>
UNREALIZED DEFICIT
LOSS ON ACCUMULATED
SECURITIES DURING TOTAL
AVAILABLE DEVELOPMENT TREASURY STOCKHOLDERS'
FOR SALE STAGE STOCK EQUITY
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1989 ..................... $ -- $ (2,030) $ -- $ 3,034
Stock options exercised January 1990 ($.66
per share) ................................... -- -- -- --
Warrants issued to purchase 9,914 shares
of Common Stock ............................... -- -- -- --
Net loss ......................................... -- (1,825) -- (1,825)
------------ ------------ ------------ ------------
Balance at December 31, 1990 ..................... -- (3,855) -- 1,209
Stock options exercised, May 1991 ($.66
per share) .................................... -- -- -- --
Issuance of Common Stock for cash and notes
payable including accrued interest of
$96,505, October 1991 ($7.26 per share) ...... -- -- -- 4,328
Deferred compensation relating to certain
stock options ................................. -- -- -- --
Compensation expense related to stock options .... -- -- -- 138
Net loss ......................................... -- (2,914) -- (2,914)
------------ ------------ ------------ ------------
Balance at December 31, 1991 ..................... -- (6,769) -- 2,761
Stock options exercised, January, April, May,
October and December 1992 ($.66 per
share) ........................................ -- -- -- 24
Stock warrants exercised April, May and
August 1992 ($3.63 per share) ................. -- -- -- 41
Issuance of Common Stock for cash in initial
public offering, July 1992 ($14.00 per
share) ........................................ -- -- -- 10,660
Deferred compensation relating to certain
stock options ................................. -- -- -- --
Compensation expense related to stock options .... -- -- -- 460
Net loss ......................................... -- (4,708) -- (4,708)
------------ ------------ ------------ ------------
Balance at December 31, 1992 ..................... $ -- $ (11,477) $ -- $ 9,238
</TABLE>
(continued on next page)
F-6
<PAGE> 61
ARONEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (JUNE 13, 1986) THROUGH SEPTEMBER 30, 1998
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL COMMON
--------------------------- PAID-IN STOCK DEFERRED
SHARES AMOUNT CAPITAL WARRANTS COMPENSATION
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1992 ..................... 3,342,344 $ 3 $ 22,084 $ -- $ (1,372)
Issuance of Common Stock for compensation ........ 5,000 -- 51 -- --
Warrants issued to purchase 50,172 shares
of Common Stock .............................. -- -- -- -- --
Stock options exercised, February and
November 1993 ($.66) per share ................ 14,465 -- 9 -- --
Issuance of Common Stock for cash,
September 1993 ($14.00 per share) ............. 357,143 -- 4,538 -- --
Issuance of Common Stock for cash in
secondary public offering November &
December 1993 ($9.00 per share) ............... 1,402,250 2 11,462 -- --
Compensation expense related to stock options .... -- -- -- -- 396
Net loss ......................................... -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1993 ..................... 5,121,202 5 38,144 -- (976)
Deferred compensation relating to certain
stock options ................................. -- -- 66 -- (66)
Stock options exercised, January through October
1994 ($.66 per share) ......................... 15,111 -- 10 -- --
Warrants issued to purchase 537 shares of
Common Stock .................................. -- -- -- -- --
Issuance of additional shares of Common
Stock pursuant to collaborative
agreement (see Note 6) ........................ 66,163 -- -- -- --
Compensation expense related to stock options .... -- -- -- -- 546
Unrealized loss on available-for-sale securities . -- -- -- -- --
Net loss ......................................... -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1994 ..................... 5,202,476 $ 5 $ 38,220 $ -- $ (496)
<CAPTION>
UNREALIZED DEFICIT
LOSS ON ACCUMULATED
SECURITIES DURING TOTAL
AVAILABLE DEVELOPMENT TREASURY STOCKHOLDERS'
FOR SALE STAGE STOCK EQUITY
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1992 ..................... $ -- $ (11,477) $ -- $ 9,238
Issuance of Common Stock for compensation ........ -- -- -- 51
Warrants issued to purchase 50,172 shares
of Common Stock .............................. -- -- -- --
Stock options exercised, February and
November 1993 ($.66) per share ................ -- -- -- 9
Issuance of Common Stock for cash,
September 1993 ($14.00 per share) ............. -- -- -- 4,538
Issuance of Common Stock for cash in
secondary public offering November &
December 1993 ($9.00 per share) ............... -- -- -- 11,464
Compensation expense related to stock options .... -- -- -- 396
Net loss ......................................... -- (6,225) -- (6,225)
------------ ------------ ------------ ------------
Balance at December 31, 1993 ..................... -- (17,702) -- 19,471
Deferred compensation relating to certain
stock options ................................. -- -- -- --
Stock options exercised, January through October
1994 ($.66 per share) ......................... -- -- -- 10
Warrants issued to purchase 537 shares of
Common Stock .................................. -- -- -- --
Issuance of additional shares of Common
Stock pursuant to collaborative
agreement (see Note 6) ........................ -- -- -- --
Compensation expense related to stock options .... -- -- -- 546
Unrealized loss on available-for-sale securities . (315) -- -- (315)
Net loss ......................................... -- (9,052) -- (9,052)
------------ ------------ ------------ ------------
Balance at December 31, 1994 ..................... $ (315) $ (26,754) $ -- $ 10,660
</TABLE>
(continued on next page)
F-7
<PAGE> 62
ARONEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (JUNE 13, 1986) THROUGH SEPTEMBER 30, 1998
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL COMMON
--------------------------- PAID-IN STOCK DEFERRED
SHARES AMOUNT CAPITAL WARRANTS COMPENSATION
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 ..................... 5,202,476 $ 5 $ 38,220 $ -- $ (496)
Deferred compensation relating to certain
stock options ............................... -- -- 1,380 -- (1,380)
Stock options exercised, January through
December 1995 ($.66 per share) .............. 36,958 -- 24 -- --
Issuance of Common Stock and warrants
pursuant to merger agreements
(see Note 4) ................................ 3,868,436 4 11,111 2,844 --
Warrants exercised ($4.50 per share) ............. 705,614 1 3,402 (226) --
Issuance of Common Stock pursuant to
settlement agreement (see Note 4) ........... 531,552 -- 2,046 (1,130) --
Issuance of Common Stock for services
rendered .................................... 37,500 -- 159 -- --
Treasury stock purchased ($4.42 per share) ....... (2,480) -- -- -- --
Compensation expense related to stock
options ..................................... -- -- -- -- 340
Unrealized gain on available-for-sale
securities ..................................... -- -- -- -- --
Net loss ......................................... -- -- -- -- --
------------ ----------- ------------ ------------ ------------
Balance at December 31, 1995 ..................... 10,380,056 $ 10 $ 56,342 $ 1,488 $ (1,536)
<CAPTION>
UNREALIZED DEFICIT
LOSS ON ACCUMULATED
SECURITIES DURING TOTAL
AVAILABLE DEVELOPMENT TREASURY STOCKHOLDERS'
FOR SALE STAGE STOCK EQUITY
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1994 ..................... $ (315) $ (26,754) $ -- $ 10,660
Deferred compensation relating to certain
stock options ............................... -- -- -- --
Stock options exercised, January through
December 1995 ($.66 per share) .............. -- -- -- 24
Issuance of Common Stock and warrants
pursuant to merger agreements
(see Note 4) ................................ -- -- -- 13,959
Warrants exercised ($4.50 per share) ............. -- -- -- 3,177
Issuance of Common Stock pursuant to
settlement agreement (see Note 4) ........... -- -- -- 916
Issuance of Common Stock for services
rendered .................................... -- -- -- 159
Treasury stock purchased ($4.42 per share) ....... -- -- (11) (11)
Compensation expense related to stock
options ..................................... -- -- -- 340
Unrealized gain on available-for-sale
securities ..................................... 199 -- -- 199
Net loss ......................................... -- (17,429) -- (17,429)
------------ ------------ ------------ ------------
Balance at December 31, 1995 ..................... $ (116) $ (44,183) $ (11) $ 11,994
</TABLE>
(continued on next page)
F-8
<PAGE> 63
ARONEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (JUNE 13, 1986) THROUGH SEPTEMBER 30, 1998
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL COMMON
--------------------------- PAID-IN STOCK DEFERRED
SHARES AMOUNT CAPITAL WARRANTS COMPENSATION
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 ..................... 10,380,056 $ 10 $ 56,342 $ 1,488 $ (1,536)
Warrants redeemed January 1996 ................... -- -- 269 (269) --
Deferred compensation relating to certain
stock options ............................... -- 966 -- (966)
Issuance of Common Stock for cash in
secondary public offering, March &
April 1996 ($10.00 per share)................ 3,450,000 4 32,073 -- --
Stock options exercised, January through
December 1996 ($.04-$9.50 per share)......... 106,041 -- 343 -- --
Warrants exercised January through December
1996 ($4.50-$12.00 per share) ............... 622,574 1 3,528 (194) --
Issuance of Common Stock pursuant to
settlement agreements ....................... 38,722 -- 221 (57) --
Compensation expense related to stock options .... -- -- -- -- 553
Unrealized gain on available-for-sale securities.. -- -- -- -- --
Net loss ......................................... -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1996 ..................... 14,597,247 15 93,742 968 (1,949)
Warrants exercised February and March 1997
($8.00 per share) .......................... 3,499 -- 28 (1) --
Reversal of deferred compensation relating to
forfeited stock options ..................... -- -- (578) -- 578
Issuance of Common Stock for services ............ 22,278 -- 130 -- --
Stock options exercised, January through
December 1997 ($.04-$5.50 per share) ........ 128,278 -- 215 -- --
Issuance of shares through the employee stock
purchase plan, June and December 1997 ($3.31
and $3.19 per share) ........................ 21,392 -- 69 -- --
Issuance of Common Stock pursuant to
contingent stock agreement .................. 686,472 -- 3,000 -- --
Compensation expense related to stock options .... -- -- -- -- 464
Unrealized loss on securities available-for-sale.. -- -- -- -- --
Net loss ......................................... -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance at December 31, 1997 ..................... 15,459,166 $ 15 $ 96,606 $ 967 $ (907)
<CAPTION>
UNREALIZED DEFICIT
LOSS ON ACCUMULATED
SECURITIES DURING TOTAL
AVAILABLE DEVELOPMENT TREASURY STOCKHOLDERS'
FOR SALE STAGE STOCK EQUITY
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995 ..................... $ (116) $ (44,183) $ (11) $ 11,994
Warrants redeemed January 1996 ................... -- -- --
Deferred compensation relating to certain
stock options ............................... -- -- -- --
Issuance of Common Stock for cash in
secondary public offering, March &
April 1996 ($10.00 per share) ............... -- -- -- 32,077
Stock options exercised, January through
December 1996 ($.04-$9.50 per share) ........ -- -- -- 343
Warrants exercised January through December
1996 ($4.50-$12.00 per share) ............... -- -- -- 3,335
Issuance of Common Stock pursuant to
settlement agreements ....................... -- -- -- 164
Compensation expense related to stock options .... -- -- -- 553
Unrealized gain on available-for-sale securities.. 41 -- -- 41
Net loss ......................................... -- (8,030) -- (8,030)
------------ ------------ ------------ ------------
Balance at December 31, 1996 ..................... (75) (52,213) (11) 40,477
Warrants exercised February and March 1997
($8.00 per share) .......................... -- -- -- 27
Reversal of deferred compensation relating to
forfeited stock options ..................... -- -- -- --
Issuance of Common Stock for services ............ -- -- -- 130
Stock options exercised, January through
December 1997 ($.04-$5.50 per share) ........ -- -- -- 215
Issuance of shares through the employee stock
purchase plan, June and December 1997 ($3.31
and $3.19 per share) ........................ -- -- -- 69
Issuance of Common Stock pursuant to
contingent stock agreement .................. -- -- -- 3,000
Compensation expense related to stock options .... -- -- -- 464
Unrealized loss on securities available-for-sale.. (12) -- -- (12)
Net loss ......................................... -- (16,991) -- (16,991)
------------ ------------ ------------ ------------
Balance at December 31, 1997 ..................... $ (87) $ (69,204) $ (11) $ 27,379
</TABLE>
(continued on next page)
F-9
<PAGE> 64
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL COMMON
--------------------------- PAID-IN STOCK DEFERRED
SHARES AMOUNT CAPITAL WARRANTS COMPENSATION
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997 ..................... 15,459,166 $ 15 $ 96,606 $ 967 $ (907)
Stock Options exercised January through June
1998 (unaudited) ............................ 8,115 -- 3 -- --
Issuance of Common Stock for services ............ 17,192 -- 70 -- --
Warrants expired June 1998 (unaudited) ........... -- -- 917 (917) --
Issuance of shares through the employee stock
purchase plan, June 1998
($3.35) (unaudited) ...................... 19,272 -- 64 -- --
Compensation expense related to stock
options (unaudited) ......................... -- -- -- -- 362
Unrealized gain on securities available for sale.. -- -- -- -- --
Net loss (unaudited) ............................. -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance at September 30, 1998 (unaudited) ........ 15,503,745 $ 15 $ 97,660 $ 50 $ (545)
============ ============ ============ ============ ============
<CAPTION>
UNREALIZED DEFICIT
LOSS ON ACCUMULATED
SECURITIES DURING TOTAL
AVAILABLE DEVELOPMENT TREASURY STOCKHOLDERS'
FOR SALE STAGE STOCK EQUITY
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1997 ..................... $ (87) $ (69,204) $ (11) $ 27,379
Stock Options exercised January through June
1998 (unaudited) ............................ -- -- -- 3
Issuance of Common Stock for services ............ -- -- -- 70
Warrants expired June 1998 (unaudited) ........... -- -- -- --
Issuance of shares through the employee stock
purchase plan, June 1998
($3.35) (unaudited) ...................... -- -- -- 64
Compensation expense related to stock
options (unaudited) ......................... -- -- -- 362
Unrealized gain on securities available for sale.. 21 -- -- 21
Net loss (unaudited) ............................. -- (16,546) -- (16,546)
------------ ------------ ------------ ------------
Balance at September 30, 1998 (unaudited) ........ $ (66) $ (85,750) $ (11) $ 11,353
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-10
<PAGE> 65
ARONEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
(ALL AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(JUNE 13,
NINE MONTHS ENDED 1986)
YEARS ENDED DECEMBER 31, SEPTEMBER 30, THROUGH
----------------------------------- ---------------------- SEPTEMBER 30,
1995 1996 1997 1997 1998 1998
--------- --------- --------- --------- --------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss ........................................ $ (17,429) $ (8,030) $ (16,991) $ (12,278) $ (16,546) $ (85,750)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities .... --
Depreciation and amortization ................... 749 936 1,139 652 521 4,547
Loss (gain) on disposal of assets ............... -- -- 200 107 (2) 198
Compensation expense related to stock and
stock options ................................. 499 553 594 400 432 3,668
Charge for purchase of in-process research and
development ................................... 8,383 164 3,000 3,000 -- 11,547
Unrealized gain (loss) on investment ............ 199 41 (12) (31) 21 (66)
Acquisition costs, net of cash received ......... (270) -- -- -- -- (270)
Loss in affiliate ............................... 300 50 -- -- -- 500
Accrued interest payable converted to stock ..... -- -- -- -- -- 97
Changes in assets and liabilities:
(Decrease) increase in prepaid expenses and
other assets .................................... (1) (375) 189 (45) 90 (199)
Decrease (increase) in accounts receivable ...... (32) 267 (22) (88) 100 --
Increase (decrease) in accounts payable and
accrued expenses .............................. 796 (322) 1,214 211 1,361 3,819
Increase (decrease) in deferred revenue ........ 272 (876) -- -- -- (353)
--------- --------- --------- --------- --------- ---------
Net cash used in operating activities ........... (6,534) (7,592) (10,689) (8,072) (14,023) (62,262)
Cash flows from investing activities:
Purchases of investments ........................ (5,438) (92,560) (71,047) (50,064) (37,539) (244,980)
Sales of investments ............................ 15,532 59,585 80,331 56,456 53,240 238,491
Purchase of furniture, equipment and leasehold
improvements .................................. (137) (256) (352) (280) (1,545) (5,666)
Proceeds from sale of assets .................... -- -- 54 34 9 63
Decrease (increase) in deposits ................. -- -- (490) (336) 490 --
Investment in affiliate ......................... -- -- -- -- -- (500)
--------- --------- --------- --------- --------- ---------
Net cash provided by (used in) investing
activities .................................... 9,957 (33,231) 8,496 5,810 14,655 (12,592)
Cash flows from financing activities:
Proceeds from notes payable and capital leases .. 64 2,000 -- -- 1,369 6,041
Repayment of notes payable and principal
payments under capital lease obligations ...... (321) (534) (272) (237) (307) (2,765)
Purchase of treasury stock ...................... (11) -- -- -- -- (11)
Proceeds from issuance of stock ................. 3,200 35,755 315 241 68 75,380
--------- --------- --------- --------- --------- ---------
Net cash provided by (used in) financing
activities .................................... 2,932 37,221 43 4 1,130 78,645
--------- --------- --------- --------- --------- ---------
Net increase in cash and cash equivalents ....... 6,355 (3,602) (2,150) (2,258) 1,762 3,791
Cash and cash equivalents at beginning
of period ..................................... 1,426 7,781 4,179 4,179 2,029 --
--------- --------- --------- --------- --------- ---------
Cash and cash equivalents at end of period. $ ...... 7,781 $ 4,179 $ 2,029 $ 1,921 $ 3,791 $ 3,791
========= ========= ========= ========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest ........ $ 184 $ 120 $ 57 $ 52 $ 14 $ 826
Supplemental schedule of noncash financing
activities: Conversion of notes payable and
accrued interest to Common Stock .............. $ -- $ -- $ -- $ -- $ -- $ 3,043
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-11
<PAGE> 66
ARONEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
Aronex Pharmaceuticals, Inc. ("Aronex Pharmaceuticals" or the
"Company") was incorporated in Delaware on June 13, 1986 and merged with Triplex
Pharmaceutical Corporation ("Triplex") and Oncologix, Inc. ("Oncologix")
effective September 11, 1995 (see Note 4). Aronex Pharmaceuticals is a
development stage company which has devoted substantially all of its efforts to
research and product development and has not yet generated any significant
revenues, nor is there any assurance of future revenues. In addition, the
Company expects to continue to incur losses for the foreseeable future, and
there can be no assurance that the Company will successfully complete the
transition from a development stage company to successful operations. See "Risk
Factors" elsewhere herein. The research and development activities engaged in by
the Company involve a high degree of risk and uncertainty. The ability of the
Company to successfully develop, manufacture and market its proprietary products
is dependent upon many factors. These factors include, but are not limited to,
the need for additional financing, attracting and retaining key personnel and
consultants, and successfully developing manufacturing, sales and marketing
operations. The Company's ability to develop these operations may be immensely
impacted by uncertainties related to patents and proprietary technologies,
technological change and obsolescence, product development, competition,
government regulations and approvals, health care reform, third-party
reimbursement and product liability exposure. Additionally, the Company is
reliant upon collaborative arrangements for research, contractual agreements
with corporate partners, and its exclusive license agreements with The
University of Texas M.D. Anderson Cancer Center ("M.D. Anderson"). Further,
during the period required to develop these products, the Company will require
additional funds which may not be available to it. Accordingly, there can be no
assurance of the Company's future success. The Company expects that its existing
financial resources should be sufficient to fund its capital requirements into
the fourth quarter of 1999. As a result, the Company's independent public
accountants have informed the Company that if at the time of their audit of the
financial statements for the year ending December 31, 1998, the Company's
existing resources continue to only be sufficient to fund capital requirements
into the fourth quarter of 1999, their report on those financial statements will
include an explanatory fourth paragraph expressing substantial doubt about the
Company's ability to continue as a going concern.
2. ACCOUNTING POLICIES
Interim Financial Statements
The interim financial statements as of September 30, 1998, and for the
nine months ended September 30, 1997 and September 30, 1998, are unaudited, and
certain information and footnote disclosures, normally included in financial
statements prepared in accordance with generally accepted accounting principles,
have been omitted. In the opinion of management, all adjustments, consisting
only of normal recurring adjustments, necessary to fairly present the financial
position, results of operations and cash flows with respect to the interim
financial statements, have been included. The results of operations for the
interim periods are not necessarily indicative of the results for the entire
fiscal year.
Cash, Cash Equivalents and Short- and Long-Term Investments
The Company has adopted Statement of Financial Accounting Standards No.
115 ("SFAS 115"), "Accounting for Certain Investments in Debt and Equity
Securities". Debt and equity securities that the Company has the intent and
ability to hold to maturity are classified as "held to maturity" and reported at
amortized cost. Debt and equity securities that are held for current resale are
classified as "trading securities" and reported at fair value with unrealized
gains and losses included in earnings. Debt and equity securities not classified
as either "securities-held-to-maturity" or "trading securities" are classified
as "securities-available-for-sale" and reported at fair value, with unrealized
gains and losses excluded from earnings and reported as a separate component of
stockholders' equity. The adoption of SFAS 115 did not have a material effect on
the Company's financial position or results of operations.
F-12
<PAGE> 67
ARONEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Cash and cash equivalents include money market accounts and investments
with an original maturity of less than three months. At September 30, 1998, all
short-term investments are held to maturity securities consisting of high-grade
commercial paper and United States Government backed securities with a carrying
value of $10,936,000 (unaudited), which approximates fair market value and cost.
Long-term investments at September 30, 1998 are available for sale securities
which are United States mortgage backed securities with various maturity dates
over the next several years that have an amortized cost of $1,354,000
(unaudited), a fair market value of $1,288,000 (unaudited) and a gross
unrealized loss of $66,000 (unaudited) at September 30, 1998. The Company
currently has no trading securities.
Furniture, Equipment and Leasehold Improvements
Furniture and equipment are carried at cost and depreciation is
calculated on the straight-line method using a five-year estimated useful life.
Leasehold improvements are amortized on the straight-line method over the
shorter of the life of the lease or a five-year estimated useful life.
Maintenance and repairs that do not improve or extend the life of assets are
expensed as incurred. Expenditures which improve or extend the life of assets
are capitalized.
A summary of furniture, equipment and leasehold improvements is as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1997
------------- ---------
<S> <C> <C>
Office furniture and equipment................................... $ 571 $ 611
Laboratory equipment............................................. 2,986 2,802
Leasehold improvements........................................... 1,464 1,354
--------- ---------
5,021 4,767
Less accumulated depreciation and amortization.................... (2,869) (3,660)
--------- ---------
Furniture, equipment and leasehold improvements, net.............. $ 2,152 $ 1,107
========= =========
</TABLE>
At December 31, 1996 and 1997, the cost of laboratory equipment held
under capital leases aggregated $64,000. All furniture, equipment and leasehold
improvements have been pledged as collateral on notes payable.
Revenue Recognition
Research and development grant and contract revenues are recognized as
the related work is performed. Any revenue contingent upon future performance by
the Company is deferred and recognized as the performance is completed. Any
revenues resulting from the achievement of milestones are recognized when the
milestones are achieved. Research and development grant and contract revenues
are received under best efforts contracts and such revenue is not refundable.
Research and Development
Costs incurred in connection with research and development activities
are expensed as incurred. These costs consist of direct and indirect costs
associated with specific projects as well as fees paid to various entities that
perform certain research on behalf of the Company.
Loss Per Share
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings
per Share", which establishes standards for computing and presenting
F-13
<PAGE> 68
ARONEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
earnings per share. The new standard replaces the presentation of primary
earnings per share prescribed by Accounting Principles Board Opinion No. 15
("APB 15"), "Earnings per Share", with a presentation of basic earnings per
share and also requires dual presentation of basic and diluted earnings per
share on the face of the statement of operations for all entities with complex
capital structures. Basic earnings per share excludes dilution and is computed
by dividing income available to common stockholders by the weighted-average
number of common shares outstanding for the period. Diluted earnings per share
is computed similarly to fully-diluted earnings per share pursuant to APB 15.
The Company adopted SFAS No. 128 in the fourth quarter of fiscal 1997. Because
of the loss for the year, no shares resulting from the assumed exercise of the
options or warrants using the treasury stock method are added to the denominator
because the inclusion of such shares would be antidilutive due to the losses for
all periods included in the statements of operations. Therefore, the Company's
basic and diluted earnings per share are the same.
Presentation
In April 1992, the stockholders approved a 1 for 3.3 reverse stock
split and in July 1996 approved a 1 for 2 reverse stock split. Retroactive
effect has been given to the reverse stock splits in stockholders' equity and in
all per share data in the accompanying financial statements.
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
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.
3. INVESTMENT IN AFFILIATE
In April 1994, the Company invested in and entered into a drug
development agreement with RGene Therapeutics, Inc. ("RGene"). RGene was
involved in the development of gene therapy. Aronex Pharmaceuticals purchased
$500,000 of RGene's preferred stock. The $500,000 investment was recorded in the
financial statements as investment in affiliate. The investment was written down
during 1994, 1995 and 1996 to the carrying value of zero. In June 1996, RGene
was acquired by Targeted Genetics Corporation ("Targeted Genetics"), a publicly
traded company. The Company received 440,520 shares of Targeted Genetics common
stock from the merger. Such shares have a zero carrying value in the
accompanying financial statements. In October 1998, the Company received 104,596
(unaudited) shares of Targeted Genetics common stock upon the successful
completion of certain milestones. Those shares are subject to Rule 144(k) of the
1933 Securities Act. Under the drug development agreement with RGene, Aronex
Pharmaceuticals performed certain research and development activities with
respect to certain RGene projects for three years. This agreement expired in
April 1997. During 1995, 1996 and 1997, Aronex Pharmaceuticals recorded
$668,000, $597,000 and $166,000, respectively, in revenue relating to this
agreement.
