================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------------
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 0-27578
SUNPHARM CORPORATION
(Name of small business issuer in its charter)
Delaware F593097048
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
The Veranda, Suite 301
819 Highway A1A,
Ponte Vedra Beach, Florida 32082
(Address of principal executive offices) (Zip Code)
(904) 394-2800
(Issuer's telephone number)
------------------------------------
Securities registered under Section 12(b) of the Exchange
Act: None Securities registered under Section 12(g) of
the Exchange Act:
Title of Class
Common Stock, par value $.0001 per share
Redeemable Common Stock Purchase Warrants
Units consisting of Common Stock and Redeemable Common Stock Purchase Warrants
Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 [ ]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of the Issuer's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
The Issuer's revenues for its most recent fiscal year: $230,729
The aggregate market value of the voting common stock held by
non-affiliates of the Issuer on March 16, 1999 was $12,111,733, based on the
closing sales price of the Issuer's common stock on the Nasdaq Small Cap Market
on such date of $2.13 per share, and assuming full conversion of the Issuer's
Series A Redeemable Convertible Preferred Stock . For purposes of the preceding
sentence only, all directors, executive officers and beneficial owners of ten
percent or more of the common stock are assumed to be affiliates. As of March
16, 1999, 6,739,475 shares of the Issuer's common stock and 300,000 shares of
the Issuer's Series A Redeemable Convertible Preferred Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: CERTAIN SECTIONS OF THE ISSUER'S
DEFINITIVE PROXY STATEMENT RELATING TO THE ISSUER'S 1999 ANNUAL MEETING OF
STOCKHOLDERS, WHICH PROXY STATEMENT WILL BE FILED UNDER THE SECURITIES EXCHANGE
ACT OF 1934, AS AMENDED, WITHIN 120 DAYS OF THE END OF THE ISSUER'S FISCAL YEAR
ENDED DECEMBER 31, 1998, ARE INCORPORATED BY REFERENCE INTO PART III OF THIS
FORM 10-KSB.
Transitional Small Business Disclosure Format (check one): Yes [_]; No
[X]
================================================================================
<PAGE>
PART I
WHEN USED IN THIS DOCUMENT, THE WORDS "ANTICIPATES," "EXPECTS,"
"BELIEVES," "INTENDS" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS ARE SUBJECT TO CERTAIN RISKS,
UNCERTAINTIES AND ASSUMPTIONS. SHOULD ONE OR MORE OF THESE RISKS OR
UNCERTAINTIES MATERIALIZE, OR SHOULD UNDERLYING ASSUMPTIONS PROVE INCORRECT,
ACTUAL RESULTS MAY VARY MATERIALLY FROM THOSE ANTICIPATED, EXPECTED, ESTIMATED
OR PROJECTED. FOR ADDITIONAL DISCUSSION OF SUCH RISKS, UNCERTAINTIES AND
ASSUMPTIONS, SEE "ITEM 1. DESCRIPTION OF BUSINESS--RISK FACTORS."
ITEM 1. DESCRIPTION OF BUSINESS.
SunPharm Corporation ("SunPharm" or the "Company") is a
development-stage company engaged in the design and development of small
molecule pharmaceutical products, consisting of novel polyamine analogue and
metal chelator compounds invented at the University of Florida and licensed
exclusively worldwide to the Company. The Company's drug development efforts are
focused on cancer, refractory diarrhea associated with acquired immunodeficiency
syndrome ("AIDS"), other gastrointestinal disorders, and iron overload. The
Company currently has 9 compounds in various stages of research or development,
targeting 6 indications.
Two of the Company's polyamine analogue compounds have advanced to
Phase II clinical trials. Diethylhomospermine ("DEHOP"), which completed a Phase
II clinical trial in 1997 for the treatment of refractory AIDS-related diarrhea,
is currently undergoing additional evaluation for safety. A second compound,
diethylnorspermine ("DENSPM"), is in a Phase II clinical trial for the treatment
of various solid tumor cancers under the direction of the Parke Davis
Pharmaceutical Research Division of the Warner-Lambert Company, pursuant to a
sublicense agreement.
The Company is also conducting preclinical studies of several other
potential lead compounds and indications through its sponsored research
agreement with the University of Florida, with the objective of readying these
compounds for pilot studies in humans at the earliest possible time. In this
regard, the Company intends to file an Investigational New Drug Application
("IND") for each of the following compounds and indications in 1999: DENSPM for
psoriasis and the human immuno-deficiency virus ("HIV"), diethylspermine
("DESPM") for AIDS-related diarrhea, pyrrole-carboxylic acid ("PCA") for
ulcerative colitis, and the monosodium salt of hydroxybenzylethylenediamine
diacetic acid ("HBED") for Cooley's anemia. In addition, the Company has a
potential orally active analogue of the iron chelator
desazadesmethyldesferrithiocin ("DFT") in preclinical development.
The Company's strategy is to develop products both independently and
through strategic alliances, pursuant to which the Company seeks financial,
preclinical and clinical trial assistance from larger pharmaceutical and/or
biotechnology companies for novel drugs with broad market potential, while
retaining parallel manufacturing and/or marketing rights for all or part of
those products. Consistent with this strategy, the Company sublicensed worldwide
rights (excluding Japan) to manufacture and market DENSPM for all cancer
indications to Warner-Lambert in May 1993 and sublicensed such rights in Japan
to Nippon Kayaku Co., Ltd. ("Nippon Kayaku") in February 1994. Warner-Lambert
and Nippon Kayaku have agreed to make staged payments to SunPharm for license
fees and research and development milestones, of which an aggregate of $3.1
million has been paid to date, and to pay royalties on sales of products
incorporating DENSPM. In addition, Warner-Lambert and Nippon Kayaku have agreed
to fund and administer all further clinical trials which may be conducted for
DENSPM in cancer indications.
The Company was incorporated in Delaware in 1990 as Lexigen,
Incorporated and in 1991 changed its name to SunPharm Corporation. The Company's
principal executive offices are located at The Veranda, Suite 301, 814 Highway
A1A, Ponte Vedra Beach, Florida 32082. The Company's telephone number is (904)
394-2800. SunPharm supports a principal research facility at the University of
Florida in Gainesville, Florida, and maintains a quality assurance laboratory in
Alachua, Florida.
2
<PAGE>
TECHNOLOGY OVERVIEW
DEVELOPMENT OF POLYAMINE ANALOGUE TECHNOLOGY
For the past fifteen years, the inventor of the Company's polyamine
analogues, Dr. Raymond Bergeron, has conducted research at the University of
Florida directed towards the development of polyamine analogues as potential
anti-cancer agents. This research has been supported by over $6 million of
funding under National Cooperative Drug Discovery Group grants from the National
Cancer Institute and, since 1992, nearly $6 million of funding from the Company
through December 31, 1998.
CHARACTERISTICS AND FUNCTIONS OF POLYAMINES
Human cells contain three essential, naturally occurring polyamines:
putrescine, spermidine and spermine. In contrast to building blocks such as
amino acids, nucleotides and sugars, polyamines do not incorporate into
macromolecules but remain as metabolically distinct entities within cells.
Research indicates that these polyamines bind to nucleic acids and promote the
integrity and fidelity of many of their functions, such as replication,
supercoiling, ribonucleic acid ("RNA") transcription and processing and protein
synthesis. These functions of polyamines are necessary for cellular
proliferation to occur.
Human cells employ a family of enzymes to maintain the proper balance,
or equilibrium, of polyamines. Included in this family of enzymes are ornithine
decarboxylase ("ODC") and S-adenosylmethionine decarboxylase ("SAMDC"), which
make or synthesize polyamines for the cell, and spermidine/spermine
N1-acetyltransferase ("SSAT"), which controls the export and/or recycling of
polyamines from the cell. All three of these enzymes are short-lived, rapidly
inducible proteins, and are tightly regulated by intracellular polyamine pools.
Working together, these enzymes function in a highly coordinated manner to
maintain polyamine pools within a very narrow range of concentration inside the
cell.
The Company's polyamine analogue compounds are structurally similar to
(hence, "analogues" of) the cell's naturally occurring polyamines. Because of
this similarity, these analogues are recognized as natural polyamines by the
cell's polyamine uptake system and thus gain entry into the cell. Once inside
the cell, the Company's polyamine analogues disrupt the cell's polyamine balance
and biosynthetic network, causing the cell to shut down the enzymes ODC and
SAMDC that would normally make natural polyamines, and to increase production of
SSAT, the enzyme which is responsible for the breakdown and export of natural
polyamines from the cell. The combined effect on the enzymes controlling the
proper level of polyamines in the cell results is a substantial reduction in the
amount of natural polyamines in the cell and a corresponding increase in the
amount of analogues in the cell. Because cancer cells have a high rate of
polyamine biosynthesis and contain higher concentrations of essential polyamines
than normal cells, the Company believes that the substitution of its polyamine
analogues for the naturally occurring polyamines will counteract the increased
level of polyamines present in the cancer cells, thereby reducing the ability of
the cancer cells to proliferate.
The Company has discovered, through its sponsored research at the
University of Florida, that certain polyamine analogues modify other
cell-related activities besides cell proliferation. For example,
Company-sponsored work on uncovering DEHOP's mechanism of action in arresting
diarrhea suggests that DEHOP interacts with several receptor complexes,
including the N-methyl-D-aspartate ("NMDA") receptor, which control
neuromuscular function. Additional evidence suggests that DEHOP also stimulates
nitric oxide release, which could be responsible for DEHOP's promotion of the
relaxation of smooth muscles in the gastrointestinal tract. This is consistent
with studies indicating that the smooth muscle relaxation promoted by DEHOP is
inhibited by the nitric oxide synthase inhibitor L-NAME.
DEVELOPMENT OF METAL CHELATOR TECHNOLOGY
A second technology platform, consisting of proprietary metal chelator
compounds invented by Dr. Bergeron at the University of Florida, has been
licensed exclusively to the Company. Metal chelators are drugs that bind tightly
to certain metals, such as iron, in the bloodstream and inside cells, acting to
eliminate quantities in excess of the body's needs, thereby avoiding damage to
vital organs such as the liver, heart and pancreas. Chelators are administered
to supplement the body's poorly developed ability to get rid of excess metal
concentrations.
3
<PAGE>
PRODUCTS UNDER DEVELOPMENT
The Company currently has 9 compounds in various stages of research or
development, targeting 6 indications, including two compounds that have reached
Phase II clinical trials. These products are based on novel polyamine analogue
compounds and metal chelators developed at the University of Florida and
licensed exclusively to the Company. Additional compounds and/or indications
discovered by Dr. Bergeron and his staff will also be licensed to the Company on
an exclusive worldwide basis pursuant to the terms of the Company's sponsored
research agreement with the University of Florida. The following table
summarizes the Company's current product portfolio, or pipeline, which has
resulted from the license agreement and sponsored research agreement with the
University of Florida:
<TABLE>
<CAPTION>
PRODUCT PIPELINE
- - -----------------------------------------------------------------------------------------------------------
DISEASE AREA COMPOUND INDICATION STATUS
- - ------------ -------- ---------- ------
- - -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cancer DENSPM cancer Phase II commenced 1st Qtr. 1998 by
Warner-Lambert Co.
DPNSPM cancer Preclinical development
DENOHO cancer Preclinical development
DEHOHO cancer Preclinical development
- - -----------------------------------------------------------------------------------------------------------
AIDS DEHOP AIDS-related diarrhea Phase II completed 4th Qtr. 1997;
further evaluation for safety ongoing
DESPM AIDS-related diarrhea Preclinical development
DENSPM HIV Preclinical development
- - -----------------------------------------------------------------------------------------------------------
Gastrointestinal
Disorders PCA Ulcerative colitis Preclinical development
- - -----------------------------------------------------------------------------------------------------------
Others DENSPM Psoriasis Preclinical development
HBED Cooley's anemia Preclinical development
DFT Analogue Cooley's anemia Preclinical development
- - -----------------------------------------------------------------------------------------------------------
</TABLE>
CANCER
BACKGROUND. The American Cancer Society estimates that more than 1.2
million new cases of cancer will be diagnosed and more than 500,000 people will
die of cancer in 1999 in the United States. Chemotherapy, surgery and radiation
are the major components in the current treatment of cancer. Chemotherapy is
usually the primary treatment for cancers, such as hematologic malignancies,
which cannot be excised by surgery. In addition, chemotherapy is increasingly
being used as an adjunct to radiation and surgery to improve efficacy and
address metastases (the spread of cancer), and as primary therapy for some solid
tumors. The standard strategy for chemotherapy is to destroy the malignant cells
by exposing them to as much drug as the patient can tolerate. Clinicians attempt
to design a combination of drugs, dosing schedule and method of administration
that increases the probability that malignant cells will be destroyed, while
minimizing the harm to healthy cells.
4
<PAGE>
Most current anti-cancer drugs have significant limitations. Certain
cancers, such as colon, lung, kidney and pancreatic cancers, are inherently
unresponsive to chemotherapeutic agents. Certain other cancers may initially
respond to a chemotherapeutic agent, but cease to respond as the cancer cells
acquire resistance to the drug during the course of therapy. As such cancer
cells develop resistance to a specific chemotherapeutic agent, they often
simultaneously become resistant to a wide variety of structurally unrelated
agents through a phenomenon known as "multi-drug resistance." Additionally,
current anti-cancer drugs are generally highly toxic, with effects, including
bone marrow suppression and irreversible cardiotoxicity, which can prevent their
administration in therapeutic doses.
DENSPM. Phase I clinical trials for DENSPM in refractory solid-tumor
cancer commenced in January 1994 at the University of Florida, Johns Hopkins
University and Roswell Park Cancer Institute. The protocol allowed for dosing
regimens of one, two and three times per day at each center, respectively, in
order to determine DENSPM's maximum tolerated dose and side effects. Following
the Phase I trials, the Company and its sublicensee Warner-Lambert agreed that
the maximum tolerated dose had been determined at all dosage regimens. In
December 1996, the Company received the remaining $500,000 of the $1,000,000
milestone payment due from Warner-Lambert upon reaching that milestone, and
transferred the IND for the clinical trial to Warner-Lambert. In early 1998,
Warner-Lambert commenced Phase II clinical trials of DENSPM in six solid tumor
cancers and will be responsible for all subsequent clinical development of the
compound (excluding Japan) in cancer applications.
DEHOP. This compound was first tested at the University of Florida in
five cancer patients during 1988 and 1989. The purpose of the study was to
determine a safe dosage for DEHOP in cancer patients, and no drug-related side
effects were observed except for constipation. This led the Company and its
researchers at the University of Florida to test DEHOP for use in treating AIDS
patients who suffer from chronic refractory diarrhea. See "--AIDS" and
"--Gastrointestinal Disorders."
Early studies conducted by the Company demonstrated that DEHOP may have
anti-proliferative properties. As a result, the Company filed an IND in March
1996 for a Phase I clinical trial to test DEHOP in cancer patients. The study,
which commenced in October 1996, was conducted by Dr. George Wilding at the
University of Wisconsin Comprehensive Cancer Center, with funding under a
federal grant from the National Cancer Institute. The study was a dose ranging
trial conducted in cancer patients to determine safety, pharmacokinetics, and
maximum tolerated dose. An adverse event was observed in this trial in 1997 at a
dose level five times higher than was used in the Phase II AIDS-related diarrhea
trial. This led to discussions with the U. S. Food and Drug Administration (the
"FDA") to evaluate safety data from the Phase II trial to determine whether to
continue development of DEHOP for cancer indications as well as for trials
planned for other indications, including non-Hodgkin's lymphoma and ulcerative
colitis. In October 1998, the Company announced that an additional Phase II
study of DEHOP would be required, designed to generate additional safety and
pharmacokinetic data prior to commencing pivotal studies in refractory AIDS
related diarrhea. See "Risk Factors --No Assurance of Successful Product
Development or Commercialization".
DEHOHO. Preclinical studies have indicated that a derivative of DEHOP,
diethyldihydroxy-homospermine ("DEHOHO") may be useful in treatment of
pancreatic carcinoma. Several animal studies have demonstrated that this
compound concentrates in the exocrine cells of the pancreas and after a
relatively short use causes almost complete atrophy of these cells, while
sparing the insulin producing endocrine cells. Because the pancreatic cells are
irreversibly altered by the compound, this finding is expected to be relevant to
the treatment of pancreatic carcinoma, a rapid and invariably fatal neoplastic
disease. Preclinical IN VITRO and IN VIVO efficacy studies relevant to this
indication are anticipated to be completed by mid-year 1999, with preclinical
safety studies expected to commence shortly thereafter. Similarly, preclinical
work is planned in 1999 for two other derivative compounds, dipropylnorspermine
("DPNSPM") and diethyldihydroxynorspermine ("DENOHO"), to explore additional
cancer indications.
AIDS
BACKGROUND. AIDS, which is a disease caused by HIV, is a devastating
viral infection that destroys the immune system of affected patients. The
Centers for Disease Control and Prevention ("CDC") estimates that nearly one
million people in the United States and over 30 million people worldwide are
infected with HIV. Over 44,000 new AIDS cases were expected in the United States
in 1998, and globally there are an estimated 16,000 new cases daily.
5
<PAGE>
Disorders of the gastrointestinal tract are common in AIDS patients. It
is estimated that between 50% and 80% of all AIDS patients and between 20% and
30% of all HIV-positive patients suffer from chronic diarrhea during the course
of their disease. Most of these patients have periods of stable weight
interspersed with episodes of heavy diarrhea and rapid wasting that often occur
while the patient is suffering from active secondary infections. Over time, the
patient's recovery from bouts of diarrhea is less complete, producing long-term
loss of body cell mass. The causes of AIDS-related diarrhea and weight loss are
not yet fully understood, and the condition is often unresponsive to medical
therapy. Of the HIV-positive patients with chronic diarrhea, a pathogen can be
identified as the cause in roughly 50% of the cases, and, among those patients
with an identifiable pathogen, approximately 50% (or only 25% of all
HIV-positive patients with chronic diarrhea) can be treated with antibiotic
therapy. Treatment is therefore empiric and uses a combination of anti-diarrheal
agents, including opiates, loperamide, octreotide and diphenoxylate.
DEHOP. In January 1994, the FDA allowed an Investigator IND submitted
by the University of Florida to conduct Phase I clinical trials of DEHOP as a
possible treatment for chronic AIDS-related refractory diarrhea. The first
segment of the Phase I clinical trial, to determine side effects, was completed
in June 1994. Five AIDS patients, for whom treatments with other anti-diarrheal
medications had been unsuccessful, received doses which were three-to five-fold
lower than those doses previously given to cancer patients in a prior study of
DEHOP for cancer conducted in 1989. All five patients experienced a significant
reduction in stool volume with no measurable adverse side effects. An expanded
segment of the Phase I clinical trial in a total of nineteen evaluable patients,
to determine safety, route of administration and dosage regimen, was completed
in December 1995. Across the three dose levels tested, ten responded positively
to the drug. A Phase II clinical trial of DEHOP was conducted on refractory
AIDS-related diarrhea under a Sponsor IND, which was allowed by the FDA in
January 1996, to establish safety and appropriate dosing regiments for use in a
future pivotal clinical trial. In December 1997, the Company reported
statistically significant results of the Phase II multicenter clinical trial of
DEHOP.
Overall, the Phase I and II clinical trials demonstrated positive
response rates of 53% and 80%, respectively, in AIDS patients with very severe,
refractory diarrhea, that is, diarrhea which had failed to respond to all other
approved treatments for two weeks prior to initiating treatment with DEHOP.
Although a small number of drug-related adverse events were reported in each
study, the Company believes that the risks to patients associated with the
observed adverse events are outweighed by the significant anti-diarrheal benefit
of the drug observed in its clinical trials and that they do not preclude
further development of DEHOP for AIDS-related diarrhea. The Company is
continuing to evaluate the impact of safety data from its Phase I clinical trial
of DEHOP for cancer on the development of DEHOP for this indication. As
previously discussed, in October 1998, the Company announced that additional
studies of DEHOP would be required prior to initiating pivotal trials in
AIDS-related diarrhea. If or when initiated, these studies would be designed to
generate additional safety and pharmacokinetic data on the compound. See "Cancer
- - --DEHOP".
HIV . The HIV-1 virus has nine known genes that contain the information
for viral structural, enzymatic and regulatory proteins necessary for
intracellular viral replication and assembly. HIV drugs in use today are
directed toward the viral enzymes, reverse transcriptase and protease. These
enzymes are necessary for conversion of viral RNA to DNA and assembly of viral
components into infective virus, respectively. Despite the effectiveness of
currently available HIV drugs in reducing the levels of HIV, progress of the
disease continues to occur in treated patients, with decreases in CD4+ T
lymphocyte levels, the onset of opportunistic infections, and ultimate
progression to death. Hypotheses for the ultimate failure of these drugs
include: (i) the drugs become overwhelmed by the amount of HIV present; (ii) the
virus develops resistance to the drugs; and (iii) the inhibition of one or two
molecular targets (e.g. reserve transcriptase and/or protease) is insufficient
to control the virus. Although treatment with a combination of reverse
transcriptase and protease inhibitors has been shown to reduce the level of HIV
RNA in the blood to undetectable levels in some patients, HIV DNA continues to
persist in the tissues of these patients. In addition, 25% of patients who have
received combination therapy with reverse transcriptase and protease inhibitors
do not respond to the treatment, either because of the patient's inability to
take the combination therapy due to side effects or the failure of the
combination therapy to produce an antiviral effect.
