<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON ___________, 1997
REGISTRATION NO. 333-20511
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------
AMENDMENT NO. 1 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
ANTIVIRALS INC.
(Name of small business issuer as specified in its charter)
<TABLE>
<CAPTION>
<S><C>
OREGON 2834 93-0797222
(State or other jurisdiction of (Primary Standard (IRS Employer Identification Number)
incorporation or organization) Industrial Classification
Code Number)
</TABLE>
ONE SW COLUMBIA, SUITE 1105
PORTLAND, OREGON 97201
(503) 227-0554
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
DENIS R. BURGER, PH.D.
CHIEF EXECUTIVE OFFICER
ANTIVIRALS INC.
ONE S.W. COLUMBIA, SUITE 1105
PORTLAND, OREGON 97258
(503) 227-0554
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
- --------------------------------------------------------------------------------
ANTI-GENE DEVELOPMENT GROUP
(Name of small business issuer as specified in its charter)
<TABLE>
<CAPTION>
<S><C>
OREGON 2834 93-0797108
(State or other jurisdiction of (Primary Standard (IRS Employer Identification Number)
incorporation or organization) Industrial Classification
Code Number)
</TABLE>
3107 NW NORWOOD PLACE
CORWALLIS, OREGON 97330
(541) 753-3133
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
JAMES E. SUMMERTON, PH.D.
GENERAL PARTNER
ANTI-GENE DEVELOPMENT GROUP
3107 NW NORWOOD PLACE
CORWALLIS, OREGON 97330
(541) 753-3133
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
--------------------
Copies to:
JACK W. SCHIFFERDECKER, JR., ESQ.
BYRON W. MILSTEAD, ESQ.
ATER WYNNE HEWITT DODSON & SKERRITT LLP
222 SW COLUMBIA, SUITE 1800
PORTLAND, OREGON 97201
TELEPHONE: (503) 226-1191
--------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after this Registration Statement becomes effective.
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 delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. 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, check the following. /x/
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
Proposed
Proposed maximum Amount of
Title of each class of Amount to be maximum aggregate registration
securities to be registered offering price offering fee
registered per share price
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stock(1) 667,436 (2) $ 3,121,965 $ 946.05
Common Stock(3) 625,537 (4) 2,852,449 864.38
Common Stock(5) 3,569,030 (6) 21,414,180 6,489.15
Promissory Notes 3,750,965 $1.00 3,750,965 1,136.66
Limited Partnership Units(7) 568.67 (8) 2,852,449 864.38
Total $ 33,992,008 $ 10,300.62
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Represents shares of Common Stock underlying a right to rescind being
offered to certain purchasers of Common Stock of the Company.
(2) The shares of Common Stock that are subject to the rescission offer were
sold at prices ranging from $4.56 to $4.95 per share.
(3) Represents shares of Common Stock underlying a right to rescind being
offered to certain persons who exchanged units of limited partnership
interest in the Anti-Gene Development Group at a ratio of 1100:1 on
April 29, 1993.
(4) The shares of Common Stock have been valued at $4.56 per share based on the
Company's sale of shares of Common Stock for $4.56 per share on April 29,
1993, contemporaneous with its exchange offering.
(5) Represents shares of Common Stock to be pledged by certain officers,
directors and principal shareholders of the Company to secure the
Company's payment of the Promissory Notes.
(6) The shares of Common Stock to be pledged have been valued at $6.00 per
share based upon the initial value established for such shares in the
Pledge Agreement.
(7) Represents units of limited partnership interst in the Anti-Gene
Development Group which may be issued to certain persons who exchanged
units of limited partnership interest in the Anti-Gene Development Group
at a ratio 1:1100 for shares of the Company's Common Stock on April 29,
1993.
(8) The units of limited partnership interest have been valued at $5,016 per
unit based on the exchange ratio and the Company's sale of shares of
Common Stock for $4.56 per share on April 29, 1993, contemporaneous with
the exchange offering.
The Company has filed a registration statement on Form SB-2 with the
Securities and Exchange Commission in connection with a proposed offering of
1,500,000 units (the "Unit Offering"), each consisting of one share of the
Company's Common Stock and one warrant to purchase one share of the Company's
Common Stock. Under the terms of the underwriting agreement between the
Company and Paulson Investment Company, Inc., underwriter of the Unit
Offering, the Unit Offering is conditioned on the Company's making this
Rescission Offer. The Company does not presently intend that the
registration statement filed by the Company in connection with the Unit
Offering be declared effective until the Company has completed this
Rescission Offer. There can be no assurance that the Unit Offering will be
successfully undertaken or that a public market for the Company's Common
Stock will thereafter develop, if at all, at prices equal to or exceeding the
amounts offered to offerees hereunder.
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 THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL HEREAFTER 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>
ANTIVIRALS
ANTI-GENE DEVELOPMENT GROUP
----------------------------------
CROSS REFERENCE SHEET
Showing Location in Prospectus of Information
Required by Items of Form SB-2
----------------------------------
<TABLE>
<CAPTION>
FORM SB-2 ITEM NUMBER AND CAPTION PROSPECTUS CAPTION
----------------------------------- ------------------------------------
<C> <S> <C>
1. Front of Registration Statement and
Outside Front Cover of
Prospectus......................... Outside Front Cover Page of
Prospectus
2. Inside Front and Outside Back Cover
Page of Prospectus................. Inside Front Cover Page of
Prospectus; Outside Back Cover Page
of Prospectus; Additional
Information
3. Summary Information and Risk
Factors............................ Prospectus Summary; Risk Factors
4. Use of Proceeds.................... Prospectus Summary; Use of Proceeds
5. Determination of Offering Price.... Not Applicable
6. Dilution........................... Not Applicable
7. Selling Security Holders........... Not Applicable
8. Plan of Distribution............... Not Applicable
9. Legal Proceedings.................. Not Applicable
10. Director, Executive Officers,
Promoters and Control Persons...... Management of the Company; Management of AGDG
11. Security Ownership of Certain
Beneficial Owners and Management... Principal Shareholders of the Company; Principal Interest Holders of AGDG
12. Description of Securities.......... Prospectus Summary; Dividend Policy;
Capitalization; Description of
Securities of the Company; Description of Securities of AGDG
13. Interest of Named Experts and
Counsel............................ Not Applicable
14. Disclosure of Commission Position
on Indemnification for Securities
Act Liabilities.................... Management of the Company; Management of AGDG
15. Organization Within Last Five
Years.............................. Certain Transactions of the Company and AGDG
16. Description of Business............ Prospectus Summary; Risk Factors;
Management's Discussion and Analysis
of Financial Condition and Results
of Operations of the Company; Business of the Company;
Management's Discussion and Analysis of Financial Condition
and Results of Operations of AGDG; Business of AGDG
17. Management's Discussion and
Analysis or Plan of Operations..... Management's Discussion and Analysis
of Financial Condition and Results
of Operations of the Company; Management's Discussion and
Analysis of Financial Condition and Results of Operations of AGDG
18. Description of Property............ Business of the Company; Business of AGDG
19. Certain Relationships and Related
Transactions....................... Certain Transactions of the Company and AGDG
20. Market for Common Equity and
Related Stockholder Matters........ Risk Factors; Description of
Securities of the Company; Description of Securities of AGDG
21. Executive Compensation............. Management of the Company; Management of AGDG
22. Financial Statements............... Financial Statements
23. Changes in and Disagreements With
Accountants on Accounting and
Financial Disclosure............... Not Applicable
</TABLE>
<PAGE>
Prospectus
Rescission Offer to Certain Shareholders of
ANTIVIRALS INC.
AntiVirals, Inc. (the "Company") hereby offers to certain purchasers of the
Company's Common Stock, $0.0001 par value (the "Common Stock"), the right to
rescind their acquisition of the Company's Common Stock and to receive in
exchange for the Common Stock relinquished to the Company a payment equal to the
purchase price of such Common Stock, or the return of the units of limited
partnership interest in the Anti-Gene Development Group exchanged for such
Common Stock, each plus interest at the applicable statutory rate in the state
in which they reside (the "Statutory Rate") from the date of purchase or
exchange, or if the Common Stock has been disposed of at a loss, the difference
between the purchase price of such Common Stock and the price received upon
disposition plus interest at the Statutory Rate from the date of disposition
(the "Rescission Offer"). The securities that are the subject of the Rescission
Offer include 667,436 shares of Common Stock that were sold between October,
1990 and March, 1994 at prices ranging from $4.56 per share to $4.95 per share
and 625,537 shares of Common Stock that were issued during April, 1993 in
exchange for units of limited partnership interest in the Anti-Gene Development
Group (the "Subject Securities"). This information has been adjusted to reflect
a 1-for-3 reverse split of the Company's Common Stock which was completed on
November 4, 1996. The Rescission Offer is made only to persons who purchased
the Subject Securities from the Company by payment or exchange (each, an
"Eligible Offeree") and is not available with respect to any other securities
purchased from the Company or to persons who purchased the Company's securities
from any other person. During 1992, the Company's management conducted a review
of its past operations, including capital-raising activities. At that time,
although management did not identify any specific, material failures to comply
with obligations imposed on the Company by applicable federal and state
securities laws, management concluded that the record with respect to such
activities was sufficiently incomplete that a conclusion could not be drawn with
substantial certainty that such obligations were complied with in all material
respects. Notwithstanding this conclusion, a review of the Company's securities
offering documents, prepared in connection with sales of Common Stock by the
Company between October, 1990 and March, 1994, indicated that the Company had
omitted to disclose, or provided only limited disclosure with respect to, this
conclusion to certain prospective purchasers of the Subject Securities. The
offer and sale of the Subject Securities therefore may not have been undertaken
in compliance with the Securities Act of 1933, as amended (the "1933 Act"), the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Oregon
Securities Law or the securities laws of other states (collectively, the
"Securities Laws"). The Rescission Offer is being made in order to limit, so
far as may be permissible under the Securities Laws, the potential liability of
the Company with respect to the offer and sale of the Subject Securities. The
Securities and Exchange Commission takes the position that liabilities under the
federal securities laws are not terminated by making a Rescission Offer. See
"The Rescission Offer."
The Company will pay to each Eligible Offeree who accepts the Rescission
Offer an amount equal to the consideration paid to the Company by the
Eligible Offeree for the repurchased securities or return the units of
limited partnership interest in the Anti-Gene Development Group, together
with interest from the date of purchase at the Statutory Rate (collectively,
the "Rescission Price"). The Rescission Price will be paid promptly after
April 30, 1997 (the "Expiration Date"). Eligible Offerees who obtained
shares of Common Stock through the exchange of units of the Anti-Gene
Development Group will be tendered units of the Anti-Gene Development Group
and will be paid interest at the Statutory Rate in cash or notes as hereafter
provided. The Rescission Price will be paid in cash to all other Eligible
Offerees; provided, however, that to the extent that securities with an
aggregate cash Rescission Price in excess of $1,500,000 are tendered to the
Company in response to the Rescission Offer, the Company will issue to
rescinding securityholders in the state of Oregon and Colorado a portion of
the Rescission Price in the form of secured promissory notes of the Company
bearing interest at the rate of 9% per annum and with maturities of 18 months
to 36 months. Each such Eligible Offeree will cease to be a shareholder of
the Company with respect to any tendered shares upon payment by the Company
of the Rescission Price. See "The Rescission Offer."
All Eligible Offerees are urged to read this Rescission Offer carefully.
NEITHER THE COMPANY NOR ITS BOARD OF DIRECTORS MAKE ANY RECOMMENDATION TO
ANY SHAREHOLDER AS TO WHETHER TO ACCEPT THE RESCISSION OFFER OR TO RETAIN THE
COMMON STOCK PURCHASED FROM THE COMPANY. EACH SHAREHOLDER MUST MAKE HIS OWN
DECISION AS TO WHETHER TO ACCEPT THE RESCISSION OFFER.
THE RESCISSION OFFER WILL EXPIRE AT 5:00 P.M., PORTLAND, OREGON TIME, ON
APRIL 30, 1997.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE UNITED STATES
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE UNDER THE LAWS OF THE UNITED STATES.
The date of this Prospectus is _______________, 1997.
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUMMARY. . . . . . . . . . . . . . . . . . . . . . . . . . 3
THE RESCISSION OFFER . . . . . . . . . . . . . . . . . . . . . . . . . 4
SUMMARY FINANCIAL DATA OF THE COMPANY. . . . . . . . . . . . . . . . . 10
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
DIVIDEND POLICY OF THE COMPANY . . . . . . . . . . . . . . . . . . . . 16
CAPITALIZATION OF THE COMPANY. . . . . . . . . . . . . . . . . . . . . 17
SELECTED FINANCIAL DATA OF THE COMPANY . . . . . . . . . . . . . . . . 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF THE COMPANY . . . . . . . . . . . . . . . . . 19
BUSINESS OF THE COMPANY. . . . . . . . . . . . . . . . . . . . . . . . 21
MANAGEMENT OF THE COMPANY. . . . . . . . . . . . . . . . . . . . . . . 34
CERTAIN TRANSACTIONS OF THE COMPANY AND AGDG . . . . . . . . . . . . . 40
PRINCIPAL SHAREHOLDERS OF THE COMPANY. . . . . . . . . . . . . . . . . 42
DESCRIPTION OF SECURITIES OF THE COMPANY . . . . . . . . . . . . . . . 44
SHARES OF THE COMPANY ELIGIBLE FOR FUTURE SALE . . . . . . . . . . . . 47
SELECTED FINANCIAL DATA OF AGDG. . . . . . . . . . . . . . . . . . . . 48
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF AGDG. . . . . . . . . . . . . . . . . . 48
BUSINESS OF AGDG . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
MANAGEMENT OF AGDG . . . . . . . . . . . . . . . . . . . . . . . . . . 50
DESCRIPTION OF SECURITIES OF AGDG. . . . . . . . . . . . . . . . . . . 50
PRINCIPAL INTEREST HOLDERS OF AGDG . . . . . . . . . . . . . . . . . . 51
LEGAL MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
EXPERTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
ADDITIONAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . 52
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . F-1
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ
IN CONJUNCTION WITH THE MORE DETAILED INFORMATION AND THE FINANCIAL STATEMENTS
AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. EXCEPT AS OTHERWISE
NOTED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES (I) NO EXERCISE OF THE
OVERALLOTMENT OPTION, THE WARRANTS OR THE REPRESENTATIVE'S WARRANT IN CONNECTION
WITH THE PROPOSED OFFERING OF 1,500,000 UNITS BY THE COMPANY AND (II) A 1-FOR-3
REVERSE SPLIT OF THE COMMON STOCK WHICH WAS COMPLETED ON NOVEMBER 4, 1996. SEE
"DESCRIPTION OF SECURITIES" AND "UNDERWRITING"
THIS PROSPECTUS CONTAINS, IN ADDITION TO HISTORICAL INFORMATION, FORWARD-
LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL
RESULTS OR EXPERIENCE COULD DIFFER SIGNIFICANTLY FROM THOSE DISCUSSED IN THE
FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS"
AS WELL AS THOSE ELSEWHERE IN THIS PROSPECTUS.
THE COMPANY
ANTIVIRALS is a pioneer company in the field of gene-inactivating
technology referred to as antisense and has developed a patented class of
antisense compounds which may be useful in the treatment of a wide range of
human diseases. The Company also has developed new drug delivery technology
which may be useful with many FDA-approved drugs as well as with its antisense
compounds. The Company's drug development program has two areas of near-term
focus:
- NEU-GENE antisense compounds for selected applications, and
- CYTOPORTER drug delivery engines for enhanced delivery of FDA-approved
drugs with delivery problems.
The Company's long-term product development program combines its NEU-GENE
and CYTOPORTER technologies to produce combination drugs with potential
applications for many human diseases. The Company has 20 issued patents and
several patent applications covering the basic compositions of matter, methods
of synthesis, and medical uses of NEU-GENE and CYTOPORTER compounds.
Antisense technology has the potential to provide safe and effective
treatment for a broad range of diseases that previously have been difficult to
address, including viral and host diseases. The Company's new approach uses
synthetic compounds designed to inactivate selected genetic sequences that
underlie the disease process and thereby halt the disease. Targeting genetic
sequences with antisense compounds provides the selectivity that is not
available in conventional drug development which typically targets proteins
directly. The antisense approach specifically inhibits the mechanisms which
underlie the production of disease-producing proteins.
To reach their therapeutic targets, many drugs must cross tissue and
cellular barriers. Drugs that have an intracellular site of action must cross
the lipid (fat-like) barrier of cellular membranes to move from the aqueous
environment in blood into the interior of target cells. Therefore, these drugs
must achieve solubility in both water and lipids. Since few compounds have
these solubility characteristics, many drug candidates are a compromise between
inherent solubility and effective delivery. This trade-off reduces efficacy and
may significantly heighten toxicity of many drug candidates, as well as many
FDA-approved drugs.
The Company has developed two distinct technologies to address the critical
issues in drug development: selectivity for the target and delivery to the
target. The Company's NEU-GENE antisense technology addresses the issue of drug
selectivity and its CYTOPORTER drug delivery technology addresses delivery
problems with FDA-approved drugs and antisense compounds. The patented
structure of the Company's NEU-GENE compounds distinguishes its antisense
technology from competing technologies and provides the selectivity for a single
disease target that is the hallmark of antisense drug development. The
Company's molecular engine, CYTOPORTER, is designed to transport drugs with
delivery problems across the lipid barrier of cellular membranes into the
interior of cells to reach their targets.
The first application of the Company's NEU-GENE antisense technology is
designed to treat restenosis, a cardiovascular disease. The Company is
currently in pre-clinical development with this compound and expects to file
an IND to begin clinical trials in 1998. The Company's first planned drug
delivery products combine its CYTOPORTER delivery engine with two
FDA-approved drugs that have delivery problems. These drugs, cyclosporin and
paclitaxel (Taxol-Registered Trademark-), will both be off patent by late
1997 and could have much broader usage if their delivery problems are
reduced. The Company expects to file an IND to begin clinical trials with
its enhanced form of cyclosporin and to initiate pre-clinical studies with
its enhanced form of paclitaxel in 1998.
The Company plans to market its initial products through marketing
agreements or other licensing arrangements with large pharmaceutical companies.
The Company intends to retain manufacturing rights to all products incorporating
its technology, whether such products are marketed directly by the Company or
through collaborative agreements with industry partners.
The Company is a development stage biotechnology company which must
achieve additional significant milestones before it can commercialize either
NEU-GENE antisense compounds or its CYTOPORTER drug delivery engines.
Successful commercialization of these potential products also is dependent on
the Company's successful testing of and obtaining regulatory approval of the
potential products. This testing and regulatory approval process, if
successful, will not be completed for several years. The Company will
require substantial funds to further develop its potential products
and to commercialize the products that may be developed. There can be no
assurance that the Company will achieve the necessary milestones,
successfully test its proposed products, obtain necessary regulatory
approvals, or obtain necessary financing to successfully commercialize its
proposed products.
The Company's principal executive office is located at One S.W. Columbia,
Suite 1105, Portland, Oregon 97258, where the telephone number is (503) 227-
0554.
This Prospectus includes trademarks and registered trademarks of the
Company, including NEU-GENE-Registered Trademark- and CYTOPORTER-TM-, and
trademarks and registered trademarks of other companies.
3
<PAGE>
THE RESCISSION OFFER
BACKGROUND
For most of its existence, the Company has operated with limited
capital, most of which has been raised through periodic offerings of equity
securities. During 1992, the Company's management conducted a review of its
past operations, including capital-raising activities. At that time,
although management did not identify any specific, material failures to
comply with obligations imposed on the Company by applicable federal and
state securities laws, management concluded that the record with respect to
such activities was sufficiently incomplete that a conclusion could not be
drawn with substantial certainty that such obligations were complied with in
all material respects.
The Company believes that, as of the date of this prospectus, its
potential rescission liability to shareholders for failure to comply with
these obligations has been effectively eliminated by the running of
applicable statutes of limitations. The capital raising activities which
were the subject of this review were undertaken between May 1991 and
October 1992. The Company's management was unable to conclude that,
with respect to certain sales during this period, its records were
sufficiently complete to demonstrate the availability of an exemption from
registration in various jurisdictions, including Oregon, California,
Colorado, District of Columbia, Florida, Illinois, Missouri, Nevada, New York,
Texas, and Washington. Except for Nevada, which maintains a five-year statute
of limitations, the applicable statutes of limitations in these jurisdictions
for a claim arising from the sale of an unregistered security are variously
two and three years. The Company accordingly believes that any such claims
are time-barred.
Although the Company believes that such claims have been effectively
eliminated by the running of applicable statutes of limitation, a review of
the Company's securities offering documents prepared in connection with sales
of Common Stock by the Company from November 1991 to March 1994 indicated
that the Company had omitted to specifically disclose or quantify in such
disclosure, or provided only limited disclosure with respect to its then
potential rescission liablity to prospective purchasers of its Common Stock.
Because this then potential rescission liability may have been deemed
material to their investment decision by purchasers of its Common Stock, as
a result of this omission or limited disclosure, the Company's management has
been unable to conclude that sales of the Company's Common Stock made in
accordance with those offering documents complied in all material respects
with the securities laws. Management accordingly has determined that the
Company would offer rescission to certain purchasers of its Common Stock, as
soon as practicable.
The following table summarizes the shares that are the result of
this investment activity and which are the subject of this Rescission Offering,
adjusted to give effect to a 1-for-3 reverse split of the Company's Common Stock
which was completed on November 4, 1996.
SALES SUBJECT TO PAYMENT OF CASH OR NOTES
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
DATES OF NUMBER PER SHARE
STATE INVESTMENT TYPE OF TRANSACTION OF SHARES PRICE RANGE TOTAL
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Alabama 11/29/91 Investment in Common Stock 1,100 $4.56 $5,000
Colorado 08/06/92 Investment in Common Stock 1,667 4.56 7,600
Illinois 02/13/92 to
06/02/92 Investment in Common Stock 23,030 4.56 105,000
Massachusetts 04/10/92 to
01/07/94 Investment in Common Stock 17,302 4.56
to 4.95 84,750
Oregon 10/31/90 to
03/12/94 Investment in Common Stock 550,648 4.56
to 4.95 2,667,013
Texas 08/10/92 Investment in Common Stock 4,606 4.56 21,000
Washington 04/03/92 to
02/18/94 Investment in Common Stock 48,749 4.56
to 4.95 230,082
New Jersey 08/11/92 Investment in Common Stock 334 4.56 1,520
- ----------------------------------------------------------------------------------------------------------------
TOTAL 667,436 $3,121,965
-------- ----------
-------- ----------
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
SHARES SUBJECT TO RETURN OF ANTI-GENE DEVELOPMENT GROUP UNITS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
DATES OF TOTAL EXCHANGE NUMBER
STATE INVESTMENT TYPE OF TRANSACTION SHARES RATE OF UNITS
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Alabama 04/29/93 Exchange of Limited 4,400 1:1100 4.00
Partnership Units
Montana 04/29/93 Exchange of Limited 1,100 1:1100 1.00
Partnership Units
Ohio 04/29/93 Exchange of Limited 44,000 1:1100 40.00
Partnership UnitS
Oregon 04/29/93 Exchange of Limited 519,937 1:1100 472.67
Partnership Units
Texas 04/29/93 Exchange of Limited 3,300 1:1100 3.00
Partnership Units
Utah 04/29/93 Exchange of Limited 5,500 1:1100 5.00
Partnership Units
Washington 04/29/93 Exchange of Limited 36,300 1:1100 33.00
Partnership Unit
Wisconsin 04/29/93 Exchange of Limited 11,000 1:1100 10.00
Partnership Units
- ----------------------------------------------------------------------------------------------------
TOTAL 625,537 568.67
------- ------
------- ------
- ----------------------------------------------------------------------------------------------------
</TABLE>
The above tables reflect investments made by persons or entities who are
currently residents of the states of Alabama, Colorado, Illinois,
Massachusetts, Montana, New Jersey, Ohio, Oregon, Texas, Utah, Washington and
Wisconsin. In addition, although the laws of the state of Florida permit the
making of a Rescission Offer in connection with registration violations, the
making of a rescission offer to residents of that state to cure a disclosure
violation may not preclude a subsequent rescission action by such Offerees.
The Rescission Offering accordingly is not being made to residents of Florida
at this time and the potential rescission liability to those investors,
related to the 22,021 shares held by them, could be as much as $100,000 and
one unit of limited partnership interest in the Anti-Gene Development Group,
exclusive of interest.
The Company recently has achieved certain milestones in the
development of its antisense and drug delivery technologies, including
improvements in the manufacturing of its therapeutic products, preclinical
studies with its antisense agents, clinical efficacy of its antisense
technology in animal models, and filing of a patent application for its drug
delivery technology. On January 28, 1997, the Company filed a registration
statement with the Securities and Exchange Commission in connection with a
proposed offering of 1,500,000 units, each consisting of one share of the
Company's Common Stock and one warrant to purchase one share of the Company's
Common Stock (the "Unit Offering"). The Company anticipates that the
proceeds of the Unit Offering will be utilized to fund pre-clinical and
clinical trial studies, additional research and development efforts, and for
general working capital purposes. Under the terms of the underwriting
agreement between the Company and Paulson Investment Company, Inc.,
underwriter of the Unit Offering, the Unit Offering is conditioned on the
Company's conducting this Rescission Offering. The Unit Offering is proposed
to be underwritten on a "firm commitment" basis and the obligation of the
underwriter accordingly is not conditioned on the results of the Rescission
Offer. Significant participation in the Rescission Offering could adversely
affect the pricing of the units and the ability of the underwriter to sell
the units in the Unit Offering. Accordingly, there can be no assurance that
the Unit Offering will be successfully undertaken or that a public market for
the Company's Common Stock will thereafter develop, if at all, at prices
equal to or exceeding the amounts offered to offerees hereunder.
PURPOSE OF RESCISSION OFFER
The securities that are the subject of the Rescission Offer include
667,436 shares of Common Stock at prices ranging from $4.56 per share to
$4.95 per share, and 625,537 shares of Common Stock obtained upon the
exchange of 568.67 units of limited partnership interest in the Anti-Gene
Development Group ("AGDG"). Sales of the Subject Securities were conducted
under offering documents which omitted to disclose or provided only limited
disclosure that the Company's management was unable to conclude that the
Company had complied in all material respects with its obligations under
federal and state securities laws in connection with certain prior sales of
securities, with the result that the Company may be deemed to have violated
the requirements of the Securities Laws with respect to the offer and sale of
the Subject Securities.
5
<PAGE>
In order to limit, so far as may be permissible under the Securities Laws,
the liability of the Company with respect to the offer and sale of the Subject
Securities, the Company is unconditionally offering to repurchase all of the
Subject Securities from Eligible Offerees for an amount equal to the purchase
price of such securities plus interest from the date of purchase at the
Statutory Rate, for the return of the units of limited partnership interest in
the Anti-Gene Development Group exchanged for the Subject Securities plus
interest from the date of the exchange at the Statutory Rate, or, if the Common
Stock has been disposed of at a loss, for an amount equal to the difference
between the purchase price of such Common Stock and the price received upon
disposition plus interest at the Statutory Rate from the date of disposition
(the "Rescission Price"). The Securities and Exchange Commission takes the
position that liabilities under the federal securities laws are not terminated
by making a Rescission Offer. Subject to the closing of the Unit Offering on
terms and conditions acceptable to the Company, the Rescission Price will be
payable promptly after April 10, 1997 (the "Expiration Date"). See "Payment of
the Rescission Price."
The following table sets forth the Statutory Rate of interest applicable
under state laws:
STATUTORY INTEREST
RATE OF INTEREST
STATE PER ANNUM STATUTORY BASIS
- ----- ---------------- --------------
Alabama 6% Ala. Code Section 8-8-10
Colorado 8% Colo. Rev. Stat. Section 5-12-101
Illinois 10% Ill. Rev. Stat. Section 13[5/13]C.
Massachusetts 6% Mass. Gen. Laws Ann. Ch. 110A, Section 410(e)
Montana 10% Mont. Code. Ann. Section 30-10-307
New Jersey 12% N.J. Rev. Stat. Section 49:3-71(e)
Ohio 10% Ohio Rev. Code Ann. Section 1343.03
Oregon 9% Or. Rev. Stat. Section 82.010
Texas 6% Tex. Code. Ann. Section 5069-1.03
Utah 12% Utah Code Ann. Section 15-1-1
Washington 8% Wash. Rev. Code Section 21.20.430(4)(b)
Wisconsin 5% Wisc. Stat. Section 138.04
EFFECT OF ACCEPTANCE OF RESCISSION OFFER
The Company believes that its potential liability under applicable state
securities laws for the sale or exchange of securities with inadequate
disclosure will be eliminated with respect to each Eligible Offeree who
accepts the Rescission Offer and sells the Subject Securities back to the
Company. However, the fact that the Company will issue promissory notes in
lieu of cash to rescinding shareholders if the aggregate Rescission Price
exceeds $1,500,000 may limit the preclusive effect of the Rescission Offer in
Oregon and Colorado. Moreover, the Securities and Exchange Commission takes
the position that liabilities under the federal securities laws are not
terminated by making a rescission offer.
This Prospectus constitutes notice, as required by Oregon Revised
Statutes ("ORS") 59.125, of the Company's offer to pay the Rescission Price
upon tender of the Common Stock subject to this Rescission Offer ("Notice").
Pursuant to ORS 59.125, an offeree may not commence an action under ORS
59.115 (which provides for liability in connection with sales of securities
in violation of the Oregon Securities Laws or by means of a material
misstatement or omission) with respect to his or her purchase of the Common
Stock subject to this Rescission Offer after receipt of this Notice unless
(i) if the Eligible Offeree owns such Common Stock when this Prospectus is
received, he or she accepted the Rescission Offer prior to the Expiration
Date and has not been paid the full amount due thereunder, or (ii) if the
Eligible Offeree does not own such Common Stock when this Prospectus is
received, he or she so notifies the Company in writing within 30 days of such
receipt. A failure of any Eligible Offeree to respond to this Notice within
the prescribed period of time will have the effect of precluding such
Eligible Offeree from commencing an action under ORS 59.115. States other
than Oregon, including Alabama, Colorado, Illinois, Massachusetts, Montana,
New Jersey, Ohio, Texas, Utah, Washington and Wisconsin, have similar laws
regarding the effect of a decision not to accept the Rescission Offer.
ORS 59.125 and Colo. Rev. Stat. 11-51-604(9)(a)(i) do not expressly
permit the issuance of promissory notes in lieu of cash in a rescission
offering. Although no Oregon court has addressed this issue in a reported
decision, a Colorado appellate court, construing the Colorado Statute, has
ruled that a party accepting a promissory note in lieu of cash in a
rescission offering may not commence an action for violation of securities
laws relating to the original sale. Although it has not expressed an opinion
on this issue, the Oregon Division of Finance and Corporate Securities has
previously permitted a party in a rescission offering of promissory notes in
lieu of cash to maintain that the sole remedy of a party who accepted the
offer was to bring suit on the notes and that any other remedies the investor
might have had under the Oregon Securities Laws were extinguished by the
rescission offering. Although the Company believes that the Rescission
Offering will have preclusive effect if all of the Oregon and Colorado
holders of 1,072,252 shares of the Company's Common Stock were to
successfully assert claims against the Company, the Company would be required
to pay those holders approximately $2,674,613, plus approximately 473 units
of limited partnership in AGDG, plus statutory interest.
To the extent that Eligible Offerees affirmatively reject or fail to
respond to the Company's Rescission Offer, potential liability of the Company
under the 1933 Act may not be completely extinguished. Nevertheless, under
those circumstances, the Company will assert that an Eligible Offeree who
affirmatively rejects or fails to respond to the Company's Rescission Offer has
released his claims to recover the purchase price of the securities and that
such claims further are barred by applicable statutes of limitation. The
Securities and Exchange Commission takes the position that liabilities under the
federal securities laws are not terminated by making a rescission offer. If the
affirmative rejection or failure to respond to the Rescission Offer does not act
as a release of claims, each Eligible Offeree who affirmatively rejects or fails
to respond to the Rescission Offer would retain any rights or claims such
Eligible Offeree may have under the federal securities laws, subject to the
statute of limitations with respect to such rights and claims. In general, for
a claim based on violations of the registration provisions of the federal
securities laws, such a claim must be brought within one year after discovery of
the violation upon which the claim is based, provided that, in no event may such
claims be brought more than three years after the occurrence of the violation.
The Company accordingly believes that the applicable statute of limitations has
run with respect to such claims. In addition, the Rescission Offer will not
prevent the Securities and Exchange Commission from pursuing enforcement action
against the Company with respect to any violations of the federal securities
laws that may have occurred.
A decision to reject the Rescission Offer will not affect the restricted
status of the Common Stock held by the Eligible Offerees. See "Description of
Securities -- Restrictions on Transfer."
PROVISION OF UNITS OF LIMITED PARTNERSHIP
INTEREST IN ANTI-GENE DEVELOPMENT GROUP
The Company will return to certain purchasers of the Company's Common
Stock, if they accept the Rescission Offer, units of limited partnership
interest in AGDG exchanged for the Company's Common Stock on or about April 29,
1993.
AGDG was formed in 1981 under the Oregon Uniform Limited Partnership
Act for the purpose of funding the development of and obtaining the proprietary
rights to Anti-Genes. Prior to 1993, AGDG periodically contracted with the
Company to develop the technologies while retaining the rights to the resultant
technologies. Substantially all of the proceeds from sales of interests in AGDG
and interest income were paid to the Company under the terms of these research
and development contracts.
Sole management of AGDG is vested in the general partner. The general
partner of AGDG is Dr. James Summerton, founder and Chairman and Chief Executive
Officer of the Company until January 1996. Dr. Summerton presently serves as
President and Chief Scientific Officer of the Company. Dr. Summerton receives
no fees or other remuneration for his management of AGDG.
In February 1993, to facilitate additional capital raising activities
associated with the development of the technologies, AGDG and the Company
entered into a Technology Transfer Agreement whereby, effective May 19, 1993,
AGDG conveyed all intellectual property in its control to the Company. In
consideration of this transfer, the Company is obligated to pay to AGDG certain
technology transfer fees arising from the sale of products incorporating the
technologies. See "Effect of Rescission Offering on the Anti-Gene Development
Group and Technology Transfer Agreement."
During March, 1993, the Company offered all holders of interests in AGDG
the opportunity to exchange their units of limited partnership interest for
shares of the Common Stock of the Company at a ratio of 1,100 shares of
Common Stock for each unit exchanged. The exchange ratio was determined based
on historical perceptions by the partners of AGDG and shareholders of the
Company as to the relative values of AGDG, but was not confirmed by financial
analysis of any kind. The exchange offer was the subject of a fairness
hearing conducted by the Oregon Department of Insurance and Finance on April
19, 1993, and after such hearing the Oregon Department of Insurance and
Finance issued an order permitting the exchange offering to proceed.