4. MERGER AGREEMENTS WITH TRIPLEX PHARMACEUTICAL CORPORATION AND
ONCOLOGIX, INC.
On September 11, 1995, Aronex Pharmaceuticals merged with Triplex and
Oncologix through two newly-formed, wholly-owned subsidiaries pursuant to
Agreements and Plans of Merger (the "Triplex Agreement" and the "Oncologix
Agreement"). The results of operations and the cash flow for Triplex and
Oncologix have been included in the financial statements from the date of
acquisition.
In connection with the Triplex Agreement, the Company issued the
following to existing Triplex stockholders and option holders: (i) 3,441,436
shares of Common Stock; (ii) options to purchase 88,912 shares of Common Stock;
and (iii) contingent stock issue rights to receive shares of Common Stock with a
fair market value of up to $8.0 million, the conversion of which is contingent
upon the satisfaction of conditions which relate to the licensing or development
of certain products (the "Triplex Contingent Stock Rights").
F-14
<PAGE> 69
ARONEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Triplex Contingent Stock Rights entitle the former Triplex
stockholders and option holders to receive shares of Common Stock with an
aggregate fair market value at the time of issuance of $5.0 million (subject to
certain adjustments) if the Company either: (i) entered into an agreement on or
before September 11, 1997 with respect to the licensing of a certain product
whereby the Company received at least $5.0 million in cash or an unconditional
binding commitment for at least $5.0 million (events which did not occur) or
(ii) obtains data from such clinical trials for such product on or before
September 11, 2000 that the Company's Board of Directors determines to be
sufficient to file a New Drug Application. In addition, the Triplex Contingent
Stock Rights entitled the former Triplex stock and option holders to receive
shares of Common Stock with an aggregate fair market value at the time of
issuance of $3.0 million if the Company did not receive a minimum of $5.0
million in equity milestone payments from Genzyme on or before September 11,
1997 with respect to the development of its ATRAGEN(R) product. As a result of
its failure to receive such payments from Genzyme, the Company issued 686,472
shares of Common Stock under the Triplex Contingent Stock Rights with an
aggregate fair market value at the time of issuance of $3.0 million and recorded
a corresponding non-cash research and development expense of $3.0 million in
1997.
In connection with the Oncologix Agreement, the Company issued the
following: (i) 427,000 shares of Common Stock to certain Oncologix debt holders;
(ii) warrants (the "Warrants") to purchase approximately 9.0 million shares of
Common Stock to Oncologix preferred stockholders, certain former employees and
debt holders; and (iii) contingent stock issue rights to receive shares of
Common Stock with a fair market value of approximately $2.1 million, the
conversion of which was contingent upon the satisfaction of conditions which
relate to the licensing or development of certain products (the "Oncologix
Contingent Stock Rights").
The Oncologix Contingent Stock Rights entitled such former Oncologix
investors to receive shares of Common Stock if the Company received at least
$5.0 million in cash or an unconditional binding commitment for at least $5.0
million on or before September 11, 1997 relating to certain products. Neither
such event occurred and, accordingly, the Oncologix Contingent Stock Rights
expired in 1997.
The Warrants issued in connection with the Oncologix merger consisted
of three series of warrant rights to purchase approximately 2.4 million, 2.8
million and 3.7 million shares of Common Stock, respectively designated as
Series A, Series B and Series C. Upon the failure to exercise a series of
warrant rights prior to their expiration, the warrant holder forfeits all
remaining rights under the terms of the Warrant. The Series A component of the
Warrants expired in 1995. At December 31, 1997 the Series B and Series C
components to purchase approximately 1.4 million and 1.2 million shares of
Common Stock, respectively, had exercise prices of $8.00 and $12.00 per share,
respectively, and expiration dates of June 1998 and December 1999, respectively.
In June 1998, the Series B component of the Warrants expired. At September 30,
1998, Series C Warrants to purchase approximately 160,000 (unaudited) shares of
Common Stock were outstanding.
In October 1995, the Company was named a defendant in a lawsuit filed
by certain warrant holders challenging the redemption of the Warrants. To
resolve this matter, the Company entered into an agreement in December 1995
which settled the lawsuit. In accordance with the settlement agreement the
plaintiffs were issued 531,552 shares of Common Stock in exchange for 3,576,668
Warrants in 1995. In 1996, in accordance with the settlement agreement an
additional 18,722 shares of Common Stock were issued to the warrant holders'
attorneys for related expenses. The excess of the fair value of the common stock
over the warrant value was charged to expense.
In August 1995, the Company was a defendant in a lawsuit filed by
certain common stockholders of Oncologix, Inc. challenging the merger with
Oncologix, Inc. To resolve this matter, the Company entered into an agreement in
July 1996 which settled the lawsuit. In accordance with the settlement
agreement, the plaintiffs were issued 20,000 shares of Common Stock. The fair
value of these common shares was charged to expense.
F-15
<PAGE> 70
ARONEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. NOTES PAYABLE AND OBLIGATIONS UNDER CAPITAL LEASES
In June 1993, the Company entered into a master loan agreement for the
financing of $1.0 million in furniture, office equipment and laboratory
equipment acquisitions. Each loan is collateralized by the furniture and
equipment and is payable in 48 monthly installments with a final installment at
the end of the loan term not to exceed 20% of the purchase price at inception.
During 1993 and 1994, the Company borrowed $607,000 and $392,000, respectively,
through this agreement. In 1993 and 1994, in connection with the financing, the
Company issued to the lender warrants to purchase 5,093 and 2,944 shares of the
Common Stock at an exercise price of $12.00 per share that expire in March 2000
and March 2001, respectively. No value was assigned to the warrants as the value
of the warrants at the dates of issuance was de minimis. This loan was paid in
full in 1998.
In July 1990 and October 1992, the Company borrowed $108,000 and
$388,000, respectively, from a real estate company related to one of its
stockholders to finance the construction of the Company's laboratory and office
space. The Company executed promissory notes bearing interest at 10.5 and 12.5%
per annum, respectively. The July 1990 note was payable in monthly installments
of principal and interest over a five-year period ending July 1995. The October
1992 note, as amended, provided for payment of interest only through October
1994 and monthly payment of principal and interest from November 1994 through
January 1999. This note was paid in full in 1996.
At December 31, 1996, the Company had a promissory note payable to
Genzyme bearing interest at nine percent per annum. This note was converted to
an advance in 1997 (see Note 9).
In May 1998, the Company entered into a master loan agreement for the
financing of $1.5 million in furniture, office equipment and laboratory
equipment acquisitions. Each loan is collateralized by the furniture and
equipment and is payable in 60 monthly installments. In June 1998, the Company
borrowed $1,369,000 (unaudited) through this agreement bearing interest at 12%.
Future principal payments under the master loan agreement at September 30, 1998
are as follows:
<TABLE>
<CAPTION>
NOTE PAYABLE
MASTER LOAN
YEAR ENDING AGREEMENT
DECEMBER 31, (UNAUDITED)
------------ --------------
<S> <C>
1998 $ 50,000
1999 221,000
2000 250,000
2001 281,000
2002 318,000
2003 144,000
-------------
Total $ 1,264,000
=============
</TABLE>
The Company leases certain laboratory equipment under capital leases.
The leases have effective interest rates ranging from approximately 15 to 18%
and mature at various dates through March 1999. Future payments under capital
lease obligations at December 31, 1997 are as follows:
F-16
<PAGE> 71
ARONEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, CAPITAL LEASES
------------ --------------
<S> <C>
1998 $ 21,000
1999 6,000
-------------
27,000
Less Interest (3,000)
-------------
Lease Obligations $ 24,000
=============
</TABLE>
6. STOCKHOLDERS' EQUITY
Common Stock
In July 1992, the Company, in an initial public offering, issued
850,000 shares of Common Stock for $14 a share, with the Company receiving net
proceeds of approximately $10.7 million. In connection with a collaborative
agreement entered into in September 1993 (described in Note 9), Genzyme
Corporation ("Genzyme") made a $5 million equity investment in the Company which
resulted in Genzyme's ownership of approximately 9% of the Company's outstanding
Common Stock at the time the investment was made. In September 1994, the Company
issued to Genzyme 66,162 additional shares which were contingent on certain
stock performance criteria. In November 1993, the Company sold 1,250,000 shares
of its Common Stock in a secondary public offering for $9.00 per share which,
together with the over-allotment exercise for 152,250 shares of its Common
Stock, raised net proceeds of approximately $11.5 million. In May 1996, the
Company sold 3,000,000 shares of its Common Stock in a secondary public offering
for $10.00 per share which, together with the over-allotment exercise for
450,000 shares of its Common Stock, raised net proceeds of approximately $32.1
million.
Common Stock Warrants
At September 30, 1998, the Company had warrants outstanding, relating
to certain financing and leasing transactions, to purchase 17,951 (unaudited)
shares of Common Stock at exercise prices ranging from $3.63 per share to $12.00
per share. The warrants expire at various dates through March 2001.
The Company issued Warrants to purchase approximately 9.0 million
shares of Common Stock in connection with the Oncologix merger in 1995 (see Note
4). At September 30, 1998, warrants to purchase approximately 160,000
(unaudited) shares of Common Stock remained outstanding at an exercise price of
$12.00 per share. The Warrants expire in December 1999.
Contingent Stock Rights
In connection with the Triplex and Oncologix mergers, the Company
issued $10.1 million contingent stock rights. At December 31, 1997, $5.0 million
contingent stock rights remain outstanding, contingent upon the development and
licensing of a certain product (see Note 4).
7. STOCK OPTION PLANS
During 1989, the Company's stockholders approved the 1989 Stock Option
Plan (the "Plan"). The Plan, as amended in 1992 and in May 1997, authorizes the
issuance of options covering the greater of (i) 2,490,000 shares of Common Stock
or (ii) 17% of the shares of Common Stock outstanding on the last day of the
preceding fiscal quarter. The term of each option ranges from five to seven
years from the date of grant. At December 31, 1997, 301,907 shares were
available for future grant under the Plan.
F-17
<PAGE> 72
ARONEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
A summary of stock option activity for the Plan follows:
<TABLE>
<CAPTION>
OPTIONS PRICE
OUTSTANDING PER SHARE
------------ ---------------------
<S> <C> <C>
Balance at December 31, 1994............................ 364,607 $ .66 to $14.88
Granted, including options repriced............... 578,968 $ .04 to $7.00
Options repriced.................................. (10,500) $ 7.00 to $14.88
Exercised......................................... (49,459) $ .22 to $.68
Forfeited......................................... (95,079) $ .66 to $14.88
-------------
Balance at December 31, 1995............................ 788,537 $ .04 to $14.88
Granted........................................... 533,200 $ 5.50 to $12.00
Exercised......................................... (93,541) $ .04 to $9.50
Forfeited......................................... (109,047) $ 4.24 to $11.00
------------ ---------------------
Balance at December 31, 1996............................ 1,119,149 $ .04 to $14.88
Granted........................................... 1,232,578 $ 4.06 to $8.88
Exercised......................................... (150,556) $ .04 to $5.50
Forfeited......................................... (240,454) $ .66 to $10.50
------------ ---------------------
Balance at December 31, 1997............................ 1,960,717 $ .04 to $14.88
Granted (unaudited)............................... 290,320 $ 2.19 to $4.63
Exercised (unaudited)............................. (8,115) $ 0.12 to $3.88
Forfeited (unaudited)............................. (110,646) $ 3.88 to $14.88
------------
Balance at September 30, 1998 (unaudited)............... 2,132,276 $ .04 to $14.88
============ ---------------------
Exercisable at September 30, 1998 (unaudited)........... 954,652 $ .04 to $14.88
============ =====================
</TABLE>
During June 1998, the Company's stockholders approved the 1998 Stock
Option Plan. This plan authorizes the issuance of options to purchase up to
750,000 (unaudited) shares of Common Stock. Shares issued under this plan expire
10 years from the date of issuance. In 1998, options to purchase 320,000 shares
(unaudited) of Common Stock at an exercise price of $3.88 were issued to
employees under this plan. These shares will vest at various dates based on the
achievement of corporate and personal goals as determined by the Board of
Directors' compensation committee and the achievement of specific Common Stock
price targets. None of the options issued under this plan were exercisable at
September 30, 1998.
During 1993, the Company adopted the 1993 Non-Employee Director Stock
Option Plan (the "Director Plan"). The Director Plan, as amended effective in
May 1997, authorizes the issuance of options to purchase up to 600,000 shares of
Common Stock. Shares issued under the Director Plan expire 10 years from the
date of issuance. The Director Plan allows for the issuance of two types of
grants: Formula Grants and Discretionary Grants. Formula Grants are fully vested
when issued and are issued at a price equal to the fair market value of the
Company's stock at the date of issuance. Each Non-Employee Director was issued
12,500 Formula Grants on November 14, 1995. In addition, the following Formula
Grants are issued under the Director Plan: (1) options to purchase 25,000 shares
of common stock to each Non-Employee Director upon first being elected to the
Board of Directors and (2) options to purchase 7,500 shares of Common Stock
annually, beginning on December 31, 1997, to each Non-Employee Director who has
served as a director for at least six months. Additionally, under the Director
Plan, as amended in 1997, on March 17, 1997, each Non-Employee Director received
an option to purchase 16,250 shares of Common Stock. These options were fully
vested when issued and were issued at a price equal to the fair market value of
the Company's stock at the date of issuance. Discretionary Grants may be issued
by the Compensation Committee of the Board of Directors and may be issued at
less than the fair market value of the Company's stock. In 1997, grants to
purchase a total of 15,000 shares of Common Stock were issued to one
Non-Employee Director. These options were fully vested when issued and were
issued at a price equal to the fair market value of the Company's stock at the
date of issuance. In 1996, Discretionary Grants to purchase a total of 87,500
shares of Common Stock were issued to two Non-Employee Directors. These options
vest over four years and were issued at less than the fair market value of the
Company's Common Stock at the date of grant.
F-18
<PAGE> 73
ARONEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
A summary of stock option activity for the Director Plan follows:
<TABLE>
<CAPTION>
OPTIONS PRICE
OUTSTANDING PER SHARE
-------------- -----------------
<S> <C> <C>
Balance at December 31, 1994........................... 30,000 $ 11.00
Granted................................................ 87,500 $ 5.50
Forfeited.............................................. (15,000) $ 11.00
-------------- -----------------
Balance at December 31, 1995........................... 102,500 $ 5.50 to $11.00
Granted................................................ 110,000 $ 5.50 to $9.38
Exercised.............................................. (12,500) $ 5.50
-------------- -----------------
Balance at December 31, 1996........................... 200,000 $ 5.50 to $9.38
Granted................................................ 167,500 $ 4.25 to $11.00
Exercised.............................................. -- $ --
-------------- -----------------
Balance at December 31, 1997........................... 367,500 $ 4.25 to $11.00
-------------- -----------------
Granted (unaudited).................................... 25,000 $ 2.53
Exercised (unaudited).................................. -- $ --
-------------- -----------------
Balance at September 30, 1998 (unaudited).............. 392,500 $ 2.53 to $11.00
============== =================
Exercisable at September 30, 1998 (unaudited).......... 348,750 $ 2.53 to $11.00
============== =================
</TABLE>
The Company records deferred compensation for the difference between
the grant price and the deemed fair value for financial statement presentation
purposes related to options. Such amount totals $907,000 at December 31, 1997.
In 1995, 1996 and 1997, $340,000, $553,000, and $594,000, respectively, in
related expense was recorded. The balance will be amortized to expense over the
remaining vesting periods of the options.
The Company accounts for these plans under APB Opinion No. 25, under
which compensation expense was recorded. Had compensation cost for these plans
been determined consistent with FASB Statement No. 123 ("SFAS 123"), the
Company's net loss per share would have been increased to the following pro
forma amounts:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------------------------------------------
1995 1996 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Net Loss:
As reported........................ $ (17,429,000) $ (8,030,000) $ (16,991,000)
=============== =============== ===============
Pro forma.......................... $ (18,240,000) $ (9,062,000) $ (19,129,000)
=============== =============== ===============
Loss Per Share (basic and diluted):
As reported........................ $ (2.69) $ (0.62) $ (1.14)
============== ============== ==============
Pro forma.......................... $ (2.81) $ (0.69) $ (1.29)
============== ============== ==============
</TABLE>
Because the SFAS 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
may not be representative of that to be expected in future years. The fair value
of each option grant is estimated on the date of grant using the Black Scholes
options pricing model with the following weighted-average assumptions used for
grants in 1995, 1996 and 1997, respectively: risk-free interest rates of 5.5% to
7.7%, 5.4% to 6.4% and 5.7% to 6.9%, with no expected dividends; expected lives
of 5 years and expected volatility of 116% in 1995 and 1996 and 114% in 1997.
F-19
<PAGE> 74
ARONEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
A summary of the status of the Company's two fixed stock option plans
as of December 31, 1995, 1996 and 1997 and charges during the years ending on
those dates is presented below:
<TABLE>
<CAPTION>
1995 1996 1997
----------------------- ----------------------- -----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
FIXED OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE
- ------------------------------------ --------- ---------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of year........ 394,607 $ 5.37 891,037 $4.29 1,319,149 $5.27
Granted............................. 666,468 $ 3.61 643,200 $6.89 1,400,078 $4.99
Options repriced.................... (10,500) $11.48 -- $ -- -- $ --
Exercised........................... (49,459) $ 0.49 (106,041) $3.24 (150,556) $1.43
Forfeited........................... (110,079) $ 7.30 (109,047) $6.75 (240,454) $5.91
--------- ---------- ----------
Balance at end of year.............. 891,037 $ 4.10 1,319,149 $5.27 2,328,217 $5.37
========= ========== ==========
Options exercisable at year end..... 360,657 $ 3.24 437,391 $4.10 915,103 $5.56
========= ========== ==========
Weighted-average fair value of
options granted during the year..... $ 6.49 $ 7.99 $ 4.02
</TABLE>
The following table summarizes information about fixed stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------------- -------------------------------------
AMOUNT WEIGHTED-AVERAGE NUMBER
RANGE OF OUTSTANDING AT REMAINING WEIGHTED-AVERAGE EXERCISABLE AT WEIGHTED-AVERAGE
EXERCISE PRICES DECEMBER 31, 1997 CONTRACTUAL LIFE EXERCISE PRICE DECEMBER 31, 1997 EXERCISE PRICE
- --------------- ----------------- ---------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
$0.04 - $ 3.00 56,894 4.2 $0.40 56,894 $0.40
$3.01 - $ 7.00 1,863,110 6.3 $4.90 612,880 $4.92
$7.01 - $14.88 408,213 6.9 $8.22 245,329 $8.37
--------- -------
2,328,217 915,103
========= =======
</TABLE>
8. FEDERAL INCOME TAXES
The Company recognizes deferred tax liabilities and assets for the
expected future tax consequences of events that have been recognized differently
in the financial statements or tax returns. Under this method, deferred tax
liabilities and assets are determined based on the difference between the
financial statement carrying amounts and tax bases of assets and liabilities
using enacted tax rates and laws in effect in the years in which the differences
are expected to reverse. Deferred tax assets are evaluated for realization based
on a more-likely-than-not criteria in determining if a valuation allowance
should be provided.
A reconciliation of the statutory federal income tax rate to the
Company's effective income tax rate for the periods ended December 31, 1995,
1996 and 1997 is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Statutory rate ......................................... (34.0)% (34.0)% (34.0)%
Purchase of in-process research and development ........ 16.4 % 1.1 % 6.6 %
Stock option compensation not deductible (deductible) .. 0.7 % (0.3)% (0.2)%
Other nondeductible expenses ........................... -- -- (0.7)%
Adjustment to deferred tax valuation allowance ......... 16.9 % 33.2 % 28.3 %
----- ----- =====
0.0 % 0.0 % 0.0 %
===== ===== =====
</TABLE>
F-20
<PAGE> 75
ARONEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Significant components of the Company's net deferred tax asset at
December 31, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
1996 1997
------------ ------------
<S> <C> <C>
Deferred tax assets relating to:
Federal net operating loss carryforwards ................ $ 22,777,400 $ 27,640,500
Financial statement depreciation and amortization in
excess of (less than) amount deductible for income
tax purposes ....................................... 130,400 132,000
Accrued liabilities not currently deductible
for income tax purposes ............................ 42,900 725,100
Equity in loss of affiliate not currently
deductible for income tax purposes ................. 170,000 170,000
Other items, net ........................................ (24,300) (19,400)
------------ ------------
Total deferred items, net .................................. 23,096,400 28,648,200
Deferred tax valuation allowance ........................... (23,096,400) (28,648,200)
------------ ------------
Net deferred tax asset ..................................... $ -- $ --
============ ============
</TABLE>
At December 31, 1997, the Company had net operating loss ("NOL")
carryforwards for federal income tax purposes of approximately $79.0 million.
The Tax Reform Act of 1986 provided a limitation on the use of NOL and tax
credit carryforwards following certain ownership changes that could limit the
Company's ability to utilize these NOLs and tax credits. Accordingly, the
Company's ability to utilize the above NOL and tax credit carryforwards to
reduce future taxable income and tax liabilities may be limited. As a result of
the merger (see Note 4) with Triplex and Oncologix, a change in control as
defined by federal income tax law occurred, causing the use of these
carryforwards to be limited and possibly eliminated. Additionally, because
United States tax laws limit the time during which NOLs and the tax credit
carryforwards may be applied against future taxable income and tax liabilities,
the Company may not be able to take full advantage of its NOLs and tax credit
carryforwards for federal income tax purposes. The carryforwards will begin to
expire in 2001 if not otherwise used. Due to the possibility of not reaching a
level of profitability that will allow for the utilization of the Company's
deferred tax assets, a valuation allowance has been established to offset these
tax assets. The valuation allowance increased $10,957,000, $3,504,000, and
$5,551,800 for the years ended December 31, 1995, 1996 and 1997, respectively.
These increases were primarily due to the Company's losses from operations for
such periods and the valuation allowance for the net operating loss
carryforwards acquired in the 1995 mergers with Triplex and Oncologix (See Note
4). The Company has not made any federal income tax payments since inception.
9. LICENSE, RESEARCH AND DEVELOPMENT AGREEMENTS
The Company has two exclusive license agreements with M.D. Anderson
which may be terminated in the event of a material breach of the terms of the
agreement or for failure to convert the licensed subject matter to a commercial
form. However, the Company believes its ongoing research and development efforts
currently satisfy this obligation to commercialize.
The license agreements require the Company to pay royalties for
licensed patent products or processes based on cumulative net sales percentages.
The Company must also pay M.D. Anderson $200,000 for each FDA-approved product
resulting from certain licensed research tasks. No royalties have been paid to
date since the Company has had no sales.
For the years ended December 31, 1995, 1996 and 1997, the Company paid
M.D. Anderson $392,000, $144,000, and $108,000, respectively, for research
performed on behalf of the Company. At December 31, 1998, the Company was
committed to pay M.D. Anderson $117,000 for research through November 15, 1999.
F-21
<PAGE> 76
ARONEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Company entered into a non-exclusive license agreement to use a
patented process in the manufacture, use and sale of certain of Aronex
Pharmaceuticals' products in 1993 with an initial fee of $30,000. Annual royalty
payments by the Company are to be computed as a percentage of sales, as defined
in the agreement. The royalty payments shall not exceed $1 million in a calendar
year and expire upon expiration of the licensed patents.
In 1993, the Company entered into a license and development agreement
with Genzyme to develop and commercialize ATRAGEN(R). The initial focus of the
collaboration was the development of ATRAGEN(R) for the treatment of myelogenous
leukemias and certain non-hematologic cancers. The Company and Genzyme shared
clinical development responsibilities and research program funding through the
end of 1996. Under the agreement, Genzyme was required to make up to $1.5
million in milestone payments to the Company upon the occurrence of certain
events and to pay the Company royalties on sales of the product. Genzyme had the
right to terminate the agreement in the event of a third party claim of
infringement by products subject to the agreement. The Company had the right to
terminate the agreement if Genzyme failed to satisfy certain milestones. In
connection with the collaborative agreement, Genzyme made a net $4.5 million
equity investment in the Company and agreed to make an additional $5.0 million
equity investment in the Company if certain developmental goals were achieved.
In September 1996, Genzyme advanced the Company $2.0 million relating
to the $5.0 million equity milestone. The advance does not bear interest. In
early 1997, the license and development agreement was amended and Genzyme was
released from any further obligation to perform development work for ATRAGEN(R).
Under the amendment, the license granted to Genzyme was converted to an option
to acquire the right to market and sell ATRAGEN(R) worldwide (with the Company
retaining co-promotion rights in the United States). Genzyme is required to pay
the Company $3.0 million no more than six months after the filing of an NDA for
ATRAGEN(R) to exercise the option, and would thereafter be required to pay
royalties on sales of ATRAGEN(R). The Company has the right to reacquire the
marketing rights at any time within the six months following Genzyme's exercise
of the option by returning Genzyme's $3.0 million option exercise payment,
repaying Genzyme's $2.0 million advance and paying royalties on sales of
ATRAGEN(R), including $500,000 in minimum royalties in the first year. If
Genzyme does not exercise its option, the Company is required to repay Genzyme
the $2.0 million advance and to pay royalties on sales of ATRAGEN(R), including
$500,000 in minimum royalties in the first year following the expiration of the
option.
In 1996, the Company entered into a license agreement with Boehringer
Mannheim GmbH (subsequently acquired by F. Hoffman-LaRoche Ltd. ("Roche")) to
develop and commercialize one of the Company's products, AR209. Under the
agreement, Roche was responsible for funding the costs of all remaining
preclinical and clinical development of AR209 and for manufacturing the product.