The Company, through its funded research at the University of Florida,
is currently investigating another possible therapeutic approach to HIV. The
viral rev gene is a regulatory gene that is required for the production of viral
structural components by the infected cell. The product of the viral rev gene
combines in the nucleus with the viral genetic message, HIV mRNA, and with
cellular eIF-5A, an initation factor needed for protein synthesis. This
combination of rev, HIV
6
<PAGE>
MRNA and eIF-5A can then be transported across the nuclear membrane to the
cytoplasm. There, the HIV genetic message can be translated to HIV protein,
viral particles can assemble, burst out of the cell and infect other cells.
The Company has funded research at the University of Florida to
investigate several proprietary analogue compounds that may alter eIF-5A in such
a way as to inhibit its combination with the rev gene product or the ability of
the combination to bind to the viral genetic message. One such compound is
DENSPM, which has been shown to remove the substrate needed in an enzymatic
reaction that converts a lysine residue on eIF-5A to hypusine. Accordingly, the
Company believes that a reduction in hypusine will correlate with a reduction in
viral load and is planning to test this hypothesis in a pilot clinical trial
before the end of 1999. By using DENSPM to disrupt this important phase of the
viral life-cycle, the Company believes HIV cannot proliferate and infect new
lymphocytes. Although the HIV virus has a tremendous ability to mutate, this
approach may represent an "Achilles heel" in the virus' life cycle where
mutation plays a less important role and may therefore lead to new drugs for the
treatment of AIDS.
GASTROINTESTINAL DISORDERS
BACKGROUND. Ulcerative colitis is a form of inflammatory bowel disease
of unknown origin affecting approximately 500,000 Americans. Ulcerative colitis
consists of a diffuse, continuous, inflammatory process that almost always
involves the rectum, varies in its proximal extent, but rarely involves the
small intestines. The etiology of ulcerative colitis remains uncertain, but
genetic, infectious, immunological, and psychological factors have been
implicated as possible pathogenetic mechanisms in producing the chronic mucosal
inflammatory condition and the ulcerative and hemorrhagic conditions which
result. To date the disease is treated with sulfasalazine, other
5-aminosalicylic acid ("ASA") compounds and/or rectal corticosteroids. None of
these treatments is totally effective in alleviating the signs and symptoms of
ulcerative colitis.
DEHOP. Preclinical investigation with DEHOP in animal models for
inflammatory bowel disease (ulcerative colitis) indicates that the compound
exerts protective and anti-inflammatory effects in the mucosa of the colon.
Accordingly, the Company believes that DEHOP, owing to its biochemical,
antimotility, antisecretory and mucosal-protective properties, may palliate or
attenuate colonic mucosal inflammatory infiltrates and the signs and symptoms of
mild to moderate ulcerative colitis. To test this theory, an IND was allowed by
the Food and Drug Administration in March 1997, whereby clinical investigators
at the University of Chicago would conduct a Phase I/II clinical trial in
patients with mild to moderate ulcerative colitis. Patient enrollment in this
trial commenced in November 1997. However, in 1998 the Company decided to delay
further enrollment while evaluating safety data from its Phase I clinical trial
of DEHOP for cancer on the continued development of DEHOP for this indication,
and also in light of ensuing discussions with the FDA on proceeding with a
pivotal trial of DEHOP for AIDS-related diarrhea.. See "--Cancer --DEHOP".
PCA. The Company has identified a metal chelator, pyrrole-carboxylic
acid ("PCA"), formerly known as JM-27, which has been encouraging in early
preclinical studies. In two different models of ulcerative colitis, PCA has been
shown to have a favorable impact on the inflammation of the colon. This
beneficial effect was reversed when PCA was complexed with iron before
administration, affirming the importance of the actual chelator capacity of the
compound in exerting its protective effect. The Company believes that iron
present in the inflamed bowel facilitates the production of free radicals which
amplify the inflammatory response and that the resultant oxidative stress may
contribute to the high incidence of colon carcinoma in these patients. The
Company also believes that the local use of iron chelators may simultaneously
eliminate the free iron catalyst and scavenge free radicals, thereby minimizing
the oxidative damage to the intestinal lining.
OTHER DISEASE AREAS
PSORIASIS
DENSPM. The Company believes that DENSPM may have potential application
for the treatment of psoriasis. Patients with psoriasis have been found to have
increased local ODC activity, elevated systemic polyamine levels and increased
urinary polyamine excretion. Experimental studies conducted ten years ago using
various models of mouse skin have shown that the ODC inhibitor
difluoromethylornithine ("DFMO"), administered systemically or topically,
prevented polyamine accumulation and subsequently inhibited tissue growth,
indicating the potential use of DFMO in the treatment
7
<PAGE>
of hyperproliferating disorders of human skin. Seven of ten patients treated
topically with DFMO for psoriasis in clinical studies experienced moderate
improvement. DFMO significantly reduced putrescine and spermidine concentrations
of the skin in these patients. However, the overall clinical efficacy of the
DFMO treatment has been proven to be marginal, partly attributable to poor
permeability into human skin. Accordingly, DFMO has not gained a foothold in the
treatment of psoriasis. DENSPM, however, has been shown to penetrate mouse skin
and to have cytostatic properties, and Company-sponsored preclinical studies of
DENSPM as a possible treatment for psoriasis have been conducted at the
University of Florida. In addition, the Company has completed skin safety and
hypersensitivity studies in animals. The Company expects that an IND application
will be filed in 1999 for testing DENSPM against psoriasis in human clinical
trials.
IRON OVERLOAD
HBED. In March 1998, the National Institutes of Health (NIH) issued a
statement on research at the University of Florida with the metal chelator
compound monosodium hydroxybenzylethylenediamine diacetic acid ("HBED"). When
tested in rats and primates overloaded with iron, HBED removed up to 3 times
more iron than desferrioxamine ("DFO") by subcutaneous administration. The study
was funded in part by the National Institute of Diabetes and Digestive and
Kidney Diseases and appeared in the February 15, 1998 issue of the science
journal Blood.
The Company believes that HBED presents a promising drug development
opportunity, possibly leading to a more effective treatment that is easier to
administer for patients with iron overload. For example, the currently available
treatment for excess iron levels found in disorders such as Cooley's anemia,
sickle cell anemia and hemochromatosis is a nine to twelve-hour infusion of DFO
at least 5 days per week, which is difficult for patients to tolerate.
Preclinical testing of HBED is continuing at the University of Florida. Testing
in human subjects is expected to begin after the filing of a Physician IND in
1999.
DFT ANALOGUE In January 1999, Dr. Bergeron and his collaborators at the
University of Florida reported progress in identifying and structuring an orally
effective iron clearing agent with a more acceptable level of toxicity than the
commercially available DFO. Results of their work were reported in the Journal
of Medicinal Chemistry, which included discussion of screening several compounds
in rodent and primate models. The Company believes that one such analogue
compound, desazadesmethyldesferrithiocin ("DFT") exhibits sufficient iron
chelation properties and an acceptable safety profile in the animal models to
warrant further investigation in humans. An IND is expected to be prepared and
filed to begin a pilot clinical trial in the year 2000.
STRATEGIC ALLIANCES
WARNER-LAMBERT AGREEMENT
In May 1993, the Company entered into a sublicense agreement with
Warner-Lambert, with respect to DENSPM. The agreement grants Warner-Lambert
exclusive worldwide rights (excluding Japan) to manufacture and market DENSPM
for all cancer indications in exchange for certain license fees, advance royalty
payments and development milestone payments, of which Warner-Lambert has paid a
total of $2.9 million to date. Warner-Lambert will also pay the Company a
royalty on all sales of products incorporating this compound and indication. The
agreement provides for additional payments to the Company upon completion of
Phase II clinical trials, filing of a new drug application ("NDA") for DENSPM,
and approval of the NDA for commercial sale of DENSPM. The Company's rights to
receive such payments are dependent on the achievement of these milestones by
Warner-Lambert and are not within the control of the Company. Pursuant to the
agreement, the Company was responsible for conducting Phase I clinical trials
for DENSPM, and Warner-Lambert is responsible for completing all remaining
clinical trials at its expense. Warner-Lambert has a right of first refusal to
acquire the rights to DENSPM for other indications should the Company elect to
sublicense the development of DENSPM for such indications. If Warner-Lambert
elects to subcontract any portion of the manufacturing of the compound to a
third party, the Company has the right to match such third party's offer under
certain circumstances.
8
<PAGE>
The Warner-Lambert sublicense agreement terminates on a
country-by-country basis, upon the later of (i) the expiration of the
last-to-expire patent in such country or (ii) ten years after the commencement
of marketing of a product in that country.
In June 1996, Warner-Lambert acquired a 12-month option to other linear
polyamines for use in cancer indications in exchange for an early payment of
$500,000, one half of the milestone payment due upon completion of the Phase I
clinical study of DENSPM. In December 1996, Warner-Lambert agreed that SunPharm
had met its obligations under the sublicense agreement for completion of the
Phase I study, and the IND was transferred to Warner-Lambert in exchange for the
remaining portion of the $1,000,000 milestone payment.
NIPPON KAYAKU AGREEMENT
In February 1994, the Company entered into an agreement with Nippon
Kayaku with respect to the Japanese marketing and development rights to DENSPM
for cancer indications. Nippon Kayaku has committed to make staged payments to
the Company for research and development milestones, of which it has paid
$225,000 to date, together with royalties on all sales of products incorporating
DENSPM. The Nippon Kayaku agreement provides for additional payments to the
Company upon commencement of Phase I and Phase II clinical trials in Japan, upon
the submission of, and upon the approval of, an NDA in Japan, and upon the later
to occur of product pricing approval or patent approval in Japan. The Company's
rights to receive additional payments from Nippon Kayaku are dependent on the
achievement of these milestones and are not within the control of the Company.
Nippon Kayaku is responsible for completing all necessary Japanese clinical
trials and associated regulatory submissions at its expense. The Company has
retained the right to supply Nippon Kayaku with all of its bulk product
requirements for marketing DENSPM in Japan.
LICENSED TECHNOLOGY AND SPONSORED RESEARCH
The Company holds an exclusive worldwide license to the commercial
rights to polyamine compounds and various iron chelators and their uses under
more than 45 issued United States and foreign patents and numerous pending
patent applications held by the University of Florida Research Foundation, Inc.
("UFRFI"), the technology transfer subsidiary of the University of Florida. The
agreements pursuant to which the Company has the rights to these patents require
the Company to file and prosecute the patents relating to the technology
licensed to the Company, the costs of which are paid by the Company. Further,
the Company must take all necessary steps to defend such patent rights. If the
Company fails to take any such action, UFRFI has the right to defend such rights
at its own expense.
No assurance can be given that any existing patent application, or any
future patent applications, will be issued or that any patents, if issued, will
provide the Company with adequate patent protection with respect to the covered
products, their uses, technology or processes. In addition, under its license
with UFRFI, the Company is required to meet specified milestone and diligence
requirements to retain its license of these patents.
LICENSE AGREEMENT
The Company and UFRFI entered into a Patent License Agreement with
Research Component (the "1991 License Agreement") in December 1991, (as amended
from time to time), pursuant to which UFRFI granted to the Company a worldwide
exclusive license to its rights under certain patents and patent applications
relating to polyamine and metal chelator technology invented by Dr. Bergeron.
The Company has rights under the 1991 License Agreement to all indications
currently under development and, with respect to all patent applications filed
for inventions discovered during the term of the Company's sponsored research
agreement, the Company obtains rights for all indications and uses for humans
and animals. The Company's license is subject to certain diligence milestones
related to product development and regulatory applications, product marketing
and certain other matters. UFRFI may terminate the 1991 License Agreement if the
Company fails to meet certain of these milestones; provided, however, such
termination will be limited to a particular compound if the default is related
to a particular compound only. UFRFI may terminate the 1991 License Agreement in
its entirety if the Company defaults in its payment obligations under the
sponsored research agreement.
9
<PAGE>
Under the 1991 License Agreement, the Company is obligated to pay
royalties on sales of products, subject to certain annual minimum royalties and
reimbursement of patent costs incurred by the Foundation. These royalties
include a royalty on net sales of the Company's products of between five and six
percent and a royalty of 28 percent (increasing to 35 percent under certain
circumstances) on royalty and license payments made to the Company by its
sublicensees. Payments to UFRFI on sales of products by sublicensees may not
however, be less than two percent of sublicensee sales. The Company is required
to pay a minimum annual royalty of $100,000 on each anniversary date of the 1991
License Agreement, which is credited against royalties and research payments due
under the Company's Corporate Research Agreement with UFRFI, as discussed
herein.
Under the 1991 License Agreement, as amended, the Company has issued
UFRFI a total of 342,760 shares of Common Stock, which shares are subject to
certain limitations on sales under an agreement with the Company. The 1991
License Agreement terminates when the last patent licensed to the Company
expires or December 9, 2011, whichever is later.
RESEARCH AGREEMENT
The Company and UFRFI also entered into a Corporate Research Agreement
in December 1991 (as amended from time to time) which provides that the Company
will fund the research and development work of Dr. Bergeron's laboratory for a
period not less than two years as extended each December 31 at an annual cost
(including direct and indirect costs) of $875,000. The Company has made all
required payments under the Corporate Research Agreement to date. Under the
Corporate Research Agreement, any new invention covered by the 1991 License
Agreement will be licensed to the Company on the same terms as the 1991 License
Agreement without any additional license fees to UFRFI.
The Company has a close working relationship with Dr. Bergeron at the
University of Florida, who is engaged as a consultant to the Company. Management
of SunPharm and the scientists at the University of Florida meet regularly to
review the progress and direction of the University's efforts under the
Corporate Research Agreement. A total of 26 scientists and technicians at the
University of Florida are working on the Company's products under Dr. Bergeron's
supervision, seven of whom have Ph.D. degrees. By utilizing the significant
resources of the University of Florida, including its state-of-the-art
equipment, its laboratory facilities for synthesis, analysis, pharmacology,
toxicology, IN VITRO and IN VIVO studies, and its clinical and animal
facilities, the Company believes that it has accomplished significantly more in
the development of its licensed compounds than it would have been able to do on
its own, without substantially greater need for capital.
The Company has incurred costs of research and development totaling
approximately $2,228,000, $2,417,000 and $2,510,000 for the years ended December
31, 1996, 1997 and 1998, respectively. The Company has incurred research and
development costs of approximately $12,496,000 for the period from the Company's
inception through December 31, 1998.
PATENTS AND PROPRIETARY TECHNOLOGY
Subject to a nonexclusive statutory license to the United States
government, the Company is the exclusive licensee of over 45 issued United
States and foreign patents and numerous pending patent applications. The Company
is required to meet specified milestone and diligence requirements in order to
retain its license to the patents and other proprietary rights licensed from
UFRFI. No assurance can be given that the Company will satisfy any of these
requirements.
The Company's success will depend, in part, on the validity and scope
of the patents and patent applications licensed from UFRFI, and on its ability
to operate without infringing on the proprietary rights of others. Other parties
have filed patent applications, and some patents may have been or may be issued
in the therapeutic areas in which the Company is developing products. If any of
the Company's proprietary technology in these areas were to conflict with the
rights of others, the Company's ability to commercialize products using such
technologies could be materially and adversely affected.
The patent position of pharmaceutical companies generally is highly
uncertain and involves complex legal and factual questions. There can be no
assurance that the patents licensed from UFRFI will provide substantial
protection or
10
<PAGE>
commercial benefit to the Company, will afford the Company adequate protection
from competing products, will not be challenged or declared invalid, or that
additional related United States or foreign patents will be issued, the
occurrence of any of which could have a material adverse effect on the Company's
operations. While the United States government could use its rights as licensee
of UFRFI's patents to increase the supply of products based on such patents or
to reduce the cost of treatment with such products, the Company is unaware of
any instance in which federal authorities have exercised such rights in that
manner.
Certain proprietary trade secrets and unpatented know-how are important
to the Company. There can be no assurance that others may not independently
develop the same or similar technologies. It is the Company's current policy to
require all employees and consultants to execute confidentiality agreements
protecting the Company's proprietary information. In addition, the Company's
sponsored research agreement with the University of Florida requires
confidential treatment by the University of Florida and its employees of the
proprietary information owned by or licensed to the Company. Notwithstanding
such agreements, however, third parties nonetheless may gain access to such
information.
There has been significant litigation in the biotechnology and
pharmaceutical industry regarding patents and other proprietary rights. If the
Company became involved in similar litigation regarding its intellectual
property rights, the cost of such litigation could be substantial.
GOVERNMENT REGULATION
In the United States, the Company's polyamine analogue and iron
chelator products are regulated under the Federal Food, Drug and Cosmetic Act by
the FDA's Center for Drug Evaluation and Research. The steps required before a
pharmaceutical product may be marketed in the United States include (i)
preclinical laboratory evaluation of product chemistry and animal studies to
assess the safety and efficacy of the product and its formulation; (ii)
submission to the FDA of an IND, which includes the results of the preclinical
studies and, unless the FDA objects, becomes effective 30 days following its
filing with the FDA (and which must become effective before human clinical
trials may commence); (iii) adequate and well-controlled human clinical trials
to establish the safety and efficacy of the drug (and which provide data
satisfying FDA data integrity standards); (iv) submission of an NDA to the FDA;
and (v) FDA review and subsequent approval of the NDA prior to any commercial
sale or shipment of the drug. In addition to obtaining FDA approval for each
product, each domestic drug manufacturing facility is subject to inspections
every two years by the FDA and must comply with the FDA's Good Laboratory
Practices and Good Manufacturing Practices.
In the United States, human clinical trial programs generally involve a
three-phase process. Typically, Phase I trials are conducted in healthy
volunteers to determine the early side-effect profile and the pattern of drug
distribution and metabolism. Phase II trials are conducted in groups of patients
afflicted with the target disease to provide sufficient dose-response and safety
data as required by the FDA. If Phase II evaluations indicate that a product has
shown indications of potential effectiveness and has an acceptable
benefit-to-risk profile, Phase III trials are undertaken to conclusively
demonstrate clinical efficacy and safety within an expanded population at
multiple clinical study sites. Sometimes, the FDA requires Phase IV studies to
track patients after a product is approved for commercial sale to identify side
effects that may occur in a relatively small percentage of patients.
In the case of drugs for cancer, AIDS and other life-threatening
diseases, the initial human testing is generally done in patients rather than in
healthy volunteers. Because these patients are already afflicted with the target
disease, these studies may provide results traditionally obtained in Phase II
studies. Similarly, Phase II studies may be expanded to provide results
generally obtained in Phase III studies (such expanded studies are generally
referred to as Phase II/III studies). As a result, subject to obtaining the
necessary FDA approvals, the clinical trial process for cancer, AIDS and other
life-threatening diseases may be shortened in comparison with the process for
non-life-threatening diseases. No assurance can be given, however, that the FDA
will grant such approvals.
The Company will also be subject to widely varying foreign regulations
governing clinical trials and pharmaceutical sales. Whether or not FDA approval
has been obtained, approval of a product by the comparable regulatory
authorities of foreign countries must be obtained prior to commencement of
marketing the product in those countries. The approval process varies from
country to country, the time may be shorter or longer than that required for FDA
approval, and additional clinical data may be required by the regulatory
authorities of other nations. The Company intends, where
11
<PAGE>
applicable and to the extent possible, to rely on licensees to obtain regulatory
approval for marketing the Company's products in foreign countries.
From the time an NDA is filed, regulatory review and approval of a new
pharmaceutical product may take up to two years for life-threatening diseases
and longer for non-life-threatening diseases, and may involve the expenditure of
substantial resources. Approval depends on a number of factors, including the
severity of the disease in question, the availability of alternative treatments,
and the risks and benefits demonstrated in clinical trials.
During the development phase of its products or thereafter, the Company
may file for Treatment IND status under provisions of the IND regulations. These
regulations apply to products for serious or life-threatening diseases and are
intended to facilitate the availability of new products to desperately ill
patients after clinical trials have shown evidence of efficacy, but before
general marketing approval has been granted by the FDA.
The Company may also seek designation for its products, where
applicable, as "Orphan Drugs" under the Orphan Drug Act 1983. The Orphan Drug
Act generally provides incentives for the development of drugs to treat diseases
affecting fewer than 200,000 persons in the United States. It is the Company's
intention to seek this designation for DEHOP for AIDS-related diarrhea. A drug
that receives Orphan Drug designation and is the first product to receive FDA
marketing approval for its product claim is entitled to a seven-year exclusive
marketing period in the United States for that claim for the product. However,
the Company believes that its patent position on this compound will afford
exclusivity for a longer period than seven years.
COMPETITION
The Company has numerous competitors, including major pharmaceutical
and chemical companies, specialized biotechnology firms, universities and other
research institutions. These competitors may succeed in developing technologies
and products that are more effective than those being developed by the Company
or which would render the Company's technology and products obsolete and
noncompetitive. Many of these competitors have substantially greater financial
and technical resources and production and marketing capabilities than the
Company. In addition, many of the Company's competitors have significantly
greater experience than the Company in preclinical testing and human clinical
trials of new or improved pharmaceutical products and in obtaining FDA and other
regulatory approvals of products for use in health care.
The Company is aware of various products which are under development or
manufactured and marketed by competitors. These products are used for the
prevention, diagnosis or treatment of certain diseases which the Company has
targeted for its own product development, some of which use therapeutic
approaches that would compete with certain of the Company's potential products.
For example, the Company believes that Novartis AG, a major international
pharmaceutical company, is developing a product which targets SAMDC, one of the
two enzymes responsible for the biosynthesis of polyamines in human cells.
Novartis AG is also marketing a natural form of DFO for iron overload
dysfunctions ("DesferralR"), and has significantly greater resources than the
Company. There can be no assurance, however, of the ultimate success or failure
of Novartis AG in these efforts.