Prior to the exchange offering, there were 3665.5 units of limited
partnership interest in AGDG outstanding. Holders of 1,809.5 units exchanged
those units for shares of Common Stock of the Company in the offer. As of the
date of this Prospectus, 1856 units of limited partnership interest in AGDG are
outstanding. If all Eligible Offerees who participated in the exchange offer
tender their 625,537 shares and 568.67 units of limited partnership interest are
issued therefor, 2424.67 units of limited partnership interest will be
outstanding.
The Company and AGDG believe that the rights of an interest holder in
AGDG upon completion of this Rescission Offering are equivalent to the rights
of an interest holder immediately prior to the 1993 exchange offering. In
addition to cash and cash equivalents of approximately $189,000 as of
December 31, 1996, AGDG's principal asset, as it was prior to the exchange
offering, is the right to technology transfer payments arising from the sale
of products incorporating the transferred technologies. The units of limited
partnership interest in AGDG are speculative investments and unit holders
bear the risk of the loss of their entire investment. In addition, the
investment in units of limited partnership interest in AGDG is subject to
additional risks, including the lack of a public market for the interests,
uncertainty of the utility and commercial viability of the technologies,
uncertainty of the superiority of the technologies, and uncertainty in the
obtaining of adequate financing to achieve effective commercialization of
products arising from the technologies. AGDG's achievement of revenues based
on the technology transfer fees is based on the successful commercialization
of the technologies by the Company. For a detailed statement of the risks
associated with the Company, see "Risk Factors."
6
<PAGE>
EFFECT OF RESCISSION OFFERING ON THE ANTI-GENE DEVELOPMENT GROUP AND TECHNOLOGY
TRANSFER AGREEMENT
The Company will return to certain purchasers of the Company's Common
Stock, if they accept the Rescission Offer, units of limited partnership
interest in the Anti-Gene Development Group exchanged for the Company's Common
Stock on or about April 29, 1993.
On February 9, 1993, the Company and AGDG entered into a Technology
Transfer Agreement wherein effective May 19, 1993, AGDG conveyed all
intellectual property in its control related to antisense technology (the
"Intellectual Property") to the Company. As part of the conveyance, the Company
tendered to AGDG for liquidation all partnership units received pursuant to an
exchange offer and received a 49.37 percent undivided interest in the
intellectual property. The Company then purchased the remaining undivided
interest in the Intellectual Property in consideration of payments of 4.05% of
gross revenues in excess of $200 million, if any, derived from sales of products
which would, in the absence of the Technology Transfer Agreement, infringe a
valid claim under any patent transferred to the Company (the "Technology Fees").
The Company's obligation to make payments of the Technology Fees with respect to
a particular product terminates upon the expiration of all patents transferred
to the Company pursuant to the Technology Transfer Agreement related to that
product.
Pursuant to a License and Option Agreement by and between AGDG and the
Company dated February 9, 1993 (the "License Agreement"), the Company granted to
AGDG a royalty-free non-exclusive license to use the Intellectual Property for
internal research and development and to sell small quantities of products
incorporating the Intellectual Property. In addition, if AGDG develops any
specific prototype products which incorporate any of the Intellectual Property,
the Company has the right to commercialize and market such products in
consideration of payments of 4.05% of gross revenues, in excess of the $200
million exemption for all products utilizing the Intellectual Property, to AGDG.
If the Company elects not to commercialize the proposed AGDG product or fails to
meet certain product development milestones, the Company is required to grant
AGDG a license to develop and market the proposed product (an "AGDG License").
The Company is entitled to payments for the AGDG license but only if the
proposed product incorporates patented improvements developed by the Company to
the Intellectual Property. The amount of the license fee payable to the Company
by AGDG pursuant to an AGDG License, if any, is equal to the percentage payable
to AGDG for products sold by the Company and covered by the Technology Transfer
Agreement. AGDG also has the right to obtain an exclusive royalty-free license
to use, develop, make, sell, distribute and sublicense products utilizing the
Intellectual Property at such time as the Company has less than 10 full-time
employees engaged in developing, testing or marketing products based upon the
Intellectual Property for a period of at least 180 consecutive days.
AGDG's entitlement to Technology Fees constitutes a material asset of
AGDG. The payment of such fees is dependent upon the successful
commercialization of products incorporating the Intellectual Property by the
Company, which is dependent in part on the Company's ability to raise capital
on terms and conditions acceptable to the Company. To facilitate the making
of the Rescission Offer, which is a condition to the underwriting of the
Company's proposed Unit Offering, AGDG has agreed to issue units of limited
partnership interest to certain shareholders of the Company who accept the
Rescission Offer in consideration of the Company's agreement to increase the
Technology Fees and License Agreement fees. This increase will be determined
by the formula originally negotiated by the Company and AGDG in connection
with the 1993 exchange offer and technology transfer. The amount of any
increase will depend on the number of units of limited partnership interest
that Anti-Gene Development Group is required to issue in connection with the
Rescission Offer. If all 625,537 shares are tendered for rescission and
568.67 units of limited partnership interest are required to be issued in
payment therefor, the Technology Fees and License Agreement fees would
increase to 5.27% of sales in excess of the $200 million exemption. If no
shares are tendered for rescission and no units of limited partnership
interest are required to be tendered therefor, the Technology Fees and
License Agreement fees will remain 4.05%.
On January 20, 1997, AGDG and the Company amended the Technology
Transfer Agreement to reduce the Technology Fees arising from the sale of
diagnostic products from 4.05% to 2% and to remove the $200 million exemption
with respect to sales of such diagnostic products. AGDG and the Company
believe that such an adjustment was necessary in connection with potential
diagnostic applications of the Intellectual Property because negotiated
license fees or royalties in connection with diagnostic products typically
are lower than those for therapeutic products and the prior rate exceeded the
levels that would permit the licensing of the technologies to third parties
on favorable terms and conditions. The Company also granted to AGDG a
royalty-bearing license to make, use and sell small quantities of product
derived from the Intellectual Property for research purposes only. The
Technology Fees arising from the sale of diagnostic products will not be
adjusted if the Anti-Gene Development Group issues units of limited
partnership interest in connection with the Rescission Offer.
CERTAIN TAX CONSIDERATIONS RELATING TO THE RESCISSION OFFER
An Eligible Offeree's acceptance of the Rescission Offer and receipt of the
payment thereunder will be a taxable event for both state and federal income tax
purposes. However, if the amount received by the Eligible Offeree as a result
of the acceptance of the Rescission Offer does not exceed the tax basis for the
securities surrendered, there will be no realized taxable gain. Amounts
received as interest in connection with the Rescission Offer will be taxable to
the recipient at ordinary income tax rates.
7
<PAGE>
BECAUSE OF UNCERTAINTIES RELATING TO THE FEDERAL, STATE AND LOCAL INCOME
TAX TREATMENT OF ACCEPTANCE OF THE OFFER OF RESCISSION, ELIGIBLE OFFEREES WHO
MAY WISH TO ACCEPT THE RESCISSION OFFER ARE URGED TO CONSULT THEIR PERSONAL TAX
ADVISORS BEFORE ACCEPTING OR REJECTING THE RESCISSION OFFER.
PROCEDURES FOR TENDERING SECURITIES
For an Eligible Offeree to validly tender securities pursuant to the
Rescission Offer, a properly completed Request for Rescission in the form
attached hereto, evidencing the decision of the Eligible Offeree to accept
the Rescission Offer, must be received by the Company at its principal
executive offices (One S.W. Columbia, Suite 1105, Portland, Oregon 97258) on
or before 5:00 p.m., Portland, Oregon time, on or before April 10, 1997, the
Expiration Date. Documentation received by the Company other than at the
address specified above or after 5:00 p.m. on the Expiration Date, incomplete
or invalid documentation, or documentation purporting to accept the
Rescission Offer in a manner not permitted by the terms of the Rescission
Offer will not be deemed to constitute acceptance of the Rescission Offer.
Pursuant to ORS 59.125, an Eligible Offeree must accept the payment offer
within 30 days of receipt of the rescission notice. States other than Oregon,
including Alabama, Colorado, Illinois, Massachusetts, Montana, New Jersey,
Ohio, Texas, Utah, Washington and Wisconsin, have similar laws permitting the
offeree not more than 30 days after receipt of a rescission offer within
which to accept the offer.
The Request for Rescission must be accompanied by Common Stock certificates
representing all (and not less than all) of the Subject Securities purchased by
the Eligible Offeree in any particular transaction. If an Eligible Offeree
purchased Subject Securities from the Company in more than one transaction, such
Eligible Offeree may accept the Rescission Offer with respect to the securities
purchased in one transaction and reject the Rescission Offer with respect to
securities purchased in other transactions. The Rescission Offer does not apply
to any securities of the Company other than the Subject Securities.
The Request for Rescission and stock certificates may be delivered by
hand or courier service, or by mail. Each stock certificate must be duly
endorsed in blank by the registered holder thereof and the signature should
be guaranteed by an eligible guarantor institution (banks, stockbrokers,
savings and loan associations, and credit unions with membership in an
approved signature guarantee medallion program). The method of delivery of
all documents is at the election and risk of the Eligible Offeree. If
delivery is by mail, registered mail, return receipt requested, properly
insured, is recommended. The Company will seek to notify Eligible Offerees
who submit incomplete or invalid Requests for Rescission to the Company by
mailing notice of the same to the Eligible Offeree's last known address prior
to deeming the Rescission Offer rejected by the Eligible Offeree.
Tenders of shares made pursuant to the Rescission Offer may be withdrawn by
written notice to the Company at any time prior to the Expiration Date.
PAYMENT OF THE RESCISSION PRICE
At the Expiration Date, the Company will become obligated to pay the
Rescission Price to each Eligible Offeree who has properly tendered shares
pursuant to the Rescission Offer and has not withdrawn such tender prior to the
Expiration Date. Each such Eligible Offeree will cease to be a shareholder of
the Company with respect to the tendered shares upon payment by the Company of
the Rescission Price. Payment for any shares of Common Stock validly tendered
and not withdrawn will be made promptly after the Expiration Date.
The Company has reserved up to $1,500,000 in cash to cover liabilities
under this Rescission Offering. To the extent that shares with an aggregate
cash Rescission Price in excess of $1,500,000 are tendered to the Company
pursuant to the Rescission Offer, the Company will issue to rescinding
shareholders in the states of Oregon and Colorado a portion of the Rescission
Price in the form of promissory notes of the Company bearing interest at a
rate of 9% per annum and with maturities ranging from 18 months to 36 months
(the "Notes"). Shareholders who reside in Oregon and Colorado may receive
Notes because there is administrative or judicial precedent in those
jurisdictions for the issuance of promissory notes in connection with a
rescission offering. The first $1.5 million of rescission liabilities will
be paid in cash; the next $1 million will be paid in Notes with a term of 18
months, bearing interest at 9% per annum; the next $1 million will be paid in
Notes with a term of 24 months, bearing interest at 9% per annum; the next $1
million will be paid in Notes with a term of 30 months, bearing interest at
9% per annum; the balance of rescission liabilities will be paid in Notes
having a term of 36 months, bearing interest at 9% per annum. Priority with
respect to the payment of cash will be given to rescinding shareholders who
resided in states other than Oregon and Colorado at the time they purchased
or otherwise obtained their shares, to the extent of their cash investment in
such shares and statutory interest thereon and, in the case of former holders
of units of interest in AGDG who resided in states other than Oregon and
Colorado, to the extent of their statutory interest thereon. After the
payments to such shareholders, the remainder of the rescission liabilities
will be paid to shareholders who resided in Oregon and Colorado on a pro rata
basis. Accordingly, for example, if the aggregate rescission price exceeds
$3 million, each rescinding shareholder who resided in states other than
Oregon and Colorado at the time they purchased or otherwise obtained their
shares will receive their Rescission Price in cash, or units of interest in
AGDG, as applicable, and cash payment of statutory interest thereon, and each
other rescinding shareholder will receive its pro rata share of cash,
18-month Notes, 24-month Notes, and units, as applicable. Interest on the
Notes will be paid quarterly and all principal will be due at the end of the
term of the Note.
Payment by the Company of its obligations under the Notes will be
secured by a pledge of shares of the Common Stock of the Company held of
record by certain of the Company's directors, officers and principal
shareholders (the "Pledgors"), including Dr. Denis R. Burger, Dr. James E.
Summerton, Dr. Dwight D. Weller, Nick Bunick, Dr. Donald R. Johnson, Dr.
James E. Reinmuth and Cascadia Pacific Management, LLC for the benefit of the
Oregon Resource Technology and Development Fund. The Pledgors have agreed to
pledge the shares of Common Stock to facilitate the making of the Rescission
Offer. As of the date of this Prospectus, the Pledgors hold of record
3,569,030 shares of the Common Stock of the Company, which shares may be
pledged to secure payment of the Notes.
8
<PAGE>
Under the terms of the Pledge Agreement, prior to the closing of the
Company's proposed offering of 1,500,000 units, the Pledgors have agreed to
maintain as security for payment of the Notes sufficient shares of Common
Stock of the Company that the aggregate value of such shares, based on an
estimated value of $6.00 per share, equals 120 percent of the outstanding
principal amount of the Notes. After the closing of the proposed unit
offering or any other public offering, the Pledgors have agreed to maintain
as security for payment of the Notes sufficient shares of Common Stock of the
Company that the aggregate value of such shares, based on the last reported
sales price of the Company's Common Stock on the last day of the preceding
month, equals 120 percent of the outstanding principal amount of the Notes.
The Pledge Agreement provides that, in the event of a default by the Company
in the payment of the Notes, shares of the Company's Common Stock subject to
the pledge will be sold and the proceeds applied to payment of obligations.
To facilitate the sale of the shares in the event of a default in the payment
of the Notes, the shares have been registered for sale with the Securities
and Exchange Commission.
The Company has been unprofitable since its inception and has received no
material revenues from the sale of products or other sources. The Company
does not anticipate material revenues in the near term. The proceeds of the
Company's proposed Unit Offering are the only source of capital potentially
available in the near term to the Company, other than its existing cash and
cash equivalents. There can be no assurance that the proposed Unit Offering
will be successfully undertaken by the Company. Even if successful, although
the Company's management enjoys broad discretion with respect to the use of
proceeds from the Unit Offering, there can be no assurance that proceeds will
be applied to the payment of the Notes or that any proceeds will be available
therefor upon the maturity of the Notes. Moreover, based on the Company's
current operating plan, if the Company experiences unanticipated cash
requirements during the next 24 months, including without limitation cash
required to pay holders of a significant number of shares of its Common Stock
in connection with the rescission offering, the Company could require
significant additional capital to fund operations, continue research and
development programs, pre-clinical and clinical testing of its potential
antisense and drug delivery compounds, commercialize any products that may be
developed and make payments on the Notes. There can be no assurance that,
however, that additional funds will be available, if at all.
There previously has been no public market for the Company's Common
Stock and there can be no assurance that an active public market for the
Common Stock will be developed or sustained after the Rescission Offer. In
addition, even if such a public market does develop, the obligations of the
Pledgors to pledge shares is limited to shares held of record by the Pledgors
as of the date of this Prospectus and there can be no assurance that the
value of the Company's Common Stock on such public market will be sustained
at levels so that the shares subject to the pledge will be sufficient to
satisfy the obligations of the Company in the event of a default by the
Company in the payment of the Notes. Regardless of the sufficiency of the
pledged shares, the Pledgors have no recourse liability on the Notes.
9
<PAGE>
SUMMARY FINANCIAL DATA OF THE COMPANY
<TABLE>
<CAPTION>
Period From
July 22, 1980
Year Ended (Inception)
December 31, through
------------------------ December 31,
1995 1996 1996
---- ---- ----
(unaudited)
STATEMENTS OF OPERATIONS DATA:
<S> <C> <C> <C>
Revenues, from grants and
research contracts $ 82,500 $ 27,227 $ 689,497
------------- -------------- -------------
Operating expenses:
Research and development 2,097,796 1,729,554 9,011,574
General and administrative 609,723 613,811 4,549,582
------------- -------------- -------------
Total operating expenses 2,707,519 2,343,365 13,561,156
------------- -------------- -------------
Other income 68,133 228,776 446,176
------------- -------------- -------------
Net loss $ (2,556,886) $ (2,087,362) $ (12,425,483)
------------- -------------- -------------
------------- -------------- -------------
Net loss per share (1) $ (0.37) $ (0.25)
-----------------------------
-----------------------------
Shares used in per share
calculation (1) 6,982,459 8,233,548
-------------- -------------
-------------- -------------
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
December -----------------------------------------------------------------
BALANCE SHEET DATA 1995 Actual As Adjusted (2) As Adjusted (3) As Adjusted (4)
<S> <C> <C> <C> <C> <C>
Working capital 646,814 2,738,677 14,346,177 12,846,177 12,846,177
Total assets 2,324,736 4,248,899 15,856,399 14,356,399 14,356,399
Common stock subject to rescission 3,121,965 3,121,965 3,121,965 2,229,401 --
Deficit accumulated during the development stage (10,338,121) (12,425,483) (12,425,483) (13,032,917) (14,550,141)
Total shareholders' equity (deficit) (1,051,293) 796,127 12,403,627 11,796,193 10,278,969
</TABLE>
- -------
(1) See Note 2 of Notes to Financial Statements for an explanation of the
determination of the number of shares used in computing net loss per share.
(2) Adjusted to give effect to the application of the estimated net proceeds of
the Company's Unit Offering based upon an assumed initial public offering
price of $9.00 per Unit. See "Use of Proceeds" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
(3) Assumes that shares with an aggregate Rescission Price of $1.5 million are
tendered for rescission, which represents the cash portion of the Company's
potential payments under the Rescission Offer.
(4) Assumes that shares with an aggregate Rescission Price of $5,246,623 are
tendered for rescission, the first $1.5 million of which is paid in cash
and the next $3,746,623 is paid through the issuance of the Company's one
and one-half year to three-year 9% notes.
10
<PAGE>
RISK FACTORS
THE COMMON STOCK THAT IS THE SUBJECT OF THIS RESCISSION OFFER INVOLVES A
SUBSTANTIAL DEGREE OF RISK AND SHOULD BE REGARDED AS SPECULATIVE. ELIGIBLE
OFFEREES SHOULD CAREFULLY CONSIDER, IN ADDITION TO THE MATTERS SET FORTH
ELSEWHERE IN THIS PROSPECTUS, THE FOLLOWING FACTORS RELATED TO THE BUSINESS OF
THE COMPANY AND THE RESCISSION OFFERING.
POTENTIAL RESCISSION LIABILITY. This Rescission Offering is being made
to all holders of the Subject Securities. If all of the Eligible Offerees
who are holders of the Subject Securities accept the Rescission Offer, the
Company would be required to make payments in the amount of $3,121,965, plus
interest at the Statutory Rate in the approximate amount of $2,129,000, plus
applicable interest on the Notes, plus approximately 568.67 units of limited
partnership interest in AGDG. Although the Company has limited the amount of
its cash payments to $1,500,000, the payment of any amount in cash or
pursuant to the Notes will reduce the liquidity and financial resources of
the Company and may adversely affect the future growth of the Company as well
as its financial condition and results of operations.
The Company believes that its potential liability under state securities
laws for the sale or exchange of securities with inadequate disclosure will be
eliminated with respect to each Eligible Offeree who accepts the Rescission
Offer and sells the Subject Securities back to the Company. However, the fact
that the Company will issue promissory notes in lieu of cash to rescinding
shareholders residing in Oregon and Colorado if the aggregate Rescission Price
exceeds $1,500,000 may limit the preclusive effect of the Rescission Offer in
Oregon and Colorado. If all Oregon and Colorado holders of the 1,072,252 shares
successfully asserted claims against the Company, the Company would be required
to pay these holders approximately $2,674,613, plus approximately 472.67 units
of limited partnership interest in AGDG, plus statutory interest. Even if the
Company were successful in defending any securities law claims, the assertion of
such claims against the Company additionally would result in costly litigation
and significant diversions of effort by the Company's management.
The Securities and Exchange Commission takes the position that
liabilities under the federal securities laws are not terminated by making a
rescission offer. To the extent that Eligible Offerees affirmatively reject
or fail to respond to the Company's Rescission Offer, potential liability of
the Company under the 1933 Act may not be completely extinguished.
Nevertheless, under those circumstances, the Company will assert that an
Eligible Offeree who affirmatively rejects or fails to respond to the
Company's Rescission offer has released his claims to recover the purchase
price of the securities and that such claims further are barred by applicable
statutes of limitation. If the affirmative rejection or failure to respond to
the Rescission Offer does not act as a release of claims, each Eligible
Offeree who affirmatively rejects or fails to respond to the Rescission Offer
would retain any rights or claims such Eligible Offeree may have under the
federal securities laws, subject to the statute of limitations with respect
to such rights and claims. In general, for a claim based on violations of the
registration provisions of the federal securities laws, such a claim must be
brought within one year after discovery of the violation upon which the claim
is based, provided that, in no event may such claims be brought more than
three years after the occurrence of the violation. The Company accordingly
believes that the applicable statute of limitations has run with respect to
such claims. Notwithstanding the foregoing, if all holders of the 1,292,973
shares subject to the Rescission Offer successfully asserted claims against
the Company, the Company would be required to pay these holders approximately
$3,121,965, plus approximately 568.67 units of limited partnership interest
in AGDG, plus statutory interest. Even if the Company were successful in
defending any securities law claims, the assertion of such claims against the
Company additionally could result in costly litigation and diversions of
effort by the Company's management. In addition, the Rescission Offer will
not prevent the Securities and Exchange Commission from pursuing enforcement
action against the Company with respect to any violations of the federal
securities laws that may have occurred.
In addition, the rescission offer is not being made to holders of 22,021
shares of the Company's Common Stock who reside in Florida, the laws of which
do not permit rescission offerings to cure omissions in securities offering
documents. These holders of 22,021 shares of Common Stock originally
purchased such shares from the Company at prices ranging from $4.56 to $4.95
per share or through the exchange of one unit of limited partnership interest
in the Anti-Gene Development Group. There can be no assurance that claims
asserting violations of federal or state securities laws will not be asserted
by any of these shareholders against the Company or that certain holders will
not prevail against the Company in the assertion of such claims, thereby
compelling the Company to repurchase their shares. If all of the holders of
the 22,021 shares successfully asserted claims against the Company, the
Company would be required to pay these holders approximately $100,000, plus
approximately one unit of limited partnership interest in Anti-Gene
Development Group, plus approximately $44,000 in statutory interest. The
rescission offer is not being made to holders of 192,603 shares of the
Company's Common Stock who reside in the states of California and Nevada
because the Company believes that its potential liability to these
shareholders has been eliminated by the running of applicable statutes of
limitation. There can be no assurance, however, that claims asserting
violations of federal or state securities laws will not be asserted by any of
those shareholders or that certain holders will not prevail against the
Company in the assertion of such claims, compelling the Company to repurchase
their shares. If all of the holders of the 192,603 shares successfully
asserted claims against the Company, the Company would be required to pay
these holders approximately $218,450, plus approximately 54 units of limited
partnership interest in the Anti-Gene Development Group, plus approximately
$193,000 in statutory interest. Even if the Company were successful in
defending any securities laws claims, the assertion of such claims against
the Company additionally could result in costly litigation and significant
diversions of effort by the Company's management.
SECURITIES LITIGATION. Although the Company believes that its potential
liability under state securities laws for the sale of securities with inadequate
disclosure will be effectively eliminated by the Rescission Offering and the
running of applicable statutes of limitations, and that its potential liability
under federal securities laws has been effectively eliminated by the running of
applicable statutes of limitations, there can be no assurance that claims
asserting violations of state or federal securities laws based on the facts
underlying the Rescission Offer will not be asserted. A successful claim brought
against the Company could have a material adverse effect on the Company's
business, financial condition and results of operation. Even unsuccessful claims
could result in costly litigation and significant diversions of effort by the
Company's management.
DEVELOPMENT STAGE COMPANY; HISTORY OF OPERATING LOSSES. The Company is a
development stage biotechnology company. Since its inception in 1980 through
December 31, 1996, the Company had incurred losses of $12,425,483,
substantially all of which resulted from expenditures related to research and
development and general and administrative expenses. The Company has not
generated any material revenues from product sales to date, and there can be no
assurance that material revenues from product sales will ever be achieved.
Moreover, even if the Company does realize revenues from product sales, the
Company nevertheless expects to incur significant operating losses over the next
several years. The financial statements accompanying this Prospectus have been
prepared assuming that the Company will continue as a going concern. The
Company's ability to achieve a profitable level of operations in the future will
depend in large part on the completion of product development of its antisense
and/or drug delivery products, obtaining regulatory approvals for such products
and bringing several of these products to market. The likelihood of the long-
term success of the Company must be considered in light of the expenses,
difficulties and delays frequently encountered in the development and
commercialization of new pharmaceutical products, competitive factors in the
marketplace as well as the burdensome regulatory environment in which the
Company operates. There can be no assurance that the Company will ever achieve
significant revenues or profitable operations. See "Selected Financial Data"
and "Management's Discussion and Analysis of Results of Operations and Financial
Condition."
TECHNOLOGICAL UNCERTAINTY; EARLY STAGE OF PRODUCT DEVELOPMENT; NO ASSURANCE
OF REGULATORY APPROVALS. The Company's proposed products are in the pre-
clinical stage of development and will require significant further research,
development, clinical testing and regulatory clearances. The Company has no
products available for sale other than research reagents and does not expect to
have any products resulting from its research efforts commercially available for
at least several years. None of the Company's proposed products has been tested
in humans, nor has the Company filed an Investigational New Drug Application
("IND") with the United States Food and Drug Administration ("FDA") on any of
its products currently under research and development. The Company's proposed
products are subject to the risks of failure inherent in
11
<PAGE>
the development of products based on innovative technologies. These risks
include the possibilities that some or all of the proposed products could be
found to be ineffective or toxic, or otherwise fail to receive necessary
regulatory clearances; that the proposed products, although effective, will be
uneconomical to manufacture or market; that third parties may now or in the
future hold proprietary rights that preclude the Company from marketing its
products; or that third parties will develop and market a superior or equivalent
products. Accordingly, the Company is unable to predict whether its research
and development activities will result in any commercially viable products or
applications. Furthermore, due to the extended testing and regulatory review
process required before marketing clearance can be obtained, the Company does
not expect to be able to commercialize any therapeutic drug for at least several
years, either directly or through any potential corporate partners or licensees.
Although the Company and others have demonstrated the effectiveness of antisense
compounds in living cells and, in some cases, in animal models, none of the
Company's proposed products has been tested in humans and there can be no
assurance that the Company's proposed products will prove to be safe or
effective in humans or will receive the regulatory approvals that are required
for commercial sale.
NEED FOR ADDITIONAL FUNDING; UNCERTAINTY OF ACCESS TO CAPITAL. The
Company will require substantial funds for further development of its
potential products and to commercialize any products that may be developed.
The Company's capital requirements depend on numerous factors, including the
progress of its research and development programs, the progress of
pre-clinical and clinical testing, the time and cost involved in obtaining
regulatory approvals, the cost of filing, prosecuting, defending and
enforcing patent claims and other intellectual property rights, competing
technological and market developments and the ability of the Company to
establish collaborative arrangements. The Company has no current anticipated
sources of funding beyond the proceeds of the proposed Unit Offering. There
can be no assurance that the Company will successfully complete the proposed
Unit Offering on terms and conditions acceptable to the Company. The Company
believes that its existing capital resources, including the estimated net
proceeds of that offering, will be sufficient to satisfy its current and
projected funding requirements for at least 24 months from the date of this
Prospectus. The Company anticipates that after 24 months, it will require
substantial additional capital. Moreover, if the Company experiences
unanticipated cash requirements during the next 24 months, including without
limitation the tender to the Company of a significant number of shares of its
Common Stock in connection with this rescission offering, the Company could
require additional capital to fund its operations, continue research and
development programs and to continue the pre-clinical and clinical testing of
its potential products and to commercialize any products that may be
developed. The Company may seek such additional funding through public or
private financings, collaborative arrangements, or other arrangements with
third parties. There can be no assurance that additional funds will be
available on acceptable terms, if at all. The Company may receive additional
funds upon the exercise from time to time of the warrants to be sold in its
unit offering and other outstanding warrants and stock options, but there can
be no assurance that any such warrants or stock options will be exercised or
that the amounts received will be sufficient for the Company's purposes. If
additional funds are raised by issuing equity securities, further substantial
dilution to existing shareholders may result. If adequate funds are not
available, the Company may be required to delay, scale back or eliminate one
or more of its development programs, or to obtain funds by entering into
arrangements with collaborative partners or others that may require the
Company to relinquish rights to certain of its products or technologies that
the Company would not otherwise relinquish. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
UNCERTAINTY OF NOTE VALUE AND PAYMENT. The Company has been
unprofitable since its inception and has received no material revenues from
the sale of products or other sources. The Company does not expect material
revenues in the near term. The proceeds of the Company's proposed Unit
Offering are the only source of capital potentially available in the near
term to the Company, other than its existing cash and cash equivalents.
There can be no assurance that the proposed Unit Offering will be
successfully undertaken by the Company. Even if successful, although the
Company's management enjoys broad discretion with respect to the use of
proceeds from the Unit Offering, there can be no assurance that proceeds will
be applied to the payment of the Notes or that any proceeds will be available
therefor upon the maturity of the Notes. Moreover, based on the Company's
current operating plan, if the Company experiences unanticipated cash
requirements during the next 24 months, including without limitation cash
required to pay holders of a significant number of shares of its Common Stock
in connection with the rescission offering, the Company could require
significant additional capital to fund operations, continue research and
development programs, pre-clinical and clinical testing of its potential
antisense and drug delivery compounds, commercialize any products that may be
developed and make payments on the Notes. There can be no assurance that,
however, that additional funds will be available, if at all.
Although shares of the Company's Common Stock will be pledged to secured
payment of the Notes by the Company, there previously has been no public
market for the Company's Common Stock and there can be no assurance an active
public market for the Common Stock will be developed or sustained after the
Rescission Offer. In addition, even if such a public market does develop,
the obligations of the Pledgors to pledge shares are limited to shares held
of record by the Pledgors as of the date of this Prospectus and there can be
no assurance that the value of the Company's Common Stock on such public
market will be at levels so that the shares subject to the pledge will be
sufficient to satisfy the obligations of the Company in the event of a
default by the Company in the payment of the Notes. Regardless of the
sufficiency of the pledged shares, the Pledgors have no personal recourse
liability on the Notes.
The Notes are being issued pursuant to an exemption from the Trust
Indenture Act of 1939 and the protective provisions of the Act will not apply
to holders of the Notes.
LACK OF OPERATING EXPERIENCE. To date, the Company has engaged exclusively
in the development of pharmaceutical technology. Although members of the
Company's management have experience in biotechnology company operations, the
Company has no experience in manufacturing or procuring products in commercial
quantities or selling pharmaceutical products and has only limited experience in
negotiating, setting up and maintaining strategic relationships, conducting
clinical trials and other later-stage phases of the regulatory approval process.
There can be no assurance that the Company will successfully engage in any of
these activities. See "Management."
MANUFACTURING. The Company intends to undertake the manufacture of its
products through the clinical development phase. The Company has not previously
manufactured pharmaceutical products of any kind nor has it manufactured
antisense or drug delivery compounds in commercial quantities. Establishing
manufacturing facilities will require the retention of experienced personnel and
compliance with complex regulations relating to the manufacture of
pharmaceutical products. There is no assurance that the Company will be
successful in establishing and operating a manufacturing facility. See
"Business -- Manufacturing."
DEPENDENCE ON THIRD PARTIES FOR CLINICAL TESTING, MANUFACTURING AND
MARKETING. The Company does not have the resources and does not currently
intend to conduct later-stage human clinical trials itself or to manufacture all
of its proposed products for commercial sale. The Company therefore intends to
seek larger pharmaceutical company partners to conduct such activities for most
or all of its proposed products and to contract with third parties for the
manufacture of its proposed products for commercial sale. In connection with
its efforts to secure corporate partners, the Company will seek to retain
certain co-marketing rights to certain of its proposed products, so that it may
promote such products to selected medical specialists while its corporate
partner promotes these products to the general medical market. There can be no
assurance that
12
<PAGE>
the Company will be able to enter into any such partnering arrangements on this
or any other basis. In addition, there can be no assurance that either the
Company or its prospective corporate partners can successfully introduce its
proposed products, that they will achieve acceptance by patients, health care
providers and insurance companies, or that they can be manufactured and marketed
at prices that would permit the Company to operate profitably. With respect to
the Company's products, the Company may seek to enter into joint venture,
sublicense or other marketing arrangements with another party that has an
established marketing capability. There can be no assurance that the Company
will be able to enter into any such marketing arrangements with third parties,
or that such marketing arrangements would be successful. Failure to market its
products successfully would have a material adverse effect on the Company's
business and results of operations. In addition, the Company has no current
joint venture, strategic partnering or other similar agreements with
pharmaceutical companies, and there can be no assurance that the Company could
negotiate any such arrangements, on an acceptable basis or at all, if it chose
to do so. Accordingly, the commercial viability of the Company's proposed
products has not been independently evaluated by any independent pharmaceutical
company. See "Business -- Manufacturing" and "Marketing Strategy."
NEED TO COMPLY WITH GOVERNMENTAL REGULATION AND TO OBTAIN PRODUCT
APPROVALS. The testing, manufacturing, labeling, distribution, marketing and
advertising of products such as the Company's proposed products and its ongoing
research and development activities are subject to extensive regulation by
governmental regulatory authorities in the United States and other countries.
The FDA and comparable agencies in foreign countries impose substantial
requirements on the introduction of new pharmaceutical products through lengthy
and detailed clinical testing procedures and other costly and time-consuming
compliance procedures. The Company's compounds require substantial clinical
trials and FDA review as new drugs. The Company cannot predict with certainty
when it might submit its products currently under development for regulatory
review. Once the Company submits its potential products for review, there can
be no assurance that FDA or other regulatory approvals for any pharmaceutical
products developed by the Company will be granted on a timely basis or at all.