Roche paid the Company $150,000 in license fees in connection with this
agreement in 1997 and agreed to pay minimum annual license fees of $100,000
during the term of the agreement. In addition, Roche was required to pay the
Company up to $2.65 million in milestone payments upon the occurrence of certain
events and to pay the Company royalties on sales of the product. The Company had
the option to co-promote the product under terms to be negotiated by the parties
or to co-market the product if the parties are unable to reach an agreement as
to the terms of a co-promotion arrangement. Roche had the right to terminate the
agreement if the costs of developing AR209 were materially greater than
anticipated and Roche determined, in its reasonable discretion, not to proceed
with the development of the product in light of such increased costs. The
Company had the right to terminate the agreement if Roche failed to achieve
certain milestones. Both parties had the right to terminate the agreement
without cause, with all rights to AR209 reverting to the non-terminating party.
The agreement was terminated without cause by Roche in September 1998, as a
result of which all rights to AR209 have reverted to the Company.
F-22
<PAGE> 77
ARONEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES
The Company leases laboratory and office space under operating leases
and certain office equipment on a short-term basis. In 1997, the Company entered
into a lease for a building from its current landlord who was a related party
until late in 1997. Under this lease, the Company has committed to lease 30,000
square feet for ten years beginning in January 1998. Rental expense was
approximately $208,000, $268,000, and $236,000 for the years ended December 31,
1995, 1996 and 1997, respectively.
Future minimum noncancellable payments under operating leases at
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, AMOUNT
------------ ----------
<S> <C>
1998 $ 698,000
1999 714,000
2000 714,000
2001 714,000
2002 712,000
Thereafter 3,570,000
----------
Total $7,122,000
==========
</TABLE>
The Company is subject to numerous risks and uncertainties because of
the nature of and status of its operations. The Company maintains insurance
coverage for events and in amounts that it deems appropriate. Management
believes that uninsured losses, if any, will not be materially adverse to the
Company's financial position or results of operations.
11. RELATED PARTY TRANSACTIONS AND EMPLOYMENT AGREEMENTS
In September 1995, the Company entered into an employment agreement
with an officer of the Company, for an initial term of one year. This officer
terminated his employment on January 15, 1998 and the Company paid his monthly
salary of $19,583 and certain benefits for a period of twelve months after
termination.
During 1995, 1996 and 1997, the Company entered into employment
agreements with its chief executive officer and other officers which have
initial termination dates ranging from 1998 to 2000. The agreements are
thereafter automatically renewed for successive periods of twelve to eighteen
months unless terminated by either party. Such agreements provide that in the
case of termination without cause, the officers are entitled to payments ranging
from one hundred to one hundred and fifty percent of their annual salaries.
Under these agreements, the Company is committed to pay certain relocation costs
and an amount equal to the federal income tax liability relating to a portion of
the taxable relocation costs. Additionally, one of these officers has an
outstanding loan with the Company with a balance of approximately $18,000 at
December 31, 1997. This loan will be repaid over the next three years. Current
annual salaries relating to these agreements total $1,017,000 at December 31,
1997.
In February 1998, the Company amended a consulting agreement with the
Company's chief scientific advisor for a three-year period ending December 31,
2000, whereby the Company is committed to pay consulting fees of $156,000 per
year through December 31, 2000. One-half of the amount to be paid over the next
three years will be paid
F-23
<PAGE> 78
ARONEX PHARMACEUTICALS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
in cash and one-half will be paid in Company Common Stock. The Company paid cash
of $132,000, $144,000, and $156,000 for the years ended December 31, 1995, 1996
and 1997, respectively, pursuant to this agreement.
During 1995 and 1996, the Company paid $28,500 and $2,500,
respectively, in consulting fees to a consulting firm which is wholly-owned by a
former member of the Board of Directors.
12. 401(k) PLAN
The Company maintains a retirement savings plan, effective as amended
on January 1, 1991, in which any employee of the Company who has completed one
month of employment may elect to participate. The plan is an individual account
plan providing for deferred compensation as described in Section 401(k) of the
Code and is subject to, and intended to comply with, the Employee Retirement
Income Security Act of 1974, as amended. Each eligible employee is permitted to
contribute up to 20% of his annual salary up to the applicable statutory maximum
prescribed in the Code. The Company may, in its discretion, contribute an amount
equal to the employee's contribution, but such Company contribution may not
exceed an amount equal to six percent of the employee's compensation. A
participant is 50% vested in the accrued benefits derived from the Company's
contributions after completion of one year of employment following his election
to participate in the plan, and 100% vested in such contributions after
completion of two years of employment following such election. Participants may
receive hardship loans under the terms of the plan. The plan provides for
distributions in the event a participant dies, reaches the age of 65, becomes
disabled or terminates his employment prior to the age of 65. The Company made
contributions of approximately $25,800, $40,000 and $45,700 under the 401(k)
plan for the years ended December 31, 1995, 1996 and 1997, respectively.
13. EMPLOYEE STOCK PURCHASE PLAN
In December 1996, the Board of Directors adopted the 1997 Employee
Stock Purchase Plan and reserved 250,000 shares of Common Stock for issuance
thereunder. The plan permits employees to purchase Common Stock through payroll
deductions of up to 15% of their compensation subject to limitations as defined
by the Internal Revenue Service. Purchases of Common Stock are made at the lower
of 85% of fair market value at the beginning or end of each six-month offering
period. In 1997, 21,292 shares were purchased by employees at $3.31 and $3.19
per share.
14. EVENTS SUBSEQUENT TO THE DATE OF REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS (UNAUDITED)
On November 12, 1998, the Company entered into a license agreement with
Abbott Laboratories ("Abbott") for NYOTRAN(R). The license agreement provides
Abbott with exclusive worldwide rights to market and sell NYOTRAN(R), subject to
rights previously granted to Grupo Ferrer Internacional, S.A. in Spain and
Portugal and certain copromotion rights retained by the Company in the United
States and Canada. Abbott paid the Company up-front payments of $2.8 million
under the license agreement on November 25, 1998 and additional milestone
payments of $5.6 million were received in December 1998 and January 1999. These
amounts are not refundable, do not relate to any future performance obligations
and were recognized as revenue in the fourth quarter of 1998. Abbott purchased
837,989 shares of the Company's common stock for $3.0 million under a related
stock purchase agreement on November 30, 1998. Abbott is providing funding for
the continuing clinical development of NYOTRAN(R) and is making subsequent
milestone payments as specified regulatory goals and sales targets are achieved.
Abbott will also pay to the Company escalating royalties on all product sales of
NYOTRAN(R).
F-24
<PAGE> 79
================================================================================
WE HAVE NOT AUTHORIZED ANY DEALER, SALESPERSON OR OTHER PERSON TO GIVE YOU
WRITTEN INFORMATION (OTHER THAN THIS PROSPECTUS) OR TO MAKE ANY
REPRESENTATIONS AS TO MATTERS NOT STATED IN THIS PROSPECTUS. YOU MUST NOT RELY
ON UNAUTHORIZED INFORMATION. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE
SECURITIES OR A SOLICITATION OF YOUR OFFER TO BUY THESE SECURITIES IN ANY
JURISDICTION WHERE THAT WOULD NOT BE PERMITTED OR LEGAL. NEITHER THE DELIVERY
OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER AFTER THE DATE OF THIS
PROSPECTUS SHALL CREATE AN IMPLICATION THAT THE INFORMATION CONTAINED HEREIN
OR THE AFFAIRS OF THE COMPANY HAVE NOT CHANGED SINCE THE DATE THEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Table of Contents............................................................. ii
Caution as to Forward-Looking
Statements................................................................. ii
Prospectus Summary............................................................ 1
Risk Factors.................................................................. 3
Use of Proceeds............................................................... 10
Dividend Policy............................................................... 10
Price Range of Common Stock................................................... 11
Dilution...................................................................... 12
Capitalization................................................................ 13
Selected Financial Data....................................................... 14
Management's Discussion and Analysis
of Financial Condition and Results of
Operations................................................................. 15
Business...................................................................... 22
Management.................................................................... 39
Certain Transactions.......................................................... 43
Principal Stockholders........................................................ 44
Description of Capital Stock.................................................. 46
Plan of Distribution.......................................................... 50
Legal Matters................................................................. 51
Experts....................................................................... 51
Available Information......................................................... 51
</TABLE>
----------------------
================================================================================
================================================================================
4,500,000 SHARES
[ARONEX PHARMACEUTICALS, INC. LOGO]
COMMON STOCK
--------------
PROSPECTUS
--------------
PARAMOUNT CAPITAL, INC.
, 1999
================================================================================
<PAGE> 80
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
An itemized statement of the estimated amount of all expenses in
connection with the distribution of the securities registered hereby, all of
which will be paid by the Company, is as follows:
<TABLE>
<S> <C>
Registration fee............................................................ $ 3,953
NASD filing fee............................................................. 1,922
Nasdaq listing fee.......................................................... 17,500
Blue Sky fees and expenses.................................................. 2,500
Printing and engraving expenses............................................. 10,000
Legal fees and expenses..................................................... 150,000
Accounting fees and expenses................................................ 95,000
Miscellaneous fees and expenses............................................. 19,125
---------
Total ............................................................. $ 300,000
=========
</TABLE>
- ---------------------------
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law ("DGCL"), inter
alia, empowers a Delaware corporation to indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding (other than an action by or in the right
of the corporation) by reason of the fact that such person is or was a
director, officer, employee or agent of the corporation, or is or was serving
at the request of the corporation as a director, officer, employee or agent of
another corporation or other enterprise, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or proceeding
if he acted in good faith and in a manner he reasonably believed to be in or
not opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful. Similar indemnity is authorized for such persons against
expenses (including attorneys' fees) actually and reasonably incurred in
connection with the defense or settlement of any such threatened, pending or
completed action or suit if such person acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and provided further that (unless a court of competent
jurisdiction otherwise provides) such person shall not have been adjudged
liable to the corporation. Any such indemnification may be made only as
authorized in each specific case upon a determination by the stockholders or
disinterested directors or by independent legal counsel in a written opinion
that indemnification is proper because the indemnitee has met the applicable
standard of conduct.
Section 145 further authorizes a corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee
or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation
or enterprise, against any liability asserted against him and incurred by him
in any such capacity, or arising out of his status as such, whether or not the
corporation would otherwise have the power to indemnify him under Section 145.
The Company maintains policies insuring its and its subsidiaries' officers and
directors against certain liabilities for actions taken in such capacities,
including liabilities under the Securities Act of 1933, as amended (the
"Securities Act").
Article VIII of the Amended and Restated Certificate of Incorporation of
the Company and Article VII of the Bylaws of the Company provides for
indemnification of the directors of the Company to the full extent permitted
by law, as now in effect or later amended. Article VII of the Bylaws also
permits the indemnification to the same extent of officers, employees or
agents of the Company if, and to the extent, authorized by the Board of
Directors. In addition, the Bylaws provide for indemnification against
expenses incurred by a director to be paid by the Company at reasonable
intervals in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of the director or
officer to repay such amount if it shall be ultimately determined that he is
not entitled to be
II-1
<PAGE> 81
indemnified by the Company. The Bylaws further provide for a contractual cause
of action on the part of directors of the Company for indemnification claims
that have not been paid by the Company.
The Company also has provided liability insurance for each director and
officer for certain losses arising from claims or charges made against them
while acting in their capacities as directors or officers of the Company.
Article VII of the Company's Amended and Restated Certificate of
Incorporation, as amended, limits under certain circumstances the liability of
the Company's directors for a breach of their fiduciary duty as directors.
These provisions do not eliminate the liability of a director (i) for a breach
of the director's duty of loyalty to the Company or its stockholders, (ii) for
acts or omissions not in good faith or that involve intentional misconduct or
a knowing violation of law, (iii) under Section 174 of the DGCL (relating to
the declaration of dividends and purchase or redemption of shares in violation
of the DGCL) or (iv) for any transaction from which the director derived an
improper personal benefit.
ITEM 15. RECENT SALE OF UNREGISTERED SECURITIES
On November 12, 1998, the Company entered into a license agreement and a
related stock purchase agreement with Abbott Laboratories ("Abbott") for
NYOTRAN(R). In connection with the license agreement, Abbott purchased 837,989
shares of the Company's common stock pursuant to the stock purchase agreement.
Closing of the transaction occurred on November 30, 1998. The sale of shares
of the Company's common stock to Abbott was conducted as a private placement
pursuant to Regulation D (Rule 501(a)(3) and Rule 505) promulgated under the
Securities Act.
ITEM 16. EXHIBITS
*1.1 Form of Placement Agency Agreement dated as of November 19, 1998
between Aronex Pharmaceuticals, Inc. and Paramount Capital, Inc.
*1.2 Form of Warrant for the purchase of shares of common stock to be
issued to Paramount Capital, Inc. (included herein as Exhibit C
to Placement Agency Agreement which is filed herewith as Exhibit
1.1)
3.1 Restated Certificate of Incorporation, as amended (incorporated
by reference to Exhibit 3.1 to the Company's Quarterly Report on
Form 10-Q for the quarterly period ending June 30, 1997 (the
"June 1997 Form 10-Q")).
3.2 Restated Bylaws (incorporated by reference to Exhibit 3.2 to the
Company's Registration Statement on Form S-1 (No. 33-47418) (the
"1992 Registration Statement"), as declared effective by the
Commission on July 10, 1992).
4.1 Specimen certificate for shares of Common Stock, par value $0.001
per share (incorporated by reference to Exhibit 4.1 to the
Company's Annual Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1996).
*5.1 Opinion of Andrews & Kurth L.L.P.
10.1 Registration Rights Agreement dated August 2, 1989, by and among
the Company and certain of its stockholders (incorporated by
reference to Exhibit 10.2 to the 1992 Registration Statement).
10.2 First Amendment to Registration Rights Agreement dated April 18,
1990, by and among the Company and certain of its stockholders
(incorporated by reference to Exhibit 10.3 to the 1992
Registration Statement).
10.3 Second Amendment to Registration Rights Agreement dated October
31, 1991, by and among the Company and certain of its
stockholders (incorporated by reference to Exhibit 10.4 to the
1992 Registration Statement).
II-2
<PAGE> 82
10.4 Third Amendment to Registration Rights Agreement dated September
10, 1993, among the Company and certain of its stockholders
(incorporated by reference to Exhibit 10.24 to the Company's
Registration Statement on Form S-1 (No. 33-71166) (the "1993
Registration Statement"), as declared effective by the Commission
on November 15, 1993).
10.5 Fourth Amendment to Registration Rights Agreement dated January
20, 1994, among the Company and certain of its stockholders
(incorporated by reference to Exhibit 10.28 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1993
(the "1993 Form 10-K")).
10.6 Amended and Restated 1989 Stock Option Plan (incorporated by
reference to Exhibit 10.1 to the June 1997 Form 10-Q).
10.7 Amended and Restated 1993 Non-Employee Director Stock Option Plan
(incorporated by reference to Exhibit 10.2 to the June 1997 Form
10-Q).
10.8 1998 Stock Option Plan (incorporated by reference to Exhibit 10.1
to the Company's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1998 (the "June 1998 Form 10-Q")).
10.9 Exclusive License Agreement dated October 15, 1986, between the
Company, The University of Texas System Board of Regents and The
University of Texas M. D. Anderson Cancer Center (incorporated by
reference to Exhibit 10.8 to the 1992 Registration Statement).
10.10 Research and Development Contract dated October 1, 1986, between
the Company, The University of Texas System Board of Regents and
The University of Texas M. D. Anderson Cancer Center, together
with amendments and extensions thereto (incorporated by reference
to Exhibit 10.9 to the 1992 Registration Statement ).
10.11 Exclusive License Agreement dated July 1, 1988, between the
Company, The University of Texas System Board of Regents and The
University of Texas M. D. Anderson Cancer Center, together with
amendments and extensions thereto (incorporated by reference to
Exhibit 10.10 to the 1992 Registration Statement).
10.12 Research and Development Contract dated July 1, 1988, between the
Company, The University of Texas System Board of Regents and The
University of Texas M. D. Anderson Cancer Center, together with
amendments and extensions thereto (incorporated by reference to
Exhibit 10.11 to the 1992 Registration Statement).
10.13 Amendment No. 2 to Exclusive License Agreement dated July 9,
1993, among the Company, The University of Texas System Board of
Regents and The University of Texas M. D. Anderson Cancer Center
(incorporated by reference to Exhibit 10.20 to the 1993
Registration Statement).
10.14 Sponsored Laboratory Study Agreement dated July 9, 1993, between
the Company and The University of Texas M. D. Anderson Cancer
Center (incorporated by reference to Exhibit 10.21 to the 1993
Registration Statement).
10.15 Technology Transfer Agreement dated July 18, 1989, among Triplex
Pharmaceutical Corporation and Baylor College of Medicine, BCM
Technologies, Inc., Michael Edward Hogan and Donald Joseph
Kessler (incorporated by reference to Exhibit 10.61 to the
Company's Registration Statement on Form S-4 (No. 33-91584) dated
July 24, 1995 (the "Merger Registration Statement")).
10.16 Form of Key Management Proprietary Information and Inventions and
Noncompetition Agreement (incorporated by reference to Exhibit
10.23 to the 1992 Registration Statement).
10.17 Form of Proprietary Information and Inventions Agreement
(incorporated by reference to Exhibit 10.24 to the 1992
Registration Statement).
II-3
<PAGE> 83
10.18 Stock Purchase Warrant dated March 29, 1990, from the Company in
favor of Pacific Venture Finance, Inc (incorporated by reference
to Exhibit 10.28 to the 1992 Registration Statement).
10.19 Master Loan and Security Agreement dated March 1, 1993, between
the Company and MMC/GATX Partnership No. 1 (incorporated by
reference to Exhibit 10.21 to the Company's Annual Report on Form
10-K for the fiscal year Ended December 31, 1993 (the "1993 Form
10-K")).
10.20 Common Stock Purchase Warrant dated June 28, 1993 from the
Company in favor of MMC/GATX Partnership No. 1 (incorporated by
reference to Exhibit 10.22 to the 1993 Form 10-K).
10.21 Common Stock Purchase Warrant dated March 21, 1994 from the
Company in favor of MMC/GATX Partnership No. 1 (incorporated by
reference to Exhibit 10.4 to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1994 (the "March 1994
Form 10-Q")).
10.22 Common Stock Purchase Warrant dated January 27, 1994 from the
Company in favor of Vector Securities International, Inc
(incorporated by reference to Exhibit 10.29 to the 1993 Form
10-K).
10.23 License and Development Agreement dated September 10, 1993,
between the Company and Genzyme Corporation (incorporated by
reference to Exhibit 10.22 to the 1993 Registration Statement).
10.24 Common Stock Purchase Agreement dated September 10, 1993, between
the Company and Genzyme Corporation (incorporated by reference to
Exhibit 10.23 to the 1993 Registration Statement).
10.25 Amendment No. 2 to License and Development Agreement dated
September 10, 1996, between the Company and Genzyme Corporation
(incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended
September 30, 1996 (the "September 1996 Form 10-Q")).
10.26 Amendment No. 2 to Stock Purchase Agreement dated September 10,
1996, between the Company and Genzyme Corporation (incorporated
by reference to Exhibit 10.2 to the September 1996 Form 10-Q).
10.27 Amendment No. 3 to License and Development Agreement dated March
25, 1997, between the Company and Genzyme Corporation
(incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended March
30, 1997 (the "March 1997 Form 10-Q")).
10.28 Amendment No. 3 to Common Stock Purchase Agreement dated March
25, 1997, between the Company and Genzyme Corporation
(incorporated by reference to Exhibit 10.2 to the March 1997 Form
10-Q).
10.29 Licensing Agreement dated December 7, 1996, between the Company
and Boehringer Mannheim GmbH (incorporated by reference to
Exhibit 10.51 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996).
10.30 Plan and Agreement of Merger dated February 22, 1995, among
Triplex Pharmaceutical Corporation, Argus Pharmaceuticals, Inc.
and API Acquisition Company No. 1 (incorporated by reference to
Exhibit 1.1 to the Company's Current Report on Form 8-K dated
February 22, 1995 (the "February 1995 Form 8-K")).
10.31 Form of Certificate of Contingent Interest (incorporated by
reference to Exhibit 1.2 to the February 1995 Form 8-K).
10.32 Agreement and Plan of Merger dated February 22, 1995, among
Oncologix, Inc., the Company and API Acquisition Company No. 2
(incorporated by reference to Exhibit 1.7 to the February 1995
Form 8-K).
10.33 Form of Warrant (incorporated by reference to Exhibit 1.8 to the
February 1995 Form 8-K herein by reference).
II-4
<PAGE> 84
10.34 Agreement between Oncologix and HCV Group (incorporated by
reference to Exhibit 1.9 to the February 1995 Form 8-K).
10.35 Exchange Agreement dated December 12, 1995, among the Company,
Health Care Ventures I, L.P., Health Care Ventures II, L.P.,
Health Care Ventures III, L.P. and Health Care Ventures IV, L.P
(incorporated by reference to Exhibit 1.2 to the Company's
Current Report on Form 8-K dated December 12, 1995).
10.36 Employment Agreement dated March 12, 1997, between the Company
and David S. Gordon, M.D (incorporated by reference to Exhibit
10.4 to the March 1997 Form 10-Q).
10.37 Employment Agreement dated July 28, 1997, between the Company and
Janet Walter (incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for fiscal quarter ended
September 30, 1997).
10.38 Employment Agreement dated November 3, 1997 between the Company
and Geoffrey Cox, Ph.D (incorporated by reference to Exhibit
10.39 to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997 (the "1997 Form 10-K")).
10.39 Employment Termination and Severance Agreement dated January 1,
1998, between the Company and James M. Chubb, Ph.D (incorporated
by reference to Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended March 31, 1998 (the "March
1998 Form 10-Q")).
10.40 Consulting Agreement dated January 1, 1998, between the Company
and Gabriel Lopez-Berestein (incorporated by reference to Exhibit
10.2 to the March 1998 Form 10-Q).
10.41 Consulting Agreement dated April 1, 1998, between the Company and
Roman Perez-Solar (incorporated by reference to Exhibit 10.3 to
the March 1998 Form 10-Q).
10.42 Employment Agreement dated June 12, 1998, between the Company and
Praveen Tyle, Ph.D. (incorporated by reference to Exhibit 10.2 to
the June 1998 Form 10-Q).
10.43 Employment Agreement dated June 12, 1998, between the Company and
Paul A. Cossum, Ph.D. (incorporated by reference to Exhibit 10.3
to the June 1998 Form 10-Q).
10.44 Employment Agreement dated June 12, 1998, between the Company and
Terance A. Murnane, Ph.D. (incorporated by reference to Exhibit
10.4 to the June 1998 Form 10-Q).
10.45 Lease Agreement dated April 4, 1997, between the Company and The
Woodlands Corporation (incorporated by reference to Exhibit 10.3
to the June 1997 Form 10-Q).
10.46 License Agreement dated November 12, 1998, between the Company
and Abbott Laboratories (incorporated by reference to Exhibit
10.1 to the December 2, 1998 Form 8-K).
10.47 Stock Purchase Agreement dated November 12, 1998, between the
Company and Abbott Laboratories (incorporated by reference to
Exhibit 10.2 to the December 2, 1998 Form 8-K).
11.1 Statement regarding computation of loss per share (incorporated
by reference to Exhibit 11.1 to the 1997 Form 10-K).
*23.1 Consent of Arthur Andersen LLP
*23.2 Consent of Andrews & Kurth L.L.P. (included in Exhibit 5.1).
24.1 Power of attorney (included on the signature page of this
Registration Statement).
- ---------------------------
* Filed herewith.
II-5
<PAGE> 85
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes that:
(1) For purpose of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b) (1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions in Item 15 above, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-6
<PAGE> 86
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE
REGISTRANT CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS
ALL THE REQUIREMENTS FOR FILING ON FORM S-1 AND HAS DULY CAUSED THIS AMENDMENT
NO. 1 TO THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED IN THE WOODLANDS, STATE OF TEXAS, ON
JANUARY ___, 1999.
ARONEX PHARMACEUTICALS, INC.
By: /s/ Geoffrey F. Cox
-------------------------------
Geoffrey F. Cox
Chairman of the Board and
Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
AMENDMENT NO. 1 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE
FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Geoffrey F. Cox Chairman of the Board and Chief January ___, 1999
----------------------------------- Executive Officer (Principal executive
Geoffrey F. Cox officer)
/s/ Terance A. Murnane Controller (Principal financial and January ___, 1999
----------------------------------- accounting officer)
Terance A. Murnane
* Director
-----------------------------------
Gabriel Lopez-Berestein, M.D.
* Director
-----------------------------------
Ronald J. Brenner, Ph.D.
Director
-----------------------------------
James R. Butler
* Director
-----------------------------------
Martin P. Sutter
* Director
-----------------------------------
Phyllis I. Gardner, M.D.
* Director
-----------------------------------
Gregory F. Zaic
*By /s/ Terance A. Murnane
--------------------------------
Terance A. Murnane
Attorney-in-Fact
Date: January ___, 1999
</TABLE>
II-7
<PAGE> 87
EXHIBIT INDEX
<TABLE>
<S> <C>
*1.1 Form of Placement Agency Agreement dated as of November 19, 1998
between Aronex Pharmaceuticals, Inc. and Paramount Capital, Inc.
*1.2 Form of Warrant for the purchase of shares of common stock to be
issued to Paramount Capital, Inc. (included herein as Exhibit C
to Placement Agency Agreement which is filed herewith as Exhibit
1.1)
3.1 Restated Certificate of Incorporation, as amended (incorporated
by reference to Exhibit 3.1 to the Company's Quarterly Report on
Form 10-Q for the quarterly period ending June 30, 1997 (the
"June 1997 Form 10-Q")).