The Company has not to date managed a set of clinical trials to FDA
product approval. Accordingly, the Company's competitors may succeed in
obtaining FDA approval for products more rapidly than the Company, which could
adversely affect the Company's ability to further develop and market its
products. If the Company commences significant commercial sales of its products,
it will also be competing with respect to manufacturing efficiency and marketing
capabilities, areas in which the Company has limited or no experience.
EMPLOYEES
As of March 30, 1999, the Company had six full-time employees and one
part-time employee. All of the Company's preclinical and clinical tests are
subcontracted and performed at the University of Florida or at other
collaborative entities. Although the Company has obtained a $1,000,000 key
person life insurance policy on the life of
12
<PAGE>
Stefan Borg, of which the Company is the sole beneficiary, the loss of Mr.
Borg's services could nevertheless have a material adverse effect on the
Company.
RISK FACTORS
DEVELOPMENT STAGE COMPANY
The Company is in the development stage and has realized to date only
limited revenues, all of which have been derived from payments from
Warner-Lambert and Nippon Kayaku, principally in connection with achievement of
identified research milestones with respect to DENSPM. The Company has generated
no revenues to date from product sales, and it does not expect to generate
revenue from product sales for at least several years. The Company has incurred
net losses since commencement of its operations and it expects to continue to
incur losses for the foreseeable future. As of December 31, 1998, the Company
had an accumulated deficit of $19.3 million. Moreover, there can be no assurance
that the Company will successfully complete the transition from a development
company to successful operations and/or profitability.
NO ASSURANCE OF SUCCESSFUL PRODUCT DEVELOPMENT OR COMMERCIALIZATION
Since its inception, the Company has devoted its efforts exclusively to
the research and development of potential pharmaceutical products based
primarily upon its licensed polyamine analogue and metal chelator technologies.
While two of these analogues, DEHOP and DENSPM, are currently in Phase II
clinical trials, such trials are typically not sufficient to demonstrate
conclusively the safety or efficacy of the products under investigation, often
requiring that substantial further clinical trials be successfully completed
before such products may be approved for commercialization. There can be no
assurance that DEHOP or DENSPM, or any other potential product currently in
development or to be developed in the future, will prove to be safe or effective
in clinical trials, meet applicable regulatory standards, be capable of being
produced in commercial quantities at acceptable cost, or be successfully
marketed. See "--Government Regulation; No Assurance of Regulatory Approval."
NEED FOR ADDITIONAL FINANCING
The Company has expended and will continue to expend substantial funds
to continue the research and development of its products, conduct preclinical
and clinical trials, establish clinical and commercial-scale manufacturing in
its own facilities or in the facilities of others, and seek corporate partners
for the marketing of its products. The amount and timing of such expenditures
are subject to a number of factors. Based on its current operating plan, the
Company anticipates that its available capital resources at December 31, 1998
will be adequate to satisfy its capital needs into the third quarter of 1999,
but will not be sufficient to fund the Company's operations to the point of
introduction of a commercially successful product. The Company's rights to
receive payments from Warner-Lambert and Nippon Kayaku are dependent upon the
achievement of certain development and commercialization milestones by
Warner-Lambert and Nippon Kayaku, respectively, and are not within the control
of the Company. Further, the capability of Warner-Lambert or Nippon Kayaku to
achieve such milestones depends upon the availability and/or prioritization of
sufficient funding to support necessary testing of DENSPM, the availability of
trained and experienced staff for testing and the results of such testing, among
other factors. As a result, no assurance can be made that such milestones will
be achieved or that such payments will be received by the Company. See
"--Strategic Alliances."
The Company will require significant levels of additional capital in
the future, which it intends to raise through additional equity or debt
financings, additional arrangements with corporate partners, or from other
sources. No assurance can be given that the necessary funds will be available
for the Company to finance its development on acceptable terms or at all. If
adequate funds are not available from operations or additional sources of
financing, the Company's business and/or its market valuation may be materially
and adversely affected. See "Item 6. Management's Discussion and Analysis of
Financial Condition and Results of Operations."
13
<PAGE>
GOVERNMENT REGULATION; NO ASSURANCE OF REGULATORY APPROVAL
Research, preclinical development, clinical trials, and the
manufacturing and marketing of therapeutic products under development by the
Company are subject to extensive and rigorous regulation by government
authorities in the United States and other countries, including, but not limited
to, the FDA. In order to obtain approval to commercialize a product, the Company
must demonstrate to the satisfaction of the FDA and comparable authorities in
other countries that such product is safe and effective for its intended uses
and that the Company is capable of manufacturing the product to the applicable
standards. In the United States, this requires that the product undergo
extensive preclinical testing, that the Company file an IND application with the
FDA prior to commencing a series of human clinical trials, and that the Company
file an NDA requesting FDA approval for commercial marketing of the product.
The approval process for the Company's product candidates is likely to
take several years and will involve significant expenditures for which
additional financing will be required. The cost to the Company of conducting
human clinical trials for any potential product can vary dramatically based on a
number of factors, including the order and timing of clinical indications
pursued and the extent of development and financial support, if any, from
corporate partners. Although Phase I and Phase II clinical trials of DENSPM and
DEHOP have been or are presently being conducted, further clinical trials,
including large, time-consuming and more costly Phase II and Phase III clinical
trials, will be required to demonstrate the safety and efficacy of these
compounds. There can be no assurance that the Company will have sufficient
resources to complete the required regulatory review process or that the Company
could survive the inability to obtain, or delays in obtaining, such approvals.
Approvals that may be granted will be subject to continual review, and later
discovery of previously unknown problems may result in withdrawal of products
from the market. Failure to comply with the applicable regulatory requirements
can, among other things, result in fines, suspensions of regulatory approvals,
product recalls, operating restrictions and criminal prosecution. Further,
additional government regulation may be established that could prevent or delay
regulatory approval of and/or limit federal government reimbursement for the
Company's products. See "--Government Regulation."
DEPENDENCE ON EXCLUSIVE LICENSE
All of the Company's development and commercialization rights for its
products are derived from its license agreement with the Foundation. The
Company's rights under the license agreement are subject to early termination
under certain circumstances, including failure to pay royalties or other
material breach by the Company, bankruptcy of the Company or failure by the
Company to carry on its business, failure to commence marketing of a licensed
product within six months of approval in any specific market, and failure to
comply with the terms of the Company's sponsored research agreement with the
University of Florida, among others. In the event that the license agreement
terminates for any reason, the Company's rights to manufacture and market DEHOP
and DENSPM and its other potential products would terminate. See "--Licensed
Technology and Sponsored Research."
LIMITED PERSONNEL; RELIANCE ON STRATEGIC ALLIANCES; RELIANCE ON
COLLABORATIVE ARRANGEMENTS FOR RESEARCH AND DEVELOPMENT
Given that SunPharm currently has six full-time employees and one
part-time employee, the Company is substantially dependent on third parties to
conduct research and development, to conduct clinical trials of its potential
products, and to manufacture DEHOP, DENSPM and other compounds for such research
and development. See "--Licensed Technology and Sponsored Research" and
"--Strategic Alliances."
The Company is dependent on the University of Florida and Dr. Raymond
Bergeron, the inventor of the Company's technology, with respect to all research
and a large portion of the early preclinical development of its potential
products. The Company has no control over the facilities where the research and
development work is being performed or over the personnel performing such work.
If the University of Florida breaches its obligations under its agreement with
the Company, the Company's remedies may be limited by applicable law affecting
actions against state agencies.
14
<PAGE>
The Company benefits significantly from and is dependent on
collaborative arrangements with the University of Florida and Dr. Bergeron.
Although the Company believes that its relationships with its collaborators are
good, there can be no assurance that the Company's relationships with such
institutions and individuals will continue. The loss of these relationships
would significantly increase the Company's expenses and could have a substantial
negative effect on the Company's ability to attain its long-range objectives. In
addition, the loss of Dr. Bergeron's services could have a material adverse
effect on the Company.
The Company is dependent on strategic alliances with Warner-Lambert and
Nippon Kayaku with respect to the development and commercialization of DENSPM,
and expects to rely on future strategic alliances with other pharmaceutical
companies with respect to other potential products. Although the Company
believes that Warner-Lambert, Nippon Kayaku and any future strategic alliance
partners have or will have an economic motivation to develop and commercialize
such products, the amount and timing of resources to be devoted to these
activities are not within the control of the Company and will be subject to the
priorities of such strategic alliance partners in allocating these resources,
which may not be consistent with the best interests of the Company. No
assurances can be given that the Company's agreements with Warner-Lambert and
Nippon Kayaku, or with any other strategic alliances the Company may enter in
the future, will result in the successful development or commercialization of
DENSPM or other potential products, or that any such agreements will result in
any significant revenues, profits or cost savings to the Company. Furthermore,
no assurances can be given that the Company will be able to enter into future
strategic alliance agreements on favorable terms. In addition, the Company's
strategic alliance partners or their affiliates may be pursuing alternative
products or technologies which may compete with the Company's products and
technologies. See "--Strategic Alliances."
UNCERTAINTIES AS TO PATENTS AND PROPRIETARY TECHNOLOGIES
Subject to a nonexclusive statutory license to the United States
government, the Company is the exclusive licensee of more than 45 issued United
States and foreign patents and numerous pending patent applications. The Company
is required to meet specified milestone and diligence requirements in order to
retain its license to the patents and other proprietary rights licensed from the
Foundation. No assurance can be given that the Company will satisfy any of these
requirements.
The patent position of pharmaceutical companies generally is highly
uncertain and involves complex legal and factual questions. There can be no
assurance that the patents licensed from the Foundation will provide substantial
protection or commercial benefit to the Company, afford the Company adequate
protection from competing products, or not be challenged or declared invalid or
that additional related United States or foreign patents will be issued, the
occurrence of any of which could have a material adverse effect on the Company's
operations. The United States government could use its rights as licensee of the
Foundation's patents to increase the supply of products based on such patents or
to reduce the cost of treatment with such products.
Certain proprietary trade secrets and unpatented know-how are important
to the Company. There can be no assurance that others may not independently
develop the same or similar technologies. Although the Company has taken steps
to protect its trade secrets and unpatented know-how, third parties nonetheless
may gain access to such information.
There has been significant litigation in the biotechnology and
pharmaceutical industry regarding patents and other proprietary rights. If the
Company became involved in similar litigation regarding its intellectual
property rights, the cost of such litigation could be substantial. See
"--Patents and Proprietary Technology."
15
<PAGE>
UNCERTAINTY OF HEALTH CARE REFORM MEASURES AND THIRD PARTY
REIMBURSEMENT
The Company's ability to successfully commercialize its products may
depend in part on the extent to which reimbursement for the costs of such
products and related treatments will be available from government health
administration authorities, private health coverage insurers and other
organizations. While the Company cannot predict whether any future legislative
or regulatory proposals to reform the health care system may be adopted, such
proposals could have a material adverse effect on the Company's ability to raise
capital. Any such reform measures, if adopted, could adversely affect the
pricing of therapeutic products in the United States or the amount of
reimbursement available from United States governmental agencies or third party
insurers and could materially adversely affect the Company in general.
Furthermore, the Company's ability to commercialize its potential product
portfolio may be adversely affected to the extent that such proposals have a
material adverse effect on the business, financial condition and profitability
of other companies that are prospective collaborators for certain of the
Company's proposed products.
In both domestic and foreign markets, sales of the Company's proposed
products will depend in part on the availability of reimbursement from
third-party payors such as government health administration authorities, private
health insurers and other organizations. Third-party payors are increasingly
challenging the price and cost effectiveness of medical products and services.
Significant uncertainty exists as to the reimbursement status of newly approved
health care products. There can be no assurance that the Company's proposed
products will be considered cost effective or that adequate third-party
reimbursement will be available to enable the Company to maintain price levels
sufficient to realize an appropriate return on its investment in product
development. Legislation and regulations affecting the pricing of
pharmaceuticals may change before any of the Company's proposed products are
approved for marketing. Adoption of such legislation or regulations could
further limit reimbursement for medical products and services. See "--Government
Regulation."
PRODUCT LIABILITY EXPOSURE; LIMITED INSURANCE COVERAGE
The testing, marketing and sale of pharmaceutical products entails a
risk of product liability claims by consumers and others, and such claims may be
asserted against the Company. The Company currently maintains $2.0 million of
product liability insurance coverage for clinical trials currently underway or
expected to commence in 1999. There can be no assurance that the Company will be
able to obtain additional insurance at a reasonable cost sufficient to cover all
possible liabilities. In the event of a successful product liability suit
against the Company, insufficient insurance coverage could have a material
adverse effect on the Company. Further, the Company is required to indemnify the
University of Florida and its trustees, officers, employees and affiliates
against claims resulting from the manufacture or sale of products derived from
its compounds and to have product liability coverage naming the University of
Florida as an additional insured for such risks.
LACK OF MANUFACTURING EXPERIENCE OR FACILITIES
The Company currently contracts with third parties for the production
of compounds in limited quantities for its preclinical and clinical trials and
currently does not possess the staff or facilities necessary to manufacture
products in commercial quantities. The Company has entered into agreements,
however, for the production of clinical-scale quantities of its products by
third party contractors which it believes capable of supplying its short-term
requirements. There can be no assurance that the polyamine analogue compounds or
iron chelators can be manufactured by the Company or its suppliers at a cost or
in quantities necessary to make such compounds commercially viable products. The
Company also may encounter significant delays in obtaining supplies from
third-party manufacturers or experience interruptions in its supplies. If the
Company is unable to obtain adequate supplies, its business would be materially
adversely affected.
RELIANCE ON FOUNDER AND INVENTOR
The Company is highly dependent on Stefan Borg, its founder, President
and Chief Executive Officer, and on Dr. Raymond Bergeron, the inventor of the
Company's polyamine analogues and metal chelators. See "--Employees" and
"Licensed Technology and Sponsored Research --Research Agreement".
16
<PAGE>
COMPETITION
The Company has numerous competitors, including major pharmaceutical
and chemical companies, specialized biotechnology firms, universities and other
research institutions. The competitors may succeed in developing technologies
and products that are more effective than those being developed by the Company
or which would render the Company's technology and products obsolete and
noncompetitive. Many of these competitors have substantially greater financial
and technical resources and production and marketing capabilities than the
Company. In addition, many of the Company's competitors have significantly
greater experience than the Company in preclinical testing and human clinical
trials of new or improved pharmaceutical products and in obtaining FDA and other
regulatory approvals of products for use in health care.
YEAR 2000 ISSUES
The Company has undertaken an assessment of its financial and
operational systems to ensure their Year 2000 compliance. Year 2000 issues
result from the inability of certain computer programs or computerized equipment
to accurately calculate, store or use a date subsequent to December 31, 1999.
Typically, the year 2000 may be represented or interpreted as the year 1900.
This could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices or engage in similar normal business.
Based on its review to date and other preliminary information, the
Company does not anticipate that it will incur any significant costs relating to
remediation of Year 2000 issues. The Company believes that the potential impact,
if any, of its systems not being Year 2000 compliant should not impact the
Company's ability to continue its research and development activities. However,
there can be no assurance at this time that the Company, its research and
business partners, vendors or customers will successfully be able to identify
and remedy all potential Year 2000 problems or that a system failure resulting
from a failure to identify any such problems would not have a material adverse
effect on the Company.
NASDAQ LISTING REQUIREMENTS
In August 1997, the Securities and Exchange Commission approved new
listing standards for companies listed on the Nasdaq SmallCap Market. These
standards were established to enhance the quantitative threshold criteria
necessary to qualify for initial entry and continued listing. Beginning in
February 1998, Nasdaq required each small cap issuer to sign a Listing Agreement
attesting to the issuer's consent to abide by the specific eligibility criteria,
as set forth in the Marketplace Rules of The Nasdaq Stock Market. To be in
compliance with these rules, SunPharm is required to meet a number of
requirements, one of which is to maintain net tangible assets of at least $2
million or a minimum market capitalization of $35 million or earn a net income
of $500,000 in its latest fiscal year (or 2 of the 3 latest fiscal years).
Failure to meet this or any of the other requirements, or failure to cure any
deficiency within the timeframe permitted under the Marketplace Rules, could
result in delisting of the Company's stock, resulting in reduced liquidity and
accessibility of the stock to investors. There can be no assurance that the
Company will continue to be able to comply with the Marketplace Rules and
maintain its listing on the Nasdaq SmallCap Market.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company leases its executive offices in Ponte Vedra Beach, Florida,
totaling 4,788 square feet, at a current annual rent of approximately $110,000.
The lease expires in November 2003 and is renewable. The Company also leases 470
square feet of laboratory space at the Sid Martin Biotechnology Institute in
Alachua, Florida, for the purpose of analytical testing. The Company's sponsored
research is conducted in laboratory facilities operated by the University of
Florida in Gainesville, Florida.
17
<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
There are no material legal proceedings required to be reported in
response to this item.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
18
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is currently traded on the Nasdaq SmallCap
Market under the symbol "SUNP". Previously, the Company's Units and Warrants
from its 1995 initial public offering ("IPO") traded on this exchange under the
symbols "SUNPU" and "SUNPW" until their expiration on April 13, 1998. The
following table presents quarterly information on the price range of the Units,
Common Stock and Warrants, indicating the high and low sales prices reported by
the Nasdaq SmallCap Market for the periods indicated.
1997 1998
------------------------ --------------------
HIGH LOW HIGH LOW
---- --- ---- ---
First Quarter
Units $5.44 $4.25 $5.75 $4.44
Common Stock 5.50 3.75 6.25 4.13
Warrants 0.84 0.38 0.22 0.06
Second Quarter
Units $4.38 $2.88 N/A N/A
Common Stock 4.63 2.63 $5.94 $3.25
Warrants 0.44 0.25 0.06 0.03
Third Quarter
Units $3.88 $3.00 N/A N/A
Common Stock 4.06 2.63 $3.38 $1.50
Warrants 0.41 0.25 N/A N/A
Fourth Quarter
Units $6.25 $3.50 N/A N/A
Common Stock 6.25 3.63 $2.25 $0.75
Warrants 0.53 0.13 N/A N/A
At March 16, 1999, the Company's shares of Common Stock were held by
approximately 135 holders of record, and approximately 700 beneficial owners.
SunPharm is a development-stage company, has not paid a cash dividend to
holders of its Common Stock, and does not anticipate paying cash dividends on
its Common Stock in the foreseeable future. The declaration and payment of cash
dividends in the future will be at the discretion of the Board of Directors and
will depend on the Company's earnings, financial condition, capital needs and
other factors deemed pertinent by the Board of Directors, including limitations,
if any, on the payment of dividends under state law and any then-existing credit
agreement.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
Since its inception in May 1990, SunPharm has devoted substantially all
of its efforts and resources to research and development of potential
pharmaceutical products. Such research and development is conducted on its own
behalf and through collaborations with clinical institutions. The Company's drug
development strategy emphasizes conducting its research and clinical activities
at the University of Florida, in conjunction with its Sponsored Research
Agreement. (See
19
<PAGE>
"Item 1. Description of Business - Licensed Technology and Sponsored Research").
The Company has incurred cumulative net losses of $19,270,000 from its inception
through December 31, 1998.
In January 1995, the Company completed its initial public offering of
securities which resulted in net proceeds to the Company of approximately
$7,200,000. These proceeds were sufficient to finance the Company's operations
through mid-1996, at which time the Company raised $3,095,000 of net proceeds
through a private placement financing and exercise of warrants. Also in 1996,
the Company recorded a $1,000,000 milestone payment from Warner-Lambert. In
subsequent private placements which closed in March 1997 and November 1998, the
Company raised an additional $6,116,500 and $1,160,000 of net proceeds,
respectively. At the present time, the Company believes such proceeds will be
sufficient to fund its operations into the third quarter of 1999, at which time
the Company will require additional financing.
The Company intends to obtain additional funds for research and
development through collaborative arrangements with corporate partners,
additional financing and from other sources. There can be no assurance that such
arrangements will be concluded, if at all, on terms favorable to the Company.
The Company expects to incur additional significant operating losses for at
least the next two years, principally as a result of its continuing anticipated
research and development and clinical trials expenditures.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998
The Company recorded total revenues of $394,000 in 1998 compared to
$280,000 in 1997 and $1,073,000 in 1996. 1998 revenues included $231,000 of
sponsored research, representing payments for preclinical work contracted with a
corporate partner, with an identical amount included in research and development
expense. 1997 revenues consisted solely of interest income on invested cash. The
Company's 1996 revenues included a $1,000,000 milestone payment under the
Warner-Lambert agreement for successful completion of DENSPM Phase I testing.
The Company expects to receive an additional milestone payment from
Warner-Lambert in late 1999, provided that the Phase II trials for DENSPM, which
Warner-Lambert is conducting, are successfully completed.
The Company reported a net loss in 1998 of $3,767,000, which compares to
net losses of $3,906,000 in 1997 and $2,837,000 in 1996. Compared to 1997, the
lower net loss in 1998 was due to increased revenues, as discussed above. The
lower net loss in 1996 was impacted by higher revenues, as discussed above, and
lower expenses as discussed below.
Research and development expenses increased 4% from $2,417,000 in 1997
to $2,510,000 in 1998. However, since $231,000 of the 1998 amount represents
sponsored research offset by an equal amount of revenue as discussed above,
actual research and development expenses in 1998 declined by roughly 6% from the
prior year. The Company's research and development expenses relate principally
to human clinical trials, license payments to the University of Florida,
expenses for screening and testing of drug compounds, salaries and benefits for
the Company's employees who are engaged in research and development activities,
and legal costs of patent prosecution by retained counsel. The lower actual
expenses in 1998, as compared to 1997, were due to lower clinical investigator
and monitoring costs. Research and development expenses for 1997 were 8% higher
than the $2,228,000 recorded in 1996. This increase reflected greater
preclinical activity, increased sponsored research payments made to the
University of Florida, expenses associated with an expanding patent portfolio,
and expenses associated with establishment of a quality assurance laboratory.
