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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997,
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER 0-19825
SCICLONE PHARMACEUTICALS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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CALIFORNIA 94-3116852
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
901 MARINERS ISLAND BOULEVARD,
SAN MATEO, CALIFORNIA 94404
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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(650) 358-3456
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, NO PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant was approximately $72,992,432 as of March 27, 1998, based upon
the closing sale price of the Registrant's Common Stock on The Nasdaq National
Market on such date. Shares of Common Stock held by each executive officer and
director have been excluded from the calculation because such persons may be
deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
As of March 27, 1998, there were 17,348,108 shares of the Registrant's
Common Stock outstanding.
Part III incorporates by reference from the definitive proxy statement for
the registrant's 1997 Annual Meeting of Shareholders to be filed with the
Commission pursuant to Regulation 14A not later than 120 days after the end of
the fiscal year covered by this Form.
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NOTE REGARDING FORWARD-LOOKING STATEMENTS:
This Annual Report on Form 10-K for SciClone Pharmaceuticals, Inc.
("SciClone" or the "Company") contains forward-looking statements concerning,
among other things, the Company's expected future revenues, operations and
expenditures, estimates of the potential markets for the Company's products,
assessments of competitors and potential competitors, projected timetables for
the preclinical and clinical development, regulatory approval and market
introduction of the Company's products and the Company's expectations regarding
future financing and corporate partnering arrangements. These forward-looking
statements represent the expectations of SciClone's management as of the filing
date of this Form 10-K. The Company's actual results could differ materially
from those anticipated by the forward-looking statements due to a number of
factors, including (i) the Company's current reliance on a single product,
ZADAXIN(R) thymosin alpha 1, for its revenues; (ii) the absence of regulatory
approval for ZADAXIN in significant markets; (iii) risks associated with the
manufacture and supply of ZADAXIN; (iv) the Company's ability to complete
successfully preclinical and clinical development and obtain timely regulatory
approval and patent and other proprietary rights protection for its products;
(v) decisions and timing of decisions made by the U.S. Food and Drug
Administration and other agencies regarding the indications for which the
Company's products may be approved; (vi) market acceptance of the Company's
products; (vii) the Company's ability to obtain reimbursement for its products
from third-party payers, where appropriate; (viii) the accuracy of the Company's
information concerning the products and resources of competitors and potential
competitors; and the risks and uncertainties described in Part II under the
captions "Factors That May Affect Future Operating Results" -- "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
PART I
ITEM 1. BUSINESS
INTRODUCTION
SciClone Pharmaceuticals, Inc. ("SciClone" or the "Company") is an
international biopharmaceutical company that acquires, develops, and
commercializes specialist-oriented proprietary drugs for treating chronic and
life-threatening diseases, including hepatitis B, hepatitis C, cancer, immune
system disorders and cystic fibrosis. SciClone has two drugs in clinical
development, ZADAXIN(R) thymosin alpha 1 and CPX, and other drug candidates in
preclinical development.
ZADAXIN, an immunomodulator (i.e., an immune system regulator), is the
Company's lead drug, targeting hepatitis B, hepatitis C, cancer, vaccine
enhancement and certain immune system disorders such as DiGeorge Anomaly.
ZADAXIN is approved and marketed (over $2.2 million in 1997 sales) in the
People's Republic of China, the Philippines and Singapore for treatment of
hepatitis B, one of the most common chronic infectious diseases in the world. In
February 1998, ZADAXIN was approved in Argentina, a leading market in Latin
America, for use as an influenza vaccine adjuvant and in Peru for treatment of
hepatitis B. In March 1998, ZADAXIN was approved in Kuwait for the treatment of
hepatitis B, the Company's sixth ZADAXIN market approval. ZADAXIN has now been
approved in each of the three primary regions SciClone has targeted for
hepatitis B sales -- Asia, Latin America and the Middle East. Collectively,
these regions represent most of the potential hepatitis B markets worldwide. The
Company has filed for approval to market ZADAXIN in 16 additional countries in
Asia, Latin America and the Middle East. SciClone has worldwide marketing,
development and manufacturing rights to ZADAXIN, except in Japan, Italy, Spain
and Portugal, where the Company's rights have been sublicensed.
In the U.S. and Europe, the Company is developing combination ZADAXIN plus
interferon for the treatment of hepatitis C, a worldwide epidemic affecting over
170 million worldwide including ten million people in the U.S., Europe and
Japan, the world's largest pharmaceutical markets. Clinical data demonstrate
that combination ZADAXIN plus interferon could be a significant therapeutic
advance in the fight against hepatitis C. Interferon, the only approved therapy
to treat hepatitis C, leads to a sustained response in only 5% to 20% of
patients and causes unpleasant side effects. The Company is pursuing a corporate
partnering
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arrangement for the pivotal phase 3 development of combination ZADAXIN plus
interferon for hepatitis C in the U.S. and Europe.
In Japan, the world's leading market for viral hepatitis therapies, the
Company has licensed exclusive development and marketing rights to ZADAXIN to
Schering-Plough K.K. ("SPKK"), the Japanese subsidiary of Schering-Plough
Corporation, a leading marketer of viral hepatitis therapies worldwide. The
Japanese Ministry of Public Health has approved SPKK's application to commence a
Japanese pivotal phase 3 study of ZADAXIN monotherapy for hepatitis B. In Japan,
interferon monotherapy, including SPKK's interferon, is the established
first-line therapy for hepatitis B. In November 1997, SPKK commenced a phase 2
study of ZADAXIN monotherapy for hepatitis C, as required in Japan for approval
of the drug for the treatment of hepatitis C. SPKK is also in the process of
satisfying Japanese requirements to begin a clinical program to study the use of
its interferon plus ZADAXIN as a combination therapy for hepatitis C.
CPX is SciClone's second drug in clinical development. CPX is an orally
administered protein-repair therapy initially developed by the U.S. National
Institutes of Health ("NIH") as a potential treatment for cystic fibrosis
("CF"). SciClone acquired an exclusive license to CPX from the NIH. CF is caused
by mutations in the gene that encodes the cystic fibrosis transmembrane
conductance regulator ("CFTR") protein. More than 70% of the CF patients have
the delta F508 mutation, the most common cause of CF. In October 1997, Harvey
Pollard, M.D., Ph.D, of the Uniformed Services University of the Health Sciences
and formerly of the NIH, presented breakthrough new preclinical data
demonstrating that CPX corrects the two key molecular defects causing CF --
impaired chloride ion transport and abnormal CFTR trafficking. These preclinical
data indicate that CPX is the only drug in clinical development with the
potential to correct the two key molecular defects in CF patients. The Company
obtained orphan drug status for CPX from the United States Food and Drug
Administration ("FDA") in April 1997. In October 1997, the FDA awarded SciClone
a $100,000 Orphan Drug Grant for phase 1 development of CPX as a treatment for
CF. The Company recently completed dosing thirty-six (36) patients in its
multicenter, single ascending oral dose phase 1 clinical study in the U.S.
SciClone plans to start a multicenter, multiple-ascending oral dose phase 2
clinical trial in the U.S. in the third quarter of 1998. The Cystic Fibrosis
Foundation ("CF Foundation") provided substantial financial support for early
NIH research of CPX. The CF Foundation also supported SciClone in its
Investigational New Drug ("IND") filing with the FDA to gain approval to begin
the testing of CPX directly in CF patients rather than the standard process of
testing first in healthy volunteers.
The Company has other drug candidates in early preclinical development. One
of these drug candidates is in preclinical studies at the NIH and U.S. National
Cancer Institute for epilepsy and multiple drug resistance in cancer,
respectively. The Company plans to continue to evaluate activity of its
preclinical drug candidates in 1998.
Internationally, SciClone has entered into ZADAXIN distribution
arrangements covering 31 countries outside the U.S., Europe and Japan. The
Company intends to out-license its products where a collaborative arrangement
will materially enhance the prospects for a drug's commercial success in
licensed markets, such as the Company's license with SPKK for exclusive rights
to develop and market ZADAXIN in Japan and its arrangements with its ZADAXIN
distributors. The Company is currently pursuing a corporate partnering
arrangement in the U.S. and Europe for pivotal phase 3 development of
combination ZADAXIN plus interferon for hepatitis C. The Company intends to
source ZADAXIN, CPX and any future products through contract manufacturing and
supply agreements. The Company has entered into separate supply agreements in
the U.S. and Europe for the supply of bulk and finished product thymosin alpha
1. The Company currently contracts with a major U.S. pharmaceutical company for
the supply of bulk CPX and another U.S. pharmaceutical manufacturer for finished
product CPX.
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STRATEGY
SciClone's corporate objective is to become a leader in the acquisition,
development and commercialization of specialist-oriented drugs for treating
chronic and life threatening diseases, such as hepatitis B, hepatitis C, cancer,
immune system disorders and cystic fibrosis. The Company's strategy to achieve
this objective is to apply its international drug development, regulatory
affairs and sales and marketing expertise as follows:
Increase ZADAXIN Sales. In 1997, SciClone's lead product, ZADAXIN, achieved
over $2.2 million in first full-year commercial sales for hepatitis B. In 1998,
the Company intends to expand its international sales and marketing capabilities
and increase sales of ZADAXIN. Management forecasts solid growth potential for
ZADAXIN in the Company's existing and anticipated markets.
In addition to its global sales and marketing capabilities, SciClone is
equipped to manage clinical development and regulatory submissions worldwide.
The Company plans to continue to expand these capabilities aggressively to
commercialize ZADAXIN and new products in markets around the world. Management
believes that this strategy will enable the Company to penetrate and perform in
markets worldwide in an accelerated and profitable manner.
Expand Product Pipeline. The Company focuses its resources on drug
development and commercialization, not early drug discovery. SciClone evaluates
new compounds for acquisition or in-licensing from various sources, including
government agencies, universities, and pharmaceutical and biotechnology
companies. The Company seeks development stage compounds that are
specialist-oriented, novel, patented or patentable and possess excellent safety
profiles. Management believes that this will enable the Company to lower its
expected time-to-market and development risk profile relative to competitors
engaged in both drug discovery and drug development.
Leverage Key Third-Party Resources. The Company does not own or maintain
any manufacturing facilities for finished products or raw materials. Instead,
SciClone's manufacturing and quality assurance teams out-source these functions
to third parties that supply bulk product and finished goods according to
current Good Manufacturing Practices ("cGMP"). Management believes that this
strategy will lower the Company's capital requirements and enable the Company to
concentrate its resources on drug development and commercialization activities.
Enhance Product Portfolio Patent Protection. SciClone pursues a policy of
obtaining patent protection both in the U.S. and in selected foreign countries
for subject matter considered patentable and important to its business. SciClone
regularly reviews and seeks to broaden the protection of its intellectual
property and trade secrets by actively developing and expanding its patent
filings for composition of matter, method of use and process patents. Management
believes this strategy will enable the Company to further protect the increased
use of its product portfolio.
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PRODUCT DEVELOPMENT ACTIVITIES
The following table summarizes the Company's current significant product
development activities:
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INDICATION/
PRODUCT LOCATION APPLICATION STATUS
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ZADAXIN People's Republic Hepatitis B and Marketed
thymosin alpha 1 of China viral vaccine
adjuvant
Philippines, Hepatitis B Marketed
Singapore
Kuwait, Hepatitis B Approved Q1 1998
Peru
Argentina Influenza vaccine Approved Q1 1998
adjuvant
Brazil, Brunei, Hepatitis B Market
Chile, Cyprus Applications
Egypt, Hong Kong, Filed
India, Indonesia,
Lebanon, Malaysia,
Mexico, Myanmar,
Nepal, Pakistan,
Turkey, Venezuela
Taiwan Hepatitis B Completed phase 3
Japan(3) Hepatitis B Completed phase 2
U.S./Europe Hepatitis C Phase 3(1)
Japan(2) Hepatitis C Phase 2
CPX U.S. Cystic Fibrosis Phase 1(3)
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(1) A successful, non-pivotal U.S. phase 3 study has been completed. Subsequent
meetings have been held with the FDA, the United Kingdom Medicines Control
Agency, the Netherlands Medicines Evaluation Board and the Denmark Medicines
Agency. From these meetings, a protocol for pivotal phase 3 trials has been
proposed and refined in a workshop with leading international hepatologists.
(2) Clinical trial conducted by SPKK.
(3) The Company recently completed dosing thirty-six (36) patients in its
multi-center, multiple ascending oral dose phase 1 clinical study in the
U.S. and is preparing to start its phase 2a study in early Q3.
ZADAXIN THYMOSIN ALPHA 1 (THYMALFASIN) FOR HEPATITIS B AND HEPATITIS C
ZADAXIN thymosin alpha 1 for injection is a naturally occurring 28 amino
acid peptide that is produced by chemical synthesis for therapeutic use.
ZADAXIN's common chemical name is thymosin alpha 1. Thymosin alpha 1's generic
name in the U.S. is thymalfasin. The Company believes that ZADAXIN has
significant immunomodulatory properties. Data demonstrate that ZADAXIN enhances
multiple immune response parameters in a substantial number of patients. The
drug appears to act on cells of the immune system that have been suppressed by
infection or other causes. Additionally, ZADAXIN does not produce the side
effects, particularly fever, chills, fatigue, nausea and depression, associated
with other immunomodulatory agents, such as interferon. No significant ZADAXIN
related side effects have been reported. Based on more than 70 clinical trials
conducted to date, the Company believes that ZADAXIN, either alone or in
combination with other therapies, especially interferon, may have application
across a broad spectrum of diseases, including hepatitis B, hepatitis C, cancer
and immune system diseases such as DiGeorge Anomaly.
Pursuant to its 1994 license agreement with Alpha 1 Biomedicals ("A1B"),
the Company obtained worldwide marketing, development and manufacturing rights
to thymosin alpha 1, with the exception of Italy, Spain and Portugal. In April
1997, SciClone entered into an agreement with A1B to administer the sublicense
activities of A1B's licensee for Italy, Spain and Portugal. Under this 1997
agreement, the Company also
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acquired control of A1B's patent portfolio for thymosin alpha 1. In December
1997, SciClone and A1B entered into an Asset Purchase Agreement (the
"Agreement") pursuant to which the Company will acquire A1B's worldwide rights
to thymosin alpha 1, including rights A1B licensed from Hoffmann-LaRoche, Inc.
and F. Hoffmann-LaRoche AG. (collectively, "Roche"), and eliminated the
Company's and the Company's current and future sublicensee's royalty obligations
to A1B with respect to future sales of thymosin alpha 1. Pursuant to the
Agreement, the Company agreed to issue up to 600,000 shares of common stock and
loan A1B up to an aggregate amount of $280,000 for the assets described above.
The Agreement is subject to approval by A1B's stockholders at A1B's 1998 Annual
Meeting of Stockholders and the Company's receipt of certain consents from
Roche..
HEPATITIS B
Hepatitis B is one of the most common infectious diseases in the world. It
is transmitted through blood transfusions, contaminated needles, sexual contact
and from mother-to-child. In addition, a large number of people are infected by
unknown means. The World Health Organization estimates that approximately 350
million individuals worldwide or 5% of the world's population are carriers of
the virus. Among carriers of the hepatitis B virus, unfortunately most are
unaware that they are infected or have minimal disease with no clinically
evident symptoms. However, carriers of the hepatitis B virus have a 200-fold
increased chance of developing primary liver cancer, the most common cancer in
the world, and a significant number develop cirrhosis of the liver.
ZADAXIN has been approved in five countries as a safe and effective
treatment for hepatitis B. When used alone or in combination with other
immunodulatory agents such as interferon ZADAXIN has not caused any significant
drug related side effects.
META ANALYSIS AND RANDOMIZED AND CONTROLLED ZADAXIN HEPATITIS B TRIALS
Meta analysis is the statistical pooling of data derived from two or more
clinical trials. By using data from two or more studies, random effects are
reduced and precision of estimates will increase as sample size increases. A
valuable use of meta analysis is to assess the efficacy of a drug in the
treatment of a particular disease across many studies. The Company commissioned
a meta analysis of hepatitis B randomized and controlled trials of ZADAXIN. The
meta analysis was performed by MetaWorks, Inc. of Boston, Massachusetts, and
included AlB's two U.S. hepatitis B trials and the Company's Taiwan hepatitis B
trial. A statistically significant benefit (p=0.04) was demonstrated in the meta
analysis with a ZADAXIN overall response rate of 36% compared to 19% for the
control group. The results also showed no indications of drug toxicity and no
significant drug related side effects in any of the trials.
Interferon is an immunomodulatory protein that is produced commercially
using recombinant DNA technology and other techniques. Interferon is approved
for treatment of hepatitis B in the United States, Europe, Japan as well as in
numerous countries in Asia, Latin America and the Middle East. Other agents
under development, but not yet approved anywhere for the treatment of hepatitis
B, include nucleoside analogs such as lamivudine and famciclovir. Unlike
ZADAXIN, data reported in the October 1997 supplement to Hepatology show that
lamivudine may be associated with fatal rebound viral hepatitis. Nucleoside
analogs may suppress viral replication but seldom eradicate the virus. Viral
replication resumes when nucleoside analogs are discontinued.
Set forth below is more detailed information regarding the commercial and
clinical development status of ZADAXIN as a therapy for hepatitis B in certain
key markets.
THE PEOPLE'S REPUBLIC OF CHINA. In January 1997, the Company launched
ZADAXIN for the treatment of hepatitis B in The People's Republic of China. This
product launch marked the first introduction of ZADAXIN by the Company anywhere
in the world and the first introduction of an imported finished pharmaceutical
for treatment of hepatitis B in this market since the interferons. The Chinese
Ministry of Public Health (MOPH) approval was based on a regulatory package
assembled from U.S. and European data in addition to a locally required
controlled clinical trial to evaluate the efficacy of ZADAXIN for patients
suffering from hepatitis B. Sales and distribution of ZADAXIN in The People's
Republic of China are
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managed by SciClone Pharmaceuticals International, Ltd. (SPIL) based in Hong
Kong. SPIL focused its 1997 sales efforts on the following three population
centers: the southern province of Guangdong, the capital city of Beijing, and
Shanghai. In these three areas four local distribution teams are used to sell
and place ZADAXIN on hospital formularies of Chinese city and provincial
hospitals. The Company expects to expand into additional major population
centers in the Chinese market in 1998.
JAPAN. In Japan, the world's largest market for viral hepatitis therapies,
the Company has licensed exclusive ZADAXIN development and marketing rights to
SPKK. SPKK has completed a phase 1 single and multiple dose safety and
pharmacokinetics trial. SPKK has successfully completed a dose ranging phase 2
safety and efficacy trial involving approximately 60 patients. SPKK recently
received government approval to commence a 300-patient pivotal phase 3 study in
hepatitis B.
TAIWAN. The Company has submitted the Plant Master File required by
Taiwanese law to allow the Company to file for registration in Taiwan. The
Company expects to file for registration in Taiwan in the second quarter of
1998. The Company sponsored a multicenter, randomized and controlled ZADAXIN
phase 3 hepatitis B trial in Taiwan. The audited results of this trial showed
37% of patients responded to ZADAXIN monotherapy, compared to 25% for the
control patients. The Company believes this trial produced the best results of
any randomized and controlled hepatitis B trial for any therapy in Taiwan. The
results also showed no significant ZADAXIN related side effects, consistent with
all prior ZADAXIN studies.
ASIA, LATIN AMERICA AND THE MIDDLE EAST. ZADAXIN has been approved in each
of the three primary regions SciClone has targeted for hepatitis B
sales -- Asia, Latin America and the Middle East. Collectively, these regions
represent most of the potential hepatitis B markets worldwide. In February 1998,
ZADAXIN was approved in Argentina, a leading market in Latin America, for use as
a viral vaccine adjuvant and in Peru for treatment of hepatitis B. In March
1998, ZADAXIN was approved in Kuwait, the Company's first market in the Middle
East, for the treatment of hepatitis B. SciClone has 16 ZADAXIN NDAs pending in
Asia, Latin America and the Middle East and expects to file additional NDAs in
these territories in 1998.
HEPATITIS C
Hepatitis C is a worldwide epidemic, infecting over 170 million people
worldwide, including approximately 10 million in the U.S., Europe and Japan, the
world's leading pharmaceutical markets. According to the Centers for Disease
Control and Prevention, approximately 4 million Americans are infected with the
hepatitis C virus. The American Liver Foundation (ALF) estimates that 170,000
new hepatitis C cases are reported each year in the U.S. and that up to 10,000
people in the U.S. die as a result of complications of hepatitis C each year.
Without improved prevention and treatment, the ALF estimates that the death rate
associated with hepatitis C will triple in the next 20 years. The prevalence of
hepatitis C in Europe is similar to that in the U.S., approximately 4 million.
An article in the Annals of Internal Medicine indicates that in Japan there are
more than l million cases of hepatitis C. Hepatitis C can be transmitted
wherever blood to blood contact occurs, especially by blood transfusions and
contaminated needles. The mode of transmission in many cases is unknown.
Approximately 10% to 20% of hepatitis C carriers may develop cirrhosis, and up
to 40% of these individuals may develop liver cancer. Hepatitis C, accompanied
by cirrhosis and liver failure, is the leading cause of liver transplantation in
the U.S. Currently, interferon is the only therapy approved in major markets for
hepatitis C. There is no approved vaccine to prevent hepatitis C.
POOLED AND META ANALYSES OF HEPATITIS C TRIALS
Although interferon has been shown to be safe and effective in the
treatment of hepatitis C, dissatisfaction with the low sustained response rate
(5% to 20%) to interferon monotherapy has led to the study of interferon
combination therapies. Clinical data demonstrate that combination ZADAXIN plus
interferon could be a significant therapeutic advance in the fight against
hepatitis C. Three studies, published as full articles or abstracts, describe
the response in patients with hepatitis C to combination ZADAXIN plus
interferon. The strength of pooled analysis and meta analysis techniques was
applied to the three studies. Patients were treated for 6 to 12 months with
combination ZADAXIN plus interferon and followed for 6 months after treatment.
Interferon-treated patients from the randomized controlled trials and historical
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controls from an open label trial were used as controls. A total of 121 patients
(67 ZADAXIN plus interferon combination therapy and 54 interferon monotherapy)
were studied.
END OF TREATMENT BIOCHEMICAL AND VIROLOGICAL RESPONSE
Pooled intent-to-treat analysis revealed an end of treatment biochemical
(ALT, a liver enzyme) response of 44.7% in the combination ZADAXIN plus
interferon group compared to 22.2% in the interferon monotherapy group
(p = 0.0096). Meta analysis demonstrated an end of treatment biochemical
response odds ratio and 95% confidence interval of greater than 1 indicating
that combination ZADAXIN plus interferon was significantly superior to
interferon monotherapy. Meta analysis also showed an end of treatment
virological response odds ratio and 95% confidence interval of indicating that
combination ZADAXIN plus interferon was significantly superior to interferon
monotherapy.
SUSTAINED BIOCHEMICAL AND VIROLIGICAL RESPONSE
Pooled intent-to-treat analysis revealed sustained biochemical (ALT)
response of 22.3% in the combination ZADAXIN plus interferon group compared to
9.26% in the interferon monotherapy group (p = 0.1). Meta analysis demonstrated
a sustained response odds ratio of greater than 1 and a 95% confidence interval
slightly overlaping 1 indicating that combination ZADAXIN plus interferon was
numerically superior to interferon monotherapy. These two sustained biochemical
response analyses demonstrate a statistical trend in favor of the combination
ZADAXIN plus interferon group and suggest that there is only a small chance that
this difference occurred by chance alone. Meta analysis also showed sustained
virological response odds ratio and 95% confidence interval of greater than 1
indicating that combination ZADAXIN plus interferon was significantly superior
to interferon monotherapy.
There were no increased or new side effects in the combination ZADAXIN plus
interferon group compared to patients treated with interferon monotherapy.
Set forth below is more detailed information regarding the development
status of combination ZADAXIN plus interferon for treatment of hepatitis C, an
emerging epidemic worldwide.
U.S. AND EUROPE. In the U.S. and Europe, the Company is developing
combination ZADAXIN plus interferon for hepatitis C. After meeting with the FDA
and regulatory authorities in the United Kingdom, the Netherlands and Denmark in
the first half of 1997, the Company prepared a protocol outline for its pivotal
phase 3 hepatitis C program. In late 1997, this protocol outline was refined by
over 15 leading hepatologists. The Company is currently pursuing a corporate
partnering arrangement for pivotal phase 3 development of combination ZADAXIN
plus interferon for hepatitis C in the U.S. and Europe. Adrian Di Bisceglie,
M.D., Associate Chairman of Medicine, Professor of Internal Medicine at Saint
Louis University and Medical Director of the American Liver Foundation, has
agreed to be the principal investigator for the Company's planned pivotal phase
3 hepatitis C program.
JAPAN. In Japan, SciClone has licensed exclusive development and marketing
rights to ZADAXIN to SPKK. In November 1997, SPKK commenced a phase 2 study of
ZADAXIN as a monotherapy for hepatitis C, as required for Japanese approval of
ZADAXIN for the treatment of hepatitis C. SPKK also is working to satisfy
requirements to begin a clinical program to study the use of its interferon plus
ZADAXIN as a combination therapy for hepatitis C.
ASIA, LATIN AMERICA, MIDDLE EAST. The Company is working to expand its
current approvals and pending NDAs to include use of combination ZADAXIN plus
interferon to treat hepatitis C.
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CPX FOR CYSTIC FIBROSIS
CYSTIC FIBROSIS.
Cystic fibrosis (CF) is the most common fatal genetic disorder in the U.S.
today. Currently, there is no cure for the disease. CF affects approximately
70,000 children and young adults worldwide, including approximately 30,000 in
the U.S. and approximately 30,000 in Europe. In the U.S., CF occurs in
approximately one of every 3,300 live births and approximately 1,000 new cases
are diagnosed each year, usually by the age of three. The median age of survival
for a person with CF is 31 years. CF is caused by a mutated gene that produces
an abnormal CFTR protein. This basic genetic defect in CF cells results in the
faulty transport of chloride and sodium within epithelial cells (which line
organs such as the lungs and pancreas) to the cells' outer surfaces. This faulty
transport causes the body to produce abnormally thick, sticky mucus which clogs
the lungs and leads to fatal infections. This mucus also obstructs the pancreas,
preventing enzymes from reaching the intestines to digest food. Most CF patients
die from lung disease. One in 29 Americans, more than 10 million people, is an
unknowing, symptomless carrier of the defective gene. A child must inherit two
defective copies of the CF gene, one from each parent, to have CF. Each time two
carriers conceive a child, there is a 25% chance that the child will have CF, a
50% chance that the child will be a carrier, and a 25% chance that the child
will be a non-carrier.
Currently, approved CF treatments only address the symptoms of the disease
and not the two underlying molecular defects causing CF in most patients --
impaired chloride ion transport and abnormal CFTR trafficking. The treatment of
CF depends upon the stage of the disease and which organs are involved. One
means of treatment, postural drainage (also called chest physical therapy),
requires vigorous percussion (by using cupped hands) on the back and chest to
dislodge the thick, sticky mucus from the lungs. Antibiotics are also used to
treat lung infections and are administered intravenously, orally and/or in
medicated vapors which are inhaled to open up clogged airways. In addition,
mucolytic (mucus-thinning) drugs are used to thin the viscosity of the mucus.
When CF affects the digestive system, the body does not absorb enough nutrients.
Therefore, people with CF may need to eat an enriched diet and take both
replacement vitamins and enzymes. The annual average cost of care of a CF
patient has been estimated by the CF Foundation to be approximately $50,000 per
patient.
CPX
CPX is an orally available xanthine derivative that is produced for
therapeutic use through chemical synthesis. CPX targets the underlying
biochemical abnormality at the root cause of CF, the malfunctioning CFTR protein
that results in the buildup of thick, sticky mucus. CPX use in CF was discovered
by Harvey Pollard, M.D., Ph.D., and Kenneth Jacobson, Ph.D., while at the
National Institute of Diabetes and Digestive and Kidney Disorders (NIDDK) of the
NIH. In October 1997, Dr. Pollard presented new breakthrough preclinical data
demonstrating that CPX corrects the two key molecular defects causing CF --
impaired chloride ion transport and abnormal CFTR trafficking. Trafficking
refers to the ability of the CFTR protein to traverse the cell cytoplasm and
reach the proper location on the cell membrane. These preclinical data indicate
that CPX is the only drug in clinical development with the potential to correct
the two molecular defects in CF patients.
Consistent with the Company's strategy to expand its product portfolio,
SciClone licensed CPX from the NIH in April 1996. In January 1997, the Company's
IND was approved by the FDA to begin clinical studies of CPX in the U.S.
directly in CF patients rather than healthy volunteers. The CF Foundation
provided substantial financial support in the NIH's early CPX research and has
supported SciClone in its IND filing with the FDA to gain approval to begin
testing of CPX directly in patients. In April 1997, the Company obtained orphan
drug status for CPX from the FDA. In May 1997, the Company initiated a
multicenter phase 1 trial of CPX directly in CF patients. In October 1997, the
FDA awarded SciClone a $100,000 Orphan Drug Grant for phase 1 development of CPX
as a treatment for CF.
U.S. MULTICENTER PHASE 1 CPX TRIAL IN CF PATIENTS
The Company recently completed dosing thirty-six (36) patients in its
multicenter phase 1 clinical study of CPX. The five participating CF centers
were: University of Washington and Children's Hospital CF Center in Seattle,
Washington; University of Iowa Hospitals and Clinics CF Center in Iowa City,
Iowa; The LeRoy
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Matthews CF Center, Rainbow Babies and Children's Hospital in Cleveland, Ohio;
The Emory University CF Center, Egleston Children's Hospital in Atlanta,
Georgia; and Stanford CF Center, and Lucille Packard Children's Hospital in Palo
Alto, California. The primary objectives of the study were to evaluate the
safety and pharmacokinetic profile of CPX. SciClone plans to start a
multicenter, multiple-ascending oral dose phase 2 clinical trial in the U.S. in
the third quarter of 1998.
MARKETING AND SALES
In general, the Company plans to market and sell its products in the U.S.
by establishing its own marketing and sales organization. Outside the U.S., the
Company markets and sells its products through collaborative or distribution
arrangements.
In the U.S. and Europe, ZADAXIN is in late-stage clinical development. In
the U.S. and Europe, SciClone is currently pursuing a corporate partnering
arrangement with a major pharmaceutical company for the pivotal phase 3
development and commercialization of combination ZADAXIN plus interferon for the
treatment of hepatitis C. In Japan, SciClone has licensed exclusive ZADAXIN
development and marketing rights to SPKK.
SciClone's marketing and sales strategy for ZADAXIN in Asia (excluding
Japan), Latin America and the Middle East, is to establish and expand its own
proprietary regional sales and marketing capabilities to commercialize ZADAXIN.
Consistent with this strategy, SciClone conducts medical education and clinical
trial programs targeting the leading specialists (e.g. hepatologists) and
teaching hospitals in each of its approved markets and markets in which the
Company anticipates ZADAXIN approval on a near term or medium term basis.
Distributors assist SciClone with local regulatory submissions to the ministries
of health and are responsible for the importation, inventory, physical
distribution and invoicing of ZADAXIN. SPIL is based in Hong Kong and has
international offices in Japan, Philippines, Singapore and Taiwan. SPIL also
manages a distribution center in Hong Kong which is the source for all ZADAXIN
exported to the Company's non-U.S. markets, except Japan. SciClone has
established distribution arrangements with local pharmaceutical distribution
companies covering 31 countries outside of the U.S., Europe and Japan. In its
three approved ZADAXIN markets in Asia (China, the Philippines and Singapore)
and its three recently approved markets in Latin America (Argentina and Peru)
and the Middle East (Kuwait), SciClone has established ZADAXIN marketing
programs including the positioning and pricing of the drug. Local ZADAXIN sales
in the Company's approved markets are or will be managed by SciClone employees
utilizing dedicated distributor employees nominated and supported by SciClone.
In the U.S., CPX is in clinical development. Currently, the Company plans
to market and sell CPX in the U.S. through the establishment of its own
marketing and sales organization. In other markets, the Company is evaluating
alternative plans for marketing and selling CPX.
MANUFACTURING
The Company has entered into contract manufacturing and supply agreements
to source ZADAXIN and CPX.
To supply markets in Asia (except Japan), Europe, Latin America and the
Middle East, SciClone has a European cGMP third-party source for bulk thymosin
alpha 1. This bulk supply is turned into finished sterile injectable product by
a separate European cGMP manufacturer. This finished product is shipped to Hong
Kong for labeling and redistribution. To supply the U.S. and Japanese markets,
the Company has contracted with a cGMP bulk manufacturer and a separate cGMP
finishing plant, both in the U.S. SciClone has established an inventory of
ZADAXIN sufficient to fulfill its expected commercial requirements in the near
term.
CPX is manufactured for SciClone in the U.S. by a major U.S. pharmaceutical
company and turned into finished form by a separate U.S. pharmaceutical
manufacturer.
The Company directly monitors production runs of its products and maintains
its own quality assurance audit program.
PATENTS AND PROPRIETARY RIGHTS
The Company is the exclusive licensee of composition of matter, process and
use patents and pending applications related to thymosin alpha 1, in the U.S.
and abroad.
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The Company is the exclusive licensee (with limited exceptions) of foreign
patents directed to the thymosin alpha 1 composition of matter which are owned
by F. Hoffmann-La Roche AG and the Board of Regents of the University of Texas
System. Many of these foreign composition of matter patents expired in 1997.
However, the Company is the exclusive licensee of a number of composition of
matter patents and applications directed to analogs and derivatives of thymosin
alpha 1 and has and is seeking numerous other proprietary rights for thymosin
alpha 1. The Company is the exclusive licensee and is directing prosecution of
use and process patents related to the method of making and therapeutic uses of
thymosin alpha 1. Consistent with its strategy, the Company also has filed and
is the owner of use patents for thymosin alpha 1.
Process patents owned by A1B and exclusively licensed to SciClone are
directed to methods of making thymosin alpha 1 and have issued in the U.S., a
majority of European countries, Hong Kong and Taiwan.
SciClone also has exclusively licensed patents and pending applications
covering numerous uses of thymosin alpha 1, including treatment of hepatitis C
which has issued in a majority of European countries, Taiwan, Australia and
South Africa. Patents under which SciClone is exclusively licensed have
additionally issued in the U.S. and Australia covering the use of thymosin alpha
1 to treat small cell and non-small cell lung cancer; in the U.S., South Africa
and Taiwan covering the use of thymosin alpha 1 to treat autoimmune hepatitis;
in Japan covering the treatment of hepatitis B using thymosin alpha 1; in South
Africa for the use of thymosin alpha 1 in treating hepatitis C in non-responders
to interferon treatment; in the U.S., Taiwan and South Africa covering the use
of thymosin alpha 1 to treat septic shock; in the U.S., Australia, Taiwan and
South Africa covering the treatment of infertility in mammalian males using
thymosin alpha 1; and in New Zealand covering the use of thymosin alpha 1 to
treat decompensated liver disease. Patents which SciClone owns have issued in
the U.S., Taiwan, Malaysia and South Africa covering the use of thymosin alpha 1
to treat hepatitis B carriers with minimal disease. Numerous corresponding
additional patent applications in other countries are pending for each of the
above named indications.
The Company is the exclusive licensee of an issued U.S. patent covering the
use of CPX to treat CF, as well as other pending domestic and foreign patent
applications covering CPX analogs and their use in treating CF.
In addition to patent protection, the Company intends to use other means to
protect its proprietary rights. Certain marketing exclusivity periods may be
available under regulatory provisions in certain countries including the U.S.,
European Union countries, Japan and Taiwan, which benefits the holder of the
first marketing approval for new chemical entities or their equivalents for a
given indication and the Company is pursuing such rights. Orphan drug protection
has been or will be sought where available granting additional market
exclusivity and the Company is pursuing such rights. The Company is the holder
of an orphan drug product designation for thymosin alpha 1 for hepatitis B and
DiGeorge Anomaly in the U.S. Recognition and protection of trademarks for
thymosin alpha 1 is being accomplished through a worldwide filing of trademark
applications for ZADAXIN and other trademarks which appear on the commercial
packaging of the product and are used in promotional literature. Copyrights for
the commercial packaging may provide SciClone with means to take advantage of
procedures available in certain countries to exclude counterfeit products or
genuine but unauthorized products from entering a particular country by parallel
importation. The Company has also implemented anti-counterfeiting measures on
commercial packaging and plans to register the packaging with customs
departments in countries where such procedures exist.
The Company is pursuing similar types of protection for CPX, where
applicable. The Company is the holder of an orphan drug product designation for
CPX to treat CF in the U.S.
The Company also relies upon trade secrets, which it seeks to protect, in
part, by confidentiality agreements with employees, consultants, suppliers and
licenses. There can be no assurance that these agreements will not be breached,
that SciClone would have adequate remedies for any breach or that SciClone's
trade secrets will not otherwise become known or independently developed by
competitors.
Upon the closing of the Asset Purchase Agreement with A1B, the Company will
acquire A1B's worldwide patent rights to thymosin alpha 1 and will eliminate
future royalties otherwise payable by it or its sublicensees to A1B. The Company
will become the worldwide exclusive licensee of F. Hoffmann-LaRoche
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AG and the Board of Regents of the University of Texas System and of the foreign
patents directed to the thymosin alpha 1 composition of matter. The Company also
will become the patentee (or owner) of all patents and applications worldwide
currently solely owned by A1B upon closing of the Asset Purchase Agreement.