3.2 Restated Bylaws (incorporated by reference to Exhibit 3.2 to the
Company's Registration Statement on Form S-1 (No. 33-47418) (the
"1992 Registration Statement"), as declared effective by the
Commission on July 10, 1992).
4.1 Specimen certificate for shares of Common Stock, par value $0.001
per share (incorporated by reference to Exhibit 4.1 to the
Company's Annual Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1996).
*5.1 Opinion of Andrews & Kurth L.L.P.
10.1 Registration Rights Agreement dated August 2, 1989, by and among
the Company and certain of its stockholders (incorporated by
reference to Exhibit 10.2 to the 1992 Registration Statement).
10.2 First Amendment to Registration Rights Agreement dated April 18,
1990, by and among the Company and certain of its stockholders
(incorporated by reference to Exhibit 10.3 to the 1992
Registration Statement).
10.3 Second Amendment to Registration Rights Agreement dated October
31, 1991, by and among the Company and certain of its
stockholders (incorporated by reference to Exhibit 10.4 to the
1992 Registration Statement).
10.4 Third Amendment to Registration Rights Agreement dated September
10, 1993, among the Company and certain of its stockholders
(incorporated by reference to Exhibit 10.24 to the Company's
Registration Statement on Form S-1 (No. 33-71166) (the "1993
Registration Statement"), as declared effective by the Commission
on November 15, 1993).
10.5 Fourth Amendment to Registration Rights Agreement dated January
20, 1994, among the Company and certain of its stockholders
(incorporated by reference to Exhibit 10.28 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1993
(the "1993 Form 10-K")).
10.6 Amended and Restated 1989 Stock Option Plan (incorporated by
reference to Exhibit 10.1 to the June 1997 Form 10-Q).
10.7 Amended and Restated 1993 Non-Employee Director Stock Option Plan
(incorporated by reference to Exhibit 10.2 to the June 1997 Form
10-Q).
10.8 1998 Stock Option Plan (incorporated by reference to Exhibit 10.1
to the Company's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1998 (the "June 1998 Form 10-Q")).
10.9 Exclusive License Agreement dated October 15, 1986, between the
Company, The University of Texas System Board of Regents and The
University of Texas M. D. Anderson Cancer Center (incorporated by
reference to Exhibit 10.8 to the 1992 Registration Statement).
</TABLE>
<PAGE> 88
<TABLE>
<S> <C>
10.10 Research and Development Contract dated October 1, 1986, between
the Company, The University of Texas System Board of Regents and
The University of Texas M. D. Anderson Cancer Center, together
with amendments and extensions thereto (incorporated by reference
to Exhibit 10.9 to the 1992 Registration Statement ).
10.11 Exclusive License Agreement dated July 1, 1988, between the
Company, The University of Texas System Board of Regents and The
University of Texas M. D. Anderson Cancer Center, together with
amendments and extensions thereto (incorporated by reference to
Exhibit 10.10 to the 1992 Registration Statement).
10.12 Research and Development Contract dated July 1, 1988, between the
Company, The University of Texas System Board of Regents and The
University of Texas M. D. Anderson Cancer Center, together with
amendments and extensions thereto (incorporated by reference to
Exhibit 10.11 to the 1992 Registration Statement).
10.13 Amendment No. 2 to Exclusive License Agreement dated July 9,
1993, among the Company, The University of Texas System Board of
Regents and The University of Texas M. D. Anderson Cancer Center
(incorporated by reference to Exhibit 10.20 to the 1993
Registration Statement).
10.14 Sponsored Laboratory Study Agreement dated July 9, 1993, between
the Company and The University of Texas M. D. Anderson Cancer
Center (incorporated by reference to Exhibit 10.21 to the 1993
Registration Statement).
10.15 Technology Transfer Agreement dated July 18, 1989, among Triplex
Pharmaceutical Corporation and Baylor College of Medicine, BCM
Technologies, Inc., Michael Edward Hogan and Donald Joseph
Kessler (incorporated by reference to Exhibit 10.61 to the
Company's Registration Statement on Form S-4 (No. 33-91584) dated
July 24, 1995 (the "Merger Registration Statement")).
10.16 Form of Key Management Proprietary Information and Inventions and
Noncompetition Agreement (incorporated by reference to Exhibit
10.23 to the 1992 Registration Statement).
10.17 Form of Proprietary Information and Inventions Agreement
(incorporated by reference to Exhibit 10.24 to the 1992
Registration Statement).
10.18 Stock Purchase Warrant dated March 29, 1990, from the Company in
favor of Pacific Venture Finance, Inc (incorporated by reference
to Exhibit 10.28 to the 1992 Registration Statement).
10.19 Master Loan and Security Agreement dated March 1, 1993, between
the Company and MMC/GATX Partnership No. 1 (incorporated by
reference to Exhibit 10.21 to the Company's Annual Report on Form
10-K for the fiscal year Ended December 31, 1993 (the "1993 Form
10-K")).
10.20 Common Stock Purchase Warrant dated June 28, 1993 from the
Company in favor of MMC/GATX Partnership No. 1 (incorporated by
reference to Exhibit 10.22 to the 1993 Form 10-K).
10.21 Common Stock Purchase Warrant dated March 21, 1994 from the
Company in favor of MMC/GATX Partnership No. 1 (incorporated by
reference to Exhibit 10.4 to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1994 (the "March 1994
Form 10-Q")).
10.22 Common Stock Purchase Warrant dated January 27, 1994 from the
Company in favor of Vector Securities International, Inc
(incorporated by reference to Exhibit 10.29 to the 1993 Form
10-K).
10.23 License and Development Agreement dated September 10, 1993,
between the Company and Genzyme Corporation (incorporated by
reference to Exhibit 10.22 to the 1993 Registration Statement).
10.24 Common Stock Purchase Agreement dated September 10, 1993, between
the Company and Genzyme Corporation (incorporated by reference to
Exhibit 10.23 to the 1993 Registration Statement).
</TABLE>
<PAGE> 89
<TABLE>
<S> <C>
10.25 Amendment No. 2 to License and Development Agreement dated
September 10, 1996, between the Company and Genzyme Corporation
(incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended
September 30, 1996 (the "September 1996 Form 10-Q")).
10.26 Amendment No. 2 to Stock Purchase Agreement dated September 10,
1996, between the Company and Genzyme Corporation (incorporated
by reference to Exhibit 10.2 to the September 1996 Form 10-Q).
10.27 Amendment No. 3 to License and Development Agreement dated March
25, 1997, between the Company and Genzyme Corporation
(incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended March
30, 1997 (the "March 1997 Form 10-Q")).
10.28 Amendment No. 3 to Common Stock Purchase Agreement dated March
25, 1997, between the Company and Genzyme Corporation
(incorporated by reference to Exhibit 10.2 to the March 1997 Form
10-Q).
10.29 Licensing Agreement dated December 7, 1996, between the Company
and Boehringer Mannheim GmbH (incorporated by reference to
Exhibit 10.51 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996).
10.30 Plan and Agreement of Merger dated February 22, 1995, among
Triplex Pharmaceutical Corporation, Argus Pharmaceuticals, Inc.
and API Acquisition Company No. 1 (incorporated by reference to
Exhibit 1.1 to the Company's Current Report on Form 8-K dated
February 22, 1995 (the "February 1995 Form 8-K")).
10.31 Form of Certificate of Contingent Interest (incorporated by
reference to Exhibit 1.2 to the February 1995 Form 8-K).
10.32 Agreement and Plan of Merger dated February 22, 1995, among
Oncologix, Inc., the Company and API Acquisition Company No. 2
(incorporated by reference to Exhibit 1.7 to the February 1995
Form 8-K).
10.33 Form of Warrant (incorporated by reference to Exhibit 1.8 to the
February 1995 Form 8-K herein by reference).
10.34 Agreement between Oncologix and HCV Group (incorporated by
reference to Exhibit 1.9 to the February 1995 Form 8-K).
10.35 Exchange Agreement dated December 12, 1995, among the Company,
Health Care Ventures I, L.P., Health Care Ventures II, L.P.,
Health Care Ventures III, L.P. and Health Care Ventures IV, L.P
(incorporated by reference to Exhibit 1.2 to the Company's
Current Report on Form 8-K dated December 12, 1995).
10.36 Employment Agreement dated March 12, 1997, between the Company
and David S. Gordon, M.D (incorporated by reference to Exhibit
10.4 to the March 1997 Form 10-Q).
10.37 Employment Agreement dated July 28, 1997, between the Company and
Janet Walter (incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for fiscal quarter ended
September 30, 1997).
10.38 Employment Agreement dated November 3, 1997 between the Company
and Geoffrey Cox, Ph.D (incorporated by reference to Exhibit
10.39 to the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997 (the "1997 Form 10-K")).
10.39 Employment Termination and Severance Agreement dated January 1,
1998, between the Company and James M. Chubb, Ph.D (incorporated
by reference to Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended March 31, 1998 (the "March
1998 Form 10-Q")).
</TABLE>
<PAGE> 90
<TABLE>
<S> <C>
10.40 Consulting Agreement dated January 1, 1998, between the Company
and Gabriel Lopez-Berestein (incorporated by reference to Exhibit
10.2 to the March 1998 Form 10-Q).
10.41 Consulting Agreement dated April 1, 1998, between the Company and
Roman Perez-Solar (incorporated by reference to Exhibit 10.3 to
the March 1998 Form 10-Q).
10.42 Employment Agreement dated June 12, 1998, between the Company and
Praveen Tyle, Ph.D. (incorporated by reference to Exhibit 10.2 to
the June 1998 Form 10-Q).
10.43 Employment Agreement dated June 12, 1998, between the Company and
Paul A. Cossum, Ph.D. (incorporated by reference to Exhibit 10.3
to the June 1998 Form 10-Q).
10.44 Employment Agreement dated June 12, 1998, between the Company and
Terance A. Murnane, Ph.D. (incorporated by reference to Exhibit
10.4 to the June 1998 Form 10-Q).
10.45 Lease Agreement dated April 4, 1997, between the Company and The
Woodlands Corporation (incorporated by reference to Exhibit 10.3
to the June 1997 Form 10-Q).
10.46 License Agreement dated November 12, 1998, between the Company
and Abbott Laboratories (incorporated by reference to Exhibit
10.1 to the December 2, 1998 Form 8-K).
10.47 Stock Purchase Agreement dated November 12, 1998, between the
Company and Abbott Laboratories (incorporated by reference to
Exhibit 10.2 to the December 2, 1998 Form 8-K).
11.1 Statement regarding computation of loss per share (incorporated
by reference to Exhibit 11.1 to the 1997 Form 10-K).
*23.1 Consent of Arthur Andersen LLP
*23.2 Consent of Andrews & Kurth L.L.P. (included in Exhibit 5.1).
24.1 Power of attorney (included on the signature page of this
Registration Statement).
</TABLE>
---------------------------
* Filed herewith.
<PAGE> 1
EXHIBIT 1.1
ARONEX PHARMACEUTICALS, INC.
PLACEMENT AGENCY AGREEMENT
Dated as of November 19, 1998
Paramount Capital, Inc.
787 Seventh Avenue, 48th Floor
New York, New York 10019
Dear Sirs:
Aronex Pharmaceuticals, Inc., a Delaware corporation (the
"Company") proposes to issue, offer and sell (the "Offering"), an aggregate of
4,500,000 shares (the "Shares") of its common stock (the "Offering Amount"),
par value $.001 per share (the "Common Stock"). The Company hereby confirms
its agreement to retain Paramount Capital, Inc. (the "Placement Agent") on an
exclusive "best efforts" basis to introduce the Company to, and to obtain
indications of interest from, prospective purchasers ("Purchasers") of the
Shares, at a price per share (the "Offering Price") equal to the price set
forth on the cover page of the Prospectus (as defined below) on the date that
the Registration Statement is declared effective (the "Effective Date").
1. Appointment of Placement Agent.
(a) The Placement Agent is hereby appointed exclusive
placement agent of the Company (subject to the Placement Agent's right to have
Selected Agents, as defined in Section 1(c) hereof, participate in the
Offering) during the Offering Period herein specified for the purposes of
assisting the Company in obtaining indications of interest from qualified
Purchasers. The Placement Agent shall not be deemed an agent of the Company
for any other purpose.
(b) Subject to the performance by the Company of all of
its obligations to be performed under this Agreement and to the completeness
and accuracy of all representations and warranties of the Company contained in
this Agreement, the Placement Agent hereby accepts such agency and agrees to
use its best efforts to assist the Company in obtaining indications of interest
from Purchasers pursuant to the Offering. It is understood that the Placement
Agent has no obligation to sell the Shares, but only to use its best efforts to
obtain indications of interest therefor. Furthermore, it is understood that
neither the Placement Agent nor any of its affiliates are under any obligation
to purchase any Shares in the Offering. The Placement Agent's agency hereunder
is not terminable by the Company prior to the Termination Date except as set
forth in Section 8(g).
<PAGE> 2
Paramount Capital, Inc.
Page 2
(c) The Placement Agent may engage other persons,
selected by it in its sole discretion, who are members of the National
Association of Securities Dealers, Inc., ("NASD") or who are located outside
the United States and that have executed a Selected Agents' Agreement (each
such person being hereinafter referred to as a "Selected Agent") and the
Placement Agent may allow such persons such part of the compensation and
payment of expenses payable to the Placement Agent hereunder as the Placement
Agent shall determine; provided, however, that any such compensation shall be
received pursuant to Section 4(m) hereof.
2. Offering Period; Escrow Agreement; Delivery and Payment.
(a) The "Offering Period" shall be deemed to have
commenced on November 19, 1998 (the date on which the Prospectus was first made
available to the Placement Agent by the Company for use in connection with the
Offering). If not terminated earlier pursuant to this Agreement, the Offering
Period shall terminate at 11:59 p.m. Eastern Standard Time on March 31, 1999,
or such later time and date as may be consented to by the Placement Agent (the
"Termination Date"). If indications of interest for the entire Offering Amount
are not received prior to the end of the Offering Period, the Offering will be
terminated.
(b) On or prior to the Effective Date, the Company, the
Placement Agent and State Street Bank & Trust Co., as escrow agent (the "Escrow
Agent"), shall enter into an escrow agreement in customary form mutually
acceptable to the Company, the Placement Agent and the Escrow Agent (the
"Escrow Agreement"), pursuant to which an escrow account will be established,
at the Company's expense, for the benefit of the Purchasers (the "Escrow
Account"). Such Escrow Agreement shall conform in all material respects to the
requirements of Rule 15c2-4 under the Securities Exchange Act of 1934, as
amended. The Company will not request effectiveness of the Registration
Statement until indications of interest for the entire Offering Amount have
been received. When the condition set forth in the immediately preceding
sentence has been met, the Company shall request that the Commission (as
defined below) declare the Registration Statement effective. The Offering
Price shall be determined (the "Pricing") on the Effective Date. Immediately
after the Pricing, the Placement Agent will distribute confirmations and final
prospectuses to all Purchasers, and shall inform each Purchaser of the
following: (i) the closing date (the "Closing Date"), which will be scheduled
for three business days after the Pricing or such other time as may be agreed
upon by the Company and the Placement Agent, but in no event on the date prior
to the date on which the Escrow Agent has received an amount equal to the
proceeds of the sale of all of the Shares offered hereby (the "Requisite
Funds"); (ii) the Offering Price; and (iii) the total amount of funds such
Purchaser shall deposit in the Escrow Account. The Escrow Agreement shall
provide that the Escrow Agent shall notify the Company and the Placement Agent
in writing when the Purchasers have deposited funds into the Escrow Account the
Requisite Funds. At 9:00 a.m., New York City time, on the Closing Date, the
Escrow Agent will release the Requisite Funds from the
<PAGE> 3
Paramount Capital, Inc.
Page 3
Escrow Account for collection by the Company and the Placement Agent as
provided in the Escrow Agreement and the Company shall deliver the Shares to
the Purchasers, which delivery may be made through the facilities of The
Depository Trust Company. The Closing shall take place at the offices of the
Placement Agent, 787 Seventh Avenue, 48th floor, New York, New York 10019. All
actions taken at the Closing shall be deemed to have occurred simultaneously.
If the Closing Date shall not have occurred on or prior to the [Termination
Date] APRIL 5, 1999, or such later date as may be consented to by Placement
Agent, all funds together with any interest earned thereon or provided in the
Escrow Agreement shall be returned to the Purchasers who deposited such funds
in the Escrow Account and the Offering shall terminate.
(c) Unless delivery of the Shares is made through the
facilities of The Depository Trust Company, certificates evidencing the Shares
shall be in definitive form and shall be registered in such names and in such
denominations as the Placement Agent shall request by written notice to the
Company and shall be available at the Closing for immediate delivery thereafter
to the Purchasers. For the purpose of expediting the checking and packaging of
certificates for the Shares, the Company agrees to make such certificates
available for inspection at least 24 hours prior to the Closing Date.
3. Representations and Warranties and Covenants of the
Company. The Company represents, warrants and covenants to the Placement Agent
and each Selected Dealer, if any, as follows:
(a) Securities Law Compliance. (i) A registration
statement (File No. 333-67599) on Form S-1 under the Act, relating to the
Offering of the Shares, including a form of prospectus subject to completion,
has been prepared by the Company in accordance with the requirements of the Act
and the rules and regulations of the Securities and Exchange Commission (the
"Commission") thereunder (the "Rules and Regulations") and has been filed with
the Commission under the Act. After the execution of this Agreement, the
Company shall file with the Commission an amendment to such registration
statement, including a form of prospectus, a copy of which amendment shall have
been furnished to and approved by the Placement Agent prior to the filing
thereof. As used in this Agreement, the term "Registration Statement" means
such registration statement, as amended at the time when it is declared
effective, including all financial statements and exhibits thereto and
including any information deemed to be part of the Registration Statement at
the Effective Date pursuant to Rule 430A under the Act; the term "Preliminary
Prospectus" means each prospectus subject to completion filed with such
registration statement or any amendment thereto (including the prospectus
subject to completion, if any, included in the Registration Statement or any
amendment thereto at the time it is declared effective); and the term
"Prospectus" means the prospectus first filed with the Commission pursuant to
Rule 424(b) under the Act, or, if no prospectus is required to be filed
pursuant to said Rule 424(b), such term means the prospectus
<PAGE> 4
Paramount Capital, Inc.
Page 4
included in the Registration Statement; except that if such registration
statement or prospectus is amended or such prospectus is supplemented after the
effective date of such registration statement, the terms "Registration
Statement" and "Prospectus" shall include such registration statement and
prospectus as so amended and the term "Prospectus" shall include the prospectus
as so supplemented, or both, as the case may be.
(ii) Neither the Commission nor any state
securities commission has issued any order preventing or suspending the use of
any Preliminary Prospectus or has instituted or threatened to institute any
proceedings with respect to such an order. When any Preliminary Prospectus was
filed with the Commission it (i) contained all material statements required to
be stated therein in accordance with, and complied in all material respects
with the requirements of, the Act and the Rules and Regulations and (ii) did
not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading. At the time the Registration Statement, or any
amendments thereto, becomes effective and at all times subsequent thereto up to
and including the Closing Date (i) the Registration Statement and Prospectus
will comply in all material respects to the requirements of the Act and the
Rules and Regulations; (ii) the Registration Statement will not contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein not misleading
and (iii) the Prospectus will not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(b) Organization. The Company is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of Delaware and has all requisite corporate power and authority to own and
lease its properties, to carry on its business as currently conducted and as
proposed to be conducted (all as described in the Registration Statement and
the Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus)), to execute and deliver this Agreement and to carry
out the transactions contemplated by this Agreement. The Company is duly
qualified or licensed to do business as a foreign corporation and is in good
standing in the State of Texas and in each jurisdiction in which the nature of
the business conducted, or the properties owned, leased or operated by it,
makes such qualification or licensing necessary and where the failure to be so
qualified or licensed would have a material adverse effect upon the business,
prospects and financial condition of the Company.
(c) Capitalization. The authorized, issued and
outstanding capital stock of the Company prior to the consummation of the
transactions contemplated hereby is as set forth in the Prospectus. All issued
and outstanding shares of the Company are duly and validly issued, fully paid
and nonassessable and have not been issued in violation of the preemptive
rights of any
<PAGE> 5
Paramount Capital, Inc.
Page 5
stockholder of the Company. The Shares, when issued, will be validly issued,
fully paid and non-assessable and will not have been issued in violation of the
preemptive rights of any stockholder of the Company. Purchasers of the Shares
will receive good title to such Shares, free and clear of any liens, security
interests, charges, encumbrances, stockholder agreements, voting trusts or
other defects of title whatsoever (other than those created by the Purchasers
themselves). When certificates representing the Placement Warrants shall have
been duly delivered to the Placement Agent, the Placement Agent or its
designees shall have good and valid title to the Placement Warrants, and upon
exercise of such Placement Warrants, such persons will have good and valid
title to the Common Stock issuable upon such exercise, free and clear of all
liens, encumbrances and adverse claims, whatsoever (other than those created by
the Placement Agent or its designees themselves). All prior sales of
securities of the Company were either registered under the Act and applicable
state securities laws or exempt from such registration, and no security holder
has any rescission rights with respect thereto. Except as set forth in or
contemplated by the Registration Statement, there are not, nor will there be
immediately after the Closing (as hereinafter defined), any outstanding
warrants, options, agreements, convertible securities, rights of first refusal,
rights of first offer, preemptive rights or other rights to subscribe for or to
purchase or other commitments pursuant to which the Company is, or may become,
obligated to issue any shares of its capital stock or other securities of the
Company and this Offering will not cause any anti-dilution adjustments to such
securities or commitments except as reflected in the Registration Statement.
Except as set forth in the Registration Statement or the Prospectus and as
otherwise required by law, there are no restrictions on the voting or transfer
of any shares of the Company's capital stock pursuant to the Company's
Certificate of Incorporation, By-laws or other governing documents or any
agreement or other instruments to which the Company is a party or by which the
Company is bound.
(d) Investments; Subsidiaries Organization. Other than
as disclosed in the Registration Statement or on Schedule 2(d) hereto, the
Company has no subsidiaries, nor does the Company own, directly or indirectly,
capital stock or other equity ownership or proprietary interests in any other
corporation, association, trust, partnership, joint venture or other entity.
Each such subsidiary is duly incorporated, validly existing and in good
standing under the laws of the state of its incorporation and has all requisite
corporate power and authority to own and lease its properties, to carry on its
business as currently conducted and as proposed to be conducted. Each such
subsidiary is duly qualified or licensed to do business as a foreign
corporation and is in good standing in each jurisdiction in which the nature of
the business conducted, or the properties owned, leased or operated by it,
makes such qualification or licensing necessary and where the failure to be so
qualified or licensed would have a material adverse effect upon the business,
prospects and financial condition of the Company.
<PAGE> 6
Paramount Capital, Inc.
Page 6
(e) Financial Statements. The financial statements,
including the notes thereto, included in the Prospectus present fairly the
financial position of the entities purported to be represented thereby as of
the dates indicated and the results of operations for the periods specified.
Except as otherwise stated in the Prospectus, such financial statements have
been prepared in conformity with generally accepted accounting principles
applied on a consistent basis in accordance with the books and records of the
Company, and are correct and complete in all material respects. The "pro
forma" and "as adjusted" financial information included in the Prospectus,
fairly present the information purported to be shown therein at the dates
thereof and for the respective periods covered thereby and all adjustments have
been properly applied. No other financial statements are required by Form S-1,
or otherwise, to be included in the Registration Statement or the Prospectus
other than those included therein.
(f) Absence of Changes. Except as has been or will be
reflected in the Registration Statement prior to the Closing OR OTHERWISE
DISCLOSED IN THE PROSPECTUS (i) the Company has not incurred any material
liabilities or obligations, direct or contingent, nor has the Company entered
into any transaction that is material to the business of the Company, (ii) as
of the date set forth therein, there has not been any change in the capital
stock of, or any incurrence of long-term debt by, the Company, or any issuance
of options, warrants or other rights to purchase the capital stock of the
Company, or any material adverse change or any development involving a
prospective material adverse change in the condition (financial or otherwise),
net worth, results of operations, business, key personnel or properties which
would be material to the business, prospects or financial condition of the
Company, (iii) and the Company has not become a party to, and neither the
business nor the property of the Company has become the subject of, any
material litigation whether or not in the ordinary course of business.
(g) Title. The Company has good title to all tangible
properties and assets owned by it, free and clear of all material liens,
charges, encumbrances or restrictions. Except as has been or will be reflected
in the Registration Statement prior to the Closing, all of the material leases
and subleases under which the Company is the lessor or sublessor of properties
or assets or under which the Company holds properties or assets as lessee or
sublessee are in full force and effect, and the Company is not in default in
any material respect under the terms or provisions of any of such leases or
subleases, and no material claim has been asserted by anyone adverse to rights
of the Company as lessor, sublessor, lessee or sublessee under any such leases
or subleases mentioned above, or affecting or questioning the right of the
Company to continued possession of the leased or subleased premises or assets
under any such lease or sublease. The Company owns or leases all such tangible
properties as are necessary to its operations as now conducted and proposed to
be conducted and except to the extent described in the Registration Statement,
the Company presently does not anticipate the need for any capital
expenditures.
<PAGE> 7
Paramount Capital, Inc.