The Company expects its research and development expenses to increase in 1999
and 2000, reflecting anticipated increases in the funding of preclinical
studies, the initiation of pilot clinical trials for four compounds, and the
anticipated addition of a regulatory affairs staff position.
General and administrative expenses declined by 7% in 1998 to
$1,652,000, from $1,769,000 recorded in 1997. The decline reflected, in part, a
consolidation of investor relations activity. 1997 expenses were 26% higher than
the $1,401,000 recorded in 1996. Contributing significantly to this increase
were salaries, benefits and personnel recruiting expenses associated with the
addition of three management positions, beginning in September 1996. The Company
expects a slight increase in its general and administrative expenses in 1999 and
a larger increase in 2000, anticipating greater need for administrative support
for planned growth in its drug pipeline and corporate partnering activity.
20
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations primarily
through collaborative research and sublicense agreements with its strategic
alliance partners and the issuance of debt and equity securities. Through
December 31, 1998, the Company has received $3,116,000 of cumulative sponsored
research and sublicensing revenues and $20,872,000 in consideration of the
issuance of debt and equity securities.
On January 12, 1995, the Company completed an initial public offering
(the "IPO") of 1,100,000 units ("Unit") at $7.00 per Unit. Each Unit consisted
of one share of the Company's Common Stock and one Redeemable Common Stock
Purchase Warrant ("Warrant"), which entitled the holder to purchase one share of
Common Stock at $8.75 per share. The Warrants, which were due to expire on
January 12, 1998, three years after issuance, were extended to April 13, 1998,
at which time they expired. Additionally, on February 16, 1995, a representative
of Royce Investments, underwriters in the IPO, exercised an option to purchase
an additional 165,000 Units at $7.00 per Unit. Proceeds from the IPO were
approximately $7,200,000 of cash, net of underwriting and other costs of
$1,655,000. Of such net proceeds, the Company used approximately $1,793,000 to
repay its outstanding indebtedness (including accrued interest and certain
fees).
During the year ended December 31, 1996, the Company completed the
private placement of 537,623 units (the "1996 Units") pursuant to Section 4(2)
of the Securities Act of 1933, as amended (the "Act"), for $5.50 per unit. Each
1996 Unit consisted of one share of the Company's Common Stock and one
redeemable Common Stock Purchase Warrant. The warrants included in the 1996
Units expire four years from the date of issuance and have exercise prices of
$5.50 per share until the first anniversary date, $6.50 per share until the
second anniversary date, and $7.50 per share thereafter. Additionally, the
warrants included in the 1996 Units are subject to redemption by the Company at
$0.01 per warrant, provided the Company's Common Stock closes at a price of
$8.50, $9.50 or $10.50 per share for 20 consecutive days during the second,
third or fourth years, respectively, of the term of the warrant. Proceeds from
the private placement were approximately $2,636,000, net of placement agent and
other costs of approximately $321,000.
Also during 1996, the Company offered certain of its existing warrant
holders a 30% reduction in their applicable exercise price if they exercised
their warrants prior to December 31, 1996. Additionally, for each four warrants
exercised, participants were issued a warrant identical to the warrants issued
in the private placement. As a result of this warrant exchange offer, 236,721
outstanding warrants were exercised in exchange for 236,721 shares of Common
Stock and 59,178 new warrants. The Company received proceeds from the warrant
exchange of approximately $459,000, net of offering costs of approximately
$34,000.
On March 28, 1997, the Company sold 1,828,286 units (the "1997 Units"),
each consisting of one share of the Company's Common Stock and one redeemable
Common Stock Purchase Warrant (the "1997 Warrants") for $3.50 per Unit. The
Warrants included in the 1997 Units expire five years from the date of issuance.
In case of a "cashless exercise," the 1997 Warrant exercise price is $4.00 per
share plus forty percent of the difference between the current trading price of
the Company's Common Stock and $4.00; in all other cases, the 1997 Warrant
exercise price is $4.00 per share plus thirty percent of the difference between
the current trading price of the Company's Common Stock and $4.00. The Warrants
are subject to redemption at the exercise price by the Company, provided the
Company's Common Stock closes at a price of $16.00, $20.00, $24.00, or $28.00
per share for twenty consecutive days during the second, third, fourth or fifth
years, respectively, of the term of the 1997 Warrant. Proceeds from the private
placement were $6,116,500, net of placement agent and other offering costs of
$282,500. During the nine months ended December 31, 1997, the Company sold an
additional 120,000 1997 Units and received proceeds of $378,000, net of
placement costs of $42,000.
On March 28, 1997, the Company and warrant holders amended the terms of
the warrants issued in the private placement of 537,623 units and in the warrant
exchange resulting in 59,178 new warrants, to provide that (i) the warrant
exercise price was reduced to $3.00 per share, (ii) the price of Common Stock of
the Company at which the Company can exercise the call feature was increased,
(iii) the warrant expiration date was extended to March 31, 2001, and (iv) the
Company would use reasonable best efforts to register the resale of shares by
June 30, 1997.
On November 13, 1998, the Company sold 300,000 shares of Series A
Redeemable Convertible Preferred Stock ("Preferred Stock") and 853,565 of Common
Stock to certain institutions and other accredited investors in a Private
21
<PAGE>
Placement pursuant to Regulation D under the Securities Act of 1933. The
purchase price for the Preferred Stock and Common Stock sold in the Private
Placement consisted of $1,200,000 in cash and the surrender by the investors of
approximately 347,000 redeemable Common Stock Purchase Warrants originally
issued in the Company's March 1997 private placement financing . Shares of
Series A Preferred Stock are initially convertible to Common Stock on a 1-for-1
basis, subject to customary antidilution adjustments. Dividends shall accrue on
the Series A Preferred Stock at the rate of 8% per annum. In the event of
liquidation, dissolution, or winding up of the Company, or, at the option of the
holders of the Preferred Stock, a consolidation or merger of the Company of a
sale of all or substantially all of its assets, the Preferred Stock will be
entitled to receive in preference to the Company's Common Stock an amount per
share equal to the original purchase price plus any accrued dividends per share.
Redemption of the Preferred Stock is at the request of holders of at least
33-1/3% of such shares outstanding, which request may be made at any time two
years following closing of the Private Placement. In the event of such request,
the Company shall be required to redeem all of the Series A Preferred Stock held
by the requesting holders at a redemption price equal to $4.00 per share
(subject to adjustment), plus any accrued dividends per share. The redemption
price may be paid, at the Company's option, in cash or in shares of the
Company's Common Stock. The Company's intention is to make such redemption in
Common Stock, and accordingly the Series A Preferred Stock has been included in
Stockholder's Equity. Proceeds to the Company from this Private Placement were
$1,160,000 net of legal fees of $40,000.
During the year ended December 31, 1998, net cash used in operating
activities was $4,023,000, as compared to $4,062,000 during the prior year. The
lower usage of cash by the Company in 1998 was primarily due to the lower net
loss. The Company had net working capital of approximately $1,410,000 at
December 31, 1998, and will require additional funds to continue preclinical
testing and clinical trials of its potential products. The Company believes that
available cash at December 31, 1998 will satisfy its operating needs into the
third quarter of 1999, at which time additional funding will be required.
On February 16, 1999, the underwriter of the Company's IPO agreed to
surrender a purchase option for 110,000 shares of Common Stock exercisable at
$11.20 per share, which it had acquired in connection with the IPO and which was
due to expire on January 12, 2000. In exchange for surrender of this option, the
Company agreed to issue an equal number of shares to the underwriter at $0.60
per share, for total proceeds of $66,000.
On March 31, 1999, the Company sold 66,667 shares of Series B
Redeemable Convertible Preferred Stock ("Series B Preferred") and 183,333 shares
of Common Stock to an institutional investor in a Private Placement pursuant to
Regulation D under the Securities Act of 1933. Rights and preferences on the
Series B Preferred were identical to the Series A Preferred stock sold in
November 1998 and discussed above. Proceeds from this Private Placement closed
on March 31, 1999 were approximately $485,000, net of legal costs.
The Company expects to incur substantial additional research and
development expenses, including expenses associated with preclinical studies,
clinical trials and manufacturing. The Company intends to use a portion of its
cash resources, together with funds from its existing collaborative arrangements
with Warner-Lambert and Nippon Kayaku, for these purposes; however, the
Company's rights to receive payments from Warner-Lambert and Nippon Kayaku are
dependent upon the achievement of certain milestones by Warner-Lambert and
Nippon Kayaku, respectively, and are not within the control of the Company. No
assurance can be made that such milestones will be achieved or that such
payments will be received by the Company. The Company intends to obtain
additional funds for research and development through new collaborative
arrangements with corporate partners, additional financing, and from other
sources; however, there can be no assurance that the Company will be able to
obtain necessary financing when required or what the terms of any financing, if
obtained, might be. Accordingly, there can be no assurance of the Company's
future success. In addition, the Company's future success is affected by the
progress of the Company's research and development, the scope and results of
preclinical studies and clinical trials, the cost and timing of regulatory
approvals, the rate of technological advances, determinations as to the
commercial potential of the Company's products under development, the status of
competitive products, the establishment of manufacturing capacity or third-party
manufacturing arrangements, its reliance on research institutions and corporate
partners, the uncertainty of health care reform and the competitive environment
in which the Company operates. The Company's existing capital resources will not
be sufficient to fund the Company's operations to the point of introduction of a
commercially successful product, if and when that time should arrive. No
assurance can be given that additional funds will be available on acceptable
terms, if at all.
The Company has incurred losses since inception and, therefore, has not
been subject to federal income taxes. As of December 31, 1998, the Company had
net operating loss ("NOL") and tax credit carry forwards for income tax purposes
of approximately $16,953,000 and $596,000, respectively, which may be available
to reduce future taxable income and future tax liabilities. These carry forwards
begin to expire in 2008. The Tax Reform Act of 1986 provides for an annual
limitation on the use of NOL and credit carry forwards (following certain
ownership changes) that could significantly limit the Company's ability to
utilize these carry forwards. The Company has made no determination concerning
whether there has been such a cumulative change in ownership. It is possible
that such a change in ownership occurred following the completion of the
Company's IPO, subsequent private placements, and subsequent exercise of
warrants. Accordingly, the Company's ability to utilize the aforementioned carry
forwards to reduce future taxable income and tax liabilities may be
22
<PAGE>
limited. Additionally, because United States tax laws limit the time during
which these carry forwards may be applied against future taxes, the Company may
not be able to take full advantage of these attributes for federal income tax
purposes.
ITEM 7. FINANCIAL STATEMENTS.
The financial statements and supplementary financial information
required to be filed under this Item are presented on pages F-1 through F-25 of
this Annual Report on Form 10-KSB, and are incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL MATTERS.
None.
23
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The information required by this item as to the directors and executive
officers of the Company is hereby incorporated by reference from the information
appearing under the captions "Election of Directors," "Executive Compensation"
and "Compliance with Section 16(a)" in the Company's definitive proxy statement
which involves the election of directors and is to be filed with the Securities
and Exchange Commission ("Commission") pursuant to the Securities Exchange Act
of 1934, as amended (the "Exchange Act") within 120 days of the end of the
Company's fiscal year ended December 31, 1998.
ITEM 10. EXECUTIVE COMPENSATION.
The information required by this item as to the management of the
Company is hereby incorporated by reference from the information appearing under
the captions "Executive Compensation" and "Election of Directors--Compensation
of Directors" in the Company's definitive proxy statement which involves the
election of directors and is to be filed with the Commission pursuant to the
Exchange Act within 120 days of the end of the Company's fiscal year ended
December 31, 1998.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item as to the ownership by management
and others of securities of the Company is hereby incorporated by reference from
the information appearing under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Company's definitive proxy statement
which involves the election of directors and is to be filed with the Commission
pursuant to the Exchange Act within 120 days of the end of the Company's fiscal
year ended December 31, 1998.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item as to certain business
relationships and transactions with management and other related parties of the
Company is hereby incorporated by reference from the information appearing under
the captions "Certain Relationships and Related Transactions" in the Company's
definitive proxy statement which involves the election of directors and is to be
filed with the Commission pursuant to the Exchange Act within 120 days of the
end of the Company's fiscal year ended December 31, 1998.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
EXHIBIT NO. DESCRIPTION
3.1(a) -- Certificate of Incorporation (incorporated by reference to
Exhibit 3.1 to the Company's Registration Statement on Form
SB-2) (Registration No. 33-85416-A)(the "Registration
Statement")).
3.1(b)* -- Certificate of Designation, Preferences and Rights of
Series A Redeemable Convertible Preferred Stock.
3.2 -- Bylaws (incorporated by reference to Exhibit 3.2 to the
Company's Registration Statement).
4.1 -- Specimen Common Stock Certificate (incorporated by
reference to Exhibit 4.1 to Amendment No. 2 to the
Company's Registration Statement).
4.2 -- Revised Form of Warrant Agreement relating to Redeemable
Common Stock Purchase Warrants (incorporated by reference
to Exhibit 4.2 to Amendment No.3 to the Company's
Registration Statement).
24
<PAGE>
EXHIBIT NO. DESCRIPTION
4.3 -- Investment Agreement between the Company and SunPharm
Investors, L.P., (incorporated by reference to Exhibit 4.4
to the Company's Quarterly Report on Form 10-QSB for the
quarter ended June 30, 1997 (the "June 1997 Form 10-QSB"))
dated January 11, 1993, relating to the Company's 9.5%
Extendable Notes and Warrants (incorporated by reference to
Exhibit 4.4 to the Company's Registration Statement).
4.4 -- Revised form of Unit Purchase Option issued to Royce
Investment Group, Inc. (incorporated by reference to
Exhibit 4.5 to Amendment No. 3 to the Company's
Registration Statement).
4.5 -- Unit Purchase Agreement dated March 28, 1997, between the
Company and several purchasers name therein (incorporated
by reference to Exhibit 4.1 to the Company's Quarterly
Report on Form 10-QSB for the quarter ended March 30, 1997
(the "March 1997 Form 10-QSB")).
4.6 -- Warrant Agreement dated March 28, 1997, between the Company
and several purchasers names therein (incorporated by
reference to Exhibit 4.2 to the Company's March 1997 Form
10-QSB).
4.7 -- Securities Purchase Agreement dated November 13, 1998,
between the Company and several purchasers named therein.
10.1 -- Patent License Agreement between the Company and the
University of Florida Research Foundation, Inc. dated
December 9, 1991, as amended by the First Amendment thereto
dated December 30, 1991 and the Second Amendment dated
March 26, 1993 (incorporated by reference to Exhibit 10.1
to the Company's Registration Statement).
10.2 -- Corporate Research Agreement between the Company and the
University of Florida Research Foundation, Inc. dated April
30, 1993, as amended by the First Amendment dated May 16,
1994 (incorporated by reference to Exhibit 10.2 to the
Company's Registration Statement).
10.3 -- Sublicense Agreement between the Company and Warner-Lambert
Company dated May 1, 1993 (incorporated by reference to
Exhibit 10.3 to the Company's Registration Statement).
10.4 -- Exclusive Sublicense Agreement between the Company and
Nippon Kayaku Co., Ltd. dated February 28, 1994
(incorporated by reference to Exhibit 10.4 to the Company's
Registration Statement).
10.5** -- Amended and Restated 1994 Stock Option Plan (incorporated
by reference to Exhibit 10.1 to the Company's June 1997
Form 10-QSB).
10.6** -- Employment Agreement between the Corporation and Stefan
Borg dated April 1, 1993 (incorporated by reference to
Exhibit 10.6 to the Company's Registration Statement).
10.7 -- Stock Appreciation Rights Agreement between the Company and
Craig Siegler dated August 1, 1994 (incorporated by
reference to Exhibit 10.7 to the Company's Registration
Statement).
10.8 -- Stock Purchase Warrant between the Company and Craig
Siegler dated August 18, 1994 (incorporated by reference to
Exhibit 10.8 to the Company's Registration Statement).
10.9** -- Consulting Agreement between the Company and Dr. Raymond J.
Bergeron dated December 9, 1991, as amended by letters
dated April 2, 1993 and April 29, 1994 (incorporated by
reference to Exhibit 10. 9 to the Company's Registration
Statement).
10.10 -- Form of Bridge Warrant Certificate (incorporated by
reference to Exhibit 10.10 to the Company's Registration
Statement).
10.11 -- Form of Subscription Agreement for Bridge Financing
(incorporated by reference to Exhibit 10.13 to the
Company's Registration Statement).
10.12 -- Second Amended and Restated Registration Rights Agreement
(incorporated by reference to Exhibit 10.14 to the
Company's Registration Statement).
10.13 -- Agency Agreement between the Registrant and Royce
Investment Group, Inc. dated August 12, 1994 (incorporated
by reference to Exhibit 10.15 to the Company's Registration
Statement).
10.14 -- First Amendment to Second Amended and Restated Registration
Rights Agreement (incorporated by reference to Exhibit
10.16 to Amendment No. 1 to the Company's Registration
Statement).
25
<PAGE>
EXHIBIT NO. DESCRIPTION
10.15 -- Third Amendment to Patent License Agreement between the
Company and the University of Florida Research Foundation,
Inc. (incorporated by reference to Exhibit 10.17 to
Amendment No. 1 to the Company's Registration Statement).
10.16 -- License Agreement between the Company and the University of
Florida Research Foundation, Inc. dated October 23, 1995
(incorporated by reference to Exhibit 10.16 to the
Company's Annual Report on Form 10-KSB for the year ended
December 31, 1995).
10.17 -- SunPharm Corporation Amended and Restated 1995 Nonemployee
Directors' Stock Option Plan (incorporated by reference to
Exhibit 10.2 to the Company's June 1997 Form 10-QSB).
10.18 -- Form of Redeemable Common Stock Purchase Warrant
(incorporated by reference to Exhibit 4.2 to the Company's
Quarterly Report on Form 10-QSB for the quarter ended
September 30, 1996 (the "September 1996 Form 10-QSB")).
10.19 -- Form of Subscription Agreement relating to 1996 Private
Placement of Units consisting of Common Stock and
Redeemable Common Stock Purchase Warrants (incorporated by
reference to Exhibit 4.1 to the Company's September 1996
Form 10-QSB).
10.20 -- Fourth Amendment to Patent License Agreement between the
Company and the University of Florida Research Foundation,
Inc. effective September 9, 1996 (incorporated by reference
to the Company's Annual Report on Form 10-KSB for the year
ended December 31, 1997 (the "1997 Form 10-KSB")).
10.21 -- Lock-up Agreement between the University of Florida
Research Foundation, Inc. and members of the Board of
Directors of Company effective December 31, 1996
(incorporated by reference to Exhibit 10.21 to the
Company's 1997 Form 10-KSB).
10.22 -- Fifth Amendment to Patent License Agreement between the
Company and the University of Florida Research Foundation,
Inc. dated December 26, 1997 (incorporated by reference to
Exhibit 10.22 to the Company's 1997 Form 10-KSB).
10.23 -- First Amendment to Amended and Restated 1995 Nonemployee
Directors' Stock Option Plan (incorporated by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form
10-QSB for the quarter ended June 30, 1998).
10.24* -- Second Amendment to Corporate Research Agreement between
the Company and the University of Florida Research
Foundation, Inc. dated September 9, 1996.
10.25* -- Third Amendment to Corporate Research Agreement between the
Company and the University of Florida Research Foundation,
Inc. dated April 2, 1998.
11.1* -- Calculation of weighted average shares outstanding and net
loss of per share for the twelve months ending December 31,
1998 and 1997.
27.1* -- Financial Data Schedule *
- - ----------
*Filed herewith.
**Management or compensatory plan.
(b) Reports on Form 8-K
None.
26
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Issuer caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SUNPHARM CORPORATION
By: /s/ STEFAN BORG
---------------------------------------------
Stefan Borg
President and Chief Executive Officer
Date: March 30 , 1999
--------------------------------------------
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Issuer and in the capacities and on the dates
indicated.
Date: March 30, 1999 /s/ STEFAN BORG
----------------------------------------------
Stefan Borg
President and Chief Executive Officer
(Principal Executive Officer)
Date: March 30, 1999 /s/ PAUL M. HERRON
----------------------------------------------
Paul M. Herron
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: March 30, 1999 /s/ PHILIP R. TRACY
----------------------------------------------
Philip R. Tracy
Chairman of the Board of Directors
Date: March 30, 1999 /s/ CHARLES L. DIMMLER III
----------------------------------------------
Charles L. Dimmler III, Director
Date: March 30, 1999 /s/ JERRY T. JACKSON
----------------------------------------------
Jerry T. Jackson, Director
Date: March 30, 1999 /s/ ROBERT S. JANICKI, M.D.
----------------------------------------------
Robert S. Janicki, Director
Date: March 30, 1999 /s/ JAY MOORIN
----------------------------------------------
Jay Moorin, Director
Date: March 30, 1999 /s/ JACQUES REJEANGE
----------------------------------------------
Jacques Rejeange, Director
Date: March 30, 1999 /s/ ROBERT A. SCHOELLHORN
----------------------------------------------
Robert A. Schoellhorn, Director
27
<PAGE>
SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1997 AND THE PERIOD
FROM MAY 3, 1990 (DATE OF INCORPORATION) TO
DECEMBER 31, 1998 AND INDEPENDENT AUDITORS'
REPORT
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of SunPharm Corporation:
We have audited the accompanying balance sheets of SunPharm Corporation (a
development stage company) as of December 31, 1998 and 1997, and the related
statements of operations, stockholders' equity, and cash flows for the years
then ended, and for the period from May 3, 1990 (date of incorporation) to
December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. The Company's financial statements for
the period May 3, 1990 (date of incorporation) through December 31, 1994 were
audited by other auditors whose report, dated April 3, 1995, expressed an
unqualified opinion on those statements. The financial statements for the period
May 3, 1990 (date of incorporation) through December 31, 1994 reflect total
revenues and net loss of $1,885,000 and $4,390,367, respectively, of the related
totals. The other auditors' report has been furnished to us, and our opinion,
insofar as it relates to the amounts included for such prior period, is based
solely on the report of such other auditors.