These patents and applications are directed to processes of making the compound
and analogs and derivatives of the thymosin alpha 1 composition of matter.
Finally, on the closing, the Company will become a joint owner of all A1B's
patents and applications directed to therapeutic uses of thymosin alpha 1,
worldwide, where the Company is now the exclusive licensee of such patents and
applications. The Company has agreed in its Asset Purchase Agreement to issue up
to 600,000 shares of common stock and loan up to an aggregate amount of $280,000
to A1B in exchange for the assets described above.
SPONSORED RESEARCH AND DEVELOPMENT
For the years ended December 31, 1997, 1996 and 1995, the Company expended
$8,642,000, $9,904,000 and $10,386,000, respectively, in Company sponsored
research and development activities.
COMPETITION
Competition in the pharmaceutical field is intense and the Company expects
that competition will increase. The Company's competitors include major
pharmaceutical companies, biotechnology firms and universities and other
research institutions, both in the U.S. and abroad, that are actively engaged in
research and development of products in the therapeutic areas being pursued by
the Company. Many of these companies and institutions have substantially greater
financial, technical, manufacturing, marketing and human resource capabilities
than the Company and extensive experience in undertaking clinical testing and
obtaining regulatory approvals necessary to market drugs. Principal competitive
factors in the pharmaceutical field include efficacy, safety, and therapeutic
regimen. Where comparable products are marketed by other companies price is also
a competitive factor. The Company intends to use alpha interferon as a reference
drug in establishing pricing for ZADAXIN, although this may change over time.
GOVERNMENT REGULATION
Regulation by governmental authorities in the U.S. and foreign countries is
a significant factor in the manufacturing of products for the Company and the
marketing of products by the Company, in ongoing research and development
activities and in preclinical and clinical trials and testing related to the
Company's products. If the Company's products are manufactured, tested or sold
in the U.S., they will be regulated in accordance with the Federal Food, Drug
and Cosmetic Act ("FFD&C Act"). The standard process required by the FDA before
a pharmaceutical agent may be marketed in the U.S. includes (i) preclinical
laboratory and animal tests, (ii) submission to the FDA of an application for an
investigational new drug exemption ("IND"), which must become effective before
human clinical trials may commence, (iii) adequate well-controlled human
clinical trials to establish the safety and efficacy of the product for its
intended indication, (iv) submission to the FDA of a New Drug Application
("NDA") with respect to drugs, and (v) FDA approval of the NDA prior to any
commercial marketing, sale or shipment of the drug. In addition to obtaining FDA
approval for each product, each domestic manufacturing establishment must be
registered with the FDA. Domestic manufacturing establishments are subject to
inspections by the FDA and by other federal, state and local agencies and must
comply with current United States Good Manufacturing Practices ("cGMP").
In the U.S., clinical trial programs generally involve a three-phase
process. Typically, phase 1 pharmacology trials are conducted in a small number
of healthy volunteers to determine the toxicity, pharmacological effects,
metabolism and dose range requirements for the drug. Phase 2 trials are
conducted with groups of patients afflicted with the target disease to make a
preliminary determination of efficacy and optimal dosages and to provide
additional evidence of safety. In phase 3, large-scale, multi-center comparative
trials are conducted in patients afflicted with the target disease to provide
sufficient data for the statistical proof of efficacy and safety required by the
FDA and other regulatory agencies. The results of the preclinical and clinical
testing are submitted to the FDA in the form of an NDA or PLA for approval to
commence commercial sales. In responding to an NDA, the FDA may grant marketing
approval or deny the application if
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the FDA determines that the application does not satisfy its regulatory approval
criteria. In approving an NDA, the FDA may require further post-marketing
studies, referred to as phase 4 studies. When used in this Report in connection
with trials and filings in other countries, terms such as "phase 1," "phase 2,"
"phase 3," "phase 4" and "new drug application" refer to what the Company
believes are comparable trials and filings in such other countries.
Congress recently amended the FFD&C Act to facilitate and expedite the
development and review of drugs intended for treatment of serious or
life-threatening conditions that demonstrate the potential to address unmet
medical needs for such conditions. These provisions, which combine existing FDA
expedited approval and accelerated approval procedures, set forth a new
procedure for designation of a drug as a "fast track product." Concurrent with
or after an IND is filed, the sponsor may request designation as a fast track
product, which must be responded to by the FDA within 60 calendar days.
If designated fast track, the FDA must take such actions as are appropriate
to expedite the development and review of applications for these products.
Another advantage of fast track designation is that sponsors may submit, and the
FDA may commence review of, portions of an application before the complete
application is submitted, provided that a schedule for submission of the
completed application is provided. Sponsors of fast track products also may seek
and obtain FDA approval based upon a determination that the product has an
effect on a clinical endpoint or on a surrogate endpoint that is reasonably
likely to predict clinical benefit. Products approved on such basis are subject
to rigorous postmarket compliance requirements. For example, the sponsor may be
required to conduct post-approval studies to validate or confirm the endpoint
and/or may be required to submit copies of all promotional materials 30 days
prior to their dissemination. The FDA may withdraw approval of fast track
products if, for example, the sponsor fails to conduct required post-approval
studies or disseminates false or misleading promotional materials.
Even after initial FDA approval has been obtained, further studies,
including post-marketing studies, may be required to provide additional data on
safety and will be required to gain approval for the use of a product as a
treatment for clinical indications other than those for which the product was
initially tested. Also, the FDA will require post-marketing reporting to monitor
the side effects of the drug. Results of post-marketing programs may limit or
expand the further marketing of the products. Further, if there are any
modifications to the drug, including changes in indication, labeling, or a
change in manufacturing facility, an NDA supplement may be required to be
submitted to the FDA. Pursuant to recent amendments to the FFD&C Act, once
regulations are implemented, certain manufacturing changes will not require
submission of a supplement.
The orphan drug provisions of the FFD&C Act provide incentives to drug
manufacturers to develop and manufacture drugs for the treatment of rare
diseases, currently defined as diseases that affect fewer than 200,000
individuals in the U.S. or, for a disease that affects more than 200,000
individuals in the U.S., where the sponsor does not realistically anticipate its
product becoming profitable. Under these provisions, a manufacturer of a
designated orphan product can seek tax benefits, and the holder of the first FDA
approval of a designated orphan product will be granted a seven year period of
marketing exclusivity for that product for the orphan indication. While the
marketing exclusivity of an orphan drug would prevent other sponsors from
obtaining approval of the same compound for the same indication, it would not
prevent other types of drugs from being approved for the same use. SciClone has
been granted orphan designation by the FDA for CPX for cystic fibrosis and for
thymosin alpha 1 for hepatitis B and DiGeorge Anomaly. In prior years,
legislation was introduced in the U.S. Congress that would restrict the duration
of the market exclusivity of an orphan drug. There can be no assurances that
this type of legislation will not be reintroduced and passed into law, or that
the benefits of the existing statute will remain in effect.
Under the Drug Price Competition and Patent Term Restoration Act of 1984
("DPCPTRA"), a sponsor may be granted marketing exclusivity for a period of time
following FDA approval of certain drug applications, regardless of patent
status, if the drug is a new chemical entity or new clinical studies were used
to support the marketing application. This marketing exclusivity would prevent a
third party from obtaining FDA approval for a similar or identical drug through
an Abbreviated New Drug Application ("ANDA"), which is the application form
typically used by manufacturers seeking approval of a generic drug. The statute
also allows a patent owner to extend the term of the patent for a period equal
to one-half the period of time elapsed between
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the filing of an IND and the filing of the corresponding NDA plus the period of
time between the filing of the NDA and FDA approval with the maximum patent
extension term being five years. Once a drug is granted some form of marketing
exclusivity, the recently enacted FDA Modernization Act provides an additional
six months of marketing exclusivity for certain pediatric research conducted at
the written request of FDA.
The Company may seek the benefits of orphan, DPCPTRA, or fast track
provisions, but there can be no assurance that the Company will be able to
obtain any such benefits.
The Company is subject to foreign regulations governing human clinical
trials and pharmaceutical sales. The requirements governing the conduct of
clinical trials, product licensing, pricing and reimbursement vary widely from
country to country. Whether or not FDA approval has been obtained, approval of a
product by the comparable regulatory authorities of foreign countries is
required prior to the commencement of marketing of the Company's products in
those countries. The approval process varies from country to country and the
time required for approval may be longer or shorter than that required for FDA
approval. In general, foreign countries use one of three forms of regulatory
approval process. In one form, local clinical trials must be undertaken and the
data must be compiled and submitted for review and approval. In Japan, for
example, the process is time-consuming and costly because all clinical trials
and most preclinical studies must be conducted in Japan. A second form of
approval process requires clinical trial submissions, but permits use of foreign
clinical trials and typically also requires some form of local trial as well. A
third form of approval process does not require local clinical trials, but
rather contemplates submission of an application including proof of approval by
countries that have clinical trial review procedures. Thus, a prior approval in
one or more of the U.S., Japan, most European countries or Australia, among
others, is often sufficient for approval in countries using this third form of
approval process.
In addition to required foreign approvals, the FDA regulates the export of
drugs or bulk pharmaceuticals from the U.S. In general, a drug that has been
approved for commercial sale in the U.S. may be exported for commercial sale. In
1996, export reform legislation was passed in the U.S. that provides that an
unapproved drug may be exported to a "listed country" for investigational
purposes without FDA authorization. The listed countries are Australia, Canada,
Israel, Japan, New Zealand, Switzerland, South Africa, and countries in the
European Union and the European Economic Area. Export of drugs to an unlisted
country for clinical trial purposes continues to require FDA approval. The
Company has obtained, where necessary, FDA approval for all exports of ZADAXIN
from the U.S. to date for clinical trial purposes, and will seek to obtain FDA
approval, where necessary, for any future shipments from the U.S. to any
unlisted country. The export reform legislation further provides that an
unapproved drug can be exported to any country for commercial purposes without
prior FDA approval, provided that the drug: (i) complies with the laws of that
country; and (ii) has valid marketing authorization or the equivalent from the
appropriate authority in a "listed country." Export of drugs not approved in the
U.S. that do not have marketing authorization in a listed country continue to
require FDA export approval.
Pursuant to the Prescription Drug User Fee Act of 1992, drug manufacturers
generally are required to pay three types of user fees: (1) a one-time
application fee for approval of an NDA; (2) an annual product fee imposed on
prescription drugs after FDA approval; and (3) an annual establishment fee
imposed on facilities used to manufacture prescription drugs. The fee rates for
1998 are: (1) $256,846 one-time fee for an application requiring clinical data,
or $128,423 fee for an application not requiring clinical data; (2) $141,966
annual establishment fee; and (3) $18,591 annual product fee. These fee amounts
are likely to increase in the future. Fee waivers or reductions are available in
certain instances, including a waiver of the application fee for the first
application filed by a small business. Additionally, no user fees are assessed
on NDAs for products designated as orphan drugs, unless such drug also includes
a non-orphan indication.
Among the conditions for NDA approval in the U.S. is the requirement that
the prospective manufacturer's quality control and manufacturing procedures
conform to cGMP. In complying with standards set forth in these regulations,
manufacturers must continue to expend time, money and effort in the area of
production and quality control to ensure full technical compliance.
The Company is also subject to various federal, state and local laws,
regulations and recommendations relating to safe working conditions, laboratory
and manufacturing practices, the experimental use of animals
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and the use and disposal of hazardous or potentially hazardous substances,
including radioactive compounds and infectious disease agents, used in
connection with research work and preclinical and clinical trials and testing.
The extent of government regulation which might result from future legislation
or administrative action in these areas cannot be accurately predicted.
As the preceding discussion indicates, the research, preclinical
development, clinical development, manufacturing, marketing and sales of
pharmaceuticals, including ZADAXIN and CPX, are subject to extensive regulation
by governmental authorities. Products developed by the Company cannot be
marketed commercially in any jurisdiction in which they have not been approved.
The process of obtaining regulatory approvals is lengthy, uncertain and requires
the expenditure of substantial resources. For example, in some countries where
the Company contemplates marketing ZADAXIN, the regulatory approval process for
drugs not previously approved in countries that have established clinical trial
review procedures is uncertain and this uncertainty may result in delays in
granting regulatory approvals. In addition, in certain countries such as Japan,
the process for obtaining regulatory approval is time consuming and costly
because all clinical trials and most preclinical studies must be conducted in
that country. The Company is currently pursuing regulatory approvals of ZADAXIN
in a number of countries, and of CPX in the U.S., but there can be no assurance
that the Company will ultimately obtain approvals in such countries in a timely
and cost-effective manner or at all. The marketing approval for ZADAXIN in
Singapore requires a post marketing surveillance program to continue study of
the drug's safety and efficacy. Failure to comply with applicable U.S. or
foreign regulatory requirements can, among other things, result in Warning
Letters, fines, suspensions of regulatory approvals, product recalls or
seizures, operating restrictions, injunctions and criminal prosecutions.
Further, additional government regulation may be established or imposed by
legislation or otherwise which could prevent or delay regulatory approval of
ZADAXIN, CPX or any future products of the Company. Adverse events related to
the Company's products in any of the Company's existing or future markets could
cause regulatory authorities to withdraw market approval for such products, if
any, or prevent the Company from receiving market approval in the future.
THIRD PARTY REIMBURSEMENT
The Company's ability to successfully commercialize its products may depend
in part on the extent to which coverage and reimbursement for such products will
be available from government health care programs, private health insurers and
other third party payors or organizations. Significant uncertainty exists as to
the reimbursement status of new therapeutic products and there can be no
assurance that third party insurance coverage and reimbursement will be
available for therapeutic products the Company might develop. In many of the
foreign countries in which the Company intends to market ZADAXIN, reimbursement
of ZADAXIN under government or private health insurance programs will not be
available. In the U.S., health care reform is an area of increasing national
attention and a priority of many governmental officials. Recent legislation, for
example, imposes limitations on the amount of reimbursement available for
specific drug products under some governmental health care programs. There can
be no assurance that future additional limitations will not be imposed in the
future on drug coverage and reimbursement.
EMPLOYEES
As of December 31, 1997, the Company had 35 employees, 24 in the U.S. and
11 abroad. The Company considers its relations with its employees to be
satisfactory.
RECENT DEVELOPMENTS
On April 1, 1998, the Company issued 661,157 shares of convertible
preferred stock (the "Series C Preferred Stock") to three institutional
investors (each an "Investor" and collectively, the "Investors") at a purchase
price (the "Purchase Price") of $6.05 per share (the "Sale"). The Company has
agreed to use its best efforts to cause a registration statement to become
effective with respect to the resale of the common stock issuable upon
conversion of the Series C Preferred Stock within 90 days of the closing date of
the Sale (the "Closing Date"). The Purchase Price was equal to 160% of the
average closing bid price for the common stock of the Company (the "Common
Stock") for the five trading days prior to the Closing Date.
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Generally, the Series C Preferred Stock is not convertible until 90 days
from the closing and is then subject to limitations summarized below. The
conversion price for the Series C Preferred Stock is the lesser of (a) $6.05, or
(b) the average closing bid price of the Common Stock on any three (3)
consecutive trading days selected by an Investor out of the twenty-two (22)
trading days immediately prior to the date the Investor delivers a notice of
conversion (the "Market Conversion Price"). However, the Market Conversion Price
can never be less than $3.78 except as described below. The Investors may
convert fifty percent (50%) of their Series C Preferred Stock into Common Stock
at the Market Conversion Price between the 91st and 180th day following the
Closing Date, and the Investors may convert one hundred percent (100%) of their
Series C Preferred Stock at the Market Conversion Price from and after the 181st
day following the Closing Date. Whenever the Market Conversion Price of the
Series C Preferred Stock is more than $6.05, the Investors may convert all of
their then outstanding Series C Preferred Stock at the Market Conversion Price.
If between ninety (90) and three hundred sixty-five (365) days after the
Closing Date, the closing bid price of the Common Stock is less than $3.78 on
any three (3) consecutive trading days, the Company has the option to (a) allow
any of the shares of Series C Preferred Stock which are then convertible to be
converted at the Market Conversion Price or (b) redeem the shares of Series C
Preferred Stock then eligible for conversion, if any. The Investors are not
obligated to accept either option. However, these provisions will terminate
immediately and automatically after the closing bid price of the Common Stock
has exceeded $6.00 for forty (40) consecutive trading days. At the end of such
forty (40) day period or three hundred sixty-five (365) days after the Closing
Date, whichever occurs first, the conversion price for the Series C Preferred
Stock may never be less than $3.78. Further, if at any time after the Closing
Date the closing bid price of the Common Stock is less than $1.50 for ten (10)
consecutive trading days, the Company has the option to either (a) permit the
Investors to convert any then remaining Series C Preferred Stock at the Market
Conversion Price and without lock-up restrictions, or (b) redeem the then
remaining Series C Preferred Stock, if any. The redemption price for any of the
foregoing redemptions would be 110% of the original purchase price of the
remaining shares of Series C Preferred Stock subject to redemption, if any.
Each Investor also received an option to purchase additional shares in the
Sale. If the Market Conversion Price prior to the date Investor delivers notice
of conversion is more than $6.00 per share, the Investor has the right to
purchase one additional share of the Common Stock for every share of the Common
Stock received upon conversion of the Series C Preferred Stock. Such additional
shares of the Common Stock purchased by an Investor will be priced at the Market
Conversion Price, which price will never be less than $6.00 per share.
The Investors also received warrants to purchase an aggregate of 100,000
shares of Common Stock at a price equal to $5.67 per share. The warrants have a
five (5) year term.
The Company also granted the Investors certain rights of first refusal and
protective provisions in the event the Company sells shares at a lower price
prior to conversion of the Series C Preferred Stock. Further, in order to ensure
the Investors of the free tradability of their shares upon conversion, the
Company is subject to penalties in certain events, including the failure of the
Company to fulfill its obligation to file and keep effective a registration
statement for the resale of the Common Stock by the Investors, or if trading of
the Common Stock is suspended for a prolonged period.
ITEM 2. PROPERTIES
The Company has leased approximately 14,000 square feet of office space at
its headquarters in San Mateo, California and limited office space for marketing
purposes in Singapore, Hong Kong, Taiwan and Japan. The Company believes that
its existing facilities are adequate for its current needs and that additional
space will be available as needed.
ITEM 3. LEGAL PROCEEDINGS
As of the filing date of this Form 10-K, there are no material pending
legal proceedings to which SciClone or any of its subsidiaries is a party or to
which any of their property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The Company's Common Stock trades on The Nasdaq National Market under the
symbol "SCLN."
The following table sets forth the high and low sale prices per share for
the periods indicated, as reported by The Nasdaq National Market. The quotations
shown represent inter-dealer prices without adjustment for retail markups,
markdowns, or commissions, and may not necessarily reflect actual transactions.
<TABLE>
<CAPTION>
PRICE RANGE
COMMON STOCK
------------------------------
HIGH LOW
1997 ----------- -----------
<S> <C> <C> <C> <C>
4th quarter................................. $ 7 11/32 $ 2 15/16
3rd quarter................................. 6 1/2 3 7/16
2nd quarter................................. 7 15/32 4 3/8
1st quarter................................. 16 1/8 4 3/4
</TABLE>
<TABLE>
<CAPTION>
HIGH LOW
1996 ----------- -----------
<S> <C> <C> <C> <C>
4th quarter................................. $13 $ 7 3/4
3rd quarter................................. 14 3/4 6 7/8
2nd quarter................................. 15 1/8 11 1/4
1st quarter................................. 16 1/8 4 3/4
</TABLE>
As of March 15, 1998, there were approximately 250 holders of record and
more than 5,000 beneficial holders of the Company's Common Stock.
The Company has not paid any dividends on its Common Stock and currently
intends to retain any future earnings for use in its business.
16
<PAGE> 18
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data of the Company is qualified by
reference to and should be read in conjunction with the consolidated financial
statements and notes thereto included elsewhere in this Annual Report on Form
10-K.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Product sales................... $ 2,223,052 $ 703,082 $ 273,353 $ -- $ --
Cost of product sales........... 989,792 740,494 737,460 -- --
------------ ------------ ------------ ------------ ------------
Gross margin.................... 1,233,260 (37,412) (464,107) -- --
Operating expenses:
Research and development...... 8,642,137 9,903,536 10,386,312 9,282,051 8,122,716
Special research and
development charges......... -- -- -- 3,470,000 --
Marketing..................... 4,144,499 4,240,208 4,323,327 4,375,447 1,771,985
General and administrative.... 3,662,441 3,182,972 2,903,991 3,810,696 2,895,513
------------ ------------ ------------ ------------ ------------
Total operating expenses........ 16,449,077 17,326,716 17,613,630 20,938,194 12,790,214
------------ ------------ ------------ ------------ ------------
Loss from operations............ (15,215,817) (17,364,128) (18,077,737) (20,938,194) (12,790,214)
Interest and investment income,
net........................... 1,218,812 2,618,381 3,302,307 3,056,869 1,111,183
------------ ------------ ------------ ------------ ------------
Net loss........................ $(13,997,005) $(14,745,747) $(14,775,430) $(17,881,325) $(11,679,131)
============ ============ ============ ============ ============
Basic net loss per share........ $ (0.85) $ (0.85) $ (0.88) $ (1.02) $ (0.89)
============ ============ ============ ============ ============
Weighted average shares used in
computing basic net loss per
share amounts................. 16,472,765 17,421,312 16,881,652 17,507,564 13,098,462
BALANCE SHEET DATA:
Cash, cash equivalents and
investments................... $ 12,900,465 $ 35,105,708 $ 47,389,827 $ 63,670,287 $ 284,254
Working capital................. 7,416,472 9,223,793 19,283,278 44,796,629 4,995,598
Total assets.................... 19,195,505 42,727,687 54,150,795 67,012,993 48,095,931
Total shareholders' equity...... 15,723,657 37,465,628 49,555,262 62,754,031 45,520,246
</TABLE>
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<PAGE> 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company is an international biopharmaceutical company that acquires,
develops and commercializes specialist-oriented proprietary drugs for treating
chronic and life-threatening diseases, including hepatitis B, hepatitis C,
cancer, immune system disorders and cystic fibrosis. Currently, the Company has
two drugs in clinical development, ZADAXIN for hepatitis B, hepatitis C, cancer
and immune system disorders, and CPX for cystic fibrosis. The Company also has
other drug candidates in preclinical development. To date, the Company's
principal focus has been the development and commercialization of ZADAXIN and
the development of CPX.
From commencement of operations through December 31, 1997, the Company
incurred a cumulative net loss of approximately $85.3 million. The Company
expects its operating expenses to increase over the next several years as it
expands its research and development, clinical testing and marketing
capabilities. The Company's ability to achieve profitable operations is
primarily dependent on increasing ZADAXIN sales in approved markets, securing
regulatory approvals for ZADAXIN in additional countries and successfully
launching ZADAXIN, if approved, in such countries. In addition, other factors
may also impact the Company's ability to achieve a profitable level of
operations such as spending associated with successful development of CPX,
acquiring rights to additional drugs, and entering into and extending agreements
for product development and commercialization, where appropriate. There can be
no assurance that the Company will be able to attain these objectives or that
the Company will ever achieve a profitable level of operations.
The Company's operating results may fluctuate from period to period as a
result of, among other things, market acceptance of ZADAXIN, the timing and
costs associated with preclinical and clinical development of the Company's
products, the regulatory approval process, and the acquisition of additional
product rights. The Company participates in a highly dynamic industry, which
often results in significant volatility of the Company's common stock price.
Setbacks in the launch, sale or distribution of ZADAXIN, preclinical and
clinical development of the Company's products, the regulatory approval process
or relationships with collaborative partners, and any shortfalls in revenue or
earnings from levels expected by securities analysts, among other developments,
have in the past had and could in the future have an immediate and significant
adverse effect on the trading price of the Company's common stock in any given
period.
RESULTS OF OPERATIONS
Product sales were approximately $2,223,000, $703,000 and $273,000 for the
years ended December 31, 1997, 1996 and 1995, respectively. Currently, the
Company has received approval to market ZADAXIN in Argentina, Kuwait, the
People's Republic of China, Peru, the Philippines and Singapore. For the year
ended December 31, 1997, the first full-year of ZADAXIN sales, one customer in
China accounted for 66% of the Company's product sales. The Company's accounts
receivable collections in China are typically 180 days or longer. Such customer
represents 86% of the accounts receivable balance at December 31, 1997. Such
collections to date have been slower than anticipated and the Company is
currently monitoring the situation. At the end of 1997, the Company has
allowances for bad debts of $250,000. If collection of outstanding accounts
receivable does not improve, it may become necessary to further increase related
allowances for bad debts. In addition, the Company has filed for approval to
market ZADAXIN in several countries and anticipates additional filings in other
countries. As a result, the Company expects product sales to increase in its
existing approved markets in 1998 and beyond, upon the commencement of the
commercial launch of ZADAXIN in additional markets once regulatory approvals are
secured. The level of such product sales increase is dependent upon increased
ZADAXIN market penetration in the Company's existing approved markets,
additional ZADAXIN marketing approvals and the successful launch of ZADAXIN in
new markets. Although the Company remains optimistic regarding the prospects of
ZADAXIN, there can be no assurance that the Company will ever achieve
significant levels of product sales or that the Company will receive additional
ZADAXIN market approvals.
Cost of product sales was approximately $990,000, $740,000 and $737,000 for
the years ended December 31, 1997, 1996 and 1995, respectively. The increase is
attributable to increased product sales. The Company expects cost of product
sales to vary from quarter to quarter, dependent upon the level of product
sales, the absorption of fixed product-related costs, and any charges associated
with excess or expiring finished product.
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<PAGE> 20
Research and development expenses were approximately $8,642,000,
$9,904,000, and $10,386,000 for the years ended December 31, 1997, 1996, and
1995, respectively. For the year ended December 31, 1997, the decrease in
research and development expenses as compared to 1996 was due to decreased
professional fees partially offset by increased clinical trial expenses.
Clinical trial expenses in 1997 were impacted by additional clinical trial
expenses for the clinical development of CPX, a synthetic compound licensed in
April 1996 from the NIH as a potential treatment for cystic fibrosis. In April
1997, the Company commenced its CPX clinical trial program in the U.S. In
addition, the Company is pursuing a corporate partnering arrangement with a
major pharmaceutical company for a pivotal phase 3 development of combination
ZADAXIN plus interferon for hepatitis C in the U.S. and Europe. The initiation
and continuation of these programs by the Company had and will continue to have
a significant effect on the Company's research and development expenses in the
future and will require the Company to seek additional capital resources. For
the year ended December 31, 1996, the decrease in research and development
expenses as compared to 1995 was primarily attributable to decreases in
regulatory expenses and in costs associated with decreased ZADAXIN clinical
trials, essentially due to the completion of the ZADAXIN Taiwan phase 3
Hepatitis B trial during the first half of 1996, offset by increased preclinical
development expenses associated with CPX. In general, the Company expects
product research and development expenses to increase over the next several
years and to vary quarter to quarter as the Company pursues its strategy of
initiating additional clinical trials and testing, entering into one or more
corporate partnering arrangements, acquiring product rights, and expanding
regulatory activities.
Marketing expenses were approximately $4,144,000, $4,240,000, and
$4,323,000 for the years ended December 31, 1997, 1996, and 1995, respectively.
The decrease in 1997 as compared to 1996 is due to decreased professional
services and travel expenses partially offset by increased publications and
promotional material expenses associated with the launch of ZADAXIN in its
approved markets. The decrease in 1996 as compared to 1995 is primarily
attributable to decreased payroll costs related to an executive officer who left
the Company in 1995, offset by increased professional services, primarily
consulting services expenses, regarding preparations for the launch of ZADAXIN
in its approved markets in early 1997. The Company expects marketing expenses to
increase significantly in the next several quarters and years as it anticipates
expanding its commercialization and marketing efforts and pursuing other
strategic relationships.
General and administrative expenses were approximately $3,662,000,
$3,183,000, and $2,904,000 for the years ended December 31, 1997, 1996, and
1995, respectively. The increase in 1997 as compared to 1996 is due to increased
general office expenses associated with increased rent and office relocation
expenses and investment banking fees and fees for professional services,
primarily legal and accounting fees, associated with the Company's adoption of a
shareholder rights plan and proposed public offering. The increase in 1996 as
compared to 1995 is primarily attributable to increased payroll costs offset by
decreased expenses for professional services, primarily legal services and
consulting fees. In the near term, the Company expects general and
administrative expenses to vary quarter to quarter as the Company augments its
general and administrative activities and resources to support increased
expenditures on clinical trials and testing, and regulatory,
pre-commercialization and marketing activities.
Net interest and investment income was approximately $1,218,000,
$2,618,000, and $3,302,000 for the years ended December 31, 1997, 1996, and
1995, respectively. The decrease in 1997 as compared to 1996 and in 1996 as
compared to 1995 resulted from decreased interest and investment income due to
lower average invested cash balances.
LIQUIDITY AND CAPITAL RESOURCES
In April 1998, the Company received $4,000,000 (before deducting expenses)
from the sale of 661,157 shares of Series C convertible preferred stock from a
private placement. In March 1998, the Company also received approximately
$754,000 from one of its executive officers as a partial payment of an
outstanding loan. (See "Note 1" -- "Notes Receivable from Officers").
In July 1997, the Company loaned Thomas E. Moore, former Chairman and one
of the founders of the Company, $5.944 million secured by approximately 1.9
million shares of SciClone common stock owned by Mr. Moore. The loan carries
interest at 7%. During the period Mr. Moore's loan is outstanding and
19
<PAGE> 21
immediately prior to the closing of any offering of the Company's common stock,
the Company may convert the loan, in a non-cash exchange into Mr. Moore's
SciClone common stock by retiring shares of his SciClone common stock at a fixed
discount rate from the offering price. To date, the Company has not retired any
of Mr. Moore's SciClone common stock. In connection with this transaction, Mr.
Moore resigned from the Company. On December 31, 1997, the principal balance of
the loan was $5.944 million and was classified as an offset to shareholders'
equity.
At December 31, 1997, and 1996, the Company had approximately $12,900,000,
and $35,106,000, respectively, in cash, cash equivalents and marketable
securities. The marketable securities consist primarily of highly liquid
short-term and long-term investments.
Net cash used by the Company in operating activities amounted to
approximately $14,056,000, $14,641,000, and $17,098,000, for the years ended
December 31, 1997, 1996, and 1995, respectively. Net cash used in operating
activities for the year ended December 31, 1997 is greater than the Company's
net loss for such period primarily due to increases in accounts receivable
associated with sales from the Company's launch of ZADAXIN in its approved
markets and increases in payments to third parties for goods and services and to
employees for compensation and benefits. These amounts were partially offset by
non-cash charges associated with depreciation and amortization, decreases in
prepayments of certain future expenses, and increases in amounts owed to third
parties for clinical trials. Net cash used in operating activities for the year
ended December 31, 1996 is less than the Company's net loss for such period
primarily due to non-cash charges associated with depreciation of furniture and
equipment and amortization of deferred compensation in addition to increases in
amounts owed to third parties for goods and services. These amounts were
partially offset by cash used for inventory purchases, increases in and
prepayments of certain future period expenses and payments of amounts owed to
third parties related to clinical trial expenses and compensation and benefits.
Net cash used in operating activities for the year ended December 31, 1995 was
greater than the Company's net loss for such period primarily due to cash used
for inventory purchases, the prepayment of certain future period expenses and
increases in accounts receivable. These cash uses were partially offset by
increases in amounts owed to third parties for goods and services related to
clinical trial expenses in addition to noncash charges associated with
depreciation and amortization.
Net cash provided by investing activities for the year ended December 31,
1997 primarily related to the net sale of approximately $21,335,000 in
marketable securities offset by the purchase of approximately $404,000 in
equipment and furniture. Net cash provided by investing activities for the year
ended December 31, 1996 primarily related to the net sale of approximately
$12,319,000 in marketable securities offset by the purchase of approximately
$94,000 in equipment and furniture. Net cash provided by investing activities
for the year ended December 31, 1995 primarily related to the net sale of
approximately $14,729,000 in marketable securities offset by the purchase of
approximately $204,000 in equipment and furniture.
Net cash used in financing activities for the year ended December 31, 1997
consisted of approximately $4,267,000 related to Company's repurchase of its
common stock under the Company's approved stock repurchase plan, the amounts
loaned to Mr. Thomas E. Moore referred to above of $5,944,000 offset by
approximately $2,313,000 in proceeds received from the issuance of common stock
by the exercise of outstanding warrants and from the issuance of common stock
under the Company's stock option plan and employee stock purchase plan. Net cash
provided by financing activities for the year ended December 31, 1996 related to
approximately $3,731,000 in proceeds received from the issuance of common stock
under the Company's stock option plan offset by approximately $659,000 related
to Company's repurchase of its common stock. Net cash used in financing
activities for the year ended December 31, 1995 related to the Company's
repurchase of approximately $1,925,000 of its common stock offset by
approximately $192,000 in proceeds received from the issuance of common stock
under the Company's stock option plan.
Management believes its existing capital resources and interest on funds
available are adequate to maintain its current and planned operations through
1998. In December 1997, the Company filed a registration statement with the
Securities and Exchange Commission with respect to a proposed registered direct
placement of its Common Stock but decided not to proceed with such offering due
to market conditions and other factors. The Company subsequently concluded an
offering of convertible preferred stock with
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<PAGE> 22
proceeds of $4,000,000 (before deducting expenses) and is actively pursuing
additional financings including a private placement of common stock and an
equity line. The Company believes it will conclude one or more of such
additional financings in the next three to six months although no assurance can
be given that such financing will occur in the time frame expected by the
Company, on terms favorable to the Company, or at all. The Company is
considering corporate partnering and other opportunities to increase its capital
resources and if one or more of such other opportunities occurred, the Company
would consider accelerating drug development activities, including clinical
trials. The Company's capital requirements may change depending upon numerous
factors, including the level of ZADAXIN product sales, the availability of
complementary products, technologies and businesses, the initiation of
preclinical and clinical trials and testing, the timing of regulatory approvals,
developments in relationships with existing or future collaborative partners and
the status of competitive products. The Company continues to pursue corporate
partnering and public and private financing alternatives. If the Company cannot
eventually generate sufficient funds from operations, it will need to raise
additional financing in the near future. There can be no assurance that such
financing will be available on acceptable terms and on a timely basis, if at
all.
IMPACT OF THE YEAR 2000
As the year 2000 approaches, an issue impacting all companies has emerged
regarding how existing application software programs and operating systems can
accommodate this date value. In brief, many existing application software
products in the marketplace were designed to accommodate only a two digit date
position which represents the year (e.g., "95" is stored on the system and
represents the year 1995). As a result, the year 1999 (i.e., "99") could be the
maximum date value systems will be able to accurately process. Management is in
the process of working with its software vendors to assure that the Company is
prepared for the year 2000. Management does not anticipate that the Company will
incur significant operating expenses or be required to invest heavily in
computer system improvements to be year 2000 compliant.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
Dependence on ZADAXIN and CPX. The Company's principal drug development
efforts are currently focused primarily on ZADAXIN and CPX. Clinical trials of
ZADAXIN sponsored by the Company and/or other parties are currently in progress
or planned and favorable results from such trials will be necessary to gain
regulatory approval in significant markets. Sales of ZADAXIN commenced in 1997
but are not material at this time. While ZADAXIN has been approved for
commercial sale for treatment of hepatitis B in the People's Republic of China,
Kuwait, Peru, the Philippines and Singapore, no assurance can be given that
ZADAXIN approvals will be obtained in additional countries or for the treatment
of additional indications, such as hepatitis C or cancer, in a timely fashion or
at all. The Company's launch of ZADAXIN in the People's Republic of China, the
Philippines and Singapore is the first commercial introduction of ZADAXIN by the
Company, and no assurance can be given that commercialization of ZADAXIN will
prove successful. The Company has not yet launched ZADAXIN in Argentina, Kuwait
or Peru and no assurance can be given that future launch of ZADAXIN will prove
successful. Future sales of ZADAXIN will depend on market acceptance and
successful distribution. In particular, although the People's Republic of China
has the highest hepatitis B prevalence rate in the world, the low average income
and poorly developed distribution infrastructure present ongoing challenges to
successful commercialization of ZADAXIN in that market. Because the Company
currently relies on ZADAXIN as its sole source of revenue, the failure to
demonstrate the drug's efficacy in future clinical trials, obtain additional
marketing approvals or commercialize the drug successfully would have a material
adverse effect on the Company.
The Company may experience delays and encounter difficulties in clinical
trials of CPX. In addition, there can be no assurance that any clinical trial
will provide statistically significant evidence of the efficacy of CPX in
treating CF. A failure to demonstrate the efficacy of CPX in a CF clinical
trial, obtain regulatory approval of CPX for CF or successfully commercialize
CPX would have a material adverse effect on the Company.