Page 7
(h) Proprietary Rights. Except as has been or will be
reflected in the Registration Statement prior to the Closing, the Company owns
or possesses adequate licenses or other enforceable rights to use all patents,
patent applications, trademarks, service marks, trade names, corporate names,
copyrights, trade secrets, processes, mask works, licenses, inventions,
formulations, technology and know-how and other intangible property used or
proposed to be used in the conduct of its business as described in or
contemplated by the Prospectus (the "Proprietary Rights"). Except as has been
or will be reflected in the Registration Statement prior to the Closing, the
Company or the entities from whom the Company has acquired rights, has taken
all necessary action to enforce and/or defend all of the Company's Proprietary
Rights. Except as has been or will be set forth in the Registration Statement,
the Company has not received any notice of, and there are not any facts known
to the Company that indicate the existence of (i) any infringement or
misappropriation by any third party of any of the Proprietary Rights or (ii)
any claim by a third party contesting the validity of any of the Proprietary
Rights. The Company has not received any notice of any infringement,
misappropriation or violation by the Company or any of its employees of any
Proprietary Rights of third parties, and, to the best of the Company's
knowledge, the Company nor any of its employees has infringed, misappropriated
or otherwise violated any Proprietary Rights of any third parties; and, to the
best of the Company's knowledge, no infringement, illicit copying,
misappropriation or violation of any intellectual property rights of any third
party has occurred or will occur with respect to any products currently being
sold by the Company or with respect to any products currently under development
by the Company or with respect to the conduct of the Company's business as
currently contemplated. Except as has been or will be described in the
Registration Statement, the Company is not aware that any of its employees are
obligated under any contract (including licenses, covenants or commitments of
any nature) or other agreement, or subject to any judgment, decree or order of
any court or administrative agency, that would interfere with the use of the
employee's best efforts to promote the interests of the Company or that would
conflict with the Company's business as currently conducted or as proposed to
be conducted. To the best of the Company's knowledge, neither the execution
nor delivery of this Agreement, nor the carrying on of the Company's business
by the employees of the Company, nor the conduct of the Company's business, as
currently conducted or as proposed to be conducted, will conflict with or
result in a breach of the terms, conditions or provisions of, or constitute a
default under, any contract, covenant or instrument under which any such
employee is now obligated.
(i) Material Contracts. Each contract, agreement,
instrument, lease, license or other item required to be described in the
Registration Statement or Prospectus or filed as an exhibit to the Registration
Statement has been so described or filed, as the case may be. The description
of any such contracts is complete and accurate in all respects, does not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
made therein, in light of the circumstances under which they were made, not
misleading.
<PAGE> 8
Paramount Capital, Inc.
Page 8
(j) Litigation. Except as has been set forth in the
Registration Statement, there is no material action, suit, claim or proceeding
at law or in equity, or, to the Company's knowledge, investigation, or customer
complaint, by or before any arbitrator, governmental instrumentality or other
agency now pending, or, to the knowledge of the Company, threatened against the
Company (or basis therefor known to the Company which the Company believes will
result in the foregoing), the adverse outcome of which would materially
adversely affect the Company's business, prospects or financial condition. The
Company is not subject to any judgment, order, writ, injunction or decree of
any Federal, state, municipal or other governmental department, commission,
board, bureau, agency or instrumentality, domestic or foreign which would
materially adversely affect the Company's business, prospects or financial
condition.
(k) Non-Defaults, Non-Contravention. The Company is
not in violation of or default under, nor will the execution and delivery of
this Agreement, the Registration Statement, the Prospectus, the Escrow
Agreement or the Placement Warrants (as described below) (the "Offering
Documents") or the consummation of the transactions contemplated herein or
therein result in a violation of or constitute a default in the performance or
observance of any obligation of the Company under (i) its Certificate of
Incorporation, its By-laws, or any indenture, mortgage, material purchase order
or other agreement or instrument to which the Company is a party or by which it
or its property is bound or affected or (ii) any material order, writ,
injunction or decree of any court of any Federal, state, municipal or other
governmental department, commission, board, bureau, agency or instrumentality,
domestic or foreign. There is no existing condition, event or act which
constitutes, nor which after notice, the lapse of time or both, could
constitute, a default under any of the foregoing that would have a material
adverse effect on the business, prospects or financial condition of the
Company.
(l) Taxes. The Company has filed all Federal and state
tax returns and all material local and foreign tax returns required to be filed
by it and all such returns are true and correct in all material respects. The
Company has paid all taxes pursuant to such returns or pursuant to any
assessments received by it or which it is obligated to withhold from amounts
owing to any employee, creditor or third party. The Company has properly
accrued all taxes required to be accrued. The tax returns of the Company have
never been audited by any state, local or Federal authorities. The Company has
not waived any statute of limitations with respect to taxes or agreed to any
extension of time with respect to any tax assessment or deficiency. The
Company does not have knowledge of any tax deficiency which has been or could
be assessed against the Company which, individually or in the aggregate, would
have a material adverse effect on the business of the Company.
(m) Compliance With Laws, Licenses, Etc. The Company
has not received notice of any violation of, or non-compliance with, any
Federal, state, local or foreign, laws,
<PAGE> 9
Paramount Capital, Inc.
Page 9
ordinances, regulations and orders applicable to its business, the violation
of, or noncompliance with which, would have a material adverse effect on the
business, financial condition, prospects or operations of the Company. The
Company has all governmental licenses and permits and other governmental
certificates, authorizations and permits and approvals (collectively,
"Licenses") required by every Federal, state and local government or regulatory
body for the operation of its business as currently conducted and the use of
its properties, except where the failure to be licensed would not have a
material adverse effect on the business of the Company. The Company's Licenses
are in full force and effect and no violations are or have been recorded in
respect of any License and no proceeding is pending or, to the best knowledge
of the Company, threatened to revoke or limit any such License.
(n) Authorization of Documents and Common Stock. Each
of the Offering Documents has been, or prior to the Closing will be, duly and
validly authorized by all necessary corporate action on the part of the Company
and have been duly executed and delivered by the Company and when delivered,
constitute or will constitute (assuming that such agreements are countersigned,
if necessary) the legal, valid and binding obligations of the Company,
enforceable in accordance with their respective terms, subject to the
availability and enforceability of equitable remedies and to applicable
bankruptcy and other laws relating to the rights of creditors generally and
except as the enforcement of the rights to indemnification and contribution
hereunder and under any other Offering Documents may be limited by federal or
state securities laws or public policy. The Company has full corporate power
and lawful authority to authorize, issue and sell the Shares to be sold to the
Purchasers. No consent is required by the Company or from any third party to
perform any of its obligations under this Agreement or any of the Offering
Documents.
(o) Title to Common Stock. When certificates
representing the Shares shall have been duly delivered to the Purchasers and
payment shall have been made for the Shares, the several Purchasers shall have
good and valid title to the Shares free and clear of all liens, encumbrances
and claims and adverse claims whatsoever (other than those created by the
Purchasers themselves or arising from applicable Federal and state securities
laws), and the Company shall have paid all taxes, if any, in respect of the
original issuance thereof. When certificates representing the Placement
Warrants shall have been duly delivered to the Placement Agent, the Placement
Agent or its designees shall have good and valid title to the Placement
Warrants, upon exercise of such Placement Warrants, will have good and valid
title to the Common Stock issuable upon such exercise, free and clear of all
liens, encumbrances and adverse claims, whatsoever (other than those created by
the Purchasers themselves or arising from applicable Federal and state
securities laws), and the Company shall have paid all taxes, if any, in respect
of the original issuance thereof.
<PAGE> 10
Paramount Capital, Inc.
Page 10
(p) Brokers. Neither the Company nor any of its
officers, directors, employees or 5% beneficial stockholders has employed any
broker or finder in connection with the transactions contemplated by this
Agreement other than the Placement Agent.
(q) Non-Affiliated Directors. The Company's Board of
Directors has not less than two (2) directors who are independent from (as
defined in Rule 4460 of the NASD Market Place Rules), and unaffiliated with,
management of the Company.
(r) Accuracy of Reports. All material reports required
to be filed by the Company within the two years prior to the date of this
Agreement under the Securities and Exchange Act of 1934, as amended (the
"Exchange Act"), have been duly filed with the SEC, complied at the time of
filing in all material respects with the requirements of their respective forms
and, except to the extent updated or superseded by the Prospectus or the
Registration Statement or any subsequently filed report, were complete and
correct in all material respects as of the dates at which the information was
furnished, and contained (as of the time of such filings) no untrue statement
of a material fact or omitted to state a material fact necessary in order to
make the statements contained therein, in light of the circumstances under
which they were made, not misleading.
(s) Reservation of Shares; Transfer Taxes, Etc. The
Company shall at all times reserve and keep available, out of its authorized
and unissued shares of Common Stock, solely for the purpose of effecting the
exercise of Placement Warrants, such number of shares of its Common Stock free
of preemptive rights as shall be sufficient to effect the exercise of the
Placement Warrants. The Company shall use its best efforts from time to time,
in accordance with the laws of the State of Delaware, to increase the
authorized number of shares of Common Stock if at any time the number of shares
of authorized, unissued and unreserved Common Stock shall not be sufficient to
permit the exercise of the Placement Warrants.
(t) Registration Rights Except as described in the
Prospectus, or as set forth in this Agreement, no person or entity has the
right, by contract or otherwise, to require registration under the Act of
shares of capital stock or other securities of the Company because of the
filing or effectiveness of the Registration Statement or otherwise in
connection with the sale of the Shares contemplated hereby, except for such
rights as have been legally and effectively waived.
(u) Investment Company Act. Neither the Company
nor any of its subsidiaries is, and upon consummation of the transactions
contemplated hereby none of them will be, subject to registration as an
"investment company" as defined pursuant to the Investment Company Act of 1940,
as amended.
<PAGE> 11
Paramount Capital, Inc.
Page 11
(v) NASDAQ. The Common Stock of the Company is
included for trading on the Nasdaq National Market.
(w) Accounting. The Company maintains a system of
internal accounting controls sufficient to provide reasonable assurance that
(i) transactions are executed in accordance with management's general or
specific authorization; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles ("GAAP") and to maintain accountability for assets; (iii)
the access to the assets of the Company and each of its subsidiaries is
permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(x) No Labor Disputes. Other than as disclosed in
the Registration Statement and the Prospectus, no labor dispute with the
employees of the Company is pending or, to the best knowledge of the Company,
threatened that, individually or in the aggregate, would have a material
adverse effect on the business of the Company.
(y) Insurance. The Company is insured by insurers
of recognized financial responsibility against such losses and risks and in
such amounts as are prudent and customary in the business in which the Company
is engaged. The Company has no reason to believe that it will not be able to
renew existing insurance coverage from similar insurers, except as disclosed in
the Registration Statement and the Prospectus.
(z) Business Relationships. Except as disclosed in
the Registration Statement and in the Prospectus, there are no business
relationships or related party transactions of the nature described in Item 404
of Regulation S-K of the Commission involving the Company or any other persons
referred to in such Item 404, except for such transactions as are not required
under Item 404 to be disclosed in the Prospectus.
(aa) Unlawful Payments. Neither the Company nor, to
the best knowledge of the Company, any director, officer or employee of the
Company has, directly or indirectly, used any corporate funds for unlawful
contributions, gifts, entertainment, or other unlawful expenses relating to
political activity; made any unlawful payment to foreign or domestic government
officials or employees or to foreign or domestic political parties or campaigns
from corporate funds; violated any provision of the Foreign Corrupt Practices
Act of 1977, as amended; or made any bribe, rebate, payoff, influence payment,
kickback, or other unlawful payment.
<PAGE> 12
Paramount Capital, Inc.
Page 12
(bb) Price Manipulation. Neither the Company nor to
the Company's knowledge after due inquiry, any officer, director, or affiliate
(as defined in the Rules and Regulations) of the Company has taken, directly or
indirectly, any action designed to cause or result in, or which constitutes or
which might reasonably be expected to constitute, the stabilization or
manipulation of the price of the shares of Common Stock to facilitate the sale
or resale of the Shares.
(cc) No Business with Cuba. Neither the Company
nor, to the best knowledge of the Company, any affiliate of the Company does
business with the government of Cuba or with any person or affiliate located in
Cuba within the meaning of Section 517.075 Florida Statutes.
(dd) Waiver of Registration Rights. All rights, whether
by contract or otherwise, that any person has, to require registration under
the Act of shares of capital stock or other securities of the Company because
of the filing or effectiveness of the Registration Statement or otherwise in
connection with the sale of the Shares contemplated hereby, have been legally
and effectively waived.
4. Conditions to Placement Agent's Obligations. The
obligations of the Placement Agent hereunder are subject to the accuracy of the
representations and warranties of the Company herein contained as of the date
hereof and as of the Closing Date, to the performance by the Company of its
covenants and obligations hereunder and to the following additional conditions:
(a) Effectiveness of Registration Statement. If the
Company has elected to rely on Rule 430A under the Act, the Registration
Statement shall have been declared effective, and the Prospectus (containing
the information omitted pursuant to Rule 430A) shall have been filed with the
Commission not later than the Commission's close of business on the second
business day following the date hereof or such later time and date to which the
Placement Agent shall have consented; if the Company does not elect to rely on
Rule 430A, the Registration Statement shall have been declared effective not
later than the Termination Date or such later time and date to which the
Placement Agent shall have consented. No stop order suspending the
effectiveness of the Registration Statement or any amendment thereto shall have
been issued, and no proceedings for that purpose shall have been instituted or
threatened or, to the knowledge of the Company or the Placement Agent, shall be
contemplated by the Commission. The Company shall have complied with any
request of the Commission for additional information (to be included in the
Registration Statement or the Prospectus or otherwise).
(b) No Material Misstatements. The Placement Agent
shall not have advised the Company that the Registration Statement, or any
amendment thereto, contains an untrue statement of fact which, in the Placement
Agent's opinion, or in the opinion of counsel for the
<PAGE> 13
Paramount Capital, Inc.
Page 13
Placement Agent, is material, or omits to state a fact which, in the Placement
Agent's opinion, or in the opinion of counsel for the Placement Agent, is
material and is required to be stated therein or is necessary to make the
statements therein not misleading, or that the Prospectus, or any supplement
thereto, contains an untrue statement of fact which, in the Placement Agent's
opinion, or in the opinion of counsel for the Placement Agent, is material, or
omits to state a fact which, in the Placement Agent's opinion, or in the
opinion of counsel for the Placement Agent, is material and is required to be
stated therein or is necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(c) Compliance with Agreements. The Company shall have
complied with all agreements and satisfied all conditions on its part to be
performed or satisfied hereunder and under the other Offering Documents at or
prior to the Closing;
(d) Corporate Action. The Company shall have taken all
corporate action necessary to permit the valid execution, delivery and
performance of the Offering Documents by the Company, including, without
limitation, obtaining the approval of the Company's board of directors for the
execution and delivery of the Offering Documents and the performance by the
Company of its obligations hereunder and the offering contemplated hereby;
(e) Opinion of Counsel to the Company. The Placement
Agent shall receive the opinion of Andrews & Kurth, L.L.P., counsel to the
Company, (stating that each of the Purchasers may rely thereon as though
addressed directly to such Purchaser), dated as of the Closing Date,
substantially to the effect that:
(i) the Company is duly incorporated, validly
existing and in good standing under the laws of the State of Delaware, has all
requisite corporate power and authority necessary to own or hold its properties
and conduct its business as described in the Registration Statement and the
Prospectus;
(ii) the Company is duly qualified or licensed to
do business as a foreign corporation and is in good standing in the State of
Texas and in each jurisdiction in which the nature of the business conducted by
it, or the properties owned, leased or operated by it, makes such qualification
or licensing necessary and where the failure to be so qualified or licensed
would have a material adverse effect upon the business, prospects and financial
condition of the Company. Other than with respect to the Subsidiaries or as
described in the Prospectus, to such counsel's knowledge the Company does not
own, directly or indirectly, any capital stock or other equity ownership or
proprietary interests in any other corporation, association, trust,
partnership, joint venture or other entity;
<PAGE> 14
Paramount Capital, Inc.
Page 14
(iii) the authorized capitalization of the Company
as of the date of the Prospectus is as set forth under "Capitalization" in the
Prospectus; all shares of the Company's outstanding capital stock have been
duly authorized, are validly issued, fully paid and nonassessable; conform in
all material respects to the descriptions thereof contained in the Prospectus
under the caption "Description of Capital Stock," and to such counsel's
knowledge have not been issued in violation of the preemptive rights of any
shareholder; the shareholders of the Company do not have any preemptive rights
or other rights to subscribe for or to purchase, nor are there any restrictions
upon the voting or transfer of any of the Shares except as provided in the
Prospectus; the Shares, the Placement Warrants, and the Escrow Agreement
conform in all material respects to the respective descriptions thereof
contained in the Prospectus;
(iv) the Shares and the shares of Common Stock to
be issued upon exercise of the Placement Warrants (the "Warrant Shares"), when
issued and delivered in accordance with the terms of this Agreement and the
Placement Warrants, respectively, will be validly issued, fully paid,
non-assessable, and free of preemptive rights and no personal liability will
attach to the ownership thereof; all prior sales by the Company of the
Company's securities have been made in compliance with or under an exemption
from registration under the Act and applicable state securities laws; a
sufficient number of shares of Common Stock has been reserved for issuance upon
exercise of the Placement Warrants;
(v) to such counsel's best knowledge, neither
the filing of the Registration Statement nor the offering or sale of the Shares
or the exercise of the Placement Warrants, as contemplated by this Agreement
gives rise to any rights of any person, corporation, partnership or other
entity to require registration under the Act of any shares of Common Stock or
other securities of the Company other than such rights which have been waived
or satisfied;
(vi) the execution, delivery and performance of
each of the Offering Documents to which the Company is a signatory, and the
issuance of the Shares, the Placement Warrants and the Warrant Shares have been
duly authorized by all necessary corporate action on the part of the Company or
its shareholders;
(vii) each of the Offering Documents to which the
Company is a signatory has been duly executed and delivered by the Company and
constitutes a legal, valid and binding obligation of the Company enforceable in
accordance with its terms, subject to such limitations on enforceability as
such counsel shall specify in the opinion and that shall be acceptable to the
Placement Agent;
<PAGE> 15
Paramount Capital, Inc.
Page 15
(viii) the certificates evidencing the Shares
comply in all material respects with the Delaware General Corporation Law; the
Placement Warrants will be exercisable for shares of Common Stock in accordance
with the terms of the Placement Warrants;
(ix) to such counsel's knowledge there are no
pending or threatened legal or governmental proceedings to which the Company is
a party, which would materially adversely affect the business, property,
financial condition, or operations of the Company or which question the
validity of the Shares or any of the Offering Documents, or of any action taken
or to be taken by the Company pursuant to any of the Offering Documents and to
such counsel's knowledge, there are no governmental proceedings or regulations
that are required to be described or referred to in the Registration Statement
which are not so described or referred to;
(x) the execution and delivery of this
Agreement and the other Offering Documents and the consummation of the
transactions contemplated hereby and thereby, will not result in a breach or
violation of, or constitute a default under, the Certificate of Incorporation
or By-laws of the Company, any material contract, indenture, mortgage, loan
agreement, lease, joint venture, or other agreement or instrument to which the
Company or any of its subsidiaries is a party or by which they or any of their
properties are bound or in violation of any order, rule, regulation, writ,
injunction, or decree of any government, governmental instrumentality, or
court, domestic or foreign or violate any applicable order or decree of any
governmental agency or court having jurisdiction over the Company or any of its
subsidiaries or any of their properties or business;
(xi) the Registration Statement has become
effective under the Act, and to such counsel's knowledge, no stop order
suspending the effectiveness of the Registration Statement is in effect, and no
proceedings for that purpose have been instituted or are pending before, or
threatened by, the Commission;
(xii) the Registration Statement and the
Prospectus (except for the financial statements and other financial data
contained therein as to which such counsel need express no opinion) as of the
Effective Date comply as to form in all material respects with the applicable
requirements of the Act and the Rules and Regulations;
(xiii) all descriptions in the Registration
Statement and the Prospectus, and any amendment or supplement thereto, of
contracts and other agreements to which the Company is a party are accurate and
fairly present in all material respects the information required to be shown,
and such counsel is familiar with all contracts and other agreements referred
to in the Registration Statement and the Prospectus and any such amendment or
supplement thereto or filed as exhibits to the Registration Statement, and such
counsel does not know of any contracts
<PAGE> 16
Paramount Capital, Inc.
Page 16
or agreements to which the Company is a party of a character required to be
summarized or described therein or to be filed as exhibits thereto which are
not so summarized, described, or filed;
(xiv) to the such counsel's knowledge no
authorization, approval, consent, or license of any governmental or regulatory
authority or agency is necessary in connection with the authorization,
issuance, transfer, sale, or delivery of the Shares by the Company, the
execution, delivery, and performance of this Agreement by the Company or the
taking of any action contemplated herein, or the issuance of the Placement
Warrants or the Warrant Shares, other than registrations or qualifications of
the Shares under applicable state or foreign securities or Blue Sky laws and
registration under the Act;
(xv) upon the issuance of the Common Stock, the
Placement Warrants and the Common Stock issuable upon exercise of the Placement
Warrants each of the Purchasers or the Placement Agent and its designees, as
the case may be, shall acquire such securities, free and clear of all pledges,
liens, claims, encumbrances, preemptive rights, rights of first offer or right
of first refusal and restrictions (other than those created by the Placement
Agent or its designees themselves) known to such counsel after due inquiry;
(xvi) the Company is not, and upon the
consummation of the transactions contemplated by this Agreement will not be an
"investment company" as defined pursuant to the Investment Company Act of 1940,
as amended;
(xvii) based solely on advice of representatives of
Nasdaq, the Shares and the Common Stock issuable upon exercise of the Placement
Warrants are duly authorized for quotation on the Nasdaq National Market,
subject to notice of issuance;
(xviii) the issuance and Sale by the Company of the
Shares does not violate Nasdaq Market Place Rule 4460(i); and
(xiv) insofar as the statements in the
Registration Statement purport to summarize the nature and status of litigation
or provisions of law, rules, regulations, orders judgments or decrees or legal
proceedings, such statements are correct in all material respects and are fair
summaries of the matters referred to therein.
Such opinion shall state that in the course of preparation of the
Registration Statement and the Prospectus such counsel has among other things:
(i) made inquiries concerning various legal matters and has reviewed certain
corporate records, documents and proceedings; (ii) had discussions with
officers and other representatives of the Company, representatives of Arthur
Andersen LLP, independent public accountants for the Company and
representatives of the Placement Agent and
<PAGE> 17
Paramount Capital, Inc.
Page 17
its counsel during which the contents of the Registration Statement and
Prospectus and related matters were discussed. Such counsel shall state that,
relying as to materiality to a large extent upon facts provided to such counsel
by officers and other representatives of the Company, the actions performed in
sections (i) and (ii) above did not disclose to such counsel any information
which gives such counsel reason to believe that the Registration Statement or
any amendment thereto and the Prospectus included therein, at the time such
Registration Statement became effective, contained any untrue statement of a
material fact required to be stated therein or omitted to state any material
fact required to be stated therein or necessary in order to make the statements
therein not misleading or that the Prospectus (except, in the case of both the
Registration Statement and any amendment thereto and the Prospectus and any
supplement thereto, for the financial statements, notes thereto, and other
financial information included therein, as to which such counsel need express
no opinion) contained any untrue statement of a material fact required to be
stated therein or omitted to state any material fact required to be stated
therein or necessary to make the statements therein not misleading;
Such opinion shall also cover such matters incident to the
transactions contemplated hereby as the Placement Agent or counsel for the
Placement Agent shall reasonably request. In rendering such opinion, such
counsel may rely upon certificates of any officer of the Company or public
officials as to matters of fact.
Such counsel shall state, in opining on any matter stated to be
subject to the knowledge of such counsel, that such knowledge shall include the
actual knowledge of such counsel who have given substantive attention to the
Company's affairs in connection with the Offering and that such counsel has
made due inquiry, including, but not limited to, appropriate inquiries of
officers of the Company with respect to the subject matter of such opinion and
has reviewed all documents the existence of which is disclosed by such
inquiries or of which such counsel is otherwise aware of as a result of its
representation of the Company.
(f) Opinion of Patent Counsel. The Placement Agent
shall receive (unless waived in writing by the Placement Agent) the opinion of
patent counsel to the Company (which such counsel shall be satisfactory to the
Placement Agent), dated the Closing Date in the form and substance satisfactory
to counsel for the Placement Agent.
(g) Comfort Letter. The Company shall cause Arthur
Andersen, LLP, the Company's independent public accountants, to address and
deliver to the Company and the Placement Agent a letter or letters (which
letters are frequently referred to as "Comfort Letters") dated as of the
Effective Date and the Closing Date.
<PAGE> 18
Paramount Capital, Inc.
Page 18
(h) Officer's Certificate. The Placement Agent shall
receive an Officer's Certificate substantially in the form of Exhibit A hereto
and a Secretary's Certificate substantially in the form of Exhibit B hereto,
signed by the appropriate parties and dated as of the Closing Date.
(i) Escrow Agreement. The Placement Agent shall
receive a copy of a duly executed Escrow Agreement with State Street Bank &
Trust Company.
(j) Transmittal Letters. The Placement Agent shall
receive copies of all letters from the Company to the investors transmitting
the Common Stock and shall receive a letter from the Company confirming
transmittal of the securities to the investors.
(k) NASDAQ. The Shares and the Common Stock
issuable upon exercise of the Placement Warrants, shall have been duly
authorized for quotation on the Nasdaq National Market, subject to notice of
issuance.
(l) Blue Sky. A summary blue sky survey, at the sole
cost of the Company (including, without limitation, the legal fees and
disbursements in connection therewith), shall be prepared by counsel to the
Company stating the extent to which and the conditions upon which offers and
sales of the Shares may be made in certain jurisdictions.