A delay in obtaining or failure to obtain such approvals would have a material
adverse effect on the Company's business and results of operations. Failure to
comply with regulatory requirements could subject the Company to regulatory or
judicial enforcement actions, including, but not limited to, product recalls or
seizures, injunctions, civil penalties, criminal prosecution, refusals to
approve new products and withdrawal of existing approvals, as well as
potentially enhanced product liability exposure. Sales of the Company's
products outside the United States will be subject to regulatory requirements
governing clinical trials and marketing approval. These requirements vary
widely from country to country and could delay introduction of the Company's
products in those countries. See "Business -- Drug Approval Process and Other
Government Regulation."
DEPENDENCE ON KEY PERSONNEL. The success of the Company's business will
depend to a large extent on the abilities and continued participation of
certain key employees, including Drs. Denis Burger, James Summerton, and
Dwight Weller, upon each of whom the Company holds key man life insurance.
The Company has entered into employment agreements with each of the key
employees, which agreements restrict their ability to compete with the
Company for a period of two years following termination of their employment.
The loss of any of these persons or of other key employees could
significantly delay the achievement of the Company's planned development
objectives. Competition for qualified personnel among pharmaceutical
companies is intense, and the loss of key personnel, or the inability to
attract and retain the additional, highly skilled personnel required for the
expansion of the Company's activities, could have a material adverse effect
on the Company's business and results of operations. See "Management."
FORECLOSURE OF PLEDGE; POTENTIAL CHANGE OF CONTROL; ADVERSE EFFECT ON
MARKET PRICE. The Company will issue the Notes in lieu of cash to rescinding
shareholders residing in Oregon and Colorado if the aggregate Rescission
Price of the shares tendered for rescission exceeds $1,500,000. Certain
officers and directors of the Company, including Drs. Denis Burger, James
Summerton and Dwight Weller, have agreed to maintain as security for payment
of the Notes sufficient shares of Common Stock of the Company that the
aggregate value of such shares equals 120% of the outstanding principal
amount of the Notes. The directors and officers own, of record, 3,569,030
shares of the Common Stock of the Company as of the date of this Prospectus,
which will represent approximately 40% of the Company's outstanding Common
Stock if all Eligible Offerees exercise their right to rescind. The Company's
issuance of Notes in connection with the Rescission Offer, together with a
significant decline in the market value of the Company's Common Stock, could
result in the pledge of a sufficient number of shares to effect a change of
control of the Company upon a default by the Company and foreclosure of the
pledged shares. The sale of a substantial number of shares of the Company's
Common Stock could adversely affect the market price of the Common Stock and
the Company's ability to raise capital in the future in the equity markets.
There can be no assurance that key personnel will be retained if parties
acquire control of the Company through the acquisition of substantial shares
as a result of a foreclosure. See "Dependence on Key Personnel."
COMPETITION. Competition in the area of pharmaceutical products is
intense. There are many companies, both public and private, including
well-known pharmaceutical companies, that are engaged in the development of
products for certain of the applications being pursued by the Company. The
Company's probable competitors in the antisense and drug delivery fields include
Glaxo Ltd. ("Glaxo"), Boehringer Ingelheim Inc. ("Boehringer Ingelheim"), Gilead
Sciences Inc. ("Gilead"), Hybridon Inc. ("Hybridon"), ISIS Pharmaceuticals, Inc.
("ISIS"), Lynx Therapeutics Inc. ("Lynx"), Cygnus, Inc. (Cygnus"), Biovail
Corporation International ("Biovail"), and Noven Pharmaceuticals, Inc.
("Noven"), among others. Most of these companies have substantially greater
financial, research and development, manufacturing and marketing experience, and
resources than the Company does and represent substantial long-term competition
for the Company. Such companies may succeed in developing pharmaceutical
products that are more effective or less costly than any that may be developed
by the Company.
Factors affecting competition in the pharmaceutical industry vary depending
on the extent to which the competitor is able to achieve a competitive advantage
based on patented or proprietary technology. If the Company is able to
establish and maintain a significant patent position with respect to its
antisense compounds and drug delivery technology, its competition will likely
depend primarily on the effectiveness of the products and the number, gravity
and severity of unwanted side effects, if any, with its products as compared to
alternative products.
The industry in which the Company competes is characterized by extensive
research and development efforts and rapid technological progress. Although the
Company believes that its patent position may give it a competitive advantage
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<PAGE>
with respect to its proposed antisense compounds and drug delivery products, new
developments are expected to continue and there can be no assurance that
discoveries by others will not render the Company's potential products
noncompetitive. The Company's competitive position also depends on its ability
to attract and retain qualified scientific and other personnel, develop
effective products, implement development and marketing plans, obtain patent
protection, and secure adequate capital resources. See "Business --
Competition."
PATENTS AND PROPRIETARY RIGHTS. The Company believes that its ultimate
success will depend in part on the strength of its existing patents and
additional patents that it files in the future. Patent applications have
been filed covering the basic compositions of matter, methods of synthesis
and medical uses of NEU-GENES. These applications were filed in the United
States, Canada, Europe, Australia, and Japan. Certain of the Company's
patents were issued in the United States from 1991 through the present.
Additionally, patents on NEU-GENE chemistry and CYTOPORTER drug delivery
systems have recently been filed. There can be no assurance, however, that
any additional patents will ultimately issue. Although the Company believes
that its technology is adequately protected, there is no assurance that any
existing or future patents will survive a challenge or will otherwise provide
meaningful protection from competition. There is also no assurance that the
Company will have the financial resources to provide a vigorous defense of
its patent position, if challenged or that the practice of its patented and
proprietary technology will not infringe third-party patents. If an actual
infringement were instituted against the Company, there can be no assurance
that the Company would have the financial ability to defend the action or
that the action would not have an adverse effect on the Company. The
Company's success will also depend on its ability to avoid infringement of
patent or other proprietary rights of others or that it will be able to
obtain any technology licenses it may require in the future. See "Business
- -- Patent and Proprietary Rights."
RISK OF PRODUCT LIABILITY. Clinical trials or marketing of any of the
Company's potential pharmaceutical products may expose the Company to liability
claims from the use of these products. The Company currently intends to obtain
product liability insurance at the appropriate time; however, there can be no
assurance that the Company will be able to obtain or maintain insurance on
acceptable terms for its clinical and commercial activities or that such
insurance would be sufficient to cover any potential product liability claim or
recall. Failure to have sufficient coverage could have a material adverse
effect on the Company's business and results of operations.
CONTROL BY EXISTING SHAREHOLDERS. The Company's officers, directors and
principal shareholders, and certain of their affiliates, beneficially own 46% of
the Company's outstanding Common Stock. If all Eligible Offerees exercise their
right to rescind, the Company's officers, directors, and principal shareholders,
will beneficially own 52% of the Company's then outstanding Common Stock. Such
concentration of ownership may have the effect of delaying or preventing a
change in control of the Company. Additionally, these shareholders will have
significant influence over major corporate transactions as well as the election
of directors of the Company and control over Board decisions. See "Principal
Shareholders."
ANTI-TAKEOVER EFFECTS OF CERTAIN CHARTER PROVISIONS AND OREGON LAW.
Certain provisions of the Company's Second Restated Articles of Incorporation
and Bylaws could discourage potential acquisition proposals, could delay or
prevent a change in control of the Company and could make removal of management
more difficult. Such provisions could diminish the opportunities for a
shareholder to participate in tender offers, including tender offers that are
priced above the then-current market value of the Common Stock. The provisions
may also inhibit increases in the market price of the Common Stock and Warrants
that could result from takeover attempts. For example, the Board of Directors
of the Company, without further shareholder approval, may issue up to 2,000,000
shares of Preferred Stock, in one or more series, with such terms as the Board
of Directors may determine, including rights such as voting, dividend and
conversion rights which could adversely affect the voting power and other rights
of the holders of Common Stock. Preferred Stock thus may be issued quickly with
terms calculated to delay or prevent a change in control of the Company or make
removal of management more difficult. Additionally, the issuance of Preferred
Stock may have the effect of decreasing the market price of the Common Stock.
The Oregon Control Share Act and Business Combination Act limit the ability of
parties who acquire a significant amount of voting stock to exercise control
over the Company. These provisions may have the effect of lengthening the time
required for a person to acquire control of the Company through a proxy contest
or the election of a majority of the Board of Directors and may deter efforts to
obtain control of the Company. Finally, the Company's Board of Directors is
divided into two classes, each of which serves for a staggered two-year term,
which may make it more difficult for a third party to gain control of the
Company's Board of Directors. See "Description of Securities."
NO PRIOR PUBLIC MARKET. There previously has been no public market for the
Company's Common Stock or Warrants. There can be no assurance that an active
public market for the Common Stock or Warrants will develop or be sustained
after the proposed Unit Offering by the Company or that the Company will
successfully complete the Unit Offering. All of the Company's outstanding
shares of Common Stock, other than those issued in connection with the Company's
Unit Offering, are "restricted securities," which means that such shares are not
freely tradeable and may not be offered or sold at any time unless the
transaction is registered under the 1933 Act or an exemption from registration
is available. A decision not to accept the Rescission Offer will not affect the
restricted status of the Common Stock held by any Eligible Offeree. Although
the Company intends to apply to the NASDAQ Stock Market's National Market for
listing of its Common Stock and warrants issued in connection with the Unit
Offering, no assurance can be given that a public market for the Common Stock
will develop in the foreseeable future or, should a market develop, that
prevailing market prices will exceed those paid by Eligible Offerees for the
Common Stock.
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ABSENCE OF DIVIDENDS. The Company has never paid cash dividends on its
Common Stock and does not anticipate paying cash dividends in the foreseeable
future. See "Dividend Policy."
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<PAGE>
DIVIDEND POLICY OF THE COMPANY
The Company has not declared or paid cash dividends on its Common Stock.
The Company currently intends to retain all future earnings to fund the
operation of its business and, therefore, does not anticipate paying dividends
in the foreseeable future. Future cash dividends, if any, will be determined by
the Board of Directors.
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CAPITALIZATION OF THE COMPANY
The following table sets forth the capitalization of the Company as of
December 31, 1996 (i) on an actual basis, (ii) as adjusted to reflect the
receipt and application of the estimated net proceeds from the sale of the
1,500,000 Units offered by the Company at an assumed initial offering price of
$9.00 per Unit, and (iii) as adjusted to give effect to the Rescission Offer;
assuming that the interest component maintains a constant proportion of the
total Rescission Price.
<TABLE>
<CAPTION>
December 31, 1996
-----------------------------------------------------------------
Actual As Adjusted (2) As Adjusted (3) As Adjusted (4)
<S> <C> <C> <C> <C>
Long-term debt, including current portion $ -- $ -- $ -- $ 3,746,623
---------- ---------- ---------- ----------
Common stock subject to rescission 3,121,965 3,121,965 2,229,401 --
Shareholders' equity:
Preferred stock, $0.0001 par value: 2,000,000
shares authorized; no shares issued and
outstanding, actual and as adjusted(1) -- -- -- --
Common stock, $0.0001 par value: 50,000,000
shares authorized; 7,486,790 shares issued
and outstanding, actual; 8,986,790 shares
issued and outstanding, as adjusted(2)(3)(4) 749 899 899 899
Additional paid in capital 13,220,861 24,828,211 24,828,211 24,828,211
Deficit accumulated during the development stage (12,425,483) (12,425,483) (13,032,917) (14,550,141)
---------- ---------- ---------- ----------
Total shareholders' equity 796,127 12,403,627 11,796,193 10,278,969
---------- ---------- ---------- ----------
Total capitalization $ 796,127 $12,403,627 $11,796,193 $10,278,969
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
(1) Reflects an amendment to the Company's Articles of Incorporation that was
effective November 4, 1996, authorizing the issuance of up to 2,000,000
shares of Preferred Stock.
(2) Excludes 1,551,261 shares of Common Stock issuable upon exercise of stock
options and warrants outstanding as of December 31, 1996, at a weighted
average exercise price of $4.66 per share. Also excludes 209,506 shares
reserved for future issuance pursuant to the Company's Stock Incentive
Plan. See "Management--Stock Incentive Plan" and Note 3 of Notes to
Financial Statements.
(3) Assumes that shares with an aggregate Rescission Price of $1,500,000
are tendered for rescission, which represents the cash portion of
the Company's potential payments under the Rescission Offer.
(4) Assumes that shares with an aggregate Rescission Price of $5,246,623 are
tendered for rescission, the first $1.5 million of which is paid in cash
and the next $3,746,623 is paid through the issuance of the Company's one
and one-half year to three-year 9% notes.
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<PAGE>
SELECTED FINANCIAL DATA OF THE COMPANY
The Selected Financial Data set forth below for the years ended December
31, 1995 and 1996, and for the period from July 22, 1980 (inception) through
December 31, 1996, and with respect to the Balance Sheet Data at December 31,
1995 and 1996 are derived from, and are qualified by reference to, the
audited Financial Statements and related Notes thereto included elsewhere in
this Prospectus and should be read in conjunction with those audited
Financial Statements and Notes thereto. The Selected Financial Data set
forth below are qualified by reference to, and should be read in conjunction
with, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the Financial Statements and Notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Period From
July 22, 1980
Year Ended (Inception)
December 31, through
----------------------------- December 31,
1995 1996 1996
------------- ------------- -------------
(unaudited)
STATEMENTS OF OPERATIONS DATA:
<C> <C> <C> <C>
Revenues, from grants and research
contracts. . . . . . . . . . . . . . . . . . $ 82,500 $ 27,227 $ 698,497
------------- ------------- -------------
Operating expenses:
Research and development. . . . . . . . . 2,097,796 1,729,554 9,011,574
General and administrative. . . . . . . . 609,723 613,811 4,549,582
------------- ------------- -------------
Total operating expenses . . . . . . . 2,707,519 2,343,365 13,561,156
------------- ------------- -------------
Other income. . . . . . . . . . . . . . . . 68,133 228,776 446,176
------------- ------------- -------------
Net loss. . . . . . . . . . . . . . . . . . $ (2,556,886) $ (2,087,362) $ (12,425,483)
-------------- -------------- --------------
-------------- -------------- --------------
Net loss per share (1). . . . . . . . . . . $ (0.37) $ (0.25)
-------------- --------------
-------------- --------------
Shares used in per share
calculation (1) . . . . . . . . . . . . . 6,982,459 8,233,548
-------------- --------------
-------------- --------------
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
December -----------------------------------------------------------------
BALANCE SHEET DATA 31, 1995 Actual As Adjusted (2) As Adjusted (3) As Adjusted (4)
<S> <C> <C> <C> <C> <C>
Working capital 646,814 2,738,677 14,346,177 12,646,177 12,846,177
Total assets 2,324,736 4,248,899 15,856,399 14,356,399 14,356,399
Common stock subject to rescission 3,121,965 3,121,965 3,121,965 2,229,401 --
Deficit accumulated during the development stage (10,338,121) (12,425,483) (12,425,483) (13,032,917) (14,550,141)
Total shareholders' equity (deficit) (1,051,293) 796,127 12,403,627 11,796,193 10,276,969
</TABLE>
- -------
(1) See Note 2 of Notes to Financial Statements for an explanation of the
determination of the number of shares used in computing net loss per share.
(2) Adjusted to give effect to the application of the estimated net proceeds of
the Company's Unit Offering based upon an assumed initial public offering
price of $9.00 per Unit. See "Use of Proceeds" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
(3) Assumes that shares with an aggregate Rescission Price of $1.5 million are
tendered for rescission, which represents the cash portion of the Company's
potential payments under the rescission offer.
(4) Assumes that shares with an aggregate Rescission Price of $5,246,623 are
tendered for rescission, the first $1.5 million of which is paid in cash
and the next $3,746,623 is paid through the issuance of the Company's one
and one-half year to three-year 9% notes.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OF THE COMPANY
OVERVIEW
From its inception in July 1980, the Company has devoted its resources
primarily to fund its research and development efforts. The Company has been
unprofitable since inception and, other than limited interest and grant revenue,
has had no revenues from the sale of products or other sources, and does not
expect revenues for at least the next 12 months. The Company expects to continue
to incur losses for the foreseeable future as it expands its research and
development efforts. As of December 31, 1996 the Company's accumulated deficit
was $12,425,483.
The Company intends to use the net proceeds of this offering to expand its
research and administrative operations. In support of this, the Company expects
to use up to $5 million of the net proceeds of this offering for the
pre-clinical development and the clinical trial phases of the Company's
near-term therapeutic programs including contract GMP manufacturing. The Company
intends to increase its research staff as it prepares to initiate pre-clinical
studies and file INDs for Resten-NG and Cyclosporin-CP in 1997. The Company's
administrative staff will be supplemented as needed to support the research and
development activities, to assure compliance with governmental regulatory
requirements, and to develop and establish strategic pharmaceutical alliances.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1996.
The Company had revenues from research contracts of $82,500 and $27,227 for
the years ended December 31, 1995 and 1996 respectively. Revenues for both
time periods were derived from research collaborations with outside
organizations, and the decrease between the current and prior year periods
was due primarily to the completion of a collaborative research program.
Operating expenses were $2,707,519 and $2,343,365 for the years ended
December 31, 1995 and 1996 respectively. The decrease in operating expenses
was due to a reduction in staff and other efficiencies that resulted from a
shift in focus of the Company's research. General and administrative
expenses, however, remained relatively constant at $609,723 and $613,811 over
the 1995 and 1996 comparable years, respectively. Other income increased from
$68,133 to $228,776 for the years ended December 31, 1995 and 1996
respectively, primarily due to the sale of short term investments and
increased interest income in 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception primarily through
private equity sales totaling $16,340,342 and grants and contract research
funding of $689,497 from various sources. The Company's cash and cash
equivalents were $680,892 at December 31, 1995 and $3,011,229 at December 31,
1996. The increase of $2,330,337 was due to net proceeds from the sale of the
Company's common stock of approximately $4,031,532 offset by the usage of
approximately $1,608,088 for operations.
The Company's future expenditures and capital requirements will depend on
numerous factors, including without limitation, the progress of its research
and development programs, the progress of its preclinical and clinical
trials, the time and costs involved in obtaining regulatory approvals, the
cost of filing, prosecuting, defending and enforcing any patent claims and
other intellectual property rights, competing technological and market
developments, the ability of the Company to establish collaborative
arrangements and the terms of any such arrangements, and the costs associated
with commercialization of its products. The Company's cash requirements are
expected to continue to increase significantly each year as it expands
19
<PAGE>
its activities and operations. There can be no assurance, however, that the
Company will ever be able to generate product revenues or achieve or sustain
profitability. See "Risk Factors."
The proceeds of this offering are the only source of capital currently
available to the Company, other than existing cash and cash equivalents. See
"Use of Proceeds." The Company believes that the estimated net proceeds from
this offering and existing cash and cash equivalents will satisfy its budgeted
cash requirements for at least the next twenty-four months based upon the
Company's current operating plan. The Company's current operating plan shows
that at the end of the twenty-four month period, the Company will require
substantial additional capital. Moreover, if the Company experiences
unanticipated cash requirements during the twenty-four month period, including
without limitation, cash required to pay the holders of a significant number of
shares of Common Stock in connection with the Company's proposed rescission
offering, the Company could require additional capital to fund operations,
continue research and development programs and pre-clinical and clinical testing
of its potential antisense and drug delivery products and commercialize any
products that may be developed. See "Risk Factors - Potential Liability Arising
From Rescission Rights of Certain Shareholders." The Company may seek such
additional funding through public or private financings or collaborative or
other arrangements with third parties. There can be no assurance, however, that
additional funds will be available on acceptable terms, if at all. See "Risk
Factors - Additional Financing Requirements."
The Company anticipates that it will satisfy the cash requirements of the
Rescission Offer from current cash and cash equivalents. Potential continuing
liability from the issuance of Notes related to the Rescission Offer could
result in substantial ongoing interest expense and adversely affect the
Company's access to capital markets. For example, the Company's issuance of
Notes would result in additional annual interest expense of approximately
$90,000 for each $1,000,000 of Notes issued, up to a maximum of approximately
$300,000 if all Eligible Offerees exercise their right to rescind. All such
potential increases in annual interest expense could have the effect of
increasing the Company's net loss. Additionally, the potential additional
debt would make it more difficult for the Company to satisfy minimum net
worth standards required to list the Company's Common Stock for quotation on
the Nasdaq National Market System. Finally, the potential additional debt
could adversely affect the Company's creditworthiness in the view of
potential lenders and investors, making it more difficult and expensive for
the Company to obtain needed financing.
20
<PAGE>
BUSINESS OF THE COMPANY
GENERAL OVERVIEW
ANTIVIRALS is a pioneer in the field of the gene-inactivating technology
referred to as ANTISENSE and has developed a patented class of antisense
compounds which may be useful in the treatment of a wide range of human
diseases. The Company also has developed new drug delivery technology which may
be useful with many FDA-approved drugs as well as with its antisense compounds.
The Company's drug development program has two areas of near-term focus:
- NEU-GENE antisense compounds for selected applications, and
- CYTOPORTER drug delivery engines for enhanced delivery of FDA-
approved drugs with delivery problems.
The Company's long-term product development program combines its NEU-GENE and
CYTOPORTER technologies to produce combination drugs with potential
applications for many diseases. The Company has filed patent applications
covering the basic compositions of matter, methods of synthesis and
therapeutic uses of NEU-GENES in the United States, Canada, Europe, Australia
and Japan. Eleven patents have issued in the United States and nine others
have been granted in the European Patent Office, Japan, Canada and Australia.
Additional patent applications, covering the Company's basic compositions of
matter, methods of synthesis and medical uses of CYTOPORTER compounds have
been filed.
The first application of the Company's antisense technology is designed
to treat restenosis, a cardiovascular disease. The Company is currently in
pre-clinical development with this compound and expects to file an IND to
begin clinical trials in 1998. The Company's first planned drug delivery
products combine its CYTOPORTER delivery engine with two FDA-approved drugs
that have delivery problems. These drugs, cyclosporin and paclitaxel
(Taxol-Registered Trademark-), will both be off patent by late 1997 and could
have much wider use if their delivery problems are reduced. The Company
expects to file an IND to begin clinical trials with its enhanced form of
cyclosporin and to initiate pre-clinical studies with its enhanced form of
paclitaxel in 1998. See "Drug Approval Process and Other Government
Regulations."
DRUG DESIGN AND DEVELOPMENT. Most conventional drugs are chemicals
designed to induce or inhibit the function of a target protein molecule with as
few side effects as possible. Conventional drugs are not available for many
diseases due to their low level of selectivity for the specific disease target
or because they are difficult to deliver to their targets. These two issues,
lack of selectivity and poor delivery, may contribute to poor efficacy, unwanted
side effects or high toxicity, even at a suboptimal dosages. Moreover, the
development of conventional drugs is usually time consuming and expensive, since
thousands of compounds must be produced and analyzed to find one with an
acceptable balance between efficacy and toxicity. Safe and effective
therapeutics for viral and host diseases have been particularly difficult to
develop because these diseases use the patient's own cellular machinery and
therefore provide few specific targets for therapeutic intervention that will
not prove toxic to the patient.
Antisense technology has the potential to provide safe and effective
treatment for a wide range of diseases, including viral and host diseases. This
new approach uses synthetic compounds, or polymers, designed to inactivate
selected genetic sequences, thereby halting the disease process. Targeting
these genetic sequences provides the selectivity that is not available in
conventional drug development which typically targets proteins directly. The
antisense approach inhibits at the genetic level the mechanisms which underlie
the production of disease-producing proteins.
To reach their therapeutic targets, many drugs must cross tissue and
cellular barriers. Drugs that have an intracellular site of action must cross
the lipid barrier of cellular membranes to move from the aqueous environment in
blood into the interior of target cells. Therefore, these drugs must achieve
solubility in both water and lipids. Since few compounds have these solubility
characteristics, many drug candidates are a compromise between inherent
solubility and effective delivery. This trade-off greatly reduces efficacy and
may significantly heighten toxicity of many drug candidates as well as many FDA-
approved drugs.
The Company has developed two distinct technologies designed to address the
critical issues in drug development. The Company's NEU-GENE antisense
technology addresses the issue of drug selectivity, and its CYTOPORTER drug
delivery technology addresses delivery problems with both FDA-approved drugs and
antisense compounds. The characteristics of the patented structure of the
Company's NEU-GENE compounds distinguish its antisense technology from competing
technologies and provide the selectivity for a single disease target that is the
hallmark of all antisense technology. The Company's
21
<PAGE>
molecular engine, CYTOPORTER, is designed to transport certain drugs with poor
delivery characteristics across the lipid barrier of cellular membranes into the
interior of cells to reach their targets.
NEAR-TERM PRODUCT DEVELOPMENT SUMMARY
The first application of the Company's antisense technology is designed to
treat restenosis. The Company's first planned drug delivery products combine
its CYTOPORTER delivery engine with two FDA-approved drugs, paclitaxel (Taxol)
and cyclosporin, each of which the Company believes could have much broader
usage if their delivery problems are reduced.
<TABLE>
<CAPTION>
COMPOUND DRUG POTENTIAL INDICATION DEVELOPMENT STATUS
-------- ---- -------------------- ------------------
<S> <C> <C> <C>
AVI-2221 NEU-GENE Resten-NG Restenosis Pre-clinical studies in 1997
and IND filing expected in 1998
AVI-2401 CYTOPORTER Cyclosporin-CP Transplantation Pre-clinical studies in 1997 and
IND filing expected in 1998
AVI-2301 CYTOPORTER Paclitaxel-CP Cancer Pre-clinical studies expected in
1998
</TABLE>
ANTISENSE - NEU-GENE
TECHNICAL OVERVIEW
GENETIC STRUCTURE AND FUNCTION. All life forms contain genetic information
in molecules called DNA and RNA which comprise the operating instructions for
all life processes. The specific instructions are called genes, which are long
chains or strands of the four genetic bases: adenine, cytosine, guanine and
thymine, represented by the letters, A, C, G and T, respectively. The molecular
structures of these letters are complementary, such that A pairs with T, and C
pairs with G. Consequently, each genetic strand has the unique ability to bind
specifically to its complementary strand to form a duplex.
The information encoded in the DNA by its sequence of genetic letters is
used to make proteins. To accomplish this, one strand (called the template
strand) of the duplex DNA is copied to make a new complementary strand, referred
to as messenger RNA. This messenger RNA is referred to as the SENSE strand
because it carries the information used to assemble a specific protein. See
"Figure 1" below. An ANTISENSE compound is a synthetic strand that is
complementary to a small portion of the messenger RNA. Antisense compounds
pair with their complementary messenger RNA sense strand to form a duplex,
preventing the message from initiating protein assembly. See "Figure 2" below.
FIGURE 1--GENETIC FUNCTION
[Genetic Function Diagram]
22
<PAGE>
GENE-TARGETED THERAPEUTICS. Most human diseases arise from the function or
dysfunction of genes within the body, either those of pathogens, such as
viruses, or of one's own genes. New techniques in molecular biology have led to
the identification of the genes associated with most of the major human diseases
and to the determination of the sequence of their genetic letters. Using modern
methods of chemical synthesis, a genetic compound can be prepared that is
complementary to a critical SENSE sequence in a pathogen or pathogenic process.
When this complementary ANTISENSE compound binds tightly to the disease-causing
sequence, the selected protein is inhibited, and thus the pathogen or pathogenic
process is disabled. See "Figure 2" below.
FIGURE 2--ANTISENSE INHIBITION OF GENETIC FUNCTION
[Antisense Inhibition Diagram]
Antisense compounds are composed of repeating structures or subunits that
are linked together forming a polymer, referred to as the antisense BACKBONE.
Each subunit carries a genetic letter (A, C, G, or T) that pairs with its
corresponding letter in the genetic target. Although the genetic letters are a
feature common to all antisense compounds, the structure of the subunits and the
linkage groups that string them together may differ greatly. These differences
in the subunits and the linkages define the different types of antisense
backbones and their corresponding physical and biological properties. The
Company is distinguished from all other antisense companies by the
characteristics of its patented antisense backbone. The subunits which carry
the genetic letters on the Company's backbone are synthetic products rather than
modified natural materials. In addition, the linkages used to string the
subunits together carry no charge in the Company's backbone. The Company
believes these differences may provide pharmaceutical advantages that are
critical for antisense drug development to meet the challenges of broad clinical
utility.
FIRST-GENERATION COMPOUNDS. The first gene-inactivating compounds had
backbones composed of natural genetic materials and linkages. Development of
these compounds began in the late 1960s. As work continued in this new field,
it became increasingly clear that there were significant problems with these
structures. These natural compounds were degraded or broken down by enzymes in
the blood and within cells and had difficulty crossing cellular membranes to
enter the cells that contained their genetic target.
SECOND-GENERATION COMPOUNDS. To overcome these problems of degradation and
permeability, several research groups developed modified backbones in the late
1970s which were designed to resist degradation by enzymes and to enter tissues
and cells more efficiently. The most common of these types, the
phosphorothioate backbones used by ISIS Pharmaceuticals and Hybridon, use
natural DNA subunits linked together by a sulfur-containing, charged linkage.
The
23
<PAGE>
Company was also extensively involved in developing second-generation backbones
through the mid-1980s. After extensive investigation, however, the Company
concluded that even after optimization, these second-generation compounds might
lack the combination of properties desirable for broad clinical utility. For
this reason, the Company abandoned development of second-generation backbones in
the mid-1980s and started development of third-generation backbones designed to
address these drawbacks. Today, in spite of extensive progress in the field,
the Company believes that there remain serious limitations to second-generation
compounds due to problems with the stability, specificity, cost effectiveness,
and delivery of these compounds.
NEU-GENE THIRD-GENERATION TECHNOLOGY. By the mid-1980s, the limitations of
the second-generation compounds led the Company to pursue the development of
antisense technology with improved pharmaceutical properties which could be
produced in a cost-effective manner. This effort culminated in the Company's
development of a new class of compounds having a backbone of synthetic subunits
carrying each genetic letter, with each subunit linked together by a patented
uncharged linkage group. The synthetic subunits and linkages are not found in
nature, but rather were designed and synthesized to meet specific pharmaceutical
parameters. These patented third-generation agents, known as NEU-GENE
compounds, display advantageous pharmaceutical properties (stability, neutral
charge, high binding affinity and specificity). Moreover, they are made from
less expensive, more abundant materials, and the Company believes that they will
cost significantly less to produce than second-generation compounds.
The Company and others have shown in cell culture and animal studies that
NEU-GENE compounds inhibit targeted genetic sequences. With these scientific
benchmarks in place, the Company's objective is to develop its third-generation
antisense compounds into effective and affordable therapeutics for major
infectious and host diseases.
PHARMACEUTICAL PROPERTIES OF ANTISENSE COMPOUNDS. If antisense compounds
are to become widely applicable pharmaceutical compounds, the following
challenges must be addressed.
- Stability: resistance to enzymatic degradation both in blood and
inside cells
- Efficacy: ability to inhibit expression of the target gene
- Specificity: binding restricted to the selected target, reducing
toxicity
- Cost effectiveness: manufacturing efficiency which allows a broad
range of applications
- Delivery: ability to cross tissue and cellular barriers in order
to reach targeted genetic sequences
The Company's core technology differentiates it from others developing
gene-inactivating compounds. The Company believes its principal competitive
advantage in the antisense area is the chemical structure of the NEU-GENE
backbone which was developed to address all of the above parameters.
STABILITY. Biological stability is principally determined by the degree of
resistance to enzymatic degradation. Because the NEU-GENE backbone is a unique
synthetic structure, the Company believes that there are no enzymes found in man
to degrade it. The Company has conducted studies indicating that these agents
are stable in blood and are stable to a broad range of degradative enzymes.
EFFICACY AND SPECIFICITY. Efficacy refers to the efficiency with which the
antisense compounds block selected protein production. In a direct comparison
with second-generation compounds conducted by the Company, its NEU-GENE
compounds exhibited significantly better binding to both RNA and DNA, as well as
substantially greater inhibition of the activity of targeted genetic sequences.
Specificity can be assessed by comparing target inactivation of perfectly paired
sequences and mispaired sequences. In the Company's direct comparison studies,
NEU-GENE compounds exhibited substantially greater specificity than all other
backbone types tested.
COST EFFECTIVENESS. The difficulty of synthesizing antisense compounds has
been a concern in the field since its inception. The cost of producing gene-
inactivating polymers depends to a considerable extent on the cost of the
subunits from which they are constructed. The Company believes that because of
abundant, low-cost materials, simpler production techniques and higher yields,
the subunits used for NEU-GENE synthesis will cost substantially less than those
used in the synthesis of second-generation backbones. After the genetic
subunits are prepared, they must be assembled in a defined order to form the
desired gene-inactivating polymer. The Company believes that the total cost of
production of commercial
24
<PAGE>
quantities of NEU-GENES will be significantly less than that of gene-
inactivating compounds prepared from natural or modified subunits by
competitors.
DELIVERY. To reach their targets, antisense compounds must cross tissue
and cellular barriers, including cellular and nuclear membranes. Preliminary
research indicates that antisense compounds, including those of the Company, may
face delivery problems when addressing many diseases. Accordingly, the Company
has devoted substantial research effort to develop technology for delivering
NEU-GENES to the interior of the cell. See "Drug Delivery - CYTOPORTER."
NEAR-TERM ANTISENSE PRODUCT DEVELOPMENT - RESTENOSIS
The first application of the Company's antisense technology is designed to
treat restenosis, a cardiovascular disease. Restenosis results from the failure
of balloon angioplasty due to a rapid growth of smooth muscle cells leading to a
second blockage of a coronary artery. There are approximately 400,000 balloon
angioplasties done in the United States each year with a failure rate of
approximately 30% - 40%. Although balloon angioplasty may avoid expensive
bypass surgery if successful, restenosis may ultimately require the patient to
undergo bypass surgery. The Company has selected restenosis as its first
antisense product opportunity because the Company believes that delivery of NEU-
GENE compounds is achievable in this disease setting, NEU-GENE compounds have
the combination of other properties to address this disease and because the
restenosis market is estimated at more than $1 billion annually in the United
States.
When a patient has a blocked coronary artery, a procedure called balloon
angioplasty is frequently used to remove the blockage. In this procedure a
balloon catheter is inserted in the artery up to the blockage and the balloon is
inflated to open the artery. The balloon scrapes away the blockage as it
interfaces with the blocked portion of the artery. During this process,
vascular cells, including smooth muscle cells which underlie the blockage, may
be damaged. This process may result in rapid cell division leading to closure
of the artery a second time. Restenosis occurs in 30% - 40% of these procedures
and cannot be predicted from patient to patient. The precise mechanisms which
cause this reaction are not known. However, scientific evidence suggests that,
if the smooth muscle cells can be prevented from dividing for a few days until
the integrity of the artery is reestablished, restenosis could be prevented in
a significant number of cases. Although there are a few new clinical approaches
that attempt to prevent restenosis, none is very effective and all have
significant risks associated with them.