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 and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, such
financial statements present fairly, in all material respects, the financial
position of SunPharm as of December 31, 1998 and 1997, and the results of its
operations and its cash flows for the two years then ended, and for the period
from May 3, 1990 (date of incorporation) to December 31, 1998, in conformity
with generally accepted accounting principles.
The Company is in the development stage at December 31, 1998. As discussed in
Note 1 to the financial statements, successful completion of the Company's
development program and ultimately, the attainment of profitable operations is
dependent upon future events, including obtaining adequate financing to fulfill
its development activities, obtaining regulatory approval, and achieving a level
of sales adequate to support the Company's cost structure.
DELOITTE & TOUCHE LLP
Jacksonville, Florida
February 12, 1999
F-2
<PAGE>
SUNPHARM CORPORATION
(A Development Stage Company)
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
ASSETS 1998 1997
CURRENT ASSETS:
Cash $ -- $ 356,969
Investments 1,699,200 4,268,566
Prepaid expenses and other 162,734 206,024
------------ ------------
Total current assets 1,861,934 4,831,559
RECEIVABLE FROM STOCKHOLDER 124,865 106,611
PROPERTY AND EQUIPMENT, net of accumulated
depreciation of $17,085 and $10,322 57,933 30,319
OTHER ASSETS 9,275 3,250
------------ ------------
TOTAL ASSETS $ 2,054,007 $ 4,971,739
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 213,627 $ 399,996
Accrued liabilities 135,580 231,754
Notes payable 102,706 155,271
------------ ------------
Total current liabilities 451,913 787,021
COMMITMENTS AND CONTINGENCIES (Note 6)
STOCKHOLDERS' EQUITY:
Undesignated serial preferred stock, $.001 par value, 2,200,000
and 2,500,000 shares authorized, none issued and outstanding -- --
Series A redeemable convertible preferred stock,
$.001 par value, 300,000 and 0 shares authorized, issued
and outstanding (cumulative dividends in arrears of
$12,887 at December 31, 1998) 300 --
Common stock, $.0001 par value, 25,000,000 shares
authorized, 6,621,395 and 5,737,828 issued and outstanding 662 574
Additional paid-in capital 20,871,578 19,687,198
Deficit accumulated during development stage (19,270,446) (15,503,054)
Accumulated other comprehensive income -- --
------------ ------------
Total stockholders' equity 1,602,094 4,184,718
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,054,007 $ 4,971,739
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
SUNPHARM CORPORATION
(A Development Stage Company)
STATEMENTS OF OPERATIONS
- - -----------------------------------------------------------------------------
PERIOD FROM
MAY 3, 1990
(DATE OF
INCORPORATION)
YEARS ENDED TO
DECEMBER 31, DECEMBER 31,
---------------------------- --------------
1998 1997 1998
SPONSORED RESEARCH/
SUBLICENSING REVENUES $ 230,729 $ -- $ 3,115,729
INTEREST INCOME 163,126 280,045 678,433
------------ ------------ ------------
Total revenues 393,855 280,045 3,794,162
------------ ------------ ------------
EXPENSES:
Research and development 2,509,561 2,417,209 12,495,801
General and administrative 1,651,686 1,769,261 10,078,807
Royalty -- -- 490,000
------------ ------------ ------------
Total expenses 4,161,247 4,186,470 23,064,608
------------ ------------ ------------
NET LOSS $ (3,767,392) $ (3,906,425) $(19,270,446)
============ ============ ============
LOSS PER SHARE $ (0.64) $ (0.75)
============ ============
SHARES USED IN COMPUTING
LOSS PER SHARE 5,876,875 5,214,733
============ ============
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
SUNPHARM CORPORATION
(A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Redeemable Convertible
Preferred Stock
--------------------------------------------------
SERIES A SERIES B
---------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
Issuance of common stock for services,
October 1991 ($.0064 per share)
Issuance of common stock for license agreement rights,
December 1991 ($.0064 per share)
Issuance of common stock for cash, December 1991
($.0064 per share) --------- --------- --------- ---------
BALANCE, DECEMBER 31, 1991
Issuance of Series A for cash, February through
November 1992 ($1.67 per share) 307,500 $ 513,525
Issuance of Series B for cash, October through
December 1992 ($5.00 per share) 32,500 $ 162,500
Issuance of common stock for services, October 1992
($.32 per share)
Issuance of Series B for services, December 1992
($5.00 per share) 5,000 25,000
Net loss
--------- --------- --------- ---------
BALANCE, DECEMBER 31, 1992 307,500 513,525 37,500 187,500
Issuance of Series B for cash, April through June 1993
($5.00 per share) 57,500 287,500
Issuance of Series B for services, June 1993
($5.00 per share) 1,500 7,500
Issuance of common stock for services, March 1993
($.32 per share)
Issuance of common stock for cash, December 1993
($.32 per share)
Net loss
--------- --------- --------- ---------
BALANCE, DECEMBER 31, 1993 307,500 513,525 96,500 482,500
Other Comprehensive income:
Deferred compensation
Amortization of deferred compensation
Exercise of stock options, September 1994 ($.32 per share)
Issuance of warrants to purchase common stock in
connection with the Bridge notes ($2.63 per share)
Net loss
--------- --------- --------- ---------
BALANCE, DECEMBER 31, 1994 307,500 513,525 96,500 482,500
Compensation expense
Conversion of preferred stock to common stock (307,500) (513,525) (96,500) (482,500)
Initial public offering
Net loss
--------- --------- --------- ---------
BALANCE, DECEMBER 31, 1995 -- -- -- --
Exercise of warrants
Issuance of common stock
Issuance of common stock for settlement of litigation
Net loss
--------- --------- --------- ---------
BALANCE, DECEMBER 31, 1996 $ $
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------------------------
Deficit
Accumulated Accumulated
Common Stock Additional Other During
---------- ----------- Paid-in Comprehensive Development
Shares Amount Capital Income Stage
<S> <C> <C> <C> <C> <C>
Issuance of common stock for services,
October 1991 ($.0064 per share) 467,400 $ 47 $ 2,953
Issuance of common stock for license agreement rights,
December 1991 ($.0064 per share) 311,600 31 1,969
Issuance of common stock for cash, December 1991
($.0064 per share) 148,010 15 935
---------- ----------- ----------- ----------- ------------
BALANCE, DECEMBER 31, 1991 927,010 93 5,857
Issuance of Series A for cash, February through
November 1992 ($1.67 per share)
Issuance of Series B for cash, October through
December 1992 ($5.00 per share)
Issuance of common stock for services, October 1992
($.32 per share) 3,895 1,250
Issuance of Series B for services, December 1992
($5.00 per share)
Net loss $ (998,004)
---------- ----------- ----------- ----------- ------------
BALANCE, DECEMBER 31, 1992 930,905 93 7,107 (998,004)
Issuance of Series B for cash, April through June 1993
($5.00 per share)
Issuance of Series B for services, June 1993
($5.00 per share)
Issuance of common stock for services, March 1993
($.32 per share) 31,160 3 9,997
Issuance of common stock for cash, December 1993
($.32 per share) 15,580 2 4,998
Net loss (1,233,352)
---------- ----------- ----------- ----------- ------------
BALANCE, DECEMBER 31, 1993 977,645 98 22,102 (2,231,356)
Other Comprehensive income:
Deferred compensation 818,308 $ (818,308)
Amortization of deferred compensation 818,308
Exercise of stock options, September 1994 ($.32 per share) 7,790 1 2,499
Issuance of warrants to purchase common stock in
connection with the Bridge notes ($2.63 per share) 600,000
Net loss (2,159,011)
---------- ----------- ----------- ----------- ------------
BALANCE, DECEMBER 31, 1994 985,435 99 1,442,909 (4,390,367)
Compensation expense 28,188
Conversion of preferred stock to common stock 634,100 63 995,962
Initial public offering 1,265,000 126 7,175,375
Net loss (4,369,653)
---------- ----------- ----------- ----------- ------------
BALANCE, DECEMBER 31, 1995 2,884,535 288 9,642,434 (8,760,020)
Exercise of warrants 236,721 24 458,697
Issuance of common stock 537,623 54 2,636,195
Issuance of common stock for settlement of litigation 50,000 5 324,995
Net loss (2,836,609)
---------- ----------- ----------- ----------- ------------
BALANCE, DECEMBER 31, 1996 3,708,879 $ 371 $13,062,321 $ -- $(11,596,629)
========== =========== =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
SUNPHARM CORPORATION
(A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY (Continued)
- - ------------------------------------------------------------------------------
REDEEMABLE CONVERTIBLE
PREFERRED STOCK
------------------------------------------
SERIES A SERIES B
------------------------------------------
SHARES AMOUNT SHARES AMOUNT
BALANCE, DECEMBER 31, 1996
Exercise of stock options
Issuance of common stock
Issuance of warrants for service
Net loss
--------- --------- --------- ---------
BALANCE, DECEMBER 31, 1997
Exercise of stock options
Issuance of common stock
Issuance of preferred stock 300,000 $ 300
Net loss
--------- --------- --------- ---------
BALANCE, DECEMBER 31, 1998 300,000 $ 300
========= ========= ========= =========
(Concluded)
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED ACCUMULATED
COMMON STOCK ADDITIONAL OTHER DURING
---------------------------- PAID-IN COMPREHENSIVE DEVELOPMENT
SHARES AMOUNT CAPITAL INCOME STAGE
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 3,708,879 $ 371 $ 13,062,321 $(11,596,629)
Exercise of stock options 75,663 8 15,802
Issuance of common stock 1,953,286 195 6,519,055
Issuance of warrants for service 90,020
Net loss (3,906,425)
----------- ----- ------------ ------------ ------------
BALANCE, DECEMBER 31, 1997 5,737,828 574 19,687,198 (15,503,054)
Exercise of stock options 30,002 3 17,582
Issuance of common stock 883,565 85 7,398
Issuance of preferred stock 1,159,400
Net loss (3,767,392)
----------- ----- ------------ ------------ ------------
BALANCE, DECEMBER 31, 1998 6,621,395 $ 662 $ 20,871,578 $ - $(19,270,446)
========== ===== ============ ============ ============
</TABLE>
(Concluded)
F-8
<PAGE>
SUNPHARM CORPORATION
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
MAY 3, 1990
(DATE OF
YEARS ENDED INCORPORATION)
DECEMBER 31, TO
---------------------------- DECEMBER 31,
1998 1997 1998
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (3,767,392) $ (3,906,425) $(19,270,446)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 8,282 5,692 85,680
Compensation expense related to options, warrants
and stock appreciation rights -- 90,020 999,016
Amortization of deferred offering costs incurred in
connection with issuance of Bridge Notes -- -- 775,000
Write-off of patents -- -- 70,120
Increase in receivable from stockholder (18,254) (96,611) (124,865)
Decrease (increase) in prepaid expenses
and other assets 37,265 406,042 (170,400)
(Decrease) increase in accounts payable (186,369) 76,545 213,627
(Decrease) increase in accrued liabilities (96,174) (637,491) 141,830
Increase in accrued legal fees -- -- 300,000
------------ ------------ ------------
Total adjustments (255,250) (155,803) 2,290,008
------------ ------------ ------------
Net cash used in operating activities (4,022,642) (4,062,228) (16,980,438)
------------ ------------ ------------
INVESTING ACTIVITIES:
Purchases of short-term investments (8,553,779) (12,815,678) (26,488,831)
Sales and maturities of short-term investments 11,123,145 10,342,424 24,789,631
Purchases of property and equipment (35,896) (26,824) (79,918)
Payment of patent costs -- -- (67,424)
------------ ------------ ------------
Net cash provided by (used in) investing activities 2,533,470 (2,500,078) (1,846,542)
------------ ------------ ------------
Continued
</TABLE>
F-9
<PAGE>
SUNPHARM CORPORATION
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
MAY 3, 1990
(DATE OF
YEARS ENDED INCORPORATION)
DECEMBER 31, TO
---------------------------- DECEMBER 31,
1998 1997 1998
<S> <C> <C> <C>
FINANCING ACTIVITIES:
(Repayments of) proceeds from notes payable $ (52,565) $ 43,070 $ 2,706
Issuance of Series A redeemable convertible
preferred stock 1,159,700 -- 1,673,225
Issuance of Series B redeemable convertible
preferred stock -- -- 450,000
Issuance of common stock 25,068 6,535,060 17,298,397
Stock offering costs -- -- (597,348)
Proceeds from payable to stockholders -- 542,500
Repayment of payable to stockholders -- -- (542,500)
------------ ------------ ------------
Net cash provided by financing activities 1,132,203 6,578,130 18,826,980
------------ ------------ ------------
NET CHANGE IN CASH (356,969) 15,824 --
CASH AT BEGINNING OF PERIOD 356,969 341,145 --
------------ ------------ ------------
CASH AT END OF PERIOD $ -- $ 356,969 $ --
============ ============ ============
SUPPLEMENTAL INFORMATION:
Cash paid for interest $ 4,064 $ 2,512 $ 171,516
============ ============ ============
The accompanying notes are an integral part of these financial statements. (Concluded)
</TABLE>
F-10
<PAGE>
SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997 AND THE PERIOD FROM
MAY 3, 1990 (DATE OF INCORPORATION) TO DECEMBER 31, 1998
- - --------------------------------------------------------------------------------
1. ORGANIZATION
SunPharm Corporation ("SunPharm" or the "Company"), formerly LexiGen,
Incorporated, was incorporated in the State of Delaware on May 3, 1990,
issued shares of its common stock in 1991, and commenced operations in
February 1992. The Company was formed to develop and commercialize unique
and proprietary polyamine analogs with antiproliferative and other
therapeutic uses.
The Company is a development stage company which has devoted substantially
all of its efforts to research and product development and has not yet
generated any revenues from the sale of products. At this time, there can
be no assurance of future revenues. In addition, the Company expects to
continue to incur losses for the foreseeable future, and there can be no
assurance that the Company will successfully complete the transition from
a development stage company to successful operations. The research and
development activities in which the Company is engaged involve a high
degree of risk and uncertainty. The ability of the Company to successfully
develop, manufacture and market its proprietary products is dependent upon
many factors. These factors include, but are not limited to, the need for
additional financing, the reliance on collaborative arrangements for
research and contractual agreements with corporate partners, the Company's
dependence on its exclusive license agreement with the University of
Florida, the ability to attract and retain key personnel and consultants,
including its founder, and the ability to develop manufacturing, sales and
marketing expertise. In addition, the Company's future success is affected
by the progress of the Company's research and development, the scope and
results of preclinical studies and clinical trials, the cost and timing of
regulatory approvals, the rate of technological advances, determinations
as to the commercial potential of the Company's products under
development, the status of competitive products, the establishment of
manufacturing capacity or third-party manufacturing arrangements, its
reliance on research institutions and corporate partners, the uncertainty
of health care reform and the competitive environment in which the Company
operates. The Company's existing capital resources will not be sufficient
to fund the Company's operations to the point of introduction of a
commercially successful product, if and when that time should arrive. No
assurance can be given that additional funds will be available on
acceptable terms, if at all.
In order to continue its research and product development activities as
planned, the Company has raised equity through an initial public offering
("IPO") and various private placements of the Company's Common Stock and
Series A and Series B Redeemable Convertible Preferred Stock. Such
offerings through December 31, 1998 have resulted in proceeds of
approximately $19,421,000. The Company intends to obtain additional funds
for research and development through collaborative arrangements with
corporate partners, additional financings, and from other sources;
however, there can be no assurance that the Company will be able to obtain
necessary financing when required or what the terms of any financing, if
obtained, might be. Accordingly, there can be no assurance of the
Company's future success.
F-11
<PAGE>
SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997 AND THE PERIOD FROM MAY 3, 1990 (DATE OF
INCORPORATION) TO DECEMBER 31, 1998 (CONTINUED)
- - --------------------------------------------------------------------------------
In August 1994, the board of directors authorized a 1.558-for-1 stock
split of all outstanding stock, increased the number of shares of
authorized common stock to 25,000,000 and changed the par value of the
common stock to $.0001 per share, all of which was approved by the
stockholders in October 1994. All share and per share amounts have been
retroactively restated to reflect the stock split for all years presented.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - The financial statements are presented in
accordance with generally accepted accounting principles, which require
management to make estimates that affect the reported amounts and
contingency disclosures in the financial statements. Actual results could
differ from these estimates.
PATENT COSTS - The Company reimburses the University of Florida Research
Foundation, Inc. ("UFRFI"), for direct expenses related to the Company's
licensed patents. Patent costs consist of legal fees and other direct
costs incurred in filing, prosecuting and maintaining the licensed
patents. These costs are charged directly to research and development
expense.
RESEARCH AND DEVELOPMENT - Sponsored research payments are recognized as
revenue when the research underlying such payments has been performed.
Research and development expenses are charged to operations as incurred.
Research and development expenses principally include, among other things,
consulting fees and cost reimbursements to UFRFI, preclinical and clinical
testing of compounds under investigation, and salaries and benefits of
employees engaged in research and development activities.
PROPERTY AND EQUIPMENT - Office and laboratory equipment and leasehold
improvements are carried at cost less accumulated depreciation, which is
computed on a straight-line basis over the estimated useful lives of the
related assets. The useful lives generally fall between 5 and 10 years.
EARNINGS PER SHARE - During the year ended December 31, 1997, the Company
adopted SFAS No. 128, "Earnings per Share" (SFAS 128). This Statement
establishes standards for computing and presenting earnings per share
("EPS") and applies to all entities with publicly held common stock or
potential common stock. This Statement replaces the presentation of
primary EPS and fully diluted EPS with a presentation of basic EPS and
diluted EPS, respectively. Basic EPS excludes dilution and is computed by
dividing earnings available to common stockholders by the weighted-average
number of common shares outstanding for the period. Similar to fully
diluted EPS, diluted EPS reflects the potential dilution of securities
that could share in the earnings. Since the Company has experienced losses
since inception, there is no dilutive effect of any of its common stock
equivalents. Accordingly, only basic EPS is shown.
F-12
<PAGE>
SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997 AND THE PERIOD FROM MAY 3, 1990 (DATE OF
INCORPORATION) TO DECEMBER 31, 1998 (CONTINUED)
- - --------------------------------------------------------------------------------
STOCK OPTIONS, WARRANTS AND SARS - Effective January 1, 1996, the Company
adopted SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS
123). SFAS 123 establishes a fair value based method of accounting for
stock-based employee compensation plans; however, it also allows an entity
to continue to measure compensation cost for those plans using the
intrinsic value based method of accounting prescribed by Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees." Under the fair value based method, compensation cost is
measured at the grant date based on the value of the award and is
recognized over the service period, which is usually the vesting period.
The Company has elected to continue to account for its employee stock
compensation plans under APB Opinion No. 25 with pro forma disclosures of
net earnings and earnings per share, as if the fair value based method of
accounting defined in SFAS 123 has been applied.
RECENTLY ADOPTED ACCOUNTING STANDARDS - In June 1997, the Financial
Accounting Standards Board issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130")
effective for fiscal years beginning after December 15, 1997. SFAS No. 130
requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in
a financial statement that is displayed with the same prominence as other
financial statements. SFAS No. 130 does not require a specific format for
that financial statement but requires that an entity display an amount
representing total comprehensive income for the period in that statement.
SFAS No. 130 requires that an entity classify items of other comprehensive
income by their nature in a financial statement. For example, other
comprehensive income may include foreign currency and unrealized gains and
losses on certain investments in debt and equity securities. In addition,
the accumulated balance of other comprehensive income must be displayed
separately from retained earnings and additional paid in capital in the
equity section of a statement of financial position. Adoption of SFAS No.
130 did not have a material impact on the financial statements.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS No. 131") effective for fiscal years beginning after December 15,
1997. SFAS No. 131 establishes standards for reporting information about
operating segments in annual financial statements and requires selected
information about operating segments in interim financial reports issued
to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas and major customers.
Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by
the chief operating decision maker in deciding how to allocate resources
and in assessing performance. SFAS No. 131 requires reporting of segment
profit or loss, certain specific revenue and expense items and segment
assets. It also requires reconciliations of total segment revenues, total
segment profit or loss, total segment assets, and other amounts disclosed
for segments to corresponding amounts reported in the financial
statements. The Company is in one business segment and follows the
requirements of SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information".
F-13
<PAGE>
SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997 AND THE PERIOD FROM MAY 3, 1990 (DATE OF
INCORPORATION) TO DECEMBER 31, 1998 (CONTINUED)
- - --------------------------------------------------------------------------------
In February 1998, the FASB issued SFAS No. 132, "Employer's Disclosures
about Pensions and Other Postretirement Benefits" ("SFAS No. 132"),
effective for fiscal years beginning after December 15, 1997. SFAS 132
revises employer disclosures about pension and other postretirement
benefit plans. It does not change the measurement or recognition of those
plans. This statement standardizes the disclosure requirements for
pensions and other postretirement benefits to the extent practicable,
requires additional information on changes in the benefit obligations and
fair values of plan assets that will facilitate financial analysis and
eliminates certain disclosures. Restatement of disclosures for earlier
periods is required. Adoption of SFAS No. 132 did not have a material
impact on the financial statements.