(m) Placement Fees and Expenses. (i) At the Closing,
pursuant to the terms of the Escrow Agreement, the Escrow Agent shall release
the funds held in the Escrow Account for collection by the Company and the
Placement Agent. The Company agrees that the Placement Agent shall receive a
commission (the "Cash Commission") equal to (A) eight percent (8%) of the
aggregate purchase price of all of the Shares sold in the Offering to non-
affiliates of the Company and (B) five percent (5%) of the aggregate purchase
price of all of the Shares sold in the Offering to affiliates of the Company.
The Company further agrees to reimburse the Placement Agent for all out-of-
pocket expenses incurred by the Placement Agent in connection with such
Offering (the "Expenses") as more fully set forth in section 5(l) below, in an
amount not to exceed $150,000 in the aggregate. In addition, at the Closing,
the Company will sell to the Placement Agent and/or its designees, for $.001
per warrant, warrants in the form attached hereto as Exhibit C (the "Placement
Warrants") to acquire a number of newly issued shares of Common Stock equal,
but not greater than, ten percent (10%) of the number of shares of Common Stock
issued and sold in the Offering, exercisable for a period of five (5) years
from the Closing and commencing 12 months after the Closing Date at an exercise
price equal to one hundred fifty percent (150%) of the Offering Price. The
Company agrees with the Placement Agent and its successors and assigns that the
securities underlying the Placement Warrants will not be subject to redemption
by the Company nor will they be callable or mandatorily convertible by the
Company. The Placement Warrants cannot be transferred, sold, assigned or
hypothecated for 12 months except that they may be assigned in
<PAGE> 19
Paramount Capital, Inc.
Page 19
whole or in part during such period to any NASD member participating in the
Offering or any officer of the Placement Agent or any such NASD member. The
Placement Warrants will contain a cashless exercise feature and certain
registration rights.
(ii) The Cash Commission, Expenses, and Placement
Warrants as set forth in this Agreement shall be paid to the Placement Agent
with respect to any investment by any investors introduced to the Company by
the Placement Agent ("Covered Investors") in the event that any such Covered
Investor purchases any securities from the Company during the 12 months
following the Closing].
(n) No Adverse Changes. There shall not have occurred,
at any time prior to the Closing (i) any domestic or international event, act
or occurrence which has materially disrupted, or in the Placement Agent's
determination will in the immediate future materially disrupt, the securities
markets of the United States; (ii) a general suspension of, or a general
limitation on prices for, trading in securities on the New York Stock Exchange,
the American Stock Exchange or the NASDAQ National Market; (iii) any outbreak
of major hostilities or other national or international calamity; (iv) any
banking moratorium declared by a state or federal authority; (v) any moratorium
declared in foreign exchange trading by major international banks or other
persons; (vi) any material interruption in the mail service or other means of
communication within the United States; (vii) any material adverse change in
the business, properties, assets, results of operations, financial condition or
prospects of the Company; or (viii) any change in the market for securities in
general or in political, financial, or economic conditions which, in the
Placement Agent's reasonable judgment, makes it inadvisable to proceed with the
offering, sale, and delivery of the Shares.
(o) Waiver of Registration Rights. All rights, whether
by contract or otherwise, that any person has, to require registration under
the Act of shares of capital stock or other securities of the Company because
of the filing or effectiveness of the Registration Statement or otherwise in
connection with the sale of the Shares contemplated hereby, shall have been
legally and effectively waived.
5. Covenants of the Company. The Company covenants and
agrees as follows:
(a) The Company will use its best efforts to cause the
Registration Statement and any amendments thereto to become effective pursuant
to the terms hereof. If required, the Company will file the Prospectus and any
amendment or supplement thereto with the Commission in the manner and within
the time period required by Rule 424(b) under the Act. During any time when a
prospectus relating to the Shares is required to be delivered under the Act,
the Company (i) will comply with all requirements imposed upon it by the Act
and the Rules and
<PAGE> 20
Paramount Capital, Inc.
Page 20
Regulations to the extent necessary to permit the continuance of sales of or
dealings in the Shares in accordance with the provisions hereof and of the
Prospectus, as then amended or supplemented, and (ii) will not file with the
Commission any prospectus, any amendment or supplement to any prospectus or any
amendment to the Registration Statement of which the Placement Agent shall not
previously have been advised and furnished with a copy a reasonable period of
time prior to the proposed filing and as to which filling the Placement Agent
shall not have given its consent.
(b) As soon as the Company is advised or obtains
knowledge thereof, the Company will advise the Placement Agent (i) when the
Registration Statement, as amended, has become effective; (ii) if the
provisions of Rule 430A promulgated under the Act will be relied upon, when the
Prospectus has been filed in accordance with said Rule 430A and when any post-
effective amendment to the Registration Statement becomes effective; (iii) of
any request made by the Commission for amending the Registration Statement, for
supplementing any Preliminary Prospectus or the Prospectus or for additional
information; or (iv) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or any post-
effective amendment thereto or any order preventing or suspending the use of
any Preliminary Prospectus or the Prospectus or any amendment or supplement
thereto or the institution or threat of any investigation or proceeding for
that purpose, and will use its best efforts to prevent the issuance of any such
order and, if issued, to obtain the lifting thereof as soon as possible.
(c) The Company consents to the use of the Prospectus
(and any amendment or supplement thereto) by the Placement Agent in connection
with the solicitation of indications of interest in purchasing the Shares and
for such period of time thereafter as the Prospectus is required by law to be
delivered in connection therewith. If, at any time when a prospectus relating
to the Shares is required to be delivered under the Act, any event occurs as a
result of which the Prospectus, as then amended or supplemented, would include
any untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein not misleading, or if it becomes
necessary at any time to amend or supplement the Prospectus to comply with the
Act or the Rules and Regulations, the Company promptly will so notify the
Placement Agent and, subject to Section 5(a) hereof, will prepare and file with
the Commission an amendment to the Registration Statement or an amendment or
supplement to the Prospectus which will correct such statement or omission or
effect such compliance, each such amendment or supplement to be reasonably
satisfactory to counsel to the Placement Agent.
(d) As soon as practicable, but in any event not later
than 45 days after the end of the 12-month period beginning on the day after
the end of the fiscal quarter of the Company during which the effective date of
the Registration Statement occurs (90 days in the event that the end of such
fiscal quarter is the end of the Company's fiscal year), the Company will make
generally available to its security holders, in the manner specified in Rule
158(b) of the Rules and
<PAGE> 21
Paramount Capital, Inc.
Page 21
Regulations, and to the Placement Agent, an earnings statement which will be in
the detail required by, and will otherwise comply with, the provisions of
Section 11(a) of the Act and Rule 158(a) of the Rules and Regulations, which
statement need not be audited unless required by the Act or the Rules and
Regulations, covering a period of at least 12 consecutive months after the
effective date of the Registration Statement.
(e) During a period of three years after the date
hereof, the Company will furnish to its stockholders, as soon as practicable,
annual reports (including financial statements audited by independent public
accountants) and unaudited quarterly reports of earnings, and will deliver to
the Placement Agent:
(i) concurrently with furnishing such quarterly
reports to its stockholders, statements of income of the Company for each
quarter in the form furnished to the Company's stockholders and certified by
the Company's principal financial or accounting officer;
(ii) concurrently with furnishing such annual
reports to its stockholders, a balance sheet of the Company as at the end of
the preceding fiscal year, together with statements of operations,
stockholders' equity, and cash flows of the Company for such fiscal year,
accompanied by a copy of the report thereon of independent public accountants;
(iii) as soon as they are available, copies of all
information (financial or other) mailed to stockholders;
(iv) as soon as they are available, copies of all
reports and financial statements furnished to or filed with the Commission, the
National Association of Securities Dealers, Inc. ("NASD") or any securities
exchange;
(v) every press release and every material news
item or article of interest to the financial community in respect of the
Company or its affairs which was released or prepared by the Company; and
(vi) any additional information of a public
nature concerning the Company or its business which the Placement Agent may
reasonably request.
During such three-year period, if the Company has active
subsidiaries, the foregoing financial statements will be on a consolidated
basis to the extent that the accounts of the Company and its subsidiaries are
consolidated, and will be accompanied by similar financial statements for any
significant subsidiary which is not so consolidated.
<PAGE> 22
Paramount Capital, Inc.
Page 22
(f) The Company will maintain a Transfer Agent and, if
necessary under the jurisdiction of incorporation of the Company, a Registrar
(which may be the same entity as the Transfer Agent) for its Common Stock.
(g) The Company will furnish, without charge, to the
Placement Agent or on the Placement Agent's order, at such place as the
Placement Agent may designate, copies of each Preliminary Prospectus, the
Registration Statement and any pre-effective or post-effective amendments
thereto (two of which copies will be signed and will include all financial
statements and exhibits) and the Prospectus, and all amendments and supplements
thereto, in each case as soon as available and in such quantities as the
Placement Agent may reasonably request.
(h) The Company will cause the Shares and the Common
Stock issuable upon exercise of the Placement Warrants to be duly included for
quotation on the Nasdaq National Market prior to the Closing Date.
(i) Neither the Company nor any of its officers or
directors, nor affiliates of any of them (within the meaning of the Rules and
Regulations) will take, directly or indirectly, any action designed to, or
which might in the future reasonably be expected to cause or result in,
stabilization or manipulation of the price of any securities of the Company.
(j) The Company will timely file all such reports,
forms or other documents as may be required from time to time, under the Act,
the Rules and Regulations, the Exchange Act, and the rules and regulations
thereunder, and all such reports, forms and documents filed will comply as to
form and substance with the applicable requirements under the Act, the Rules
and Regulations, the Exchange Act and the rules and regulations thereunder.
(k) Use of Proceeds. The net proceeds of the
Offering will be used by the Company substantially as set forth in the
Registration Statement and Prospectus. The Company shall not use any of the
proceeds from this Offering to repurchase, redeem or otherwise acquire any
shares of capital stock of the Company or repay any indebtedness of the Company
including but not limited to any indebtedness to current executive officers or
principal stockholders of the Company, but excluding accounts payable to non-
affiliates incurred in the ordinary course of business, without the prior
written consent of the Placement Agent.
(l) Expenses of Offering. The Company shall be
responsible for and shall bear all expenses incurred in connection with the
proposed Offering, including but not limited to, the costs of preparing and
duplicating the Registration Statement and all exhibits thereto; the costs of
preparing, printing and filing with the Securities and Exchange Commission (the
"SEC") the Registration Statement and amendments, post-effective amendments and
supplements thereto;
<PAGE> 23
Paramount Capital, Inc.
Page 23
preparing, duplicating and delivering exhibits thereto and copies of the
preliminary, final and supplemental prospectus; preparing, duplicating and
delivering (including by facsimile) all selling documents, including but not
limited to the Registration Statement and Prospectus, the Placement Agency
Agreement, blue sky memorandum and stock certificates; blue sky fees, filing
fees and legal fees and disbursements of the Placement Agent's, which legal
fees shall be included in calculating the $150,000 expense reimbursement; fees
and disbursements of the transfer agent; the cost of a total of two sets of
bound closing volumes for the Placement Agent and its counsel; and 40 lucite
deal mementos (collectively, the "Company Expenses"). The Company has
previously paid to the Placement Agent an expense allowance equal to fifteen
thousand dollars ($15,000) to cover the initial costs of the Placement Agent's
mailing, telephone, telecopy, travel to due diligence meetings and other
similar expenses. If the proposed financing is not completed because the
Company prevents it or because of a breach by the Company of any covenants,
representations or warranties contained herein, or because indications of
interest for the Offering Amount have not been received by the Termination
Date, then the Company shall reimburse the Placement Agent for actual,
accountable out-of-pocket expenses (in addition to the Company Expenses for
which the Company shall in all events remain liable).
(m) Notification. The Company shall notify the
Placement Agent immediately, and in writing, (A) when any event shall have
occurred during the period commencing on the date hereof and ending on the
Closing Date as a result of which the Offering Documents would include any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein not misleading
in light of the circumstances under which they were made and (B) of the receipt
of any notification with respect to the modification, rescission, withdrawal or
suspension of the qualification or registration of the Common Stock, or of any
exemption from such registration or qualification, in any jurisdiction. The
Company will use its best efforts to prevent the issuance of any such
modification, rescission, withdrawal or suspension and, if any such
modification, rescission, withdrawal or suspension is issued and the Placement
Agent so requests, to obtain the lifting thereof as promptly as possible.
(n) Blue Sky. The Company will use its best efforts to
qualify the Common Stock for offering and sale under exemptions from
qualification or registration requirements under the securities or "blue sky"
laws of such jurisdictions as the Placement Agent may reasonably request;
provided however, that the Company will not be obligated to qualify as a dealer
in securities in any jurisdiction in which it is not so qualified. The Company
will not consummate any sale of Common Stock in any jurisdiction in which it is
not so qualified or in any manner in which such sale may not be lawfully made.
(o) Press Releases, Etc. Except as otherwise required
by applicable law or the rules of the Nasdaq Stock Market or any other
regulatory body, the Company shall not, during
<PAGE> 24
Paramount Capital, Inc.
Page 24
the period commencing on the date hereof and ending 30 days after the Final
Closing Date, issue any press release or other communication, make any written
or oral statement to any media organization or publication or hold any press
conference, presentation or seminar, or engage in any other publicity with
respect to the Company, its financial condition, results of operations,
business, properties, assets, or liabilities, or the Offering, without the
prior written consent of the Placement Agent.
(p) Public Documents. Following the Closing of the
Offering, the Company will furnish to the Placement Agent: (i) as soon as
practicable (but in the case of the annual report of the Company to its
stockholders, within 120 days after the end of each fiscal year of the Company)
one copy of: (A) its annual report to its stockholders (which annual report
shall contain financial statements audited in accordance with generally
accepted accounting principles in the United States of America by a firm of
certified public accountants of recognized standing), (B) if not included in
substance in its annual report to stockholders, its annual report on Form 10-K,
(C) each of its quarterly reports to its stockholders, if any, and if not
included in substance in its quarterly reports to stockholders, its quarterly
report on Form 10-Q, (D) each of its current reports on Form 8-K, and (E) a
copy of the full Registration Statement, (the foregoing, in each case,
excluding exhibits); and (ii) upon reasonable request, all exhibits excluded by
the parenthetical to the immediately preceding clause 5(p)(i)(E) and any other
information that is generally available to the public.
(q) Company Insiders. Officers, directors or principal
stockholders of the Company may invest in the Offering.
(r) Placement Agent Insiders. Certain affiliates of
the Placement Agent may purchase Common Stock in the Offering. Affiliates of
the Placement Agent will invest net of cash commissions and expenses.
Accordingly, pursuant to the Escrow Agent, the Placement Agent will not receive
a commission on the Shares purchased by its affiliates and the Company will
receive net proceeds equivalent to the net proceeds received from the purchase
of Shares by persons not affiliated with the Placement Agent.
(s) No Offerings. Pending completion or termination of
the Offering in accordance with the terms of this Agreement, the Company agrees
that it will not enter into an agreement (whether binding or not) with any
other person or entity relating to a possible public or private offering or
placement of its securities (other than in connection with a corporate
partnership, strategic alliance or government funding).
(t) Lock-Ups. The Placement Agent shall have
received from the officers, directors and 5% beneficial owners of the Company
an agreement that they will not, directly or indirectly, offer, sell or
otherwise dispose of any shares of Common Stock or any securities
<PAGE> 25
Paramount Capital, Inc.
Page 25
convertible into or exercisable for, or any rights to purchase or acquire,
Common Stock for a period of 180 days after the date that the Registration
Statement is filed with the Commission, without the prior written consent of
the Placement Agent.
(u) No Statements. The Company shall not use the name
of the Placement Agent or any officer, director, employee or shareholder
thereof without the express written consent of the Placement Agent, which
consent shall not be unreasonably withheld.
(v) Waiver of Registration Rights. The Company shall
cause all rights, whether by contract or otherwise, that any person has, to
require registration under the Act of shares of capital stock or other
securities of the Company because of the filing or effectiveness of the
Registration Statement or otherwise in connection with the sale of the Shares
contemplated hereby, to have been legally and effectively waived.
6. Indemnification.
(a) The Company agrees to indemnify and hold harmless
the Placement Agent and each Selected Agent, if any, and their respective
partners, affiliates, shareholders, directors, officers, agents, advisors,
representatives, employees, counsel and controlling persons within the meaning
of the Act (a "Paramount Indemnified Party") against any and all losses,
liabilities, claims, damages and expenses whatsoever (and all actions in
respect thereof), and to reimburse each such Paramount Indemnified Party for
legal fees and related expenses as incurred (including, but not limited to the
costs of giving testimony or furnishing documents in response to a subpoena or
otherwise, the costs of investigating, preparing, pursuing or defending any
such action or claim whether or not pending or threatened and whether or not
the Placement Agent or any Paramount Indemnified Party is a party thereto), in
so far as such losses, liabilities, claims, damages or expenses arise out of,
relate to, are incurred in connection with or are in any way a result of (i)
the engagement of the Placement Agent pursuant to this Agreement and in
connection with the transactions contemplated by this Agreement and the other
Offering Documents (the "Engagement"), including any modifications or future
additions to such Engagement and related activities prior to the date hereof,
(ii) any act by the Placement Agent or any Paramount Indemnified Party taken in
connection with the Engagement, (iii) a breach of any representation, warranty,
covenant, or agreement of the Company contained in this Agreement, (iv) the
employment by the Company of any device, scheme or artifice to defraud, or the
engaging by the Company in any act, practice or course of business which
operates or would operate as a fraud or deceit, or any conspiracy with respect
thereto, in connection with the sale of the Common Stock, or (v) any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement or Prospectus or the omission or alleged omission
therefrom of a material fact necessary in order to make the statements therein,
in light of the circumstances under which they were made, not misleading,
<PAGE> 26
Paramount Capital, Inc.
Page 26
provided, however, that the Company will not be liable in any such case if and
to the extent that any such loss, claim, damage, liability or expense arises
out of or is based upon an untrue statement or alleged untrue statement or
omission or alleged omission so made in conformity with information furnished
by any such Paramount Indemnified Party in writing specifically for use in
therein;
(b) The Company agrees to indemnify and hold harmless a
Paramount Indemnified Party to the same extent as the foregoing indemnity, and
subject to the limitations set forth therein, against any and all loss,
liability, claim, damage and expense whatsoever directly arising out of the
exercise by any person of any right under the Act or the Exchange Act or the
securities or Blue Sky laws of any state on account of violations of the
representations, warranties or agreements set forth in Section 3 hereof.
(c) The Placement Agent agrees to indemnify and hold
harmless the Company, the Company's directors, officers, employees, counsel,
advisors, representatives and agents and controlling persons within the meaning
of the Act (a "Company Indemnified Party") and each and all of them, to the
same extent as set forth in Section 6(a)(v) of the foregoing indemnity from the
Company to the Placement Agent, but only with reference to information,
relating to the Placement Agent, furnished in writing to the Company by the
Placement Agent specifically for inclusion in the Registration Statement and
only to the extent that any losses, claims, damages, and liabilities in respect
of which indemnification is claimed are finally judicially determined to have
resulted primarily and directly from the bad faith or gross negligence of the
Placement Agent.
(d) Promptly after receipt by a person entitled to
indemnification pursuant to subsection (a), (b), or (c) (an "indemnified
party") of this Section 6 of notice of the commencement of any action, the
indemnified party will, if a claim in respect thereof is to be made against a
person granting indemnification (an "indemnifying party") under this Section 6,
notify in writing the indemnifying party of the commencement thereof; but the
omission so to notify the indemnifying party will not relieve it from any
liability which it may have to the indemnified party otherwise than under this
Section 6. In case any such action is brought against an indemnified party,
and it notifies the indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate in, and, to the extent that
it may wish, jointly with any other indemnifying party similarly notified, to
assume the defense thereof, subject to the provisions herein stated, with
counsel reasonably satisfactory to the indemnified party, and after notice from
the indemnifying party to the indemnified party of its election so to assume
the defense thereof, the indemnifying party will not be liable to the
indemnified party for any legal or other expenses subsequently incurred by the
indemnified party in connection with the defense thereof other than reasonable
costs of investigation incurred at the request of the indemnifying party. The
indemnified party shall have the right to employ separate counsel in any such
action and to participate in the defense thereof, but the fees and expenses of
such counsel shall not be at the expense of the indemnifying party if the
<PAGE> 27
Paramount Capital, Inc.
Page 27
indemnifying party has assumed the defense of the action with counsel
reasonably satisfactory to the indemnified party; provided that the fees and
expenses of such counsel shall be at the expense of the indemnifying party if
(i) the employment of such counsel has been specifically authorized in writing
by the indemnifying party or (ii) the named parties to any such action
(including any impleaded parties) include both the indemnified party or parties
and the indemnifying party and, in the opinion of counsel of the indemnified
party, a conflict of interest exists between such parties in which case the
indemnifying party shall not have the right to assume the defense of such
action on behalf of the indemnified party or parties, it being understood,
however, that the indemnifying party shall not, in connection with any one such
action or separate but substantially similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances, be
liable for the reasonable fees and expenses of more than one separate firm of
attorneys for the indemnified party or parties. No settlement, compromise,
consent to entry of judgment or other termination of any action (collectively,
"Terminations") in respect of which a Paramount Indemnified Party may seek
indemnification hereunder (whether or not any Paramount Indemnified Party is a
party thereto) shall be made without the prior written consent of the Paramount
Indemnified Party, which such consent may be withheld at the sole discretion of
such Paramount Indemnified Party, provided, however, that the foregoing
requirement of prior written consent for Terminations shall not apply to the
Placement Agent who may agree to such Terminations without the prior written
consent of any Paramount Indemnified Party.
(e) Notwithstanding any of the provisions of this
Agreement, the aggregate indemnification or contribution of the Placement Agent
for or on account of any losses, claims, damages, liabilities or actions under
this Section 6, Section 7 or any other applicable section of this Agreement,
shall not exceed the Cash Commissions actually paid to the Placement Agent.
The respective indemnity and contribution agreements by the Company and the
Placement Agent contained in subsections (a), (b), (c) and (d) of this Section
6 and Section 7, and the covenants, representations and warranties of the
Company and the Placement Agent set forth in Sections 1, 2, 3, 4 and 5 shall
remain operative and in full force and effect regardless of (i) any
investigation made by the Placement Agent, on the Placement Agent's behalf or
by or on behalf of any person who controls the Placement Agent, the Company or
any controlling person of the Company or any director or officer of the
Company, (ii) acceptance of any of the Common Stock and payment therefor or
(iii) any termination of this Agreement, and shall survive the delivery of the
Common Stock, and any successor of the Placement Agent or of the Company or of
any person who controls the Placement Agent or the Company, as the case may be,
shall be entitled to the benefit of such respective indemnity and contribution
agreements. The respective indemnity and contribution agreements by the
Company and the Placement Agent contained in subsections (a), (b) and (c) of
this Section 6 and Section 7 shall be in addition to any liability which the
Company and the Placement Agent may otherwise have.
<PAGE> 28
Paramount Capital, Inc.
Page 28
7. Contribution.
(a) To provide for just and equitable contribution, if
(i) an indemnified party makes a claim for indemnification pursuant to Section
6 but it is found in a final judicial determination, by a court of competent
jurisdiction, not subject to further appeal, that such indemnification may not
be enforced in such case, even though this Agreement expressly provides for
indemnification in such case, or (ii) any indemnified or indemnifying party
seeks contribution under the Act, the Exchange Act, or otherwise, then the
Company (including for this purpose any contribution made by or on behalf of
any officer, director, employee or agent for the Company, or any controlling
person of the Company), on the one hand, and the Placement Agent and any
Selected Agents (including for this purpose any contribution by or on behalf of
an indemnified party), on the other hand, shall contribute to the losses,
liabilities, claims, damages, and expenses whatsoever to which any of them may
be subject, in such proportions as are appropriate to reflect the relative
benefits received by the Company, on the one hand, and the Placement Agent and
the Selected Agents, on the other hand; provided, however, that if applicable
law does not permit such allocation, then other relevant equitable
considerations such as the relative fault of the Company and the Placement
Agent and the Selected Agents in connection with the facts which resulted in
such losses, liabilities, claims, damages, and expenses shall also be
considered. In no case shall the Placement Agent or a Selected Agent be
responsible for a portion of the contribution obligation in excess of the
compensation received by it pursuant to Section 4 or 5 hereof or the Selected
Agent Agreement, as the case may be. No person guilty of a fraudulent
misrepresentation shall be entitled to contribution from any person who is not
guilty of such fraudulent misrepresentation. For purposes of this Section 7,
each person, if any, who controls the Placement Agent or a Selected Dealer
within the meaning of Section 15 of the Act or Section 20(a) of the Exchange
Act and each officer, director, stockholder, employee and agent of the
Placement Agent or a Selected Agent, shall have the same rights to contribution
as the Placement Agent or the Selected Agent, and each person, if any, who
controls the Company within the meaning of Section 15 of the Act or Section
20(a) of the Exchange Act and each officer, director, employee and agent of the
Company, shall have the same rights to contribution as the Company, subject in
each case to the provisions of this Section 7. Anything in this Section 7 to
the contrary notwithstanding, no party shall be liable for contribution with
respect to the settlement of any claim or action effected without its written
consent. This Section 7 is intended to supersede any right to contribution
under the Act, the Exchange Act, or otherwise.
8. Miscellaneous.
(a) Survival. Any termination of the Offering without
any Closing shall be without obligation on the part of any party except that
the provisions regarding fees and expenses contained in Sections 4(m) and 5(l),
the indemnification provided in Section 6 hereof and the
<PAGE> 29
Paramount Capital, Inc.
Page 29
contribution provided in Section 7 hereof shall survive any termination and
shall survive any Closing.
(b) Representations, Warranties and Covenants to
Survive Delivery. Except as provided in Section 8(a), the respective
representations, warranties, indemnities, agreements, covenants and other
statements of the Company and the Placement Agent as of the date hereof shall
survive execution of this Agreement and delivery of the Shares and the
termination of this Agreement.