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<PAGE> 23
No History of Significant Revenues; Continuing Operating Losses. The
Company has only recently generated revenues from the commercialization of its
products, and there is substantial uncertainty regarding the timing and amount
of any future revenues and whether such future revenues will be material. The
Company cannot predict when or if marketing approvals for CPX will be obtained
or additional marketing approvals for ZADAXIN will be obtained. Even if such
approvals are obtained, there can be no assurance that ZADAXIN and CPX will be
commercialized successfully. The Company has experienced significant operating
losses since its inception and, as of December 31, 1997, had an accumulated
deficit of approximately $85.3 million. The Company expects its operating
expenses to increase over the next several years as it expands its development,
clinical testing and marketing capabilities. The Company's ability to achieve a
profitable level of operations is dependent in large part on successful
expansion of the market for ZADAXIN in Asia, Latin America and the Middle East,
obtaining additional regulatory approvals for ZADAXIN and/or future products,
entering into a corporate partnering arrangement for pivotal phase 3 development
of combination ZADAXIN plus interferon for hepatitis C in the U.S. and Europe,
entering into other agreements for product development and commercialization,
where appropriate, and continuing to expand from development into successful
marketing. There can be no assurance that the Company will ever achieve a
profitable level of operations.
Future Capital Needs; Uncertainty of Additional Financing. The Company
will need additional financing to support its long-term product development and
commercialization programs. The Company's future capital requirements will
depend on many factors, including progress with preclinical testing and clinical
trials, the time and cost involved in obtaining regulatory approvals, patent
costs, competing technological and market developments, the nature of existing
and future collaborative relationships, and the Company's ability to establish
development, sales, manufacturing and marketing arrangements. No assurance can
be given that adequate financing will be available to the Company on acceptable
terms and on a timely basis, if at all.
Dependence on Third Parties. The Company's strategy contemplates that it
will enter into various arrangements with other entities. To date, the Company
has acquired rights to ZADAXIN, CPX and certain other drugs but is only actively
pursuing clinical development of ZADAXIN and CPX. Failure to license or
otherwise acquire rights to additional drugs would result in a shortage of
products for development. In addition, the Company has licensed exclusive rights
to develop and market ZADAXIN in Japan to SPKK. SPKK has a substantial
commitment to alpha interferon, which is an approved therapy for hepatitis B and
hepatitis C in Japan. There can be no assurance that the relationship will prove
successful or that the Company will be able to negotiate additional arrangements
in the future. The amount and timing of resources that collaborators devote to
their activities with the Company will not be within the control of the Company
and may be affected by financial difficulties or other factors affecting these
third parties. There can be no assurance that such parties will perform their
obligations as expected. Moreover, the Company's ability to obtain regulatory
approval in one country may be delayed or adversely affected by the timing of
regulatory activities and approvals in one or more other countries, particularly
if the Company does not participate in the regulatory approval process in such
other countries. See "Business -- Manufacturing" and "-- Marketing and Sales."
Foreign Sales and Operations. The Company's financial condition in the
near term will be highly dependent on ZADAXIN sales in foreign jurisdictions,
where sales and operations are subject to inherent risks, including difficulties
and delays in obtaining pricing approvals and reimbursement, unexpected changes
in regulatory requirements, tariffs and other barriers, political instability,
difficulties in staffing and managing foreign operations, longer payment cycles,
greater difficulty in accounts receivable collection, currency fluctuations and
potential adverse tax consequences. Certain foreign countries regulate pricing
of pharmaceuticals and such regulation may result in prices significantly below
those that would prevail in a free market. The majority of the Company's current
sales are to customers in the People's Republic of China where the Company's
accounts receivable collections are typically 180 days or greater. Such
collections to date have been slower than anticipated and the Company is
currently monitoring the situation. If collection of outstanding accounts
receivable does not continue to improve, it may become necessary to further
increase the related allowances for bad debts or slow the rate of sales to this
market.
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<PAGE> 24
Patents and Proprietary Rights. Most European composition of matter
patents for thymosin alpha 1 expired in October 1997. The Company will in the
future have only limited composition of matter patents for thymosin alpha 1 or
other products and this could adversely affect the Company's proprietary rights.
However, the Company owns or has exclusive licenses for use and process patents
or patent applications in the U.S. and other jurisdictions for thymosin alpha 1
and CPX and will seek to protect such products from competition through such
patent protection and through other means. See "Business -- Patents and
Proprietary Rights." The Company's success is significantly dependent on its
ability to obtain patent protection for its products and technologies and to
preserve its trade secrets and operate without infringing on the proprietary
rights of third parties. No assurance can be given that the Company's pending
patent applications will result in the issuance of patents or that any patents
will provide competitive advantages or will not be invalidated or circumvented
by its competitors. Moreover, no assurance can be given that patents are not
issued to, or patent applications have not been filed by, other companies which
would have an adverse effect on the Company's ability to use, manufacture or
market its products or maintain its competitive position with respect to its
products. Numerous patents and patent applications relating to thymosin alpha 1
are held under exclusive license and the breach by the Company of the terms of
such license could result in the loss of the Company's rights to such patents
and patent applications. Other companies obtaining patents claiming products or
processes useful to the Company may bring infringement actions against the
Company and such litigation is typically costly and time-consuming. As a result,
the Company may be required to obtain licenses from others or not be able to
use, manufacture or market its products. Such licenses may not be available on
commercially reasonable terms, if at all.
The patent positions of biotechnology firms generally are highly uncertain
and involve complex legal and factual questions. No consistent policy has
emerged regarding the validity and scope of claims in biotechnology patents, and
courts have issued varying interpretations in the recent past, and legal
standards concerning validity, scope and interpretations of claims in
biotechnology patents may continue to evolve. Even issued patents may later be
modified or revoked by the U.S. Patent and Trademark Office, the European Patent
Office or the courts in proceedings instituted by third parties. Moreover, the
issuance of a patent in one country does not assure the issuance of a patent
with similar claims in another country and claim interpretation and infringement
laws vary among countries, so the extent of any patent protection is uncertain
and may vary in different countries.
Pharmaceuticals are not patentable in certain countries in SciClone's
ZADAXIN territory, or have only recently become patentable, and enforcement of
intellectual property rights in many countries in such territory has been
limited or non-existent. Future enforcement of patents and proprietary rights in
many countries in SciClone's ZADAXIN territory can be expected to be problematic
or unpredictable. There can be no assurance that any patents issued or licensed
to the Company will provide it with competitive advantages or will not be
challenged by others. No assurance can be given that holders of patents licensed
to the Company will file, prosecute, extend or maintain their patents in
countries where the Company has rights. Furthermore, there can be no assurance
that others will not independently develop similar products or will not design
around patents issued or licensed to the Company.
Government Regulation and Product Approvals. The research, preclinical and
clinical development, manufacturing, marketing and sales of pharmaceuticals,
including ZADAXIN, CPX and the Company's other drug candidates, are subject to
extensive regulation by governmental authorities. Products developed by the
Company cannot be marketed commercially in any jurisdiction in which they have
not been approved. The process of obtaining regulatory approvals is lengthy and
requires the expenditure of substantial resources. In some countries where the
Company contemplates marketing ZADAXIN, the regulatory approval process for
drugs not previously approved in countries that have established clinical trial
review procedures is uncertain and this uncertainty may result in delays in
granting regulatory approvals. In addition, in certain countries such as Japan,
the process for obtaining regulatory approval is time consuming and costly
because all clinical trials and most preclinical studies must be conducted
there. The Company is currently sponsoring clinical trials and pursuing
regulatory approvals of ZADAXIN in a number of countries and of CPX in the U.S.,
but there can be no assurance that the Company will be able to complete such
trials, that such trials, if completed, will fulfill regulatory approval
criteria or that the Company will ultimately obtain approvals in such countries.
Adverse
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<PAGE> 25
results in the Company's development programs also could result in the placement
of restrictions on the use of ZADAXIN and CPX or revocation of the approval. The
marketing approval for ZADAXIN in Singapore requires a patient surveillance
program to continue study of the drug's safety and efficacy. Adverse results in
such program could result in the placement of restrictions on the use of ZADAXIN
or revocation of the approval in Singapore. Failure to comply with the
applicable U.S. or foreign regulatory requirements can, among other things,
result in Warning Letters, fines, suspensions of regulatory approvals, product
recalls or seizures, operating restrictions, injunctions and criminal
prosecutions. Further, additional government regulation may be established or
imposed which could prevent or delay regulatory approval of ZADAXIN, CPX or any
future products of the Company.
Manufacturing. The Company has entered into contract manufacturing and
supply agreements to source ZADAXIN and CPX. The Company has experienced delays
of supply of thymosin alpha 1 bulk drug in the past and could do so again in the
future. To be successful, the Company's products must be manufactured in
commercial quantities in compliance with regulatory requirements and at an
acceptable cost. While the Company believes it has and will be able in the
future to establish manufacturing relationships with experienced suppliers
capable of meeting the Company's needs, there can be no assurance that the
Company will establish long term manufacturing relationships with suppliers or
that these suppliers will prove satisfactory. The Company currently has vialing
and packaging supply agreements in effect and has a sufficient supply of
finished thymosin alpha 1 for the near term and is currently negotiating a new
vialing and packaging supply agreement. No assurances can be given that such new
agreement will be reached. Production interruptions, if they occur, could
significantly delay clinical development of potential products, reduce third
party or clinical researcher interest and support of proposed clinical trials.
Such interruptions could also delay commercialization of the Company's products
and impair their competitive position, which would have a material adverse
effect on the business and financial condition of the Company. See "Business --
Manufacturing."
Marketing and Sales. The Company has established distribution arrangements
with local pharmaceutical distribution companies covering 31 countries, in Asia,
Latin America and the Middle East. However, no assurance can be given that any
such distribution arrangements will remain in place or prove successful. See
"Business -- Marketing and Sales."
Technological Change and Competition. Rapid technological development may
result in the Company's products becoming obsolete before they are marketed or
before the Company recovers a significant portion of the related development and
commercialization expenses. Competition in the pharmaceutical field is intense
and the Company expects that competition will increase. The Company's
competitors include major pharmaceutical companies, biotechnology firms and
universities and other research institutions, both in the U.S. and abroad, that
are actively engaged in research and development of products in the therapeutic
areas being pursued by the Company. Many of these companies and institutions
have substantially greater financial, technical, manufacturing, marketing and
human resource capabilities than the Company and extensive experience in
undertaking clinical testing and obtaining regulatory approvals necessary to
market drugs. Principal competitive factors in the pharmaceutical field include
efficacy, safety, and therapeutic regimen. Where comparable products are
marketed by other companies price is also a competitive factor.
Uncertainty of Third Party Reimbursement; Resources of Patient
Populations. The Company's ability to successfully commercialize its products
may depend in part on the extent to which reimbursement for the cost of such
products will be available from government health administration authorities,
private health insurers and other organizations. Significant uncertainty exists
as to the reimbursement status of new therapeutic products and there can be no
assurance that third party reimbursement will be available for therapeutic
products the Company might develop. In many of the foreign countries in which
the Company intends to operate, reimbursement of ZADAXIN under government or
private health insurance programs will not be available. In the U.S., health
care reform is an area of increasing national attention and a priority of many
governmental officials. Certain reform proposals, if adopted, could impose
limitations on the prices the Company will be able to charge in the U.S. for its
products or the amount of reimbursement for the Company's products from
governmental agencies or third party payors. In many countries where the Company
has marketing rights for ZADAXIN, government resources and per capita income
levels may be so low that
24
<PAGE> 26
the Company's products will be prohibitively expensive for a large percentage of
the population. In such countries, there can be no assurance that the Company
will be successful in marketing its products on economically favorable terms, if
at all.
Dependence on Qualified Personnel and Key Individuals. Because of the
specialized scientific nature of the Company's business, the Company is highly
dependent upon its ability to continue to attract and retain qualified
management, scientific and technical personnel. There is intense competition for
qualified personnel in the areas of the Company's activities, and there can be
no assurance that the Company will be able to continue to attract and retain the
qualified personnel necessary for the development of its business. In addition,
many key responsibilities within the Company have been assigned to a relatively
small number of individuals. Loss of the services of any of these individuals
unless they were promptly replaced could be significantly detrimental to the
Company's development. The Company does not maintain key person life insurance
on the lives of any of its key personnel.
Product Liability; Absence of Insurance. The Company's business will expose
it to potential product liability risks which are inherent in the testing,
manufacturing, marketing and sale of pharmaceutical products, and there can be
no assurance that product liability claims will not be asserted against the
Company. Product liability insurance for the pharmaceutical industry generally
is expensive to the extent that it is available at all. The Company has product
liability insurance coverage for clinical trials and commercial sales. However,
there can be no assurance that a product liability claim would not adversely
affect the business or financial condition of the Company.
Blank Check Preferred Stock. The Company recently issued shares of Series C
Preferred Stock in a $4,000,000 financing. (See "Business -- Recent
Developments"). The Company's Board of Directors has the authority to issue
additional series of preferred stock and to determine the price, rights,
preferences, privileges and restrictions, including voting rights, without any
further vote or action by the Company's shareholders. The rights of the holders
of the Common Stock will be subject to, and may be adversely affected by, the
rights of the holders of any Preferred Stock that may be issued in the future.
The issuance of Preferred Stock, while providing desirable flexibility in
connection with possible acquisitions and other corporate purposes, could have
the effect of making it more difficult for a third party to acquire a majority
of the outstanding voting stock of the Company.
Series C Preferred Stock. Under certain conditions, each share of the
Company's outstanding Series C Preferred Stock may convert into more than one
share of Common Stock. If such events were to occur, the conversion of the
Preferred Stock could have a dilutive effect on the common shareholders. (See
"Business -- Recent Developments.")
25
<PAGE> 27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SCICLONE PHARMACEUTICALS, INC.
FINANCIAL STATEMENTS AT DECEMBER 31, 1997 AND 1996 AND FOR
EACH OF THE THREE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995.
26
<PAGE> 28
SCICLONE PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 3,619,100 $ 4,642,590
Short-term investments.................................... 3,866,007 5,205,529
Accounts receivable, net of allowances of $250,000 in 1997
and $7,000 in 1996..................................... 1,024,802 245,078
Inventory................................................. 2,046,218 2,608,877
Prepaid expenses and other current assets................. 332,193 1,783,778
------------ ------------
Total current assets........................................ 10,888,320 14,485,852
Property and equipment, net................................. 525,077 299,405
Long-term investments....................................... 5,415,358 25,257,589
Notes receivable from officers.............................. 2,326,851 2,648,292
Other assets................................................ 39,899 36,549
------------ ------------
Total assets................................................ $ 19,195,505 $ 42,727,687
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 562,730 $ 639,392
Accrued compensation and employee benefits................ 758,955 817,774
Accrued clinical trials expense........................... 1,210,164 964,331
Accrued professional fees................................. 413,000 1,989,000
Other accrued expenses.................................... 526,999 851,562
------------ ------------
Total current liabilities................................... 3,471,848 5,262,059
Commitments and contingencies (Note 7)
Shareholders' equity:
Preferred stock, no par value; 10,000,000 shares
authorized; no shares issued and outstanding........... -- --
Common stock, no par value; 75,000,000 shares authorized;
17,343,358 and 17,532,195 shares issued and
outstanding............................................ 107,033,516 108,988,019
Note receivable from former officer....................... (5,944,000) --
Net unrealized loss on available-for-sale securities...... (17,588) (171,125)
Accumulated deficit....................................... (85,348,271) (71,351,266)
------------ ------------
Total shareholders' equity.................................. 15,723,657 37,465,628
------------ ------------
Total liabilities and shareholders' equity.................. $ 19,195,505 $ 42,727,687
============ ============
</TABLE>
See notes to consolidated financial statements
27
<PAGE> 29
SCICLONE PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Product sales.................................. $ 2,223,052 $ 703,082 $ 273,353
Cost of product sales.......................... 989,792 740,494 737,460
------------ ------------ ------------
Gross margin................................... 1,233,260 (37,412) (464,107)
Operating expenses:
Research and development..................... 8,642,137 9,903,536 10,386,312
Marketing.................................... 4,144,499 4,240,208 4,323,327
General and administrative................... 3,662,441 3,182,972 2,903,991
------------ ------------ ------------
Total operating expenses....................... 16,449,077 17,326,716 17,613,630
------------ ------------ ------------
Loss from operations........................... (15,215,817) (17,364,128) (18,077,737)
Interest and investment income, net............ 1,218,812 2,618,381 3,302,307
------------ ------------ ------------
Net loss....................................... $(13,997,005) $(14,745,747) $(14,775,430)
============ ============ ============
Basic net loss per share....................... $ (0.85) $ (0.85) $ (0.88)
============ ============ ============
Weighted average shares used in computing basic
net loss per share amounts................... 16,472,765 17,421,312 16,881,652
</TABLE>
See notes to consolidated financial statements
28
<PAGE> 30
SCICLONE PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
NET UNREALIZED
NOTE GAIN (LOSS) ON
COMMON STOCK RECEIVABLE AVAILABLE-FOR-
------------------------- FROM FORMER SALE ACCUMULATED DEFERRED
SHARES AMOUNT OFFICER SECURITIES DEFICIT COMPENSATION
---------- ------------ ----------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1994...................... 17,086,780 $107,648,758 $ -- $(2,304,989) $(41,830,089) $ (759,649)
Issuance of common stock
from exercise of stock
options................. 66,477 191,686 -- -- -- --
Repurchase of common
stock................... (346,000) (1,924,896) -- -- -- --
Amortization of deferred
compensation -- -- -- -- -- 554,796
Net unrealized gain on
available-for-sale
securities.............. -- -- -- 2,755,075 -- --
Net loss.................. -- -- -- -- (14,775,430) --
---------- ------------ ----------- ----------- ------------ -----------
Balance at December 31,
1995...................... 16,807,257 105,915,548 -- 450,086 (56,605,519) (204,853)
Issuance of common stock
from exercise of stock
options and warrants and
employee stock purchase
plan.................... 802,938 3,731,284 -- -- -- --
Repurchase of common
stock................... (78,000) (658,813) -- -- -- --
Amortization of deferred
compensation............ -- -- -- -- -- 204,853
Net unrealized loss on
available-for-sale
securities................ -- -- -- (621,211) -- --
Net loss.................. -- -- -- -- (14,745,747) --
---------- ------------ ----------- ----------- ------------ -----------
Balance at December 31,
1996...................... 17,532,195 108,988,019 -- (171,125) (71,351,266) --
Issuance of common stock
from exercise of stock
options and warrants and
employee stock purchase
plan.................... 495,663 2,312,746 -- -- -- --
Repurchase of common
stock................... (684,500) (4,267,249) -- -- -- --
Note receivable from
former officer.......... (5,944,000) -- -- --
Net unrealized gain on
available-for-sale
securities.............. -- -- -- 153,537 -- --
Net loss.................. -- -- -- -- (13,997,005) --
---------- ------------ ----------- ----------- ------------ -----------
Balance at December 31,
1997...................... 17,343,358 $107,033,516 $(5,944,000) $ (17,588) $(85,348,271) $ --
========== ============ =========== =========== ============ ===========
<CAPTION>
TOTAL
SHAREHOLDERS'
EQUITY
-------------
<S> <C>
Balance at December 31,
1994...................... $ 62,754,031
Issuance of common stock
from exercise of stock
options................. 191,686
Repurchase of common
stock................... (1,924,896)
Amortization of deferred
compensation 554,796
Net unrealized gain on
available-for-sale
securities.............. 2,755,075
Net loss.................. (14,775,430)
------------
Balance at December 31,
1995...................... 49,555,262
Issuance of common stock
from exercise of stock
options and warrants and
employee stock purchase
plan.................... 3,731,284
Repurchase of common
stock................... (658,813)
Amortization of deferred
compensation............ 204,853
Net unrealized loss on
available-for-sale
securities................ (621,211)
Net loss.................. (14,745,747)
------------
Balance at December 31,
1996...................... 37,465,628
Issuance of common stock
from exercise of stock
options and warrants and
employee stock purchase
plan.................... 2,312,746
Repurchase of common
stock................... (4,267,249)
Note receivable from
former officer.......... (5,944,000)
Net unrealized gain on
available-for-sale
securities.............. 153,537
Net loss.................. (13,997,005)
------------
Balance at December 31,
1997...................... $ 15,723,657
============
</TABLE>
See notes to consolidated financial statements
29
<PAGE> 31
SCICLONE PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss....................................... $(13,997,005) $(14,745,747) $(14,775,430)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................ 178,484 313,560 713,343
Changes in operating assets and liabilities:
Prepaid expenses and other assets......... 1,769,676 (490,243) (1,924,132)
Accounts receivable....................... (779,724) (136,668) (108,410)
Inventory................................. 562,659 (248,398) (1,340,190)
Accounts payable and other accrued
expenses................................ (401,225) 802,066 64,276
Accrued clinical trials expense........... 245,833 (1,090,410) 238,437
Accrued professional fees................. (1,576,000) 1,224,000 (10,000)
Accrued compensation and benefits......... (58,819) (269,130) 43,858
------------ ------------ ------------
Net cash used in operating activities (14,056,121) (14,640,970) (17,098,248)
------------ ------------ ------------
INVESTING ACTIVITIES:
Purchase of property and equipment........... (404,156) (94,409) (204,077)
Sale of marketable securities, net........... 21,335,290 12,319,191 14,728,955
------------ ------------ ------------
Net cash provided by investing activities...... 20,931,134 12,224,782 14,524,878
------------ ------------ ------------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock,
net....................................... 2,312,746 3,731,284 191,686
Notes receivable from former officer......... (5,944,000) -- --
Repurchase of common stock................... (4,267,249) (658,813) (1,924,897)
------------ ------------ ------------
Net cash (used in) provided by financing
activities................................... (7,898,503) 3,072,471 (1,733,211)
------------ ------------ ------------
Net (decrease) increase in cash and cash
equivalents.................................. (1,023,490) 656,283 (4,306,581)
Cash and cash equivalents, beginning of
period....................................... 4,642,590 3,986,307 8,292,888
------------ ------------ ------------
Cash and cash equivalents, end of period....... $ 3,619,100 $ 4,642,590 $ 3,986,307
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
30
<PAGE> 32
SCICLONE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIALS
NOTE 1 -- THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
SciClone Pharmaceuticals, Inc. ("SciClone" or the "Company") is an
international biopharmaceutical company that acquires, develops and
commercializes specialist-oriented proprietary drugs for treating chronic and
life-threatening diseases, including hepatitis B, hepatitis C, cancer, immune
system disorders and cystic fibrosis. Currently, the Company has two products in
clinical development, ZADAXIN for hepatitis B, hepatitis C, cancer and immune
system disorders, and CPX for cystic fibrosis. The Company has other drug
candidates in preclinical development. To date, the Company's principal focus
has been the development and commercialization of ZADAXIN and the development of
CPX.
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. The principal office of the Company's
subsidiary is located in Hong Kong. All significant intercompany accounts and
transactions have been eliminated
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash Equivalents and Investments
Cash equivalents consist of highly liquid investments with remaining
maturities of three months or less. All cash equivalents are carried at cost
plus accrued interest, which approximates market.
The Company has classified its entire investments portfolio as
available-for-sale and records these investments at fair value, as determined by
available market information, on the balance sheet. The portfolio primarily
consists of U.S. Government securities and short-term and long-term debt
instruments. Unrealized holding gains or losses are carried as a separate
component of shareholders' equity. The amortized cost of debt securities
classified as available-for-sale is adjusted for amortization of premiums and
accretion of discounts to maturity. Such amortization is included in investment
income along with interest earned. Realized gains or losses, and declines in
value judged to be other than temporary are also included in investment income.
Management believes the credit risk associated with these investments is limited
due to the nature of investments.
For the year ended December 31, 1997, net unrealized gains of approximately
$154,000 were charged to shareholders' equity, leaving a balance at December 31,
1997 of approximately $18,000 of net unrealized losses. For the year ended
December 31, 1996, net unrealized losses of approximately $621,000 were charged
to shareholders' equity, leaving a balance at December 31, 1996 of approximately
$171,000 of net unrealized losses.
Property and Equipment
Property and equipment is stated at cost, less accumulated depreciation.
Depreciation is provided over the estimated useful lives of the respective
assets (three to five years) on the straight-line basis.
31
<PAGE> 33
SCICLONE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIALS (CONTINUED)
Notes Receivable from Officers
In August 1996, the Company extended a loan to one of its executive
officers with an aggregate principal amount of $1,000,000 to be used to finance
the purchase of his primary residence. The loan is secured by a first deed of
trust on the property, bears interest at 8% per annum and is payable in July
2000.
In June 1995, the Company extended a loan to one of its executive officers
with an aggregate principal amount of $1,365,000 to be used to finance the
purchase and renovation of his primary residence. The loan is secured by a first
deed of trust on the property and 20,000 shares of SciClone Common Stock owned
by the executive officer, bears interest at 7.5% per annum and is payable in
July 2000.
In July 1995, the Company extended a loan to one of its former board
members and former executive officers in the principal amount of $95,000 which
carries an interest rate of 7.375%. In December 1995, the Company extended an
additional loan to this individual in the principal amount of $600,000, which
carries an interest rate of 7.50%. The loans were due and payable in December
1997 after which they became subject to an additional 3.5% accelerated interest.
The loans are secured by a second deed of trust on residential property owned by
this individual. At December 31, 1997, these loans have not been repaid. The
Company expects the loans to be repaid, both principal and accrued interest, in
1998.
At December 31, 1997 and 1996, the fair value of the notes receivable from
officers was $2,320,000 and $2,710,000 respectively. The fair value was
estimated using discounted cash flow analyses, using interest rates currently
being offered for loans with similar terms of borrowers of similar credit
quality.
Foreign Currency Translation
The Company has determined the U.S. dollar to be the functional currency
for its wholly owned subsidiaries. Adjustments resulting from translation are
included in results of operations and have not been significant.
Revenue Recognition
The Company recognizes revenue from product sales at the time of shipment.
Research and Development
Research and development expenditures are charged to operations as
incurred.
Income Taxes
Income tax expense is based on reported results of operations before
extraordinary items and income taxes. Deferred income taxes reflect the impact
of temporary differences between the amount of assets and liabilities recognized
for financial reporting purposes and such amounts recognized for tax purposes.
These deferred taxes are measured by applying current tax laws. Based on the
Company's lack of earnings history, deferred tax assets have been fully offset
by a valuation allowance.
Retirement Benefits
The Company has a pre-tax savings plan covering substantially all U.S.
employees, which qualifies under Section 401(k) of the Internal Revenue Code.
Under the plan, eligible employees may contribute a portion of their pre-tax
salary, subject to certain limitations. The Company contributes and matches 20%
of the employee contributions, up to 6% of the employee's salary. Company
contributions, which can be terminated at the Company's discretion, were
$26,000, $25,000, and $24,000 for the years ended December 31, 1997, 1996, and
1995, respectively. The plan commenced on January 1, 1991.
32
<PAGE> 34
SCICLONE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIALS (CONTINUED)
Net Loss Per Share
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). SFAS 128
requires the presentation of basic earnings (loss) per share and diluted
earnings (loss) per share, if more dilutive, for all periods presented. In
accordance with SFAS 128, basic net loss per share has been computed using the
weighted average number of shares of common stock outstanding during the period.
The weighted average number of shares are different than what was disclosed in a
prior press release due to the exclusion of shares held as collateral against a
former officer's loan (see Note 8). Diluted net loss per share has not been
presented as the result would be antidilutive given the Company's history of net
losses.
Had the Company been in a net income position, diluted earnings per share
would have included the shares used in the computation of basic net loss per
share as well as an additional 3,058,734, 2,991,260, 3,026,392 shares in 1997,
1996 and 1995, respectively, related to outstanding options and warrants not
included in the calculation of basic net loss per share.
Accounting for Employee Stock-Based Compensation
As permitted by SFAS 123, the Company accounts for its stock option and
employee stock purchase plans under the provisions of Accounting Principles
Board Opinion 25 ("APB 25") and related Interpretations. Accordingly, the
Company does not recognize compensation expense in accounting for its stock
option and employee stock purchase plans for awards which have an exercise price
equal to the fair value of the Company's common stock on the date of the grant.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive
Income," and Statement of Financial Accounting Standards No. 131 ("SFAS 131"),
"Disclosures about Segments of an Enterprise and Related Information," which
require additional disclosures to be adopted beginning in the first quarter of
1998 and on December 31, 1998, respectively. Under SFAS 130, the Company is
required to display comprehensive income and its components as part of the
Company's full set of financial statements. SFAS 131 requires that the Company
report financial and descriptive information about its reportable operating
segments. The Company is evaluating the impact if any, of SFAS 130 and SFAS 131
on its future financial statement disclosures, but does not believe the
additional disclosure will be material to the financial statements.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current
year's presentation.
Impact of the Year 2000
As the year 2000 approaches, an issue impacting all companies has emerged
regarding how existing application software programs and operating systems can
accommodate this date value. In brief, many existing application software
products in the marketplace were designed to accommodate only a two digit date
position which represents the year (e.g., "95" is stored on the system and
represents the year 1995). As a result, the year 1999 (i.e., "99") could be the
maximum date value systems will be able to accurately process. Management is in
the process of working with its software vendors to assure that the Company is
prepared for the year 2000. Management does not anticipate that the Company will
incur significant operating expenses or be required to invest heavily in
computer system improvements to be year 2000 compliant.
33
<PAGE> 35
SCICLONE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIALS (CONTINUED)
NOTE 2 -- INVESTMENTS
The following is a summary of available-for-sale securities:
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE SECURITIES
---------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1997:
U.S. government & agency obligations...... $ 3,873,492 $17,045 $ (3,509) $ 3,887,028
Corporate obligations..................... 5,356,643 6,612 (39,751) 5,323,504
Corporate equity securities............... 100,000 8,333 (37,500) 70,833
----------- ------- ---------- -----------
$ 9,330,135 $31,990 $ (80,760) $ 9,281,365
=========== ======= ========== ===========
DECEMBER 31, 1996:
U.S. government & agency obligations...... $21,974,342 $37,048 $ (158,340) $21,853,050
Corporate obligations..................... 8,459,901 10,882 (23,535) 8,447,248
Corporate equity securities............... 200,000 12,820 (50,000) 162,820
----------- ------- ---------- -----------
$30,634,243 $60,750 $ (231,875) $30,463,118
=========== ======= ========== ===========
</TABLE>
The amortized cost and estimated fair value of debt and investments at
December 31, 1997 by contractual maturity are shown below.
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR
COST VALUE
---------- ----------
<S> <C> <C>
Due in one year or less........................... $3,813,655 $3,795,174
Due after one year through three years............ 5,416,480 5,415,358
---------- ----------
9,230,135 9,210,532
Corporate equity securities....................... 100,000 70,833
---------- ----------
$9,330,135 $9,281,365
========== ==========
</TABLE>
NOTE 3 -- INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out basis) or
market. Inventories consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996
---------- ----------
<S> <C> <C>
Raw materials..................................... $1,568,071 $1,545,923
Finished goods.................................... 478,147 1,062,954
---------- ----------
$2,046,218 $2,608,877
========== ==========
</TABLE>
34
<PAGE> 36
SCICLONE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIALS (CONTINUED)
NOTE 4 -- PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
-------- --------
<S> <C> <C>
Office furniture and fixtures........................ $300,469 $279,369
Office equipment..................................... 798,629 619,709
Leasehold improvements............................... 204,136 --
-------- --------
1,303,234 899,078
Less accumulated depreciation........................ 778,157 599,673
-------- --------
Net property and equipment........................... $525,077 $299,405
======== ========
</TABLE>
NOTE 5 -- LICENSE AGREEMENTS
Pursuant to its 1994 license agreement with Alpha 1 Biomedicals, Inc.
("A1B"), the Company obtained worldwide marketing, development and manufacturing
rights to thymosin alpha 1, with the exception of Italy, Spain and Portugal. In
April 1997, SciClone entered into an arrangement with A1B to administer the
sublicense activities of the A1B licensee for Italy, Spain and Portugal. Under
this 1997 agreement, the Company also acquired control of A1B's patent portfolio
for thymosin alpha 1. In December 1997, SciClone and A1B entered into an Asset
Purchase Agreement pursuant to which the Company will acquire A1B's worldwide
rights to thymosin alpha 1, which rights A1B licensed from Hoffmann-LaRoche,
Inc. and F. Hoffmann-LaRoche AG (collectively, "Roche"), and eliminated the
Company's and its current and future sublicensee's royalty obligations to A1B
with respect to future sales of thymosin alpha 1. The Company has agreed in its
Asset Purchase Agreement to issue up to 600,000 shares of common stock and make
loans up to an aggregate amount of $280,000 to A1B in exchange for the assets
described above. The Agreement is subject to approval by A1B's stockholders at
A1B's 1998 Annual Meeting of Stockholders and receipt of consents from Roche.
In October 1996, the Company entered into an expanded and amended license
and supply agreement with Schering-Plough K.K. ("SPKK"), giving SPKK exclusive
development and marketing rights to ZADAXIN in Japan. Under the amended
agreement, the Company expects SPKK to continue development of ZADAXIN
monotherapy for the treatment of hepatitis B and hepatitis C and to initiate
investigation of the combination ZADAXIN plus SPKK's INTRON(R) A (interferon
alfa-2b) for the treatment of hepatitis C, with the parties sharing certain
development expenses. SPKK will undertake the development, registration and
marketing of ZADAXIN in Japan. Contingent upon product approval, SciClone will
receive milestone payments. To date, there has been no license fee revenue
recognized by the Company.
In April 1996, the Company acquired an exclusive license to CPX, a
synthetic compound, from the National Institutes of Health ("NIH"). The NIH
developed CPX as a potential treatment for cystic fibrosis. Under this license
agreement, the Company is obligated to pay the NIH a minimum annual royalty
payment and, upon product approval, will receive a milestone payment in addition
to royalties based on a percentage of CPX net sales revenue.
In December 1994, the Company acquired the rights to develop, manufacture,
and commercialize thymosin alpha 1 in South Korea from a pharmaceutical company.
35
<PAGE> 37
SCICLONE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIALS (CONTINUED)
NOTE 6 -- INCOME TAXES
The domestic and foreign components of loss before income tax are as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Domestic....................... $ (8,515,547) $ (6,125,896) $ (5,675,924)
Foreign........................ (5,481,458) (8,610,042) (9,099,506)
------------ ------------ ------------
Loss before income tax......... $(13,997,005) $(14,735,938) $(14,775,430)
============ ============ ============
</TABLE>
The significant components of the Company's deferred tax assets and
liabilities at December 31, 1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ -----------
<S> <C> <C> <C>
ASSETS
Net operating loss carryforwards........ $ 12,640,000 $ 9,854,000 $ 6,231,000
Other, net.............................. 2,500,000 1,795,000 277,000
------------ ------------ -----------
Gross deferred tax assets............... 15,140,000 11,649,000 6,508,000
Valuation allowance..................... (15,070,000) (11,426,000) (6,308,000)
------------ ------------ -----------
Total deferred tax asset................ $ 70,000 $ 223,000 $ 200,000
------------ ------------ -----------
LIABILITIES
Net unrealized gains on
available-for-sale securities......... $ -- $ -- $ 200,000
Other................................... 70,000 223,000 --
------------ ------------ -----------
Total deferred tax liability............ 70,000 223,000 200,000
------------ ------------ -----------
Net deferred tax assets................. $ -- $ -- $ --
============ ============ ===========
</TABLE>
Deferred tax assets relating to net operating loss carryforwards as of
December 31, 1997 and 1996 include $3,400,000 and $3,300,000, respectively,
associated with stock option activity for which any subsequently recognized tax
benefits will be credited directly to shareholders' equity.
At December 31, 1997, the Company had net operating loss carryforwards for
U.S. tax purposes totaling approximately $34,000,000, expiring in 2006-2012, and
approximately $10,000,000 in state net operating losses expiring in 1998-2002.
The difference between the current year's loss for financial reporting purposes
and federal income tax purposes is primarily attributable to losses incurred by
the Company's foreign subsidiaries.
Due to the change in ownership provisions of the Tax Reform Act of 1986,
utilization of net operating loss carryforwards may be limited against taxable
income in future periods.
NOTE 7 -- COMMITMENTS AND CONTINGENCIES
Leases
The Company leases its main office facility under a non-cancelable lease
agreement which expires in April 2000. The lease is for a period of five years
and requires the Company to pay insurance and taxes and its pro-rata share of
operating expenses. The Company also leases various office facilities abroad
under non-cancelable lease agreements, expiring in 2002. Rental expense in 1997,
1996, and 1995 was $462,000, $397,000, and $391,000 respectively. Minimum future
rental commitments amount to $494,000 in 1998, $509,000 in 1999, $147,000 in
2000, $139,000 in 2001 and $145,000 in 2002.
36
<PAGE> 38
SCICLONE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIALS (CONTINUED)
Royalties
Under the April 1996 CPX license agreement with the NIH, the Company is
obligated to pay the NIH a minimum annual royalty and, upon commercialization of
CPX, will be obligated to pay a royalty based on a percentage of CPX net sales
revenue. During 1997, the Company paid $10,000 related to the minimum annual
royalty. No royalties were paid in 1996.
In October 1992, the Company amended its services agreement with a Japanese
trading company. Upon receipt by SciClone of any revenues in Japan for ZADAXIN,
the Japanese trading company will receive a royalty as a percentage of such
revenues for a specified period of time. To date, no royalty amounts have been
paid or are due the Japanese trading company with respect to this agreement.
NOTE 8 -- SHAREHOLDERS' EQUITY
Common Stock and Warrants
In January 1994, the Company sold 2,000,000 shares of common stock in an
underwritten public offering at $23.25 per share. The Company received
approximately $43,600,000 in net proceeds from the offering.