There is scientific evidence that antisense compounds readily enter scrape-
damaged artery cells and the Company has demonstrated that its NEU-GENE
antisense compounds readily enter and function in scraped cells in the
laboratory. The Company has selected target genetic sequences, has produced
drug candidates, and has demonstrated that its NEU-GENE compounds inhibit cell
division in laboratory models for this disease. Compound AVI-2221, Resten-NG,
is now in pre-clinical development for restenosis, and the Company expects to
file an IND to begin clinical trials in 1997. See "Drug Approval Process and
Other Government Regulations." The Company intends to co-develop its NEU-GENE
restenosis compound with a pharmaceutical partner. There can be no assurance,
however, that the Company will be able to attract any partnerships or establish
any such relationship on favorable terms.
DRUG DELIVERY - CYTOPORTER
Since NEU-GENES are large molecules that do not readily make their way into
cells, the Company has been developing a delivery mechanism that would allow
NEU-GENES, as well as other drugs, to be transported directly into their
intercellular site of action. The Company has developed and has filed a patent
for a molecular engine, called CYTOPORTER, to transport drugs across the lipid
layers of cellular and endosomal membranes into the interior of cells. This
engine is powered by the acidic differential (pH gradient) across the endosomal
membrane, does not disrupt the membrane, and is disassembled into harmless
byproducts after carrying out its transport function.
TECHNICAL OVERVIEW
The body has protective barriers that shield it from penetration by foreign
agents. Two of these barriers, cell membranes and the outermost layer of the
skin, are composed of lipid layers (fat-like substances). The lipid composition
of these barriers prevents aqueous or water-soluble agents from the environment
or in the blood from penetrating into the interior of cells and interfering with
critical cellular functions. These lipid layers are the principal barriers to
effective drug delivery for many drugs that have an intracellular site of
action.
25
<PAGE>
For optimal delivery, a drug should penetrate readily into both the aqueous
compartments of the body (body fluids and the interior of cells) and into the
lipid layers which enclose those compartments. This is rarely achieved because
when lipid solubility is increased, water solubility is decreased, and vice
versa. In the past, to achieve delivery, the structure of a selected drug
candidate was chemically adjusted to produce a compromise in the solubility
profile (i.e., less than ideal water solubility in order to achieve some level
of lipid solubility). This trade-off has been successful with many drugs, but
markedly less successful for many others. Currently, about one-third of all
FDA-approved drugs have delivery problems, and many others never make it into
clinical development due to delivery problems.
Small substances of low polarity can usually pass directly through the
lipid layers of cell membranes. This appears to be the principal route of entry
for most drugs without delivery problems. In contrast, substances with greater
polarity and/or larger molecular size generally enter cells by being taken up
and sequestered in a closed cellular compartment, or endosome, in a process
called endocytosis. In this process, the interior of the endosome is acidified
and the contents are exposed to degradative enzymes resulting in their
breakdown. This is a natural cellular mechanism that protects the interior of
the cell from exposure to foreign material.
Drugs that are polar in nature or are of a larger molecular size must cross
the lipid membrane of the endosome before being degraded in order to gain entry
into the interior of the cell. Many drugs in this category fail to achieve
entry rapidly enough to be practical for pharmaceutical purposes.
CYTOPORTER DRUG DELIVERY SOLUTION. The Company believes it has developed
an effective drug delivery engine, called CYTOPORTER, to facilitate the
transport of polar and larger size drugs across the lipid barriers of the skin,
cell membranes, and endosomes into the interior of cells at a rate that is
practical to achieve pharmaceutical results. When drugs in this category are
taken up by cells, they are sequestered within an endosome surrounded by a lipid
barrier. The Company's CYTOPORTER drug delivery engine is designed to transport
these problem drugs from the endosome into the interior of cells without
disruption of the lipid membrane that traps them. CYTOPORTER is a synthetic
peptide containing specifically positioned acidic groups along its structure.
In neutral conditions, CYTOPORTER exists as a water-soluble random form with its
acidic groups exposed and hydrated. On acidification in the endosome,
CYTOPORTER undergoes a transition to a lipid-soluble, needle-like form where the
acidic groups are masked by associating as mated pairs, and other polar groups
are shielded from the environment. As the engine becomes lipid soluble it
penetrates across the surrounding lipid membrane. As it enters into the
interior of the cell, it encounters a neutral environment which induces a
transition back to a water-soluble form resulting in movement of the engine and
drug into the interior of the cell. See "Figure 3" below.
FIGURE 3--CYTOPORTER DRUG DELIVERY AT THE CELLULAR LEVEL
[Drug Delivery Diagram]
26
<PAGE>
CYTOPORTER DRUG TRANSPORT MECHANISM. In preparation for enhanced drug
delivery, the selected drug is chemically linked to the CYTOPORTER engine. This
process will be unique for each drug and must take into account each drug's mode
and site of action. Several steps are involved in the transport of the selected
drug from the blood or body fluids across lipid barriers into the interior of
target cells. After the drug is taken up by endocytosis, the endosome is
acidified as the cell attempts to degrade its contents. As this acidification
takes place, the engine converts from a water-soluble random form into a
lipophilic, needle-like form. As the engine converts to its lipophilic form, it
is PUSHED into the lipid membrane. Because the engine is longer than the
membrane is thick, continued entry pushes the leading end of the engine into the
interior of the cell. As the engine enters the neutral environment of the
interior of the cell, it reverts automatically to its random, water-soluble
form. This provides the motive force to PULL more of the engine across the
membrane. Finally, ionization and solvation of the engine as it enters the
interior pull the attached drug into the interior of the cell. The interior of
the cell contains enzymes which rapidly break down the engine into harmless by-
products. This is a natural process that results in freeing the drug to react
with its intracellular target.
The Company believes that its CYTOPORTER delivery engine can be chemically
adjusted to accommodate a range of delivery challenges. The transition from
water to lipid solubility can be manipulated to afford a wide range of
transitions to accommodate various endosome characteristics. Moreover, the
Company believes that its CYTOPORTER can be adjusted to accommodate various drug
loads from modest polar drugs to the more challenging large molecular size
polymers like uncharged antisense compounds.
CYTOPORTER APPLICATIONS. The Company believes its CYTOPORTER molecular
engines may provide improved pharmaceutical properties for a wide variety of
drugs, including:
- Improved aqueous solubility for lipophilic drugs, such as Taxol.
- Improved transport of peptides from endosomes into the interior
of cells (e.g., Cyclosporin) and transport of antisense polymers,
particularly non-charged types such as NEU-GENES.
- Protection of polymer drugs from degradation by virtue of
transport out of endosomes prior to the start of the degradation
process.
- Improved transport of drugs into cells of the brain by
specialized CYTOPORTER engines designed to provide both transport
across the blood/brain barrier and subsequent entry into the
interior of the brain.
- Delivery of highly cytotoxic drugs into bacteria living in an
acidic environment, specifically H. PYLORI, a major cause of
ulcers in the stomach.
- Transdermal delivery of lipophilic drugs.
TRANSDERMAL DRUG DELIVERY. The Company believes that its CYTOPORTER drug
delivery engine may have the potential for transdermal delivery of selected
substances. Placing an acidic, lipid-soluble form of the engine with an
attached drug in contact with the surface of the skin results in the diffusion
of the drug-engine through the lipid layers of the outer barrier of the skin
(the extracellular matrix of the stratum corneum). Upon contact with the
aqueous compartment underlying the stratum corneum, the drug-engine is drawn
actively into this compartment through progressive ionization and solvation of
the engine in the neutral conditions of this environment. This results in
delivery of the attached drug into the underlying tissues, with subsequent
distribution throughout the body.
NEAR-TERM DRUG DELIVERY PRODUCTS
The Company has selected cyclosporin and paclitaxel (Taxol) as the initial
drugs to be combined with its CYTOPORTER delivery engine for its enhanced drug
products. Additionally, the Company plans to apply its drug delivery
technology to current drugs used to treat inflammation, pain, and infectious
diseases. The Company plans to work with pharmaceutical collaborators to bring
its drug delivery technology to the market in a timely fashion. The Company has
not, however, entered into any arrangements with pharmaceutical collaborators,
and there can be no assurance that the Company will be able to do so or that if
entered into, the arrangements will be successful in bringing the technology to
the market in a timely fashion.
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CYCLOSPORIN-CP. Cyclosporin is a drug marketed by Sandoz AG whose patent
life expired in 1996. It is the transplantation anti-rejection drug of choice
worldwide, with an estimated market size of $1 billion. Difficulties with
delivery prevent broader systemic use and topical applications.
Cyclosporin is an immunosuppressive drug that inhibits the function of
lymphocytes involved in mounting a rejection response in patients undergoing
organ transplantation. It has both poor solubility and poor delivery to its
site of action. Consequently, larger doses of the drug are required in order
to achieve a clinical level of effectiveness than if the drug readily reached
its site of action. These higher dosages lead to renal toxicity and other
problems that limit broader use. The Company believes that combining its
CYTOPORTER drug delivery engine with cyclosporin (Cyclosporin-CP) potentially
would eliminate these delivery difficulties, resulting in lower dosages,
fewer side effects, and broader usage. The Company expects to begin
pre-clinical studies with cyclosporin-CP in 1997 and to file an IND to begin
clinical trials with this agent in 1998. There can be no assurance that the
Company will be able to file or obtain an approval for an IND in 1998 or at
all.
PACLITAXEL-CP. Taxol is a Bristol-Myers Squibb drug whose patent life
expires in 1997. It is the largest selling cancer therapeutic worldwide, with
an estimated market size of $1 billion. However, severe solubility and delivery
problems greatly limit its use and effectiveness.
Paclitaxel is indicated to treat ovarian cancer and is being used
experimentally to treat numerous cancers including breast cancer. The
current paclitaxel formulation is not readily soluble in aqueous solutions,
requiring the use of the solvent Cremophor-Registered Trademark-EL.
Injection of the drug/solvent combination causes hypersensitivity reactions,
leaching of plasticizer from PVC infusion bags, haziness of diluted solutions
and the need for in-line filters. The Company believes that combining its
CYTOPORTER delivery engine with paclitaxel (Paclitaxel-CP) could eliminate
the need for solvent in the formulation, thereby eliminating
solvent-associated problems. This development could result in more optimized
dosing, a reduction in side effects, and broader usage. The Company expects
to begin pre-clinical trials of Paclitaxel-CP in 1998.
LONG-TERM PRODUCT DEVELOPMENT PROGRAM - NEU-GENE/CYTOPORTER DRUG COMBINATIONS
The following table summarizes the Company's broader drug development
program. These programs combine the Company's NEU-GENE antisense technology
with its CYTOPORTER drug delivery technology. For each indication, NEU-GENES
have been designed to target the disease process at the genetic level. The
Company has designed CYTOPORTER to deliver the NEU-GENE drugs to their
intracellular site of action. Although NEU-GENES may display clinical efficacy
on their own, the Company believes that broad use of NEU-GENES and other
antisense compounds will require a drug delivery strategy. CYTOPORTER drug
delivery engines were developed to facilitate the delivery of the NEU-GENE
backbone and are currently being optimized for that purpose.
All of the development programs listed below are in the research or lead
compound stage. Disease targets have been identified and NEU-GENE compounds
have been produced and tested in laboratory and/or animal models. In some
cases, lead compounds have been produced which are undergoing optimization prior
to pre-clinical development. The Company believes that several of these
compounds may move into pre-clinical development in the next two years.
<TABLE>
INFECTIOUS DISEASE TARGETS HOST DISEASE TARGETS
-------------------------- --------------------
Development Program Potential Indications Development Program Potential Indications
- ------------------- --------------------- ------------------- ---------------------
<S> <C> <C> <C>
HIV AIDS, HIV-I infection TNF Alpha Inflammation
Hepatitis B, C Hepatitis, Liver Cancer ICAM-I Inflammation
Herpes Simplex Virus Ocular, Genital Herpes Telomerase Cancer
Cytomegalovirus Retinitis
</TABLE>
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INFECTIOUS DISEASE TARGETS
HUMAN IMMUNODEFICIENCY VIRUS ("HIV"). The Company has initiated a program
to produce and evaluate NEU-GENE agents directed at HIV targets. The Centers
for Disease Control ("CDC") estimated that, by the end of 1995, there were one
million HIV-infected persons in the United States and the cumulative number of
diagnosed AIDS cases approximated 500,000. The World Health Organization
("WHO") estimated that worldwide there were approximately 20 million individuals
infected with HIV by the end of 1995. Currently, there are few FDA-approved
therapies for the treatment of HIV-infected individuals and drugs that are
available have significant toxic side effects.
HEPATITIS B ("HBV"). The Company has initiated a program to produce and
evaluate NEU-GENE compounds directed at HBV targets. HBV is a major health
problem throughout the world, with epidemic infection levels in certain less
developed countries. HBV was estimated in 1995 to be the second leading cause
of death in the world. There are an estimated 200,000 to 300,000 new hepatitis
infections in the United States each year and approximately one million people
with chronic infection. Although there are effective vaccines against HBV,
there are currently no FDA-approved therapies for the treatment of chronic or
acute HBV infection.
HEPATITIS C ("HCV"). The Company has initiated a program to produce and
evaluate NEU-GENE compounds directed at HCV targets. HCV is a major health
problem in many parts of the world, including the United States where there are
approximately 150,000 new infections each year (about 40% of all acute hepatitis
cases). The mechanism of transmission may involve the exchange of blood,
although the route of transmission in many cases is obscure. There are no FDA-
approved vaccines or therapeutic drugs for the treatment of HCV.
HERPES SIMPLEX VIRUS ("HSV"). The Company is developing HSV NEU-GENE
compounds for the treatment of HSV type I and type II. Primary herpes
infections are usually severe and may involve skin, mucous membranes,
conjunctivae or the central nervous system. After remission of the initial
infection, the virus establishes a latent phase which is interrupted
periodically by outbreaks or herpetic lesions. Newborns can be infected at
birth, which results in 50% mortality, and survivors may suffer from permanent
neurological damage. Approximately 500,000 new cases each of genital herpes and
oral herpes infection occur annually in the United States. It is estimated that
approximately 10 million Americans suffer from some form of primary or recurrent
herpes infection each year, and about 100 million people are chronically
infected with type I and 25 million with type II.
CYTOMEGALOVIRUS ("CMV"). The Company is developing NEU-GENE compounds for
the treatment of CMV infections. CMV is a member of the herpes family of
viruses and is the most common cause of intrauterine and congenital infections
in newborns of infected mothers. CMV retinitis is a severe problem in
transplant patients and patients with immunosuppression (e.g., AIDS), often
leading to blindness and pneumonitis, one of the most lethal viral syndromes.
Current FDA-approved treatments for CMV retinitis suffer from dose-limiting side
effects and have been associated with the emergence of drug-resistant CMV
strains.
HOST DISEASE TARGETS
The Company is evaluating NEU-GENEs for the treatment of inflammatory
diseases and cancer, two major host diseases. Inflammation is a crucial
component of a number of acute and chronic diseases. Although inflammation is a
key part of the normal physiological response to injury, alterations to the
normal inflammatory process often lead to inflammatory diseases. These
inflammatory disorders can affect practically every organ system in the body.
The interactions at the molecular level that cause inflammation are becoming
better understood and provide targets for intervention by antisense approaches.
Two families of potential targets include cellular mediators (TNF alpha) and
cellular adhesion molecules (ICAM-I), which are proteins involved in various
stages of the inflammatory process. The Company believes that by targeting
messenger RNA with NEU-GENE compounds, control of these mediators of
inflammation may be possible.
TNF ALPHA. TNF alpha has been implicated as a significant factor in
psoriasis, arthritis and other inflammatory disorders. Psoriasis is a serious
chronic, recurring skin disease that involves proliferation of keratinocytes
within the epidermal layer of the skin. Approximately four million individuals
in the United States are afflicted by psoriasis and approximately 200,000 new
cases are diagnosed annually. Current psoriasis therapies are varied but offer
limited results. The Company has demonstrated that its NEU-GENE compounds are
effective in inhibiting TNF alpha in laboratory and animal models of
inflammation.
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ICAM-I. ICAM-1 facilitates the migration of immune cells involved in both
acute and chronic inflammation. Over-production of ICAM-1 is specifically
implicated in a wide variety of inflammatory disorders, such as rheumatoid
arthritis, asthma, psoriasis, organ transplant rejection, and inflammatory bowel
disease. The Company has targeted NEU-GENES against the adhesion molecule ICAM-
I and is testing these compounds in models of inflammation.
TELOMERASE. Telomerase is an enzyme found in cancer cells but rarely in
normal cells and the Company believes that inhibiting it may provide a broad
general approach to treat most cancers. There are approximately one million new
cases of cancer of all types reported in the United States annually. This leads
to about 500,000 deaths in the United States attributed to cancer each year,
making it the country's second leading cause of death. The Company has
developed NEU-GENE compounds that block telomerase activity in model systems in
the laboratory.
COLLABORATIVE AGREEMENTS
The Company believes that antisense and drug delivery technologies are
broadly applicable for the potential development of pharmaceutical products in
many therapeutic areas. To exploit its core technologies as fully as possible,
the Company's strategy is to enter into collaborative research agreements with
major pharmaceutical companies directed at specific molecular targets. It is
anticipated that collaborative research agreements may provide the Company with
funding for programs conducted by the Company aimed at discovering and
developing antisense compounds to inhibit the production of individual molecular
targets. Partners may be granted options to obtain licenses to co-develop and
to market drug candidates resulting from its collaborative research programs.
The Company intends to retain manufacturing rights to its antisense products.
There can be no assurance, however, it will be able to enter into collaborative
research agreements with large pharmaceutical companies on terms and conditions
satisfactory to the Company.
MANUFACTURING
The Company believes that it has developed significant proprietary
manufacturing techniques which will allow large-scale, low-cost synthesis and
purification of NEU-GENES. Because the Company's NEU-GENE compounds are based
upon a malleable backbone chemistry, the Company believes that NEU-GENE
synthesis will be more cost-effective than those of competing technologies. The
Company has established sufficient manufacturing capacity to meet immediate
research and development needs.
The Company currently intends to retain manufacturing rights to all
products incorporating its proprietary and patented technology, whether such
products are sold directly by the Company or through collaborative agreements
with industry partners. The Company's current production capacity is
insufficient for the requirements of human clinical studies. Consequently,
the Company intends to contract with a GMP manufacturing facility beginning
in 1997 to produce its near term therapeutic candidates for pre-clinical and
clinical trial studies. There is no assurance, however, that the Company's
plans will not change as a result of unforeseen contingencies.
In March 1993, the Company moved to its present laboratory facility. This
facility and the laboratory procedures followed by the Company have not been
formally inspected by the FDA and will have to be approved as products move from
the research phase through the clinical testing phase to commercialization. The
Company will need to comply with FDA requirements for GMP in connection with
human clinical trials and commercial production. See "Drug Approval Process and
Other Government Regulations."
MARKETING STRATEGY
The Company plans to market the initial products for which it obtains
regulatory approval, through marketing arrangements or other licensing
arrangements with large pharmaceutical companies. Implementation of this
strategy will depend on many factors, including the market potential of any
products the Company develops and the Company's financial
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<PAGE>
resources. The Company does not expect to establish a direct sales
capability for therapeutic compounds for at least the next several years. To
market products that will serve a large, geographically diverse patient
population, the Company expects to enter into licensing, distribution, or
partnering agreements with pharmaceutical companies that have large,
established sales organizations. The timing of the Company's entry into
marketing arrangements or other licensing arrangements with large
pharmaceutical companies will depend on successful product development and
regulatory approval within the regulatory framework established by the
Federal Food, Drug and Cosmetics Act and regulations promulgated thereunder.
Although the implementation of initial aspects of the Company's marketing
strategy may be undertaken before this process is completed, the development
and approval process typically is not completed in less than three to five
years after the filing of an investigational new drug application and the
Company's marketing strategy therefore may not be implemented for several
years. See "Drug Approval Process and Other Governmental Regulations." See
"Risk Factors-Dependence on Third Parties for Clinical Testing, Manufacturing
and Marketing."
PATENTS AND PROPRIETARY RIGHTS
The proprietary nature of, and protection for, the Company's product
candidates, processes and know-how are important to its business. The Company
plans to prosecute and defend aggressively its patents and proprietary
technology. The Company's policy is to patent the technology, inventions, and
improvements that are considered important to the development of its business.
The Company also relies upon trade secrets, know-how, and continuing
technological innovation to develop and maintain its competitive position.
The Company has filed patent applications covering the basic compositions
of matter, methods of synthesis and therapeutic uses of NEU-GENES. These
applications were filed in the United States, Canada, Europe, Australia, and
Japan. Of these, eleven patents have issued in the United States and a
total of nine others have been granted in the EPO, Japan, Canada and Australia.
The issued U.S. patents expire between 2008 and 2014, and the granted foreign
patents, between 2006 and 2012. Additional patent applications covering the
Company's basic compositions of matter, methods of synthesis and medical uses of
CYTOPORTER compounds have been filed. The Company feels that its patent
protection is broad in the scope and expects to continue to protect its
proprietary technology with additional filings as appropriate.
There can be no assurance that any patents applied for will be granted or
that patents held by the Company will be valid or sufficiently broad to protect
the Company's technology or provide a significant competitive advantage, nor can
the Company provide assurance that practice of the Company's patents or
proprietary technology will not infringe third-party patents.
Although the Company believes that it has independently developed its
technology and attempts to ensure that its technology does not infringe the
proprietary rights of others, if infringement were alleged and proven, there can
be no assurance that the Company could obtain necessary licenses on terms and
conditions that would not have an adverse effect on the Company. The Company is
not aware of any asserted or unasserted claims that its technology violates the
proprietary rights of any person. See "Risk Factors--Patents and Proprietary
Rights."
DRUG APPROVAL PROCESS AND OTHER GOVERNMENT REGULATION
The production and marketing of the Company's products and its research and
development activities are subject to regulation for safety, efficacy and
quality by numerous governmental authorities in the United States and other
countries. In the United States, drugs are subject to rigorous regulation. The
Federal Food, Drug and Cosmetics Act, as amended, and the regulations
promulgated thereunder, as well as 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 the Company's proposed products. Product development and approval within
this regulatory framework take a number of years and involve the expenditure of
substantial resources. In addition to obtaining FDA approval for each product,
each drug manufacturing establishment must be registered with, and approved by
the FDA. Domestic manufacturing establishments are subject to regular
inspections by the FDA and must comply with GMP. To supply products for use in
the United States, foreign manufacturing establishments must also comply with
GMP and are subject to periodic inspection by the FDA or by regulatory
authorities in certain of such countries under reciprocal agreement with the
FDA.
NEW DRUG DEVELOPMENT AND APPROVAL. The United States system of new drug
approval is the most rigorous in the world. According to a February 1993 report
by the Congressional Office of Technology Assessment, it cost an average of $359
million and took an average of 15 years from discovery of a compound to bring a
single new pharmaceutical product to market. Approximately one in 1,000
compounds that enter the pre-clinical testing stage eventually makes it to human
testing and only one-fifth of those are ultimately approved for
commercialization. In recent years, societal and governmental pressures have
created the expectation that drug discovery and development costs can be reduced
without sacrificing safety, efficacy and innovation. The need to significantly
improve or provide alternative strategies for successful pharmaceutical
discovery, research and development remains a major health care industry
challenge.
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DRUG DISCOVERY. In the initial stages of drug discovery, before a
compound reaches the laboratory, typically tens of thousands of potential
compounds are randomly screened for activity in an assay assumed to be
predictive of a particular disease process. This drug discovery process can
take several years. Once a "screening lead" or starting point for drug
development is found, isolation and structural determination are initiated.
Numerous chemical modifications are made to the screening lead (called
"rational synthesis") in an attempt to improve the drug properties of the
lead. After a compound emerges from the above process, it is subjected to
further studies on the mechanism of action and further IN VITRO animal
screening. If the compound passes these evaluation points, animal toxicology
is performed to begin to analyze the toxic effect of the compound, and if the
results indicate acceptable toxicity findings, the compound emerges from the
basic research mode and moves into the pre-clinical phase. The Company has
many compounds at the drug discovery phase and three components that it
expects to move to pre-clinical testing within 12 to 24 months.
PRE-CLINICAL TESTING. During the pre-clinical testing stage, laboratory
and animal studies are conducted to show biological activity of the compound
against the targeted disease, and the compound is evaluated for safety.
These tests can take up to three years or more to complete. The Company's
restenosis compound currently is in pre-clinical testing and the Company
presently anticipates that cyclosporin-CP will enter this phase in 1997 and
paclitaxel-CP in 1998.
INVESTIGATIONAL NEW DRUG APPLICATION. After pre-clinical testing, an IND
is filed with the FDA to begin human testing of the drug. The IND becomes
effective if the FDA does not reject it within 30 days. The IND must indicate
the results of previous experiments, how, where and by whom the new studies will
be conducted, how the chemical compound is manufactured, the method by which it
is believed to work in the human body, and any toxic effects of the compound
found in the animal studies. In addition, the IND must be reviewed and approved
by an Institutional Review Board consisting of physicians at the hospital or
clinic where the proposed studies will be conducted. Progress reports detailing
the results of the clinical trials must be submitted at least annually to the
FDA. The Company expects to file two INDs in 1998.
PHASE I CLINICAL TRIALS. After an IND becomes effective, Phase I human
clinical trials can begin. These studies, involving usually between 20 and 80
healthy volunteers, can take up to one year or more to complete. The studies
determine a drug's safety profile, including the safe dosage range. The Phase I
clinical studies also determine how a drug is absorbed, distributed, metabolized
and excreted by the body, as well as the duration of its action.
PHASE II CLINICAL TRIALS. In Phase II clinical trials, controlled
studies of approximately 100 to 300 volunteer patients with the targeted
disease assess the drug's effectiveness. These studies are designed
primarily to evaluate the effectiveness of the drug on the volunteer patients
as well as to determine if there are any side effects on these patients.
These studies can take up to two years or more and may be conducted
concurrently with Phase I clinical trials. In addition, Phase I/II clinical
trials may be conducted that evaluate not only the efficacy but also the
safety of the drug on the patient population. The Company anticipates that
its phase I/phase II clinical trials with resten-NG and cyclosporin-CP will
begin in 1998.
PHASE III CLINICAL TRIALS. This phase typically lasts up to three years or
more and usually involves 1,000 to 3,000 patients with the targeted disease.
During the Phase III clinical trials, physicians monitor the patients to
determine efficacy and to observe and report any adverse reactions that may
result from long-term use of the drug.
NEW DRUG APPLICATION ("NDA"). After the completion of all three clinical
trial phases, the data are analyzed and if the data indicate that the drug is
safe and effective an NDA is filed with the FDA. The NDA must contain all of
the information on the drug that has been gathered to date, including data from
the clinical trials. NDAs are often over 100,000 pages in length. The average
NDA review time for new pharmaceuticals approved in 1995 was approximately
19 months.
FAST TRACK REVIEW. In December 1992, the FDA formalized procedures for
accelerating the approval of drugs to be marketed for the treatment of certain
serious diseases for which no satisfactory alternative treatment exists, such as
Alzheimer's disease and AIDS. If it is demonstrated that the drug has a
positive effect on survival or irreversible morbidity during Phase II clinical
trials, then the FDA may approve the drug for marketing without completion of
Phase III testing.
APPROVAL. If the FDA approves the NDA, the drug becomes available for
physicians to prescribe. The Company must continue to submit periodic reports
to the FDA, including descriptions of any adverse reactions reported. For
certain drugs which are administered on a long-term basis, the FDA may request
additional clinical studies (Phase IV) after the drug has begun to be marketed
to evaluate long-term effects.
In addition to regulations enforced by the FDA, the Company also is subject
to regulation under the Occupational Safety and Health Act, the Environmental
Protection Act, the Toxic Substances Control Act, the Resource Conservation and
Recovery Act and other present and future federal, state or local regulations.
The Company's research and development activities involve the controlled use of
hazardous materials, chemicals, viruses and various radioactive compounds.
Although the Company believes that its safety procedures for handling and
disposing of such materials comply with the standard
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prescribed by state and federal regulations, the risk of accidental
contamination or injury from these materials cannot be completely eliminated.
In the event of such an accident, the Company could be held liable for any
damages that result, and any such liability could exceed the resources of the
Company.
For marketing outside the United States, the Company or its prospective
licensees will be subject to foreign regulatory requirements governing human
clinical trials and marketing approval for drugs and devices. The requirements
governing the conduct of clinical trials, product licensing, pricing and
reimbursement vary widely from country to country.
COMPETITION
Several companies are pursuing the development of antisense technology,
including Glaxo, Boehringer Ingelheim, Gilead, Hybridon, ISIS, and Lynx. All of
these companies are in development stages, and, in some cases, are in human
trials with antisense compounds generally similar to the Company's NEU-GENE
compounds. While the Company believes that none of these companies is likely to
introduce an antisense compound into the commercial market in the immediate
future, many pharmaceutical and biotechnology companies, including all of those
listed above, have financial and technical resources greater than those
currently available to the Company and have more established collaborative
relationships with industry partners than does the Company. Lynx has recently
announced that it plans to begin clinical trials with an antisense compound for
restenosis and that it will co-develop this potential application with Schwarz
Pharma AG. The Company believes that the combination of pharmaceutical
properties of its NEU-GENE compounds for restenosis afford it competitive
advantages when compared to the antisense compounds of competitors. Many
companies are pursuing drug delivery technology including Biovail, Cellegy
Pharmaceuticals, Cygnus, and Noven, among others. If the Company's antisense
and drug delivery technologies attain regulatory and commercial acceptance as
the basis for the commercial pharmaceutical products, it is to be expected that
additional companies, including large, multinational pharmaceutical companies,
will choose to compete in the Company's markets, either directly or through
collaborative arrangements.
The Company can also expect to compete with other companies exploiting
alternative technologies that address the same therapeutic needs as does the
Company's technology. The biopharmaceutical market is subject to rapid
technological change, and it can be expected that competing technologies will
emerge and will present a competitive challenge to the Company.
FACILITIES
The Company occupies 18,400 square feet of leased laboratory and office
space at 4575 S.W. Research Way, Suite 200, Corvallis, Oregon 97333. The
Company's executive office is located in 2,400 square feet of leased space at
One S.W. Columbia, Suite 1105, Portland, Oregon 97258.
EMPLOYEES
As of December 31, 1996, the Company had 32 employees, 12 of whom hold
advanced degrees. Twenty-seven employees are engaged directly in research and
development activities, and five are in administration. None of the Company's
employees is covered by collective bargaining agreements, and management
considers relations with its employees to be good.
LEGAL MATTERS
The Company is not currently involved in any litigation or legal
proceedings and is not aware of any litigation or proceedings threatened against
it.
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MANAGEMENT OF THE COMPANY
DIRECTORS AND EXECUTIVE OFFICERS
The directors and officers of the Company and their ages are as follows:
Name Age Position
---- --- --------
John A. Beaulieu(1)(2) 62 Chairman of the Board
Denis R. Burger, Ph.D.(1) 53 Chief Executive Officer, Director
James E. Summerton, Ph.D.(1) 52 President, Chief Scientific Officer,
Director
Alan P. Timmins 37 Chief Operating Officer, Chief
Financial Officer
Dwight D. Weller, Ph.D. 46 Vice President of Research and
Development, Director
Frederick C. Pearson, Ph.D. 53 Vice President of Regulatory
Affairs and Clinical Development
Nick Bunick 60 Director
James B. Hicks, Ph.D. 50 Director
Donald R. Johnson, Ph.D.(1) 68 Director
James E. Reinmuth, Ph.D.(2) 56 Director
Joseph Rubinfeld, Ph.D.(2) 64 Director
_____________________
(1) Member of the Executive Committee
(2) Member of the Compensation and Audit Committees
JOHN A. BEAULIEU has served as a director at the Company since 1991 and was
elected Chairman in January 1996. He is the Managing Partner of Cascadia
Pacific Management, LLC. ("CPM"). CPM is the contract manager for the Oregon
Resource and Technology Development Fund, a state-funded venture capital fund.
Mr. Beaulieu is also a general partner in Seed Management, a Vancouver
B.C.-based venture capital firm. Mr. Beaulieu is a director of TCC
Communications, Biozyme Inc., Virtual Corp., EPC Inc., and Puriponics LLC.
Mr. Beaulieu received his BS&C degree in Accounting and an M.B.A. from the
University of Santa Clara.
DENIS R. BURGER, PH.D. has served as Chief Executive Officer of the Company
since January 1996 and as a director of the Company since 1991. From 1992 to
1995 he was President and Chief Operating Officer of the Company. He co-founded
Epitope, Inc., a biotechnology company, and served as Chairman from 1981 to
1990. Dr. Burger has also been a member of Sovereign Ventures, LLC., a
biotechnology consulting and merchant banking venture since 1991. Dr. Burger is
a member of the Board of Directors of Cellegy Pharmaceuticals, Inc., an emerging
pharmaceutical company focused on drug delivery, SuperGen, Inc., a
pharmaceutical company focused on life-threatening diseases, and Trinity
Biotech, plc., an Irish diagnostics company. Dr. Burger held the positions of
Assistant Professor, Associate Professor and Professor at the Oregon Health
Sciences University ("OHSU") from 1969 to 1986. Dr. Burger received a B.A. in
Bacteriology and Immunology from the University of California, Berkeley and his
M.S. and Ph.D. degrees in Microbiology and Immunology from the University of
Arizona.
JAMES E. SUMMERTON, PH.D. has been President and Chief Scientific Officer
since January 1996. He founded the Company in 1980 and was its Chairman and
Chief Executive Officer until January 1996. He held the position of assistant
professor of Biochemistry-Biophysics at Oregon State University from 1978 to
1980. He is the inventor or co-inventor on all of the Company's patents and
pending applications. Dr. Summerton received a B.S. in Chemistry from Northern
Arizona University and a Ph.D. from the University of Arizona. Dr. Summerton
first conceived of the concept of sequence-specific gene-inactivation in 1969.
ALAN P. TIMMINS has served as Chief Operating Officer and Chief Financial
Officer of the Company since October 1996 and Executive Vice President and Chief
Financial Officer since 1992. From 1981 to 1991 he served in a variety of
positions at the firm of Price Waterhouse LLP, most recently as a Senior
Manager specializing in high technology and emerging growth companies. Mr.
Timmins received a B.B.A. in Accounting and Management from the University of
Portland and an M.B.A. from Stanford University. He is a Certified Public
Accountant.