(c) No Other Beneficiaries. This Agreement is intended
for the sole and exclusive benefit of the parties hereto and their respective
successors and controlling persons, and no other person, firm or corporation
shall have any third-party beneficiary or other rights hereunder.
(d) Governing Law. This Agreement shall be governed by
and construed in accordance with the law of the State of New York without
regard to conflict of law provisions.
(e) Counterparts. This Agreement may be signed in
counterparts with the same effect as if both parties had signed one and the
same instrument.
(f) Notices. Any communications specifically required
hereunder to be in writing, if sent to the Placement Agent, will be mailed,
delivered and confirmed to it at Paramount Capital, Inc., 787 Seventh Avenue,
48th Floor, New York, New York, 10019, Att: Michael S. Weiss and if sent to
the Company, will be mailed, delivered or telegraphed and confirmed to it at
Aronex Pharmaceuticals, Inc., 8707 Technology Forest Place, The Woodlands,
Texas 77381-1191, Attn: Chief Executive Officer.
(g) Termination. Subject to the general survival
provisions contained in Sections 8(a) and 8(b) and, in the event of a
termination by the Company, provided that the Company pays all accountable fees
and expenses of the Placemen Agent, this Agreement may be terminated by either
party prior to the end of the Offering Period upon written notice to the other
party.
(h) Entire Agreement. This Agreement constitutes the
entire agreement of the parties with respect to the matters herein referred and
supersedes all prior agreements and understandings, written and oral, between
the parties with respect to the subject matter hereof. Neither this Agreement
nor any term hereof may be changed, waived or terminated orally, but only by an
instrument in writing signed by the party against which enforcement of the
change, waiver or termination is sought.
<PAGE> 30
Paramount Capital, Inc.
Page 30
(i) Nothing contained herein or otherwise shall create
a partnership or joint venture between the Placement Agent and the Company.
(j) The headings and captions of the various
subdivisions of this Agreement are for convenience or reference only and shall
in no way modify or affect the meaning or construction of any of the terms or
provisions hereof.
<PAGE> 31
Paramount Capital, Inc.
Page 31
If you find the foregoing is in accordance with our
understanding, kindly sign and return to us a counterpart hereof, whereupon
this instrument along with all counterparts will become a binding agreement
between us.
Very truly yours,
ARONEX PHARMACEUTICALS, INC.
By:
-----------------------------
Name: Geoffrey Cox
Title: Chief Executive Officer
Agreed to by:
PARAMOUNT CAPITAL, INC.
By:
---------------------------------
Name: Lindsay A. Rosenwald, M.D.
Title: Chairman
<PAGE> 32
EXHIBIT A
ARONEX PHARMACEUTICALS, INC.
OFFICER'S CERTIFICATE
___________ __, 1999
I, Geoffrey F. Cox, certify that I am the Chairman of the Board
of Directors and Chief Executive Officer of Aronex Pharmaceuticals, Inc., a
Delaware corporation (the "Company"), and that, as such, I am authorized to
execute this certificate on behalf of the Company. All capitalized terms used
herein but not otherwise defined herein shall the meanings ascribed to such
terms in the Placement Agency Agreement (as defined below). Reference is made
herein to the closing held on _________ __, 1999 (the "Closing Date"). I do
hereby certify that I have carefully examined all of the Offering Documents (as
defined in the Placement Agency Agreement dated as of November __, 1998 between
the Company and Paramount Capital, Inc. (the "Placement Agency Agreement")),
and do hereby further certify that:
1. All of the representations and warranties of the Company
contained in the Placement Agency Agreement are true and correct in all
material respects on the Closing Date with the same force and effect as if made
on and as of the Closing Date, and the Company has performed in all material
respects all covenants and agreements and has satisfied all conditions in the
Placement Agency Agreement to be performed or satisfied on its part before the
Closing Date in all material respects.
2. Since the date of the most recent financial statements and
the information included in the Registration Statement, there has been no
material adverse change in the condition (financial or other), earnings,
business, properties or prospects of the Company taken as a whole, whether or
not arising from transactions in the ordinary course of business, nor has there
occurred any material event required to be set forth in the Registration
Statement, including, without limitation, in accordance with Section 3(g) of
the Placement Agency Agreement.
3. The Company has taken all action necessary to list (i) the
Shares and (ii) the Common Stock issuable upon exercise of the Placement
Warrants on the Nasdaq National Market in accordance with the rules of the
Nasdaq National Market.
This Certificate is made for the benefit of and may be relied
upon by, the Placement Agent, Kramer, Levin, Naftalis & Frankel, as counsel to
the Placement Agent, and each of the Purchasers.
A-i
<PAGE> 33
Paramount Capital, Inc.
Page ii
IN WITNESS WHEREOF, I have executed this certificate on this __
day of _________, 1999.
-------------------------------------
Name: Geoffrey F. Cox
Title: Chief Executive Officer
A-ii
<PAGE> 34
Paramount Capital, Inc.
Page iii
EXHIBIT B
ARONEX PHARMACEUTICALS, INC.
SECRETARY'S CERTIFICATE
__________ __, 1999
I, Terance A. Murnane, certify that I am the duly elected,
qualified and acting Secretary of Aronex Pharmaceuticals, Inc., Inc., a
Delaware corporation (the "Company"), and as such, I am duly authorized to
execute this Certificate on behalf of the Company, and that I am familiar with
the facts certified below. All capitalized terms used herein but not otherwise
defined herein shall the meanings ascribed to such terms in the Placement
Agency Agreement dated as of ________ __, 199_ between the Company and
Paramount Capital, Inc. (the "Placement Agency Agreement"). Reference is made
herein to the closing held on _________ __, 1999 (the "Closing Date"). In
connection with the offering and sale of a _________ shares of Common Stock
(the "Offering Quantity") of the Company, par value $.001 per share (the
"Common Stock"), pursuant to the registration statement on Form S-1 File No.
333-67599(the "Registration Statement"), for which Paramount Capital, Inc.
("Paramount") has acted as placement agent, I do hereby further certify as
follows:
1. Attached hereto as Attachment A is a true, correct and
complete copy of the Company's Certificate of Incorporation, as amended, which
is in full force and effect. No amendment to such certificate has been
approved by the Board of Directors or stockholders of the Company or filed with
the Delaware Secretary of State since ________ __, 1999. As of the Closing
Date, the Company is duly incorporated and in good standing in its state of
incorporation and has paid all fees and taxes due and payable by it on or prior
to the Closing Date necessary for the maintenance or continuation of its
corporate existence. As of the Closing Date, except as disclosed in the
Registration Statement, there are no proceedings or actions contemplated by the
Company, relating to the merger, liquidation, consolidation, or sale of all or
substantially all of the assets or business of the Company or which would
otherwise threaten or impair the Company's corporate existence.
2. Attached hereto as Attachment B is a true, correct and
complete copy of the By-laws of the Company, as in full force and effect on the
Closing Date and at all times from November 19, 1998 through the Closing Date.
3. As of the Closing Date, each of the Offering Documents is
in the form authorized by the board of directors of the Company pursuant to the
resolutions set forth in Attachment C.
A-i
<PAGE> 35
4. Attached hereto as Attachment D is a true, correct and
complete copy of resolutions duly adopted at meetings of the Company's board of
directors duly called and held on [DATE], which resolutions authorize the
issuance and sale of the Common Stock and the Placement Warrants in accordance
with the requirements of Delaware law, the Certificate and By-laws of the
Company, are the only resolutions in effect adopted by the board of directors
of the Company or any committee thereof with respect to the offering and sale
of the Common Stock and the transactions relating thereto, and which have not
been revoked, modified and amended or rescinded and are in full force and
effect on the Closing Date.
5. Attached hereto as Attachment E are true, correct and
complete copies of specimens of the certificates representing the Common Stock
heretofore approved and adopted by the board of directors of the Company. Each
of the certificates representing Common Stock delivered on the Closing Date to
each of the Purchasers pursuant to the Subscription Agreements has been
executed by the genuine or facsimile signature of officers of the Company who
have been duly elected or appointed, qualified and acting as such officers on
the date such certificates were executed and delivered, all in accordance with
the Certificate and By-laws of the Company and the requirements of applicable
law.
6. Attached hereto as Attachment F is a true, correct and
complete copy of the form of Placement Warrants heretofore approved and adopted
by the Board of Directors of the Company. Each of the Placement Warrants
delivered on the date hereof to each of the holders pursuant to the Placement
Agency Agreement has been executed by the genuine or facsimile signature of
officers of the Company who have been duly elected or appointed, qualified and
acting as such officers on the date such certificates were executed and
delivered, all in accordance with the Certificate and By-laws of the Company
and the requirements of applicable law.
7. The minute books and records of the Company, relating to
all proceedings of the stockholders, the Board of Directors of the Company and
the Compensation Committee, the Audit Committee and the Nominating Committee of
such Board have been made available to Kramer, Levin, Naftalis & Frankel,
counsel to Paramount, and, in such form, are the original minute books and
records of the Company. There have been no material changes, alterations or
additions in such minutes or records since their examination by Kramer, Levin,
Naftalis & Frankel on behalf of Paramount.
8. Each person who, as an officer or director of the Company,
signed any of the Offering Documents or any other document in connection with
the offering and sale of the Common Stock, the Placement Warrants and the
closing relating thereto was duly elected or appointed, qualified and acting as
such officer or director at the respective times of the signing and delivery
B-ii
<PAGE> 36
Paramount Capital, Inc.
Page iii
thereof and was duly authorized to sign such document on behalf of the Company,
and the signature of each such person appearing on each such document is the
genuine signature of such officer, director or person duly appointed for the
purpose of executing such documents under valid powers of attorney, and each
individual who signed such signature pages, personally or by an attorney-in-
fact, was then duly elected, qualified and acting as an officer or director of
the Company as stated therein.
9. The following persons are, and have been at all times
since November __, 1998, duly qualified and acting officers of the Company,
duly elected or appointed to the offices set forth opposite their respective
names, and the signature opposite the name of each such officer is his or her,
or a facsimile of his or her, authentic signature, and the seal affixed hereto
is the duly adopted seal of the Company:
Name Office Signature
[ ] [ ] [ ]
This certificate is made for the benefit of, and may be relied
upon by, Paramount, Kramer, Levin, Naftalis & Frankel, as counsel to Paramount,
and each of the Purchasers.
IN WITNESS WHEREOF, I have hereunto set forth my hand this ____
day of _________, 1999.
[SEAL]
-------------------------------------
Name: Terance A. Murnane
Title: Secretary
B-iii
<PAGE> 37
I, Geoffrey F. Cox, Chief Executive Officer of the Company, do
hereby certify that Terance A. Murnane whose genuine signature appears above,
is, and has been at all times since November __, 1998, the duly elected or
appointed, qualified and acting Secretary of the Company.
IN WITNESS WHEREOF, I have hereunto set forth my hand this ___
day of _________, 1999.
-----------------------------------
Name: Geoffrey F. Cox
Title: Chief Executive Officer
B-iv
<PAGE> 1
EXHIBIT 1.2
Paramount Capital, Inc.
Page i
EXHIBIT C
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY STATE SECURITIES LAW. SUCH SECURITIES MAY NOT BE SOLD OR
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH SALE OR TRANSFER
IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SAID
ACT.
ARONEX PHARMACEUTICALS, INC.
WARRANT FOR THE PURCHASE OF SHARES OF
COMMON STOCK
No. CW- [ ] [ ] Shares
FOR VALUE RECEIVED, ARONEX PHARMACEUTICALS, INC., a Delaware
corporation (the "COMPANY"), hereby certifies that [NAME], its designee or its
permitted assigns is entitled to purchase from the Company, at any time or from
time to time commencing on [INSERT DATE THAT IS ONE YEAR FROM THE EFFECTIVE
DATE] and prior to 5:00 P.M., New York City time, on [INSERT DATE THAT IS FIVE
YEARS FROM THE EFFECTIVE DATE], [INSERT NUMBER OF SHARES] (_______) fully paid
and non-assessable shares of common stock, $.001 par value per share, of the
Company for an aggregate purchase price of $_______. (Hereinafter, (i) said
common stock, $.001 par value per share, of the Company, is referred to as the
"COMMON STOCK", (ii) the shares of the Common Stock purchasable hereunder or
under any other Warrant (as hereinafter defined) are referred to as the
"WARRANT SHARES", (iii) the aggregate purchase price payable for the Warrant
Shares purchasable hereunder is referred to as the "AGGREGATE WARRANT PRICE",
(iv) the price payable (initially $______ per share, subject to adjustment) for
each of the Warrant Shares hereunder is referred to as the "PER SHARE WARRANT
PRICE", (v) this Warrant, all similar Warrants issued on the date hereof and
all warrants hereafter issued in exchange or substitution for this Warrant or
such similar Warrants are referred to as the "WARRANTS", (vi) the holder of
this Warrant is referred to as the "HOLDER" and the holder of this Warrant and
all other Warrants and Warrant Shares are referred to as the "HOLDERS" and
C-i
<PAGE> 2
Paramount Capital, Inc.
Page ii
Holders of more than fifty percent (50%) of the outstanding Warrants and
Warrant Shares are referred to as the "MAJORITY OF THE HOLDERS") and (vii) the
then Current Market Price per share of the Common Stock (the "CURRENT MARKET
PRICE") shall be deemed to be the last sale price of the Common Stock on the
trading day prior to such date or, in case no such reported sales take place on
such day, the average of the last reported bid and asked prices of the Common
Stock on such day, in either case on the principal national securities exchange
on which the Common Stock is admitted to trading or listed, or if not listed or
admitted to trading on any such exchange, the representative closing sale price
of the Common Stock as reported by the National Association of Securities
Dealers, Inc. Automated Quotations System ("NASDAQ"), or other similar
organization if NASDAQ is no longer reporting such information, or, if the
Common Stock is not reported on NASDAQ, the high per share sale price for the
Common Stock in the over-the-counter market as reported by the National
Quotation Bureau or similar organization, or if not so available, the fair
market value of the Common Stock as determined in good faith by the Board of
Directors. The Aggregate Warrant Price is not subject to adjustment. The Per
Share Warrant Price is subject to adjustment as hereinafter provided; in the
event of any such adjustment, the number of Warrant Shares deliverable upon
exercise of this Warrant shall be adjusted by dividing the Aggregate Warrant
Price by the Per Share Warrant Price in effect immediately after such
adjustment.
This Warrant, together with Warrants of like tenor, constituting
in the aggregate Warrants to purchase [INSERT NUMBER OF SHARES] Warrant Shares,
was originally issued pursuant to an agency agreement between the Company and
Paramount Capital, Inc., as placement agent (THE "PLACEMENT AGENT") in
connection with the offering (THE "OFFERING") of 4,500,000 shares (THE
"SHARES").
1. EXERCISE OF WARRANT.
(a) This Warrant may be exercised in whole at any time, or in
part from time to time, commencing on [INSERT DATE THAT IS 12 MONTHS FROM THE
EFFECTIVE DATE] and prior to 5:00 P.M., New York City time, on [INSERT DATE
THAT IS FIVE YEARS FROM THE EFFECTIVE DATE] by the Holder:
(i) by the surrender of this Warrant (with the
subscription form at the end hereof duly executed) at the address set forth in
Section 10(a) hereof, together with proper payment of the Aggregate Warrant
Price, or the proportionate part thereof if this Warrant is exercised in part,
with payment for the Warrant Shares made by certified or official bank check
payable to the order of the Company; or
(ii) by the surrender of this Warrant (with the cashless
exercise form at the end hereof duly executed) (a "CASHLESS EXERCISE") at the
address set forth in Section 10(a)
C-ii
<PAGE> 3
Paramount Capital, Inc.
Page iii
hereof. Such presentation and surrender shall be deemed a waiver of the
Holder's obligation to pay the Aggregate Warrant Price, or the proportionate
part thereof if this Warrant is exercised in part. In the event of a Cashless
Exercise, the Holder shall exchange its Warrant for that number of Warrant
Shares subject to such Cashless Exercise multiplied by a fraction, the
numerator of which shall be the difference between the then Current Market
Price and the Per Share Warrant Price, and the denominator of which shall be
the then Current Market Price. For purposes of any computation under this
Section 1(a), the then Current Market Price shall be based on the trading day
prior to the Cashless Exercise.
(b) If this Warrant is exercised in part, this Warrant must be
exercised for a number of whole shares of the Common Stock and the Holder is
entitled to receive a new Warrant covering the Warrant Shares that have not
been exercised and setting forth the proportionate part of the Aggregate
Warrant Price applicable to such Warrant Shares. Upon surrender of this
Warrant, the Company will (i) issue a certificate or certificates in the name
of the Holder for the largest number of whole shares of the Common Stock to
which the Holder shall be entitled and, if this Warrant is exercised in whole,
in lieu of any fractional share of the Common Stock to which the Holder shall
be entitled, pay to the Holder cash in an amount equal to the fair value of
such fractional share (determined in such reasonable manner as the Board of
Directors of the Company shall determine), and (ii) deliver the other
securities and properties receivable upon the exercise of this Warrant, or the
proportionate part thereof if this Warrant is exercised in part, pursuant to
the provisions of this Warrant.
2. RESERVATION OF WARRANT SHARES; LISTING.
The Company agrees that, prior to the expiration of this Warrant,
the Company shall at all times have authorized and in reserve, and shall keep
available, solely for issuance and delivery upon the exercise of this Warrant,
the shares of the Common Stock and other securities and properties as from time
to time shall be receivable upon the exercise of this Warrant, free and clear
of all restrictions on sale or transfer, other than under Federal or state
securities laws, and free and clear of all preemptive rights and rights of
first refusal and use its best efforts to keep the Warrant Shares authorized
for listing on the Nasdaq National Market or, if the Common Stock is no longer
traded there, the Nasdaq SmallCap Market, any national securities exchange, or
other trading market on which the Common Stock trades, upon notice of issuance.
3. PROTECTION AGAINST DILUTION.
(a) If, at any time or from time to time after the date of
this Warrant, the Company shall (i) subdivide its outstanding shares of Common
Stock into a greater number of shares or (ii) combine its outstanding shares of
Common Stock into a smaller number of shares, the Per
C-iii
<PAGE> 4
Paramount Capital, Inc.
Page iv
Share Warrant Price shall be adjusted to be equal to a fraction, the numerator
of which shall be the Aggregate Warrant Price and the denominator of which
shall be the number of shares of Common Stock or other capital stock of the
Company that the Holder would have owned immediately following such action had
such Warrant been exercised immediately prior thereto. An adjustment made
pursuant to this Subsection 3(a) shall become effective immediately after the
record date in the case of a dividend or distribution, and shall become
effective immediately after the effective date in the case of a subdivision,
combination or reclassification.
(b) In case of any capital reorganization or reclassification,
or any consolidation or merger to which the Company is a party other than a
merger or consolidation in which the Company is the continuing corporation, or
in case of any sale or conveyance to another entity of the property of the
Company as an entirety or substantially as a entirety, or in the case of any
statutory exchange of securities with another corporation (including any
exchange effected in connection with a merger of a third corporation into the
Company), the Holder of this Warrant shall have the right thereafter to receive
on the exercise of this Warrant the kind and amount of securities, cash or
other property which the Holder would have owned or have been entitled to
receive immediately after such reorganization, reclassification, consolidation,
merger, statutory exchange, sale or conveyance had this Warrant been exercised
immediately prior to the effective date of such reorganization,
reclassification, consolidation, merger, statutory exchange, sale or conveyance
and in any such case, if necessary, appropriate adjustment shall be made in the
application of the provisions set forth in this Section 3 with respect to the
rights and interests thereafter of the Holder of this Warrant to the end that
the provisions set forth in this Section 3 shall thereafter correspondingly be
made applicable, as nearly as may reasonably be, in relation to any shares of
stock or other securities or property thereafter deliverable on the exercise of
this Warrant. The above provisions of this Section 3(b) shall similarly apply
to successive reorganizations, reclassifications, consolidations, mergers,
statutory exchanges, sales or conveyances. The Company shall require the
issuer of any shares of stock or other securities or property thereafter
deliverable on the exercise of this Warrant to be responsible for all of the
agreements and obligations of the Company hereunder. Notice of any such
reorganization, reclassification, consolidation, merger, statutory exchange,
sale or conveyance and of said provisions so proposed to be made, shall be
mailed to the Holders of the Warrants not less than twenty (20) days prior to
such event. A sale of all or substantially all of the assets of the Company
for a consideration consisting primarily of securities shall be deemed a
consolidation or merger for the foregoing purposes.
(c) Whenever the Per Share Warrant Price is adjusted as
provided in this Section 3 and upon any modification of the rights of a Holder
of Warrants in accordance with this Section 3, the Company shall promptly
prepare a brief statement of the facts requiring such adjustment or
modification and the manner of computing the same and cause copies of such
certificate to be mailed to the Holders of the Warrants. The Company may, but
shall not be obligated to unless requested
C-iv
<PAGE> 5
Paramount Capital, Inc.
Page v
by a Majority of the Holders, obtain, at its expense, a certificate of a firm
of independent public accountants of recognized standing selected by the Board
of Directors (who may be the regular auditors of the Company) setting forth the
Per Share Warrant Price and the number of Warrant Shares in effect after such
adjustment or the effect of such modification, a brief statement of the facts
requiring such adjustment or modification and the manner of computing the same
and cause copies of such certificate to be mailed to the Holders of the
Warrants.
4. FULLY PAID STOCK; TAXES. The shares of the Common Stock
represented by each and every certificate for Warrant Shares delivered on the
exercise of this Warrant shall at the time of such delivery, be duly
authorized, validly issued and outstanding, fully paid and nonassessable, and
not subject to preemptive rights or rights of first refusal, and the Company
will take all such actions as may be necessary to assure that the par value, if
any, per share of the Common Stock is at all times equal to or less than the
then Per Share Warrant Price. The Company shall pay, when due and payable, any
and all Federal and state stamp, original issue or similar taxes which may be
payable in respect of the issue of any Warrant Share or any certificate thereof
to the extent required because of the issuance by the Company of such security.
5. REGISTRATION UNDER SECURITIES ACT OF 1933, AS AMENDED.
(a) As used in this Agreement, the following terms shall have the following
meanings:
(i) "Effective Date" shall mean the date on which the
registration statement filed in connection with the Offering was declared
effective by the SEC.
(ii) "Holders" shall mean the Subscribers and any Person
holding Registrable Securities to whom the rights under this Section 5 have
been transferred in accordance with Section 5(k) hereof.
(iii) "Person" shall mean any person, individual,
corporation, partnership, trust or other nongovernmental entity or any
governmental agency, court, authority or other body (whether foreign, federal,
state, local or otherwise).
(iv) The terms "register," "registered" and
"registration" refer to the registration effected by preparing and filing a
registration statement in compliance with the Act, and the declaration or
ordering of the effectiveness of such registration statement.
(v) "Registrable Securities" shall mean the shares of
Common Stock issuable upon exercise of the Warrants; provided, however, that
securities shall only be treated as Registrable Securities if and only for so
long as they (A) have not been disposed of pursuant to a registration statement
declared effective by the SEC, (B) have not been sold in a transaction exempt
C-v
<PAGE> 6
Paramount Capital, Inc.
Page vi
from the registration and prospectus delivery requirements of the Act so that
all transfer restrictions and restrictive legends with respect thereto are
removed upon the consummation of such sale or (C) are held by a Holder or a
permitted transferee pursuant to Section 5(k).
(vi) "Registration Expenses" shall mean all expenses
incurred by the Company in complying with Sections 5(b) and 5(c) hereof,
including, without limitation, all registration, qualification and filing fees,
printing expenses, escrow fees, fees and expenses of counsel for the Company,
blue sky fees and expenses and the expense of any special audits incident to or
required by any such registration (but excluding selling commissions, fees of
legal counsel for any Holder).
(vii) "Registration Period" shall have the meaning
ascribed to such term in Section 5(d).
(viii) "Securities Act" shall mean the Securities Act of
1933, as amended.
(ix) "SEC" shall mean the United States Securities and
Exchange Commission.
(x) "Selling Expenses" shall mean all underwriting
discounts and selling commissions applicable to the sale of Registrable
Securities and all fees and expenses of legal counsel for any Holder.
(xi) "Shelf Registration Statement" shall have the
meaning ascribed to such term in Section 5(b).
(b) Demand Registration Rights. At any time after the date
that is 12 months from the Effective Date, and continuing for a period of five
(5) years thereafter, a Majority of the Holders may demand that the Company (A)
file with the SEC a shelf registration statement under the Act (a "Shelf
Registration Statement") with respect to the Registrable Securities and use its
best efforts to have such Shelf Registration Statement declared effective by
the SEC and (B) use its best efforts to effect the registration, qualifications
or compliances (including, without limitation, the execution of any required
undertaking to file post-effective amendments, appropriate qualifications under
applicable blue sky or other state securities laws and appropriate compliance
with applicable securities laws, requirements or regulations) as may be so
reasonably requested and as would permit or facilitate the sale and
distribution of all Registrable Securities. Notwithstanding the foregoing, the
Company will not be obligated to enter into any underwriting agreement for the
sale of any of the Registrable Securities.
C-vi
<PAGE> 7
Paramount Capital, Inc.