In conjunction with its initial public offering ("IPO"), the Company
granted its IPO investment banker warrants to purchase 300,000 shares of common
stock and 300,000 non-redeemable warrants. The warrants were exerciseable during
the four-year period ending March 16, 1997. The exercise price of the 300,000
shares of common stock was $6.00 per share and the non-redeemable warrants was
at $0.33 per warrant. The non-redeemable warrants were further exerciseable into
one common share at $15.55 per share. In March 1997, 164,995 warrants
exerciseable at $6.00 per share remained outstanding and were exercised by the
Company's IPO investment banker resulting in proceeds of approximately $990,000.
In exchange for exercising the outstanding warrants at $6.00 per share, the
Company lowered the exercise price of the non-redeemable warrants from $15.55
per share to $4.00 per share. In October 1997, 300,000 warrants were exercised
at $4.00 per share by the Company's IPO investment banker resulting in proceeds
of approximately $1,200,000.
In July 1997, the Company loaned to one of its former board members and
former executive officers $5.944 million secured by approximately 1.9 million
shares of the Company's common stock owned by this individual. The loan carries
interest at 7%. During the period this loan is outstanding and immediately prior
to the closing of any offering of the Company's common stock, the Company may
convert the loan in a non-cash exchange into this individual's SciClone common
stock by retiring his SciClone common stock at a fixed discount rate from the
offering price. To date, the Company has not retired any of this individual's
SciClone common stock. On December 31, 1997, the balance of the loan was $5.944
million and was classified as an offset to shareholders' equity.
Repurchase of Common Stock
In 1995 and 1994, the Company's Board of Directors authorized the
repurchase of up to 1.0 million and 1.5 million shares of the Company's common
stock, respectively. In the year ended December 31, 1997, 1996, and 1995, the
Company repurchased 684,500, 78,000, and 346,000 shares of its common stock for
an aggregate cost of $4,267,000, $659,000, and $1,925,000, respectively.
Stock Award Plans
In August 1991, the Board of Directors and shareholders of the Company
approved the 1991 Stock Plan (the "1991 Plan") and reserved 1,300,000 shares for
issuance thereunder. In May 1993, the Board of Directors and shareholders of the
Company approved a 2,150,000 share increase in the shares reserved under the
1991 Plan. The 1991 Plan permits the award of incentive or nonqualified stock
options and shares of common stock under restricted stock purchase agreements.
In January 1992, the Board of Directors and
37
<PAGE> 39
SCICLONE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIALS (CONTINUED)
shareholders of the Company approved the 1992 Stock Plan (the "1992 Plan") and
reserved 240,000 shares for issuance thereunder. The 1992 Plan permits the award
of incentive or nonqualified stock options which must be exercised in cash. In
June 1995, the Board of Directors and the shareholders of the Company approved
the 1995 Equity Incentive Plan (the "1995 Plan") and reserved 1,250,000 shares
for issuance thereunder. The 1995 Plan permits the award of incentive or
nonqualified stock options and shares of common stock under restricted stock
awards.
Under the 1991, 1992 and 1995 Plans, options are exercisable upon
conditions determined by the Board of Directors and expire ten years from the
date of grant. Options are generally granted at fair market value on the date of
grant and vest over time, generally four years.
In June 1995, the Board of Directors and the shareholders of the Company
approved the Nonemployee Director Stock Option Plan (the "Nonemployee Director
Plan") and reserved 250,000 shares for issuance thereunder. The Nonemployee
Director Plan automatically grants nonqualified stock options to nonemployee
directors upon their appointment or first election to the Company's Board of
Directors ("Initial Grant") and annually upon their reelection to the Board of
Directors at the Company's Annual Meeting of Shareholders ("Annual Grant"). The
options are granted at fair market value on the date of grant. Initial Grants
vest annually over a period of three years. Annual Grants vest monthly over a
period of one year.
In July 1996, the Board of Directors and shareholders of the Company
approved the 1996 Employee Stock Purchase Plan (the "ESPP") and reserved 500,000
shares for issuance thereunder. All full-time employees are eligible to
participate in the ESPP. Under the terms of the ESPP, employees can choose to
have up to 15% of their salary withheld to purchase the Company's common stock.
The purchase price of the stock is the lower of 85% of the fair market value as
of the first trading day of each quarterly participation period, or as of the
last trading day of each quarterly participation period. Under the ESPP, the
Company sold 20,432 and 5,675 shares to employees in 1997 and 1996,
respectively.
The following table summarizes the stock option activity under the 1991,
1992 and 1995 plans and the Nonemployee Director Plan:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES AVAILABLE SHARES UNDER EXERCISE PRICE OF
FOR GRANT OPTION SHARES UNDER PLAN
---------------- ------------ -----------------
<S> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994.................. 801,212 2,225,337 $5.81
1995 Plan shares reserved................... 1,250,000 -- --
Nonemployee Director Plan shares reserved... 250,000 -- --
Options canceled............................ 63,963 (63,963) 5.93
Options granted............................. (436,500) 436,500 5.68
Options exercised........................... (66,477) 2.88
--------- ---------
BALANCE AT DECEMBER 31, 1995.................. 1,928,675 2,531,397 5.86
Options canceled............................ 107,357 (107,357) 7.97
Options granted............................. (901,850) 901,850 5.73
Options exercised........................... (799,625) 4.66
--------- ---------
BALANCE AT DECEMBER 31, 1996.................. 1,134,182 2,526,265 6.11
Options canceled............................ 232,595 (232,595) 7.03
Options granted............................. (775,300) 775,300 5.12
Options exercised........................... -- (10,236) 3.14
--------- ---------
BALANCE AT DECEMBER 31, 1997.................. 591,477 3,058,734 $5.80
========= =========
</TABLE>
38
<PAGE> 40
SCICLONE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIALS (CONTINUED)
The following table summarizes information concerning outstanding and
exercisable options as of December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ ----------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
------------------------ ----------- ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
0.30 - $ 0.30.................... 14,000 3.75 $ 0.30 14,000 $ 0.30
3.00 - $ 4.38.................... 381,578 5.12 3.50 355,161 3.46
4.80 - $ 7.25.................... 2,314,531 8.08 5.49 1,145,190 5.72
7.59 - $12.50.................... 348,625 6.42 10.57 297,975 10.82
--------- ---------
3,058,734 7.50 $ 5.80 1,812,326 $ 6.07
========= =========
</TABLE>
As permitted by SFAS 123, the Company applies APB 25 and related
Interpretations in accounting for its stock award plans and accordingly, does
not recognize compensation expense for awards which have an exercise price equal
to the fair value of the Company's common stock on the date of the grant.
Pro forma information regarding net loss and net loss per share is required
by SFAS 123 and has been determined as if the Company had accounted for its
stock awards under the fair value method of that Statement. The fair value for
the options was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions for 1997, 1996 and
1995: risk-free interest rates of 6.16%, 5.14% and 6.81%, respectively; dividend
yields of 0%; volatility factors of the expected market price of the Company's
stock of .83 for 1997 and .84 for 1996 and 1995; and a weighted average expected
life of the option of 4.31 years for 1997 and 4.37 years for 1996 and 1995. The
fair value for the employee stock purchases was also estimated using the
Black-Scholes model with the following assumptions for 1997 and 1996: risk-free
interest rate of 5.23% and 5.3% respectively; dividend yield of 0%; expected
volatility of .74 and .84 respectively, and expected life of .25 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock awards have characteristics
significantly different from those of traded options, and because changes in
subjective input assumptions can materially affect the fair value estimate, in
the Company's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options and stock
purchases.
The Company recorded deferred compensation of approximately $2.4 million
related to 1992 stock option grants. The deferred compensation is amortized over
the vesting period, which ranged from two to five years. For the years ended
December 31, 1996, and 1995, approximately $205,000 and $555,000, of deferred
compensation related to stock option grants was charged to compensation expense,
respectively. There was no deferred compensation charged to compensation expense
for the year ended December 31, 1997.
39
<PAGE> 41
SCICLONE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIALS (CONTINUED)
Had compensation expense for the Company's option and employee purchase
plans been determined based on the fair value at the grant date for awards in
1997, 1996 and 1995 consistent with the provisions of SFAS 123, the Company's
net loss and net loss per share would have been adjusted to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Net loss -- as reported........ $(13,997,000) $(14,746,000) $(14,775,000)
============ ============ ============
Net loss -- pro forma.......... $(15,726,000) $(15,821,000) $(14,643,000)
============ ============ ============
Net loss per share -- as
reported..................... $ (0.85) $ (0.85) $ (0.88)
============ ============ ============
Net loss per share -- pro
forma........................ $ (0.95) $ (0.91) $ (0.87)
============ ============ ============
</TABLE>
The effects of applying SFAS 123 for pro forma disclosures are not likely
to be representative of the effects on reported net loss for future years. Pro
forma net loss for the year ended December 31, 1997 reflects compensation
expense for three years' vesting while the year ended December 31, 1998 will
reflect compensation expense for four years' vesting of outstanding stock
awards.
NOTE 9 -- SIGNIFICANT GEOGRAPHIC INFORMATION
Approximate foreign sources of revenues were as follows:
<TABLE>
<CAPTION>
1997 1996 1994
---------- -------- --------
<S> <C> <C> <C>
Asia....................................... $2,131,000 $636,000 $239,000
Other...................................... 92,000 67,000 34,000
</TABLE>
For the year ended December 31, 1997, one customer in China accounted for
66% of the Company's product sales. Such customer represents 86% of the accounts
receivable balance at December 31, 1997.
NOTE 10 -- SUBSEQUENT EVENTS
In March 1998, the Company received $754,000 from one of its executive
officers as a partial payment of a $1,000,000 loan. This payment reduced the
loan to $236,500 including accrued interest. (See "Note 1 -- Notes Receivable
from Officers.")
In April 1998, the Company sold 661,157 shares of Series C convertible
preferred stock at $6.05 per share and received approximately $4,000,000 from
the offering (before deducting expenses). The preferred stock is convertible
into common stock on a scheduled basis over the next five years at prices based
on the market price of the common stock during a pricing period preceding
conversion. In conjunction with the offering, the Company granted to the
investor warrants to purchase 100,000 shares of common stock. These warrants are
exercisable during the five year period ending March 2003 at an exercise price
of $5.67 per share. (See "Business -- Recent Developments.")
40
<PAGE> 42
SCICLONE PHARMACEUTICALS, INC.
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
SciClone Pharmaceuticals, Inc.
We have audited the accompanying consolidated balance sheets of SciClone
Pharmaceuticals, Inc. as of December 31, 1997 and 1996 and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of SciClone
Pharmaceuticals, Inc. at December 31, 1997 and 1996, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Palo Alto, California
January 16, 1998, except Note 10 as to
which date is April 2, 1998
41
<PAGE> 43
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
42
<PAGE> 44
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers and directors of the Company, their ages as of
February 28, 1997, and certain other information about them are set forth below:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Donald R. Sellers................... 53 President, Chief Executive Officer
and Director
Alfred R. Rudolph, M.D.............. 50 Chief Operating Officer
Shawn K. Singh, J.D................. 34 Senior Vice President and Assistant
Secretary
David A. Karlin, M.D................ 54 Vice President and Medical Director
Mark A. Culhane..................... 38 Vice President, Finance and
Administration, Chief Financial
Officer and Secretary
Jere E. Goyan, Ph.D................. 67 Chairman of the Board of Directors
John D. Baxter, M.D................. 57 Director
Edwin C. Cadman, M.D................ 52 Director
Rolf H. Henel....................... 60... Director
</TABLE>
Donald R. Sellers has served as the Company's Chief Executive Officer
since April 1996 and as President and Director since January 1996. From May 1993
to present, he has also served as Managing Director, SciClone Pharmaceuticals
International Ltd., the international arm of the Company. From 1990 to 1993, Mr.
Sellers was Corporate Vice President of Getz Bros., a U.S.-based international
trading company, as well as President of one of their Japanese operations. From
1983 to 1990, Mr. Sellers was employed by Sterling Drug International, initially
as Vice President of Marketing and Operations in Asia and later as President of
their Latin American Andina Group. Mr. Sellers began his pharmaceutical career
in 1973 with Pfizer as Country Manager, Vietnam and Hong Kong, and he later
worked with the Revlon Healthcare Group as Director of Worldwide Exports and
Pacific Area Director.
Alfred R. Rudolph, M.D. joined the Company in April 1997 as Chief
Technical Officer and was promoted to Chief Operating Officer in August 1997.
From January 1995 to September 1995, Dr. Rudolph was President and Chief
Operating Officer of Neptune Pharmaceuticals, Inc., a marine-based natural
product screening company. Dr. Rudolph was Senior Vice President of T Cell
Sciences, Inc., a biotechnology company, from December 1991 to September 1994
and was Vice President, Medical Affairs from March 1990 to December 1991.
Shawn K. Singh, J.D. has served as the Company's Senior Vice President and
Assistant Secretary since January 1998. From October 1997 to January 1998, Mr.
Singh was SciClone's Vice President of Corporate Development and Communications.
From August 1995 to October 1997, Mr. Singh served as the Company's Vice
President of Business Development. He joined SciClone in November 1993 as
Director of Business Development. Prior to SciClone, Mr. Singh specialized in
corporate finance, licensing and acquisitions in the Silicon Valley office of
Morrison & Foerster, an international law firm. Mr. Singh is a member of the
California State Bar.
David A. Karlin, M.D. has served as a Company Vice President since July
1996 and as a Medical Director since June 1995. Dr. Karlin joined SciClone with
oncology, gastroenterology, antiemetic and analgesic drug development
experience. Prior to SciClone, Dr. Karlin spent nine years in various roles at
Syntex Corporation ("Syntex"). These included the positions of Director of
Medical Research and Clinical Program Team Leader for Syntex Development
Research, Senior Clinical Research Physician for Syntex Medical Research Europe,
Associate Medical Director and Head, Gastroenterology and Anti-Ulcer Therapy
Department for Institute of Clinical Medicine, Syntex. Before Syntex, Dr. Karlin
spent ten years in academia as Associate Professor, Department of
Medicine/Section of Gastroenterology at the Temple University
43
<PAGE> 45
School of Medicine in Philadelphia, Assistant Professor, Department of
Medicine/Gastroenterology Section at the University of Texas M.D. Anderson
Hospital and Tumor Institute and Instructor, Department of
Medicine/Gastroenterology Section the University of Chicago. Dr. Karlin held the
position of Major USA MC for Department of Medicine Staff Gastroenterology
Service and Staff Hematology Oncology Service at the University of Chicago,
residency training in Internal Medicine at the University of Michigan and
fellowship training in Gastroenterology/GI Oncology at the University of
Chicago.
Mark A. Culhane, currently on an unpaid leave of absence, has been the
Company's Vice President, Finance and Administration and Chief Financial Officer
since May 1994 and its Secretary since November 1993. From June 1992 to May
1994, Mr. Culhane served in other financial positions with the Company. From
July 1982 to June 1992, Mr. Culhane was employed by Price Waterhouse, an
international public accounting firm, where his last position was Senior
Manager.
Jere E. Goyan, Ph.D. has been a director of the Company since January 1992
and has been Chairman of the Board of Directors of the Company since July 1997.
Since July 1993, Dr. Goyan has been President and Chief Operating Officer and a
director of Alteon, Inc., a biotechnology company, where he served as Senior
Vice President for Research and Development from January 1993 through July 1993
and as Acting Chief Executive Officer from July 1993 through May 1994. Dr. Goyan
was Dean of the School of Pharmacy and Professor of Pharmacy and Pharmaceutical
Chemistry at the University of California, San Francisco from 1967 through 1992,
and was a Professor there from 1965 through 1992. From 1979 to 1981, Dr. Goyan
was the Commissioner of the United States Food and Drug Administration. Dr.
Goyan also currently serves as a director of Emisphere Technologies, Inc. and
Atrix Laboratories, both biotechnology companies, and Boehringer Ingelheim
Pharmaceuticals Corporation and Penwest Pharmaceuticals, a pharmaceutical
company which is a 100% owned subsidiary of Penford Corporation.
John D. Baxter, M.D. has been a director of the Company and the Chairman
of its Scientific Advisory Board since June 1991. Dr. Baxter has been associated
with the University of California, San Francisco ("UCSF") since 1970. He has
been Professor of Medicine since 1979, Chief of the Endocrinology Section,
Parnassus Campus since 1980 and Director of UCSF's Metabolic Research Unit since
1981. Dr. Baxter was a founder and served as a director of California
Biotechnology, Inc. (now Scios Nova, Inc.), a biotechnology company, from its
inception in 1982 to 1991.
Edwin C. Cadman, M.D. has been a director of the Company and a member of
its Scientific Advisory Board since November 1991. Since January 1994, Dr.
Cadman has been Senior Vice President of Medical Affairs and Chief of Staff at
Yale New Haven Hospital, where he was Chief of the Medical Service from 1987
through December 1993. Since 1987, Dr. Cadman has also been Professor of
Medicine at Yale University, where he was Chairman of the Department of Medicine
from 1987 through December 1993. Prior to these positions, he was Director of
the Cancer Research Institute at UCSF. Dr. Cadman also currently serves as a
director of CytoTherapeutics, Inc., a biotechnology company.
Rolf H. Henel joined the Company as a director in July 1997. Mr. Henel has
been a partner at Naimark & Associates, Inc., a healthcare consulting firm,
since September 1993. Mr. Henel has been Executive Director of Performance
Effectiveness Corporation, Inc., a pharmaceutical consulting and education
company, since April 1993. From 1978 to 1993, Mr. Henel was with Cyanamid, a
chemical company, most recently as President of Cyanamid International Lederele
Division. Mr. Henel is also a director of Penwest Pharmaceuticals, a
pharmaceutical company which is a 100% owned subsidiary of Penford Corporation.
Directors serve one year terms or until their successors are elected and
qualified. Executive officers serve at the discretion of the Board of Directors.
There are no family relationships among any of the directors or executive
officers of the Company.
44
<PAGE> 46
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference from the
definitive proxy statement for the Company's 1998 Annual Meeting of Shareholders
to be filed with the Commission pursuant to Regulation 14A not later than 120
days after the end of the fiscal year covered by this Form (the "Proxy
Statement") under the caption "EXECUTIVE COMPENSATION."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference from the
Proxy Statement under the caption "STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference from the
Proxy Statement under the captions "TRANSACTIONS WITH MANAGEMENT" and "EXECUTIVE
COMPENSATION -- Compensation Committee Interlocks and Insider Participation."
45
<PAGE> 47
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
(1) Financial Statements. The following financial statements of the Company
are contained on pages 26-41 of this Report on Form 10-K:
Consolidated Balance Sheets at December 31, 1997 and 1996.
Consolidated Statements of Operations for each of the three years ended
December 31, 1997, 1996 and 1995.
Consolidated Statement of Shareholders' Equity for each of the three
years ended December 31, 1997, 1996 and 1995.
Consolidated Statements of Cash Flows for each of the three years ended
December 31, 1997, 1996 and 1995.
Notes to Consolidated Financial Statements.
Report of Ernst & Young LLP, Independent Auditors.
(2) Financial Statement Schedules
The following schedule is filed as part of this Report:
Schedule II -- Valuation and Qualifying Accounts for each of the three
years ended December 31, 1997, 1996 and 1995.
All other schedules have been omitted because they are either
inapplicable or the required information has been given in the
consolidated financial statements or the notes hereto.
(3) Exhibits.
Refer to Item 14(c) below.
(b) Reports on Form 8-K.
Form 8-K filed on January 26, 1998 announcing the execution of the Alpha
Rights Acquisition Agreement
46
<PAGE> 48
(c) EXHIBITS.
Exhibits (numbered in accordance with Item 601 of Regulation S-K):
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- -----------
<S> <C>
3(i).1(1) Restated Articles of Incorporation
3(i).2(2) Certificate of Amendment of Restated Articles of
Incorporation
3(i).3(14) Certificate of Determination
3(i).4 Certificate of Determination Regarding the terms of the
Series C Preferred Stock
3(ii).1(1) Bylaws
3(ii).2(2) Certificate of Amendment of Bylaws
4.1(1) Representative's Warrant Agreement, dated as of March 24,
1992, between the Registrant and Josephthal Lyon & Ross
Incorporated
4.2(14) Rights Agreement dated as of July 25, 1997 between the
Registrant and Chase Mellon Shareholder Services, L.L.C.
4.3 Preferred Stock Investment Agreement dated March 27, 1998 by
and among Registrant, Halifax Fund, L.P., Themis Partners
L.P. and Heracles Fund
4.4 Registration Rights Agreement dated April 1, 1998 by and
among Registrant, Halifax Fund, L.P., Themis Partners L.P.
and Heracles Fund
10.1(5) Thymosin License Agreement dated August 19, 1994 between
Registrant and Alpha 1 Biomedicals, Inc.
10.2(3) License, Development and Supply Agreement, dated January 12,
1993, between the Registrant and Schering-Plough K.K.
10.3(6) Supply Agreement dated October 19, 1994 between Registrant
and UCB Bioproducts S.A.
10.4(4)** Manufacturing Services Agreement dated as of July 27, 1993
by and between SciClone Pharmaceuticals International
Limited and Sclavo S.p.A.
10.5(1) Services Agreement, dated August 28, 1991, between the
Registrant and Nichimen Corporation (the "Nichimen Services
Agreement")
10.6(3) Restated Nichimen Services Agreement, dated October 5, 1992
10.7(2)** Registrant's 1991 Stock Plan, together with forms of
agreements thereunder
10.8(1)** Registrant's 1992 Stock Plan, together with forms of
agreements thereunder
10.9(9)** Employment Agreement, dated January 3, 1995, between the
Registrant and Mark A. Culhane
10.10(1) Lease, dated September 10, 1991, between the Registrant and
Spieker-Singleton68 concerning property, located at 901
Mariners Island Boulevard, San Mateo, California, as amended
(the "Spieker Lease")
10.11(7) Amendment No. 4 to Spieker Lease, dated October 4, 1994
10.12(9) Amendment No. 7 to Spieker Lease, dated November 14, 1995
10.13(8)** Registrant's 1995 Equity Incentive Plan, together with forms
of agreement thereunder
10.14(8)** Registrant's 1995 Nonemployee Director Stock Option Plan,
together with forms of agreement thereunder
10.15(9)** Form of Promissory Note and Deed of Trust With Assignment of
Rents between the Registrant and David L. Horwitz, M.D.,
Ph.D.
10.16(9) Employment Agreement dated February 1, 1996 between the
Registrant and Donald R. Sellers
</TABLE>
47
<PAGE> 49
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- -----------
<S> <C>
10.17(10) License Agreement effective April 19, 1996 between the
Registrant and the National Institute of Health Office of
Technology Transfer
10.18(11) Form of Promissory Note secured by Deed of Trust between
Registrant and Donald R. Sellers
10.19(11) Amendment No. 8 to Spieker Lease, dated August 26, 1996
10.20(13)* Expanded and Amended License, Development and Supply
Agreement dated October 28, 1996 by and between the
Registrant and Schering-Plough K.K., a Japanese corporation
10.21(15) Alpha Rights Acquisition Agreement by and between the
Registrant and Alpha 1 Biomedicals, Inc., dated December 17,
1997
10.22(16) Purchase and Sale, Pledge and Security Agreement; Release
dated as of July 23, 1997 by Thomas Moore, in favor of
SciClone Pharmaceuticals, Inc.
21.1 Subsidiaries of Registrant
23.1 Consent of Ernst & Young LLP, Independent Auditors
24.1 Powers of Attorney. See page 49.
27 Financial Data Schedule
</TABLE>
- ---------------
* Confidential treatment requested.
** Management compensatory plan or arrangement.
(1) Incorporated by reference from the Company's Registration Statement on Form
S-l (No. 33-45446), declared effective by the Commission on March 17, 1992.
(2) Incorporated by reference from the Company's Registration Statement on Form
S-8 (No. 33-66832) filed with the Commission on August 3, 1993.
(3) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended December 31, 1992.
(4) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30. 1993.
(5) Incorporated by reference from the Company's Report on Form 8-K dated
August 19, 1994.
(6) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1994.
(7) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended December 31, 1994.
(8) Incorporated by reference from the Company's Registration Statement on Form
S-8 (No. 33-80911) filed with the Commission on December 28, 1995.
(9) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended December 31, 1995.
(10) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1996.
(11) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1996.
(12) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996.
(13) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended December 31, 1996.
(14) Incorporated by reference from the Company's Current Report on Form 8-K
filed on October 14, 1997
(15) Incorporated by reference from the Company's Current Report on Form 8-K
filed on January 26, 1998
(16) Incorporated by reference from the Company's Amendment No. 3 to its
Registration Statement on Form S-3 (No. 333-38773) filed with the
Commission December 2, 1997.
48
<PAGE> 50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SCICLONE PHARMACEUTICALS, INC.
/s/ DONALD R. SELLERS
By:
--------------------------------------
Donald R. Sellers,
Date: April 2, 1998 Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Donald R. Sellers and Shawn K. Singh, and
each of them, his attorneys-in-fact and agents, each with the power of
substitution and resubstitution, for him in any and all capacities, to sign any
and all amendments to this Report on Form 10-K, and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary, to be done in connection therewith,
as fully as to all intents and purposes as he might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents, or
either of them, or their or his substitute or substitutes, may do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ DONALD R. SELLERS Chief Executive Officer, Director April 2, 1998
- --------------------------------------------- (Principal Executive Officer)
Donald R. Sellers
/s/ DIANE LEE Director, Corporate Finance and April 2, 1998
- --------------------------------------------- Administration
Diane Lee (Principal Financial and
Accounting Officer)
/s/ JOHN D. BAXTER, M.D. Director April 2, 1998
- ---------------------------------------------
(John D. Baxter, M.D.)
/s/ EDWIN C. CADMAN, M.D. Director April 2, 1998
- ---------------------------------------------
(Edwin C. Cadman, M.D.)
/s/ JERE E. GOYAN, PH.D. Director April 2, 1998
- ---------------------------------------------
(Jere E. Goyan, Ph.D.)
</TABLE>
49
<PAGE> 51
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
SCICLONE PHARMACEUTICALS INC.
<TABLE>
<CAPTION>
ADDITIONS
-----------------------------
BALANCE AT CHARGED TO CHARGED TO
BEGINNING OF COSTS AND OTHER BALANCE AT
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS END OF PERIOD
----------- ------------ ---------- ---------------- ---------- -------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Reserves and allowances deducted from
asset accounts:
Allowance for uncollectable
accounts............................ $ 7,000 $43,000 $200,000(1) $250,000
Inventory Reserve..................... 174,888 225,000(1) 74,888(2) 325,000
YEAR ENDED DECEMBER 31, 1996
Reserves and allowances deducted from
asset accounts:
Allowance for uncollectable
accounts............................ -- 7,000 7,000
Inventory Reserve..................... 114,753 60,135 174,888
YEAR ENDED DECEMBER 31, 1995
Reserves and allowances deducted from
asset accounts:
Allowance for uncollectable
accounts............................ -- 14,753 100,000 114,753
Inventory Reserve..................... --
</TABLE>
- ---------------
(1) Transfer from General Reserve
(2) Adjustment to Reserve
50
<PAGE> 52
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT NO. EXHIBIT PAGE NUMBER
----------- ------- ------------
<S> <C> <C>
3(i).1(1) Restated Articles of Incorporation..........................
3(i).2(2) Certificate of Amendment of Restated Articles of
Incorporation...............................................
3(i).3(14) Certificate of Determination................................
3(i).4 Certificate of Determination Regarding the terms of the
Series C Preferred Stock....................................
3(ii).1(1) Bylaws......................................................
3(ii).2(2) Certificate of Amendment of Bylaws..........................
4.1(1) Representative's Warrant Agreement, dated as of March 24,
1992, between the Registrant and Josephthal Lyon & Ross
Incorporated................................................
4.2(14) Rights Agreement dated as of July 25, 1997 between the
Registrant and Chase Mellon Shareholder Services, L.L.C. ...
4.3 Preferred Stock Investment Agreement dated March 27, 1998 by
and among Registrant, Halifax Fund, L.P., Themis Partners
L.P. and Heracles Fund......................................
4.4 Registration Rights Agreement dated April 1, 1998 by and
among Registrant, Halifax Fund, L.P., Themis Partners L.P.
and Heracles Fund...........................................
10.1(5) Thymosin License Agreement dated August 19, 1994 between
Registrant and Alpha 1 Biomedicals, Inc. ...................
10.2(3) License, Development and Supply Agreement, dated January 12,
1993, between the Registrant and Schering-Plough K.K. ......
10.3(6) Supply Agreement dated October 19, 1994 between Registrant
and UCB Bioproducts S.A. ...................................
10.4(4)** Manufacturing Services Agreement dated as of July 27, 1993
by and between SciClone Pharmaceuticals International
Limited and Sclavo S.p.A. ..................................
10.5(1) Services Agreement, dated August 28, 1991, between the
Registrant and Nichimen Corporation (the "Nichimen Services
Agreement").................................................
10.6(3) Restated Nichimen Services Agreement, dated October 5,
1992........................................................
10.7(2)** Registrant's 1991 Stock Plan, together with forms of
agreements thereunder.......................................
10.8(1)** Registrant's 1992 Stock Plan, together with forms of
agreements thereunder.......................................
10.9(9)** Employment Agreement, dated January 3, 1995, between the
Registrant and Mark A. Culhane..............................
10.10(1) Lease, dated September 10, 1991, between the Registrant and
Spieker-Singleton68 concerning property, located at 901
Mariners Island Boulevard, San Mateo, California, as amended
(the "Spieker Lease").......................................
10.11(7) Amendment No. 4 to Spieker Lease, dated October 4, 1994.....
10.12(9) Amendment No. 7 to Spieker Lease, dated November 14, 1995...
10.13(8)** Registrant's 1995 Equity Incentive Plan, together with forms
of agreement thereunder.....................................
10.14(8)** Registrant's 1995 Nonemployee Director Stock Option Plan,
together with forms of agreement thereunder.................
10.15(9)** Form of Promissory Note and Deed of Trust With Assignment of
Rents between the Registrant and David L. Horwitz, M.D.,
Ph.D........................................................
10.16(9) Employment Agreement dated February 1, 1996 between the
Registrant and Donald R. Sellers............................
10.17(10) License Agreement effective April 19, 1996 between the
Registrant and the National Institute of Health Office of
Technology Transfer.........................................
</TABLE>
<PAGE> 53
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT NO. EXHIBIT PAGE NUMBER
----------- ------- ------------
<S> <C> <C>
10.18(11) Form of Promissory Note secured by Deed of Trust between
Registrant and Donald R. Sellers............................
10.19(11) Amendment No. 8 to Spieker Lease, dated August 26, 1996.....
10.20(13)* Expanded and Amended License, Development and Supply
Agreement dated October 28, 1996 by and between the
Registrant and Schering-Plough K.K., a Japanese
corporation.................................................
10.21(15) Alpha Rights Acquisition Agreement by and between the
Registrant and Alpha 1 Biomedicals, Inc., dated December 17,
1997........................................................
10.22(16) Purchase and Sale, Pledge and Security Agreement; Release
dated as of July 23, 1997 by Thomas Moore, in favor of
SciClone Pharmaceuticals, Inc. .............................
21.1 Subsidiaries of Registrant..................................
23.1 Consent of Ernst & Young LLP, Independent Auditors..........
24.1 Powers of Attorney. See page 49. ...........................
27 Financial Data Schedule.....................................
</TABLE>
- ---------------
* Confidential treatment requested.
** Management compensatory plan or arrangement.
(1) Incorporated by reference from the Company's Registration Statement on Form
S-l (No. 33-45446), declared effective by the Commission on March 17, 1992.
(2) Incorporated by reference from the Company's Registration Statement on Form
S-8 (No. 33-66832) filed with the Commission on August 3, 1993.
(3) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended December 31, 1992.
(4) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30. 1993.
(5) Incorporated by reference from the Company's Report on Form 8-K dated
August 19, 1994.
(6) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1994.
(7) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended December 31, 1994.
(8) Incorporated by reference from the Company's Registration Statement on Form
S-8 (No. 33-80911) filed with the Commission on December 28, 1995.
(9) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended December 31, 1995.
(10) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1996.
(11) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1996.
(12) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996.
(13) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended December 31, 1996.
(14) Incorporated by reference from the Company's Current Report on Form 8-K
filed on October 14, 1997
(15) Incorporated by reference from the Company's Current Report on Form 8-K
filed on January 26, 1998
(16) Incorporated by reference from the Company's Amendment No. 3 to its
Registration Statement on Form S-3 (No. 333-38773) filed with the
Commission December 2, 1997.
<PAGE> 1
Exhibit 3(i).4
SCICLONE PHARMACEUTICALS, INC.
CERTIFICATE OF DETERMINATION
Regarding the Terms of the
Series C Preferred Stock
Pursuant to Section 401 of the General Corporation Law of the State of
California:
We, the President and Assistant Secretary, respectively, of SciClone
Pharmaceuticals, Inc. (the "Corporation"), organized and existing under the
California Corporations Code, in accordance with the provisions of Section 401
thereof, DO HEREBY CERTIFY:
1. That pursuant to the authority conferred upon the Board of Directors
by the Restated Articles of Incorporation, as amended, of the said
Corporation, the said Board of Directors on March 20, 1998, adopted the
following resolution creating a series of 800,000 shares of Preferred
Stock designated as Series C Preferred Stock, none of which are issued
or outstanding:
"RESOLVED, that pursuant to the authority vested in the
Board of Directors of this Corporation in accordance with the
provisions of its Restated Articles of Incorporation, a series of
Preferred Stock of the Corporation be and it hereby is created,
and that the determination and amount thereof and the powers,
preferences and relative, participating, optional and other
special rights of the shares of such series, and the
qualifications, limitations or restrictions hereof are as
follows:
Section 1. Designation and Amount and Issuance of Series C Preferred
Stock. The shares of such series shall be designated as Series C Preferred Stock
(the "Series C Preferred Stock") and the number of shares constituting such
series shall be 800,000. The 800,000 shares of Series C Preferred Stock shall be
issued by the Corporation pursuant to a Preferred Stock Investment Agreement
("Investment Agreement") to be entered into between the Corporation and the
initial holder of Series C Preferred Stock. The "Closing Date" referred to
herein shall be the date of closing of the issuance of Series C Preferred Stock
pursuant to the Investment Agreement. The initial holder and the Corporation
have
<PAGE> 2
also entered into a Registration Rights Agreement ("Registration Rights
Agreement") in connection with the Investment Agreement.
Section 2. Liquidation Preference.
(a) In the event of any liquidation, dissolution or winding up of
the Corporation, either voluntary or involuntary, the holders of the
Series C Preferred Stock shall be entitled to receive, prior and in
preference to any distribution of any assets of the Corporation to the
holders of any other class or series of shares ranking junior to the
Series C Preferred Stock, an amount equal to the purchase price per
share for the Series C Preferred Stock set forth in the Investment
Agreement (which price shall be the same for each and every share of
Series C Preferred Stock) plus default payments (which default payments
shall be the same for each and every share of Series C Preferred Stock
then outstanding) owing to such holder with respect to such share
pursuant to the Registration Rights Agreement (the "Liquidation
Preference").
(b) If upon the occurrence of an event described in Section 2(a),
the assets thus distributed among the holders of the Series C Preferred
Stock shall be insufficient to permit the payment to such holders of the
full aforesaid preferential amounts, then the entire assets and funds of
the Corporation legally available for distribution shall be distributed
among the holders of the Series C Preferred Stock in proportion to the
number of shares of Series C Preferred Stock each such holder owns.
(c) After the payment or setting apart for payment to the holders
of Series C Preferred Stock of the full Liquidation Preference for the
Series C Preferred Stock, the remaining assets of the Corporation shall
be distributed ratably amongst the holders of the common stock of the
Corporation (the "Common Stock") and Series C Preferred Stock on the
basis of the number of shares of Common Stock held by each such persons,
treating each share of Series C Preferred Stock as converted into that
number of shares of Common Stock into which such share of Series C
Preferred Stock is then convertible in accordance with Section 3 below.
(d) Any consolidation or merger of the Corporation with or into
any other corporation or corporations, or a sale of all or substantially
all of the assets of the Corporation (i) in which the shareholders of
the Corporation immediately prior to the transaction hold less than
fifty percent (50%) of the outstanding securities of the surviving
entity and (ii) which does not fall within the definition of a
Qualifying Acquisition under Section 3(n) below, shall be deemed to be a
liquidation, dissolution, or winding up within the meaning of this
Section 2.
Section 3. Conversion and Redemption Rights. Each holder of the Series C
Preferred Stock shall have the right, at the option of such holder, to convert
Series C Preferred Stock for such number of fully paid, validly issued and
nonassessable shares of Common Stock, free and clear of any liens, claims or
encumbrances, as is determined by dividing (i) the Liquidation Preference times
the number of Series C Preferred Stock
2
<PAGE> 3
being converted by (ii) the "Conversion Price" or the "Market Conversion Price,"
as specified in Section 3(b) and Section 3(c), on the "Conversion Date" (in each
case as defined and set forth below) on the terms and conditions contained in
this Section 3 (the "Common Shares"). The Corporation shall also have the right
and/or obligation to redeem the Series C Preferred Stock on the terms and
conditions contained in this Section 3.
(a) Shares Eligible for Conversion.
(i) Except as otherwise provided in Section 3(a)(ii)
and Section 3(c), the Series C Preferred Stock may
be converted from time to time into shares of
Common Stock at the holder's option according to
the following schedule:
<TABLE>
<CAPTION>
Amount of
Days after Series C Preferred Stock
Closing Date Convertible
<S> <C>
0-90 0%
91-180 50%
From and after 181 100%
</TABLE>
The number of shares of Series C Preferred Stock
convertible at and after the times specified above
shall be a number equal to the percentage indicated
above (the "Applicable Percentage") of the total
number of shares of Series C Preferred Stock issued
on the Closing Date (the "Principal Amount").