DWIGHT D. WELLER, PH.D. has served as Vice President of Research and
Development of the Company since 1992 and as a director of the Company since
1991. He joined the faculty of Oregon State University in 1978 as Assistant
Professor and was an Associate Professor in the Chemistry Department from
1984 to 1992. He is co-inventor on all but one of the Company's issued
patents and patent applications. Dr. Weller received a B.S. in Chemistry
from Lafayette College and a
34
<PAGE>
Ph.D. in Chemistry from the University of California at Berkeley, followed by
postdoctoral work in Bio-organic Chemistry at the University of Illinois.
FREDERICK C. PEARSON, PH.D. has served as Vice President of Regulatory
Affairs and Clinical Development for the Company since March 1997. From 1994
to 1997 he served as Director of Biotechnology for the Colorado Advanced
Technology Institute. During 1992 and 1993 he was Vice President and General
Manager of Greenwich Pharmaceuticals, Inc., and Vice President, Product
Development for the Virus Research Institute. Additionally, he served from
1988 to 1992 as Vice President, Scientific Affairs for Cell Technology. From
1986 through 1988 he was Vice President, Renal Therapy Division, Baxter
International. Dr. Pearson received a B.S. in Biology from Nasson College in
1966 and his Ph.D. in Microbiology/Virology from the University of New
Hampshire in 1972.
NICK BUNICK has served as a director of the Company since 1992. Mr. Bunick
is the President and Chairman of the Board of three real estate development
companies and one investment management company. From 1987 to 1990, he was a
Vice President of In-Focus Systems, Inc., a company that specializes in the
design and manufacturing of flat panel display products. Mr. Bunick received a
B.S. in Business Administration and Marketing from the University of Florida.
JAMES B. HICKS, PH.D. has served as a director of the Company since
1997. He has served as the Chief Executive Officer, Chief Scientist and a
director of Hedral Therapeutics, Inc., a biotechnology company, since its
founding in 1993. Previously, he was a founding scientist and a Senior
Scientific Director at ICOS Corporation from 1990 to 1993, and Director of
the PPG Industries/Scripps Joint Research Program at Scripps Clinic, as well
as an Adjunct Member of the Molecular Biology Department in the Research
Institute of Scripps Clinic from 1986 to 1990. From 1978 through 1986 he was
Senior Scientist and Lab Chief of the Delbruck Laboratory at Cold Spring
Harbor Laboratory. Dr. Hicks received his B.A. degree in Biology from
Willamette University and his Ph.D. in Molecular Biology from the University
of Oregon, followed by post-doctoral research at Cornell University.
DONALD R. JOHNSON, PH.D. has served as a director of the Company since
1991. He founded Technology Conversion, a research and new product development
consulting firm in 1986, and has served as its President since that time. Dr.
Johnson was Director, New Technology Research, Diagnostic and Bioresearch
Products at E. I. du Pont de Nemours and Company, Inc. ("du Pont"), from 1983 to
1986. Dr. Johnson received a B.A. in Chemistry from the University of Minnesota
and a Ph.D. in Analytical Chemistry from the University of Wisconsin.
JAMES E. REINMUTH, PH.D. has served as a director of the Company since
1991. He was Dean of the College of Business Administration at the University
of Oregon from 1976 to 1994 and since 1995 has been the Charles H. Lundquist
Distinguished Professor of Business at University of Oregon. Dr. Reinmuth is
the Chairman of the Board of Directors and Chief Executive Officer of Athena
Medical Corp., a feminine health care company. He is also the President and
Chief Executive Officer of Fuji Advanced Filtration, Inc. Dr. Reinmuth is a
general partner in Rubicon Asset Management Corp. Dr. Reinmuth received a B.S.
in Mathematics from the University of Washington and his M.S. and Ph.D. degrees
in Statistics from Oregon State University.
JOSEPH RUBINFELD, PH.D. has been a director of the Company since 1996. He
has served as Chief Executive Officer, President, Chief Scientific Officer and a
director of SuperGen, Inc. since its inception in 1992. Dr. Rubinfeld was one
of the four initial founders of Amgen Inc. in 1980 and served as Vice President
and Chief of Operations until 1983. From 1987 to 1990, he was Senior Director
at Cetus Corporation. From 1968 to 1980, Dr. Rubinfeld was employed at Bristol-
Myers Squibb (formerly Bristol-Myers International Corporation) in a variety of
positions, most recently as Vice President and Director of Research and
Development. He received his B.S. in Chemistry from C.C.N.Y., and his M.A. and
Ph.D. degrees in Chemistry from Columbia University.
DIRECTOR COMPENSATION
Directors who are not employees of the Company receive a non-qualified
option to purchase 33,333 shares of Common Stock at an exercise price equal to
the fair market value of the Common Stock on the date of the grant pursuant to
the Company's Stock Incentive Plan, which vests over four years. See "Stock
Incentive Plan." Drs. Johnson and Rubinfeld are reimbursed for expenses for
attendance at board meetings.
SCIENTIFIC ADVISORY COMMITTEE
The Company has established relationships with a group of scientific
advisors with expertise in their respective fields that complement the Company's
product research and development. The following individuals serve on the
Scientific Advisory Committee to the Company's Board of Directors:
CHRISTOPHER K. MATHEWS, PH.D. is Chairman of the Scientific Advisory
Committee. He is the Chairman of the Biochemistry-Biophysics Department at
Oregon State University. Dr. Mathews received a B.A. from Reed College and a
Ph.D. in Biochemistry from the University of Washington. He performed
postdoctoral work in Biochemistry at the University of Pennsylvania. Dr.
Mathews joined the Scientific Advisory Committee in 1994 and was a director of
the Company from 1991 to 1994.
STEVEN H. HEFENEIDER, PH.D. has been a staff immunologist at the Veterans
Administration Medical Center in Portland, Oregon since 1985 and Research
Associate Professor in the Department of Medicine at Oregon Health Sciences
University ("OHSU") since 1987. He received a B.S. in biology from the
University of Oregon, an M.S. in genetics from the University of Minnesota and a
Ph.D. in Microbiology and Immunology from OHSU in 1981.
35
<PAGE>
DAVID J. HINRICHS, PH.D. is a Research Scientist at the Veterans
Administration Medical Center in Portland, Oregon and a Professor of
Microbiology and Immunology at OHSU. From 1976 to 1985 he was a Professor of
Microbiology at Washington State University. He received a Ph.D. in
Microbiology from the University of Arizona in 1967.
JEFFREY D. HOSENPUD, M.D. has been Chief of Cardiology and a Professor of
Medicine at the Medical College of Wisconsin in Milwaukee since 1994.
Dr. Hosenpud was Professor of Medicine and Head of the Cardiac Transplant
Medicine at OHSU from 1980 to 1994, and Medical Director for the Registry of the
International Society for Heart & Lung Transplantation since 1993. Dr. Hosenpud
competed his M.D. at the University of California, Los Angeles.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table sets forth compensation
received in the fiscal year ended December 31, 1996, certain summary information
concerning compensation of the Company's Chief Executive Officer (the "Named
Officer"). No other executive officer received compensation exceeding $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
1996 Compensation Long-Term
----------------- Compensation
------------
Securities
Underlying All Other
Salary Bonus Options Compensation(1)
------ ----- ----------- ------------
<S> <C> <C> <C> <C>
Denis R. Burger, Ph.D. $121,925 2,443
Chief Executive Officer
James E. Summerton, Ph.D. $ 92,483 --- --- 2,712
President and Chief
Scientific Officer(2)
</TABLE>
(1) Represents matching amounts received under the Company's 401(k) plan.
(2) Dr. Summerton resigned as the Chairman and Chief Executive Officer in
January 1996 and is now the Company's President and Chief Scientific
Officer.
36
<PAGE>
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information concerning the value of
unexercised options as of December 31, 1996, held by the Named Officer. No
options were exercised by the Named Officer during the year ended December 31,
1995.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT DECEMBER 31, 1996 (#) AT DECEMBER 31, 1996 ($)(1)
------------------------ ---------------------------
NAME Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Denis R. Burger, Ph.D. 365,735 -- 520,487 --
James Summerton, Ph.D.(2) 132,220 93,334 144,502 125,418
</TABLE>
--------------------
(1) Based upon the difference between the fair market value of
the securities underlying the options at December 31, 1996 ($6.00 per
share as determined by the Board of Directors) and the exercise price
of the options.
(2) Dr. Summerton resigned as the Chairman and Chief Executive Officer in
January 1996 and is now the Company's President and Chief Scientific
Officer.
EMPLOYMENT AGREEMENTS
The Company has entered into employment contracts with Messrs. Burger and
Summerton that provide for annual base salaries for Drs. Burger and Summerton of
$120,000 and $90,000, respectively, that increase to $225,000 and $150,000,
respectively, on January 1, 1997. The employment agreements also provide for
the payment to Drs. Burger and Summerton of one additional year of base salary
and the immediate and full vesting of all options granted to them under the
Company's stock incentive plan in the event of the termination of their
respective employment for reasons, other than cause, or upon their voluntary
termination upon a change in control of the Company. In addition, the
employment agreements prevent Drs. Burger and Summerton from competing with the
Company for a period of two years following termination of their employment for
any reason. Dr. Summerton's agreement also provides that the Company shall
engage him as a consultant for a term of one year following the termination of
his employment at the rate of $75,000 per year and grants the Company the option
to engage him as a consultant on the same terms for a second year. Drs. Burger
and Summerton are deferring their January 1, 1997, salary increases until
completion of the Company's initial public offering.
STOCK INCENTIVE PLAN
The Stock Incentive Plan was adopted by the Board of Directors and was
approved by the shareholders in 1992. The purposes of the Stock Incentive Plan
are to attract and retain the best available personnel for positions of
substantial responsibility, to provide additional incentive to the employees and
consultants of the Company and to promote the success of the Company's business.
The Stock Incentive Plan is administered by the Compensation Committee (the
"Committee"). Transactions under the Stock Incentive Plan are intended to
comply with all applicable conditions of Rule 16b-3 promulgated under the
Securities Exchange Act of 1934. In addition to determining who will be granted
options, the Committee has the authority and discretion to determine when
options will be granted and the number of options to be granted. The Committee
may determine which options may be intended to qualify ("Incentive Stock
Options") for special treatment under the Internal Revenue Code of 1986, as
amended from time to time (the "Code"), or whether options are Non-Qualified
Options ("Non-Qualified Stock Options") which are not intended to so qualify.
The Committee also may determine the time or times when each option becomes
exercisable, the duration of the exercise period for options and the form or
forms of the instruments evidencing options granted under the Stock Incentive
Plan. The Committee may adopt, amend and rescind such rules and regulations as
in its opinion may be advisable for the administration of the Stock Incentive
Plan. The Committee also may construe the Stock Incentive Plan and the
provisions in the instruments evidencing option granted under Stock Incentive
Plan to employee and officer participants and is empowered to make all other
determinations deemed necessary or advisable for the administration of the Stock
Incentive Plan.
37
<PAGE>
The Stock Incentive Plan contains provisions for proportionate adjustment
of the number of shares for outstanding options and the option price per share
in the event of stock dividends, recapitalizations resulting in stock splits or
combinations or exchanges of shares. In addition, the Stock Incentive Plan
provides for adjustments in the purchase price and exercise period by the
Committee in the event of a proposed dissolution or liquidation of the Company,
or any corporate separation or division, including, but not limited to, split-
up, split-off or spin-off, or a merger or consolidation of the Company with
another corporation, or in the event there is a change in constitution of the
Common Stock of the Company.
Participants in the Stock Incentive Plan may be selected by the Committee
from employees, officers, directors and consultants of the Company. In
determining the persons to whom options will be granted and the number of shares
to be covered by each option, the Committee will take into account the duties of
the respective persons, their present and potential contributions to the success
of the Company and such other factors as the Committee deems relevant to
accomplish the purposes of the Stock Incentive Plan.
Only employees of the Company as the term "employees" is defined for the
purposes of Code will be entitled to receive Incentive Stock Options. Incentive
Stock Options granted under the Stock Incentive Plan are intended to satisfy all
requirements for incentive stock options under Section 422 of the Code and the
Treasury Regulations thereunder.
Each option granted under the Stock Incentive Plan will be evidenced by a
written option agreement between the Company and the optionee. The option price
of any Incentive Stock Option may be not less than 100% of the fair market value
per share on the date of grant of the option; provided, however, that any
Incentive Stock Option granted under the Stock Incentive Plan to a person owning
more than 10% of the total combined voting power of the Common Stock will have
an option price of not less than 110% of the fair market value per share on the
date of grant of the Incentive Stock Option. Each Non-Qualified Stock Option
granted under the Stock Incentive Plan will be at an exercise price as
determined by the Board of Directors. Fair market value on the date of grant is
defined as a value determined in the discretion of the Board; provided, however,
that where there is a public market for the Common Stock, the fair market value
per share shall be the closing price of the Common Stock for the date of grant
or authorization of sale, as reported in THE WALL STREET JOURNAL.
The exercise period of Incentive Stock Options granted under the Stock
Incentive Plan generally may not exceed 10 years from the date of grant thereof.
Incentive Stock Options granted to a person owning more than 10 percent of the
total combined voting power of the Common Stock of the Company will be for no
more than five years. The Committee will have the authority to accelerate or
extend the exercisability of any outstanding option at such time and under such
circumstances as it, in its sole discretion, deems appropriate. However, no
exercise period may be extended to increase the term of an Incentive Stock
Option beyond 10 years from the date of grant.
To exercise an option, the optionee must pay the full exercise price in
whole or in part consisting of cash or transfer to the Company of shares having
a fair market value at the time of such exercise equal to the option exercise
price.
An option may not be exercised unless the optionee then is an employee,
officer, director or consultant of the Company, and unless the optionee has
remained continuously as an employee, officer, director or consultant of the
Company since the date of grant of the option. If the optionee ceases to be an
employee, officer, director or consultant of the Company, all options which are
not vested under the Stock Incentive Plan by the time of death, disability,
retirement or termination of employment, immediately terminate. All options
granted to such optionee that are fully vested to such optionee but not yet
exercised, will terminate (i) 12 months after the date the optionee ceases to be
an employee, officer or director of the Company by reason of death or
disability; or (ii) 30 days after termination of employment for any other
reason.
If an optionee dies while an employee, officer, director or consultant, or
is terminated by reason of disability, all options theretofore granted to such
optionee, unless earlier terminated in accordance with their terms, may be
exercised at any time within one year after the date of death or disability of
said optionee, by the optionee or by the optionee's estate or by a person who
acquired the right to exercise such options by request or inheritance, but only
to the extent of the right to exercise as of the date of death or disability.
Options granted under the Stock Incentive Plan are not transferable other
than by will or by the laws of descent and distribution. Options may be
exercised during the lifetime of the optionee only by the optionee. An optionee
has no rights as a shareholder with respect to any shares covered by an option
until the option has been exercised.
38
<PAGE>
The Company, to the extent permitted by law, may deduct a sufficient number
of shares due to the optionee upon exercise of the option to allow the Company
to pay federal, state and local taxes of any kind required by law to be withheld
upon the exercise otherwise due to the optionee. The Company is not obligated
to advise any optionee of the existence of any tax or the amount which the
Company will be required to withhold.
As of the date of this Prospectus, options to purchase 1,126,886 shares of
the Company's Common Stock have been granted and are outstanding under the Stock
Incentive Plan, at a weighted average exercise price of $4.73 per share, and
206,447 shares were available for future grants.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Company's Third Restated Articles of Incorporation eliminate, to the
fullest extent permitted by Oregon law, liability of a director to the Company
or its shareholders for monetary damages for conduct as a director. While
liability for monetary damages has been eliminated, equitable remedies such as
injunctive relief or rescission remain available. In addition, a director is
not relieved of his or her responsibilities under any other law, including the
federal securities laws.
The Company's Third Restated Articles of Incorporation require the
Company to indemnify its directors to the fullest extent not prohibited by
law. The Oregon Business Corporation Act authorizes a corporation, through
its articles of incorporation and bylaws, to limit the liability of directors
and to grant indemnity to directors, officers, employees or agents for
actions taken with respect to corporation in their respective capacities as
directors, officers, employees or agents. Indemnification for such
liabilities may be provided to an officer, director, employee or agent based
upon the determination by a vote of the disinterested Board of Directors, a
vote by a special committee of the Board of Directors, by the determination
of a special legal counsel or by a vote of the shareholders that the
director, officer, employee or agent may properly be indemnified under the
statute. The Company believes that the limitation of liability provisions in
its Third Restated Articles may enhance the Company's ability to attract and
retain qualified individuals to serve as directors.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions or otherwise, the Company 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
Company of expenses incurred or paid by a director, officer or controlling
person of the Company 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 Company 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 of
whether such indemnification by it is against policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
39
<PAGE>
CERTAIN TRANSACTIONS OF THE COMPANY AND AGDG
James E. Summerton, Ph.D., the President, Chief Scientific Officer, and a
director of the Company, is the general partner of Anti-Gene Development Group
("AGDG"), and was the general partner of NEU-GENE Development Group ("NGDG").
AGDG was founded in 1981 and NGDG was founded in 1984 to own and fund the
Company's development of gene-targeted therapeutics and NEU-GENE technology.
NGDG and AGDG were combined in 1989, with AGDG as the surviving entity. The
Company entered into numerous research and development contracts with AGDG and
NGDG, all of which were completed or were superseded by the Technology Transfer
Agreement described below.
On February 9, 1993, the Company and AGDG entered into a Technology
Transfer Agreement wherein effective May 19, 1993, AGDG conveyed all
intellectual property in its control related to antisense technology (the
"Intellectual Property") to the Company. As part of the conveyance, the Company
tendered to AGDG for liquidation all partnership units received pursuant to an
exchange offer and received a 49.37 percent undivided interest in the
intellectual property. The Company then purchased the remaining undivided
interest in the Intellectual Property in consideration of payments of 4.05% of
gross revenues in excess of $200 million, if any, sales of products by the
Company which would, in the absence of the Technology Transfer Agreement,
infringe a valid claim under any patent transferred to the Company (the
"Technology Fees"). The Company's obligation to make payments of the Technology
Fees with respect to a particular product terminates upon the expiration of all
patents transferred to the Company pursuant to the Technology Transfer Agreement
related to that product.
Pursuant to a License and Option Agreement by and between AGDG and the
Company dated February 9, 1993 (the "License Agreement"), the Company granted to
AGDG a royalty-free non-exclusive license to use the Intellectual Property for
internal research and development and to sell small quantities of products
incorporating the Intellectual Property. In addition, if AGDG develops any
specific prototype products which incorporate any of the Intellectual Property,
the Company has the right to commercialize and market such products in
consideration of payments of 4.05% of gross revenues, in excess of the $200
million exemption for all products utilizing the Intellectual Property, to AGDG.
If the Company elects not to commercialize the proposed AGDG product or fails to
meet certain product development milestones, the Company is required to grant
AGDG a license to develop and market the proposed product (an "AGDG License").
The Company is entitled to payments for the AGDG license but only if the
proposed product incorporates patented improvements developed by the Company to
the Intellectual Property. The amount of the license fee payable to the Company
by AGDG pursuant to an AGDG License, if any, is equal to the percentage payable
to AGDG for products sold by the Company and covered by the Technology Transfer
Agreement. AGDG also has the right to obtain an exclusive royalty-free license
to use, develop, make, sell, distribute and sublicense products utilizing the
Intellectual Property at such time as the Company has less than 10 full-time
employees engaged in developing, testing or marketing products based upon the
Intellectual Property for a period of at least 180 consecutive days.
On January 20, 1997, AGDG and the Company amended the Technology Transfer
Agreement to reduce the Technology Fees arising from the sale of diagnostic
products from 4.05% to 2% and to remove the $200 million exemption with respect
to sales of such diagnostic products. The Company also granted to AGDG a
royalty-bearing license to make, use and sell certain quantities of product
derived from the Intellectual Property.
The Company's Board of Directors has required, in conformity with Oregon
law, that a transaction in which a director has a conflict of interest be
approved by a majority of disinterested directors. The Board has recognized that
Dr. Summerton has a direct or indirect conflict of interest in connection with
transactions between the Company and AGDG and, in such circumstances, the terms
and conditions of such transactions have been negotiated for the Company by
officers other than Dr. Summerton and have been approved by a majority of
disinterested directors after disclosure of the conflict of interest.
Pursuant to an August 4, 1992 restatement of earlier agreements between
Oregon Resource and Technology Development Fund ("ORTDF"), the Company, AGDG
and Dr. Summerton, warrants to purchase 600,000 shares of the Company's
Common Stock have been issued to ORTDF. John A. Beaulieu was president of
ORTDF and a director of the Company at that time. In connection with this
issuance to ORTDF, they acquired certain rights to register such shares under
the Securities Act. See "Description of Securities -- Registration Rights."
In May 1993, ORTDF acquired warrants to purchase an additional 357,500 shares
in exchange for 325 partnership units in AGDG conveyed to the Company. Such
warrants carry no registration rights. In March 1996, ORTDF exercised its
warrants in a cashless exercise for which ORTDF acquired 957,452 shares of
the Company's Common Stock.
40
<PAGE>
Donald R. Johnson, Ph.D., a director of the Company, performed
consulting services and incurred reimbursable expenses for the Company for
which he was paid approximately $11,000 in 1996 and approximately $7,000 in
1995.
41
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of February 28, 1997, and
as adjusted to give effect to the sale by the Company of the shares of Common
Stock offered pursuant to its Unit Offering (assuming no exercise of the
Overallotment Option or the Warrants) by (i) each person (or group of affiliated
persons) who is known by the Company to own beneficially 5% or more of the
Common Stock, (ii) each of the Company's directors, (iii) the Named Officer, and
(iv) all executive officers and directors of the Company as a group. The
information as to each person or entity has been furnished by such person or
entity, and unless otherwise indicated, the persons named in the table have sole
voting and sole investment power with respect to all shares beneficially owned,
subject to community property laws where applicable.
<TABLE>
<CAPTION>
Percent of Shares
Outstanding
-----------
Shares Before After
Name and Address of Beneficial Owner (1) Beneficially Unit Unit
- ---------------------------------------- Owned (1) Offering Offering(1)
--------- -------- -----------
<S> <C> <C> <C>
James E. Summerton, Ph.D. (2)
ANTIVIRALS INC.
4575 S.W. Research Way, Suite 200
Corvallis, OR 97333 2,553,473 24.8% 21.6%
John A. Beaulieu (3)
4370 N.E. Halsey, Suite 233
Portland, OR 97213 990,785 9.7% 8.5%
Oregon Resource and Technology (4)
Development Fund
4370 N.E. Halsey, Suite 233
Portland, OR 97213 990,785 9.7% 8.5%
Wayne Embree (5) 957,452 9.4% 8.2%
4370 N.E. Halsey, Suite 233
Portland, OR 97213
Denis R. Burger, Ph.D. (6)
ANTIVIRALS INC.
1 S.W. Columbia, Suite 1105
Portland, OR 97258 406,886 3.9% 3.4%
Dwight D. Weller, Ph.D. (7)
ANTIVIRALS INC.
4575 S.W. Research Way, Suite 200
Corvallis, OR 97333 370,178 3.6% 3.1%
Nick Bunick (8)
ANTIVIRALS INC.
1 S.W. Columbia, Suite 1105
Portland, OR 97258 200,733 2.0% 1.7%
Alan P. Timmins (9)
ANTIVIRALS INC.
1 S.W. Columbia, Suite 1105
Portland, OR 97258 68,825 * *
Donald R. Johnson, Ph.D. (10)
ANTIVIRALS INC.
1 S.W. Columbia, Suite 1105
Portland, OR 97258 64,333 * *
James E. Reinmuth, Ph.D. (11)
ANTIVIRALS INC.
1 S.W. Columbia, Suite 1105
Portland, OR 97258 51,817 * *
Joseph Rubinfeld, Ph.D. (12)
ANTIVIRALS INC.
1 S.W. Columbia, Suite 1105
Portland, OR 97258 8,334 * *
James B. Hicks, Ph.D.
ANTIVIRALS INC.
1 S.W. Columbia, Suite 1105
Portland, OR 97258 0 * *
Frederick C. Pearson, Ph.D.
ANTIVIRALS INC.
4575 S.W. Research Way, Suite 200
Corvallis, OR 97333 0 * *
All executive officers and
directors as a group (10 persons) 4,715,365 53.7% 45.9%
</TABLE>
42
<PAGE>
(FOOTNOTES ON FOLLOWING PAGE)
* Less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of Common Stock
subject to options and warrants currently exercisable or convertible, or
exercisable or convertible within 60 days of February 28, 1997, are deemed
beneficially owned and outstanding for computing the percentage of the
person holding such securities, but are not considered outstanding for
computing the percentage of any other person.
(2) Includes 158,886 shares subject to options exercisable as of May 20,
1997, and 727,154 shares held jointly or by others over which Dr. Summerton
exercises voting and investment power. Does not include 66,667 shares
subject to options exercisable after May 20, 1997.
(3) Includes 33,334 shares subject to options exercisable as of May 20,
1997, of which Mr. Beaulieu is the record owner. ORTDF is the beneficial
owner of all of the 33,334 options for which Mr. Beaulieu is the
record owner. Includes 957,452 shares of common stock issued to Cascadia
Pacific Management, LLC for the benefit of ORTDF.
(4) Includes 33,334 shares subject to options held of record by Mr. Beaulieu
and exercisable as of May 20, 1997 and 957,942 shares issued to
Cascadia Pacific Managment, LLC for the benefit of ORTDF. See Note 3
above.
(5) Includes 957,452 shares of Common Stock issued to Cascadia Pacific
Management, LLC for the benefit of ORTDF.
(6) Includes 34,434 shares held by Sovereign Ventures, LLC, a limited liability
company in which Dr. Burger is a general partner. Also includes 365,735
shares subject to options exercisable as of May 20, 1997.
(7) Includes 247,634 shares held jointly or by others over which Dr. Weller
exercises voting and investment power, 94,018 shares subject to options
exercisable by Dr. Weller and 1,860 shares subject to options exercisable
by Dr. Weller's spouse as of May 20, 1997, and 25,000 shares subject
to warrants exercisable as of May 20, 1997. Does not include 25,000
shares subject to warrants exercisable after May 20, 1997.
(8) Includes 50,667 shares held jointly or by others over which Mr. Bunick
exercises voting and investment power. Includes 33,334 shares subject to
options exercisable as of May 20, 1997.
(9) Includes 68,825 shares subject to options exercisable as of May 20,
1997. Does not include 38,333 shares subject to options exercisable after
May 20, 1997.
(10) Includes 33,334 shares subject to options and 16,667 shares subject to
warrants exercisable as of May 20, 1997.
(11) Includes 33,334 shares subject to options exercisable as of May 20,
1997. Also includes 5,051 shares held jointly with others over which Dr.
Reinmuth exercises voting and investment power.
(12) Includes 8,334 shares subject to options exercisable as of May 20,
1997. Does not include 25,000 shares subject to options exercisable after
May 20, 1997.
43
<PAGE>
DESCRIPTION OF SECURITIES OF THE COMPANY
The authorized capital stock of the Company consists of 50,000,000 shares
of Common Stock and 2,000,000 shares of Preferred Stock.
COMMON STOCK
The Company is authorized to issue 50,000,000 shares of Common Stock. As
of December 31, 1996, 8,779,763 shares of Common Stock were outstanding, held of
record by 881 shareholders. The Company anticipates that 10,279,763 shares of
its Common Stock will be outstanding if the Unit Offering is completed. The
holders of Common Stock are entitled to one vote for each share held of record
on all matters submitted to a vote of shareholders (and do not have any
cumulative voting rights). Subject to preferences that may be applicable to
outstanding shares of Preferred Stock, if any, the holders of Common Stock are
entitled to receive ratably such dividends as may be declared by the Company's
Board of Directors out of funds legally available therefor. Holders of Common
Stock have no preemptive, subscription or redemption rights, and there are no
redemption, conversion or similar rights with respect to such shares. In the
event of a liquidation, dissolution or winding up of the Company, holders of the
Common Stock are entitled to share equally and ratably in the assets of the
Company, if any, remaining after the payment of all liabilities of the Company
and the liquidation preference of any outstanding class or series of Preferred
Stock. The outstanding shares of Common Stock are fully paid and nonassessable.
The rights, preferences and privileges of holders of Common Stock are subject to
any series of Preferred Stock that the Company may issue in the future, as
described below.
PREFERRED STOCK
The Company is authorized to issue up to 2,000,000 shares of undesignated
Preferred Stock. No shares of Preferred Stock have been issued. The Board of
Directors has the authority to issue the undesignated Preferred Stock in one or
more series and to fix the rights, preferences, privileges and restrictions
granted to or imposed upon any wholly unissued shares of undesignated Preferred
Stock, as well as to fix the number of shares constituting any series and the
designation of such series, without any further vote or action by the
shareholders. The Board of Directors, without shareholder approval, may issue
Preferred Stock with voting and conversion rights which could materially
adversely affect the voting power of the holders of Common Stock. The issuance
of Preferred Stock could also decrease the amount of earnings and assets
available for distribution to holders of Common Stock. In addition, the
issuance of Preferred Stock may have the effect of delaying, deferring or
preventing a change in control of the Company. At present, the Company has no
plans to issue any shares of Preferred Stock. See "Risk Factors--Anti-Takeover
Effects of Certain Charter Provisions and Oregon Law" and "Certain Provisions of
the Company's Articles of Incorporation and Bylaws."
WARRANTS
REPRESENTATIVE'S WARRANT. In connection with its Unit Offering, the
Company has authorized the issuance of the Representative's Warrant and has
reserved 300,000 shares of Common Stock for issuance upon exercise of such
warrant (including the warrants issuable upon exercise of the Representative's
Warrant). The Representative's Warrant will entitle the holder to acquire up to
150,000 Units at an exercise price of $______ per Unit (120% of the initial
public offering price for the Units). The Representative's Warrant will be
exercisable at any time from the first anniversary of the date of this
Prospectus until the fifth anniversary of the date of this Prospectus.
THE WARRANTS. In connection with its Unit Offering, the Company will issue
1,500,000 warrants (the "Warrants"). Each Warrant will entitle the holder to
purchase one share of Common Stock at a price of $______ per share (150% of the
initial public offering price for the Units). The Warrants will, subject to
certain conditions, be exercisable at any time until the fifth anniversary of
the date of this Prospectus, unless earlier redeemed. The Warrants are
redeemable by the Company at $.25 per Warrant, upon 30 days written notice, if
the closing bid price (as defined in the Warrant Agreement described below) per
share of the Common Stock for each of the 20 consecutive trading days
immediately preceding the date notice of redemption is given equals or exceeds
200% of the then-current Warrant exercise price. If the Company gives notice of
its intention to redeem, a holder would be forced either to exercise his or her
Warrant before the date specified in the redemption notice or accept the
redemption price.
44
<PAGE>
The Warrants will be issued in registered form under a Warrant Agreement
(the "Warrant Agreement") between the Company and ___________________________
______________________________________________ as warrant agent (the "Warrant
Agent"). The shares of Common Stock underlying the Warrants, when issued upon
exercise of a Warrant, will be fully paid and nonassessable, and the Company
will pay any transfer tax incurred as a result of the issuance of Common Stock
to the holder upon its exercise.
The Warrants and the Representative's Warrant contain provisions that
protect the holders against dilution by adjustment of the number of shares that
may be purchased by the holders. Such adjustments will occur in the event,
among others, that the Company makes certain distributions to holders of its
Common Stock. The Company is not required to issue fractional shares upon the
exercise of a Warrant or Representative's Warrant. The holder of a Warrant or
Representative's Warrant will not possess any rights as a shareholder of the
Company until such holder exercises the Warrant or Representative's Warrant.
A Warrant may be exercised upon surrender of the Warrant Certificate on or
before the expiration date of the Warrant at the offices of the Warrant Agent,
with the form of "Election To Purchase" on the reverse side of the Warrant
Certificate completed and executed as indicated, accompanied by payment of the
exercise price (by certified or bank check payable to the order of the Company
or by wire transfer of good funds) for the number of shares with respect to
which the Warrant is being exercised.
For a holder to exercise the Warrants, there must be a current registration
statement in effect with the Commission and qualification in effect under
applicable state securities laws (or applicable exemptions from state
qualification requirements) with respect to the issuance of shares or other
securities underlying the Warrants. The Company has agreed to use all
commercially reasonable efforts to cause a registration statement with respect
to such securities under the Securities Act to be filed and to become and remain
effective in anticipation of and prior to the exercise of the Warrants and to
take such other actions under the laws of various states as may be required to
cause the sale of Common Stock (or other securities) issuable upon exercise of
Warrants to be lawful. If a current registration statement is not in effect at
the time a Warrant is exercised, the Company may at its option redeem the
Warrant by paying to the holder cash equal to the difference between the market
price of the Common Stock on the exercise date and the exercise price of the
Warrant. The Company will not be required to honor the exercise of Warrants if,
in the opinion of the Company's Board of Directors upon advice of counsel, the
sale of securities upon exercise would be unlawful.
The foregoing discussion of certain terms and provisions of the Warrants
and Representative's Warrant is qualified in its entirety by reference to the
detailed provisions of the Warrant Agreement and Representative's Warrant
Certificate, the form of each of which has been filed as an exhibit to the
Registration Statement filed in connection with the Unit Offering.
For the life of the Warrants and Representative's Warrant, the holders
thereof have the opportunity to profit from a rise in the market price of the
Common Stock without assuming the risk of ownership of the shares of Common
Stock issuable upon the exercise of the warrants. The warrant holders may be
expected to exercise their warrants at a time when the Company would, in all
likelihood, be able to obtain any needed capital by an offering of Common Stock
on terms more favorable than those provided for by the warrants. Further, the
terms on which the Company could obtain additional capital during the life of
the warrants may be adversely affected.
OTHER WARRANTS. The Company has outstanding warrants to purchase
147,899 shares of Common Stock, of which warrants to purchase 25,000 shares
are not presently exercisable. Of these warrants, 38,001 are exercisable
through the period ending 90 days after the expiration of lock-up agreements
entered into in connection with this offering, of which 27,001 are
exercisable at a price of $0.0003 per share and 11,000 are exercisable at a
price of $1.14 per share. Warrants to purchase 14,467 shares are exercisable
through July 17, 1997, at an exercise price of $0.0003 per share. Warrants
to purchase 25,000 shares are exercisable through December 31, 1997, at an
exercise price of $0.0003 per share. Warrants to purchase 1,100 shares are
exercisable through August 8, 2001, at an exercise price of $4.56 per share.