Page vii
(c) Piggy-Back Registration Rights. (i) The Company
agrees that if, at any time, and from time to time, commencing on the date that
is nine (9) months from the Effective Date and ending on the date that is seven
years from the Effective Date, the Board of Directors of the Company shall
authorize the filing of a registration statement under the Securities Act
(other than the initial public offering of the Company's Common Stock or a
registration statement on Form S-8, Form S-4 or any other form that does not
include substantially the same information as would be required in a form for
the general registration of securities) in connection with the proposed offer
of any of its securities by it or any of its stockholders, the Company shall,
(A) promptly notify the Holder that such registration statement will be filed
and that the Registrable Securities will be included in such registration
statement at the Holder's request, (B) cause such registration statement to
cover all such Registrable Securities for which the Holder requests inclusion,
(C) use its reasonable best efforts to cause such registration statement to
become effective as soon as practicable and (D) take all other action necessary
under any Federal or state law or regulation of any governmental authority to
permit all such Registrable Securities to be sold or otherwise disposed of, and
will maintain such compliance with each such Federal and state law and
regulation of any governmental authority for the period necessary for the
Holder to effect the proposed sale or other disposition, but in no event
greater than nine (9) months.
(ii) Notwithstanding any other provision of this
Agreement, other than with respect to a registration statement filed pursuant
to Section 5(b), the Company may at any time, abandon or delay any registration
commenced by the Company. In the event of such an abandonment by the Company,
the Company shall not be required to continue registration of the Registrable
Securities requested by the Holder for inclusion and the Holder shall retain
the right to request inclusion of Registrable Securities in accordance with
Section 5(c)(i).
(d) Obligations. Whenever required under this Agreement to
include Registrable Securities in a Company registration statement, the Company
shall, as expeditiously as reasonably possible:
(i) use its best efforts to keep such registration, and
any qualification, exemption or compliance under state securities laws which
the Company determines to obtain, continuously effective until the Holders have
completed the distribution described in the registration statement relating
thereto or nine (9) months, whichever is longer. The period of time during
which the Company is required hereunder to keep the Registration Statement
effective is referred to herein as "the Registration Period." Notwithstanding
the foregoing, at the Company's election, the Company may cease to keep such
registration, qualification, exemption or compliance effective with respect to
any Registrable Securities, and the registration rights of a Holder shall
expire, at such time as the Holder may sell under Rule 144(k) under the Act (or
other exemption from registration
C-vii
<PAGE> 8
Paramount Capital, Inc.
Page viii
acceptable to the Company) in a three-month period all Registrable Securities
then held by such Holder; and
(ii) advise the Holders:
(A) when such registration statement or any
amendment thereto has been filed with the SEC and when such registration
statement or any post-effective amendment thereto has become effective;
(B) of any request by the SEC for amendments or
supplements to such registration statement or the prospectus included therein
or for additional information;
(C) of the issuance by the SEC of any stop order
suspending the effectiveness of such registration statement or the initiation
of any proceedings for such purpose;
(D) of the receipt by the Company of any
notification with respect to the suspension of the qualification of the
Registrable Securities included therein for sale in any jurisdiction or the
initiation or threatening of any proceeding for such purpose; and
(E) of the happening of any event that requires
the making of any changes in such registration statement or the prospectus so
that, as of such date, the statements therein are not misleading and do not
omit to state a material fact required to be stated therein or necessary to
make the statements therein (in the case of the prospectus, in the light of the
circumstances under which they were made) not misleading;
(iii) make every reasonable effort to obtain the
withdrawal of any order suspending the effectiveness of any Registration
Statement at the earliest possible time;
(iv) furnish to each Holder, without charge, at least
one copy of such registration statement and any post-effective amendment
thereto, including financial statements and schedules, and, if the Holder so
requests in writing, all exhibits (including those incorporated by reference)
in the form filed with the SEC;
(v) during the Registration Period, deliver to each
Holder, without charge, as many copies of the prospectus included in such
registration statement and any amendment or supplement thereto as such Holder
may reasonably request; and the Company consents to the use, consistent with
the provisions hereof, of the prospectus or any amendment or supplement thereto
by each of the selling Holders of Registrable Securities in connection with the
offering and sale of the Registrable Securities covered by the prospectus or
any amendment or supplement thereto. In
C-viii
<PAGE> 9
Paramount Capital, Inc.
Page ix
addition, upon the reasonable request of the Holder and subject in all cases to
confidentiality protections reasonably acceptable to the Company, the Company
will meet with a Holder of more than 10% of the Warrants or Warrant Shares, as
the case may be, or a representative thereof at the Company's headquarters to
discuss all information relevant for disclosure in such registration statement
covering the Registrable Securities, and will otherwise cooperate with any
Holder conducting an investigation for the purpose of reducing or eliminating
such Holder's exposure to liability under the Act, including the reasonable
production of information at the Company's headquarters;
(vi) during the Registration Period, deliver to each
Holder, without charge, (A) as soon as practicable (but in the case of the
annual report of the Company to its stockholders, within 120 days after the end
of each fiscal year of the Company) one copy of: (1) its annual report to its
stockholders, if any (which annual report shall contain financial statements
audited in accordance with generally accepted accounting principles in the
United States of America by a firm of certified public accountants of
recognized standing); (2) if not included in substance in its annual report to
stockholders, its annual report on Form 10-KSB (or similar form); (3) each of
its quarterly reports to its stockholders, and, if not included in substance in
its quarterly reports to stockholders, its quarterly report on Form 10-QSB (or
similar form), and (4) a copy of the full Registration Statement (the
foregoing, in each case, excluding exhibits); and (A) upon reasonable request,
all exhibits excluded by the parenthetical to the immediately preceding clause
(4), and all other information that is generally available to the public;
(vii) prior to any public offering of Registrable
Securities pursuant to any Registration Statement, register or qualify or
obtain an exemption for offer and sale under the securities or blue sky laws of
such jurisdictions as any such Holders reasonably request in writing, provided
that the Company shall not for any such purpose be required to qualify
generally to transact business as a foreign corporation in any jurisdiction
where it is not so qualified or to consent to general service of process in any
such jurisdiction, and do any and all other acts or things reasonably necessary
or advisable to enable the offer and sale in such jurisdictions of the
Registrable Securities covered by such registration statement;
(viii) cooperate with the Holders to facilitate the timely
preparation and delivery of certificates representing Registrable Securities to
be sold pursuant to any Registration Statement free of any restrictive legends
to the extent not required at such time and in such denominations and
registered in such names as Holders may request at least three (3) business
days prior to sales of Registrable Securities pursuant to such registration
statement;
(vix) upon the occurrence of any event contemplated by
Section 5(c)(i)(E) above, the Company shall promptly prepare a post-effective
amendment to such registration
C-ix
<PAGE> 10
Paramount Capital, Inc.
Page x
statement or a supplement to the related prospectus, or file any other required
document so that, as thereafter delivered to purchasers of the Registrable
Securities included therein, the prospectus will not include any untrue
statement of a material fact or omit to state any material fact necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading; and
(x) use its best efforts to comply with all applicable
rules and regulations of the SEC, and will make generally available to the
Holders not later than 45 days (or 90 days if the fiscal quarter is the fourth
fiscal quarter) after the end of its fiscal quarter in which the first
anniversary date of the effective date of such registration statement occurs,
an earnings statement satisfying the provisions of Section 11(a) of the Act.
(e) Furnish Information. It shall be a condition precedent to
the obligation of the Company to take any action pursuant to this Agreement
with respect to the Registrable Securities of any selling Holder that such
Holder shall furnish to the Company such information regarding the Holder, the
Registrable Securities held by the Holder, and the intended method of
disposition of such securities as shall be reasonably required by the Company
to effect the registration of such Holder's Registrable Securities.
(f) Expenses of Company Registration. The Company shall bear
and pay all Registration Expenses incurred in connection with any registration,
filing or qualification of Registrable Securities with respect to the
registrations pursuant to Sections 5(b) and/or 5(c) for each Holder relating or
apportionable thereto, but excluding Selling Expenses. Notwithstanding the
foregoing, each Holder shall pay all registration expenses that such Holder is
required to pay under applicable law.
(g) Underwriting Requirements. In connection with any
offering involving an underwriting of shares of the Company's capital stock,
the Company shall not be required under Section 5(c) to include any Holder's
Registrable Securities in such underwriting unless such Holder accepts the
terms of the underwriting as agreed upon between the Company and the
underwriters selected by it (or by other persons entitled to select the
underwriters), and then only in such quantity as the underwriters determine in
their sole discretion will not jeopardize the success of the offering by the
Company. If the total amount of securities, including Registrable Securities,
requested by stockholders to be included in such offering exceeds the amount of
securities sold other than by the Company that the underwriters determine in
their sole discretion is compatible with the success of the offering, then the
Company shall be required to include in the offering only that number of such
securities, including Registrable Securities, which the underwriters determine
in their sole discretion will not jeopardize the success of the offering (the
securities so included to be apportioned pro rata among the selling
stockholders according to the total amount of securities entitled to be
included
C-x
<PAGE> 11
Paramount Capital, Inc.
Page xi
therein owned by each selling stockholder or in such other proportions as shall
mutually be agreed to by such selling stockholders). For purposes of the
preceding parenthetical concerning apportionment, for any selling stockholder
who is a holder of Registrable Securities and is a partnership or corporation,
the partners, retired partners and stockholders of such holder, or the estates
and family members of any such partners and retired partners and any trusts for
the benefit of any of the foregoing persons shall be deemed to be a single
"selling stockholder", and any pro-rata reduction with respect to such "selling
stockholder" shall be based upon the aggregate amount of shares carrying
registration rights owned by all entities and individuals included in such
"selling stockholder", as defined in this sentence.
(h) Delay of Registration. No Holder shall have any right to
obtain or seek an injunction restraining or otherwise delaying any such
registration as the result of any controversy that might arise with respect to
the interpretation or implementation of this Agreement.
(i) Indemnification. In the event that any Registrable
Securities are included in a registration statement under this Agreement:
(i) To the extent permitted by law, the Company will
indemnify and hold harmless each Holder, any underwriter (as defined in the
Securities Act) for such Holder and each person, if any, who controls such
Holder or underwriter within the meaning of the Securities Act or the Exchange
Act, against any losses, claims, damages, or liabilities (joint or several) to
which they may become subject under the Securities Act, or the Exchange Act,
insofar as such losses, claims, damages, or liabilities (or actions in respect
thereof) arise out of or are based upon any of the following statements,
omissions or violations (collectively a "Violation"): (A) any untrue statement
or alleged untrue statement of a material fact contained in such registration
statement, including any preliminary prospectus or final prospectus contained
therein or any amendments or supplements thereto, (B) the omission or alleged
omission to state therein a material fact required to be stated therein, or
necessary to make the statements therein not misleading, or (C) any violation
or alleged violation by the Company of the Securities Act, the Exchange Act, or
any rule or regulation promulgated under the Securities Act, or the Exchange
Act, and the Company will pay to each such Holder, underwriter or controlling
person, as incurred, any legal or other expenses reasonably incurred by them in
connection with investigating or defending any such loss, claim, damage,
liability, or action; provided, however, that the indemnity agreement contained
in this Section 5(i) shall not apply to amounts paid in settlement of any such
loss, claim, damage, liability, or action if such settlement is effected
without the consent of the Company (which consent shall not be unreasonably
withheld), nor shall the Company be liable in any such case for any such loss,
claim, damage, liability, or action to the extent that it arises out of or is
based upon a Violation which occurs in reliance upon and in conformity with
written information furnished expressly for use in connection with such
registration by any such Holder, underwriter or controlling person.
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<PAGE> 12
Paramount Capital, Inc.
Page xii
(ii) To the extent permitted by law, each selling Holder
will indemnify and hold harmless the Company, each of its directors, each of
its officers who has signed the registration statement, each person, if any,
who controls the Company within the meaning of the Securities Act, any
underwriter, any other Holder selling securities in such registration statement
and any controlling person of any such underwriter or other Holder, against any
losses, claims, damages, or liabilities (joint or several) to which any of the
foregoing persons may become subject, under the Securities Act, or the Exchange
Act, insofar as such losses, claims, damages, or liabilities (or actions in
respect thereto) arise out of or are based upon any Violation, in each case to
the extent (and only to the extent) that such Violation occurs in reliance upon
and in conformity with written information furnished by such Holder expressly
for use in connection with such registration; and each such Holder will pay, as
incurred, any legal or other expenses reasonably incurred by any person
intended to be indemnified pursuant to this Section 5(i), in connection with
investigating or defending any such loss, claim, damage, liability, or action;
provided, however, that the indemnity agreement contained in this Section 5(i)
shall not apply to amounts paid in settlement of any such loss, claim, damage,
liability or action if such settlement is effected without the consent of the
Holder, which consent shall not be unreasonably withheld; provided, that, in no
event shall any indemnity under this Section 5(i) exceed the gross proceeds
from the offering received by such Holder.
(iii) Promptly after receipt by an indemnified party
under this Section 5 of notice of the commencement of any action (including any
governmental action), such indemnified party shall, if a claim in respect
thereof is to be made against any indemnifying party under this Section 5,
deliver to the indemnifying party a written notice of the commencement thereof
and the indemnifying party shall have the right to participate in, and, to the
extent the indemnifying party so desires, jointly with any other indemnifying
party similarly notified, to assume the defense thereof with counsel selected
by the indemnifying party and approved by the indemnified party (whose approval
shall not be unreasonably withheld); provided, however, that an indemnified
party (together with all other indemnified parties which may be represented
without conflict by one counsel) shall have the right to retain one separate
counsel, with the fees and expenses to be paid by the indemnifying party, if
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential differing
interests between such indemnified party and any other party represented by
such counsel in such proceeding. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action, if prejudicial to its ability to defend such action, shall relieve such
indemnifying party of any liability to the indemnified party under this Section
5, but the omission so to deliver written notice to the indemnifying party will
not relieve it of any liability that it may have to any indemnified party
otherwise than under this Section 5.
(iv) If the indemnification provided for in this Section
5 is held by a court of competent jurisdiction to be unavailable to an
indemnified party with respect to any loss, liability,
C-xii
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Paramount Capital, Inc.
Page xiii
claim, damage, or expense referred to therein, then the indemnifying party, in
lieu of indemnifying such indemnified party hereunder, shall contribute to the
amount paid or payable by such indemnified party as a result of such loss,
liability, claim, damage, or expense in such proportion as is appropriate to
reflect the relative fault of the indemnifying party on the one hand and of the
indemnified party on the other in connection with the statements or omissions
that resulted in such loss, liability, claim, damage, or expense as well as any
other relevant equitable considerations. The relative fault of the
indemnifying party and of the indemnified party shall be determined by
reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission to state a material fact relates
to information supplied by the indemnifying party or by the indemnified party
and the parties' relative intent, knowledge, access to information, and
opportunity to correct or prevent such statement or omission.
(v) Notwithstanding the foregoing, to the extent that
the provisions on indemnification and contribution contained in the
underwriting agreement entered into in connection with the underwritten public
offering are in conflict with the foregoing provisions, the provisions in the
underwriting agreement shall control.
(vi) The obligations of the Company and Holders under
this Section 5 shall survive the completion of any offering of Registrable
Securities in a registration statement under this Agreement, and otherwise.
(j) Reports Under Exchange Act. With a view to making
available to the Holders the benefits of Rule 144 and any other rule or
regulation of the SEC that may at any time permit a Holder to sell securities
of the Company to the public without registration or pursuant to a registration
on Form S-3, the Company agrees to:
(i) make and keep public information available, as
those terms are understood and defined in Rule 144, at all times;
(ii) file with the SEC in a timely manner all reports
and other documents required of the Company under the Securities Act and the
Exchange Act; and
(iii) furnish to any Holder, so long as the Holder owns
any Registrable Securities, forthwith upon request (A) a copy of the most
recent annual or quarterly report of the Company and such other reports and
documents so filed by the Company, and (B) such other information as may be
reasonably requested in availing any Holder of any rule or regulation of the
SEC which permits the selling of any such securities without registration or
pursuant to such form.
C-xiii
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Paramount Capital, Inc.
Page xiv
(k) Permitted Transferees. The rights to cause the Company to
register Registrable Securities granted to the Holders by the Company under
this Agreement may be assigned in full by a Holder in connection with a
transfer by such Holder of its Registrable Securities if: (i) such Holder gives
prior written notice to the Company; (ii) such transferee agrees to comply with
the terms and provisions of this Agreement; (iii) such transfer is otherwise in
compliance with this Agreement and (iv) such transfer is otherwise be effected
in accordance with applicable securities laws. Except as specifically
permitted by this Section 5(k), the rights of a Holder with respect to
Registrable Securities as set out herein shall not be transferable to any other
Person, and any attempted transfer shall cause all rights of such Holder
therein to be forfeited.
(l) Termination of Registration Rights. In addition, the right
of any Holder to request inclusion in any registration pursuant to Sections 5(b)
and 5(c) shall terminate if all shares of Registrable Securities held by such
Holder may immediately be sold under Rule 144.
7. INVESTMENT INTENT; LIMITED TRANSFERABILITY.
(a) The Holder represents, by accepting this Warrant, that it
understands that this Warrant and any securities obtainable upon exercise of
this Warrant have not been registered for sale under Federal or state
securities laws and are being offered and sold to the Holder pursuant to one or
more exemptions from the registration requirements of such securities laws. In
the absence of an effective registration of such securities or an exemption
therefrom, any certificates for such securities shall bear the legend set forth
on the first page hereof. The Holder understands that it must bear the
economic risk of its investment in this Warrant and any securities obtainable
upon exercise of this Warrant for an indefinite period of time, as this Warrant
and such securities have not been registered under Federal or state securities
laws and therefore cannot be sold unless subsequently registered under such
laws, unless an exemption from such registration is available.
(b) The Holder, by its acceptance of this Warrant, represents to
the Company that it is acquiring this Warrant and will acquire any securities
obtainable upon exercise of this Warrant for its own account for investment and
not with a view to, or for sale in connection with, any distribution thereof in
violation of the Securities Act of 1933, as amended (the "Act"). The Holder
agrees that this Warrant and any such securities will not be sold or otherwise
transferred unless (i) a registration statement with respect to such transfer
is effective under the Act and any applicable state securities laws or (ii)
such sale or transfer is made pursuant to one or more exemptions from the Act.
(c) This Warrant may not be sold, transferred, assigned or
hypothecated for 12 months from the Effective Date except (i) to any firm or
corporation that succeeds to all or substantially all of the business of
Paramount Capital, Inc., (ii) to any of the officers of Paramount
C-xiv
<PAGE> 15
Paramount Capital, Inc.
Page xv
Capital, Inc., or of any such successor firm, (iii) to any NASD member
participating in the Offering or any officer of any such NASD member or (iv) in
the case of an individual, pursuant to such individual's last will and
testament or the laws of descent and distribution, and is so transferable only
upon the books of the Company, which the Company shall cause to be maintained
for such purpose. The Company may treat the registered Holder of this Warrant
as it appears on the Company's books at any time as the Holder for all
purposes. The Company shall permit any Holder of a Warrant or its duly
authorized attorney, upon written request during ordinary business hours, to
inspect and copy or make extracts from its books showing the registered Holders
of Warrant. All Warrants issued upon the transfer or assignment of this
Warrant will be dated the same date as this Warrant, and all rights of the
holder thereof shall be identical to those of the Holder.
8. LOSS, ETC., OF WARRANT. Upon receipt of evidence
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant, and of indemnity reasonably satisfactory to the Company, if lost,
stolen or destroyed, and upon surrender and cancellation of this Warrant, if
mutilated, the Company shall execute and deliver to the Holder a new Warrant of
like date, tenor and denomination.
9. WARRANT HOLDER NOT STOCKHOLDER. This Warrant does not
confer upon the Holder any right to vote on or consent to or receive notice as
a stockholder of the Company, as such, in respect of any matters whatsoever,
nor any other rights or liabilities as a stockholder, prior to the exercise
hereof; this Warrant does, however, require certain notices to Holders as set
forth herein.
10. COMMUNICATION. No notice or other communication under
this Warrant shall be effective unless, but any notice or other communication
shall be effective and shall be deemed to have been given if, the same is in
writing and is mailed by first-class mail, postage prepaid, addressed to:
(a) the Company at 8707 Technology Forest Place, The
Woodlands, Texas 77381-1191, Attn: CEO or such other address as the
Company has designated in writing to the Holder, or
(b) the Holder at c/o Paramount Capital, Inc., 787 Seventh
Avenue, New York, NY 10019 or other such address as the Holder has
designated in writing to the Company.
11. HEADINGS. The headings of this Warrant have been inserted
as a matter of convenience and shall not affect the construction hereof.
C-xv
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Paramount Capital, Inc.
Page xvi
12. APPLICABLE LAW. This Warrant shall be governed by and
construed in accordance with the law of the State of New York without giving
effect to the principles of conflicts of law thereof.
13. AMENDMENT, WAIVER, ETC. Except as expressly provided
herein, neither this Warrant nor any term hereof may be amended, waived,
discharged or terminated other than by a written instrument signed by the party
against whom enforcement of any such amendment, waiver, discharge or
termination is sought; provided, however, that any provisions hereof may be
amended, waived, discharged or terminated upon the written consent of the
Company and the Majority of the Holders.
C-xvi
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Paramount Capital, Inc.
Page xvii
IN WITNESS WHEREOF, the Company has caused this Warrant to be
signed by its President and has caused its corporate seal to be hereunto
affixed and attested by its Secretary this __TH day of __________, 1999.
ARONEX PHARMACEUTICALS, INC.
By:
-----------------------------------
Name: Geoffrey Cox
Title: Chief Executive Officer and
Chairman of the Board of Directors
ATTEST:
- -----------------------------
Secretary
[Corporate Seal]
C-xvii
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Paramount Capital, Inc.
Page xviii
SUBSCRIPTION (CASH)
The undersigned, ___________________, pursuant to the provisions
of the foregoing Warrant, hereby agrees to subscribe for and purchase
____________________ shares of the Common Stock, par value $.001 per share, of
Aronex Pharmaceuticals, Inc. covered by said Warrant, and makes payment
therefor in full at the price per share provided by said Warrant.
Dated: Signature:
--------------- -------------------------
Address:
---------------------------
CASHLESS EXERCISE
The undersigned ___________________, pursuant to the provisions
of the foregoing Warrant, hereby elects to exchange its Warrant for
___________________ shares of Common Stock, par value $.001 per share, of
Aronex Pharmaceuticals, Inc. pursuant to the Cashless Exercise provisions of
the Warrant.
Dated: Signature:
--------------- -------------------------
Address:
---------------------------
ASSIGNMENT
FOR VALUE RECEIVED _______________ hereby sells, assigns and
transfers unto ____________________ the foregoing Warrant and all rights
evidenced thereby, and does irrevocably constitute and appoint
_____________________, attorney, to transfer said Warrant on the books of
Aronex Pharmaceuticals, Inc.
Dated: Signature:
--------------- -------------------------
Address:
---------------------------
C-xviii
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Paramount Capital, Inc.
Page xix
PARTIAL ASSIGNMENT
FOR VALUE RECEIVED _______________ hereby assigns and transfers
unto ____________________ the right to purchase _______ shares of Common Stock,
par value $.001 per share, of Aronex Pharmaceuticals, Inc. covered by the
foregoing Warrant, and a proportionate part of said Warrant and the rights
evidenced thereby, and does irrevocably constitute and appoint
____________________, attorney, to transfer such part of said Warrant on the
books of Aronex Pharmaceuticals, Inc.
Dated: Signature:
--------------- -------------------------
Address:
---------------------------
C-xix
<PAGE> 1
EXHIBIT 5.1
January __, 1999
Aronex Pharmaceuticals, Inc.
8707 Technology Forest Place
The Woodlands, Texas 77381-1191
Gentlemen:
We have acted as counsel to Aronex Pharmaceuticals, Inc., a Delaware
corporation (the "Company"), in connection with the registration under its
Registration Statement on Form S-1 (No. 333- 67599) (the "Registration
Statement"), filed by the Company under the Securities Act of 1933, as amended
(the "Securities Act"), with respect to the offering and sale by the Company of
up to an aggregate of 4,500,000 shares of common stock, par value $.001 per
share (the "Common Stock").
We have examined originals or copies of (i) the Certificate of
Incorporation of the Company, as amended; (ii) the Bylaws of the Company, as
amended; (iii) certain resolutions of the Board of Directors and the
stockholders of the Company; and (iv) such other documents and records as we
have deemed necessary and relevant for purposes hereof. We have relied upon
certificates of public officials and officers of the Company as to certain
matters of fact relating to this opinion and have made such investigations of
law as we have deemed necessary and relevant as a basis hereof. We have not
independently verified any factual matter relating to this opinion.
We have assumed the genuineness of all signatures, the authenticity of
all documents, certificates and records submitted to us as copies, and the
conformity to original documents, certificates and records of all documents,
certificates and records submitted to us as copies.
Based upon the foregoing, and subject to the limitations and
assumptions set forth herein, and having due regard for such legal
considerations as we deem relevant, we are of the opinion that:
<PAGE> 2
Aronex Pharmaceuticals, Inc.
January __, 1999
Page 2
1. The Company is a corporation duly incorporated, validly existing,
and in good standing under the laws of the State of Delaware.
2. The issuance of the Common Stock has been duly authorized, and when
issued and delivered by the Company against payment therefor as described in the
Registration Statement, such shares will be validly issued, fully paid, and
nonassessable.
The foregoing opinion is based on and is limited to the General
Corporation Law of the State of Delaware and the relevant federal laws of the
United States of America, and we render no opinion with respect to the laws of
any other jurisdiction.
We hereby consent to the filing of this opinion with the Securities and
Exchange Commission as Exhibit 5.1 to the Registration Statement and to the
reference to this firm under the caption "Legal Matters" in the prospectus
contained in the Registration Statement. By giving such consent, we do not admit
that we are included within the category of persons whose consent is required
under Section 7 of the Securities Act or the rules and regulations issued
thereunder.
Very truly yours,
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report and to all references to our Firm included in or made a part of this
Registration.
ARTHUR ANDERSEN LLP
Houston, Texas
January 22, 1999