NEW ACCOUNTING STANDARDS - In June 1998, the FASB issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No.
133"), effective for fiscal years beginning after June 15, 1999. SFAS No.
133 requires companies to record derivatives on the balance sheet as
assets and liabilities, measured at fair value. Gains or losses resulting
from changes in the values of those derivatives would be accounted for
depending on the use of the derivative and whether it qualifies for hedge
accounting. The Company has not determined the effect of this statement on
its financial statement disclosure.
3. INITIAL PUBLIC OFFERING AND SUBSEQUENT SECURITIES OFFERINGS
On January 12, 1995, the Company completed an IPO of 1,100,000 units
("Unit") at $7.00 per Unit. Each Unit consisted of one share of the
Company's common stock and one Redeemable Common Stock Purchase Warrant
("IPO Warrant"), which entitled the holder to purchase one share of common
stock at $8.75 per share until expiration on April 13, 1998, as extended
from the original expiration of January 12, 1998. The IPO Warrants have
been subject to redemption by the Company commencing January 1996 at $.05
per Warrant, providing the closing bid price of the Company's common stock
exceeds $12.25 per share for 20 consecutive trading days ending within
five days of the notice of redemption. Additionally, on February 16, 1995,
the underwriter of the offering (the "Representative") exercised an option
to purchase an additional 165,000 Units at $7.00 per Unit
(Representative's over-allotment option).
Proceeds from the Company's IPO were approximately $7,200,000 of cash, net
of underwriting costs and other offering costs of $1,655,000. Of such net
proceeds, approximately $1,793,000 were used to repay the outstanding
indebtedness (including accrued interest and certain fees) of the Company.
In addition, other expenses which were paid included approximately
$310,000 for human clinical trials of DEHOP and DENSPM, $150,000 for
research and development of other potential products, $240,000 for general
corporate expenses, and approximately $210,000 to pay royalties to UFRFI.
In connection with the IPO, the Company sold to the Representative, for
nominal consideration, a unit purchase option to purchase up to 110,000
Units substantially identical to the Units sold in the offering in all
respects, except that each warrant included in the unit purchase option
entitled the holder to purchase
F-14
<PAGE>
SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997 AND THE PERIOD FROM MAY 3, 1990 (DATE OF
INCORPORATION) TO DECEMBER 31, 1998 (CONTINUED)
- - --------------------------------------------------------------------------------
one share of common stock at $11.375 per share. The unit purchase option
will be exercisable during the four-year period commencing January 12,
1996, at an exercise price of $11.20 per Unit.
Also, during the five-year period from the date of the offering, in the
event the Representative originates a financing or a merger, acquisition,
joint venture, strategic alliance introduction or other similar
transaction to which the Company is a party, the Representative would be
entitled to a finder's fee in consideration of the origination of the
transaction. The fee is based upon a percentage of the consideration paid
in the transaction or, in the case of an introduction to a customer, a
five-year royalty on sales. In both instances, the consideration would
consist of 5% of the first $1,000,000, 4% of the next $1,000,000, and 3%
of any amount in excess of $2,000,000.
Upon the closing of the IPO in January 1995, the Series A and Series B
Redeemable Convertible Preferred Stock outstanding automatically converted
into 479,700 and 154,400 shares of common stock, respectively. The Company
presently has 2,200,000 shares of undesignated serial preferred stock
authorized, with none issued and outstanding.
During the year ended December 31, 1996, the Company completed a private
placement of 537,623 units pursuant to Regulation D of the Securities Act
of 1933 for $5.50 per Unit. Each unit consists of one share of the
Company's common stock and one redeemable Common Stock Purchase Warrant
("1996 Warrant"). The 1996 Warrants included in these units expire four
years from the date of issuance and have exercise prices of $5.50 per
share until the anniversary date, $6.50 per share until the second
anniversary date, and $7.50 per share thereafter. The 1996 Warrants are
subject to redemption by the Company at $.01 per 1996 Warrant, provided
the Company's common stock closes at a price of $8.50, $9.50 or $10.50 per
share for twenty consecutive days during the second, third or fourth
years, respectively, of the term of the 1996 Warrant.
Proceeds from the private placement as well as proceeds from the warrant
exchange discussed in Note 7 were approximately $3,095,000 in cash, net of
placement agent and other offering costs of approximately $355,000.
During the year ended December 31, 1997, the Company sold 1,948,286 units,
each consisting of one share of the Company's common stock and one
redeemable Common Stock Purchase Warrant ("1997 Warrant") for $3.50 per
unit. The 1997 Warrants included in the units expire five years from the
date of issuance. In case of a "cashless exercise," the 1997 Warrant
exercise price is $4.00 per share plus forty percent of the difference
between the current trading price of the Company's common stock and $4.00;
in all other cases, the 1997 Warrant exercise price is $4.00 per share
plus thirty percent of the difference between the current trading price of
the Company's common stock and $4.00. The 1997 Warrants are subject to
redemption by the Company at the exercise price, provided the Company's
common stock closes at a price of $16.00, $20.00, or $28.00 per share for
twenty consecutive days during the second,
F-15
<PAGE>
SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997 AND THE PERIOD FROM MAY 3, 1990 (DATE OF
INCORPORATION) TO DECEMBER 31, 1998 (CONTINUED)
- - --------------------------------------------------------------------------------
third, fourth or fifth years, respectively, of the term of the 1997
Warrant. Proceeds from the private placement were $6,519,250, net of
placement agent and other offering costs of $324,500.
On November 12, 1998, the Company sold 300,000 shares of Series A
Redeemable Convertible Preferred Stock ("Preferred Stock") and 853,565
shares of Common Stock to certain institutions and other accredited
investors in a Private Placement pursuant to Regulation D under the
Securities Act of 1933. The purchase price for the Preferred Stock and
Common Stock sold in the Private Placement consisted of $1,200,000 in cash
and the surrender by the investors of redeemable Common Stock Purchase
Warrants originally issued in the Company's March 1997 private placement
financing (the "1997 Warrants"). Shares of Series A Preferred Stock are
initially convertible to Common Stock on a 1-for-1 basis, subject to
customary antidilution adjustments. Dividends shall accrue on the Series A
Preferred Stock at the rate of 8% per annum. In the event of liquidation
dissolution, or winding up of the Company, or, at the option of the
holders of the Preferred Stock, a consolidation or merger of the Company
or a sale of all or substantially all of its assets, the Preferred Stock
will be entitled to receive in preference to the Company's Common Stock an
amount per share equal to the original purchase price plus any accrued
dividends per share.
Redemption of the Preferred Stock is at the request of holders of at least
33-1/3% of such shares outstanding, which request may be made at any time
two years following closing of the Private Placement. In the event of such
request, the Company shall be required to redeem all of the Series A
Preferred Stock held by the requesting holders at a redemption price equal
to $4.00 per share (subject to adjustment), plus any accrued dividends per
share. The redemption price may be paid, at the Company's option, in cash
or in shares of the Company's Common Stock. The Company's intention is to
make such redemption in Common Stock, and accordingly the Series A
Preferred Stock has been included in stockholders' equity. Proceeds to the
Company form this Private Placement were approximately $1,160,000, net of
legal fees of $40,000.
4. INVESTMENTS
At December 31, 1998 and 1997, the Company's investments consisted
primarily of United States government agency obligations and high-grade
commercial paper. These investments were considered as available for sale,
and cost plus accrued interest approximated fair market value. At December
31, 1998 and 1997, these securities had maturities of less than one year.
5. NOTES PAYABLE
In January and March 1993, the Company issued notes payable in the
aggregate principal amount of $522,500 primarily to SunPharm Investors
L.P., a limited partnership in which 7% of the funds loaned to the Company
were contributed by existing stockholders of the Company. Costs associated
with this issuance totaled $57,500. There were also stock purchase
warrants issued as discussed in Note 7. The notes bore interest at 9.5%
through January 1995, when they were repaid.
F-16
<PAGE>
SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997 AND THE PERIOD FROM MAY 3, 1990 (DATE OF
INCORPORATION) TO DECEMBER 31, 1998 (CONTINUED)
- - --------------------------------------------------------------------------------
In August and September 1994, two directors of the Company loaned $5,000
and $50,000, respectively, to the Company. The loans were repaid from the
proceeds of the Bridge Financing discussed below. In addition, the
directors were granted warrants to acquire 500 and 5,000 shares,
respectively, of common stock at an exercise price of $5.50.
On September 27, 1994, the Company issued notes totaling $1,000,000 as a
bridge financing for the IPO (the "Bridge Notes"). The holders of the
Bridge Notes also received warrants to purchase 228,573 shares of common
stock at an exercise price of $4.375 per share. The estimated value of
$600,000 for the warrants was recorded as additional paid-in capital and
deferred offering costs during 1994. Proceeds of the Bridge Notes were
$825,000, net of a $100,000 placement fee paid to the placement agent and
$75,000 of offering costs. The total deferred offering costs of $775,000
were charged to expense upon repayment of the Bridge Notes in 1995. The
Bridge Notes bore interest at an annual rate of 10% and were repaid in
January and February 1995 from the proceeds of the IPO.
In November and December 1994, two directors of the Company loaned
$100,000 and $75,000, respectively, to the Company. The notes bore
interest at 12% per annum and were repaid from the proceeds of the
Offering in January 1995. In addition, the directors were granted 10,000
and 7,500 warrants, respectively, to acquire shares of common stock at an
exercise price of $7.00. The warrants were not exercisable until the
second anniversary of the completion of the IPO.
In January 1995, two directors of the Company loaned a total of $25,000 to
the Company. The notes bore interest at 12% per annum and were repaid from
the proceeds of the IPO. In addition, the directors were granted warrants
to acquire 2,500 shares of common stock at an exercise price of $7.00. The
warrants were not exercisable until the second anniversary of the
completion of the IPO.
At December 31, 1998 and 1997, notes payable as shown on the Company's
balance sheets represent obligations resulting from the financing of
insurance premiums.
6. COMMITMENTS AND CONTINGENCIES
The Company has entered into an agreement with Dr. Raymond Bergeron,
inventor of the technology which the Company has licensed, under which the
Company is obligated to pay $8,000 per month for consulting services
through December 1999.
In March 1993, the Company entered into an employment agreement with Mr.
Stefan Borg. The agreement provides for an annual base salary of $120,000
for a three-year period beginning April 1, 1993. The board of directors
approved a $30,000 bonus upon the closing of the bridge financing
discussed in Note 5 and, effective June 1, 1994, the annual base salary
was increased to $132,000. In March 1995, the board of directors approved
a $35,000 bonus for services performed during the preceding twelve months,
extended the agreement to March 31, 1997 and agreed to increase the annual
base salary to $150,000, effective April 1, 1995. In August 1997, the
board of directors approved a bonus of $15,000, the grant of 25,000
incentive stock options (see "1994 Plan" in Note 7) and an increase
F-17
<PAGE>
SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997 AND THE PERIOD FROM MAY 3, 1990 (DATE OF
INCORPORATION) TO DECEMBER 31, 1998 (CONTINUED)
- - --------------------------------------------------------------------------------
in annual base salary to $200,000 effective April 1, 1997. The employment
agreement with Mr. Borg continues in effect on a year-to-year basis unless
terminated.
On December 20, 1995, Dean L. Rider, M.D. ("Rider"), a stockholder of the
Company, filed suit against the Company and Stefan Borg in Superior Court
for the City and County of San Francisco, California, seeking compensatory
damages of over $41 million and punitive damages based upon an alleged
agreement between SunPharm and Rider. In June 1996, the Company settled
this litigation with Rider by issuing Rider 50,000 shares of SunPharm
common stock. Such shares have subsequently been registered for resale.
The issuance of the shares was recorded by a reduction in legal fees
accrued at December 31, 1995, which approximated the fair value of the
shares issued. The Company believes that the claims made by Rider were
without merit, and did not admit to any wrongdoing in connection with the
settlement. The Company agreed to the settlement because it believed the
cost of the settlement to be more economical than the cost of continuing
to incur significant legal expenses to defend this matter.
The Company leases office space, furniture and equipment under operating
leases. Lease expense for the years ended December 31, 1998 and 1997 was
approximately $83,400 and $75,500, respectively. Future minimum
commitments on operating leases at December 31, 1998 are as follows:
1999 $ 110,000
2000 110,000
2001 110,000
2002 110,000
2003 110,000
---------
$ 550,000
=========
The Company is subject to claims arising in the ordinary course of
business but does not believe that any such claims presently identified
will have a material adverse effect on its financial condition or results
of operations.
7. STOCK OPTIONS, WARRANTS AND OTHER INCENTIVE COMPENSATION
In 1992, the Company issued warrants to a director to purchase 77,900
shares of the Company's common stock. The warrants are exercisable at
$1.93 per share. In connection with certain notes payable issued in 1993,
the Company issued warrants to purchase 155,021 shares and 133,234 shares
of the Company's common stock at exercise prices of $1.93 per share and
$3.21 per share, respectively. These warrants have been recorded at zero
in the accompanying financial statements as the value at the time of
issuance was de minimus.
During 1996, the Company offered the Bridge Notes warrant holders
discussed in Note 5 and SunPharm Investors L.P. discussed above a thirty
percent reduction in their applicable exercise price if they exercised
their warrants prior to December 31, 1996. Additionally, for each four
warrants exercised, a
F-18
<PAGE>
SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997 AND THE PERIOD FROM MAY 3, 1990 (DATE OF
INCORPORATION) TO DECEMBER 31, 1998 (CONTINUED)
- - --------------------------------------------------------------------------------
warrant identical to those included in the units described in Note 2 would
be issued. As a result of this warrant exchange offer, 62,858 of the
Bridge Note warrants and 173,863 of SunPharm L.P. warrants were exercised
in exchange for 236,721 shares of stock and 59,178 new warrants. Proceeds
from this transaction were approximately $459,000 of cash, net of offering
costs of approximately $34,000.
The Company's board of directors granted stock options to employees and
other parties to purchase common stock. Employee options generally vest
over a sixty month period or over the term of an employment agreement.
Options granted to consultants generally vest over a particular service
period or in connection with certain milestones. Also, certain options
previously granted had immediate vesting provisions. Most options expire
seven years from the date of grant if not exercised.
In April 1994, the board of directors of the Company approved the 1994
Stock Option Plan (1994 Plan) and reserved 350,550 shares of common stock
for issuance of stock options to employees and consultants. In 1997, the
board of directors increased the number of shares reserved by the Plan to
750,000 shares.
The 1994 Plan is composed of incentive stock options and nonqualified
stock options. The options generally vest over a two- to five-year period,
and the incentive stock options expire 10 years from the date of grant.
For the years ended December 31, 1998 and 1997, there were 50,000 shares
and 124,500 shares granted from this plan, respectively.
On July 10, 1995, the stockholders of the Company approved the SunPharm
Corporation 1995 Nonemployee Directors' Stock Option Plan (the "1995
Directors' Plan"). The maximum number of shares of common stock with
respect to which options may be granted under this plan is 300,000 as
amended in 1997, subject to appropriate adjustment upon a reorganization,
stock split, recapitalization or other change in the Company's capital
structure. Directors who are not employees or consultants to the Company
are eligible to receive nonqualified stock options which, in accordance
with the plan, must be issued at one hundred percent (100%) of the fair
market value of the common stock of the Company on the date of grant.
Directors who are eligible to receive options under the 1995 Directors'
Plan, will be entitled to receive an option to purchase 25,000 shares of
common stock on the date on which they become a director. Additionally,
eligible directors will be entitled to receive options annually on the
date of their reelection to the Board of Directors to purchase 5,000
shares (with an additional 10,000 shares for the Chairman of the Board of
Directors, if he is eligible) of common stock. For the years ended
December 31, 1998 and 1997, options to purchase 40,000 and 125,000 shares
of common stock were granted under the 1995 Directors' Plan.
In August 1994, the Company elected a director of the Company, and engaged
him as a consultant to provide management, marketing, economic and
strategic planning services during a two-year period. The director was
compensated under such consulting agreement at a rate of $7,500 per month,
and by the issuance of a stock appreciation right ("SAR") for 150,000
common stock equivalents, exercisable (commencing in 1996 with respect to
50% and in 1997 with respect to the remainder) in an amount equal to the
excess of the fair market value of the Company's common stock on the date
of exercise over the initial public offering price of the Units. Such
stock appreciation right terminates on January 1, 2000. As
F-19
<PAGE>
SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997 AND THE PERIOD FROM MAY 3, 1990 (DATE OF
INCORPORATION) TO DECEMBER 31, 1998 (CONTINUED)
- - --------------------------------------------------------------------------------
consideration for his serving on the Board of Directors, the director was
granted a five-year stock purchase warrant ("Warrant") for 225,000 shares
of common stock of the Company, such warrant being exercisable at a price
of $5.50 per share. In 1995, the Company recorded compensation expense of
$18,750 and $28,188 in connection with the SAR and the warrant,
respectively, and due to the terms, may incur additional non-cash charges
in the future. No compensation expense has been recorded since 1995
related to any options, warrants or SARs based on the quoted market value
of the Company's common stock.
During the year ended December 31, 1997, the Company issued warrants to
two investment companies to purchase 150,000 shares of the Company's
common stock. The warrants were valued at approximately $90,000 which
represents the fair value of the services provided. Such amount was
expensed with a corresponding increase to additional paid-in-capital
during the year ended December 31, 1997.
SFAS NO. 123 REQUIRED DISCLOSURE
If compensation cost for stock option, SARs and warrant grants ("Grants")
had been determined based on the fair value at the grant dates for 1998
and 1997 consistent with the method prescribed by SFAS No. 123, the
Company's net loss and loss per share would have been adjusted to the pro
forma amounts indicated below:
1998 1997
Net loss As reported $(3,767,392) $(3,906,425)
Pro forma (4,204,638) (4,464,082)
Loss per share As reported (0.64) (0.75)
Pro forma (0.72) (0.86)
Under SFAS No. 123, the fair value of each Grant is estimated on the date
of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1998 and 1997,
respectively: Dividend yield of 0% and 0%, expected volatility of 155.2%
and 77.8%, risk-free interest rates of 5.28% and 6.33% , and expected
lives of 7 and 7 years.
F-20
<PAGE>
SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997 AND THE PERIOD FROM MAY 3, 1990 (DATE OF
INCORPORATION) TO DECEMBER 31, 1998 (CONTINUED)
- - --------------------------------------------------------------------------------
A summary of the status of Grants under the Company's stock-based
compensation plans as of December 31, 1998 and 1997, and changes during
the years ending on those dates is presented below:
<TABLE>
<CAPTION>
1998 1997
-------------------------- --------------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISED EXERCISED
GRANTS PRICE GRANTS PRICE
<S> <C> <C> <C> <C>
Outstanding at beginning of year 1,561,390 $ 3.48 1,384,696 $ 3.25
Granted 90,000 3.19 249,500 3.79
Exercised (28,573) 0.40 (72,806) 0.10
Forfeited (80,000) 5.42
--------- ----------
Outstanding at end of year 1,542,817 3.42 1,561,390 3.48
========== ==========
Grants exercisable at year-end 1,298,384 1,205,703
========== ==========
Weighted-average fair value of
Grants granted during the year $ 3.09 $ 2.88
========== ==========
The following table summarizes information about the outstanding Grants at
December 31, 1998:
GRANTS OUTSTANDING GRANTS EXERCISABLE
---------------------------------------------- -------------------------------
NUMBER WEIGHTED- NUMBER
OUTSTANDING AVERAGE WEIGHTED- EXERCISABLE WEIGHTED-
AT REMAINING AVERAGE AT AVERAGE
RANGE OF DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
EXERCISE PRICES 1998 LIFE (YEARS) PRICE 1998 PRICE
<C> <C> <C> <C> <C> <C> <C>
$.0064 to $ .32 364,873 2.04 $ 0.31 3289,473 $ 0.31
$1.60 to $2.99 349,070 5.37 1.95 255,558 1.78
$3.00 to $4.50 178,374 8.56 3.74 119,353 3.71
$5.375 to $5.75 495,500 2.64 5.52 479,000 5.52
$6.54 to $8.75 155,000 5.81 7.19 155,000 7.19
---------- -----------
1,542,817 1,298,384
========== ===========
</TABLE>
Remaining non-exercisable Grants as of December 31, 1998 become available
as follows:
1999 142,225
2000 36,083
2001 34,000
2002 24,625
2003 7,500
--------
244,433
========
F-21
<PAGE>
SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997 AND THE PERIOD FROM MAY 3, 1990 (DATE OF
INCORPORATION) TO DECEMBER 31, 1998 (CONTINUED)
- - --------------------------------------------------------------------------------
8. FEDERAL INCOME TAXES
The Company has incurred losses since inception and, therefore, has not
been subject to federal income taxes. As of December 31, 1998, the Company
has net operating loss (NOL) and tax credit carryforwards for income tax
purposes of approximately $16,953,000 and $596,000, respectively, which
may be available to reduce future taxable income and future tax
liabilities. These carryforwards begin to expire in 2008.
The Tax Reform Act of 1986 provides for an annual limitation on the use of
NOL and tax credit carryforwards (following certain ownership changes)
that could significantly limit the Company's ability to utilize these
carryforwards. The Company has made no determination concerning whether
there has been such a cumulative change in ownership, and it is possible
that such a change in ownership occurred following the completion of the
Company's IPO, subsequent private placements, and subsequent exercise of
the Warrants. Accordingly, the Company's ability to utilize the
aforementioned carryforwards to reduce future taxable income and tax
liabilities may be limited. Additionally, because United States tax laws
limit the time during which these carryforwards may be applied against
future taxes, the Company may not be able to take full advantage of these
attributes for federal income tax purposes.