Warrants to purchase 44,334 shares are currently exercisable and do not have
a termination date; warrants to purchase 11,000 of these shares are
exercisable at a price of $1.14 per share and warrants to purchase 33,334 of
these shares are exercisable at $0.0003 per share.
The Company also has outstanding a warrant to purchase 219,334 shares of
Common Stock, exercisable through the earlier of the closing of a firmly
underwritten public offering by the Company with proceeds exceeding $5,000,000
or May 14, 2002, at an exercise price of $6.00 per share, which price is subject
to adjustment to prevent dilution. The exercise is also subject to a fair market
value adjustment to make the price paid by the warrant holder equivalent to the
price paid by certain independent third-party purchasers. For purposes of this
adjustment, an independent third-party purchaser is any party who purchases
shares of the Company's Common Stock for not less than $250,000, who was not a
shareholder of the Company on May 1, 1992, and who is not an affiliate, officer
or director of the Company. The Company has agreed to register the shares
underlying this warrant under certain circumstances. See "Registration Rights."
The Company additionally has outstanding warrants to purchase 60,201
shares of Common Stock at an exercise price of $ 9.00 per share. These
warrants are exercisable through the earlier of August 30, 2001 or three
years from the date of closing by the Company of an initial public offering.
45
<PAGE>
THE RESCISSION NOTES
In the event that the Company's liability under the Rescission Offer
exceeds $1.5 million, the Company will issue on a pro rata basis to Eligible
Offerees who accept the Rescission Offer unsecured promissory notes bearing
interest at 9% per annum. Interest will be payable quarterly and principal will
be due and payable only at maturity. The terms of the promissory notes will
range from 18 to 36 months. There is no sinking fund and holders of the notes
will have no right to convert them into other securities of the Company or to
have the Company redeem the notes.
Payment by the Company of its obligations under the Notes will be
secured by a pledge of shares of the Common Stock of the Company held of
record by certain of the Company's directors and executive officer (the
"Pledgors"). Under the terms of the Pledge Agreement, prior to the closing
of the Company's proposed offering of 1,500,000 units, the Pledgors have
agreed to maintain as security for payment of the Notes sufficient shares of
Common Stock of the Company that the aggregate value of such shares, based on
an estimated value of $6.00 per share, equals 120 percent of the outstanding
principal amount of the Notes. After the closing of the proposed unit
offering or any other public offering, the Pledgors have agreed to maintain
as security for payment of the Notes sufficient shares of Common Stock of the
Company that the aggregate value of such shares, based on the last reported
sales price of the Company's Common Stock on the last day of the preceding
month, equals 120 percent of the outstanding principal amount of the Notes.
The Pledge Agreement provides that, in the event of a default by the Company
in the payment of the Notes, shares of the Company's Common Stock subject to
the pledge will be sold and the proceeds applied to payment of obligations.
The Pledgors have executed the Pledge Agreement, which, together with the Notes,
provides that the failure of the Pledgors to fulfill their obligations under
the Pledge Agreement, including, without limitation, the obligation to
maintain the security, shall constitute an event of default with respect to
the Notes permitting a sale of the shares subject to the pledge.
There previously has been no public market for the Company's Common Stock
and there can be no assurance that an active public market for the Common Stock
will be developed or sustained after the Rescission Offer. In addition, even if
such a public market does develop, the obligations of the Pledgors to pledge
shares is limited to shares held of record by the Pledgors as of the date of
this Prospectus and there can be no assurance that the value of the Company's
Common Stock on such public market will be sustained at levels so that the
shares subject to the pledge will be sufficient to satisfy the obligations of
the Company in the event of a default by the Company in the payment of the
Notes.
REGISTRATION RIGHTS
REPRESENTATIVE'S WARRANT. The Representative's Warrant provides certain
rights with respect to the registration under the Securities Act of the 300,000
shares issuable upon exercise thereof (including the warrants included therein).
The Company has agreed that during the entire period between the first
anniversary and fifth anniversary after the date of the Unit Offering Prospectus
it will register the issuance of such shares upon the exercise of the
Representative's Warrant (and, if necessary, their resale) so as to permit their
public resale without restriction. These registration rights could result in
substantial future expense to the Company and could adversely affect the
Company's ability to complete future equity or debt financings. Furthermore,
the registration and sale of Common Stock of the Company held by or issuable to
the holders of registration rights, or even the potential of such sales, could
have an adverse effect on the market price of the securities offered hereby.
OTHER REGISTRATION RIGHTS. Holders of 834,568 shares of Common Stock, or
their transferees, are entitled to certain rights with respect to the
registration of such shares under the Securities Act. Under the terms of an
Agreement to Purchase Limited Partnership Interests dated as of August 4, 1992
among AGDG, the Company and ORTDF, if the Company purposes to register any of
its Common Stock for sale to the public, ORTDF may require the Company to
include in such registration any shares of Common Stock issued or issuable upon
the exercise of certain warrants to purchase Common Stock of the Company held by
ORTDF subject to certain conditions and limitations. As of the date of this
Prospectus, ORTDF held 957,452 shares of Common Stock and options to purchase
33,334 shares of Common Stock. ORTDF will not participate in this offering.
Under the terms of a Registration Rights Agreement dated as of May 20, 1992
between the Company and Ice Bear, Inc., an Alaska corporation ("Ice Bear"), if
the Company proposed to register any of its stock or other securities under the
Act in connection with a public offering of those securities for cash, Ice Bear
may require the Company to include in such registration any shares of Common
Stock held or issued or issuable upon the exercise of certain warrants to
purchase Common Stock of the Company held by Ice Bear subject to certain
conditions and limitations. As of the date of this Prospectus, Ice Bear held
21,930 shares of Common Stock and warrants to purchase 219,334 shares of Common
Stock. Ice Bear will not participate in this offering.
46
<PAGE>
SHARES OF THE COMPANY ELIGIBLE FOR FUTURE SALE
There has been no public market for the Company's Common Stock or
Warrants. No prediction can be made of the effect, if any, that future market
sales of shares of Common Stock or the availability of such shares for sale
will have on the prevailing market price of the Common Stock following the
proposed Unit Offering. Nevertheless, sales of substantial amounts of such
shares in the open market following the Unit Offering could adversely affect
the prevailing market price of the Common Stock.
Upon completion of the Unit Offering and assuming no exercise of
outstanding options and warrants to purchase Common Stock after December 31,
1996, the Company will have 10,279,763 outstanding shares of Common Stock.
See "Description of Securities." The 1,500,000 shares of Common Stock which
are included in the Units Offering (or 1,725,000 shares if the Overallotment
Option is exercised in full) by the Company and, subject to certain
conditions, up to 1,725,000 shares of Common Stock issuable upon exercise of
the Warrants (including Warrants subject to the Overallotment Option, and,
commencing approximately 12 months after the date of the Unit Offering
Prospectus, up to 300,000 shares of Common Stock that are issuable upon
exercise of the Representative's Warrant (including the Warrants included
therein), will, subject to any applicable state law restrictions on secondary
trading (see "Risk Factors-- Possible Illiquidity of Trading Market"), be
freely tradeable without restriction under the Securities Act, except that
any shares purchased by an "affiliate" of the Company (as that term is
defined in Rule 144 under the Securities Act) will be subject to the resale
limitations of Rule 144.
Approximately 5,210,733 of the remaining 8,779,763 shares of Common Stock
are "restricted" shares within the meaning of Rule 144 under the Securities
Act (the "Restricted Shares"). Of this number, approximately _________ shares
not subject to lock-up agreements will be eligible for immediate resale
without restriction under Rule 144(k) of the Securities Act. An additional
_________ shares held for more than two but less than three years by
shareholders who are not affiliates of the Company and who are not subject to
lock-up agreements are eligible for sale under Rule 144 of the Securities
Act, subject to the volume and other limitations thereunder. Upon expiration
of lock-up agreements with the Representative three months after the date of
the Unit Offering Prospectus (or earlier with the consent of the
Representative), _________ shares will be eligible for immediate resale
subject to the limitations of Rule 144 and _________ shares will be eligible
for resale immediately without restriction pursuant to Rule 144(k). Upon
expiration of lock-up agreements with the Representative six months after the
date of the Unit Offering Prospectus (or earlier with the consent of the
Representative), _________ shares will be eligible for immediate resale
subject to the limitations of Rule 144 and _________ shares will be eligible
for resale immediately without restriction pursuant to Rule 144(k). Upon
expiration of lock-up agreements with the Representative nine months after
the date of the Unit Offering Prospectus (or earlier with the consent of the
Representative), _________ shares will be eligible for immediate resale
subject to the limitations of Rule 144 and _________ shares will be eligible
for resale immediately without restriction pursuant to Rule 144(k). Upon
expiration of lock-up agreements with the Representative one year after the
date of the Unit Offering Prospectus (or earlier with the consent of the
Representative), _________ shares will be eligible for immediate resale
subject to the limitations of Rule 144 and _________ shares will be eligible
for resale immediately without restriction pursuant to Rule 144(k). As of the
date of the Unit Offering Prospectus, options to purchase _________ shares of
Common Stock have been granted
<PAGE>
under the Stock Incentive Plan, which shares, if acquired pursuant to the
exercise of options, are subject to lock-up agreements which expire one year
after the date of this Prospectus (or earlier with the consent of the
Representative).
In general, under Rule 144, as currently in effect, any person (or persons
whose shares are aggregated) who has beneficially owned Restricted Shares for at
least two years, is entitled to sell, within any three-month period, a number of
shares that does not exceed the greater of (i) 1% of the then outstanding shares
of the Company's Common Stock (approximately 102,798 shares immediately after
this offering) or (ii) the average weekly trading volume of the Company's Common
Stock in the Nasdaq National Market during the four calendar weeks immediately
preceding the date on which notice of the sale is filed with the Securities and
Exchange Commission. Sales pursuant to Rule 144 are also subject to certain
requirements relating to manner of sale, notice and availability of current
public information about the Company. A person who is not deemed to have been an
affiliate of the Company at any time during the 90 days immediately preceding
the sale and whose Restricted Shares have been fully-paid for three years since
the later of the date they were acquired from the Company or the date they were
acquired from an affiliate of the Company may sell such Restricted Shares under
Rule 144(k) without regard to the limitations and requirements described above.
Under Rule 701, shares privately issued under certain compensatory stock-based
plans, such as the Stock Incentive Plan, may be resold under Rule 144 by
non-affiliates, subject only to the manner of sale requirements, and by
affiliates without regard to the two-year holding period requirement, commencing
90 days after the Company becomes subject to certain periodic reporting
requirements.
The remaining 3,569,030 shares have been registered in connection with the
Rescission Offer but are subject to the Pledge Agreement which secures the
payment of the Notes by the Company. These shares also are subject to a lock-up
agreement with the Representatives for one year after the effective date of the
Unit Offering.
Shortly after the Unit Offering, the Company intends to file a
registration statement under the Securities Act covering shares of Common
Stock reserved for issuance under the Company's outstanding stock options and
Stock Incentive Plan (other than shares issued upon the exercise of options
prior to the effective date of such registration statement). Based on the
number of options outstanding and options and shares reserved for issuance,
such registration statement would cover approximately 1,333,333 shares. Such
registration statement will automatically become effective upon filing. All
shares issuable under the Company's Stock Incentive Plan are subject to a
six-month lock-up period following the date of the Unit Offering.
There has been no established public market for the Common Stock. No
prediction can be made of the effect, if any, that sales of shares under Rule
144 or the availability of shares for sale will have on the market price of
the Common Stock prevailing from time to time after the offering. The Company
is unable to estimate the number of shares that may be sold in the public
market under Rule 144, because such amount will depend on the trading volume
in, and market price for, the Common Stock and other factors. Nevertheless,
sales of substantial amounts of shares in the public market, or the
perception that such sales could occur, could adversely affect the market
price of the Common Stock of the Company. See "Underwriting."
<PAGE>
CERTAIN PROVISIONS OF THE COMPANY'S ARTICLES OF INCORPORATION AND BYLAWS
Certain provisions of the Company's Articles of Incorporation and Bylaws
could make more difficult the acquisition of the Company by means of a tender
offer, a proxy contest or otherwise and the removal of incumbent officers and
directors. These provisions include authorization of the issuance of up to
2,000,000 shares of Preferred Stock, with such characteristics, and potential
effects on the acquisition of the Company, as are described in "Preferred Stock"
above. This provision is expected to discourage certain types of coercive
takeover practices and inadequate takeover bids and to encourage persons seeking
to acquire control of the Company to negotiate first with the Company. The
Company believes that the benefits of increased protection of the Company's
potential ability to negotiate with the proponent of an unfriendly or
unsolicited proposal to acquire or restructure the Company outweigh the
disadvantages of discouraging such proposals because, among other things,
negotiation of such proposals could result in an improvement of their terms.
See "Risk Factors--Anti-Takeover Effects of Certain Charter Provisions and
Oregon Law."
OREGON CONTROL SHARE AND BUSINESS COMBINATION STATUTES
Upon completion of this offering, the Company will become subject to the
Oregon Control Share Act (the "Control Share Act"). The Control Share Act
generally provides that a person (the "Acquiring Person") who acquires voting
stock of an Oregon corporation in a transaction that results in the Acquiring
Person holding more than 20%, 331/3% or 50% of the total voting power of the
corporation (a "Control Share Acquisition") cannot vote the shares it acquires
in the Control Share Acquisition ("control shares") unless voting rights are
accorded to the control shares by (i) a majority of each voting group entitled
to vote and (ii) the holders of a majority of the outstanding voting shares,
excluding the control shares held by the Acquiring Person and shares held by the
Company's officers and inside directors. The term "Acquiring Person" is broadly
defined to include persons acting as a group.
The Acquiring Person may, but is not required to, submit to the Company a
statement setting forth certain information about the Acquiring Person and its
plans with respect to the Company. The statement may also request that the
Company call a special meeting of shareholders to determine whether voting
rights will be accorded to the control shares. If the Acquiring Person does not
request a special meeting of shareholders, the issue of voting rights of control
shares will be considered at the next annual meeting or special meeting of
shareholders. If the Acquiring Person's control shares are accorded voting
rights and represent a majority or more of all voting power, shareholders who do
not vote in favor of voting rights for the control shares will have the right to
receive the appraised "fair value" of their shares which may not be less than
the highest price paid per share by the Acquiring Person for the control shares.
Upon completion of this offering, the Company will become subject to
certain provision of the Oregon Business Corporation Act that govern business
combinations between corporations and interested shareholders (the "Business
Combination Act"). The Business Combination Act generally provides that if a
person or entity acquires 15% or more of the voting stock of an Oregon
corporation (an "Interested Shareholder"), the corporation and the Interested
Shareholder, or any affiliated entity of the Interested Shareholder, may not
engage in certain business combination transactions for three years following
the date the person became an Interested Shareholder. Business combination
transactions for this purpose include (a) a merger or plan of share exchange,
(b) any sales, lease, mortgage or other disposition of 10% or more of the assets
of the corporation and (c) certain transactions that result in the issuance of
capital stock of the corporation to the Interested Shareholder. These
restrictions do not apply if (i) the Interested Shareholder, as a result of the
transaction in which such person became an Interested Shareholder, owns at least
85% of the outstanding voting stock of the corporation (disregarding shares
owned by directors who are also officers and certain employee benefit plans),
(ii) the board of directors approves the share acquisition or business
combination before the Interested Shareholder acquires 15% or more of the
corporation's outstanding voting stock or (iii) the board of directors and the
holders of at least two-thirds of the outstanding voting stock of the
corporation (disregarding shares owned by the Interested Shareholder) approve
the transaction after the Interested Shareholder acquires 15% or more of the
corporation's voting stock. See "Risk Factors--Anti-Takeover Effects of Certain
Charter Provisions and Oregon Law."
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Company's securities is
ChaseMellon Shareholder Services.
47
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SELECTED FINANCIAL DATA OF AGDG
Year ended December 31,
-----------------------
1995 1996
---------- -----------
STATEMENT OF OPERATIONS DATA:
Interest revenue $ 9,593 $ 7,343
Expenses 4,104 3,115
-------- --------
Net income 5,489 4,228
======== ========
December 31,
1996
------------
BALANCE SHEET DATA:
Working capital $188,784
Total assets 189,139
Partners' capital 189,139
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF AGDG
OVERVIEW
From inception in 1981, the partnership has devoted its resources primarily
to contract for its research and development efforts in the field of antisense.
The Partnership has had limited interest revenue and has had no revenues to date
from the sale of products or other sources, and does not expect revenues from
such sources for at least the next 12 months. The partnership expects to
continue to earn small amounts of interest revenue for the foreseeable future.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1996. The
partnership had interest revenues of $9,593 and $7,343 for the years ended
December 31, 1995 and December 31, 1996 respectively. Revenues for both time
periods were derived from interest on certificates of deposit and short-term
investments. The decrease between the prior and current year periods was due
primarily to fluctuations in the market interest rates paid on such
investments. Operating expenses were $4,104 and $3,115 for the years ended
December 31, 1995 and 1996 respectively. The decrease in expenses was due to
savings on professional services and a decrease in miscellaneous expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception primarily through
private equity sales. Since 1992, the partnership has not actively engaged in
fundraising, and currently exists primarily for the purpose of collecting
revenues, if any, which arise under the terms of a Technology Transfer
Agreement between AGDG and the Company.
If additional partnership units are issued in connection with this
offering, the rights and returns of existing partners are not expected to be
significantly impacted as payments from the Company connected with sales of
therapeutic products will increase on a pro rata basis for each additional
partnership interest issued, such that if all unit holders accept the rescission
offer, the fees for the sales of therapeutic products will increase to
approximately 5.23%. Fees related to diagnostic products under the Technology
Transfer Agreement would remain at 2%.
48
<PAGE>
BUSINESS OF AGDG
The Anti-Gene Development Group was formed in 1981 under the Oregon Uniform
Limited Partnership Act for the purpose of funding the development of and
obtaining the proprietary rights to Anti-Genes. Prior to 1993, AGDG
periodically contracted with the Company to develop the technologies while
retaining the rights to the resultant technologies. Substantially all of the
proceeds from sales of interests in AGDG and interest income were paid to the
Company under the terms of these research and development contracts.
Sole management of AGDG is vested in the general partner. The general
partner of AGDG is Dr. James Summerton, founder and Chairman and Chief
Executive Officer of the Company, until January 1996. Dr. Summerton presently
serves as President and Chief Scientific Officer of the Company. Dr.
Summerton receives no fees or other remuneration for his management of AGDG.
In February, 1993, to facilitate additional capital raising activities
associated with the development of the technologies, AGDG and the Company
entered into a Technology Transfer Agreement whereby effective May 19, 1993,
AGDG conveyed all intellectual property in its control to the Company. In
consideration of this transfer, the Company is obligated to pay to AGDG
certain technology transfer fees arising from the sale of products
incorporating the technologies.
During March, 1993, the Company offered all holders of interests in AGDG
the opportunity to exchange their units of limited partnership interest for
shares of the Common Stock of the Company at a ratio of 1,100 shares of
Common Stock for each unit exchanged. The exchange ratio was determined based
on historical perceptions by the partners of AGDG and shareholders of the
Company as to the relative values of AGDG, but was not confirmed by financial
analysis of any kind. The exchange offer was the subject of a fairness
hearing conducted by the Oregon Department of Insurance and Finance on April
19, 1993, and after such hearing the Oregon Department of Insurance and
Finance issued an order permitting the exchange offering to proceed.
Upon completion of the exchange offer and the technology transfer
agreement, the partnership ceased active sales of partnership interests and
no longer enters into research and development contracts with the Company.
The partnership currently exists primarily for the purpose of collecting
revenues, if any, which may arise under the term of a Technology Transfer
Agreement between AGDG and the Company. There can be no assurance that the
Company will successfully develop or commercialize the technologies which are
the subject of the Technology Transfer Agreement. For a detailed statement of
the risks associated with the Company, see "Risk Factors."
49
<PAGE>
MANAGEMENT of AGDG
The General Partner of AGDG and his age are as follows:
Name Age Position
James E. Summerton, Ph.D. 52 General Partner
JAMES E. SUMMERTON, PH.D. founded AGDG in 1981 and has served as its General
Partner since that time. He has been President and Chief Scientific Officer of
ANTIVIRALS Inc. since January 1996. He founded ANTIVIRALS in 1980 and was its
Chairman and Chief Executive Officer until January 1996. He held the position of
assistant professor of Biochemistry-Biophysics at Oregon State University from
1978 to 1980. He is the inventor or co-inventor on all of the Company's patents
and pending applications. Dr. Summerton received a B.S. in Chemistry from
Northern Arizona University and a Ph.D. from the University of Arizona. Dr.
Summerton first conceived of the concept of sequence-specific gene-inactivation
in 1969.
EXECUTIVE COMPENSATION
The General Partner receives no remuneration.
PRINCIPAL INTEREST HOLDERS OF AGDG
The following table sets forth certain information with respect to the
beneficial ownership of the partnership's units of limited partnership
interest, and as adjusted to give effect to the Rescission Offer. The
information as to each person or entity has been furnished by such person or
entity, and unless otherwise indicated, the persons named in the table have
sole voting and sole investment power with respect to all shares beneficially
owned, subject to community property laws where applicable.
Percent of Units
Outstanding
Units ---------------------
Beneficially Before After
Name and Address of Beneficial Owner Owned(1) Offering Offering(3)
James E. Summerton, Ph.D.(2) 1,476 79.5% 60.9%
ANTI-GENE DEVELOPMENT GROUP
3107 NW Norwood Place
Corvallis, OR 97330
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Limited partnership units
subject to options and warrants currently exercisable or convertible, or
exercisable or convertible within 60 days of February 28, 1997 are deemed
beneficially owned and outstanding for computing the percentage of the
person holding such securities, but are not considered outstanding for
computing the percentage of any other person.
(2) Includes 52 units held by others over which Dr. Summerton exercises
voting and investment power.
(3) Assumes issuance of 568.67 units upon acceptance of the rescission offer
by all eligible former exchange offer participants.
50
<PAGE>
DESCRIPTION OF SECURITIES OF AGDG
As of the date of this Prospectus, 1,856 units of limited partnership
interest in AGDG were outstanding. If all Eligible Offerees who participated
in the exchange offer tender their 625,537 shares and 568.67 units of limited
partnership interest are issued therefor, 2,424.67 units of limited
partnership interest will be outstanding.
The units represent limited partnership interests in the AGDG limited
partnership. The liability of each limited partner of AGDG is limited to the
amount of that partner's investment in the partnership, together with their
interest in undistributed income, if any. Partnership units are
nonassessable, and no additional contributions to the Partnership's capital
may be required of the limited partners at any time by way of assessment.
The share of the profits and losses to which each partner is entitled is
established by the Anti-Gene Development Group Certificate of Limited
Partnership. Losses, up to the amount invested, are allocated yearly in
direct proportion to the amount of capital each Partner has invested during
that year, or during that phase if the phase is less than one year. Losses
are calculated on a first-in first-out basis. Any additional losses are
allocated pro rata to all partnership interests. Profits, if any, are
distributed pro rata to all partnership interests.
There currently is no public trading market for units of interest in AGDG
and AGDG does not anticipate that such a market will develop.
51
<PAGE>
LEGAL MATTERS
The validity of the Notes offered hereby will be passed upon for the
Company by Ater Wynne Hewitt Dodson & Skerritt, LLP, Portland, Oregon.
EXPERTS
The financial statements of the Company as of December 31, 1995 and for
each of the two years in the period ended December 31, 1995 appearing in this
Prospectus have been audited by Arthur Andersen LLP, independent auditors, as
set forth in their report thereon appearing elsewhere herein, and are included
in reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
The information contained in "Risk Factors -- Patents and Proprietary
Rights" and in "Business -- Patents and Proprietary Rights" have been reviewed
and approved by Peter Dehlinger & Associates, Palo Alto, California, patent
counsel to the Company, as experts in such matters, and are included in reliance
upon their review and approval.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form SB-2 under the Securities Act
with respect to the Rescission Offer, of which this Prospectus forms a part.
This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and its Common Stock, reference is made
to the Registration Statement and such exhibits and schedules. Statements
contained in this Prospectus as to the contents of any contract or other
documents referred to are not necessarily complete and, in each instance, if
such contract or document is filed as an exhibit to the Registration Statement,
reference is made to the copy of such contract or document filed as an exhibit,
each such statement being qualified in all respects by such reference to such
exhibit. The Registration Statement and the exhibits and schedules thereto may
be inspected without charge at the Commission's principal office in Washington,
D.C., and copies of all or any part thereof may be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549, upon payment of certain fees prescribed by the Commission. The
Commission also maintains a site on the World Wide Web that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission. The address of such site is
http://www.sec.gov.
52
<PAGE>
ANTIVIRALS INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants.............................................. F-2
Balance Sheets as of December 31, 1995 and 1996....................................... F-3
Statements of Operations for the two years ended December 31, 1996.................... F-4
Statements of Shareholders' Equity for the seventeen years ended December 31, 1996.... F-5
Statements of Cash Flows for the two years ended December 31, 1996.................... F-8
Notes to Financial Statements......................................................... F-9
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
ANTIVIRALS INC.
We have audited the accompanying balance sheets of ANTIVIRALS INC. (an
Oregon corporation in the development stage) as of December 31, 1995 and 1996,
and the related statements of operations, shareholders' equity and cash flows
for the years ended December 31, 1995 and 1996 and for the period from inception
(July 22, 1980) to December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan 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 ANTIVIRALS INC. as of
December 31, 1995 and 1996, and the results of its operations and its cash flows
for the years ended December 31, 1995 and 1996 and for the period from inception
(July 22, 1980) to December 31, 1996, in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
and, at December 31, 1996, has a deficit accumulated during the development
stage of $12,425,483. In addition, as more fully discussed in Note 7 to the
financial statements, the Company has filed with certain securities regulators
registration statements pertaining to a planned rescission offering for certain
purchasers' equity securities because Company management cannot draw a
conclusion with certainty that all applicable state and federal security laws
were complied with in all material respects in connection with the issuance of
such securities. Such factors raise substantial doubt about the Company's
ability to continue as a going concern. Management's plan in regard to these
matters is also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
ARTHUR ANDERSEN LLP
Portland, Oregon,
March 10, 1997
F-2
<PAGE>
ANTIVIRALS INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1995 1996
-------------- --------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents....................................................... $ 680,892 $ 3,011,229
Short-term securities--available-for-sale....................................... 212,750 30,000
Other current assets............................................................ 7,236 28,255
-------------- --------------
Total current assets........................................................ 900,878 3,069,484
-------------- --------------
PROPERTY AND EQUIPMENT, at cost:
Laboratory equipment............................................................ 677,728 738,160
Office equipment................................................................ 181,803 187,248
Leasehold improvements.......................................................... 1,464,603 1,464,603
-------------- --------------
2,324,134 2,390,011
Less--Accumulated depreciation and amortization................................. (1,379,377) (1,858,359)
-------------- --------------
944,757 531,652
-------------- --------------
PATENT COSTS, net................................................................. 449,254 474,806
DEFERRED OFFERING COSTS........................................................... -- 143,110
OTHER ASSETS...................................................................... 29,847 29,847
-------------- --------------
$ 2,324,736 $ 4,248,899
-------------- --------------
-------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................................ $ 85,298 $ 153,202
Accrued payroll................................................................. 149,715 169,609
Deferred payments............................................................... 19,051 7,996
-------------- --------------
Total current liabilities................................................... 254,064 330,807
-------------- --------------
COMMON STOCK SUBJECT TO RESCISSION, $.0001 par value, 1,292,973 issued and
outstanding..................................................................... 3,121,965 3,121,965
-------------- --------------
SHAREHOLDERS' EQUITY:
Preferred stock, $.0001 par value, 2,000,000 shares authorized; none issued and
outstanding................................................................... -- --
Common stock, $.0001 par value, 50,000,000 shares authorized; 5,816,838 and
7,486,790 shares issued and outstanding in 1995 and 1996, respectively........ 582 749
Additional paid-in capital...................................................... 9,189,496 13,220,861
Unrealized gain on available-for-sale securities................................ 96,750 --
Deficit accumulated during the development stage................................ (10,338,121) (12,425,483)
-------------- --------------
Total shareholders' (deficit) equity........................................ (1,051,293) 796,127
-------------- --------------
$ 2,324,736 $ 4,248,899
-------------- --------------
-------------- --------------
</TABLE>
See accompanying notes.
F-3
<PAGE>
ANTIVIRALS INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
JULY 22, 1980
YEAR ENDED DECEMBER 31, (INCEPTION) TO
---------------------------- DECEMBER 31,
1995 1996 1996
------------- ------------- --------------
<S> <C> <C> <C>
REVENUES, from grants and research contracts....................... $ 82,500 $ 27,227 $ 689,497
------------- ------------- --------------
OPERATING EXPENSES:
Research and development......................................... 2,097,796 1,729,554 9,011,574
General and administrative....................................... 609,723 613,811 4,549,582
------------- ------------- --------------
Total operating expenses..................................... 2,707,519 2,343,365 13,561,156
------------- ------------- --------------
OTHER INCOME....................................................... 68,133 228,776 446,176
------------- ------------- --------------
NET LOSS........................................................... $ (2,556,886) $ (2,087,362) $ (12,425,483)
------------- ------------- --------------
------------- ------------- --------------
NET LOSS PER SHARE................................................. $ (0.37) $ (0.25)
------------- -------------
------------- -------------
SHARES USED IN PER SHARE CALCULATION............................... 6,982,459 8,233,548
------------- -------------
------------- -------------
</TABLE>
F-4
<PAGE>
ANTIVIRALS INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
UNREALIZED
GAIN ON
COMMON STOCK ADDITIONAL AVAILABLE-
PARTNERSHIP ------------------------ PAID-IN FOR-SALE
UNITS SHARES AMOUNT CAPITAL SECURITIES
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE AT JULY 22, 1980 (inception)...................... -- -- $ -- $ -- $ --
No activity
----------- ----------- ----- ----------- -----------
BALANCE AT OCTOBER 31, 1980............................... -- -- -- -- --
Issuance of partnership units and common stock in
October 1981 for equipment and supplies valued at
$3,500 and technology................................. 1,000 1,666,667 167 3,333 --
Issuance of partnership units and common stock for cash,
$500 per unit......................................... 150 250,000 25 75,055 --
Issuance of partnership units for consulting services,
$500 per unit......................................... 10 -- -- 5,000 --
Issuance of common stock in connection with financing
agreement............................................. -- 33,333 3 7 --
Net loss................................................ -- -- -- -- --
----------- ----------- ----- ----------- -----------
BALANCE AT OCTOBER 31, 1981............................... 1,160 1,950,000 195 83,395 --
Issuance of common stock for consulting services........ -- 54,600 5 11 --
Net loss................................................ -- -- -- -- --
----------- ----------- ----- ----------- -----------
BALANCE AT OCTOBER 31, 1982............................... 1,160 2,004,600 200 83,406 --
Issuance of partnership units and common stock for cash,
$550 per unit......................................... 60 100,000 10 33,020 --
Issuance of common stock for consulting services........ -- 21,733 2 5 --
Net loss................................................ -- -- -- -- --
----------- ----------- ----- ----------- -----------
BALANCE AT OCTOBER 31, 1983............................... 1,220 2,126,333 212 116,431 --
Issuance of partnership units and common stock for cash,
$600 per unit......................................... 10 16,667 2 6,003 --
Issuance of partnership units and common stock for
consulting services and $1,000 cash, $550 to $600 per
unit.................................................. 20 16,667 2 11,503 --
Issuance of common stock for consulting services........ -- 2,533 -- 1 --
Issuance of common stock for donation to charitable
organizations......................................... -- 100,000 10 20 --
Net loss................................................ -- -- -- -- --
----------- ----------- ----- ----------- -----------
BALANCE AT OCTOBER 31, 1984............................... 1,250 2,262,200 226 133,958 --
Issuance of partnership units and common stock in
December 1984 for technology.......................... 1,000 166,667 16 (16) --
Issuance of partnership units and common stock for cash,
$50 to $100 per unit.................................. 460 78,333 8 23,515 --
Issuance of partnership units for cash, $50 to $550 per
unit.................................................. 140 -- -- 17,000 --
Issuance of common stock for consulting services........ -- 6,733 1 1 --
Net loss................................................ -- -- -- -- --
----------- ----------- ----- ----------- -----------
BALANCE AT OCTOBER 31, 1985............................... 2,850 2,513,933 251 174,458 --
Issuance of partnership units and common stock for cash,
$50 to $500 per unit.................................. 90 105,000 11 31,521 --
Issuance of common stock for consulting services........ -- 8,500 1 1 --
Net loss................................................ -- -- -- -- --
----------- ----------- ----- ----------- -----------
BALANCE AT OCTOBER 31, 1986............................... 2,940 2,627,433 263 205,980 --
Issuance of partnership units and common stock for cash,
$500 per unit......................................... 20 33,333 3 10,007 --
Issuance of partnership units and warrants to purchase
400,000 shares of common stock for cash, $500 to
$2,500 per unit....................................... 80 -- -- 100,000 --
Issuance of common stock for consulting services........ -- 28,533 3 6 --
Net loss................................................ -- -- -- -- --
----------- ----------- ----- ----------- -----------
BALANCE AT OCTOBER 31, 1987............................... 3,040 2,689,299 269 315,993 --
<CAPTION>
DEFICIT
ACCUMULATED
DURING THE TOTAL
DEVELOPMENT SHAREHOLDERS'
STAGE EQUITY
------------ -------------
<S> <C> <C>
BALANCE AT JULY 22, 1980 (inception)...................... $ -- $ --
No activity
------------ -------------
BALANCE AT OCTOBER 31, 1980............................... -- --
Issuance of partnership units and common stock in
October 1981 for equipment and supplies valued at
$3,500 and technology................................. -- 3,500
Issuance of partnership units and common stock for cash,
$500 per unit......................................... -- 75,080
Issuance of partnership units for consulting services,
$500 per unit......................................... -- 5,000
Issuance of common stock in connection with financing
agreement............................................. -- 10
Net loss................................................ (9,224) (9,224)
------------ -------------
BALANCE AT OCTOBER 31, 1981............................... (9,224) 74,366
Issuance of common stock for consulting services........ -- 16
Net loss................................................ (57,962) (57,962)
------------ -------------
BALANCE AT OCTOBER 31, 1982............................... (67,186) 16,420
Issuance of partnership units and common stock for cash,
$550 per unit......................................... -- 33,030
Issuance of common stock for consulting services........ -- 7
Net loss................................................ (27,475) (27,475)
------------ -------------
BALANCE AT OCTOBER 31, 1983............................... (94,661) 21,982
Issuance of partnership units and common stock for cash,
$600 per unit......................................... -- 6,005
Issuance of partnership units and common stock for
consulting services and $1,000 cash, $550 to $600 per
unit.................................................. -- 11,505
Issuance of common stock for consulting services........ -- 1
Issuance of common stock for donation to charitable
organizations......................................... -- 30
Net loss................................................ (21,463) (21,463)
------------ -------------
BALANCE AT OCTOBER 31, 1984............................... (116,124) 18,060
Issuance of partnership units and common stock in
December 1984 for technology.......................... -- --
Issuance of partnership units and common stock for cash,
$50 to $100 per unit.................................. -- 23,523
Issuance of partnership units for cash, $50 to $550 per
unit.................................................. -- 17,000
Issuance of common stock for consulting services........ -- 2
Net loss................................................ (8,469) (8,469)
------------ -------------
BALANCE AT OCTOBER 31, 1985............................... (124,593) 50,116
Issuance of partnership units and common stock for cash,
$50 to $500 per unit.................................. -- 31,532
Issuance of common stock for consulting services........ -- 2
Net loss................................................ (32,353) (32,353)
------------ -------------
BALANCE AT OCTOBER 31, 1986............................... (156,946) 49,297
Issuance of partnership units and common stock for cash,
$500 per unit......................................... -- 10,010
Issuance of partnership units and warrants to purchase
400,000 shares of common stock for cash, $500 to
$2,500 per unit....................................... -- 100,000
Issuance of common stock for consulting services........ -- 9
Net loss................................................ (71,616) (71,616)
------------ -------------
BALANCE AT OCTOBER 31, 1987............................... (228,562) 87,700
</TABLE>
See accompanying notes.