(ii) Notwithstanding Section 3(a)(i), but subject to
Section 3(c), the Series C Preferred Stock shall
become fully convertible into shares of Common
Stock on the terms set forth in this Section 3
during such times as the "Market Conversion Price"
(as defined in Section 3(b)(ii)) is more than 160%
of the "Closing Price" (as defined in Section
3(b)(iii)).
(b) Conversion Price.
(i) Except as provided in Section 3(c), the "Conversion
Price" shall be equal to the lesser of (a) 160% of
the Closing Price, and (b) the "Market Conversion
Price"; provided, however, that, except as provided
in Section 3(c), the Conversion Price shall not be
less than the Closing Price.
3
<PAGE> 4
(ii) The "Market Conversion Price" shall be equal to the
average closing bid price of the Common Stock
during any three consecutive Trading Days (as
defined in Section 3(b)(iv)) selected by the
Investor during the 22 Trading Days ending on the
Trading Day immediately prior to the "Conversion
Date" (as defined in Section 3(h)).
(iii) The "Closing Price" shall mean the average closing
bid price for the Common Stock on the five
consecutive Trading Days immediately preceding the
Closing Date.
(iv) The term "Trading Day" shall mean (x) if the Common
Stock is listed on the New York Stock Exchange or
the American Stock Exchange, a day on which there
is trading on such stock exchange, (y) if the
Common Stock is not listed on either of such stock
exchanges but sale prices of the Common Stock are
reported on an automated quotation system, a day on
which trading is reported on the principal
automated quotation system on which sales of the
Common Stock are reported, or (z) if the foregoing
provisions are inapplicable, a day on which
quotations are reported by National Quotation
Bureau Incorporated. Notwithstanding the foregoing,
a day shall not be considered a Trading Day if (i)
trading of the Common Stock was suspended during
the entire day or (ii) no reported trades occur on
such day.
(v) The term "closing bid price" shall mean the closing
bid price on the NASDAQ National Market System, the
NASDAQ Small Cap Market, the New York Stock
Exchange, the American Stock Exchange, or on any
other automated quotation system, whichever is at
the time the principal trading exchange or market
for the Common Stock.
(c) Redemption or Conversion at Market Conversion Price.
(i) Commencing on the 91st day after the Closing Date,
if at any time before the first anniversary of the
Closing Date, the average closing bid price of the
Common Stock on any consecutive three (3) Trading
Days is less than the Closing Price, and, within
one (1) day of such three (3) day period, if the
holder does not deliver a written notice
instructing the Corporation not to exercise its
option under this Section 3(c), then, on the second
Trading Day following such three
4
<PAGE> 5
(3) consecutive Trading Days (the "Option Date"),
the Corporation shall have the option ("Option") to
offer to the holders of the Series C Preferred
Stock the opportunity for such holders to redeem,
for cash, the Applicable Percentage of the
Principal Amount of the Series C Preferred Stock
(to the extent shares of Series C Preferred Stock
have not previously been converted), at the
"Redemption Price" (as defined in Section 3(c)(iii)
in each case pursuant to the procedures and on the
terms and conditions set forth in this Section
3(c). Any holder of Series C Preferred Stock may
accept or decline to redeem the shares, as provided
below.
(ii) There shall not occur more than one (1) Option Date
in any ninety (90) day period, except for any
Option Date occurring between days 361-365 after
the Closing Date, if applicable.
(iii) The "Redemption Price" shall be equal to 110% of
the Liquidation Preference.
(iv) (A) If the Corporation elects to offer to permit
holders to redeem Series C Preferred Stock pursuant
to an Option, the Corporation shall, within two (2)
Trading Days following the applicable Option Date,
give written notice (a "Redemption Notice") to the
holders of the Series C Preferred Stock that it
will offer to redeem the "Applicable Percentage" of
the Principal Amount of the Series C Preferred
Stock pursuant to the Option. Such offer shall be
held open for not less than fifteen (15) days from
the date the Redemption Notice is received by the
holder.
(B) If the Corporation may provide, but fails to
provide, a timely Redemption Notice, the holders of
the Series C Preferred Stock shall have the option,
from and after the date on which such notice was
due to be sent, to convert the number of shares of
Series C Preferred Stock that such holders are
entitled to convert at the Market Conversion Price
to the extent provided under Section 3(a) and on
the terms set forth in this Section 3(c).
(v) Notwithstanding anything to the contrary in this
Section 3(c), the Option shall be terminated for
the remainder of the time the Series C Preferred
Stock are outstanding if the closing bid price for
the Common Stock is greater than $6.00 for 40
consecutive Trading Days; provided, however,
5
<PAGE> 6
that the terms of Section 3(c)(vi) shall remain in
full force and effect.
(vi) If the closing bid price of the Common Stock is
less than $1.50 for 10 consecutive Trading Days,
the Corporation may, at its option elect either (a)
on the first Trading Day following the conclusion
of such 10 Trading Day period (the "Second Option
Date") to offer to redeem all of the Series C
Preferred Stock at the Redemption Price by sending
a Redemption Notice pursuant to the procedures and
on the terms and conditions set forth in this
Section 3(c); or (b) if the Corporation does not
elect to offer to redeem pursuant to this Section
3(c)(vi) the Series C Preferred Stock on or before
the Second Option Date, then the Corporation shall
permit the holders of the Series C Preferred Stock
to convert, without regard to the limitation
contained in Section 3(a)(i), all of their Series C
Preferred Stock into Common Stock at the Market
Conversion Price, pursuant to the procedures and on
the terms and conditions set forth in this Section
3(c).
(vii) Any Redemption Notice must be given by facsimile or
by overnight courier to the holders of the Series C
Preferred Stock. The Redemption Notice shall be
addressed to each such shareholder at the facsimile
number or address of such holder appearing on the
books of the Corporation or given by such holder to
the Corporation for the purpose of notice. The
Redemption Notice shall state the Redemption Price
and the number of shares of Series C Preferred
Stock of such holder offered to be redeemed and
shall offer to such holder the opportunity, for a
period of not less than fifteen (15) Trading Days
from the date the Redemption Notice is received by
the holder, to surrender to the Corporation at the
place designated in the Redemption Notice, or to an
agent designated by the holder, such holder's
certificate or certificates representing the shares
to be redeemed. Each holder may accept or decline,
in whole or in part, the Corporation's redemption
offer within the time specified in the Redemption
Notice; provided that the holder shall not be
permitted to redeem any fractional shares. Each
holder of shares of Series C Preferred Stock that
elects to redeem its shares of Series C Preferred
Stock shall surrender the certificate evidencing
such shares to the Corporation (except that, if
fewer shares of Series C Preferred Stock are
outstanding than were offered for redemption due to
the
6
<PAGE> 7
holder's conversion of some or all of its
outstanding shares of Series C Preferred Stock into
Common Stock after the date of the Redemption
Notice, then such number of shares shall be reduced
to the number of such shares which are still
outstanding) at the place designated in such
notice, or to such holder's agent, and shall
thereupon be entitled to receive payment of the
Redemption Price. If less than all of the
outstanding shares of Series C Preferred Stock are
to be redeemed for any reason, then the Corporation
shall offer to redeem a pro rata portion from each
holder of Series C Preferred Stock according to the
respective number of shares of Series C Preferred
Stock held by such holder.
(viii) If the Corporation fails to register the Common
Stock issuable upon conversion of the Series C
Preferred Stock pursuant to the Registration Rights
Agreement within one hundred and eighty (180) days
of the Closing Date, each holder of Series C
Preferred Stock shall have the right to require the
corporation to redeem its Series C Preferred Stock
at a price equal to 1.3 times (i.e., 130% of) the
Liquidation Preference.
(ix) The Corporation shall issue an amount equal to the
Redemption Price (as it may be adjusted as provided
in this Section 3) to any holder who elects to
redeem shares of Series C Preferred Stock, by wire
transfer or in cash by overnight courier within
three (3) business days of receipt by the
Corporation or the holder's agent of certificates
tendered for redemption, with delivery of
certificates to be made by the holder's agent
against delivery of the Redemption Price.
(x) Unless default shall be made by the Corporation in
duly paying the Redemption Price, in which case all
the rights of the holders of such shares shall
continue, the holders of the shares of the Series C
Preferred Stock sent to the Corporation by the
holder for redemption shall cease to have any
rights as shareholders of the Corporation relating
to such shares, except (i) the right to receive the
Redemption Price (as it may be adjusted as provided
in this Section 3) and (ii) if less than all of the
shares of Series C Preferred Stock represented by
the certificate(s) surrendered by the holder for
redemption are actually redeemed, the right to
receive forthwith from the
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<PAGE> 8
Corporation a new certificate for the unredeemed
shares, and the redeemed shares shall not
thereafter be transferred (except with the written
consent of the Corporation) on the books of the
Corporation and shall not be deemed outstanding for
any purpose whatsoever. The shares of Series C
Preferred Stock not redeemed shall remain
outstanding and entitled to all the rights and
preferences provided herein.
(xi) There shall be no redemption of any shares of
Series C Preferred Stock of the Corporation where
such action would be in violation of applicable
law.
(xii) Upon any redemption of Series C Preferred Stock
pursuant to this Section 3(c), the shares of Series
C Preferred Stock which are so redeemed shall not
be reissued and, upon such redemption, the number
of authorized shares of the series to which the
shares of such Series C Preferred Stock belonged
shall be reduced by the number of shares so
redeemed.
(d) Automatic Conversion.
(i) Subject to Section 3(d)(ii) below, any Series C
Preferred Stock held on the date which is the fifth
(5th) anniversary of the Closing Date ("Automatic
Conversion Date") shall be converted at the
Conversion Price or the Market Conversion Price, as
provided in Section 3(c), and the Corporation shall
provide written notice to the holders of the Series
C Preferred Stock at least 20 Trading Days prior to
the Automatic Conversion Date, which notice shall
certify that the conditions contained in Section
3(d)(ii)(A)-(C) have been satisfied as of the date
of such notice, provided that such Automatic
Conversion Date shall be deferred for such number
of days as is equal to 1.5 times the number of days
that (A) there is not an Effective Registration (as
defined in the Investment Agreement), but not
including the first 120 days after the Closing
Date; (B) there is not a sufficient amount of
Common Shares available for conversion of all
outstanding Series C Preferred Stock; or (C) there
is a suspension, restriction or limitation in the
ability of holders of Series C Preferred Stock to
sell Common Shares received upon conversion of
Series C Preferred Stock under the Registration
Statement and prospectus for any reason. As soon as
possible after the Automatic Conversion Date,
holders shall surrender the certificate or
certificates representing the shares of Series C
Preferred Stock being converted, duly endorsed, at
the office of the Corporation or of any transfer
agent for such shares, provided that the
Corporation shall at all times maintain an office
or agency in New York City (or within 60 miles
thereof) for such purposes. The Corporation shall,
within three (3) Trading Days of receipt of such
duly endorsed certificate or certificates, issue
and deliver, or cause its transfer agent to issue
and deliver, to or upon the order of such holder,
against delivery of the certificates representing
the shares which have been converted, a certificate
or certificates for the number of Common Shares to
which such holder shall be entitled (with the
number of and denomination of such certificates
designated by such holder); the Corporation shall
effect such issuance within three (3) Trading Days
of the Automatic Conversion Date and shall transmit
the certificates by messenger or overnight delivery
service to reach the address designated by such
holder within three (3) trading days after the
receipt of such duly endorsed certificate or
certificates ("T+3"). In the alternative to
physical delivery of certificates for Common
Shares, if delivery of the Common Shares pursuant
to any conversion hereunder may be effectuated by
electronic book-entry through Depository Trust
Corporation ("DTC"), then delivery of Common Shares
pursuant to such conversion shall, if requested by
such holder, be closed and settled on T+3 by
book-entry transfer through DTC, and the Common
Shares in connection with such conversion shall be
deemed delivered by such book-entry transfer. The
parties agree to coordinate with DTC to accomplish
this objective. The conversion pursuant to this
Section 3(d)(i) shall be deemed to have been made
immediately prior to the close of business on the
Automatic Conversion Date. The person or persons
entitled to receive the Common Shares issuable upon
such conversion shall be treated for all purposes
as the record holder or holders of such Common
Shares at the close of business on the Automatic
Conversion Date.
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<PAGE> 9
(ii) Notwithstanding Section 3(d)(i), no automatic
conversion shall take place unless and until each
of the following conditions has been satisfied or
exists, each of which shall be a condition
precedent to any such automatic conversion:
(A) no material default or breach exists, and no
event shall have occurred which constitutes
(or would constitute with notice or the
passage of time or both) a material default
or breach of the Investment Agreement, the
Registration Rights Agreement or the Amended
Articles of Incorporation;
(B) none of the events described in clauses (i),
(ii) and (iv) of Section 2(b) of the
Registration Rights Agreement shall have
occurred and be continuing;
(C) the Corporation and its direct and indirect
subsidiaries on a consolidated basis have
assets with a net realizable fair market
value exceeding its liabilities and is able
to pay all its debts as they become due in
the ordinary course of business, and the
Corporation is not and has not been subject
to any liquidation, dissolution or winding
up of its affairs; and
(e) Limitation on Shares Issuable on Conversion. The
maximum number of shares of Common Stock issuable on conversion of the
Series C Preferred Stock shall in no event be greater than the sum of
(i) 19.99% of the Common Stock outstanding on the Closing Date, and
(ii) the aggregate number of shares of Common Stock issued upon
conversion of Series C Preferred Stock at a Conversion Price or
Conversion Prices equal to or greater than the Closing Price (as
adjusted for events described under Section 3(f)(i)) (the "Maximum
Conversion Number"). At any time after the Maximum Conversion Number
is reached, the conversion price of the Series C Preferred Stock shall
be equal to or greater than the Closing Price (as adjusted for events
described under Section 3(f)(i)). If the Maximum Conversion Number is
less than the number of
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<PAGE> 10
shares of Common Stock that would have been issuable to the holders of
the Series C Preferred Stock, or if the Conversion Price is greater
than it would have been, but for this subsection (e), then the
Corporation shall, within five (5) Trading Days of the date that the
Maximum Conversion Number shall have been issued, offer to permit
holders of the Series C Preferred Stock to redeem all of their
remaining outstanding Series C Preferred Stock pursuant to the
procedures set forth in Section 3(c), except that the Redemption Price
shall be equal to 1.3 times (i.e., 130% of) the Liquidation
Preference.
(f) Further Adjustments to Conversion Price and Market
Conversion Price.
(i) In the event that during any period of consecutive
Trading Days provided for above, the Corporation
shall pay any dividend on the Common Stock payable
in Common Stock or in rights to acquire Common
Stock, or shall effect a stock split or reverse
stock split, or a combination, consolidation or
reclassification of the Common Stock, then the
Conversion Price and/or the Market Conversion
Price, as appropriate, shall be proportionately
decreased or increased, as appropriate, to give
effect to such event.
(ii) If at any time during the period ending twelve (12)
months after the Closing Date, the Corporation
sells securities convertible into, exercisable for,
or exchangeable for, Common Stock (other than a
sale pursuant to a bona fide registered public
offering of Common Stock by the Corporation, and
other than shares or options issued pursuant to the
Corporation's employee, director or consultant
stock option plans currently in force and other
than sales of shares of Common Stock to
underwriters) ("Convertible Private Placement"),
then, if the effective or maximum sales price of
the Common Stock into which such securities are
convertible with respect to such transaction
(including the effective or maximum conversion,
exercise or exchange price) is less than 160% of
the Closing Price (the "Reduced Conversion Price"),
the Conversion Price or the Market Conversion
Price, as appropriate, thereafter shall be equal to
the lowest of the Reduced Conversion Price, the
Market Conversion Price or the Conversion Price.
(iii) If the Corporation fails to register the Common
Stock issuable upon conversion of the Series C
Preferred Stock pursuant to the Registration Rights
Agreement within
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<PAGE> 11
ninety (90) days following the Closing Date, the
Conversion Price or the Market Conversion Price, as
applicable, will be reduced by one percent (1%). If
the Corporation fails to register the Common Stock
issuable upon conversion of the Series C Preferred
Stock within one hundred twenty (120) days
following the Closing Date, the Conversion Price or
the Market Conversion Price, as applicable, will be
reduced by an additional one point five percent
(1.5%). The Conversion Price or the Market
Conversion Price, as applicable, will be further
reduced by one point five percent (1.5%) for each
successive thirty (30) day period that the Common
Stock issuable upon conversion of the Series C
Preferred Stock remain unregistered.
(g) Certificate for Conversion Price Adjustment. The Corporation
shall, upon the written request at any time of any holder of Series C
Preferred Stock, furnish or cause to be furnished to such holder a
certificate prepared by the Corporation setting forth any adjustments or
readjustments of the Conversion Price and the Market Conversion Price
pursuant to this Section 3.
(h) Mechanics of Conversion. To convert Series C Preferred Stock
into Common Shares, the holder shall give written notice ("Conversion
Notice") to the Corporation in the form of page 1 of Exhibit A hereto
(which Conversion Notice may be given by facsimile transmission) stating
that such holder elects to convert the same and shall state therein the
number of shares to be converted and the name or names in which such
holder wishes the certificate or certificates for Common Shares to be
issued (the date of such Conversion Notice shall be referred to herein
as the "Conversion Date"). Either simultaneously with the delivery of
the Conversion Notice, or within one (1) trading day thereafter, the
holder shall deliver (which also may be done by facsimile transmission)
page 2 to Exhibit A hereto indicating the computation of the number of
Common Shares to be received. As soon as possible after delivery of the
Conversion Notice, such holder shall surrender the certificate or
certificates representing the shares being converted, duly endorsed, at
the office of the Corporation or of any transfer agent for such shares,
provided that the Corporation shall at all times maintain an office or
agency in New York City (or within 60 miles thereof) for such purposes.
The Corporation shall, within three (3) Trading Days of receipt of such
Conversion Notice, issue and deliver, or cause its transfer agent to
issue and deliver, to or upon the order of such holder, against delivery
of the certificates representing the shares which have been converted, a
certificate or certificates for the number of Common Shares to which
such holder shall be entitled (with the number of and denomination of
such certificates designated by such holder), and the Corporation shall,
within three (3) Trading Days, issue and deliver, or cause its transfer
agent
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<PAGE> 12
to issue and deliver, to such holder a certificate or certificates for
the number of Series C Preferred Stock which such holder has not yet
elected to convert hereunder but which are evidenced in part by the
certificate(s) delivered to the Corporation in connection with such
Conversion Notice; the Corporation shall effect such issuance within
three (3) Trading Days of the Conversion Date and shall transmit the
certificates by messenger or overnight delivery service to reach the
address designated by such holder within three (3) trading days after
the receipt of such Conversion Notice ("T+3"). In the alternative to
physical delivery of certificates for Common Shares, if delivery of the
Common Shares pursuant to any conversion hereunder may be effectuated by
electronic book-entry through Depository Trust Corporation ("DTC"), then
delivery of Common Shares pursuant to such conversion shall, if
requested by such holder, be closed and settled on T+3 by book-entry
transfer through DTC, and the Common Shares in connection with such
conversion shall be deemed delivered by such book-entry transfer. The
parties agree to coordinate with DTC to accomplish this objective. The
conversion pursuant to this Section 3 shall be deemed to have been made
immediately prior to the close of business on the Conversion Date. The
person or persons entitled to receive the Common Shares issuable upon
such conversion shall be treated for all purposes as the record holder
or holders of such Common Shares at the close of business on the
Conversion Date.
(i) Distributions. In the event the Corporation shall at any time
or from time to time make or issue, or fix a record date for the
determination of holders of Common Stock entitled to receive, a dividend
or other distribution payable in securities of the Corporation or any of
its direct or indirect subsidiaries other than additional Common Stock,
then in each such event, in addition to the number of shares of Common
Stock receivable upon conversion, provision shall be made so that the
holders of Series C Preferred Stock shall receive, upon the conversion
thereof, the securities of the Corporation or such subsidiary which they
would have received had they been the owners on the date of such event
of the number of shares of Common Stock issuable to them upon
conversion. The Corporation shall, upon the written request at any time
of any holder of Series C Preferred Stock, furnish or cause to be
furnished to such holder a certificate prepared by the Corporation
setting forth the number of other securities and the amount, if any, of
other property which at the time would be received upon the conversion
of Series C Preferred Stock with respect to each share of Common Stock
received upon such conversion.
(j) Notice of Record Date. In the event of any taking by the
Corporation of a record date of the holders of any class of securities
for the purpose of determining the holders thereof who are entitled to
receive any dividend or other distribution, any security or right
convertible into or entitling the holder thereof to receive additional
shares of Common Stock, or any right to subscribe for, purchase or
otherwise acquire any shares of stock of any class or any other
securities or property, or to receive any other right, the Corporation
shall deliver
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<PAGE> 13
to each holder of Series C Preferred Stock at least 20 days prior to the
date specified therein, a notice specifying the date on which any such
record is to be taken for the purpose of such dividend, distribution,
security or right and the amount and character of such dividend,
distribution, security or right.
(k) Issue Taxes. The Corporation shall pay any and all issue and
other taxes, excluding any income, franchise or similar taxes, that may
be payable in respect of any issue or delivery of Common Shares on
conversion of Series C Preferred Stock pursuant hereto.
(l) Reservation of Stock Issuable Upon Conversion. The
Corporation shall at all times reserve and keep available out of its
authorized but unissued Common Stock, solely for the purpose of
effecting the conversion of the Series C Preferred Stock, such number of
Common Shares as shall from time to time be sufficient to effect the
conversion of all outstanding Series C Preferred Stock (subject to the
limitations on conversion set forth in Section 3(e)), and if at any time
the number of authorized but unissued Common Shares shall not be
sufficient to effect the conversion of all the then outstanding Series C
Preferred Stock, the Corporation will take such corporate action as may,
in the opinion of its counsel, be necessary to increase its authorized
but unissued Common Shares to such number of shares as shall be
sufficient for such purpose, including without limitation engaging in
best efforts to obtain the requisite shareholder approval. Without in
any way limiting the foregoing, so long as any Series C Preferred Stock
remain outstanding the Corporation agrees to reserve and at all times
keep available solely for purposes of conversion of Series C Preferred
Stock such number of authorized but unissued Common Shares that is set
forth in the Investment Agreement.
(m) Fractional Shares. No fractional shares shall be issued upon
the conversion of any Series C Preferred Stock. All Common Shares
(including fractions thereof) issuable upon conversion of more than one
Preferred Share by a holder thereof shall be aggregated for purposes of
determining whether the conversion would result in the issuance of any
fractional share. If, after the aforementioned aggregation, the
conversion would result in the issuance of a fraction of a share of
Common Stock, the Corporation shall, in lieu of issuing any fractional
share, pay the holder otherwise entitled to such fraction a sum in cash
equal to the fair market value of such fraction on the Conversion Date
(as determined in good faith by the Board of Directors of the
Corporation).
(n) Reorganization or Merger; Going Private. A "Qualifying
Acquisition" shall be defined as any reorganization, consolidation or
merger of the Corporation with or into any other corporation or
corporations or a sale of all or substantially all of the assets of the
Corporation to any other person in which the holders of Series C
Preferred Stock receive for each share of Series C Preferred Stock
either (i) consideration in cash in an amount equal to or greater than
$6.00, (ii) publicly
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<PAGE> 14
traded securities (or fractions thereof) of a corporation with a market
capitalization greater than $500 million as of the effective date of
such transaction ("Qualifying Public Stock") and with an average closing
price ("Average Price") over the twenty (20) Trading Days prior to the
effective date of such transaction equal to or greater than $6.00, or
(iii) a combination of cash and Qualifying Public Stock with a value
(based upon the Average Price) greater than $6.00. In case of any
reorganization or any reclassification of the capital stock of the
Corporation or any consolidation or merger of the Corporation with or
into any other corporation or corporations or a sale of all or
substantially all of the assets of the Corporation to any other person,
then, as part of such a reorganization, consolidation, merger or sale,
if the holders of Common Shares receive any publicly traded securities
as part or all of the consideration for such a reorganization,
consolidation, merger or sale, then provision shall be made such that
each Preferred Share shall thereafter be convertible into such new
securities at a conversion price which places the holders of Series C
Preferred Stock in an economically equivalent position as they would
have been if such holders had converted all of their Series C Preferred
Stock immediately prior to such event. In addition to the foregoing, if
the holders of Common Shares receive any non-publicly traded securities
or other property or cash as part or all of the consideration for such
reorganization, consolidation, merger or sale, then in such event
provision shall be made so that the holders of the Series C Preferred
Stock shall receive, without being required to convert their shares, an
amount of such securities, property or cash that they would have been
entitled to receive had they converted their shares of Series C
Preferred Stock on the date that the holders of Common Shares become
entitled to receive such securities property or cash. So long as any
Series C Preferred Stock are outstanding, the Corporation shall not
close any such reorganization, consolidation, merger or sale other than
a Qualifying Acquisition, unless an appropriate adjustment of the
conversion price and other provisions contained herein related to the
conversion of such Series C Preferred Stock is approved by an
affirmative vote of a majority in interest of the holders of outstanding
Series C Preferred Stock and reflected in an amendment to this
Certificate of Determination, which is duly approved by all necessary
corporate action, including any necessary shareholder approval. The
Corporation shall not close any transaction or series of transactions as
a result of which the Common Shares would cease to be publicly traded
(other than an acquisition in which publicly traded securities are
issued) unless approved by an affirmative vote of a majority in interest
of the holders of Series C Preferred Stock.
(o) Specific Enforcement. The Corporation agrees that irreparable
damage would occur in the event that any of the provisions of this
Certificate of Determination were not performed in accordance with their
specific terms or were otherwise breached. It is accordingly agreed that
the holders of Series C Preferred Stock shall be entitled to specific
performance, injunctive relief or other equitable remedies to prevent or
cure breaches of the provisions of this Certificate of Determination and
to enforce specifically the terms and provisions hereof, this
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<PAGE> 15
being in addition to any other remedy to which any of them may be
entitled under agreement, at law or in equity.
Section 4. Ranking. The Series C Preferred Stock shall be senior to the
Series A Preferred Stock, and senior to the Series B Preferred Stock with
respect to dividends and liquidation preferences and to all later authorized
Series of the Corporation's preferred stock as to the distribution of assets.
Section 5. Voting Rights. The affirmative vote of a majority in interest
of the Corporation's outstanding Series C Preferred Stock shall be necessary for
(i) any amendment of this Certificate of Determination, (ii) any other amendment
to the Articles of Incorporation or by-laws of the Corporation that may
adversely affect any of the rights, preferences, or privileges of the Series C
Preferred Stock, (iii) any reorganization or reclassification of the capital
stock of the Corporation, any consolidation or merger of the Corporation with or
into any other corporation or corporations, or any sale of all or substantially
all of the assets of the Corporation, other than a Qualifying Acquisition, that
would have an adverse effect on any of the rights, preferences, or privileges of
the Series C Preferred Stock.
Section 6. Notices. The Corporation shall distribute to the holders of
Series C Preferred Stock copies of all notices, materials, annual and quarterly
reports, proxy statements, information statements and any other documents
distributed generally to the holders of shares of Common Stock of the
Corporation, at such times and by such method as such documents are distributed
to such holders of such Common Stock.
Section 7. Replacement Certificates. The certificate(s) representing the
Series C Preferred Stock held by any holder of Series C Preferred Stock may be
exchanged by such holder at any time and from time to time for certificates with
different denominations representing an equal aggregate number of Series C
Preferred Stock, as reasonably requested by such holder, upon surrendering the
same. No service charge will be made for such registration or transfer or
exchange.
Section 8. No Reissuance. No Series C Preferred Stock acquired by the
Corporation by reason of redemption, purchase, conversion or otherwise shall be
reissued.
2. There are no shares of Series A Preferred Stock or Series B Preferred
Stock outstanding.
15
<PAGE> 16
IN WITNESS WHEREOF, we have executed and subscribed this Certificate and
do affirm the foregoing as true under the penalties of perjury this ___ day of
March, 1998 under the laws of the State of California.
_________________________________
Donald R. Sellers
President
_________________________________
Shawn K. Singh
Assistant Secretary
16
<PAGE> 17
EXHIBIT A
(To be Executed by Holder
in order to Convert Series C Preferred Stock)
CONVERSION NOTICE
FOR
SERIES C CONVERTIBLE PREFERRED STOCK
The undersigned, as a holder ("Holder") of shares of Series C
Convertible Preferred Stock ("Series C Preferred Stock") of SciClone
Pharmaceuticals, Inc. (the "Corporation"), hereby irrevocably elects to convert
_____________ shares of Series C Preferred Stock for shares ("Common Shares") of
common stock, no par value (the "Common Stock"), of the Corporation according to
the terms and conditions of the Amended Articles of Incorporation as of the date
written below. The undersigned hereby requests that share certificates for the
Common Stock to be issued to the undersigned pursuant to this Conversion Notice
be issued in the name of, and delivered to, the undersigned or its designee as
indicated below. No fee will be charged to the holder of Series C Preferred
Stock for any conversion. Capitalized terms used herein and not otherwise
defined shall have the meanings ascribed thereto in the Certificate of
Determination Regarding the Terms of the Series C Preferred Stock.
Conversion Date: __________________________
Conversion Information:
NAME OF HOLDER:____________________________________
By:________________________________________________
Print Name:
Print Title:
Print Address of Holder:
___________________________________________________
___________________________________________________
at:________________________________________________
___________________________________________________
If Common Stock is to be issued to a person other than Holder, Holder's
signature must be guaranteed below:
SIGNATURE GUARANTEED BY:
___________________________________________________
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<PAGE> 18
THE COMPUTATION OF NUMBER OF COMMON SHARES TO BE RECEIVED IS SET FORTH
ON PAGE 2 OF THE CONVERSION NOTICE.
Page 2 to Conversion Notice dated____________ for:________________
(Conversion Date) (Name of Holder)
COMPUTATION OF NUMBER OF COMMON SHARES TO BE RECEIVED
Number of Shares of Series C Preferred Stock being converted:__________ shares
Number of Shares of Series C Preferred Stock being converted x
Liquidation Preference $__________
Total dollar amount being converted $__________
Conversion Price $__________
Number of Common Shares = Total dollar amount being converted $__________
divided by Conversion Price $_________
Number of Common Shares = __________
If the conversion is not being settled by DTC, please issue and deliver _____
certificate(s) for Common Shares in the following amount(s):
_________________________________________________________________
_________________________________________________________________
_________________________________________________________________
If the Holder is receiving certificate(s) for Series C Preferred Stock upon the
conversion, please issue and deliver _____ certificate(s) for Series C Preferred
Stock in the following amounts:
_________________________________________________________________
_________________________________________________________________
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<PAGE> 1
Exhibit 4.3
PREFERRED STOCK INVESTMENT AGREEMENT
THIS PREFERRED STOCK INVESTMENT AGREEMENT ("Agreement") is dated as of
March 27, 1998 between SciClone Pharmaceuticals, Inc., a California corporation
("SciClone"), Halifax Fund, L.P., Themis Partners L.P. and Heracles Fund
(individually, an "Investor," and collectively, (the "Investors").
W I T N E S S E T H:
WHEREAS, SciClone desires to sell and issue to the Investors, and the
Investors wish to purchase from SciClone, an aggregate of 661,157 shares of
SciClone's Series C Convertible Preferred Stock, no par value, having the
rights, designations and preferences set forth in the Certificate of
Determination of SciClone (the "Certificate of Determination") in the identical
form and substance of Exhibit 2.1(c) attached hereto (the "Preferred Shares"),
on the terms and conditions set forth herein; and
WHEREAS, the Preferred Shares will be convertible into shares ("Common
Shares") of common stock, no par value, of SciClone ("Common Stock"), pursuant
to the terms of the Certificate of Determination, and the Investors will have
registration rights with respect to such Common Shares issuable upon conversion,
pursuant to the terms of that certain Registration Rights Agreement to be
entered into between SciClone and the Investors substantially in the form of
Exhibit 4.2(f) hereto ("Registration Rights Agreement"); and
WHEREAS, to induce the Investors to purchase the Preferred Shares,
SciClone has agreed to issue to each Investor a Warrant in the form attached as
Exhibit A (individually, a "Warrant," and collectively, the "Warrants");
NOW, THEREFORE, in consideration of the foregoing premises and the
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
ARTICLE I
PURCHASE AND SALE OF PREFERRED STOCK
Section 1.1 Purchase and Sale of Preferred Stock. Upon the following
terms and conditions, SciClone shall issue and sell to the Investors, and the
Investors shall purchase from SciClone, an aggregate of 661,157 Preferred
Shares. Each Investor shall purchase the number of Preferred Shares listed
opposite such Investor's name on the Schedule of Purchasers attached as Exhibit
1.1. hereto.
Section 1.2 Purchase Price. The aggregate purchase price for the
Preferred Shares (the "Purchase Price") shall be $4,000,000, or $6.05 per
share. Each Investor shall pay the aggregate purchase price listed opposite such
Investor's name on the Schedule of Purchasers attached as Exhibit 1.1 hereto.
<PAGE> 2
Section 1.3 The Closing.
(a) The closing of the purchase and sale of the Preferred Shares
(the "Closing"), shall take place at the offices of the Investors' counsel, at
10:00 a.m., local time on the later of the following: (i) the date on which the
last to be fulfilled or waived of the conditions set forth in Article IV hereof
and applicable to the Closing shall be fulfilled or waived in accordance
herewith, or (ii) such other time and place and/or on such other date as the
Investors and SciClone may agree. The date on which the Closing occurs is
referred to herein as the "Closing Date."
(b) On the Closing Date, SciClone shall deliver to each Investor
(i) certificates (with the number of and denomination of such certificates as
reasonably requested by each Investor, representing the Preferred Shares
purchased hereunder by such Investor registered in the name of such Investor or
its nominee or deposit such Preferred Shares into accounts designated by such
Investors and (ii) a Warrant to purchase the number of shares of Common Stock
listed opposite such Investor's name on the Schedule of Warrants attached as
Exhibit 1.3 hereto, registered in the name of such Investor or its nominee in
such denominations as reasonably requested by such Investor, and each Investor
shall deliver to SciClone such Investor's share of the Purchase Price for the
number of Preferred Shares purchased by such Investor hereunder by wire transfer
in immediately available funds to an account designated in writing by SciClone.
In addition, each party shall deliver all documents, instruments and writings
required to be delivered by such party pursuant to this Agreement at or prior to
the Closing.
Section 1.4. Additional Shares of Common Stock. In connection with a
conversion by an Investor of any Preferred Shares, if the Market Conversion
Price (as defined in the Certificate of Determination) with respect to a
Conversion Date (as defined in the Certificate of Determination) shall be
greater than $6.00, subject to adjustment from time to time as set forth in
Section 3 of the Certificate of Determination, then, in addition to and not in
lieu of the shares of Common Stock issuable by reason of any Conversion Notice
(as defined in the Certificate of Determination) given by an Investor on such
Conversion Date or by reason of forced conversion pursuant to Section 3(d) of
the Certificate of Determination, an Investor may, by written notice to SciClone
on the Conversion Date, purchase from SciClone, at a price per share equal to
the Market Conversion Price, up to one (1) share of Common Stock (each an
"Additional Share" and, collectively, with all such other shares so purchased
and sold hereunder, "Additional Shares") for each share of Common Stock issuable
to such Investor by reason of any Conversion Notice given by such Investor on
such Conversion Date or by reason of forced conversion pursuant to Section 3(d)
of the Certificate of Determination, and failure to exercise the right to
purchase Additional Shares on the Conversion Date shall result in immediate
forfeiture of such right as to such Additional Shares and such Conversion Date.
The total price for such Additional Shares so to be issued incident to such a
Conversion Notice or forced conversion shall be paid by such Investor by wire
transfer of immediately available federal funds to such account as SciClone
shall specify in writing to such holder, or, at such Investor's election, to an
account of an agent designated by such Investor, and upon receipt, by SciClone,
or such agent, of such payment, SciClone shall
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promptly and in no event later than three (3) business days thereafter issue the
certificate or certificates therefor pursuant to this Section 1.4, with release
of the funds from the agent to SciClone to be made against delivery of such
certificate or certificates. In the alternative to physical delivery of
certificates for Common Shares, if delivery of the Additional Shares pursuant to
any conversion hereunder may be effectuated by electronic book-entry through
Depository Trust Corporation ("DTC"), then delivery of Additional Shares
pursuant to such conversion shall, if requested by such holder, be closed and
settled on T+3 by book-entry transfer through DTC, and the Additional Shares in
connection with such conversion shall be deemed delivered by such book-entry
transfer. The parties agree to coordinate with DTC to accomplish this objective.
The conversion pursuant to Section 3 of the Certificate of Determination shall
be deemed to have been made immediately prior to the close of business on the
Conversion Date. The person or persons entitled to receive the Additional Shares
issuable upon such conversion shall be treated for all purposes as the record
holder or holders of such Additional Shares at the close of business on the
Conversion Date.