As the Company has had cumulative losses and there is no assurance of
future taxable income, a valuation allowance has been established to fully
offset the deferred tax asset related to the net operating losses and
other items. The components of the Company's deferred tax assets at
December 31, 1998 and 1997 are as follows:
1998 1997
Net operating loss carryforwards $6,709,000 $4,997,000
Research and development tax credits 596,000 464,000
Deferred compensation 326,000 326,000
---------- ----------
Total deferred tax assets 7,631,000 5,787,000
Less valuation allowance 7,631,000 5,787,000
---------- ----------
Net deferred tax assets $ -- $ --
========== ==========
9. RESEARCH AND DEVELOPMENT
In 1991, the Company issued 311,600 shares of common stock to UFRFI,
recorded at $2,000, for exclusive, worldwide license agreement rights. The
Company also paid a maintenance fee to UFRFI in the amount of $50,000
which was charged to research and development expense. This fee is
credited toward sponsored research payments and/or royalties. In March
1993, the license agreement was amended to provide for additional patent
rights for the Company in exchange for the Company's payment of patent
costs incurred by UFRFI prior to the amendment, a license fee of $40,000
payable to UFRFI
F-22
<PAGE>
SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997 AND THE PERIOD FROM MAY 3, 1990 (DATE OF
INCORPORATION) TO DECEMBER 31, 1998 (CONTINUED)
- - --------------------------------------------------------------------------------
upon execution of the amendment, the issuance of 31,160 shares of common
stock valued at $10,000 and an increase in annual maintenance fee payable
to UFRFI from $50,000 to $100,000. In September 1996, this agreement was
further amended providing for more patent rights for the Company in
exchange for the Company's payment of a one-time license fee of $50,000
and an increase in the annual maintenance to $200,000 beginning in 1997.
The Company has also entered into a research agreement with UFRFI. For the
years ended December 31, 1996 and 1995, the Company paid $535,000 and
$869,000, respectively, to UFRFI under the terms of the research
agreement. The amount paid in 1995 includes the maintenance fee of
$100,000 for 1996. In September 1996, this agreement was amended
concurrently with the license agreement described above for increased
sponsored research payments related to the Company's products from
$625,000 in 1995 to $641,000 in 1996, $854,250 in 1997 and $875,000 in
1998. These expenses are charged to operations as incurred. Failure to pay
such costs could result in termination of the license agreement rights. If
UFRFI were to terminate the license, the Company's rights to manufacture
and market the technology and related products would terminate and such an
event would have a material adverse effect on the Company. In 1995, the
Company paid $50,000 to UFRFI for an additional license, described below.
The Company also paid UFRFI $163,000 and $210,00 in 1998 and 1997,
respectively, for reimbursement of patent costs.
The Company agreed to pay a royalty on net sales of licensed products up
to 6 percent of net sales for each product. A royalty of 28 percent of
sublicensee payments, but no less than 2 percent of net sales by such
sublicensee, will also be payable to UFRFI. The Company paid UFRFI
$210,000 in royalties in 1995, which were payable as a result of licensing
fees received in 1993. At December 31, 1996 the Company had accrued an
additional $280,000 liability to UFRFI for sublicense payments related to
the $1 million Warner Lambert milestone payment earned in 1996. Such
amount was paid in 1997.
On May 1, 1993, the Company entered into a sublicensing agreement with
Warner-Lambert. The agreement grants Warner-Lambert the right of first
refusal in the event the Company decides to develop certain other licensed
products under certain circumstances. Under the terms of the agreement,
Warner-Lambert paid the Company $100,000 in May 1993 upon the execution of
the agreement and $750,000 in October 1993 related to the filing of the
investigational new drug application. The payments were recognized as
revenue when the payments were received. Additional payments may be
received for the completion of certain scientific milestones. The
agreement provides for Warner-Lambert to pay the Company a royalty on net
sales, as defined. On March 1, 1994, Warner-Lambert paid the Company
$750,000 in consideration for the Company's research and development
activities performed. In 1996, the Company earned an additional $1 million
from Warner Lambert, of which $500,000 was receivable as of December
31,1996 and was collected in January, 1997. The agreement will terminate
on the later of the last expiration date of a licensed patent or 10 years
from Warner-Lambert's marketing of a licensed product.
F-23
<PAGE>
SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997 AND THE PERIOD FROM MAY 3, 1990 (DATE OF
INCORPORATION) TO DECEMBER 31, 1998 (CONTINUED)
- - --------------------------------------------------------------------------------
In February 1994, the Company entered into an exclusive sublicense
agreement with Nippon Kayaku. Upon execution of the agreement, Nippon
Kayaku paid the Company $225,000 for research and development performed.
The sponsored research payment was recognized as revenue when the payment
was received. Additional payments may be payable to the Company for the
completion of certain scientific milestones. The agreement provides for
Nippon Kayaku to pay the Company a royalty on net sales, as defined.
In addition, Nippon Kayaku will reimburse the Company for direct costs
incurred for preclinical studies performed prior to the agreement. Nippon
Kayaku will also pay a running royalty of 2 percent of net sales as
defined for 10 years in the event that Nippon Kayaku elects to manufacture
the product. The agreement will terminate on the later of the last
expiration of a licensed patent or 10 years from Nippon Kayaku's marketing
of a licensed product in Japan.
A director was issued options with an exercise price of $.32 per share to
purchase 77,900 shares of common stock in connection with the exclusive
sublicense agreement with Nippon Kayaku. The original option agreement
stipulated that the options vested upon the completion of specified
milestones and, accordingly, compensation expense was recorded for the
portion of the options that had not vested through September 1994, at
which time the Company amended the agreement to reflect vesting based upon
time or the completion of specified milestones (see Note 7).
10. SUBSEQUENT EVENTS (UNAUDITED)
SURRENDER OF PURCHASE OPTION - On February 16, 1999, the underwriter of
the Company's IPO agreed to surrender a purchase option for 110,000 shares
of Common Stock exercisable at $11.20 per share, which it had acquired in
connection with the IPO and which was due to expire on January 12, 2000.
In exchange for surrender of this option, the Company agreed to issue an
equal number of shares to the underwriter at $0.60 per share, for total
proceeds of $66,000.
PRIVATE PLACEMENT OF PREFERRED STOCK AND COMMON STOCK - On March 31, 1999,
the Company sold 66,667 shares of Series B Reedeemable Convertible
Preferred Stock at $4.00 per share, ("Series B Preferred") and 183,333
shares of Common Stock at $1.273 per share to an institutional investor in
a Private Placement pursuant to Regulation D under the Securities Act of
1933. The shares of Series B Preferred are initially convertible to Common
Stock on a 1-for-1 basis, subject to customary antidilution adjustments.
Dividends shall accrue on the Series B Preferred at the rate of 8% per
annum. In the event of liquidation, dissolution, or winding up of the
Company, or, at the option of the holders of the Series B Preferred, a
consolidation or merger of the Company or a sale of all or substantially
all of its assets, the Series B Preferred Stock will be entitled to
receive in preference to the Company's Common Stock an amount per share
equal to the original purchase price plus any accrued dividends per share.
Redemption of the Series B Preferred is at the request of holders of at
least 33-1/3% of such shares outstanding, which request may be made at any
time two years following closing of the Private Placement. In the event of
such request, the Company shall be required to redeem all of the Series B
Preferred Stock
F-24
<PAGE>
SUNPHARM CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997 AND THE PERIOD FROM MAY 3, 1990 (DATE OF
INCORPORATION) TO DECEMBER 31, 1998 (CONTINUED)
- - --------------------------------------------------------------------------------
held by the requesting holders at a redemption price equal to $4.00 per
share (subject to adjustment), plus any accrued dividends per share. The
redemption price may be paid, at the Company's option in cash or in shares
of the Company's Common Stock. The Company's intention is to make such
redemption in Common Stock, and accordingly the Series B Preferred has
been included in stockholder's equity. Net proceeds to the Company from
this Private Placement were $485,000, net of fees of approximately
$15,000.
Following is a condensed pro forma balance sheet of the Company as of
December 31, 1998, after giving effect to the transactions disclosed
above.
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, 1998
-----------------
<S> <C>
ASSETS
Cash and short-term investments $ 2,250,200
Other current assets 162,734
Property and equipment, net 57,933
Other assets 134,140
------------
$ 2,605,007
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities $ 451,913
Stockholders' equity:
Undesignated Preferred Stock, par value $.001 per share;
2,000,000 shares authorized; 0 shares issued and outstanding
Series A Preferred Stock, par value $.001 per share;
300,000 shares authorized; 300,000 shares issued and outstanding 300
Series B Preferred Stock, par value $.001 per share;
200,000 authorized; 66,667 shares issued and outstanding 67
Common Stock, par value $.0001 per share;
25,000,000 shares authorized, 6,914,728 shares issued and outstanding 691
Additional paid-in capital $ 21,422,482
Accumulated deficit during development stage (19,270,496)
------------
Total stockholders' equity $ 2,153,094
============
$ 2,605,007
============
</TABLE>
* * * * *
F-25
CERTIFICATE OF DESIGNATION, PREFERENCES,
AND RIGHTS OF
SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK
OF
SUNPHARM CORPORATION
SUNPHARM CORPORATION, a Delaware corporation (the "Corporation"), does
hereby certify that, pursuant to authority conferred on the Board of Directors
of the Corporation by the Certificate of Incorporation of the Corporation, as
amended, and pursuant to the provisions of Section 151 of Title 8 of the
Delaware Code, the Board of Directors, at a meeting of its members held on
November 10, 1998 adopted a resolution providing for the designation,
preferences and relative, participating, optional or other rights, and
qualifications, limitations or restrictions thereof, of 300,000 shares of the
Corporation's Preferred Stock, par value $.001 per share, which resolution is as
follows:
RESOLVED: That pursuant to the authority granted to and vested in the
Board of Directors of the Corporation in accordance with the
provisions of the Certificate of Incorporation, as amended, of
the Corporation, the Board hereby designates a series of
Preferred Stock of the Corporation, par value $.001 per share
(the "Preferred Stock"), consisting of 300,000 shares of the
authorized unissued Preferred Stock, as Series A Redeemable
Convertible Preferred Stock (the "Series A Preferred"), and
hereby fixes such designation and number of shares, and the
powers, preferences and relative, participating, optional or
other rights, and the qualifications, limitations and
restrictions thereof as set forth below, and that the officers
of the Corporation, and each acting singly, are hereby
authorized, empowered and directed to file with the Secretary
of State of the State of Delaware a Certificate of
Designation, Preferences and Rights of the Series A Redeemable
Convertible Preferred Stock, as such officer or officers shall
deem necessary or advisable to carry out the purposes of this
Resolution.
SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK. The preferences,
privileges and restrictions granted to or imposed upon the Corporation's Series
A Redeemable Convertible Preferred Stock, par value $.001 per share, or the
holders thereof, are as follows:
1. LIQUIDATION RIGHTS.
(a) TREATMENT AT LIQUIDATION, DISSOLUTION OR WINDING UP.
(i) Except as otherwise provided in Section 1(b) below, in the
event of any liquidation, dissolution or winding up of the affairs
(each event, a "Liquidation Event") of
<PAGE>
the Corporation, whether voluntary or involuntary, the holders of
Series A Preferred shall be entitled to be paid first out of the assets
of the Corporation available for distribution to holders of the
Corporation's capital stock of all classes, before payment or
distribution of any of such assets to the holders of any other class or
series of the Corporation's capital stock designated to be junior to
the Series A Preferred, an amount equal to the original purchase price
of $4.00 per share of Series A Preferred (which amount shall be subject
to equitable adjustment whenever there shall occur a stock dividend,
distribution, combination of shares, reclassification or other similar
event with respect to Series A Preferred and, as so adjusted from time
to time, is hereinafter referred to as the "Base Liquidation Price")
plus all dividends accrued or declared but unpaid, to and including the
date full payment shall be tendered to the holders of Series A
Preferred with respect to such Liquidation Event.
(ii) Following payment in full to the holders of Series A
Preferred of all amounts distributable to them under Section 1(a)(i)
hereof, the remaining assets of the Corporation available for
distribution to holders of the Corporation's capital stock shall be
distributed on a pro rata basis among the holders of the Series A
Preferred on an as converted basis and the holders of the Common Stock.
(iii) If the assets of the Corporation shall be insufficient
to permit the payment in full to the holders of Series A Preferred of
all amounts distributable to them under Section 1(a)(i) hereof, then
the entire assets of the Corporation available for such distribution
shall be distributed ratably among the holders of Series A Preferred.
(b) TREATMENT OF REORGANIZATIONS, CONSOLIDATIONS, MERGERS AND SALES OF
ASSETS. Except as otherwise provided in Subsection 2(d)(vii) hereof, a
Reorganization (as defined in Subsection 2(d)(vii) hereof) shall be regarded as
a Liquidation Event of the Corporation within the meaning of this Section 1,
provided, however, that the holders of at least a majority of the outstanding
shares of the Series A Preferred upon the occurrence of a Reorganization shall
have the option to elect the benefits of Subsection 2(d)(vii) hereof for the
Series A Preferred in lieu of receiving payment in a Liquidation Event of the
Corporation pursuant to this Section 1. The provisions of this Subsection 1(b)
shall not apply to any reorganization, merger or consolidation involving (1)
only a change in the state of incorporation of the Corporation, (2) a merger of
the Corporation with or into a wholly-owned subsidiary of the Corporation which
is incorporated in the United States of America, or (3) an acquisition by
merger, reorganization or consolidation, in which the Corporation is
substantively the surviving corporation and operates as a going concern, of
another corporation which is incorporated in the United States of America and
which is engaged in a business similar to or related to the business of the
Corporation and which does not involve a change in the terms of the Series A
Preferred or of the Common Stock.
(c) DISTRIBUTIONS OTHER THAN CASH. The amount deemed distributed to the
holders of Series A Preferred upon any Liquidation Event (including any
Reorganization treated as a Liquidation Event pursuant to Section 1(b)) shall be
the cash or the fair market value of the property, rights, or securities
distributed to such holders by the acquiring person, firm, or other entity. The
value of such property, rights, or other securities shall be determined in good
faith by the Board of Directors of the Corporation; provided, however, that in
the event that the amounts
2
<PAGE>
paid pursuant to Section 1(b) consist of securities of an acquiring corporation,
(i) any shares received that have been registered under the Securities Act of
1933, as amended (the "Securities Act"), shall be valued at the average closing
price per share for such securities on the 10 days ending on the fifth day prior
to the consummation of the Reorganization (the "Closing Price"), (ii) any
securities of a class that is registered under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), the offer and sale of which shares have
not been registered under the Securities Act shall be valued at 80% of the
Closing Price and (iii) securities of a class that has not been registered under
the Exchange Act shall be valued based on a valuation mutually acceptable to the
Board of Directors of the Corporation and holders of at least a majority of the
Series A Preferred.
2. CONVERSION. The holders of Series A Preferred shall have conversion
rights as follows (the "Conversion Rights"):
(a) RIGHT TO CONVERT; CONVERSION PRICE. Each share of Series A
Preferred shall be convertible, without the payment of any additional
consideration by the holder thereof and at the option of the holder thereof, at
any time after the date of issuance of such share, at the office of the
Corporation or any transfer agent for the Series A Preferred, into such number
of fully paid and non-assessable shares of Common Stock as is determined by
dividing $2.00 by the Conversion Price, determined as hereinafter provided, in
effect at the time of conversion. The Conversion Price for purposes of
calculating the number of shares of Common Stock deliverable upon conversion
without the payment of any additional consideration by the holder of Series A
Preferred (the "Conversion Price") shall initially be $2.00. Such initial
Conversion Price shall be subject to adjustment, in order to adjust the number
of shares of Common Stock into which Series A Preferred is convertible, as
hereinafter provided.
(b) MECHANICS OF CONVERSION. Before any holder of Series A Preferred
shall be entitled to convert the same into full shares of Common Stock, such
holder shall surrender the certificate or certificates therefor, duly endorsed,
at the office of the Corporation or of any transfer agent for the Series A
Preferred, and shall give written notice to the Corporation at such office that
such holder elects to convert the same and shall state therein the name of such
holder or the name or names of the nominees of such holder in which such holder
wishes the certificate or certificates for shares of Common Stock to be issued.
No fractional shares of Common Stock shall be issued upon conversion of any
shares of Series A Preferred. In lieu of any fractional shares of Common Stock
to which the holder would otherwise be entitled, the Corporation shall pay cash
equal to such fraction multiplied by the then effective Conversion Price. The
Corporation shall, as soon as practicable thereafter, issue and deliver at such
office to such holder of Series A Preferred, or to such holder's nominee or
nominees, a certificate or certificates for the number of shares of Common Stock
to which such holder shall be entitled as aforesaid, together with cash in lieu
of any fraction of a share. Such conversion shall be deemed to have been made
immediately prior to the close of business on the date of such surrender of the
shares of Series A Preferred to be converted, and the person or persons entitled
to receive the shares of Common Stock issuable upon conversion shall be treated
for all purposes as the record holder or holders of such shares of Common Stock
on such date.
3
<PAGE>
(c) [intentionally omitted]
(d) ADJUSTMENTS TO CONVERSION PRICE FOR DILUTING ISSUES.
(i) SPECIAL DEFINITIONS. For purposes of this Section
2(d), the following definitions shall apply:
(A) "OPTION" shall mean rights, options or warrants
to subscribe for, purchase or otherwise acquire Common Stock
or Convertible Securities.
(B) "ORIGINAL ISSUE DATE" shall mean the date on
which shares of Series A Preferred were first issued.
(C) "CONVERTIBLE SECURITIES" shall mean any evidences
of indebtedness, shares (other than Common Stock and Series A
Preferred) or other securities directly or indirectly
convertible into or exchangeable for Common Stock.
(D) "ADDITIONAL SHARES OF COMMON STOCK" shall mean
all shares of Common Stock issued (or, pursuant to Section
2(d)(iii), deemed to be issued) by the Corporation after the
Original Issue Date, other than the following (collectively,
"EXCLUDED SHARES"):
(I) shares of Common Stock issued or issuable
upon the conversion of Series A Preferred;
(II) shares of Common Stock issued or issuable
as a dividend on the Series A Preferred:
(III) by reason of a dividend, stock split or
other distribution on shares of Common Stock;
(IV) Options to purchase shares of Common Stock
issued or issuable to officers, employees or
directors of, or consultants to, the Corporation
pursuant to the Corporation's Amended and Restated
1994 Stock Option Plan, the Corporation's Amended and
Restated 1995 Nonemployee Directors' Stock Option
Plan or any stock option plan of the Corporation
adopted by the Board of Directors of the Corporation
and approved by the stockholders of the Corporation
after the Original Issue Date;
(V) shares of Common Stock issued or issuable
upon the exercise of Options outstanding on the
Original Issue Date or upon the exercise of the
Options referred to in the foregoing clause (IV).
4
<PAGE>
(ii) NO ADJUSTMENT OF CONVERSION PRICE. No adjustment in the
number of shares of Common Stock into which a share of Series A
Preferred is convertible shall be made by adjustment in the Conversion
Price in respect of the issuance of Additional Shares of Common Stock
or otherwise unless (i) the consideration per share for an Additional
Share of Common Stock issued or deemed to be issued by the Corporation
is less than the Conversion Price in effect on the date of, and
immediately prior to, the issue of such Additional Shares of Common
Stock and (ii), prior to such issuance, the Corporation fails to
receive written notice from the holders of at least a majority of the
then outstanding shares of Series A Preferred agreeing that no such
adjustment shall be made as the result of the issuance of Additional
Shares of Common Stock.
(iii) ISSUE OF SECURITIES DEEMED ISSUE OF ADDITIONAL SHARES OF
COMMON STOCK.