F-5
<PAGE>
ANTIVIRALS INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
UNREALIZED
GAIN ON
COMMON STOCK ADDITIONAL AVAILABLE-
PARTNERSHIP ------------------------ PAID-IN FOR-SALE
UNITS SHARES AMOUNT CAPITAL SECURITIES
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE AT OCTOBER 31, 1987............................... 3,040 2,689,299 $ 269 $ 315,993 $ --
Issuance of partnership units and common stock for cash,
$500 per unit......................................... 100 166,667 17 50,033 --
Issuance of partnership units and common stock for cash,
$1,250 per unit....................................... 20 33,333 3 25,007 --
Issuance of partnership units for cash, $50 per unit.... 20 -- -- 1,000 --
Issuance of partnership units and warrants to purchase
400,000 shares of common for cash, $1,250 per unit.... 80 -- -- 100,000 --
Compensation expense related to issuance of warrants for
partnership units..................................... -- -- -- 10,000 --
Issuance of common stock for consulting services and
employee compensation................................. -- 47,014 5 9 --
Net loss................................................ -- -- -- -- --
----------- ----------- ----- ----------- -----------
BALANCE AT OCTOBER 31, 1988............................... 3,260 2,936,313 294 502,042 --
Exercise of warrants for common stock................... -- 141,667 14 28 --
Issuance of partnership units and common stock for cash,
$1,250 per unit....................................... 10 16,667 1 12,504 --
Issuance of partnership units and warrants to purchase
800,000 shares of common stock for cash, $1,250 per
unit.................................................. 160 -- -- 200,000 --
Issuance of common stock for consulting services and
employee compensation................................. -- 17,733 2 4 --
Compensation expense related to issuance of warrants for
partnership units..................................... -- -- -- 2,500 --
Net loss................................................ -- -- -- -- --
----------- ----------- ----- ----------- -----------
BALANCE AT OCTOBER 31, 1989............................... 3,430 3,112,380 311 717,078 --
Exercise of warrants for common stock................... -- 33,333 3 7 --
Issuance of partnership units and common stock for cash,
$1,250 per unit....................................... 74 123,334 12 92,525 --
Issuance of partnership unit for cash, $5,000 per
unit.................................................. 1 -- -- 5,000 --
Issuance of common stock for cash, $4.56 per share...... -- 1,100 -- 5,000 --
Issuance of partnership units and warrants to purchase
200,000 shares of common stock for cash, $1,250 per
unit.................................................. 40 -- -- 50,000 --
Issuance of common stock for consulting services and
employee compensation................................. -- 11,400 2 51,678 --
Compensation expense related to issuance of warrants for
partnership units..................................... -- -- -- 40,000 --
Exercise of warrant for partnership units............... 10 -- -- 12,500 --
Net loss................................................ -- -- -- -- --
----------- ----------- ----- ----------- -----------
BALANCE AT OCTOBER 31, 1990............................... 3,555 3,281,547 328 973,788 --
Issuance of partnership units for cash, $5,000 per
unit.................................................. 23.5 -- -- 117,500 --
Exercise of warrants for partnership unit and common
stock................................................. 1 1,100 -- 1,250 --
Issuance of common stock for cash, $4.56 per share...... -- 24,750 3 112,505 --
Compensation expense related to issuance of warrants for
common stock.......................................... -- -- -- 1,520 --
Issuance of common stock for consulting services, $4.56
per share............................................. -- 1,657 -- 7,547 --
Common stock subject to rescission...................... -- (7,127) (1) (32,499) --
Net loss................................................ -- -- -- -- --
----------- ----------- ----- ----------- -----------
BALANCE AT OCTOBER 31, 1991............................... 3,579.5 3,301,927 330 1,181,611 --
<CAPTION>
DEFICIT
ACCUMULATED
DURING THE TOTAL
DEVELOPMENT SHAREHOLDERS'
STAGE EQUITY
------------ -------------
<S> <C> <C>
BALANCE AT OCTOBER 31, 1987............................... $ (228,562) $ 87,700
Issuance of partnership units and common stock for cash,
$500 per unit......................................... -- 50,050
Issuance of partnership units and common stock for cash,
$1,250 per unit....................................... -- 25,010
Issuance of partnership units for cash, $50 per unit.... -- 1,000
Issuance of partnership units and warrants to purchase
400,000 shares of common for cash, $1,250 per unit.... -- 100,000
Compensation expense related to issuance of warrants for
partnership units..................................... -- 10,000
Issuance of common stock for consulting services and
employee compensation................................. -- 14
Net loss................................................ (266,194) (266,194)
------------ -------------
BALANCE AT OCTOBER 31, 1988............................... (494,756) 7,580
Exercise of warrants for common stock................... -- 42
Issuance of partnership units and common stock for cash,
$1,250 per unit....................................... -- 12,505
Issuance of partnership units and warrants to purchase
800,000 shares of common stock for cash, $1,250 per
unit.................................................. -- 200,000
Issuance of common stock for consulting services and
employee compensation................................. -- 6
Compensation expense related to issuance of warrants for
partnership units..................................... -- 2,500
Net loss................................................ (243,926) (243,926)
------------ -------------
BALANCE AT OCTOBER 31, 1989............................... (738,682) (21,293)
Exercise of warrants for common stock................... -- 10
Issuance of partnership units and common stock for cash,
$1,250 per unit....................................... -- 92,537
Issuance of partnership unit for cash, $5,000 per
unit.................................................. -- 5,000
Issuance of common stock for cash, $4.56 per share...... -- 5,000
Issuance of partnership units and warrants to purchase
200,000 shares of common stock for cash, $1,250 per
unit.................................................. -- 50,000
Issuance of common stock for consulting services and
employee compensation................................. -- 51,680
Compensation expense related to issuance of warrants for
partnership units..................................... -- 40,000
Exercise of warrant for partnership units............... -- 12,500
Net loss................................................ (351,772) (351,772)
------------ -------------
BALANCE AT OCTOBER 31, 1990............................... (1,090,454) (116,338)
Issuance of partnership units for cash, $5,000 per
unit.................................................. -- 117,500
Exercise of warrants for partnership unit and common
stock................................................. -- 1,250
Issuance of common stock for cash, $4.56 per share...... -- 112,508
Compensation expense related to issuance of warrants for
common stock.......................................... -- 1,520
Issuance of common stock for consulting services, $4.56
per share............................................. -- 7,547
Common stock subject to rescission...................... -- (32,500)
Net loss................................................ (274,844) (274,844)
------------ -------------
BALANCE AT OCTOBER 31, 1991............................... (1,365,298) (183,357)
</TABLE>
See accompanying notes.
F-6
<PAGE>
ANTIVIRALS INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
UNREALIZED
GAIN ON
COMMON STOCK ADDITIONAL AVAILABLE-
PARTNERSHIP ------------------------ PAID-IN FOR-SALE
UNITS SHARES AMOUNT CAPITAL SECURITIES
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE AT OCTOBER 31, 1991............................... 3,579.5 3,301,927 $ 330 $ 1,181,611 $ --
Issuance of partnership units for cash, $5,000 per
unit.................................................. 15.5 -- -- 77,500 --
Issuance of common stock for cash, $4.56 per share...... -- 17,050 2 77,498 --
Compensation expense related to issuance of warrants for
common stock.......................................... -- -- -- 7,500 --
Common stock subject to rescission...................... -- (32,486) (3) (148,135) --
Net loss................................................ -- -- -- -- --
----------- ----------- ----- ----------- -----------
BALANCE AT DECEMBER 31, 1991.............................. 3,595 3,286,491 329 1,195,974 --
Issuance of partnership units for cash, $5,000 per
unit.................................................. 30.5 -- -- 152,500 --
Exercise of warrants for partnership units and common
stock................................................. 22 2,200 -- 28,750 --
Conversion of debt into common stock and partnership
units................................................. 9 9,634 1 87,859 --
Issuance of common stock for cash, $4.56 per share...... -- 868,906 87 3,954,625 --
Issuance of common stock for consulting services, $4.56
per share............................................. -- 22,872 2 104,167 --
Compensation expense related to issuance of warrants for
common stock and partnership units.................... -- -- -- 262,833 --
Common stock subject to rescission...................... -- (410,099) (41) (1,870,008) --
Net loss................................................ -- -- -- -- --
----------- ----------- ----- ----------- -----------
BALANCE AT DECEMBER 31, 1992.............................. 3,656.5 3,780,004 378 3,916,700 --
Exercise of warrants for partnership units.............. 9 -- -- 4,500 --
Issuance of common stock in exchange for partnership
units................................................. (1,809.5) 1,632,950 163 (163) --
Withdrawal of partnership net assets upon conveyance of
technology............................................ (1,856) -- -- (176,642) --
Issuance of common stock for cash and short-term
investments, $4.95 per share.......................... -- 507,084 50 2,510,014 --
Exercise of warrants for common stock................... -- 3,844 1 9,999 --
Common stock subject to rescission...................... -- (808,902) (81) (901,119) --
Net loss................................................ -- -- -- -- --
----------- ----------- ----- ----------- -----------
BALANCE AT DECEMBER 31, 1993.............................. -- 5,114,980 511 5,363,289 --
Issuance of common stock for cash, $4.95 per share...... -- 565,216 57 2,797,761 --
Exercise of warrants for common stock................... -- 24,667 2 122,098 --
Issuance of common stock for consulting services, $4.95
per share............................................. -- 151 -- 749 --
Unrealized gain on available-for-sale securities........ -- -- -- -- 61,000
Common stock subject to rescission...................... -- (34,359) (3) (170,075) --
Net loss................................................ -- -- -- -- --
----------- ----------- ----- ----------- -----------
BALANCE AT DECEMBER 31, 1994.............................. -- 5,670,655 567 8,113,822 61,000
Issuance of common stock for cash, $6.00 per share...... -- 146,183 15 862,674 --
Compensation expense related to issuance of warrants for
common stock.......................................... -- -- -- 213,000 --
Unrealized gain on available-for-sale securities........ -- -- -- -- 35,750
Net loss................................................ -- -- -- -- --
----------- ----------- ----- ----------- -----------
BALANCE AT DECEMBER 31, 1995.............................. -- 5,816,838 582 9,189,496 96,750
Exercise of warrants for common stock................... -- 957,452 96 (96) --
Issuance of common stock for cash, $6.00 per share...... -- 712,500 71 4,031,461 --
Liquidation of available-for-sale securities............ -- -- -- -- (96,750)
Net loss................................................ -- -- -- -- --
----------- ----------- ----- ----------- -----------
BALANCE AT DECEMBER 31, 1996.............................. -- 7,486,790 $ 749 $13,220,861 $ --
----------- ----------- ----- ----------- -----------
----------- ----------- ----- ----------- -----------
<CAPTION>
DEFICIT
ACCUMULATED
DURING THE TOTAL
DEVELOPMENT SHAREHOLDERS'
STAGE EQUITY
------------ -------------
<S> <C> <C>
BALANCE AT OCTOBER 31, 1991............................... $ (1,365,298) $ (183,357)
Issuance of partnership units for cash, $5,000 per
unit.................................................. -- 77,500
Issuance of common stock for cash, $4.56 per share...... -- 77,500
Compensation expense related to issuance of warrants for
common stock.......................................... -- 7,500
Common stock subject to rescission...................... -- (148,138)
Net loss................................................ (91,588) (91,588)
------------ -------------
BALANCE AT DECEMBER 31, 1991.............................. (1,456,886) (260,583)
Issuance of partnership units for cash, $5,000 per
unit.................................................. -- 152,500
Exercise of warrants for partnership units and common
stock................................................. -- 28,750
Conversion of debt into common stock and partnership
units................................................. -- 87,860
Issuance of common stock for cash, $4.56 per share...... -- 3,954,712
Issuance of common stock for consulting services, $4.56
per share............................................. -- 104,169
Compensation expense related to issuance of warrants for
common stock and partnership units.................... -- 262,833
Common stock subject to rescission...................... -- (1,870,049)
Net loss................................................ (1,731,138) (1,731,138)
------------ -------------
BALANCE AT DECEMBER 31, 1992.............................. (3,188,024) 729,054
Exercise of warrants for partnership units.............. -- 4,500
Issuance of common stock in exchange for partnership
units................................................. -- --
Withdrawal of partnership net assets upon conveyance of
technology............................................ -- (176,642)
Issuance of common stock for cash and short-term
investments, $4.95 per share.......................... -- 2,510,064
Exercise of warrants for common stock................... -- 10,000
Common stock subject to rescission...................... -- (901,200)
Net loss................................................ (2,346,939) (2,346,939)
------------ -------------
BALANCE AT DECEMBER 31, 1993.............................. (5,534,963) (171,163)
Issuance of common stock for cash, $4.95 per share...... -- 2,797,818
Exercise of warrants for common stock................... -- 122,100
Issuance of common stock for consulting services, $4.95
per share............................................. -- 749
Unrealized gain on available-for-sale securities........ -- 61,000
Common stock subject to rescission...................... -- (170,078)
Net loss................................................ (2,246,272) (2,246,272)
------------ -------------
BALANCE AT DECEMBER 31, 1994.............................. (7,781,235) 394,154
Issuance of common stock for cash, $6.00 per share...... -- 862,689
Compensation expense related to issuance of warrants for
common stock.......................................... -- 213,000
Unrealized gain on available-for-sale securities........ -- 35,750
Net loss................................................ (2,556,886) (2,556,886)
------------ -------------
BALANCE AT DECEMBER 31, 1995.............................. (10,338,121) (1,051,293)
Exercise of warrants for common stock................... -- --
Issuance of common stock for cash, $6.00 per share...... -- 4,031,532
Liquidation of available-for-sale securities............ -- (96,750)
Net loss................................................ (2,087,362) (2,087,362)
------------ -------------
BALANCE AT DECEMBER 31, 1996.............................. $(12,425,483) $ 796,127
------------ -------------
------------ -------------
</TABLE>
See accompanying notes.
F-7
<PAGE>
ANTIVIRALS INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD
YEAR ENDED DECEMBER 31, JULY 22, 1980
------------------------------ (INCEPTION) TO
1995 1996 DECEMBER 31, 1996
-------------- -------------- -----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................................. $ (2,556,886) $ (2,087,362) $ (12,425,483)
Adjustments to reconcile net loss to net cash used in operating
activities--
Depreciation and amortization........................................... 503,340 520,300 2,061,438
Realized gain on sale of short-term investments available for sale...... -- (96,750) (96,750)
Compensation expense on issuance of common stock and partnership
units................................................................. -- -- 182,392
Compensation expense on issuance of warrants to purchase common stock or
partnership units..................................................... 213,000 -- 562,353
Conversion of interest accrued to common stock.......................... -- -- 7,860
Changes in operating assets and liabilities:
Decrease (increase) in other current assets............................. 8,645 (21,019) (28,255)
Increase in other assets................................................ -- -- (45,191)
Net increase in accounts payable, accrued payroll and deferred
payments.............................................................. 53,318 76,743 334,570
-------------- -------------- -----------------
Net cash used in operating activities................................. (1,778,583) (1,608,088) (9,447,066)
-------------- -------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale or redemption of short-term investments................ 15,000 182,750 217,750
Purchase of property and equipment........................................ (90,594) (65,877) (2,413,356)
Patent costs.............................................................. (177,989) (66,870) (642,959)
-------------- -------------- -----------------
Net cash (used in) provided by investing activities................... (253,583) 50,003 (2,838,565)
-------------- -------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock and partnership units.................. 862,689 4,031,532 15,536,612
Withdrawal of partnership net assets...................................... -- -- (176,642)
Issuance of convertible debt.............................................. -- -- 80,000
Deferred offering costs................................................... -- (143,110) (143,110)
-------------- -------------- -----------------
Net cash provided by financing activities............................. 862,689 3,888,422 15,296,860
-------------- -------------- -----------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS............................ (1,169,477) 2,330,337 3,011,229
CASH AND CASH EQUIVALENTS:
Beginning of period....................................................... 1,850,369 680,892 --
-------------- -------------- -----------------
End of period............................................................. $ 680,892 $ 3,011,229 $ 3,011,229
-------------- -------------- -----------------
-------------- -------------- -----------------
</TABLE>
See accompanying notes.
F-8
<PAGE>
ANTIVIRALS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF BUSINESS:
ANTIVIRALS INC. (the Company) was incorporated in the State of Oregon on
July 22, 1980. The mission of the Company is to develop and commercialize
improved therapeutic products based upon antisense and drug delivery technology.
Through May 1993, the financial statements include the combined accounts of
the Company and ANTI-GENE DEVELOPMENT GROUP, a limited partnership (AGDG or the
Partnership) founded in 1981 and registered in the State of Oregon.
Substantially all income generated and proceeds from the Partnership unit sales
have been paid to the Company under the terms of research and development
contracts entered into by the Partnership and the Company. Significant
transactions between the Company and the Partnership have been eliminated.
In March 1993, the Company offered to all partners in the Partnership the
opportunity to exchange their partnership units or warrants to purchase
partnership units (unit warrants) for common stock or warrants to purchase
common stock. Under the terms of the offer, which was completed May 1, 1993,
each partner could elect to exchange each unit held or unit warrant held for
1,100 shares of common stock or warrants to purchase 1,100 shares of common
stock of the Company, respectively. One partner exchanged 325 partnership units
for warrants to purchase 357,500 shares of common stock. Total shares and
warrants to purchase shares issued in the exchange offer were 1,632,950 and
381,700, respectively.
Effective May 19, 1993, the Company and the Partnership entered into a
Technology Transfer Agreement wherein the Partnership conveyed all intellectual
property in its control to the Company. As part of the conveyance, the Company
tendered to the Partnership for liquidation all partnership units received
pursuant to the exchange offer and received a 49.37 percent undivided interest
in the intellectual property. The Company then purchased the remaining undivided
interest in the intellectual property for rights to payments of 4.05 percent of
gross revenues in excess of $200 million, from sales of products which would, in
the absence of the Technology Transfer Agreement, infringe a valid claim under
any patent transferred to the Company.
The remaining net assets of the Partnership, $176,642 of cash, were no
longer combined with those of the Company in May 1993. Under the terms of the
Technology Transfer Agreement, the Partnership ceased active sales of
partnership units and income generating activities and no longer will enter into
research and development contracts with the Company. The Partnership currently
exists primarily for the purpose of collecting potential future payments from
the Company as called for in the Technology Transfer Agreement.
Beginning in 1991, the Company changed its fiscal year from a fiscal year
ending on October 31, to a calendar year. The new fiscal year was adopted
prospectively.
In March 1996, the Company commenced a private offering wherein 712,500
shares of common stock were sold for net proceeds of $4,031,532, which included
warrants to purchase 60,201 shares of common stock at $9.00 per share. These
warrants are exercisable through the earlier of five years from issuance or
three years from the filing for an initial public offering.
On October 3, 1996, the Board of Directors authorized management of the
Company to file a registration statement with the SEC offering to the public
1,500,000 units (the Units), each unit consisting of one share of the Company's
common stock, and one warrant to purchase one share of common stock.
F-9
<PAGE>
ANTIVIRALS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND NATURE OF BUSINESS: (CONTINUED)
The Units will separate immediately following issuance and thereafter the common
stock and warrants that make up the Units will trade only as separate
securities.
In November 1996, the shareholders approved a reverse split of the Company's
outstanding Common Stock on the basis of one share for each three shares of the
then-outstanding common stock. The share information in the accompanying
financial statements has been retroactively restated to reflect the reverse
split. The Common Stock will continue to have $.0001 par value. The shareholders
approved the authorization of a new class of preferred stock which includes
2,000,000 shares at $.0001 par value.
The Company is in the development stage. Since its inception in 1980 through
December 31, 1996, the Company has incurred losses of approximately $12.4
million, substantially all of which resulted from expenditures related to
research and development and general and administrative expenses. The Company
has not generated any material revenue from product sales to date, and there can
be no assurance that revenues from product sales will be achieved. Moreover,
even if the Company does achieve revenues from product sales, the Company
nevertheless expects to incur operating losses over the next several years. The
financial statements have been prepared assuming that the Company will continue
as a going concern. The Company's ability to achieve a profitable level of
operations in the future will depend in large part on its completing product
development of its antisense and/or drug delivery products, obtaining regulatory
approvals for such products and bringing these products to market. During the
period required to develop these products, the Company will require substantial
financing. There is no assurance that such financing will be available when
needed or that the Company's planned products will be commercially successful.
If necessary, the Company's management will curtail expenditures in an effort to
conserve operating funds. The likelihood of the long-term success of the Company
must be considered in light of the expenses, difficulties and delays frequently
encountered in the development and commercialization of new pharmaceutical
products, competitive factors in the marketplace as well as the burdensome
regulatory environment in which the Company operates. There can be no assurance
that the Company will ever achieve significant revenues or profitable
operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
SHORT-TERM SECURITIES--AVAILABLE-FOR-SALE
In January 1994, the Company adopted Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" (SFAS 115). In accordance with
F-10
<PAGE>
ANTIVIRALS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
SFAS 115, the Company has classified its investment securities as
available-for-sale and, accordingly, such investment securities are stated on
the balance sheet at their fair market value, which approximated cost at
December 31, 1996 and exceeded cost by $96,750 at December 31, 1995. The
unrealized difference between the cost and the fair market value of these
securities has been reflected as a separate component of shareholders' equity.
These short-term securities included state government obligations with a cost,
which approximated fair market value, of $30,000 at December 31, 1995 and 1996
and common stock with a fair value of $182,750 at December 31, 1995.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and depreciated over the estimated
useful lives of the assets, generally five years, using the straight-line
method. Leasehold improvements are amortized over the shorter of the lease term
or the estimated useful life of the asset.
PATENT COSTS
Patent costs consist primarily of legal and filing fees incurred to file
patents on proprietary technology developed by the Company. Patent costs are
amortized on a straight-line basis over the shorter of the estimated economic
lives or the legal lives of the patents, generally 17 years. Total accumulated
amortization at December 31, 1995 and 1996 was $127,000 and $168,000,
respectively.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
INCOME TAXES
The Company accounts for income taxes, in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109). Under SFAS 109, deferred tax assets and liabilities are recorded based on
the tax effected difference between the tax bases of assets and liabilities and
their carrying amount for financial reporting purposes, referred to as temporary
differences, using enacted marginal income tax rates.
NET LOSS PER SHARE
Net loss per share is calculated using the weighted average number of shares
outstanding. Common equivalent shares (stock options and warrants) are excluded
from the computation as their effect is antidilutive, except that, pursuant to
the Securities and Exchange Commission ("SEC") Staff Accounting Bulletins,
common and common equivalent shares issued during the period commencing 12
months prior to the initial filing of a proposed public offering at prices below
the public offering price have been considered in the calculation as if they
were outstanding for all periods presented (using the treasury stock method for
stock options and warrants at the estimated initial public offering price).
3. SHAREHOLDERS' EQUITY:
At December 31, 1996, the Company had one stock option plan, the 1992 Stock
Incentive Plan (the Plan) which provides for the issuance of incentive stock
options to its employees and nonqualified stock
F-11
<PAGE>
ANTIVIRALS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. SHAREHOLDERS' EQUITY: (CONTINUED)
options, stock appreciation rights and bonus rights to employees, directors of
the Company and consultants. The Company has reserved 1,333,333 shares of common
stock for issuance under the Plan. Options issued under the Plan generally vest
ratably over four years and expire five to ten years from the date of grant.
During 1995, the Financial Accounting Standards Board issued SFAS 123, which
defines a fair value based method of accounting for an employee stock option and
similar equity instruments and encourages all entities to adopt that method of
accounting for all of their employee stock compensation plans. However, it also
allows an entity to continue to measure compensation cost for those plans using
the method of accounting prescribed by Accounting Principles Board Opinion No.
25 (APB 25). Entities electing to remain with the accounting in APB 25 must make
pro forma disclosures of net income and, if presented, earnings per share, as if
the fair value based method of accounting defined in SFAS 123 had been adopted.
The Company has elected to account for its stock-based compensation plans under
APB 25; however, the Company has computed, for pro forma disclosure purposes,
the value of all options granted during 1995 and 1996 using the Black-Scholes
options pricing model as prescribed by SFAS 123 using the following weighted
average assumptions for grants:
<TABLE>
<S> <C>
Risk-free interest rate......................... 6%
Expected dividend yield......................... 0%
4 - 5
Expected lives (years).......................... Years
Expected volatility............................. 70%
</TABLE>
Using the Black-Scholes methodology, the total value of options granted
during 1995 and 1996 was $431,582 and $148,866, respectively, which would be
amortized on a pro forma basis over the vesting period of the options (typically
four years). The weighted average fair value of options granted during 1995 and
1996 was $3.14 and $3.72, respectively. The value of warrants granted in 1995
and 1996 have not been considered as such warrant grants related to the raising
of additional equity.
If the Company had accounted for its stock-based compensation plans in
accordance with SFAS 123, the Company's net income and net income per share
would approximate the pro forma disclosures below:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1995 1996
---------------------------- ----------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net loss.................................... $ (2,556,886) $ (2,810,494) $ (2,087,362) $ (2,185,676)
Net loss per share.......................... (0.37) (0.40) (0.25) (0.27)
</TABLE>
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. SFAS 123 does not apply to awards prior to January
1, 1995, and additional awards are anticipated in future years.
F-12
<PAGE>
ANTIVIRALS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. SHAREHOLDERS' EQUITY: (CONTINUED)
A summary of the status of the Company's stock option plans and changes are
presented in the following table:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1995 1996
------------------------------- -------------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------------ ----------------- ------------ -----------------
<S> <C> <C> <C> <C>
Options outstanding at beginning of
year................................. 977,148 $ 4.65 1,109,828 $ 4.71
Granted................................ 137,400 5.01 40,000 6.00
Exercised.............................. -- -- -- --
Canceled............................... 4,720 4.95 26,001 4.98
------------ ----- ------------ -----
Options outstanding at end of year..... 1,109,828 4.71 1,123,827 4.75
------------ ----- ------------ -----
------------ ----- ------------ -----
Exercisable at end of year............. 804,181 $ 4.67 960,495 $ 4.61
------------ ----- ------------ -----
------------ ----- ------------ -----
</TABLE>
The following table sets forth the exercise price range, number of shares
outstanding at December 31, 1996, weighted average remaining contractual life,
weighted average exercise price, number of exercisable shares and weighted
average exercise price of exercisable options by groups of similar price and
grant date:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
- ---------------------------------------------------------------------
OUTSTANDING WEIGHTED AVERAGE OPTIONS EXERCISABLE
SHARES AT REMAINING ------------------------------
EXERCISE DECEMBER 31, CONTRACTUAL LIFE WEIGHTED AVERAGE EXERCISABLE WEIGHTED AVERAGE
PRICE 1996 (YEARS) EXERCISE PRICE OPTIONS EXERCISE PRISE
- ------------- ------------ ------------------- ------------------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
$4.56 790,901 5.45 $ 4.56 724,236 $ 4.56
4.95 183,679 7.46 4.95 127,012 4.95
5.01 99,800 0.42 5.01 99,800 5.01
6.00 49,447 7.61 6.00 9,447 6.00
</TABLE>
The Company has also issued warrants for the purchase of common stock in
conjunction with financing and compensation arrangements. A summary of the
status of the Company's warrants and changes are presented in the following
table:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1995 1996
------------------------------- ------------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------------ ----------------- ------------ ----------------
<S> <C> <C> <C> <C>
Warrants outstanding at beginning of
year................................. 1,324,733 $ 1.02 1,324,733 $ 1.02
Granted................................ 38,000 0.33 60,201 9.00
Exercised.............................. -- -- 957,500 0.0003
Canceled............................... 38,000 0.33 -- --
------------ ----- ------------ -------
Warrants outstanding at end of year.... 1,324,733 1.02 427,434 4.43
------------ ----- ------------ -------
------------ ----- ------------ -------
Exercisable at end of year............. 1,299,736 $ 1.04 402,437 $ 4.69
------------ ----- ------------ -------
------------ ----- ------------ -------
</TABLE>
F-13
<PAGE>
ANTIVIRALS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. SHAREHOLDERS' EQUITY: (CONTINUED)
The following table sets forth the exercise price range, number of shares
outstanding at December 31, 1996, weighted average remaining contractual life,
weighted average exercise price, number of exercisable shares and weighted
average exercise price of exercisable warrants by groups of similar price and
grant date:
<TABLE>
<CAPTION>
WARRANTS OUTSTANDING
- ----------------------------------------------------------------
OUTSTANDING WEIGHTED AVERAGE WARRANTS EXERCISABLE
SHARES AT REMAINING -----------------------------
EXERCISE DECEMBER 31, CONTRACTUAL WEIGHTED AVERAGE EXERCISABLE WEIGHTED AVERAGE
PRICE 1996 LIFE (YEARS) EXERCISE PRICE WARRANTS EXERCISE PRISE
- ------------- ------------ ----------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$0.0003 124,799 Varies $ 0.0003 99,802 $ 0.0003
1.14 22,000 Varies 1.14 22,000 1.14
4.56 1,100 5.75 4.56 1,100 4.56
6.00 219,334 Varies 6.00 219,334 6.00
9.00 60,201 Varies 9.00 60,201 9.00
</TABLE>
4. INCOME TAXES:
At December 31, 1995 and 1996, the Company had federal and state tax net
operating loss carryforwards of approximately $7,731,000 and $9,410,000,
respectively. The difference between the operating loss carryforwards on a tax
basis and a book basis is due principally to differences in depreciation,
amortization, and treatment of research and development costs. The federal and
state carryforwards will begin to expire in 1997 and 2008, respectively, if not
otherwise used. The Internal Revenue Code rules under Section 382 could limit
the future use of these losses based on ownership changes in the value of the
Company's stock.
The Company had a net deferred tax asset of $3,808,000 and $4,660,000 at
December 31, 1995 and 1996, primarily from net operating loss carryforwards. A
valuation allowance was recorded to reduce the net deferred tax asset to zero.
The net change in the valuation allowance for deferred tax assets was an
increase of approximately $1,195,000 and $852,000 for the years ended December
31, 1995 and 1996, respectively, mainly due to the increase in the net operating
loss carryforwards.
An analysis of the deferred tax assets and liabilities as of December 31,
1995, is as follows:
<TABLE>
<CAPTION>
DEFERRED TAX DEFERRED TAX
ASSET LIABILITY TOTAL
------------ ------------ -------------
<S> <C> <C> <C>
Net operating loss carryforwards............................. $3,092,000 $ -- $ 3,092,000
Accrued expenses............................................. 108,000 -- 108,000
Depreciation................................................. 298,000 -- 298,000
Research and development tax credit.......................... 490,000 -- 490,000
------------ ------------ -------------
Patent costs................................................. -- (180,000) (180,000)
------------ ------------ -------------
$3,988,000 $ (180,000) 3,808,000
------------ ------------
------------ ------------
Valuation allowance.......................................... (3,808,000)
-------------
$ --
-------------
-------------
</TABLE>
F-14
<PAGE>
ANTIVIRALS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES: (CONTINUED)
An analysis of the deferred tax assets and liabilities as of December 31,
1996, is as follows:
<TABLE>
<CAPTION>
DEFERRED TAX DEFERRED TAX
ASSET LIABILITY TOTAL
------------ ------------ -------------
<S> <C> <C> <C>
Net operating loss carryforwards............................. $3,764,000 $ -- $ 3,764,000
Accrued expenses............................................. 23,000 -- 23,000
Depreciation................................................. 403,000 -- 403,000
Research and development tax credit.......................... 660,000 -- 660,000
Patent costs................................................. -- (190,000) (190,000)
------------ ------------ -------------
$4,850,000 $ (190,000) 4,660,000
------------ ------------
------------ ------------
Valuation allowance.......................................... (4,660,000)
-------------
$ --
-------------
-------------
</TABLE>
5. LEASE OBLIGATIONS:
The Company leases office and laboratory facilities under various
noncancelable operating leases through December 1997. Rent expense under these
leases was $168,000 and $193,000 for the years ended December 31, 1995 and 1996,
respectively, and $835,000 for the period from July 22, 1980 through December
31, 1996.
In September 1996, the Company leased additional laboratory facilities and
extended the lease on its existing laboratory facilities through 2004. At
December 31, 1996, the aggregate noncancelable future minimum payments under
these leases were $288,000, $273,000, $258,000, $266,000 and $274,000 for the
years ended December 31, 1997, 1998, 1999, 2000 and 2001, respectively, and
$871,000 thereafter.
6. RELATED PARTY TRANSACTIONS:
The Company paid $8,000, $12,000 and $233,000 to certain nonemployee
directors for financial consulting, scientific research services and
reimbursement for out-of-pocket costs of attending Board of Director meetings
during the years ended December 31, 1995 and 1996, and the period from July 22,
1980 through December 31, 1996, respectively.
7. SUBSEQUENT EVENTS:
On January 20, 1997, AGDG and the Company amended the Technology Transfer
Agreement to reduce the Technology Fees arising from the sale of diagnostic
products from 4.05% to 2% and to remove the $200 million exemption with respect
to sales of such diagnostic products. The Company also granted to AGDG a
royalty-bearing license to make, use and sell small quantities of product
derived from the Intellectual Property for research purposes only.