Section 1.5 Limitation on Holder's Right to Convert. Notwithstanding
anything to the contrary contained herein, no Preferred Share may be converted
by a holder to the extent that, after giving effect to Common Shares to be
issued pursuant to a Conversion Notice, the total number of Common Shares deemed
beneficially owned by such holder (other than by virtue of the ownership of
Series C Preferred Stock or ownership of other securities that have limitations
on a holder's rights to convert or exercise similar to those limitations set
forth herein), together with all Common Shares deemed beneficially owned by the
holder's "affiliates" (as defined in Rule 144 of the Act) that would be
aggregated for purposes of determining whether a group under Section 13(d) of
the Securities Exchange Act of 1934 exists, would exceed 4.9% of the total
issued and outstanding shares of the Corporation's Common Stock, provided that
each holder shall have the right to waive this restriction, in whole or in part,
upon 61 days prior notice to SciClone. The delivery of a Conversion Notice by
any holder shall be deemed a representation by such holder that it is in
compliance with this Section 1.5. A transferee of the Series C Preferred Stock
shall not be bound by this provision unless it expressly agrees to be so bound.
The term "deemed beneficially owned" as used in this Agreement shall exclude
shares that might otherwise be deemed beneficially owned by reason of the
convertibility of the Series C Preferred Stock.
ARTICLE II
REPRESENTATIONS AND WARRANTIES
Section 2.1 Representations and Warranties of SciClone. SciClone hereby
makes the following representations and warranties to the Investors as of the
date hereof and on the Closing Date except as disclosed in the Schedule of
Exceptions hereto:
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(a) Organization and Qualification; Material Adverse Effect.
SciClone is a corporation duly incorporated and existing in good standing under
the laws of the State of California and has the requisite corporate power to own
its properties and to carry on its business as now being conducted. SciClone
does not have any direct or indirect subsidiaries other than the subsidiaries
listed on Schedule 2.1(a) attached hereto. A "subsidiary" of SciClone is any
company of which more than 50% of the voting shares are owned by SciClone.
SciClone is duly qualified as a foreign corporation to do business and is in
good standing in every jurisdiction in which the nature of the business
conducted or property owned by it makes such qualification necessary other than
those in which the failure so to qualify would not have a Material Adverse
Effect. "Material Adverse Effect" means any adverse effect on the business,
operations, properties, prospects, or financial condition of the entity with
respect to which such term is used and which is material to such entity and
other entities controlling or controlled by such entity taken as a whole, and
any material adverse effect on the transactions contemplated under this
Agreement, the Registration Rights Agreement or any other agreement or document
contemplated hereby or thereby.
(b) Authorization; Enforcement. (i) SciClone has the requisite
corporate power and authority to enter into and perform this Agreement, the
Warrants and the Registration Rights Agreement and to issue the Preferred Shares
in accordance with the terms hereof, (ii) the execution and delivery of this
Agreement, the Warrants and the Registration Rights Agreement by SciClone and
the consummation by it of the transactions contemplated hereby and thereby,
including the issuance of the Preferred Shares, and the amendment provided for
in the Certificate of Determination, have been duly authorized by all necessary
corporate action, and no further consent or authorization of SciClone or its
Board of Directors or shareholders is required, (iii) this Agreement and the
Registration Rights Agreement and the Warrants have been or will have been duly
executed and delivered by SciClone, and (iv) this Agreement and the Registration
Rights Agreement and the Warrants constitute valid and binding obligations of
SciClone enforceable against SciClone in accordance with their terms, except as
such enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, liquidation or similar laws relating to, or
affecting generally the enforcement of creditors' rights and remedies or by
other equitable principles of general application.
(c) Capitalization. The authorized capital stock of SciClone
consists of 75,000,000 shares of common stock and 10,000,000 shares of preferred
stock; there are 17,348,108 shares of common stock issued and outstanding as of
March 15, 1998 and no shares of preferred stock issued and outstanding. All of
the outstanding shares of SciClone's common stock have been validly issued and
are fully paid and nonassessable. No Common Shares are entitled to preemptive
rights; as of March 15, 1998, 3,650,211 Common Shares have been reserved for
issuance upon the exercise of options granted or to be granted under stock
option plans and 471,505 shares have been reserved for issuance under employee
stock purchase plans, and there are no outstanding warrants for Common Shares
(excluding the Warrant). There are no other scrip, rights to subscribe to, calls
or commitments of any character whatsoever relating to,
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or securities or rights exchangeable or convertible into, any shares of capital
stock of SciClone, or contracts, commitments, understandings or arrangements by
which SciClone is or may become bound to issue additional shares of capital
stock of SciClone or options, warrants, scrip, rights to subscribe to, or
commitments to purchase or acquire, any shares, or securities or rights
convertible into shares, of capital stock of SciClone (except as contemplated by
this Agreement or disclosed in the SEC Documents (as defined below)). No holders
of SciClone stock (other than the Investor) are entitled to registration rights.
Attached hereto as Exhibit 2.1(b) are true and correct copies of SciClone's
Articles of Incorporation (the "Charter") as in effect on the date hereof, and
SciClone has furnished or made available to the Investor true and correct copies
of SciClone's By-Laws, as in effect on the date hereof (the "By-Laws"). The
Certificate of Determination has been duly filed in the State of California.
(d) Issuance of Common Shares. The Common Shares issuable upon conversion of the
Preferred Shares pursuant to the Certificate of Determination (the "Underlying
Shares") or upon the exercise of the Warrants (the "Warrant Shares") are duly
authorized and reserved for issuance and, upon such conversion in accordance
with the Certificate of Determination and/or exercise in accordance with the
Warrants, such Underlying Shares and Warrant Shares will be validly issued,
fully paid and non-assessable, free and clear of any and all liens, claims and
encumbrances, and such Underlying Shares and Warrant Shares when registered
under an effective registration statement under the Securities Act and
authorized for trading under the rules of the Nasdaq National Market System (as
defined below) will be entitled to be traded on the National Association of
Securities Dealers Automated Quotation system National Market ("Nasdaq National
Market System"), and the holders of such Underlying Shares and Warrant Shares
shall be entitled to all rights and preferences accorded to a holder of Common
Shares. The outstanding Common Shares are currently quoted on the Nasdaq
National Market System.
(e) No Conflicts. The execution, delivery and performance of this
Agreement and the Registration Rights Agreement and the Warrants by SciClone and
the consummation by SciClone of the transactions contemplated hereby and thereby
and the filing of the Certificate of Determination do not and will not (i)
result in a violation of SciClone's Charter or By-Laws or (ii) conflict with, or
constitute a default (or an event which with notice or lapse of time or both
would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, any agreement, indenture, patent,
patent license or instrument to which SciClone or any of its subsidiaries is a
party, or result in a violation of any federal, state, local or foreign law,
rule, regulation, order, judgment or decree (including Federal and state
securities laws and regulations) applicable to SciClone or any of its
subsidiaries or by which any property or asset of SciClone or any of its
subsidiaries is bound or affected (except for such conflicts, defaults,
terminations, amendments, accelerations, cancellations and violations as would
not, individually or in the aggregate, have a Material Adverse Effect); provided
that, for purposes of such representation as to Federal, state, local or foreign
law, rule or regulation, no representation is made herein with respect to any of
the same applicable solely to the Investor and not to SciClone. The business of
SciClone and its direct and indirect subsidiaries is not being conducted in
violation of any law, ordinance
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or regulation of any governmental entity, except for violations which either
singly or in the aggregate do not and will not have a Material Adverse Effect.
Except for the Certificate of Determination SciClone is not required under
Federal, state, local or foreign law, rule or regulation to obtain any consent,
authorization or order of, or make any filing or registration with, any court or
governmental agency in order for it to execute, deliver or perform any of its
obligations under this Agreement and the Registration Rights Agreement and the
Certificate of Determination and the Warrants, or issue and sell the Preferred
Shares in accordance with the terms hereof and issue the Underlying Shares upon
conversion thereof and issue the Warrant Shares on exercise of the Warrants,
except for the registration provisions provided in the Registration Rights
Agreement, provided that, for purposes of the representation made in this
sentence, SciClone is assuming and relying upon the accuracy of the relevant
representations and agreements of the Investor herein.
(f) SEC Documents; Financial Statements. The Common Stock of
SciClone is registered pursuant to Section 12(g) of the Securities Exchange Act
of 1934, as amended (the "Exchange Act") and SciClone has filed all reports,
schedules, forms, statements and other documents required to be filed by it with
the Securities and Exchange Commission ("SEC") pursuant to the reporting
requirements of the Exchange Act, including material filed pursuant to Section
13(a) or 15(d), in addition to one or more registration statements and
amendments thereto heretofore filed by SciClone with the SEC (all of the
foregoing including filings incorporated by reference therein being referred to
herein as the "SEC Documents"). SciClone has delivered or made available to the
Investors true and complete copies of all SEC Documents (including, without
limitation, proxy information and solicitation materials and registration
statements) filed with the SEC since December 31, 1995 and all annual SEC
Documents filed with the SEC since December 31, 1994. SciClone has not provided
to the Investors any material non-public information or any information which,
according to applicable law, rule or regulation, should have been disclosed
publicly by SciClone but which has not been so disclosed. As of their respective
dates, SciClone's Form 10-K for the year ended December 31, 1996, and all
documents subsequently filed with the SEC (the "Current Filings"), together with
SciClone's fourth quarter 1997 earnings press release, dated February 2, 1998,
complied in all material respects with the requirements of the Exchange Act and
the rules and regulations of the SEC promulgated thereunder and other federal,
state and local laws, rules and regulations applicable to such Current Filings,
and none of the Current Filings contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading. The Current Filings contain all
material information concerning SciClone, and no event or circumstance has
occurred which would require SciClone to disclose such event or circumstance in
order to make the statements in the Current Filings, taken as a whole, not
misleading on the date hereof or on the Closing Date but which has not been so
disclosed. The financial statements of SciClone included in the Current Filings
complied as to form in all material respects with applicable accounting
requirements and the published rules and regulations of the SEC or other
applicable rules and regulations with respect thereto at the time of filing.
Such financial statements were prepared in accordance with
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generally accepted accounting principles applied on a consistent basis during
the periods involved (except (i) as may be otherwise indicated in such financial
statements or the notes thereto or (ii) in the case of unaudited interim
statements, to the extent they may not include footnotes or may be condensed or
summary statements) and fairly present in all material respects the financial
position of SciClone as of the dates thereof and the results of operations and
cash flows for the periods then ended (subject, in the case of unaudited
statements, to normal year-end audit adjustments).
(g) Principal Exchange/Market. The principal market on which the
Common Shares are currently traded is the Nasdaq National Market System.
(h) No Material Adverse Change. Since December 31, 1996, the date
through which the most recent report of SciClone on Form 10-K has been prepared
and filed with the SEC, a copy of which is included in the SEC Documents, no
Material Adverse Effect has occurred or exists with respect to SciClone or its
subsidiaries, except as otherwise disclosed or reflected in other SEC Documents
filed or press releases issued as of a date subsequent to December 31, 1996.
(i) No Undisclosed Liabilities. SciClone and its direct and
indirect subsidiaries have no liabilities or obligations not disclosed in the
SEC Documents, other than those liabilities incurred in the ordinary course of
SciClone's or its subsidiaries' respective businesses since December 31, 1996,
which liabilities, individually or in the aggregate, do not or would not have a
Material Adverse Effect on SciClone or its direct or indirect subsidiaries.
(j) No Undisclosed Events or Circumstances. No event or
circumstance has occurred or exists with respect to SciClone or its direct or
indirect subsidiaries or their respective businesses, properties, prospects,
operations or financial condition, which, under applicable law, rule or
regulation, requires public disclosure or announcement by SciClone but which has
not been so publicly announced or disclosed.
(k) No General Solicitation. Neither SciClone, nor any of its
affiliates, or, to its knowledge, any person acting on its or their behalf has
engaged in any form of general solicitation or general advertising (within the
meaning of Regulation D under the Securities Act of 1933, as amended (the
"Act")) in connection with the offer or sale of the Preferred Shares or Common
Shares.
(l) No Integrated Offering. Neither SciClone, nor any of its
affiliates, nor to its knowledge any person acting on its or their behalf has,
directly or indirectly, made any offers or sales of any security or solicited
any offers to buy any security, under circumstances that would require
registration of the Preferred Shares under the Act.
(m) Form S-3. SciClone is eligible to file the Registration
Statement (as defined in the Registration Rights Agreement) on Form S-3 under
the Act and rules promulgated thereunder, and Form S-3 is permitted to be used
for the resale by the
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Investor to the public of the Registrable Securities (as defined in the
Registration Rights Agreement) under the Act and rules promulgated thereunder.
(n) Intellectual Property. SciClone (and/or its wholly-owned
subsidiaries) owns or has licenses to use certain patents, copyrights and
trademarks ("intellectual property") associated with its business. SciClone and
its subsidiaries have all intellectual property rights which are needed to
conduct the business of SciClone and its subsidiaries as it is now being
conducted or as proposed to be conducted as disclosed in the SEC Documents.
SciClone and its subsidiaries have no reason to believe that the intellectual
property rights which it owns are invalid or unenforceable or that the use of
such intellectual property by SciClone or its subsidiaries infringes upon or
conflicts with any right of any third party, and neither SciClone nor any of its
subsidiaries has received notice of any such infringement or conflict. SciClone
and its subsidiaries have no knowledge of any infringement of its intellectual
property by any third party.
(o) No Litigation. No litigation or claim (including those for
unpaid taxes) against SciClone or any of its subsidiaries is pending or, to
SciClone's knowledge, threatened, and no other event has occurred, which if
determined adversely would have a Material Adverse Effect on SciClone or would
materially adversely effect the transactions contemplated hereby.
(p) Brokers. SciClone has taken no action that would give rise to
any claim by any person for brokerage commissions, finder's fees or similar
payments by any Investor relating to this Agreement or the transactions
contemplated hereby.
Section 2.2 Representations and Warranties of the Investors. The
Investors hereby make the following representations and warranties to SciClone
as of the date hereof and on the Closing Date:
(a) Authorization; Enforcement. (i) The Investors have the
requisite power and authority to enter into and perform this Agreement and the
Registration Rights Agreement and to purchase the Preferred Shares being sold
hereunder and to acquire the Warrant Shares, (ii) the execution and delivery of
this Agreement and the Registration Rights Agreement by the Investors and the
consummation by each of them of the transactions contemplated hereby and thereby
have been duly authorized by all necessary partnership or other action, and
(iii) this Agreement and the Registration Rights Agreement constitute valid and
binding obligations of the Investors enforceable against the Investors in
accordance
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with their terms, except as such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws
relating to, or affecting generally the enforcement of creditors' rights and
remedies or by other equitable principles of general application.
(b) No Conflicts. The execution, delivery and performance of this
Agreement and the Registration Rights Agreement and the Warrant and the
consummation by the Investors of the transactions contemplated hereby and
thereby do not and will not (i) result in a violation of the Investors'
organizational documents, or (ii) conflict with any agreement, indenture or
instrument to which any of the Investors is a party, or (iii) result in a
violation of any law, rule, or regulation, or any order, judgment or decree of
any court or governmental agency applicable to any of the Investors. The
Investors are not required to obtain any consent or authorization of any
governmental agency in order for it to perform its obligations under this
Agreement or the Registration Rights Agreement or the Warrants.
(c) Investment Representation. Each Investor is purchasing the
Preferred Shares and acquiring such Investor's Warrant for its own account and
not with a view to distribution in violation of any securities laws. Each
Investor has no present intention to sell the Preferred Shares, such Investor's
Warrant, Underlying Shares or Warrant Shares and each Investor has no present
arrangement (whether or not legally binding) to sell the Preferred Shares, such
Investor's Warrant, Underlying Shares or Warrant Shares to or through any person
or entity; provided, however, that by making the representations herein, each
Investor does not agree to hold the Preferred Shares, such Investor's Warrant,
Underlying Shares or Warrant Shares for any minimum or other specific term and
reserves the right to dispose of the Preferred Shares, the Warrants, Underlying
Shares or Warrant Shares at any time in accordance with Federal and state
securities laws applicable to such disposition. Each Investor is not the
Beneficial Owner (as defined in the Rights Agreement) of more than 4.9% of
SciClone's "common shares" (as defined in the Rights Agreement), including all
"common shares" which are aggregated with those of the Investor pursuant to a
Schedule 13D filed under Section 13(d) of the Securities Exchange Act of 1934.
(d) Accredited Investor. Each Investor is an "accredited
investor" as defined in Rule 501 promulgated under the Act. Each Investor has
such knowledge and experience in financial and business matters in general and
investments in particular, so that each Investor is able to evaluate the merits
and risks of an investment in the Preferred Shares and to protect its own
interests in connection with such investment. In addition (but without limiting
the effect of SciClone's representations and warranties contained herein), each
Investor has received such information as it considers necessary or appropriate
for deciding whether to purchase the Preferred Shares pursuant hereto.
(e) Rule 144. Each Investor understands that there is no public
trading market for the Preferred Shares, that none is expected to develop, and
that the Preferred Shares and Underlying Shares must be held indefinitely unless
such Preferred Shares or Underlying Shares are converted or registered under the
Act or an exemption from
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registration is available. Each Investor has been advised or is aware of the
provisions of Rule 144 promulgated under the Act.
(f) Brokers. Each Investor has taken no action that would give
rise to any claim by any person for brokerage commissions, finder's fees or
similar payments by SciClone relating to this Agreement or the transactions
contemplated hereby.
(g) No Solicitation. No Investor was not contacted by SciClone
or any agent or representative of SciClone in connection with the offering of
Common Stock made pursuant to SciClone's registration statement on Form S-3
filed with the SEC on October 27, 1997.
(h) Reliance by SciClone. No Investor has not traded since
March 1, 1998, and will not trade until the Closing Date, in the public market
for SciClone stock or derivatives thereof. Each Investor understands that the
Preferred Shares are being, and the Underlying Shares will be, offered and sold
and the Warrants are being issued in reliance on a transactional exemption from
the registration requirements of Federal and state securities laws and that
SciClone is relying upon the truth and accuracy of the representations,
warranties, agreements, acknowledgments and understandings of each Investor set
forth herein in order to determine the applicability of such exemptions and the
suitability of such Investor to acquire the Preferred Shares, the Underlying
Shares and such Investor's Warrant.
ARTICLE III
COVENANTS
Section 3.1 Registration and Listing; Effective Registration. Until such
time as no Preferred Shares or Warrants are outstanding, SciClone will cause the
Common Shares to continue to be registered under Section 12(g) of the Exchange
Act, will comply in all respects with its reporting and filing obligations under
the Exchange Act, and will not take any action or file any document (whether or
not permitted by the Exchange Act or the rules thereunder) to terminate or
suspend such reporting and filing obligations. Until such time as no Preferred
Shares or Warrants are outstanding, SciClone shall continue the listing or
trading of the Common Shares on the Nasdaq National Market System and comply in
all respects with SciClone's reporting, filing and other obligations under the
bylaws or rules of the Nasdaq National Market System and any exchange or market
where the Common Shares are then traded. SciClone shall cause the Underlying
Shares and the Warrant Shares to be listed on the Nasdaq National Market System
and in addition on such other markets (e.g., the New York Stock Exchange or the
American Stock Exchange) on which the Common Shares are then trading prior to
the earlier of (i) the registration of the Underlying Shares or the Warrant
Shares under the Act or (ii) 90 days after the Closing hereunder, and shall
continue such listing(s) in accordance with SciClone's obligations under the
Registration Rights Agreement. As used herein and in the Registration Rights
Agreement, the Certificate of Determination, and the Warrants, the
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term "Effective Registration" shall mean that all registration obligations of
SciClone pursuant to the Registration Rights Agreement have been satisfied, such
registration is not subject to any suspension or stop order, the prospectus for
the Underlying Shares issuable upon conversion of the Preferred Shares and the
Warrant Shares issuable upon exercise of the Warrants is current and such Common
Shares are listed for trading on the Nasdaq National Market System, and in
addition on such other markets (e.g., the New York Stock Exchange or the
American Stock Exchange) on which the Common Shares are then trading, and such
trading has not been suspended for any reason, and none of SciClone or any
direct or indirect subsidiary of SciClone is subject to any bankruptcy,
insolvency or similar proceeding.
Section 3.2 Certificates on Conversion and Warrants on Exercise.
(a) Upon any conversion by an Investor (or the holder of
Preferred Shares) of the Preferred Shares pursuant to the Certificate of
Determination, SciClone shall issue and deliver to such Investor (or holder)
within three (3) business days of the Conversion Date (as defined in the
Certificate of Determination) a new certificate or certificates for the number
of Preferred Shares which such Investor (or holder) has not yet elected to
convert but which are evidenced in part by the certificate(s) submitted to
SciClone in connection with such conversion (with the number of and denomination
of such new certificate(s) designated by such Investor or holder).
(b) Upon any partial exercise by an Investor (or the holder of a
Warrant) of a Warrant, SciClone shall issue and deliver to such Investor (or
holder) within three (3) business days of the date on which such Warrant is
exercised a new Warrant or Warrants representing the number of adjusted Warrant
Shares, in accordance with the terms of Section 2 of such Warrant.
Section 3.3 Replacement Certificates and Warrants.
(a) The certificate(s) representing the Preferred Shares held by
an Investor (or the holder) may be exchanged by such Investor (or such holder)
at any time and from time to time for certificates with different denominations
representing an equal aggregate number of Preferred Shares, as reasonably
requested by such Investor (or such holder) upon surrendering the same. No
service charge will be made for such registration or transfer or exchange.
(b) The Warrants are exchangeable at the option of an Investor
(or then holder of a Warrant) at the office of SciClone for another Warrant of
different denominations entitling the holder thereof to purchase in the
aggregate the same number of Warrant Shares as are purchasable under such
Warrant as reasonably requested by such Investor (or such holder) upon
surrendering the same. No service charge will be made for such transfer or
exchange.
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Section 3.4 Expenses. SciClone shall pay, at the Closing and promptly
upon receipt of any further invoices relating to same, all reasonable due
diligence fees and expenses and reasonable attorneys' fees and expenses up to a
maximum amount of $10,000, incurred by the Investors in connection with the
preparation, negotiation, execution and delivery of this Agreement, the
Registration Rights Agreement, the Certificate of Determination, the Warrants
and the related agreements and documents and the transactions contemplated
hereunder and thereunder. At Closing, SciClone shall pay the amount due for such
fees and expenses (which may include fees and expenses estimated to be incurred
for completion of the transaction including post-closing matters). In the event
such amount is ultimately less than the actual fees and expenses, SciClone shall
promptly pay such deficiency upon receipt of an invoice regarding the same.
Section 3.5 Securities Compliance. SciClone shall notify the SEC and the
Nasdaq National Market System, in accordance with their requirements, of the
transactions contemplated by this Agreement, the Certificate of Determination,
the Registration Rights Agreement and the Warrants, and shall take all other
necessary action and proceedings as may be required and permitted by applicable
law, rule and regulation, for the legal and valid issuance of the Preferred
Shares hereunder, the Common Shares issuable upon conversion thereof and the
Warrant Shares.
Section 3.6 Intercompany Transactions; Restrictive Covenant Termination
Date. Until the Restrictive Covenant Termination Date (as defined below),
SciClone shall not, and shall not permit any subsidiary to, transfer assets to
any direct or indirect subsidiary other than for value and for a proper business
purpose. The term "Restrictive Covenant Termination Date" shall mean the date
which is the earlier of (i) the date which is the last day of the 12th fiscal
month following the Effective Registration ("Maximum Restrictive Covenant
Termination Date"), or (ii) such date on which 80% of the Preferred Shares have
been converted for Common Shares, provided that the Maximum Restrictive Covenant
Termination Date shall not occur until such time as SciClone has performed all
material obligations under this Agreement, the Registration Rights Agreement,
the Certificate of Determination and the Warrants which were required under the
terms hereof or thereof to have been so performed prior to such date, and
provided further that the Maximum Restrictive Covenant Termination Date shall be
deferred one and one-half (1-1/2) days for each day that there is no Effective
Registration following 90 days after the Closing Date.
Section 3.7 Dividends or Distributions. So long as over 20% of the
Preferred Shares remain outstanding, SciClone agrees that it shall not (a)
declare or pay any dividends or make any distributions to any holder or holders
of Common Shares, (b) purchase or otherwise acquire for value, directly or
indirectly, any Common Stock or other equity security of SciClone either junior
to or on parity with the Preferred Shares as to priority in payment of dividends
and amounts payable in liquidation, or (c) authorize or issue any other equity
security senior to the Preferred Shares.
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Section 3.8 No Senior Securities. Until the Restrictive Covenant
Termination Date, SciClone agrees that neither SciClone nor any direct or
indirect subsidiary of SciClone shall create, incur, assume, guarantee, secure
or in any manner become liable in respect of any indebtedness, or permit any
liens, claims or encumbrances to exist against SciClone or any direct or
indirect subsidiary of SciClone or any of their assets, except for such
indebtedness, liens, claims or encumbrances incurred in the ordinary course of
business consistent with past practices (which permitted debts include, without
limitation, license fees, royalties and pursuant to any lease) and except for a
working capital facility in form and substance and with a lender reasonably
satisfactory to the Investor, which working capital facility shall not exceed
$1,000,000.
Section 3.9 Notices. SciClone agrees to provide all holders of Preferred
Shares with copies of all notices and information, including without limitation
notices and proxy statements in connection with any meetings, that are provided
to the holders of shares of Common Shares, contemporaneously with the delivery
of such notices or information to such Common Share holders.
Section 3.10 Right of First Refusal. Until the earlier of (a) twelve
months after the Closing Date or (b) when the closing bid price of the Common
Stock is equal to or greater than $6.00 for 20 consecutive Trading Days (as
defined in the Certificate of Determination), SciClone shall not offer, sell,
contract or otherwise issue or deliver any securities convertible into,
exercisable for, or exchangeable for Common Shares in a Convertible Private
Placement (as defined in the SciClone Certificate of Determination as in effect
on the date hereof) unless such offer, sale, contract, issuance or delivery is
first offered to the Investors. SciClone shall make such offer by providing the
Investors with written notice of SciClone's intention to enter into the
Convertible Private Placement together with a term sheet containing the economic
terms and significant provisions of the Convertible Private Placement and any
other information reasonably requested by the Investors (the "Offer"). Such
Offer shall be given with respect to each Convertible Private Placement
contemplated by SciClone. Each Investor shall have eight (8) business days from
receipt of the Offer to deliver a written notice to SciClone that such Investor
wishes to accept the Offer in whole (subject to satisfactory due diligence and
reasonably acceptable definitive documentation) for the Private Placement. If an
Investor rejects the Offer or fails to respond within such eight (8) business
day period, then SciClone shall be permitted to complete such Private Placement
without such Investor on terms and conditions substantially the same as those
contained in the Offer. If any Private Placement is contemplated on terms and
conditions not substantially the same as those contained in the Offer, then such
Private Placement shall be deemed a new Private Placement and the Investors
shall again be entitled to receive an Offer for such Private Placement on such
new terms and conditions (and/or with such new definitive documentation if
applicable). If an Investor accepts the Offer but fails to close the Private
Placement within twenty (20) business days of acceptance of the Offer for any
reason other than (i) any breach by SciClone of its obligations hereunder or
thereunder, (ii) any delay by SciClone or reasonable delay by such Investor in
connection with execution of definitive documentation, (iii) failure of the
parties to reasonably agree on
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<PAGE> 14
definitive documentation, or (iv) reasonable dissatisfaction by such Investor
with their due diligence examination, the Offer to such Investor shall terminate
and such Investor shall not be entitled to receive any Offer in any future
Private Placement.
Section 3.11 Reservation of Stock Issuable Upon Conversion and Upon
Exercise of the Warrants. SciClone shall at all times reserve and keep available
out of its authorized but unissued Common Shares, solely for the purpose of
effecting the conversion of the Preferred Shares and the exercise of the
Warrants, such number of its Common Shares as shall from time to time be
sufficient to effect the conversion of all outstanding Preferred Shares and the
exercise of the Warrants, and if at any time the number of authorized but
unissued Common Shares shall not be sufficient to effect the conversion of all
the then outstanding Preferred Shares and the exercise of the Warrants, SciClone
will take such corporate action as may, in the opinion of its counsel, be
necessary to increase its authorized but unissued Common Shares to such number
of shares as shall be sufficient for such purpose, including without limitation
engaging in best efforts to obtain the requisite shareholder approval. Without
in any way limiting the foregoing, SciClone agrees to reserve and at all times
keep available solely for purposes of conversion of Preferred Shares and the
exercise of the Warrants 100,000 authorized but unissued Common Shares, which
number may be reduced by the number of Common Shares actually delivered pursuant
to conversion of Preferred Shares under the Certificate of Determination or
exercise of the Warrants and shall be appropriately adjusted for any stock
split, reverse split, stock dividend or reclassification of the Common Stock. If
at any time the number of authorized but unissued Common Shares is not
sufficient to effect the conversion of all the then outstanding Preferred Shares
or the exercise of the Warrants, the Investors shall be entitled to the
redemption rights provided in the Registration Rights Agreement.
Section 3.12 Limitations on Offerings. SciClone will not sell any equity
securities if the effect of such sale would be to reduce the number of Common
Shares that SciClone can issue to the Investors upon conversion of the
Preferred Shares without the approval, under the Nasdaq listing requirements, of
the shareholders of SciClone (the "Nasdaq Shareholders Approval Requirement").
SciClone shall not offer or sell any equity securities, or any securities
convertible into or exchangeable or exercisable for equity securities (other
than a private placement of Common Stock to an affiliate of The Palladin Group,
L.P., a registered public offering of Common Stock (other than a continuous
offering pursuant to Rule 415), Common Stock issued in connection with the
acquisition of product rights, a private placement of Common Stock in which the
purchasers in such placement are not permitted to assign, sell, transfer or
otherwise dispose of such Common Stock for a period of at least one (1) year
from the date of purchase, and other shares or options issued or which may be
issued pursuant to SciClone's employee, director or consultant stock option
plans or shares issued upon exercise of options, warrants or rights outstanding
on the Closing Date listed in the SEC Documents), during the three (3) month
period commencing with the Closing Date. SciClone will not sell any equity
securities during the period beginning on the 91st day following the Closing
Date and ending on the 180th day following the Closing Date unless (i) the
Registration Statement (as defined in the Registration Rights Agreement) is
effective, and (ii) either (A) such equity securities are sold at a purchase
price per share equal to or greater than the Closing Price, or (B) legal
counsel to SciClone provides an opinion to the holders of Preferred Shares that
such issuance will not reduce the number of Common Shares that SciClone can
issue to the holders as a result of the application of the Nasdaq Shareholder
Approval Requirement.
Section 3.13 SciClone Redemption Option. SciClone shall, at all times,
maintain enough cash available to cover the cost of any possible redemption
which SciClone may elect to effect pursuant to Section 3(c)(i), Section 3(c)(vi)
or Section 3(c)(viii) of the Certificate of Determination. The amount of such
cash to be maintained shall be reduced ratably in accordance with the amount of
Series C Preferred Stock that
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<PAGE> 15
remains outstanding. No cash belonging to SciClone is required to be maintained
in an escrow account at any time for purposes of such possible future redemption
of Preferred Shares.
Section 3.14 Approval of Adjustment to Conversion Price. Each Investor
agrees, consistent with and subject to any fiduciary duties it may owe those for
whom it holds the Preferred Shares, not to unreasonably withhold approval of any
adjustment to the Conversion Price or corresponding amendment to the Certificate
of Determination as provided for in the fourth sentence of Section 3(n) of the
Certificate of Determination.
Section 3.15 Company's Failure to Timely Convert. If within ten (10)
business days of SciClone's or SciClone's Transfer Agent's receipt of the
certificates representing Preferred Shares to be converted (as provided in the
Certificate of Determination) and the originally executed Conversion Notice (as
defined in the Certificate of Determination), SciClone shall fail to issue a
certificate to a holder or credit the holder's balance account with the DTC for
the number of shares of Common Stock to which such holder is entitled upon such
holder's conversion of Preferred Shares or to issue a new certificate
representing the number of Preferred Shares to which such holder is entitled
pursuant to the Certificate of Determination, in addition to all other available
remedies which such holder may pursue hereunder and under the Certificate of
Determination (including indemnification pursuant to Section 7.5 hereof),
SciClone shall pay additional damages to such holder on each date after such
tenth (10th) business day that such conversion is not timely effected in an
amount equal to one percent (1%) of the product of (A) the number of shares of
Common Stock not issued to the holder on a timely basis pursuant to Section 3(h)
of the Certificate of Determination and to which such holder is entitled and, in
the event SciClone has failed to deliver a certificate representing Preferred
Shares to the holder on a timely basis, the number of shares of Common Stock
issuable upon conversion of the Preferred Shares represented by such
certificate, calculated as of the last possible date which SciClone could have
issued such certificate to such holder without violating Section 3(h) of the
Certificate of Determination and (B) the closing bid price of the Common Stock
on the last possible date which SciClone could have issued such Common Stock and
such certificate, as the case may be, to such holder without violating Section
3(h) of the Certificate of Determination.
ARTICLE IV
CONDITIONS
Section 4.1 Conditions Precedent to the Obligation of SciClone to Sell
the Preferred Shares. The obligation hereunder of SciClone to issue and/or sell
the Preferred Shares and Warrants to the Investors is subject to the
satisfaction, at or before the Closing, of each of the conditions set forth
below. These conditions are for SciClone's sole benefit and may be waived by
SciClone at any time in its sole discretion.
(a) Accuracy of the Investors' Representations and Warranties.
The representations and warranties of each Investor shall be true and correct in
all material respects as of the date when made and as of the Closing Date as
though made at that time (except for representations and warranties that speak
as of a particular date).
(b) Performance by the Investors. Each Investor shall have
performed all agreements and satisfied all conditions required to be performed
or satisfied by the Investors at or prior to the Closing.
(c) No Injunction. No statute, rule, regulation, executive order,
decree, ruling or injunction shall have been enacted, entered, promulgated or
endorsed by any court or governmental authority of competent jurisdiction which
prohibits the consummation of any of the transactions contemplated by this
Agreement or the Registration Rights Agreement or the Certificate of
Determination or the Warrants.
Section 4.2 Conditions Precedent to the Obligation of the Investors to
Purchase the Preferred Shares. The obligation hereunder of each Investor to
acquire and pay for the Preferred Shares and acquire the Warrants is subject to
the satisfaction, at or before the Closing, of each of the conditions set forth
below. These conditions are for the Investors' sole benefit and may be waived by
any or all of the Investors at any time in such Investor's sole discretion.
(a) Accuracy of SciClone's Representations and Warranties. The
representations and warranties of SciClone shall be true and correct in
15
<PAGE> 16
all material respects as of the date when made and as of the Closing Date as
though made at that time (except for representations and warranties that speak
as of a particular date).
(b) Performance by SciClone. SciClone shall have performed all
agreements and satisfied all conditions required to be performed or satisfied by
SciClone at or prior to the Closing.
(c) NASDAQ. From the date hereof to the Closing Date, trading in
SciClone's Common Shares shall not have been suspended by the SEC or the Nasdaq
National Market System, and trading in securities generally as reported by
Nasdaq National Market System shall not have been suspended or limited, and the
Common Shares shall not have been delisted from any exchange or market where
they are currently listed, and the market value of the outstanding Common Shares
shall not have decreased below $1.50 per share.
(d) No Injunction. No statute, rule, regulation, executive order,
decree, ruling or injunction shall have been enacted, entered, promulgated or
endorsed by any court or governmental authority of competent jurisdiction which
prohibits the consummation of any of the transactions contemplated by this
Agreement or the Registration Rights Agreement or the Certificate of
Determination or the Warrants.
(e) Opinion of Counsel. At the Closing the Investors shall have
received an opinion of counsel to SciClone in the form attached hereto as
Exhibit 4.2(e) and such other opinions, certificates and documents as the
Investor or their counsel shall reasonably require incident to the Closing.
(f) Registration Rights Agreement. SciClone and the Investors
shall have executed and delivered the Registration Rights Agreement in the form
and substance of Exhibit 4.2(f) attached hereto.
(g) Adverse Changes. Since February 2, 1998, no event which had
or is likely to have a Material Adverse Effect on SciClone or any of its direct
or indirect subsidiaries shall have occurred.
(h) Officer's Certificate. SciClone shall have delivered to the
Investors a certificate in form and substance reasonably satisfactory to the
Investors, executed by an officer of SciClone, certifying as to satisfaction of
closing conditions, incumbency of signing officers, charter, by-laws, good
standing and authorizing resolutions of SciClone.
(i) Certificate of Determination Filed. The Investors shall have
received copies of the filed Certificate of Determination.
(j) Warrants. Each Investor shall have received such Investor's
Warrant executed by SciClone in the form and substance of Exhibit 1 hereto.
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<PAGE> 17
ARTICLE V
LEGEND AND STOCK
Each certificate representing the Preferred Shares and the Warrants
shall be stamped or otherwise imprinted with a legend substantially in the
following form:
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933 OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD OR OFFERED FOR SALE
EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID ACT AND ANY
APPLICABLE STATE SECURITIES LAW OR UPON DELIVERY TO THIS CORPORATION OF AN
OPINION OF LEGAL COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION THAT AN
EXEMPTION FROM SUCH REGISTRATION REQUIREMENTS IS AVAILABLE.
SciClone agrees to reissue certificates representing the Preferred
Shares and the Warrants without the legend set forth above at such time as (i)
the holder thereof is permitted to dispose of such Preferred Shares and/or the
Warrants pursuant to Rule 144(k) under the Act, or (ii) such Preferred Shares
and/or the Warrants are sold to a purchaser or purchasers who (in the opinion of
counsel to the seller or such purchaser(s), in form and substance reasonably
satisfactory to SciClone and its counsel) are able to dispose of such shares
publicly without registration under the Act.
Prior to the Registration Statement (as defined in the Registration
Rights Agreement) being declared effective, any Common Shares issued pursuant to
conversion of Preferred Shares or exercise of the Warrants shall bear a legend
in the same form as the legend indicated above. Upon such Registration Statement
becoming effective, SciClone agrees to issue instructions to its transfer agent
to issue new certificates representing Common Shares sold pursuant to the
Registration Statement without such legend upon such terms as shall be
reasonably satisfactory to the Investors. Any Common Shares issued pursuant to
conversion of Preferred Shares or exercise of the Warrants after the
Registration Statement has become effective shall be free and clear of any
legends, transfer restrictions and stop orders.
ARTICLE VI
MISCELLANEOUS
Section 7.1 Stamp Taxes; Agent Fees. SciClone shall pay all stamp and
other taxes and duties levied in connection with the issuance of the Preferred
Shares pursuant hereto and the Common Shares issued upon conversion thereof or
upon exercise of the Warrants.
17
<PAGE> 18
Section 7.2 Specific Enforcement; Consent to Jurisdiction.
(a) SciClone and the Investors acknowledge and agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed in accordance with their specific terms or were
otherwise breached. It is accordingly agreed that the parties shall be entitled
to an injunction or injunctions to prevent or cure breaches of the provisions of
this Agreement and to enforce specifically the terms and provisions hereof, this
being in addition to any other remedy to which any of them may be entitled by
law or equity.
(b) SciClone and the Investors (i) hereby irrevocably submit to
the exclusive jurisdiction of the United States District Court, the New York
State courts and other courts of the United States sitting in New York County,
New York for the purposes of any suit, action or proceeding arising out of or
relating to this Agreement and (ii) hereby waive, and agree not to assert in any
such suit action or proceeding, any claim that it is not personally subject to
the jurisdiction of such court, that the suit, action or proceeding is brought
in an inconvenient forum or that the venue of the suit, action or proceeding is
improper. SciClone and the Investors consent to process being served in any such
suit, action or proceeding by mailing a copy thereof to such party at the
address in effect for notices to it under this Agreement and agrees that such
service shall constitute good and sufficient service of process and notice
thereof. Nothing in this paragraph shall affect or limit any right to serve
process in any other manner permitted by law.
Section 7.3 Entire Agreement; Amendment. This Agreement, together with
the Registration Rights Agreement, the Warrants and the agreements and documents
executed in connection herewith and therewith, contains the entire understanding
of the parties with respect to the matters covered hereby and thereby and,
except as specifically set forth herein or therein, neither SciClone nor the
Investors make any representation, warranty, covenant or undertaking with
respect to such matters. No provision of this Agreement may be waived or amended
other than by a written instrument signed by the party against whom enforcement
of any such amendment or waiver is sought.
Section 7.4 Notices. Any notice or other communication required or
permitted to be given hereunder shall be in writing and shall be effective upon
actual receipt of such notice. The addresses for such communications shall be:
to SciClone: SciClone Pharmaceuticals, Inc.
901 Mariners Island Boulevard
San Mateo, California 94404
Fax: (650) 358-3469
Attn: Shawn K. Singh
with copies to: Gray, Cary, Ware & Freidenrich LLP
139 Townsend St.
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<PAGE> 19
San Francisco, California 94704
Fax: (415) 836-9220
Attn: Howard Clowes, Esq.
to the Investors: Halifax Fund, L.P.
c/o The Palladin Group
40 West 57th Street
New York, New York 10019
Fax: (212) 698-0554
Attn: Robert L. Chender
Thermis Partners L.P.
Heracles Fund
(c/o) Promethean Investment Group L.L.C.
40 West 57th Street
New York, New York 10019
Fax: (212) 698-0505
Attn: E. Kurt Kim
with copies to: Arnold & Porter
555 Twelfth Street, N.W.
Washington, D.C. 20004-1202
Fax: (202) 942-5999
Attn: L. Stevenson Parker, Esq.
Any party hereto may from time to time change its address for notices by
giving at least 10 days' written notice of such changed address to the other
parties hereto.
Section 7.5 Indemnity. Each party shall indemnify each other party
against any loss, cost or damages (including reasonable attorney's fees but
excluding consequential damages) incurred as a result of such parties' breach of
any representation, warranty, covenant or agreement in this Agreement.
Section 7.6 Waivers. No waiver by any party of any default with respect
to any provision, condition or requirement of this Agreement shall be deemed to
be a continuing waiver in the future or a waiver of any other provision,
condition or requirement hereof, nor shall any delay or omission of any party to
exercise any right hereunder in any manner impair the exercise of any such right
accruing to it thereafter.
Section 7.7 Headings. The headings herein are for convenience only, do
not constitute a part of this Agreement and shall not be deemed to limit or
affect any of the provisions hereof.
Section 7.8 Successors and Assigns. Except as otherwise provided herein,
this Agreement shall be binding upon and inure to the benefit of the parties and
their successors and permitted assigns. The parties hereto may amend this
Agreement without notice to or the consent of any third party. SciClone may not
assign this Agreement or any rights or obligations hereunder without the prior
written consent of the Investors (which consent may be withheld for any reason
in its sole discretion), except that SciClone may assign this Agreement in
connection with a merger, acquisition or the sale of all or substantially all of
its assets provided that SciClone is not released from any of its obligations
hereunder, such assignee assumes all obligations of SciClone hereunder, and
appropriate adjustment of the provisions contained in this Agreement, the
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<PAGE> 20
Registration Rights Agreement, the Certificate of Determination and the
Warrants is made, in form and substance satisfactory to the Investors, to place
the Investors in the same position as it would have been but for such
assignment, in accordance with the terms of the Certificate of Determination and
the Warrants. The Investors may not assign this Agreement (in whole or in part)
or any rights or obligations hereunder without the prior written consent of
SciClone (which consent shall not be unreasonably withheld) in connection with
any sale or transfer all or any portion of the Preferred Shares or the Warrants
held by the Investors; provided that upon giving prior written notice to
SciClone, an Investor may assign this Agreement (in whole or in part) or any
rights or obligations hereunder to an affiliate of such Investor without
SciClone's consent.
Section 7.9 No Third Party Beneficiaries. This Agreement is intended for
the benefit of the parties hereto and their respective permitted successors and
assigns and is not for the benefit of, nor may any provision hereof be enforced
by, any other person.
Section 7.10 Governing Law. This Agreement shall be governed by and
construed and enforced in accordance with the internal laws of the State of New
York without regard to such state's principles of conflict of laws.
Section 7.11 Survival. The representations and warranties and the
agreements and covenants of SciClone and the Investors contained herein shall
survive the Closing.
Section 7.12 Execution. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement, it
being understood that all parties need not sign the same counterpart.
Section 7.13 Publicity. SciClone agrees that it will not disclose, and
will not include in any public announcement, the name of the Investors without
such Investor's consent (which consent shall not be unreasonably withheld),
unless and until such disclosure is required by law or applicable regulation,
and then only to the extent of such requirement. SciClone agrees that it will
deliver a copy of any public announcement regarding the matters covered by this
Agreement or any agreement and document executed herewith to the Investors and
any public announcement including the name of an Investor to such Investor,
prior to publication of such announcements.
Section 7.14 Attorney's Fees. An Investor shall be entitled to recover
from SciClone the reasonable attorney's fees and expenses incurred by such
Investor in connection with enforcement by the Investor of any obligation of
SciClone under this Agreement or the Certificate of Determination.
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<PAGE> 21
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
<TABLE>
<CAPTION>
<S> <C>
INVESTOR:
SCICLONE:
HALIFAX FUND, L.P.
SCICLONE PHARMACEUTICALS, INC. By: THE PALLADIN GROUP, L.P.
Attorney-in-fact
By: PALLADIN CAPITAL
By: _________________________ MANAGEMENT, L.L.C.,
NAME: Donald R. Sellers General Partner
Title: President and Chief Executive Officer
By: ____________________________
Name: Jeffrey E. Devers
Title: Duly Authorized Signatory
INVESTOR:
THEMIS PARTNERS L.P.
By: Promethean Investment Group L.L.C.,
its General Partner
By: ____________________________
Name: E. Kurt Kim
Title: Duly Authorized Signatory
INVESTOR:
HERACLES FUND
By: Promethean Investment Group L.L.C.,
its Investment Advisor
By: ____________________________
Name: E. Kurt Kim
Title: Duly Authorized Signatory
</TABLE>
21
<PAGE> 22
EXHIBIT 1.1
SCHEDULE OF PURCHASERS
<TABLE>
<CAPTION>
Investor Number of Shares Aggregate Purchase Price
- -------- ---------------- ------------------------
<S> <C> <C>
Halifax Fund, L.P. 413,223 $2,500,000
Themis Partners L.P. 82,645 $500,000
Heracles Fund 165,289 $1,000,000
TOTAL: 661,157 $4,000,000
</TABLE>
22
<PAGE> 23
EXHIBIT 1.3
SCHEDULE OF WARRANTS
<TABLE>
<CAPTION>
Investor Number of Shares Subject to Warrant
- -------- -----------------------------------
<S> <C>
Halifax Fund, L.P. 62,500
Themis Partners, L.P. 12,500
Heracles Fund 25,000
</TABLE>
23
<PAGE> 24
Exhibit A
Form of Warrant
THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. IT MAY NOT BE SOLD
OR OFFERED FOR SALE EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAW OR AN
APPLICABLE EXEMPTION FROM SUCH REGISTRATION REQUIREMENTS.
SCICLONE PHARMACUETICALS, INC.
Common Stock Purchase Warrant
SciClone Pharmaceuticals, Inc. a California corporation (the "Company"),
hereby certifies that for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, __________________, having an
address at _____________________________________________________________________
(the "Purchaser") or any other Warrant Holder is entitled, on the terms and
conditions set forth below, to purchase from the Company at any time beginning
on the date hereof and ending sixty (60) months after the date hereof, _______
fully paid and nonassessable shares of Common Stock, no par value, of the
Company (the "Common Stock"), at the Purchase Price per share set forth below.
1. Definitions.
(a) the term "Warrant Holder" shall mean the Purchaser or any
assignee of all or any portion of this Warrant.
(b) the term "Warrant Shares" shall mean the Shares of Common
Stock or other securities issuable upon exercise of this Warrant.
(c) the term "Registration Rights Agreement" shall mean the
Registration Rights Agreement, dated on or about the date hereof,
between the Company and the Purchaser.
(d) the term "Agreement" shall mean the Preferred Stock
Investment
<PAGE> 25
Agreement, dated March 27, 1998, between the Company and the
Purchaser.
(e) the term "Preferred Shares" shall mean the shares of Series
C Preferred Stock of the Company.
(f) The term "Purchase Price" shall be 150% of the Closing
Price as defined in the Certificate of Determination.
2. Exercise of Warrant.
This Warrant may be exercised by the Warrant Holder, in whole or in
part, at any time and from time to time, on or prior to the fifth anniversary of
the date hereof, by either of the following methods:
(a) The Warrant Holder may surrender this Warrant, together with
cash, a check or wire transfer representing the aggregate
purchase price of the number of Warrant Shares for which the
Warrant is being surrendered and the form of subscription at the
end hereof duly executed by Warrant Holder ("Subscription
Notice"), at the offices of the Company or any transfer agent for
the Common Stock; or
(b) The Warrant Holder may also exercise this Warrant, in whole
or in part, in a "cashless" or "net-issue" exercise by delivering
to the offices of the Company or any transfer agent for the
Common Stock this Warrant, together with a Subscription Notice
specifying the number of Warrant Shares to be delivered to such
Warrant Holder ("Deliverable Shares") and the number of Warrant
Shares with respect to which this Warrant is being surrendered in
payment of the aggregate Purchase Price for the Deliverable
Shares ("Surrendered Shares"); provided that the Purchase Price
multiplied by the number of Deliverable Shares shall not exceed
the value of the Surrendered Shares; and provided further that
the sum of the number of Deliverable Shares and the number of
Surrendered Shares so specified shall not exceed the aggregate
Warrant Shares represented by this Warrant. For the purposes of
this provision, each Warrant Share as to which this Warrant is
surrendered will be attributed a value equal to the fair market
value (as defined below) of the Warrant Share minus the Purchase
Price of the Warrant Share.
In the event that the Warrant is not exercised in full, the number of
Warrant Shares shall be reduced by the number of such Warrant Shares for which
this Warrant is exercised, and the Company, at its expense, shall forthwith
issue and deliver or upon the order of Warrant Holder a new Warrant of like
tenor in the name of Warrant Holder or as Warrant Holder (upon payment by
Warrant Holder of any applicable transfer taxes) may request, reflecting such
adjusted Warrant Shares.
3. Delivery of Stock Certificates.
2
<PAGE> 26
(a) Subject to the terms and conditions of this Warrant, as soon
as practicable after the exercise of this Warrant in full or in part, and in any
event within three (3) "trading days" (as defined below) thereafter, the Company
shall transmit the certificates (together with any other stock or other
securities or property to which Warrant Holder is entitled upon exercise) by
messenger or overnight delivery service to reach the address designated by such
holder within three (3) trading days after the receipt of the Warrant, the
Subscription Notice and payment of the aggregate Purchase Price in Section 2(a)
or 2(b), as appropriate ("T+3").
In lieu of delivering physical certificates representing the
Common Stock issuable upon exercise, provided the Company's transfer agent is
participating in the Depository Trust Company ("DTC") Fast Automated Securities
Transfer ("FAST") program, upon request of the Warrant Holder, the Company shall
use its best efforts to cause its transfer agent to electronically transmit the
Common Stock issuable upon exercise to the Warrant Holder by crediting the
account of Warrant Holder's prime broker with DTC through its Deposit Withdrawal
Agent Commission ("DWAC") system. The time periods for delivery described in the
immediately preceding paragraph shall apply to the electronic transmittals
described herein.
The term "trading day" means a day on which there is trading on
the Nasdaq National Market System or such other principal market or exchange on
which the Common Stock is then traded.
(b) This Warrant may not be exercised as to fractional shares of
Common Stock. In the event that the exercise of this Warrant, in full or in
part, would result in the issuance of any fractional share of Common Stock, then
in such event the Warrant Holder shall be entitled to cash equal to the fair
market value of such fractional share on the date of delivery of the
Subscription Notice. For purposes of this Warrant, "fair market value" shall
equal the closing trading price of the Common Stock, on the Nasdaq National
Market System, the American Stock Exchange or the New York Stock Exchange,
whichever is the principal trading exchange or market for the Common Stock (the
"Principal Market") on the date of determination or, if the Common Stock is not
listed or admitted to trading on any national securities exchange or quoted on
the Nasdaq National Market System, the average of the closing bid and asked
prices on the over-the-counter market as furnished by any New York Stock
Exchange member firm reasonably selected from time to time by the Company for
that purpose and reasonably acceptable to the Warrant Holder, or, if the Common
Stock is not listed or admitted to trading on any national securities exchange
or quoted on the Nasdaq National Market System or traded over-the-counter and
the average price cannot be determined a contemplated above, the fair market
value of the Common Stock shall be as reasonably determined in good faith by the
Company's Board of Directors with the concurrence of the Warrant Holder.
4. (A) Representations and Covenants of the Company.
(a) The Company shall comply with its obligations under the
Registration Rights Agreement with respect to the Warrant Shares, including,
without limitation, the Company's obligation to have filed and declared
effective a registration statement registering the Warrant Shares under the
Securities Act of 1933, as amended (the "Act").
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<PAGE> 27
(b) The Company shall take all necessary action and proceedings
as may be required and permitted by applicable law, rule and regulation,
including, without limitation, the notification of the Principal Market, for the
legal and valid issuance of this Warrant and the Warrant Shares to the Warrant
Holder under this Warrant.
(c) From the date hereof through the last date on which this
Warrant is exercisable, the Company shall take all steps reasonably necessary
and within its control to insure that the Common Stock remains listed on the
Principal Market and shall not amend its Articles of Incorporation or Bylaws so
as to adversely affect any rights of the Warrant Holder under this Warrant.
(d) The Warrant Shares, when issued in accordance with the terms
hereof, will be duly authorized and, when paid for or issued in accordance with
the terms hereof, shall be validly issued, fully paid and non-assessable. The
Company has authorized and reserved for issuance to Warrant Holder the requisite
number of shares of Common Stock to be issued pursuant to this Warrant.
(e) The Company shall at all times reserve and keep available,
solely for issuance and delivery as Warrant Shares hereunder, such number of
shares of Common Stock as shall from time to time be issuable pursuant to this
Warrant.
(f) With a view to making available to Warrant Holder the
benefits of Rule 144 promulgated under the Act and any other rule or regulation
of the Securities and Exchange Commission ("SEC") that may at any time permit
Warrant Holder to sell securities of the Company to the public without
registration, the Company agrees to use its reasonable best efforts, while this
Warrant is outstanding, to:
(i) make and keep public information available, as those
terms are understood and defined in Rule 144, at all times;
(ii) file with the SEC in a timely manner all reports
and other documents required of the Company under the Act and the Securities
Exchange Act of 1934, as amended (the "Exchange Act"); and
(iii) furnish to any Warrant Holder forthwith upon
request a written statement by the Company that it has complied with the
reporting requirements of Rule 144 and of the Act and the Exchange Act, a copy
of the most recent annual or quarterly report of the Company, and such other
reports and documents so filed by the Company as may be reasonably requested to
permit any such Warrant Holder to take advantage of any rule or regulation of
the SEC permitting the selling of any such securities without registration.
(B) Representations and Covenants of the Purchaser.
The Purchaser shall not resell Warrant Shares, unless
such resale is pursuant to an effective registration statement under the Act or
pursuant to an applicable exemption from such registration requirements.
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<PAGE> 28
5. Adjustment of Purchase Price and Number of Shares. The number of and
kind of securities purchasable upon exercise of this Warrant and the Purchase
Price shall be subject to adjustment from time to time as follows:
(a) Subdivisions, Combinations and other Issuances. If the
Company shall at any time after the date hereof but prior to the expiration of
this Warrant subdivide its outstanding securities as to which purchase rights
under this Warrant exist, by split-up, spinoff, or otherwise, or combine its
outstanding securities as to which purchase rights under this Warrant exist, the
number of Warrant Shares as to which this Warrant is exercisable as of the date
of such subdivision, split-up, spin-off or combination shall forthwith be
proportionately increased in the case of a subdivision, or proportionately
decreased in the case of a combination. Appropriate proportional adjustments
(decrease in the case of subdivision, increase in the case of combination) shall
also be made to the Purchase Price payable per share, so that the aggregate
Purchase Price payable for the total number of Warrant Shares purchasable under
this Warrant as of such date shall remain the same.
(b) Stock Dividend. If at any time after the date hereof but
prior to the expiration of this Warrant, the Company declares a dividend or
other distribution on Common Stock payable in Common Stock or other securities
or rights convertible into Common Stock ("Common Stock Equivalents") without
payment of any consideration by holders of Common Stock for the additional
shares of Common Stock or the Common Stock Equivalents (including the additional
shares of Common Stock issuable upon exercise or conversion thereof), then the
number of shares of Common Stock for which this Warrant may be exercised shall
be increased as of the record date (or the date of such dividend distribution if
no record date is set) for determining which holders of Common Stock shall be
entitled to receive such dividends, in proportion to the increase in the number
of outstanding shares (and shares of Common Stock issuable upon conversion of
all such securities convertible into Common Stock) of Common Stock as a result
of such dividend, and the Purchase Price shall be proportionately reduced so
that the aggregate Purchase Price for all the Warrant Shares issuable hereunder
immediately after the record date (or on the date of such distribution, if
applicable), for such dividend shall equal the aggregate Purchase Price so
payable immediately before such record date (or on the date of such
distribution, if applicable).
(c) Other Distributions. If at any time after the date hereof but
prior to the expiration of this Warrant, the Company distributes to holders of
its Common Stock, other than as part of its dissolution, liquidation or the
winding up of its affairs, any shares of its capital stock, any evidence of
indebtedness or any of its assets (other than cash, Common Stock or securities
convertible into Common Stock), then the number of Warrant Shares for which this
Warrant is exercisable shall be increased to equal: (i) the number of Warrant
Shares for which this Warrant is exercisable immediately prior to such event,
(ii) multiplied by a fraction, (A) the numerator of which shall be the fair
market value per share of Common Stock on the record date for the dividend or
distribution, and (B) the denominator of which shall be the fair market value
price per share of Common Stock on the record date for the dividend or
distribution minus the amount allocable to one share of Common Stock of the
value (as jointly determined in good faith by the Board of Directors of the
Company and the Warrant Holder) of any and all such evidences
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<PAGE> 29
of indebtedness, shares of capital stock, other securities or property, so
distributed. The Purchase Price shall be reduced to equal: (i) the Purchase
Price in effect immediately before the occurrence of any such event (ii)
multiplied by a fraction, (A) the numerator of which is the number of Warrant
Shares for which this Warrant is exercisable immediately before the adjustment,
and (B) the denominator of which is the number of Warrant Shares for which this
Warrant is exercisable immediately after the adjustment.
(d) Merger, etc. If at any time after the date hereof there shall
be a merger or consolidation of the Company with or into or a transfer of all or
substantially all of the assets of the Company to another entity, then the
Warrant Holder shall be entitled to receive upon or after such transfer, merger
or consolidation becoming effective, and upon payment of the Purchase Price then
in effect, the number of shares or other securities or property of the Company
or of the successor corporation resulting from such merger or consolidation,
which would have been received by Warrant Holder for the shares of stock subject
to this Warrant had this Warrant been exercised just prior to such transfer,
merger or consolidation becoming effective or to the applicable record date
thereof, as the case may be. The Company will not merge or consolidate with or
into any other corporation, or sell or otherwise transfer its property, assets
and business substantially as an entirety to another corporation, unless the
corporation resulting from such merger or consolidation (if not the Company), or
such transferee corporation, as the case may be, shall expressly assume, by
supplemental agreement reasonably satisfactory in form and substance to the
Warrant Holder, the due and punctual performance and observance of each and
every covenant and c6ndition of this Warrant to be performed and observed by the
Company.
(e) Reclassification, etc. If at any time after the date hereof
there shall be a reorganization or reclassification of the securities as to
which purchase rights under this Warrant exist into the same or a different
number of securities of any other class or classes, then the Warrant Holder
shall thereafter be entitled to receive upon exercise of this Warrant, during
the period specified herein and upon payment of the Purchase Price then in
effect, the number of shares or other securities or property resulting from such
reorganization or reclassification, which would have been received by the
Warrant Holder for the shares of stock subject to this Warrant had this Warrant
at such time been exercised.
6. No Impairment. The Company will not, by amendment of its Articles of
Incorporation or through any reorganization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms of this
Warrant, but will at all times in good faith assist in the carrying out of all
such terms and in the taking of all such action as may be necessary or
appropriate in order to protect the rights of the Warrant Holder against
impairment. Without limiting the generality of the foregoing, the Company (a)
will not increase the par value of any Warrant Shares above the amount payable
therefor on such exercise, and (b) will take all such action as may be
reasonably necessary or appropriate in order that the Company may validly and
legally issue fully paid and nonassessable Warrant Shares on the exercise of
this Warrant.
7. Notice of Adjustments. Whenever the Purchase Price or number of
Shares purchasable hereunder shall be adjusted pursuant to Section 5 hereof, the
Company shall execute
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<PAGE> 30
and deliver to the Warrant Holder a certificate setting forth, in reasonable
detail, the event requiring the adjustment, the amount of the adjustment, the
method by which such adjustment was calculated and the Purchase Price and number
of shares purchasable hereunder after giving effect to such adjustment, and
shall cause a copy of such certificate to be mailed (by first class mail,
postage prepaid) to the Warrant Holder.
8. Rights As Stockholder. Prior to exercise of this Warrant, the Warrant
Holder shall not be entitled to any rights as a shareholder of the Company with
respect to the Warrant Shares, including (without limitation) the right to vote
such shares, receive dividends or other distributions thereon or be notified of
shareholder meetings. However, in the event of any taking by the Company of a
record of the holders of any class of securities for the purpose of determining
the holders thereof who are entitled to receive any dividend (other than a cash
dividend) or other distribution, any right to subscribe for, purchase or
otherwise acquire any shares of stock of any class or any other securities or
property, or to receive any other right, the Company shall mail to each Warrant
Holder, at least 10 days prior to the date specified therein, a notice
specifying the date on which any such record is to be taken for the purpose of
such dividend, distribution or right, and the amount and character of such
dividend, distribution or right.
9. Limitation on Exercise. Notwithstanding anything to the contrary
contained herein, this Warrant may not be exercised by the Warrant Holder to the
extent that, after giving effect to Warrant Shares to be issued pursuant to a
Subscription Notice, the total number of shares of Common Stock deemed
beneficially owned by such holder (other than by virtue of ownership of this
Warrant, or ownership of other securities that have limitations on the holder's
rights to convert or exercise similar to the limitations set forth herein),
together with all shares of Common Stock deemed beneficially owned by the
holder's "affiliates" (as defined in Rule 144 of the Act) that would be
aggregated for purposes of determining whether a group under Section 13(d) of
the Securities Exchange Act of 1934 exists, would exceed 4.9% of the total
issued and outstanding shares of the Common Stock. The delivery of a
Subscription Notice by the Warrant Holder shall be deemed a representation by
such holder that it is in compliance with this paragraph.
The term "deemed beneficially owned" as used in this Warrant shall
exclude shares that might otherwise be deemed beneficially owned by reason of
the exercise of this Warrant.
10. Replacement of Warrant. On receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of the
Warrant and, in the case of any such loss, theft or destruction of the Warrant,
on delivery of an indemnity agreement or security reasonably satisfactory in
form and amount to the Company or, in the case of any such mutilation, on
surrender and cancellation of such Warrant, the Company at its expense will
execute and deliver, in lieu thereof a new Warrant of like tenor.
11. Specific Enforcement, Consent to Jurisdiction and Choice of Law
(a) The Company and the Warrant Holder acknowledge and agree that
irreparable damage would occur in the event that any of the provisions of this
Warrant were not
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<PAGE> 31
performed in accordance with their specific terms or were otherwise breached. It
is accordingly agreed that the parties shall he entitled to an injunction or
injunctions to prevent or cure breaches of the provisions of this Warrant and to
enforce specifically the terms and provisions hereof, this being in addition to
any other remedy to which either of them may be entitled by law or equity.
(b) Each of the Company and the Warrant Holder (i) hereby
irrevocably submits to the exclusive jurisdiction of the state and federal court
located in New York County, New York for the purposes of any suit, action or
proceeding arising out of or relating to this Warrant and (ii) hereby waives,
and agrees not to assert in any such suit, action or proceeding, any claim that
it is not personally subject to the jurisdiction of such court, that the suit,
action or proceeding is brought in an inconvenient forum or that the venue of
the suit, action or proceeding is improper. Each of the Company and the Warrant
Holder consents to process being served in any such suit, action or proceeding
by mailing a copy thereof to such party at the address in effect for notices to
it under this Warrant and agrees that such service shall constitute good and
sufficient service of process and notice thereof. Nothing in this paragraph
shall affect or limit any right to serve process in any other manner permitted
by law.
(c) This Warrant shall be governed by and construed and enforced
in accordance with the internal laws of the State of New York without regard to
such state's principles of conflict of laws.
12. Entire Agreement: Amendments. This Warrant, the Exhibits hereto and
the provisions contained in the Agreement or the Registration Rights Agreement
and incorporated into this Warrant and the Warrant Shares contain the entire
understanding of the parties with respect to the matters covered hereby and
thereby and, except as specifically set forth herein and therein, neither the
Company nor the Warrant Holder makes any representation, warranty, covenant or
undertaking with respect to such matters. No provision of this Agreement may be
waived or amended other than by a written instrument signed by the party against
whom enforcement of any such amendment or waiver is sought.
13. Notices. Any notice or other communication required or permitted to
be given hereunder shall be in writing and shall be effective (a) upon hand
delivery or delivery by telex (with correct answer back received), telecopy or
facsimile at the address or number designated below (if delivered on a business
day during normal business hours where such notice is to be received), or the
first business day following such delivery (if delivered other than on a
business day during normal business hours where such notice is to be received)
or (b) on the second business day following the date of mailing by express
courier service, fully prepaid, addressed to such address, or upon actual
receipt of such mailing, whichever shall first occur. The addresses for such
communications shall be:
to the Company:
SciClone Pharmaceuticals, Inc.
901 Mariners Island Boulevard
San Mateo, California 94404
Facsimile: (650) 358-3469
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<PAGE> 32
Attention: Shawn K. Singh
with copies to:
Gray, Cary, Ware & Friedenrich LLP
139 Townsend Street
San Francisco, California 94107
Facsimile: (415) 836-9220
Attention: Howard Clowes, Esq.
to the Purchaser:
__________________________________
__________________________________
__________________________________
__________________________________
with copies to:
__________________________________
__________________________________
__________________________________
__________________________________
Either party hereto may from time to time change its address for notices
under this Section 13 by giving at least 10 days prior written notice of such
changed address to the other party hereto.
14. Miscellaneous. This Warrant and any term hereof may be changed,
waived, discharged or terminated only by an instrument in writing signed by the
party against which enforcement of such change, waiver, discharge or termination
is sought. The headings in this Warrant are for purposes of reference only, and
shall not limit or otherwise affect any of the terms hereof. The invalidity or
unenforceability of any provision hereof shall in no way affect the validity or
enforceability of any other provision.
15. Assignment. This Warrant may not be assigned, by the Warrant Holder,
in whole or in part, without the prior written consent of the Company; provided
that upon written notice to the Company, the Warrant Holder may assign this
Warrant, in whole or in part, to an affiliate of the Warrant Holder without the
Company's consent. In either case, to effect a transfer of this Warrant, the
Warrant Holder shall submit this Warrant to the Company together with a duly
executed Assignment in substantially the form and substance of the Form of
Assignment which
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<PAGE> 33
accompanies this Warrant and, upon the Company's receipt hereof, and in any
event, within three (3) business days thereafter, the Company shall issue a
Warrant to the Warrant Holder to evidence that portion of this Warrant, if any
as shall not have been so transferred or assigned.
Dated:___________________ SCICLONE PHARMACEUTICALS, INC.
By:
Name:
Title:
Attest:
By: _____________________
Its
____________________________________
By: ________________________________
Title:
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<PAGE> 34
(SUBSCRIPTION NOTICE)
FORM OF WARRANT EXERCISE
(TO BE SIGNED ONLY ON EXERCISE OF WARRANT)
TO _______________
The undersigned, the holder of the within Warrant, hereby
irrevocably elects to exercise this Warrant:
_____(A) for, and to purchase thereunder, _______________ shares of
Common Stock of SciClone Pharmaceuticals, Inc., a
California corporation (the "Common Stock"), and herewith,
or by wire transfer, makes payment of $_____therefor; or
_____(B) in a "cashless" or "net-issue exercise" for, and to
purchase thereunder _______________ shares of Common
Stock, and herewith makes payment therefor with __________
Surrendered Warrant Shares.
The undersigned requests that the certificates for
such shares be issued in the name of, and
_____(A) delivered to ___________________, whose address is
_____________________; or
_____(B) electronically transmitted and credited to the account of
______________ undersigned's prime broker (Account No.
_______________) with Depository Trust Company through its
Deposit Withdrawal Agent Commission system.
Dated: _______________
_________________________________________
(Signature must conform to name of holder
as specified on the face of the Warrant)
_________________________________________
(Address)
Tax Identification Number: _____________
______________
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<PAGE> 35
FORM OF ASSIGNMENT
(TO BE SIGNED ONLY ON TRANSFER OF WARRANT)
For value received, the undersigned hereby sells, assigns, and transfers unto
______________ the right represented by the within Warrant to purchase ____
shares of Common Stock of SciClone Pharmaceuticals, Inc., a California
corporation, to which the within Warrant relates, and appoints _________
Attorney to transfer such right on the books of SciClone Pharacueticals, Inc., a
California corporation, with full power of substitution of premises.
Dated: _______________
_________________________________________
(Signature must conform to name of holder
as specified on the face of the Warrant)
________________________________________
(Address)
Signed in the presence of:
__________________________
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<PAGE> 1
Exhibit 4.4
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT is entered into as of April 1,
1998, between SciClone Pharmaceuticals, Inc., a California corporation (the
"Company") Halifax Fund, L.P., Thermis Partners L.P. and Heracles Fund
(individually, an "Investor," and collectively, the "Investors").
W I T N E S S E T H
WHEREAS, pursuant to that certain Preferred Stock Investment Agreement
by and between the Company and the Investors (the "Purchase Agreement"), the
Company has agreed to sell and issue to the Investors, and the Investors have
agreed to purchase from the Company, an aggregate of 661,157 shares of the
Company's Series C Preferred Stock (the "Preferred Shares") on the terms and
conditions set forth therein, and has agreed to issue to the Investors Common
Stock Purchase Warrants ("Warrants") providing the Investors with the right to
purchase an aggregate of 100,000 shares ("Warrant Shares") of Common Stock, no
par value ("Common Stock") on the terms and conditions set forth in the
Warrants; and
WHEREAS, the Purchase Agreement contemplates that the Preferred Shares
will be convertible into shares (together with the Warrant Shares, the "Common
Shares") of Common Stock pursuant to the terms and conditions set forth in the
Certificate of Determination for such Preferred Shares (the "Certificate of
Determination"); and
WHEREAS, pursuant to the terms of, and in partial consideration for, the
Investors' agreement to enter into the Purchase Agreement, the Company has
agreed to issue the Warrants and to provide the Investors with certain
registration rights with respect to the Common Shares and certain other rights
and remedies with respect to the Preferred Shares as set forth in this
Agreement;
NOW THEREFORE, in consideration of the mutual promises, representations,
warranties, covenants and conditions set forth in the Purchase Agreement and
this Agreement, the Company and the Investors agree as follows:
1. Certain Definitions. Capitalized terms used herein and not otherwise
defined shall have the meaning ascribed thereto in the Purchase Agreement or the
Certificate of Determination. As used in this Agreement, the following terms
shall have the following respective meanings:
"Commission" shall mean the Securities and Exchange Commission or
any other federal agency at the time administering the Securities Act.
<PAGE> 2
"Holder" and "Holders" shall include the Investors and any
transferee of the Preferred Shares, the Warrant or Common Shares or
Registrable Securities which have not been sold to the public, to whom
the registration rights conferred by this Agreement have been
transferred in compliance with this Agreement.
"Liquidation Preference" shall have the meaning ascribed to such
term in the Certificate of Determination.
"Registrable Securities" shall mean: (i) the Common Shares
issued to each Holder upon conversion of the Preferred Shares or
exercise of the Warrants or upon any stock split, stock dividend,
recapitalization or similar event with respect to such Common Shares;
(ii) any securities issued or issuable to each Holder upon the exchange
or conversion of any Preferred Shares, the Warrants or Common Shares;
and (iii) any other security of the Company issued as a dividend or
other distribution with respect to, in exchange of or in replacement of
Registrable Securities.
The terms "register", "registered" and "registration" shall
refer to a registration effected by preparing and filing a registration
statement in compliance with the Securities Act and applicable rules and
regulations thereunder, and the declaration or ordering of the
effectiveness of such registration statement.
"Registration Expenses" shall mean all expenses to be incurred
by the Company in connection with each Holder's registration rights
under this Agreement, including, without limitation, all registration
and filing fees, printing expenses, fees and disbursements of counsel
for the Company, blue sky fees and expenses, reasonable fees and
disbursements of counsel to Holders (using a single counsel selected by
a majority in interest of the Holders) for a "due diligence" examination
of the Company and review of the Registration Statement and related
documents, and the expense of any special audits incident to or required
by any such registration (but excluding the compensation of regular
employees of the Company, which shall be paid in any event by the
Company).
"Selling Expenses" shall mean all underwriting discounts and
selling commissions applicable to the sale of Registrable Securities and
all fees and disbursements of counsel for Holders not included within
"Registration Expenses".
"Registration Statement" shall have the meaning set forth in
Section 2(a) herein.
"Regulation D" shall mean Regulation D as promulgated pursuant
to the Securities Act, and as subsequently amended.
"Securities Act" or "Act" shall mean the Securities Act of 1933,
as amended.
2. Registration Requirements. The Company shall use its best efforts to
effect the registration of the Registrable Securities (including without
limitation the execution of an
2
<PAGE> 3
undertaking to file post-effective amendments, appropriate qualification under
applicable blue sky or other state securities laws and appropriate compliance
with applicable regulations issued under the Securities Act) as would permit or
facilitate the sale or distribution of all the Registrable Securities in the
manner (including manner of sale) and in all states reasonably requested by the
Holder. Such best efforts by the Company shall include the following:
(a) The Company shall, as expeditiously as reasonably possible
after the Closing Date:
(i) Prepare and file a registration statement with the
Commission pursuant to Rule 415 under the Securities Act on Form
S-3 under the Securities Act (or in the event that the Company is
ineligible to use such form, such other form as the Company is
eligible to use under the Securities Act) covering the
Registrable Securities ("Registration Statement"), which
Registration Statement, to the extent allowable under the
Securities Act and the rules promulgated thereunder, shall state
that such Registration Statement also covers such indeterminate
number of additional shares of Common Stock as may become
issuable upon conversion of the Preferred Shares or exercise of
the Warrant (i) to prevent dilution resulting from stock splits,
stock dividends or similar transactions or (ii) by reason of
changes in the Conversion Price or the Market Conversion Price.