In 1997, as a condition to its planned initial public offering, the Company
intends to offer to holders of 1,292,973 shares of its common stock, the right
to rescind their purchase of shares of the Company's common stock. If all such
offerees elect to rescind their purchases, the Company will be required to pay
these shareholders $3,121,965 and 568.67 units of limited partnership interests
in AGDG, plus statutory interest. To the extent these shareholders accept the
rescission offer, the Company will use up to $1,500,000 of its cash resources to
repurchase the shares. If any additional consideration is required to
F-15
<PAGE>
ANTIVIRALS INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. SUBSEQUENT EVENTS: (CONTINUED)
repurchase the shares, the Company will issue unsecured promissory notes to the
shareholders on a pro rata basis. Such notes will bear interest at 9% per annum
and mature between 18 and 36 months. If additional Partnership units are issued,
the fees arising from the sale of therapeutic products will be adjusted on a pro
rata basis, such that if all Partnership unit holders accept the rescission
offer, the fees for sales of therapeutic products will increase to approximately
5.25%. Fees related to diagnostic products under such a scenario would remain at
2%. The Company believes that its potential exposure to litigation for possible
past violations of securities laws will be effectively eliminated by this
rescission offer. All periods presented have been restated to reflect the amount
of common stock subject to the rescission offer outside of shareholders' equity.
The Company estimates that the total amount of its obligation for interest
to rescinding shareholders could aggregate approximately $2,129,000 if all
eligible shareholders accepted the rescission offer. Because of the contingent
nature of such liability and because the ultimate amount to be refunded is not
presently known, the potential interest liability has not been accrued but will
be recorded as an expense of the Company if and when the amount becomes an
actual liability.
The rescission offer will not be made to holders of 22,021 shares of common
stock in Florida as state securities laws do not permit such offerings. The
rescission offer will also not be made to holders of 192,603 shares of common
stock who reside in California and Nevada because the Company believes its
potential liability to these holders has been eliminated by the running of
applicable statute of limitations. If all the shareholders in Florida, Nevada
and California were to successfully assert claims against the Company, the
Company would be required to pay these holders approximately $319,000 and 55
units of limited partnership interests in AGDG, plus $237,000 in statutory
interest. Since no rescission offer has been made to these shareholders and
because of the contingent nature of such obligations, the potential liability
has not been reflected in the accompanying financial statements.
The Company's cash flow and its financial position could be materially
affected by the results of the rescission offer. The financial statements do not
include any adjustments that might result from the outcome of the rescission
offer.
F-16
<PAGE>
ANTI-GENE DEVELOPMENT GROUP
INDEX TO FINANCIAL STATEMENTS
Report of Independent Public Accountants. . . . . . . . . . . . . . . . . . F-2
Balance Sheet as of December 31, 1996 . . . . . . . . . . . . . . . . . . . F-3
Statements of Operations for the two years ended
December 31, 1995 and 1996 . . . . . . . . . . . . . . . . . . . . . . . F-4
Statements of Partners' Equity for the two years
ended December 31, 1995 and 1996 . . . . . . . . . . . . . . . . . . . . F-5
Statements of Cash Flows for the two years ended
December 31, 1995 and 1996 . . . . . . . . . . . . . . . . . . . . . . . F-6
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . F-7
F-17
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
ANTI-GENE DEVELOPMENT GROUP:
We have audited the accompanying balance sheet of ANTI-GENE DEVELOPMENT GROUP
(an Oregon limited partnership) as of December 31, 1996, and the related
statements of operations, partners' capital and cash flows for the years ended
December 31, 1995 and 1996. These financial statements are the responsibility
of the Partnership'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 audits 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 ANTI-GENE DEVELOPMENT GROUP as
of December 31, 1996, and the results of its operations and its cash flows for
the years ended December 31, 1995 and 1996 in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Portland, Oregon,
March 14, 1997
F-18
<PAGE>
ANTI-GENE DEVELOPMENT GROUP
(An Oregon Limited Partnership)
BALANCE SHEET
AS OF DECEMBER 31, 1996
ASSETS
CURRENT ASSETS:
Cash $ 1,988
Certificates of deposit 108,201
Short-term investments - held to maturity 78,595
--------
Total current assets 188,784
--------
PROPERTY AND EQUIPMENT, at cost:
Furniture and fixtures 580
Less- Accumulated depreciation (225)
--------
355
--------
$189,139
--------
--------
PARTNERS' CAPITAL
PARTNERS' CAPITAL $189,139
--------
--------
See accompanying notes.
F-19
<PAGE>
ANTI-GENE DEVELOPMENT GROUP
(An Oregon Limited Partnership)
STATEMENTS OF OPERATIONS
Year Ended
December 31,
----------------------
1995 1996
------- -------
REVENUES:
Interest income $ 9,593 $ 7,343
------- -------
EXPENSES:
Insurance 2,035 2,035
Accounting 1,250 845
Miscellaneous 819 235
------- -------
Total expenses 4,104 3,115
------- -------
NET INCOME $ 5,489 $ 4,228
------- -------
------- -------
EARNINGS PER UNIT $ 2.96 $ 2.28
------- -------
------- -------
WEIGHTED AVERAGE UNITS OUTSTANDING 1,856 1,856
------- -------
------- -------
See accompanying notes.
F-20
<PAGE>
ANTI-GENE DEVELOPMENT GROUP
(An Oregon Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Units Amount
------- ---------
BALANCE, December 31, 1994 1,856 $184,882
Add- Net income - 5,489
Less- Partnership distributions - (2,784)
------- ---------
BALANCE, December 31, 1995 1,856 187,587
Add- Net income - 4,228
Less- Partnership distributions - (2,676)
------- ---------
BALANCE, December 31, 1996 1,856 $189,139
------- ---------
------- ---------
See accompanying notes.
F-21
<PAGE>
ANTI-GENE DEVELOPMENT GROUP
(An Oregon Limited Partnership)
STATEMENTS OF CASH FLOWS
Year Ended
December 31,
----------------------
1995 1996
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,489 $ 4,228
Adjustments to reconcile net income to net
cash provided by operating activities-
Depreciation and amortization - 847
--------- ---------
Net cash provided by operating activities 5,489 5,075
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (497) -
Proceeds from redemption of certificates of
deposit 183,875 185,266
Purchase of certificate of deposit (185,971) (108,201)
Purchase of tax-exempt bonds - (78,595)
--------- ---------
Net cash used by investing activities (2,593) (1,530)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Partnership distributions (2,784) (2,676)
--------- ---------
INCREASE IN CASH 112 869
CASH, beginning of period 1,007 1,119
--------- ---------
CASH, end of period $ 1,119 $ 1,988
--------- ---------
--------- ---------
See accompanying notes.
F-22
<PAGE>
ANTI-GENE DEVELOPMENT GROUP
(An Oregon Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF BUSINESS:
ANTI-GENE DEVELOPMENT GROUP (the Partnership), a limited partnership, was
founded in 1981 and registered in the State of Oregon. Through 1992,
substantially all proceeds from Partnership interest sales and interest income
had been paid to ANTIVIRALS INC. (the Company) under terms of research and
development contracts entered into by the Partnership and the Company. The
mission of the Company at that time, and as expanded today, is to develop and
commercialize improved therapeutic products based upon antisense and drug
delivery technology.
In March 1993, the Company offered to all partners in the Partnership the
opportunity to exchange their partnership units or warrants to purchase
partnership units (unit warrants) for common stock or warrants to purchase
common stock. Under the terms of the offer, which was completed May 1, 1993,
each partner could elect to exchange each unit held or each unit warrant held
for 1,100 shares of common stock or warrants to purchase 1,100 shares of common
stock of the Company, respectively. One partner exchanged 325 partnership units
for warrants to purchase 357,500 shares of common stock. Total units exchanges
in the offer were 1,809.5.
In February 1993, the Company and the Partnership entered into a Technology
Transfer Agreement wherein effective May 19, 1993, the Partnership conveyed all
intellectual property in its control to the Company. As part of the conveyance,
the Company tendered to the Partnership for liquidation all partnership units
received pursuant to the exchange offer and received a 49.37 percent undivided
interest in the intellectual property. The Company then purchased the remaining
undivided interest in the intellectual property for payments of 4.05 percent of
gross revenues in excess of $200 million, from sales of products which would, in
the absence of the Technology Transfer Agreement, infringe a valid claim under
any patent transferred to the Company.
After the effective date of the Technology Transfer Agreement, the Partnership
ceased active sales of partnership units and no longer enters into research and
development contracts with the Company. The Partnership currently exists for
the purpose of collecting payments from the Company as called for in the
Technology Transfer Agreement.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires 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.
SHORT-TERM INVESTMENTS - HELD-TO-MATURITY
In January 1994, the Partnership adopted Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" (SFAS 115). In accordance with SFAS 115, the Partnership has
classified its investment securities as held-to-maturity and, accordingly,
such investment securities are stated on the balance sheet at their amortized
cost. Short-term investments at December 31, 1996 include a certificate of
deposit with a value of $108,201, state and local government obligations with
an amortized cost of $76,911, and a municipal money market fund with a value
of $1,684. Amortization of bond premium was $706 in 1996 and $0 in 1995.
F-23
<PAGE>
INCOME TAXES
All tax effects of the Partnership's operations are passed through to the
partners individually. Accordingly, the accompanying financial statements
include no income tax expense for the Partnership.
3. SUBSEQUENT EVENTS:
On January 20, 1997, the Partnership and the Company amended the
Technology Transfer Agreement to reduce the technology fees arising from the
sale of diagnostic products from 4.05 percent to 2 percent and to remove the
$200 million exemption with respect to sales of such diagnostic products. The
Partnership also received a royalty-bearing license to make, use and sell
certain quantities of product derived from the intellectual property.
In 1997, as a condition to its planned initial public offering, the Company
intends to offer to holders of 1,292,973 shares of its common stock, the right
to rescind their purchase of shares of the Company's common stock. If all such
offerees elect to rescind their purchases, the Company will be required to pay
these shareholders $3,121,965 and 568.67 units of limited partnership interests
in the Partnership, plus statutory interest. To the extent these
shareholders accept the rescission offer, the Company will use up to
$1,500,000 of its cash resources to repurchase the shares. If any additional
consideration is required to repurchase the shares, the Company will issue
unsecured promissory notes to the shareholders on a pro rata basis. Such
notes will bear interest at 9% per annum and mature between 18 and 36 months.
If additional Partnership units are issued, the fees arising from the sale
of therapeutic products will be adjusted on a pro rata basis, such that if
all Partnership unit holders accept the rescission offer, the fees for sales
of therapeutic products will increase to approximately 5.25%. Fees related
to diagnostic products under such a scenario would remain at 2%. The Company
believes that its potential exposure to litigation for possible past
violations of securities laws will be effectively eliminated by this
rescission offer.
F-24
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
As an Oregon corporation the Company is subject to the Oregon Business
Corporation Act ("OBCA") and the exculpation from liability and indemnification
provisions contained therein. Pursuant to Section 60.047(2)(d) of the OBCA,
Article VI of the Company's Second Restated Articles of Incorporation (the
"Articles") eliminates the liability of the Company's directors to the Company
or its stockholders, except for any liability related to breach of the duty of
loyalty, actions not in good faith and certain other liabilities.
Section 60.387 et seq. of the OBCA allows corporations to indemnify their
directors and officers against liability where the director or officer has acted
in good faith and with a reasonable belief that actions taken were in the best
interests of the corporation or at least not adverse to the corporation's best
interests and, if in a criminal proceeding, the individual had no reasonable
cause to believe the conduct in question was unlawful. Under the OBCA,
corporations may not indemnify against liability in connection with a claim by
or in the right of the corporation but may indemnify against the reasonable
expenses associated with such claims unless the party is adjusted liable to the
corporation. Corporations may not indemnify if the party is adjudged liable for
receiving improper personal benefit. The OBCA provides for mandatory
indemnification of directors against all reasonable expenses incurred in the
successful defense of any claim made or threatened whether or not such claim was
by or in the right of the corporation. Finally, a court may order
indemnification if it determines that the director or officer is fairly and
reasonably entitled to indemnification in view of all the relevant circumstances
whether or not the director or officer met the good faith and reasonable belief
standards of conduct set out in the statute.
The OBCA also provides that the statutory indemnification provisions are
not deemed exclusive of any other rights to which directors or officers may be
entitled under a corporation's articles of incorporation or bylaws, any
agreement, general or specific action of the board of directors, vote of
stockholders or otherwise.
Article VII of the Articles requires the Company to indemnify its directors
and officers to the fullest extent not prohibited by law. The Bylaws of the
Company also permit the Company to indemnify its directors and officers to the
fullest extent permitted by the OBCA.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, expected to be incurred by the
Registrant in connection with the offering described in this Registration
Statement. All amounts, except the SEC registration fee, the NASD filing fee
and the NASDAQ National Market System listing fee, are estimates.
SEC Registration Fee $ 10,300
Legal Fees and Expenses 100,000
Blue Sky Fees and Expenses
(including fees of Counsel) 1,700
Miscellaneous Expenses 4,946
--------
Total $116,946
--------
--------
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
Within the last three years, the Company has sold securities without
registration under the Securities Act in the transactions and in reliance on
the exemptions from registration described below.
1. Between November 1995 and October 1996, the Company sold an aggregate
of 866,172 shares of its Common Stock at $6.00 per share to 208 purchasers.
The sale of these shares was exempt from registration pursuant to Section 4(2)
of the Securities Act and Regulation D, Rule 506, a notice of which was filed
with the SEC on October 10, 1995, and subsequently amended on June 14, 1996,
and July 22, 1996. The Company obtained detailed information from each
investor which provided the Company with a reasonable belief that all
investors were "accredited investors" as defined in the Securities Act.
2. On March 15, 1996, the Company issued 957,500 shares of its Common
Stock pursuant to the exercise of warrants that were issued to Oregon Resource
and Technology Development Corporation (ORTDC). The issuance
II-1
<PAGE>
of the Common Stock upon the exercise of the warrants was exempt from
registration pursuant to Section 4(2) of the Securities Act. The Company
reasonably believed that ORTDC was an "accredited investor" at the time of
both the warrant issuance and exercise. Further, ORTDC was granted a seat on
the Company's Board of Directors during the time the warrants were
outstanding.
3. Between January 1994 and April 1995, the Company sold an aggregate of
752,972 shares of its Common Stock at $4.95 per share to 145 purchasers. The
sale of these shares was exempt from registration pursuant to Regulation D,
Rule 505 and Section 4(2) of the Securities Act. The Company obtained
detailed information from each investor which provided the Company with a
reasonable belief that there were no more than 35 "unaccredited investors"
who purchased shares in the offering. The Company also provided investors
with an offering document containing all necessary disclosures.
ITEM 27. EXHIBITS.
(a) Exhibits
Number Description
- ------ -----------
3.1 Third Restated Articles of Incorporation of AntiVirals Inc.(1)
3.2 Bylaws of AntiVirals Inc.(1)
3.3 Certificate of Limited Partnership of Anti-Gene Development Group
4.1 Registration Rights Agreement between AntiVirals Inc. and Ice Bear,
Inc., dated May 20, 1992(1)
4.2 Purchase Warrants between AntiVirals and ORTDF, dated August 4, 1992(1)
5.0 Opinion of Ater Wynne Hewitt Dodson & Skerritt, LLP as to the legality of
the securities being registered(2)
10.1 1992 Stock Incentive Plan(1)
10.2 Employment Agreement with Denis R. Burger, Ph.D. dated November 4,
1996(1)
10.3 Employment Agreement with James Summerton, Ph.D. dated November 4,
1996(1)
10.4 Employment Agreement with Alan P. Timmins dated November 4, 1996(1)
10.5 Employment Agreement with Dwight Weller, Ph.D. dated November 4, 1996(1)
10.6 Technology Transfer Agreement between Anti-Gene Development Group and
AntiVirals Inc., dated February 9, 1992(1)
10.7 Amendment to Technology Transfer Agreement between Anti-Gene Development
Group and AntiVirals Inc. dated January 20, 1997.(1)
10.8 License and Option Agreement between Anti-Gene Development Group and
AntiVirals Inc., dated February 9, 1993.(1)
10.9 Commercial Lease between Research Way Investments, Landlord, and
AntiVirals Inc., Tenant, dated June 15, 1992.(1)
10.10 Lease between Benjamin Franklin Plaza, Inc., Landlord, and AntiVirals
Inc., Tenant, dated June 17, 1992.(1)
10.11 First Amendment to lease between Benjamin Franklin Plaza, Inc.,
Landlord, and AntiVirals Inc., Tenant, dated July 24, 1995.(1)
10.12 Pledge Agreement, dated _____________, 1997(2)
23.1 Consent of Ater Wynne Hewitt Dodson & Skerritt, LLP (included in legal
opinion filed as Exhibit 5.0)(2)
23.2 Consent of Arthur Andersen LLP
23.3 Consent of Peter Dehlinger & Associates(2)
23.4 Consent of Arthur Andersen LLP
25.0 Powers of Attorney (included in signature page in Part II of the
Registration Statement)
- --------------------
(1) Filed as an Exhibit to the Company's Registration Statement on Form
SB-2 (Commission File No. 333-20513 and filed on January 28, 1996) and
incorporated herein by reference.
(2) To be filed by amendment.
II-2
<PAGE>
(b) Financial Statement Schedules
ITEM 28. UNDERTAKINGS.
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 described in Item 24, 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 of 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.
The undersigned registrant hereby undertakes:
1. To file, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information set
forth in the registration statement; and
(iii) include any additional or changed material information on the
plan of distribution.
2. That, for determining liability under the Securities Act, it will
treat each post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to be the
initial bona fide offering.
3. To file a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
4. That, for determining any liability under the Securities Act, it will
treat 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 Company pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act as part of this registration statement as of the time
it was declared effective.
5. That, for determining any liability under the Securities Act, it will
treat each post-effective amendment that contains a form of prospectus as a new
registration statement for.the securities offered therein, and the offering of
the securities at that time as the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned in the city of Portland,
state of Oregon, on January 22, 1997.
AntiVirals Inc.
By: /s/ Denis R. Burger
------------------------------
Denis R. Burger, Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Denis R. Burger and Alan P. Timmins and each of
them singly, as true and lawful attorneys-in-fact and agents with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities to sign the Registration Statement filed herewith and any
or all amendments to said Registration Statement (including post-effective
amendments), and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission
granting unto said attorneys-in-fact and agents and full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in and about the foregoing, as full to all intents and purposes as he or she
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or his substitute, may lawfully do
or cause to be done by virtue hereof.
Witness our hands on the date set forth below.
In accordance with the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the capacity
stated on January 22, 1997.
Signature Title
--------- -----
/s/ Denis R. Burger Chief Executive Officer
----------------------------- and Director (Principal
Denis R. Burger Executive Officer)
/s/ James E. Summerton President, Chief
----------------------------- Scientific Officer and
James E. Summerton Director
/s/ Alan P. Timmins Chief Operating Officer
----------------------------- and Chief Financial
Alan P. Timmins Officer (Principal
Financial and Accounting
Officer)
/s/ Dwight D. Weller Vice President of Research
----------------------------- and Development and
Dwight D. Weller Director
/s/ John A. Beaulieu Chairman of the Board
-----------------------------
John A. Beaulieu
/s/ Nick Bunick Director
-----------------------------
Nick Bunick
/s/ James B. Hicks Director
-----------------------------
James B. Hicks
II-4
<PAGE>
/s/ Donald R. Johnson Director
-----------------------------
Donald R. Johnson
/s/ James E. Reinmuth Director
-----------------------------
James E. Reinmuth
/s/ Joseph Rubinfeld Director
-----------------------------
Joseph Rubinfeld
II-5
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned in the city of Portland,
state of Oregon, on March 24, 1997.
Anti-Gene Development Group,
a limited partnership
By: /s/ James E. Summerton
-----------------------------------
James E. Summerton, General Partner
II-6
<PAGE>
ANTIVIRALS INC.
INDEX TO EXHIBITS
Number Description Page
- ------ ----------- ----
3.1 Third Restated Articles of Incorporation of AntiVirals Inc.(1)........
3.2 Bylaws of AntiVirals Inc.(1)..........................................
3.3 Certificate of Limited Partnership of Anti-Gene Development Group.....
4.1 Registration Rights Agreement between AntiVirals Inc. and
Ice Bear, Inc., dated May 20, 1992(1).................................
4.2 Purchase Warrants between AntiVirals Inc and ORTDF, dated
August 4, 1992(1).....................................................
5.0 Opinion of Ater Wynne Hewitt Dodson & Skerritt, LLP as to the
legality of the securities being registered*..........................
10.1 1992 Stock Incentive Plan(1)..........................................
10.2 Employment Agreement with Denis R. Burger, Ph.D., dated November 4,
1996(1)...............................................................
10.3 Employment Agreement with James Summerton, Ph.D., dated November 4,
1996(1)...............................................................
10.4 Employment Agreement with Alan P. Timmins, dated November 4,
1996(1)...............................................................
10.5 Employment Agreement with Dwight Weller, Ph.D., dated November
4, 1996(1)............................................................
10.6 Technology Transfer Agreement between Anti-Gene Development
Group and AntiVirals Inc., dated February 9, 1992(1)..................
10.7 Amendment to Technology Transfer Agreement between Anti-Gene
Development Group and AntiVirals Inc., dated January 20, 1996(1)......
10.8 License and Option Agreement between Anti-Gene Development Group and
AntiVirals Inc., dated February 9, 1993(1)............................
10.9 Commercial Lease between Research Way Investments, Landlord, and
AntiVirals Inc., Tenant, dated June 15, 1992(1).......................
10.10 Lease between Benjamin Franklin Plaza, Inc., Landlord, and AntiVirals
Inc., Tenant, dated June 17, 1992(1)..................................
10.11 First Amendment to Lease between Benjamin Franklin Plaza, Inc.,
Landlord, and AntiVirals Inc., Tenant, dated July 24, 1995(1).........
10.12 Pledge Agreement, dated _________, 1997(2)............................
23.1 Consent of Ater Wynne Hewitt Dodson & Skerritt, LLP (included
in legal opinion filed as Exhibit 5.0)*...............................
23.2 Consent of Arthur Andersen LLP........................................
23.3 Consent of Peter Dehlinger & Associates*..............................
23.4 Consent of Arthur Andersen LLP........................................
25.0 Powers of Attorney (included in signature page in Part II of the
Registration Statement)...............................................
___________________________
* To be filed by amendment.
(1) Filed as an Exhibit to the Company's Registration Statement on Form SB-2
filed on January 28, 1997 (Commission File No. 333-20513) and incorporated
herein by reference.
<PAGE>
CERTIFICATE OF LIMITED PARTNERSHIP
RESTATED December 31, 1994
Due to the transfer exchange of partnership units the Certificate of Limited
Partnership of ANTI-GENE DEVELOPMENT GROUP is hereby restated:
I.
The name of the limited partnership is:
ANTI-GENE DEVELOPMENT GROUP
II.
The character of the business to be transacted is:
development and commercialization of novel classes of compounds designed to bind
selected genetic sequences and related technologies for diagnostic and
therapeutic applications.
III.
The location of the principal place of business is at:
3107 NW Norwood Place
Corvallis, Oregon 97330
IV.
The address of its initial registered office in the State of Oregon is:
3107 NW Norwood Place
Corvallis, Oregon 97330
V.
The undersigned general partner designates the initial registered agent of the
limited partnership and any successor registered agent as his personal
registered agent and attorney upon whom any process, notice, or demand may be
served which arises out of the conduct of the partnership affairs and which is
required or permitted by law to be served upon a general partner.
VI.
The term for which the partnership is to exist is until December 31, 2018,
unless sooner dissolved by consent of the general partner and a majority of the
limited partners.
1
<PAGE>
VII.
The name and residence of each member of the partnership and whether such
member is a general or limited partner.
Name Residence General or Limited
Anderson, David 220 SW Avery limited
Corvallis, OR 97333
Anderson, Lawrence & Janet 21052 Winfield Road limited
Topanga, CA 90290
Ball, Peter 2805 SW Fairmont Dr. limited
Corvallis, OR 97333
Bartley & Starns 2705 NW Glenwood Dr. limited
Corvallis, OR 97330
Blackledge & Blackledge PO Box 639 limited
Corvallis, OR 97339
Brajcich, Douglas West 601 Main, Suite 812 limited
Spokane, Wa 99201
Brunner & Johnson 2486 NE Dutch Vista #3 limited
Canby, OR 97013
Buchanan, Deanna PO Box 3205 limited
Friday Harbor, WA 98250
Buchanan & Buchanan 1146 NW Alder Creek Dr. limited
Corvallis, OR 97330
Buchanan, William 1125 Bay Blvd. limited
Newport, OR 97365
Dehlinger & Dehlinger 58 Roosevelt Circle limited
Palo Alto, CA 94306
Einwaller, Chris 10001 SW 25th Ave. limited
Portland, OR 97219
Einwaller, Peter 10001 SW 25th Ave. limited
Portland, OR 97219
Einwaller, Tony 295 Pond Lane limited
Bow, WA 98232
Epplett, Louis 815 Brookside Drive limited
Eugene, OR 97405
Farrell, Pamela 130 E. 38th Avenue limited
Eugene, OR 97405
Fishler & Fishler 9704 Cedar Crest Drive limited
Sandy, UT 84092
Foster, Ernest 1694 SW Squaw Creek Pl. limited
Corvallis, OR 97333
Gehring, Byron 4816 Cypress Ford Dr. limited
Fuguay Vanna, NC 27526
Hall, Clifford 7505 NW Hoodview Dr. limited
Corvallis, OR 97330
2
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Hare, Michael 1601 SW Brooklane Drive limited
Pacific NW Trust co., Cust. Corvallis, OR 97333
FBO Salem Emerg Phys., Cust.
Harvey, Charles PO Box 1525 limited
Blythe, CA 92226
Hensley-Jones, Constance 774 SW Lookout Dr. limited
Corvallis, OR 97333
Henderson & Pehkonen 2007 Morningside Drive limited
Florence, KY 41042
Heying, C. Stephen 514 Redbud Lane limited
Ashland, MO 65010
Hoard, Lott & Caldwell 307 Sunset Ave. limited
Huntsville, AL 35801
Houghtaling & Houghtaling 2630 SW McGinnis Ave. limited
Troudale, OR 97060
Ito & Ito 3844 NW Jameson Dr. limited
Corvallis, OR 97330
Johnson, Arnett 8115 Sacajawea Way N. limited
Wilsonville, OR 97070
Johnson, Donald 1005 South Hilton Rd. limited
Wilmington, DE 19803
Johnson C. & Johnson S. 1265 NW Heather Dr. limited
Corvallis, OR 97330
Johnson K. & Johnson L. 2929 NW Highland limited
Corvallis, OR 97330
Johnson M. & Johnson K. 4721 NW Virginia Place limited
Corvallis, OR 97330
Kaiser, Henry 14040 Kings Valley Hwy limited
Monmouth, OR 97361
Koopman, Dirk 5745 SW Arrowwood Lane limited
Portland, OR 97225
Kraft & Kraft, Henry 6508 Pontiac Drive limited
Indian Head Park, IL 60525
Kraft & Kraft, Walter 2900 NE Pilkington Dr. limited
Corvallis, OR 97330
Larpenteur, James A. 1211 SW 5th, Suite 1800 limited
Portland, OR 97204
Latimer/Tabor Family Trust 7220 NE Logsdon Road limited
Corvallis, OR 97330
Magee, Thomas & Joseph 9905 S. Damen Ave. limited
Chicago, IL 60643
Malone, Kristeen 3602 NW 135th Circle limited
Vancouver, WA 98685
Mathews & Mathews 3336 SW Willamette limited
Corvallis, OR 97333
Novak & Novak 14750 SW Bonanza Ct. limited
Beaverton, OR 97007
3
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Oregon Resource and 4370 NE Halsey, Suite 233 limited
Technology Development Fund Portland, OR 97213
Pyle, Jane 3955 SW Brooklane Dr. limited
Revocable Living Trust Corvallis, OR 97333
Pyle, Scotty 3955 SW Brooklane Dr. limited
Revocable Living Trust Corvallis, OR 97333
Rarick, et al. 13 Pinto Lane limited
Rolling Hills Est., CA 90274
Rarick, Wanda & Rose 834 2nd St., Apt. 1 & 6 limited
Santa Monica, Ca 90403
Reynolds, Kathryn PO Box 8317 limited
Black Butte Ranch OR 97759
Reynolds & Reynolds 3293 NW Tanager Dr. limited
Corvallis, OR 97330
Rose, Mark 17824 SE Alder limited
Portland, OR 97233
Schmidt & Schmidt 7929 SE Duke St. limited
Portland, OR 97206
Small, Enoch S. 6805 Tomaker Lane limited
Spokane, WA 99223
Starns, Selma 2705 NW Glenwood Dr. limited
Corvallis, OR 97330
Summerton, James E. 3107 NW Norwood Place general
Corvallis, OR 97330
Summerton, Patricia 3107 NW Norwood Place limited
Corvallis, OR 97330
Timmins, Alan 29290 SW Ladd hill Road limited
Sherwood, OR 97140
Weatherford, Marion Olex Rural Route Box 44 limited
Arlington, OR 97812
Weller & Weller 3323 NW Elmwood limited
Corvallis, OR 97330
Wildish, Forona 455 Alexander Loop #137 limited
Eugene, OR 97401
Winner, Dennis 1905 SW Custer limited
Portland, OR 97219
Held as:
Enele and Co. 121 SW Morrison, Suite 1450 limited
Cust. FBO Portland, OR 97204
Dennis D. Winner, MD
Keogh #4804
4
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VIII
The additional contributions of cash or property, if any, agreed to be made by
each partner: NONE!
IX
In the event the general partner concludes there are insurmountable
difficulties preventing further development or commercialization of the
partnership's inventions and patents, any uncommitted partnership funds and
other assets, or proceeds from liquidation thereof, will be returned to the
partners pro rata to their partnership interests.
X
The share of the profits and losses which each partner shall receive by reason
of his proportional ownership shall be:
Losses, up to the amount invested, will be allocated yearly in direct
proportion to the amount of capital each partner has invested during that year,
or during that phase if the phase is less than one year. Losses will be
calculated on a first-in first-out basis. Any additional losses will be
allocated pro rata to all partnership interests.
Profits will be distributed pro rata to all partnership interests.
Name Number of Interests
---- -------------------
Anderson, David 6
Anderson, Lawrence & Janet 1
Ball, Peter 1
Bartley & Starns 20
Blackledge & Blackledge 43
Brajcich, Douglas .5
Brunner & Johnson 2
Buchanan, Deanna 4
Buchanan & Buchanan .5
Buchanan, William .5
Dehlinger & Dehlinger 5
Einwaller, Chris 1
Einwaller, Peter 1
Einwaller, Tony 1
Epplett, Louis 4
Farrell, Pamela 1
Fishler & Fishler 1
Foster, Ernest 6
Gehring, Byron 2
Hall, Clifford .25
Hare, Michael 1
Harvey, Charles 1
Hensley-Jones, Constance 2
5
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Henderson & Pehkonen 2
Heying, C. Stephen 1
Hoard, Lott & Caldwell 1
Houghtaling & Houghtaling 1
Ito & Ito 1
Johnson, Arnett 5
Johnson, Donald 10
Johnson C. & Johnson S. 1
Johnson K. & Johnson L. 8
Johnson M. & Johnson K. 6
Kaiser, Henry 10
Koopman, Dirk 1
Kraft & Kraft, Henry 10
Kraft & Kraft, Walter 5
Larpenteur, James 5
Latimer/Tabor Family Trust .25
Magee, Thomas & Joseph 1
Malone, Kristeen 1
Mathews & Mathews 10.5
Novak & Novak 1
Oregon Resource &
Tech. Dev. Fund 36
Pyle, Jane Revocable
Living Trust 2
Pyle, Scotty Revocable
Living Trust 2
Rarick, et al. 1
Rarick, Wanda & Rose .5
Reynolds, Kathryn 5
Reynolds & Reynolds .5
Rose, Mark .5
Schmidt & Schmidt 2
Small, Enoch 2
Starns, Selma 10
Summerton, James E. 1,422
Summerton, Patricia 52
Timmins, Alan 2
Weatherford, Marion 2
Weller & Weller 80
Wildish, Leonard A. Family
Trust #1 50
Winner, Dennis 1
Total interests 1,856
6
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XI
The right of a partner to substitute an assignee as partner in his place and
the terms and conditions of that substitution are:
Any partner is free to assign his interest or interests in the partnership
unless the general partner concludes that such an assignment when added to
previous assignments within the previous 12 months would jeopardize the tax
status of the partnership.
XII
Rights to admit additional limited partners are as follows:
The general partner has the right to admit additional limited partners and the
right to exercise a power of attorney to sign on behalf of the limited partners
an amendment to this certificate--but only for the purpose of adding new limited
partners, deleting retiring partners, or effecting partnership transfers.
XIII
No right is given for one or more of the partners to have priority over other
partners as to contributions or as to compensation by way of income, aside from
that detailed in section X.
XIV
Rights to continue the business on the death, insanity, or retirement of the
general partner are as follows:
In the event of the death, insanity or retirement of the general partner, the
partners shall elect by majority vote either to continue the partnership with a
new general partner or to dissolve the partnership and distribute the assets pro
rata to their interests with one vote corresponding to each partnership
interest. Any selection of a new general partner shall be carried out by
majority election with one vote corresponding to each partnership interest.
XV
The right of a partner to demand and receive property other than cash in
return for his contribution is as follows:
No compensation other than that detailed in sections IX, X, and XIV of this
certificate shall accrue to partners.
XVI
The right of a limited partner to vote upon matters affecting the basic
structure of the partnership is as follows:
Limited partners may vote to dissolve the partnership prior to its planned
termination date. Consent of a majority of the limited partners plus the
general partner will constitute grounds for early dissolution.
7
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
dated March 10, 1997, relating to the financial statements of AntiVirals Inc.
and to all references to our firm included in Amendment No. 1 to
Registration Statement (No. 333-20511) of AntiVirals Inc.
ARTHUR ANDERSEN LLP
Portland, Oregon,
March 24, 1997
<PAGE>
Exhibit 23.4
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
dated March 14, 1997, relating to the financial statements of Anti-Gene
Development Group, and to all references to our firm included in Amendment
No. 1 to Registration Statement (No. 333-20511) of AntiVirals Inc.
ARTHUR ANDERSEN LLP
Portland, Oregon,
March 24, 1997