The number of shares of Common Stock initially included in such
Registration Statement shall be no less than the number of Common
Shares that would be issuable upon conversion of the Preferred
Shares if the Conversion Price was equal to $1.50 and upon
exercise of the Warrant without regard to any limitation on the
Investors' ability to convert the Preferred Shares and without
regard to any adjustment of the number of shares of Common Stock
issuable pursuant to the Warrants. Thereafter the Company shall
use its best efforts to cause such Registration Statement and
other filings to be declared effective prior to 90 days following
the Closing Date. The Company shall provide the Holders
reasonable opportunity to review any such Registration Statement
or amendment or supplement thereto prior to filing.
(ii) Prepare and file with the Commission such amendments
and supplements to such Registration Statement and the prospectus
used in connection with such Registration Statement as may be
necessary to comply with the provisions of the Act with respect
to the disposition of all securities covered by such Registration
Statement and notify the Holders of the filing and effectiveness
of such Registration Statement and any amendments or supplements.
(iii) Furnish to each Holder such numbers of copies of a
current prospectus conforming with the requirements of the Act,
copies of the Registration Statement, any amendment or supplement
thereto and any documents incorporated by reference therein and
such other documents as such Holder may reasonably require in
order to facilitate the disposition of Registrable Securities
owned by such Holder.
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<PAGE> 4
(iv) Use its best efforts to register and qualify the
securities covered by such Registration Statement under such
other securities or "Blue Sky" laws of such jurisdictions as
shall be reasonably requested by each Holder.
(v) Notify each Holder immediately of the happening of any
event as a result of which the prospectus (including any
supplements thereto or thereof) included in such Registration
Statement, as then in effect, includes an untrue statement of
material fact or omits to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading in light of the circumstances then existing, and use
its best efforts to promptly update and/or correct such
prospectus.
(vi) Notify each Holder immediately of the issuance by the
Commission or any state securities commission or agency of any
stop order suspending the effectiveness of the Registration
Statement or the initiation of any proceedings for that purpose.
The Company shall use its best efforts to prevent the issuance of
any stop order and, if any stop order is issued, to obtain the
lifting thereof at the earliest possible time.
(vii) Permit a single firm of counsel, designated as
Holder's counsel by a majority of the Registrable Securities
included in the Registration Statement, to review the
Registration Statement and all amendments and supplements thereto
within a reasonable period of time prior to each filing, and
shall not file any document in a form to which such counsel
reasonably objects.
(viii) Use its best efforts to list the Registrable
Securities covered by such Registration Statement with all
securities exchange(s) and/or markets on which the Common Stock
is then listed and prepare and file any required filings with the
National Association of Securities Dealers, Inc. or any exchange
or market where the Common Shares are traded.
(ix) Take all steps necessary to enable Holders to avail
themselves of the prospectus delivery mechanism set forth in Rule
153 (or successor thereto) under the Act.
(b) Set forth below in this Section 2(b) are (I) events that may
arise that the Investors consider will interfere with the full enjoyment
of their rights under this Agreement (the "Interfering Events"), and
(II) certain remedies applicable in each of these events.
Paragraphs (i) through (iv) of this Section 2(b) describe the
Interfering Events, provide a remedy to the Investors if an Interfering
Event occurs and provide that the Investors may require that the Company
redeem outstanding Preferred Shares at a specified price if certain
Interfering Events are not timely cured.
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<PAGE> 5
Paragraph (v) provides inter alia, that if cash payments required
as the remedy in the case of certain of the Interfering Events are not
paid when due, the Company may be required by the Investors to redeem
outstanding Preferred Shares at a specified price.
Paragraph (vi) provides, inter alia that the Investors have the
right to specific performance.
The preceding paragraphs in this Section 2(b) are meant to serve
only as an introduction to this Section 2(b), are for convenience only,
and are not to be considered in applying, construing or interpreting
this Section 2(b).
(i) Delay in Effectiveness of Registration Statement. The
Company agrees that it shall file the Registration Statement
complying with the requirements of this Agreement promptly
following the date of the closing of the Purchase Agreement (the
"Closing Date") and shall use its best efforts to cause such
Registration Statement to become effective within 90 days from
the Closing Date. In the event that such Registration Statement
has not been declared effective within 90 days from the Closing
Date, then the Conversion Price or the Market Conversion Price,
as applicable, shall be reduced by 1% during and after the 30-day
period ("Default Period") from and after the 90th day following
the Closing Date during which such Registration Statement is not
effective, and be further reduced by an additional 1.5% during
and after each Default Period thereafter. For example, if the
Registration Statement does not become effective until 130 days
from the Closing Date, the Conversion Price or the Market
Conversion Price, as applicable, during days 91 through 119 shall
be equal to 99% of the Conversion Price or the Market Conversion
Price, as applicable. The Conversion Price or the Market
Conversion Price, as applicable, from and after day number 120
from the Closing Date shall be equal to 97.5%. In each case, the
Conversion Price or the Market Conversion Price, as applicable,
shall be subject to further adjustment as set forth in the
Certificate of Determination. If the Registration Statement has
not been declared effective within 180 days after the Closing
Date, then each Holder shall have the right to sell its Preferred
Shares to the Company at a price (the "Premium Redemption Price")
equal to 1.3 times (i.e., 130% of) the Liquidation Preference (as
defined in the Certificate of Determination). Payment of such
amount shall be due and payable within five (5) business days of
demand therefor and surrender by the Holder of its certificate(s)
for the Series C Preferred Stock.
(ii) No Listing Premium Price Redemption for Delisting of
Class of Shares.
(A) In the event that the Company fails, refuses or
is unable to cause the Registrable Securities covered by
the Registration Statement to be listed with the NASDAQ
National Market System and each other securities exchange
and market on which the Common Stock is then traded at all
times during the period ("Listing Period") from the 90th
day following the Closing Date until the Forced Conversion
Date (provided that such date shall be deferred 1.5 days
for each day that there is no Effective Registration),
then the Company shall pay in cash to each Holder
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<PAGE> 6
a default payment in an amount equal to three percent (3%)
of the aggregate Liquidation Preference represented by the
Preferred Shares held by such Holder for each 30-day
period during the Listing Period from and after such
failure, refusal or inability to so list the Registrable
Securities until the Registrable Securities are so listed.
(B) In the event that shares of Common Stock of the
Company are delisted from the NASDAQ National Market
System any time following the Closing Date and remain
delisted for 5 consecutive business days, then at the
option of each Holder and to the extent such Holder so
elects, the Company shall on 5 business days notice redeem
the Preferred Shares and/or Common Shares held by such
Holder, in whole or in part, as follows: (I) in the case
of the Preferred Shares, they shall be redeemed at a
redemption price equal to the Premium Redemption Price (as
defined in Section 2(b)(i)); and (II) in the case of
Common Shares issued to such Holder pursuant to conversion
of the Preferred Shares, such shares shall be redeemed at
a redemption price per share equal to 1.3 times the dollar
amount which is the product of (x) the number of shares so
to be redeemed pursuant to this paragraph, and (y) the
Conversion Price or Market Conversion Price, as
appropriate, as in effect at the time such shares were
received pursuant to conversion of the Preferred Shares;
provided, however, that such Holder may revoke such
request at any time prior to receipt of such payment of
such redemption price. Default payments shall no longer
accrue on the Preferred Shares after such shares have been
redeemed by the Company pursuant to the foregoing
provision.
(iii) Blackout Periods. During the period between the
effective date of the Registration Statement and the second
anniversary of the Closing Date, in the event any Holder's
ability to sell Registrable Securities under the Registration
Statement is suspended for more than (i) five (5) consecutive
business days or (ii) fifteen (15) days in any calendar year
("Suspension Grace Period"), including without limitation by
reason of a suspension of trading of the Common Shares on the
NASDAQ National Market System or any suspension or stop order
with respect to the Registration Statement or the fact that an
event has occurred as a result of which the prospectus (including
any supplements thereto) included in such Registration Statement
then in effect includes an untrue statement of material fact or
omits to state a material fact required to be stated therein or
necessary to make the statements therein not misleading in light
of the circumstances then existing, then the Company shall pay in
cash to each Holder a default payment in an amount equal to three
percent (3%) of the Liquidation Preference for the Preferred
Shares held by such Holder for each 30-day period from and after
the expiration of the Suspension Grace Period. At any time after
the fifth day following the expiration of the Suspension Grace
Period, a Holder shall have the right to have the Company redeem
its Preferred Shares and Common Shares at the price and on the
terms set forth in Section 2(b)(ii)(B) above.
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<PAGE> 7
(iv) Conversion Deficiency Premium Price Redemption for
Conversion Deficiency. In the event that the Company does not
have a sufficient number of Common Shares available to satisfy
the Company's obligations to any Holder upon receipt of a
Conversion Notice or is otherwise unable or unwilling to issue
such Common Shares (including without limitation by reason of the
limit described in Section 10 below) (each, a "Conversion
Deficiency") in accordance with the terms of the Purchase
Agreement for any reason after receipt of a Conversion Notice,
then:
(A) The Company shall pay in cash to each Holder a
default payment in an amount equal to three percent (3%)
of the Liquidation Preference for the Preferred Shares
held by such Holder for each 30-day period that the
Company fails or refuses to issue Common Shares in
accordance with the terms of the Certificate of
Determination; and
(B) At any time five days after the commencement of
the running of the first 30-day period described above in
clause (A) of this paragraph (iv), at the request of any
Holder pursuant to a redemption notice, the Company
promptly (1) shall purchase from such Holder, at a
purchase price equal to the Premium Redemption Price, the
number of Preferred Shares equal to such Holder's pro rata
share of the "Deficiency," as such term is defined below,
if the failure to issue Common Shares results from the
lack of a sufficient number thereof and (2) shall purchase
all of such Holder's Preferred Shares if the failure to
issue Common Shares results from any other cause;
provided, however, if within three (3) business days of
such Redemption Notice the Company delivers to such Holder
a Notice stating that the Company will have a sufficient
number of Common Shares available for conversion of all
outstanding Preferred Shares within ten (10) business
days, then the Company shall not be required to redeem
such Preferred Shares pursuant to this paragraph (iv)
unless the Company shall fail to have a sufficient number
of Common Shares available for conversion of all
outstanding Preferred Shares after such ten (10) business
day period. Pursuant to the foregoing, in the event any
Holder delivers a Conversion Notice and the Company is
unable to convert any Preferred Shares under the
Certificate of Determination due to an insufficient number
of Common Shares available for any reason, the Company
promptly shall purchase from such Holder, at a purchase
price equal to the Premium Redemption Price, the number of
Preferred Shares requested to be converted in such
Conversion Notice which are not so converted. The
"Deficiency" shall be equal to the number of Preferred
Shares that could be converted for the number of Common
Shares represented by the number of Common Shares required
to be issued upon receipt of a Conversion Notice less the
number of Common Shares available for issuance upon
receipt of such Conversion Notice, if all
7
<PAGE> 8
outstanding Preferred Shares eligible for conversion were
submitted for conversion at the Conversion Price set forth
in the Certificate of Determination as of the date such
Deficiency is determined. Default payments shall no longer
accrue on Preferred Shares after such shares have been
redeemed by the Company pursuant to the foregoing
provision.
(v) Premium Price Redemption for Cash Payment Defaults.
(A) The Company acknowledges that any failure,
refusal or inability by the Company described in the
foregoing paragraphs (i) through (iv) will cause the
Holders to suffer damages in an amount that will be
difficult to ascertain, including without limitation
damages resulting from the loss of liquidity in the
Registrable Securities and the additional investment risk
in holding the Registrable Securities. Accordingly, the
parties agree that it is appropriate to include in this
Agreement the foregoing provisions for default payments
and mandatory redemptions in order to compensate the
Holders for such damages. The parties acknowledge and
agree that the default payments and mandatory redemptions
set forth above represent the parties' good faith effort
to quantify such damages and, as such, agree that the form
and amount of such default payments are reasonable and
will not constitute a penalty.
(B) Each default payment provided for in the
foregoing paragraphs (ii) through (iv) shall be in
addition to each other default payment. All default
payments required to be made in connection with the above
provisions shall be paid in cash by the tenth (10th) day
of each calendar month following the date on which such
payment becomes due and payable (which payments shall be
pro rata on a per diem basis for any period of less than
30 days).
(C) In the event that the Company fails or refuses
to pay any default payment when due, at any Holder's
request and option, the Company shall purchase all or a
portion of the Preferred Shares held by such Holder (with
default payments accruing through the date of such
purchase), within five (5) days of such request, at a
purchase price equal to the Premium Redemption Price,
provided that such Holder may revoke such request at any
time prior to receipt of such payment of such purchase
price. Until such time as the Company purchases such
Preferred Shares at the request of such Holder pursuant to
the preceding sentence, at any Holder's request and option
the Company shall as to such Holder pay such amount by
adding and including the amount of such default payment to
Conversion Amount and the Liquidation Preference instead
of in cash.
(vi) Cumulative Remedies. The default payments and
mandatory redemptions provided for above are in addition to and
not in lieu or limitation of
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<PAGE> 9
any other rights the Holders may have at law, in equity or under
the terms of the Certificate of Determination, the Purchase
Agreement, the Warrant or this Agreement, including without
limitation the right to specific performance. Each Holder shall
be entitled to specific performance of any and all obligations of
the Company in connection with the registration rights of the
Holders hereunder.
(vii) Deferral of Forced Conversion Date. In the event of
a failure of Effective Registration, including without limitation
by reason of any of the circumstances described in the foregoing
clauses (i) through (iv) above, then the Forced Conversion Date
(as defined in the Certificate of Determination) shall be
deferred by 1.5 days for each day that any of the circumstances
in clauses (i), (ii), (iii) (without regard to the applicability
of the Suspension Grace Period), or (iv) exist.
(c) If the Holder(s) intend to distribute the Registrable
Securities by means of an underwriting, the Holder(s) shall so advise
the Company. Any such underwriting may only be administered by
investment bankers reasonably satisfactory to the Company. The Company
shall only be obligated to permit one underwritten offering, which
offering shall be determined by a majority-in-interest of the Holders.
(d) In the event of an underwriting pursuant to Section 2(c), the
Company shall enter into such customary agreements for a secondary
offering and take all such other reasonable actions reasonably requested
by the Holders in connection therewith in order to expedite or
facilitate the disposition of such Registrable Securities and in such
connection, whether or not an underwriting agreement is entered into and
whether or not the Registrable Securities are to be sold in an
underwritten offering:
(i) make such representations and warranties to the
Holders and the underwriter or underwriters, if any, in form,
substance and scope as are customarily made by issuers to
underwriters in secondary offerings;
(ii) cause to be delivered to the sellers of Registrable
Securities and the underwriter or underwriters, if any, opinions
of independent counsel to the Company, on and dated as of the
effective day (or in the case of an underwritten offering, dated
the date of delivery of any Registrable Securities sold pursuant
thereto) of the Registration Statement, and within ninety (90)
days following the end of each fiscal year thereafter, which
counsel and opinions (in form, scope and substance) shall be
reasonably satisfactory to the Holders and the underwriter(s), if
any, and their counsel and covering, without limitation, such
matters as the due authorization and issuance of the securities
being registered and compliance with securities laws by the
Company in connection with the authorization, issuance and
registration thereof and other matters that are customarily given
to underwriters in underwritten offerings, addressed to the
Holders and each underwriter, if any.
(iii) cause to be delivered, immediately prior to the
effectiveness of the
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<PAGE> 10
Registration Statement (and, in the case of an underwritten
offering, at the time of delivery of any Registrable Securities
sold pursuant thereto), and at the beginning of each fiscal year
following a year during which the Company's independent certified
public accountants shall have reviewed any of the Company's books
or records, a "comfort" letter from the Company's independent
certified public accountants addressed to the Holders and each
underwriter, if any, stating that such accountants are
independent public accountants within the meaning of the
Securities Act and the applicable published rules and regulations
thereunder, and otherwise in customary form and covering such
financial and accounting matters as are customarily covered by
letters of the independent certified public accountants delivered
in connection with secondary offerings; such accountants shall
have undertaken in each such letter to update the same during
each such fiscal year in which such books or records are being
reviewed so that each such letter shall remain current, correct
and complete throughout such fiscal year; and each such letter
and update thereof, if any, shall be reasonably satisfactory to
the Holders.
(iv) if an underwriting agreement is entered into, the
same shall include customary indemnification and contribution
provisions to and from the underwriters and procedures for
secondary underwritten offerings;
(v) deliver such documents and certificates as may be
reasonably requested by the Holders of the Registrable Securities
being sold or the managing underwriter or underwriters, if any,
to evidence compliance with clause (i) above and with any
customary conditions contained in the underwriting agreement, if
any; and
(vi) deliver to the Holders on the effective day (or in
the case of an underwritten offering, dated the date of delivery
of any Registrable Securities sold pursuant thereto) of the
Registration Statement, and at the beginning of each fiscal
quarter thereafter, a certificate in form and substance as shall
be reasonably satisfactory to the Holders, executed by an
executive officer of the Company and to the effect that all the
representations and warranties of the Company contained in the
Purchase Agreement are still true and correct except as disclosed
in such certificate; the Company shall, as to each such
certificate delivered at the beginning of each fiscal quarter,
update or cause to be updated each such certificate during such
quarter so that it shall remain current, complete and correct
throughout such quarter; and such updates received by the Holders
during such quarter, if any, shall have been reasonably
satisfactory to the Holders.
(e) The Company shall make available for inspection by the
Holders, representative(s) of all the Holders together, any underwriter
participating in any disposition pursuant to a Registration Statement,
and any attorney or accountant retained by any Holder or underwriter,
all financial and other records customary for purposes of
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<PAGE> 11
the Holders' due diligence examination of the Company and review of any
Registration Statement, all SEC Documents (as defined in the Purchase
Agreement) filed subsequent to the Closing, pertinent corporate
documents and properties of the Company, and cause the Company's
officers, directors and employees to supply all information reasonably
requested by any such representative, underwriter, attorney or
accountant in connection with such Registration Statement, provided that
such parties agree to keep such information confidential.
(f) Subject to Section 2(b) above, the Company may suspend the
use of any prospectus used in connection with the Registration Statement
only in the event, and for such period of time as, such a suspension is
required in the reasonable opinion of counsel to the Company by the
rules and regulations of the Commission. The Company will use its best
efforts to cause such suspension to terminate at the earliest possible
date.
(g) The Company shall file a Registration Statement with respect
to any newly authorized shares reserved for issuance upon conversion
of the Series C Preferred Stock within five (5) business days of any
shareholders meeting authorizing same and shall use its best efforts to
cause such Registration Statement to become effective within ninety (90)
days of such shareholders meeting. If the Holders become entitled,
pursuant to an event described in clause (iii) of the definition of
Registrable Securities, to receive any securities in respect of
Registrable Securities that were already included in a Registration
Statement, subsequent to the date such Registration Statement is
declared effective, and the Company is unable under the securities laws
to add such securities to the then effective Registration Statement, the
Company shall promptly file, in accordance with the procedures set forth
herein, an additional Registration Statement with respect to such newly
Registrable Securities. The Company shall use its best efforts to (i)
cause any such additional Registration Statement, when filed, to become
effective under the Securities Act, and (ii) keep such additional
Registration Statement effective during the period described in Section
5 below. All of the registration rights and remedies under this
Agreement shall apply to the registration of such newly reserved shares
and such new Registrable Securities, including without limitation the
provisions providing for default payments contained herein.
3. Expenses of Registration. All Registration Expenses incurred in
connection with any registration, qualification or compliance with registration
pursuant to this Agreement except for registration expenses incurred pursuant
to Sections 2(c) and 2(d) of this Agreement, shall be borne by the Company,
and all Selling Expenses of a Holder shall be borne by such Holder.
4. Registration on Form S-3. The Company shall use its best efforts to
qualify for registration on Form S-3 or any comparable or successor form or
forms, or in the event that the Company is ineligible to use such form, such
form as the Company is eligible to use under the Securities Act.
5. Registration Period. In the case of the registration effected by the
Company pursuant to this Agreement, the Company will use its best efforts to
keep such registration effective until all the Holders have completed the sales
or distribution described in the
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<PAGE> 12
Registration Statement relating thereto or, if earlier, until such
Registerable Securities may be sold under Rule 144(k) (provided that the
Company's transfer agent has accepted an instruction from the Company to such
effect).
6. Indemnification.
The Company Indemnity. The Company will indemnify each
Holder, each of its officers, directors and partners, and
each person controlling each Holder, within the meaning of
Section 15 of the Securities Act and the rules and
regulations thereunder with respect to which registration,
qualification or compliance has been effected pursuant to
this Agreement, and each underwriter, if any, and each
person who controls, within the meaning of Section 15 of
the Securities Act and the rules and regulations
thereunder, any underwriter, against all claims, losses,
damages and liabilities (or actions in respect thereof)
arising out of or based on any untrue statement (or
alleged untrue statement) of a material fact contained in
any prospectus, offering circular or other document
(including any related registration statement,
notification or the like) incident to any such
registration, qualification or compliance, or based on any
omission (or alleged omission) to state therein a material
fact required to be stated therein or necessary to make
the statements therein not misleading, or any violation by
the Company of the Securities Act or any state securities
law or in either case, any rule or regulation thereunder
applicable to the Company and relating to action or
inaction required of the Company in connection with any
such registration, qualification or compliance, and will
reimburse each Holder, each of its officers, directors and
partners, and each person controlling such Holder, each
such underwriter and each person who controls any such
underwriter, for any legal and any other expenses
reasonably incurred in connection with investigating and
defending any such claim, loss, damage, liability or
action, provided that the Company will not be liable in
any such case to a Holder to the extent that any such
claim, loss, damage, liability or expense arises out of or
is based on any untrue statement or omission based upon
written information furnished to the Company by such
Holder or the underwriter (if any) therefor and stated to
be specifically for use therein. The indemnity agreement
contained in this Section 6(a) shall not apply to amounts
paid in settlement of any such loss, claim, damage,
liability or action if such settlement is effected without
the consent of the Company (which consent will not be
unreasonably withheld).
(b) Holder Indemnity. Each Holder will, severally and not
jointly, if Registrable Securities held by it are included in the
securities as to which such registration, qualification or compliance is
being effected, indemnify the Company, each of its directors, officers,
partners, and each underwriter, if any, of the Company's securities
covered by such a registration statement, each person who controls the
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<PAGE> 13
Company or such underwriter within the meaning of Section 15 of the
Securities Act and the rules and regulations thereunder, each other
Holder (if any), and each of their officers, directors and partners, and
each person controlling such other Holder(s) against all claims, losses,
damages and liabilities (or actions in respect thereof) arising out of
or based on any untrue statement (or alleged untrue statement) of a
material fact contained in any such registration statement, prospectus,
offering circular or other document, or any omission (or alleged
omission) to state therein a material fact required to be stated therein
or necessary to make the statement therein not misleading, and will
reimburse the Company and such other Holder(s) and their directors,
officers and partners, underwriters or control persons for any legal or
any other expenses reasonably incurred in connection with investigating
and defending any such claim, loss, damage, liability or action, in each
case to the extent, but only to the extent, that such untrue statement
(or alleged untrue statement) or omission (or alleged omission) is made
in such registration statement, prospectus, offering circular or other
document in reliance upon and in conformity with written information
furnished to the Company by such Holder and stated to be specifically
for use therein, and provided that the maximum amount for which such
Holder shall be liable under this indemnity shall not exceed the net
proceeds received by such Holder from the sale of the Registrable
Securities. The indemnity agreement contained in this Section 6(b) shall
not apply to amounts paid in settlement of any such claims, losses,
damages or liabilities if such settlement is effected without the
consent of such Holder (which consent shall not be unreasonably
withheld).
(c) Procedure. Each party entitled to indemnification under this
Article (the "Indemnified Party") shall give notice to the party
required to provide indemnification (the "Indemnifying Party") promptly
after such Indemnified Party has actual knowledge of any claim as to
which indemnity may be sought, and shall permit the Indemnifying Party
to assume the defense of any such claim in any litigation resulting
therefrom, provided that counsel for the Indemnifying Party, who shall
conduct the defense of such claim or any litigation resulting therefrom,
shall be approved by the Indemnified Party (whose approval shall not be
unreasonably withheld), and the Indemnified Party may participate in
such defense at such party's expense, and provided further that the
failure of any Indemnified Party to give notice as provided herein shall
not relieve the Indemnifying Party of its obligations under this Article
except to the extent that the Indemnifying Party is materially and
adversely affected by such failure to provide notice. No Indemnifying
Party, in the defense of any such claim or litigation, shall, except
with the consent of each Indemnified Party, consent to entry of any
judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to
such Indemnified Party of a release from all liability in respect to
such claim or litigation. Each Indemnified Party shall furnish such
information regarding itself or the claim in question as an Indemnifying
Party may reasonably request in writing and as shall be reasonably
required in connection with the defense of such claim and litigation
resulting therefrom.
7. Contribution. If the indemnification provided for in Section 6 herein
is unavailable to the Indemnified Parties in respect of any losses, claims,
damages or liabilities referred to herein
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<PAGE> 14
(other than by reason of the exceptions provided therein), then each such
Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall
contribute to the amount paid or payable by such Indemnified Party as a result
of such losses, claims, damages or liabilities as between the Company on the one
hand and any Holder on the other, in such proportion as is appropriate to
reflect the relative fault of the Company and of such Holder in connection with
the statements or omissions which resulted in such losses, claims, damages or
liabilities, as well as any other relevant equitable considerations. The
relative fault of the Company on the one hand and of any Holder on the other
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or omission or alleged omission to
state a material fact relates to information supplied by the Company or by such
Holder.
In no event shall the obligation of any Indemnifying Party to contribute
under this Section 7 exceed the amount that such Indemnifying Party would have
been obligated to pay by way of indemnification if the indemnification provided
for under Section 6(a) or 6(b) hereof had been available under the
circumstances.
The Company and the Holders agree that it would not be just and
equitable if contribution pursuant to this Section 7 were determined by pro rata
allocation (even if the Holders or the underwriters were treated as one entity
for such purpose) or by any other method of allocation which does not take
account of the equitable considerations referred to in the immediately preceding
paragraphs. The amount paid or payable by an Indemnified Party as a result of
the losses, claims, damages and liabilities referred to in the immediately
preceding paragraphs shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses reasonably incurred by such Indemnified
Party in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this section, no Holder or underwriter shall
be required to contribute any amount in excess of the amount by which (i) in the
case of any Holder, the net proceeds received by such Holder from the sale of
Registrable Securities or (ii) in the case of an underwriter, the total price at
which the Registrable Securities purchased by it and distributed to the public
were offered to the public exceeds, in any such case, the amount of any damages
that such Holder or underwriter has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of Section ii
(f) of the Securities Act) shall be entitled to contribution from any person who
was not guilty of such fraudulent misrepresentation.
8. Survival. The indemnity and contribution agreements contained in
Sections 6 and 7 and the representations and warranties of the Company referred
to in Section 2(d)(i) shall remain operative and in full force and effect
regardless of (i) any termination of this Agreement or the Purchase Agreement or
any underwriting agreement, (ii) any investigation made by or on behalf of any
Indemnified Party or by or on behalf of the Company, and (iii) the consummation
of the sale or successive resales of the Registrable Securities.
9. Information by Holders. Each Holder shall furnish to the Company such
information regarding such Holder and the distribution and/or sale proposed by
such Holder as the Company may reasonably request in writing and as shall be
reasonably required in connection with any registration, qualification or
compliance referred to in this Agreement. The intended method or methods of
disposition and/or sale (Plan of Distribution) of such securities as so provided
by such Holder and as approved by counsel to the Company shall be included
without alteration in the Registration Statement covering the Registrable
Securities and shall not be changed without the written consent of such Holder.
10. NASDAQ Limit on Stock Issuances. In the event that the Company does
not issue (i) any Common Shares upon conversion of the Preferred Shares or (ii)
any Warrant Shares, due to the rules or regulations of any market or exchange
regulator for the market or exchange on which the Common Shares or Warrant
Shares are then trading, the Company shall, at the request of any Holder
promptly following such determination, purchase such Preferred Shares of such
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<PAGE> 15
Holder which cannot be converted, or Warrant Shares which cannot be issued, at a
purchase price equal to the Premium Redemption Price.
11. Replacement Certificates. The certificate(s) representing the Common
Shares or Warrant Shares held by any Investor (or then Holder) may be exchanged
by such Investor (or such Holder) at any time and from time to time for
certificates with different denominations representing an equal aggregate number
of Common Shares or Warrant Shares, as reasonably requested by such Investor (or
such Holder) upon surrendering the same. No service charge will be made for such
registration or transfer or exchange.
12. Transfer or Assignment. Except as otherwise provided herein, this
Agreement shall be binding upon and inure to the benefit of the parties and
their successors and permitted assigns. The rights granted to the Investors by
the Company under this Agreement to cause the Company to register Registrable
Securities may be transferred or assigned (in whole or in part) to a transferee
or assignee of the Preferred Shares or the Warrant, and all other rights granted
to the Investors by the Company hereunder may be transferred or assigned to any
transferee or assignee of any Preferred Shares or the Warrant; provided in each
case that each Investor must give prior written notice to the Company of any
such transfer or assignment, stating the name and address of said transferee or
assignee and identifying the securities with respect to which such registration
rights are being transferred or assigned; and provided further that the
transferee or assignee of such rights agrees in writing to be bound by the
registration provisions of this Agreement.
13. Miscellaneous.
(a) Remedies. The Company and the Investors acknowledge and agree
that irreparable damage would occur in the event that any of the
provisions of this Agreement were not performed in accordance with their
specific terms or were otherwise breached. It is accordingly agreed that
the parties shall be entitled to an injunction or injunctions to prevent
or cure breaches of the provisions of this Agreement and to enforce
specifically the terms and provisions hereof, this being in addition to
any other remedy to which any of them may be entitled by law or equity.
(b) Jurisdiction. The Company and each of the Investors (i)
hereby irrevocably submits to the exclusive jurisdiction of the United
States District Court, the New York State courts and other courts of the
United States sitting in New York County, New York for the purposes of
any suit, action or proceeding arising out of or relating to this
Agreement and (ii) hereby waives, and agrees not to assert in any such
suit action or proceeding, any claim that it is not personally subject
to the jurisdiction of such court, that the suit, action or proceeding
is brought in an inconvenient forum or that the venue of the suit,
action or proceeding is improper. The Company and the Investors consent
to process being served in any such suit, action or proceeding by
mailing a copy thereof to such party at the address in effect for
notices to it under this Agreement and agrees that such service shall
constitute good and sufficient service of process and notice thereof.
Nothing in this paragraph shall affect or limit any right to serve
process in any other
15
<PAGE> 16
manner permitted by law.
(c) Notices. Any notice or other communication required or
permitted to be given hereunder shall be in writing by facsimile, mail
or personal delivery and shall be effective upon actual receipt of such
notice. The addresses for such communications shall be:
to the Company:
SciClone Pharmaceuticals, Inc.
901 Mariners Island Boulevard
San Mateo, California 94404
Facsimile: (650) 358-3469
Attention: Shawn K. Singh
with copies to:
Gray, Cary, Ware & Freidenrich LLP
139 Townsend St.
San Francisco, California 94107
Facsimile: (415) 836-9220
Attention: Howard Clowes, Esq.
to the Investors:
Halifax Fund, L.P.
c/o The Paladin Group
40 West 57th Street
New York, New York 10019
Thermis Partners L.P.
Heracles Fund
c/o The Palladin Group
New York, New York 10019
40 West 57th Street
Facsimile: 212-698-0505
Attention: E. Kurt Kim
with copies to:
Arnold & Porter
555 Twelfth Street, N.W.
Washington, DC 20004-1202
Facsimile: (202) 942-5999
Attention: L. Stevenson Parker, Esq.
Any party hereto may from time to time change its address for notices by
giving at least 10 days' written notice of such changed address to the other
parties hereto.
(d) Indemnity. Each party shall indemnify each other party
against any loss,
16
<PAGE> 17
cost or damages (including reasonable attorney's fees) incurred as a
result of such parties' breach of any representation, warranty, covenant
or agreement in this Agreement.
(e) Waivers. No waiver by any party of any default with respect
to any provision, condition or requirement of this Agreement shall be
deemed to be a continuing waiver in the future or a waiver of any other
provision, condition or requirement hereof, nor shall any delay or
omission of any party to exercise any right hereunder in any manner
impair the exercise of any such right accruing to it thereafter. The
representations and warranties and the agreements and covenants of the
Company and each Investor contained herein shall survive the Closing.
(f) Execution. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same
agreement, it being understood that all parties need not sign the same
counterpart.
(g) Publicity. The Company agrees that it will not disclose, and
will not include in any public announcement, the name of an Investor
without such Investor's consent, unless and until such disclosure is
required by law or applicable regulation, and then only to the extent of
such requirement. The Company agrees to deliver a copy of any public
announcement regarding the matters covered by this Agreement or any
agreement or document executed herewith to the Investors and any public
announcement including the name of an Investor to such Investor, prior
to the publication of such announcements.
(h) Entire Agreement. This Agreement, together with the Purchase
Agreement, the Certificate of Determination and the
Warrant and the agreements and documents contemplated hereby and
thereby, contains the entire understanding and agreement of the parties,
and may not be modified or terminated except by a written agreement
signed by both parties.
(i) Governing Law; Consent of Jurisdiction. This Agreement and
the validity and performance of the terms hereof shall be governed by
and construed in accordance with the laws of the State of New York.
(j) Jury Trial. EACH PARTY HERETO WAIVES THE RIGHT TO A TRIAL BY
JURY.
(k) Titles. The titles used in this Agreement are used for
convenience only and are not to be considered in construing or
interpreting this Agreement.
17
<PAGE> 18
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
<TABLE>
<S> <C>
SCICLONE: INVESTOR:
SCICLONE PHARMACEUTICALS, INC. HALIFAX FUND, L.P.
By: THE PALLADIN GROUP, L.P.
By: Attorney-in-fact
-----------------------------------
Name: Donald R. Sellers By: PALLADIN CAPITAL
Title: President and Chief Executive MANAGEMENT, L.L.C.,
Officer General Partner
By: -----------------------------------
Name: Jeffrey E. Devers
Title: Duly Authorized Signatory
INVESTOR:
THEMIS PARTNERS L.P.
By: Promethean Investment Group L.L.C.,
its General Partner
By: -----------------------------------
Name: E. Kurt Kim
Title: Duly Authorized Signatory
INVESTOR:
HERACLES FUND
By: Promethean Investment Group L.L.C.,
its Investment Advisor
By: -----------------------------------
Name: E. Kurt Kim
Title: Duly Authorized Signatory
</TABLE>
18
<PAGE> 1
Exhibit 21.1
SciClone Pharmaceuticals Italy s.r.l
Piazza Belgioioso 2
20121 Milano
Italy
SciClone Pharmaceuticals
PO Box 309
Ugland House
South Church Street
Grand Cayman
Cayman Island
British West Indies
<PAGE> 1
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of SciClone Pharmaceuticals of our report dated January 16, 1998 except for
note 10 which date is April 2, 1998, included in the 1997 Annual Report to
Stockholders of SciClone Pharmaceuticals.
Our audits also include the financial statement schedule of SciClone
Pharmaceuticals listed in Item 14(a). This schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion based on
our audits. In our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
We also consent to the incorporation by reference in the Registration Statement
on Form S-3 No. 33-60526 pertaining to Redeemable Warrants and shares of Common
Stock issued on exercise thereof and the Registration Statements on Form S-8
No. 33-66832 pertaining to the 1991 Stock Plan, No. 33-52820 pertaining to the
1991 Stock Plan and 1992 Stock Plan, No. 33-80911 pertaining to the 1995 Equity
Incentive Plan, 1995 Nonemployee Director Stock Option Plan, and No. 333-12169
pertaining to the Employee Stock Purchase Plan of SciClone Pharmaceuticals,
Inc. of our report dated January 16, 1998, except for note 10 which date is
April 2, 1998, with respect to the consolidated financial statements
incorporated herein by reference, and our report included in the preceding
paragraph with respect to the financial statement schedule included in this
Annual Report (Form 10-K) for the year ended December 31, 1997.
Palo Alto, California
April 2, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 3,619,100
<SECURITIES> 9,281,365
<RECEIVABLES> 1,024,802
<ALLOWANCES> 0
<INVENTORY> 2,046,218
<CURRENT-ASSETS> 10,888,320
<PP&E> 1,303,234
<DEPRECIATION> (778,157)
<TOTAL-ASSETS> 19,195,505
<CURRENT-LIABILITIES> 3,471,848
<BONDS> 0
0
0
<COMMON> 107,033,516
<OTHER-SE> (91,309,859)
<TOTAL-LIABILITY-AND-EQUITY> 19,195,505
<SALES> 2,223,052
<TOTAL-REVENUES> 2,223,052
<CGS> 989,792
<TOTAL-COSTS> 989,792
<OTHER-EXPENSES> 16,449,077
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (13,997,005)
<INCOME-TAX> 0
<INCOME-CONTINUING> (13,997,005)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,997,005)
<EPS-PRIMARY> (0.85)
<EPS-DILUTED> (0.85)
</TABLE>