(A) OPTIONS AND CONVERTIBLE SECURITIES. In the event
the Corporation at any time after the Original Issue Date
shall issue any Options or Convertible Securities or shall fix
a record date for the determination of holders of any class of
securities entitled to receive any such Options or Convertible
Securities, then the maximum number of shares (as set forth in
the instrument relating thereto without regard to any
provisions contained therein for a subsequent adjustment of
such number) of Common Stock (other than Excluded Shares)
issuable upon the exercise of such Options or, in the case of
Convertible Securities and Options therefor, the conversion or
exchange of such Convertible Securities, shall be deemed to be
Additional Shares of Common Stock issued as of the time of
such issue or, in case such a record date shall have been
fixed, as of the close of business on such record date,
provided that Additional Shares of Common Stock shall not be
deemed to have been issued unless the consideration per share
(determined pursuant to Section 2(d)(v) hereof) of such
Additional Shares of Common Stock would be less than the
Conversion Price in effect on the date of and immediately
prior to such issue, or such record date, as the case may be,
and provided further that in any such case in which Additional
Shares of Common Stock are deemed to be issued:
(I) No further adjustment in the Conversion
Price shall be made upon the subsequent issue of
Convertible Securities or shares of Common Stock upon
the exercise of such Options or conversion or
exchange of such Convertible Securities;
(II) If such Options or Convertible Securities
by their terms provide, with the passage of time or
otherwise, for any increase in the consideration
payable to the Corporation, or decrease in the number
of shares of Common Stock issuable upon the exercise,
conversion or exchange thereof, the Conversion Price
computed upon the original issue thereof (or upon the
occurrence of a record date with respect thereto),
and any subsequent adjustments based thereon, shall,
upon any such increase or
5
<PAGE>
decrease becoming effective, be recomputed to reflect
such increase or decrease insofar as it affects such
Options or the rights of conversion or exchange under
such Convertible Securities;
(III) Upon the expiration of any such options or any
rights of conversion or exchange under such Convertible
Securities which shall not have been exercised, the Conversion
Price computed upon the original issue thereof (or upon the
occurrence of a record date with respect thereto), and any
subsequent adjustments based thereon, shall, upon such
expiration, be recomputed as if:
(a) In the case of Convertible Securities or
Options for Common Stock the only Additional Shares
of Common Stock issued were the shares of Common
Stock, if any, actually issued upon the exercise of
such Options or the conversion or exchange of such
Convertible Securities and the consideration received
therefor was the consideration actually received by
the Corporation for the issue of all such Options,
whether or not exercised, plus the consideration
actually received by the Corporation upon such
exercise, or for the issue of all such Convertible
Securities which were actually converted or
exchanged, plus the additional consideration, if any,
actually received by the Corporation upon such
conversion or exchange; and
(b) In the case of Options for Convertible
Securities only the Convertible Securities, if any,
actually issued upon the exercise thereof were issued
at the time of issue of such Options, and the
consideration received by the Corporation for the
Additional Shares of Common Stock deemed to have been
then issued was the consideration actually received
by the Corporation for the issue of all such Options,
whether or not exercised, plus the consideration
deemed to have been received by the Corporation
(determined pursuant to Section 2(d)(v)) upon the
issue of the Convertible Securities with respect to
which such Options were actually exercised;
(IV) No readjustment pursuant to clause (II) or (III)
above shall have the effect of increasing the Conversion Price
to an amount which exceeds the lower of (a) the Conversion
Price on the original adjustment date, or (b) the Conversion
Price that would have resulted from any issuance of Additional
Shares of Common Stock between the original adjustment date
and such readjustment date;
(V) In the case of any Options which expire by their
terms not more than 30 days after the date of issue thereof,
no adjustment of the Conversion Price shall be made until the
expiration or exercise of all such Options, whereupon such
6
<PAGE>
adjustment shall be made in the same manner provided in clause
(III) above; and
(VI) If such record date shall have been fixed and
such Options or Convertible Securities are not issued on the
date fixed therefor, the adjustment previously made in the
Conversion Price which became effective on such record date
shall be canceled as of the close of business on such record
date, and thereafter the Conversion Price shall be adjusted
pursuant to this Section 2(d)(iii) as of the actual date of
their issuance.
(B) STOCK DIVIDENDS, STOCK DISTRIBUTIONS AND
SUBDIVISIONS. In the event the Corporation at any time or from
time to time after the Original Issue Date shall declare or
pay any dividend or make any other distribution on the Common
Stock payable in Common Stock or effect a subdivision of the
outstanding shares of Common Stock (by reclassification or
otherwise than by payment of a dividend in Common Stock), then
and in any such event, Additional Shares of Common Stock shall
be deemed to have been issued:
(I) In the case of any such dividend or
distribution, immediately after the close of business
on the record date for the determination of holders
of any class of securities entitled to receive such
dividend or distribution, or
(II) In the case of any such subdivision, at
the close of business on the date immediately prior
to the date upon which corporate action becomes
effective.
If such record date shall have been fixed and no part
of such dividend shall have been paid on the date fixed
therefor, the adjustment previously made for the Conversion
Price which became effective on such record date shall be
canceled as of the close of business on such record date, and
thereafter the Conversion Price shall be adjusted pursuant to
this Section 2(d)(iii) as to the time of actual payment of
such dividend.
(iv) ADJUSTMENT OF CONVERSION PRICE UPON ISSUANCE OF
ADDITIONAL SHARES OF COMMON STOCK.
(A) In the event the Corporation shall issue
Additional Shares of Common Stock (including, without
limitation, Additional Shares of Common Stock deemed to be
issued pursuant to Section 2(d)(iii) but excluding Additional
Shares of Common Stock deemed to be issued pursuant to Section
2(d)(iii)(B), which event is dealt with in Section 2(d)(vi)
hereof), without consideration or for a consideration per
share less than the applicable Conversion Price in effect on
the date of and immediately prior to such issue, then and in
such event, such Conversion Price shall be reduced,
concurrently with such issue, to a price (calculated to the
nearest cent) determined by multiplying such Conversion Price
by a fraction, the numerator of
7
<PAGE>
which shall be (I) the number of shares of Common Stock
outstanding immediately prior to such issue plus (II) the
number of shares of Common Stock which the aggregate
consideration received or deemed to have been received by the
corporation for the total number of Additional Shares of
Common Stock so issued would purchase at such Conversion
Price, and the denominator of which shall be (I) the number of
shares of Common Stock outstanding immediately prior to such
issue plus (II) the number of Additional Shares of Common
Stock so issued or deemed to be issued.
(B) For the purposes of Section 2(d)(iv)(A) hereof,
(i) all shares of Common Stock issuable upon conversion of
shares of Series A Preferred, and upon exercise of options or
conversion or exchange of Convertible Securities which are
part of the Excluded Shares, outstanding immediately prior to
any issue of Additional Shares of Common Stock, or any event
with respect to which Additional Shares of Common Stock shall
be deemed to be issued, shall be deemed to be outstanding and
(ii) immediately after any Additional Shares of Common Stock
are deemed issued pursuant to Section 2(d)((iii), such
Additional Shares of Common Stock shall be deemed to be
outstanding.
(C) Notwithstanding anything to the contrary
contained herein, the applicable Conversion Price in effect at
the time Additional Shares of Common Stock are issued or
deemed to be issued shall not be reduced pursuant to Section
2(d)(iv)(A) hereof at such time if the amount of such
reduction would be an amount less than $0.01, but any such
amount shall be carried forward and reduction with respect
thereto made at the time of and together with any subsequent
reduction which, together with such amount and any other
amount or amounts so carried forward, shall aggregate $0.01 or
more.
(v) DETERMINATION OF CONSIDERATION. For purposes of this
Section 2(d), the consideration received by the Corporation for the
issue of any Additional Shares of Common Stock shall be computed as
follows:
(A) CASH AND PROPERTY. Such consideration shall:
(I) Insofar as it consists of cash, be computed
at the aggregate amounts of cash received by the
Corporation excluding amounts paid or payable for
accrued interest or accrued dividends at the time of
such issue;
(II) Insofar as it consists of property other
than cash, be computed at the fair market value
thereof at the time of such issue, as determined in
good faith by the Board of Directors; and
(III) In the event that Additional Shares of
Common Stock are issued together with other shares or
securities or other assets of the
8
<PAGE>
Corporation for consideration which covers both, be
the proportion of such consideration so received,
computed as provided in clauses (I) and (II) above,
as determined in good faith by the Board of
Directors.
(B) OPTIONS AND CONVERTIBLE SECURITIES. The
consideration per share received by the Corporation for
Additional Shares of Common Stock deemed to have been issued
pursuant to Section 2(d)(iii)(A), relating to Options and
Convertible Securities, shall be determined by dividing (I)
the total amount, if any, received or receivable by the
Corporation as consideration for the issue of such Options or
Convertible Securities, plus the minimum aggregate amount of
additional consideration (as set forth in the instruments
relating thereto, without regard to any provision contained
therein for a subsequent adjustment of such consideration)
payable to the Corporation upon the exercise of such Options
or the conversion or exchange of such Convertible Securities,
or in the case of Options for Convertible Securities, the
exercise of such Options for Convertible Securities and the
conversion or exchange of such Convertible Securities, by (II)
the maximum number of shares of Common Stock (as set forth in
the instruments relating thereto, without regard to any
provision contained therein for a subsequent adjustment of
such number) issuable upon the exercise of such Options or the
conversion or exchange of such Convertible Securities.
(vi) ADJUSTMENT FOR DIVIDENDS, DISTRIBUTIONS, SUBDIVISIONS,
COMBINATIONS OR CONSOLIDATIONS OF COMMON STOCK.
(A) STOCK DIVIDENDS, DISTRIBUTIONS OR SUBDIVISIONS.
In the event the Corporation shall issue Additional Shares of
Common Stock pursuant to Section 2(d)(iii)(B) in a stock
dividend, stock distribution or subdivision, the Conversion
Price in effect immediately prior to such stock dividend,
stock distribution or subdivision shall, concurrently with the
effectiveness of such stock dividend, stock distribution or
subdivision, be proportionately decreased.
(B) COMBINATIONS OR CONSOLIDATIONS. In the event the
outstanding shares of Common Stock shall be combined or
consolidated, by reclassification or otherwise, into a lesser
number of shares of Common Stock, the Conversion Price in
effect immediately prior to such combination or consolidation
shall, concurrently with the effectiveness of such combination
or consolidation, be proportionately increased.
(vii) CAPITAL REORGANIZATION, MERGER OR SALE OF ASSETS. If at
any time or from time to time there shall be a capital reorganization
of the Common Stock (other than a subdivision, combination,
recapitalization, reclassification or exchange of shares provided for
elsewhere in this Section 2) or a consolidation or merger of the
Corporation, or a sale of all or substantially all of the assets of the
Corporation, other than a merger, consolidation or sale of all or
substantially all of the assets of the Corporation in a transaction in
which the shareholders of the Corporation immediately prior to the
transaction possess more than 50%
9
<PAGE>
of the voting securities of the surviving entity (or parent, if any)
immediately after the transaction (a "Reorganization"), then, as a part
of and as a condition to such Reorganization, provision shall be made
so that the holders of shares of the Series A Preferred shall
thereafter be entitled to receive upon conversion of the shares of the
Series A Preferred the same kind and amount of stock or other
securities or property (including cash) of the Corporation, or of the
successor corporation resulting from such Reorganization, to which such
holder would have been entitled if such holder had converted its shares
of the Series A Preferred immediately prior to the effective time of
such Reorganization. In any such case, appropriate adjustment shall be
made in the application of the provisions of this Section 2 to the end
that the provisions of this Section 2 (including adjustment of the
Conversion Price then in effect and the number of shares of Common
Stock or other securities issuable upon conversion of the shares of the
Series A Preferred) shall be applicable after such Reorganization in as
nearly equivalent manner as may be reasonably practicable.
In the case of a transaction to which both this Subsection
2(d)(vii) and Subsection 1(b) hereof apply, the holders of at least a
majority of the outstanding shares of the Series A Preferred upon the
occurrence of a Reorganization shall have the option to elect treatment
either under this Subsection 2(d)(vii) or under Subsection 1(b) hereof,
notice of which election shall be given in writing to the Corporation
not less than five (5) business days prior to the effective date of
such Reorganization. If no such election is timely made, the provisions
of Subsection 1(b) and not of this Subsection 2(d)(vii) shall apply.
The provisions of this Subsection 2(d)(vii) shall not apply to
any reorganization, merger or consolidation involving (1) only a change
in the state of incorporation of the Corporation, (2) a merger of the
Corporation with or into a wholly-owned subsidiary of the Corporation
which is incorporated in the United States of America, or (3) an
acquisition by merger, reorganization or consolidation, in which the
Corporation is substantively the surviving corporation and operates as
a going concern, of another corporation which is incorporated in the
United States of America and which is engaged in a business similar to
or related to the business of the Corporation and which does not
involve a change in the terms of the Series A Preferred or of the
Common Stock.
(e) NO IMPAIRMENT. The Corporation shall not, by amendment of its
Certificate 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 to be observed or performed hereunder by the Corporation but shall at
all times in good faith assist in the carrying out of all the provisions of this
Section 2 and in the taking of all such action as may be necessary or
appropriate in order to protect the conversion rights of the holders of Series A
Preferred against impairment.
(f) CERTIFICATE AS TO ADJUSTMENTS. Upon the occurrence of each
adjustment or readjustment of the Conversion Price pursuant to this Section 2,
the Corporation at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and furnish to each affected
holder of Series A Preferred, a certificate setting forth such adjustment or
10
<PAGE>
readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. The Corporation shall, upon the written request at any
time of any affected holder of Series A Preferred furnished to such holder a
like certificate setting forth (i) such adjustments and readjustments, (ii) the
Conversion Price at the time in effect, and (iii) the number of shares of Common
Stock and the amount, if any, of other property which at the time would be
received upon conversion of each share of Series A Preferred.
(g) NOTICES OF RECORD DATE. In the event of any taking by the
Corporation 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 which is the same as cash dividends paid in
previous quarters) or other distribution, the Corporation shall mail to each
holder of Series A Preferred at least ten (10) days prior to such record date a
notice specifying the date on which any such record is to be taken for the
purpose of such dividend or distribution.
(h) COMMON STOCK RESERVED. The Corporation shall reserve and keep
available out of its authorized but unissued Common Stock such number of shares
of Common Stock as shall from time to time be sufficient to effect the
conversion of all outstanding shares of Series A Preferred.
(i) CERTAIN TAXES. The Corporation shall pay any issue or transfer
taxes payable in connection with the conversion of any shares of Series A
Preferred, provided, however, that the Corporation shall not be required to pay
any tax which may be payable in respect of any transfer to a name other than
that of the holder of such Series A Preferred.
(j) CLOSING OF BOOKS. The corporation shall at no time close its
transfer books against the transfer of any Series A Preferred, or of any shares
of Common Stock issued or issuable upon the conversion of any shares of Series A
Preferred in any manner which interferes with the timely conversion or transfer
of such Series A Preferred.
3. VOTING RIGHTS.
(a) Except as otherwise required by law or this Certificate of
Incorporation the holders of Series A Preferred and the holders of Common Stock
shall be entitled to notice of any stockholders' meeting and to vote as a single
class upon any matter submitted to the stockholders for a vote, on the following
basis:
(i) Holders of Common Stock shall have one vote per share of
Common Stock held by them; and
(ii) Holders of Series A Preferred shall have that number of
votes per share of Series A Preferred as is equal to the number of
shares of Common Stock into which each such share of Series A Preferred
held by such holder could be converted on the date for determination of
stockholders entitled to vote at the meeting.
(b) ELECTION OF DIRECTORS. In addition to voting as a single class with
the holders of the Common Stock for the election of directors, so long as there
shall be outstanding at least 100,000
11
<PAGE>
shares of Series A Preferred (adjusted for any stock splits, dividend or similar
events affecting the Series A Preferred after the date of this Certificate), a
majority of the holders of the Series A Preferred voting separately from the
holders of Common Stock shall at all times be entitled to elect one member of
the Board of Directors.
4. DIVIDEND RIGHTS.
(a) From and after the Original Issue Date, dividends shall accrue on
each share of the Series A Preferred, whether or not funds are legally available
therefor and whether or not declared by the Board of Directors, at the rate per
annum equal to $0.32 per share of Series A Preferred (the "Series A Dividends").
From time to time the Board of Directors of the Corporation may declare and pay
dividends or distributions on shares of the Common Stock, provided that no such
dividend or other distribution may be declared or paid on the Common Stock
(other than a dividend payable entirely in shares of the Common Stock of the
Corporation) unless (1) all accrued Series A Dividends shall have been paid in
full prior to the date of any such declaration, payment or distribution and (2)
no shares of Series A Preferred remain outstanding on the date of any such
declaration, payment or distribution.
(b) If, with the consent of the holders of at least a majority of the
outstanding Series A Preferred, the Board of Directors of the Corporation shall
declare a dividend payable upon the then outstanding shares of the Common Stock
(other than a dividend payable entirely in shares of the Common Stock of the
Corporation), then the Board of Directors shall declare at the same time a
dividend upon the then outstanding shares of the Series A Preferred payable at
the same time as the dividend paid on the Common Stock, in an amount equal to
the amount of dividends per share of Series A Preferred as would have been
payable on the largest number of whole shares of Common Stock which each share
of Series A Preferred held by each holder thereof would have received if such
Series A Preferred had been converted to Common Stock pursuant to the provisions
of Section 2 hereof as of the record date for the determination of holders of
Common Stock entitled to receive such dividends.
(c) In the event the Board of Directors of the Corporation shall
declare a dividend payable upon any class or series of capital stock of the
corporation other than Common Stock, the Board of Directors shall declare at the
same time a dividend upon the then outstanding shares of Series A Preferred,
payable at the same time as such dividend on such other class or series of
capital stock in an amount equal to (i) in the case of any series or class
convertible into Common Stock, that dividend per share of Series A Preferred as
would equal the dividend payable on such other class or series determined as if
all such shares of such class or series had been converted to Common Stock and
all shares of Series A Preferred have been converted to Common Stock on the
record date for the determination of holders entitled to receive such dividend
or (ii) if such class or series of capital stock is not convertible into Common
Stock, at a rate per share of Series A Preferred determined by dividing the
amount of the dividend payable on each share of such class or series of capital
stock by the original issuance price of such class or series of capital stock
and multiplying such fraction by the Base Liquidation Price then in effect.
12
<PAGE>
(d) Notwithstanding the foregoing provisions of this Section 4: (i)
upon any conversion of the Series A Preferred pursuant to Section 2 above, all
accrued and unpaid dividends on such shares of Series A Preferred to and until
the date of such conversion shall be forfeited and shall not be due and payable;
and (ii) the payment of all or any portion of accrued and unpaid dividends on
Series A Preferred may be waived by the affirmative vote of holders of not less
than a majority in interest of the Series A Preferred, voting as a separate
class.
5. COVENANTS.
The Corporation shall not, without first having obtained the
affirmative vote or written consent of the holders of not less than two-thirds
in voting power of the outstanding shares of Series A Preferred:
(i) Amend, alter or repeal any provision of, or add any
provision to, the Corporation's Certificate of Incorporation or
By-Laws;
(ii) Alter or change the preferences, rights, privileges or
powers of, or the restrictions provided for the benefit of, the Series
A Preferred;
(iii) Increase the authorized number of shares of the Series A
Preferred or any other series of capital stock of the Corporation;
(iv) Reclassify any shares of any class or series of the
capital stock of the Corporation into shares having any preference or
priority superior to or on a parity with any such preference or
priority of the Series A Preferred;
(v) Create, authorize or issue any other class or series of
capital stock or any security convertible into or evidencing the right
to purchase shares of any class or series of capital stock of the
Corporation having any preference or priority superior to or on a
parity with any such preference or priority of the Series A Preferred;
or
(vi) Effect (A) any Liquidation Event of the Corporation or
any of its subsidiaries, (B) any sale, lease, assignment, transfer or
other conveyance (other than the grant of a mortgage or security
interest in connection with indebtedness for borrowed money) of all or
substantially all the assets of the Corporation, or (C) any
consolidation or merger of the Corporation with or into any other
entity.
6. NO REISSUANCE OF SERIES A PREFERRED. No share or shares of Series A
Preferred acquired by the Corporation by reason of redemption, purchase,
conversion or otherwise shall be reissued, and all such shares shall be
canceled, retired and eliminated from the shares which the corporation shall be
authorized to issue.
7. REDEMPTION.
(a) At the written request in the form of notice to the
Corporation (the
13
<PAGE>
"Redemption Notice") of the holder or holders of at least a majority of the
shares of Series A Preferred then outstanding made at any time after November
___, 2000 , the Corporation shall redeem on the Redemption Date (as such term is
defined below), at a redemption price per share equal to the greater of the
original Conversion Price, being $2.00 per share, or the Conversion Price as
adjusted at the Redemption Date for such Series A Preferred, plus an amount
equal to any accrued or declared but unpaid dividends thereon (the "Redemption
Price"), all of the outstanding Series A Preferred. The Redemption Price may be
payable, at the Corporation's option, in cash or a number of shares of Common
Stock, as determined pursuant to Section 7(d) below.
(b) On and after the Redemption Date, all rights of all holders with
respect to those shares of Series A Preferred being redeemed by the Corporation
pursuant to Section 7(a), except the right to receive the Redemption Price per
share of Series A Preferred as hereinafter provided, shall cease and terminate,
and such shares of Series A Preferred shall no longer be deemed to be
outstanding, whether or not the certificates representing such shares have been
received by the Corporation; PROVIDED, HOWEVER, that, notwithstanding anything
to the contrary set forth herein, if the Corporation defaults in the payment of
the Redemption Price in respect of any share of Series A Preferred, then the
rights of the holder or holders with respect to such shares of Series A
Preferred shall continue until the Corporation cures such default.
(c) On the twentieth (20th) business day following the date upon which
the Corporation received the Redemption Notice (the "Redemption Date") from a
majority of holders of Series A Preferred the Corporation shall pay each holder
of Series A Preferred the applicable Redemption Price pursuant to the terms of
Section 7(a), provided that the Corporation or its transfer agent has received
the certificate(s) representing the shares of Series A Preferred to be redeemed.
(d) The Redemption Price shall be payable, at the Corporation's option,
in cash or in shares of Common Stock, or any combination thereof; PROVIDED that
if the Corporation elects to pay the aggregate Redemption Price in cash and
shares of Common Stock, the cash portion shall be allocated pro rata to all
holders of Series A Preferred. In the event that the Corporation elects to pay
all or any portion of the Redemption Price in shares of Common Stock, such
shares of Common Stock shall be valued at the lowest of (i) the Market Price Per
Share (as defined below) of the Common Stock on November ____, 1998, (ii) the
Market Price Per Share of the Common Stock on the original issue date of the
Series A Preferred and (iii) the Market Price Per Share of the Common Stock on
the date which is two business days prior to the Redemption Date. The "Market
Price Per Share" of the Common Stock on any date shall mean the average of the
daily closing prices per share of Common Stock for the 20 consecutive Trading
Days immediately prior to such date; PROVIDED that in the event that the current
market price per share of Common Stock is determined during a period following
the announcement by the Corporation of (A) a dividend or distribution on the
Common Stock payable in shares of Common Stock or securities convertible into
shares of Common Stock or (B) any subdivision, combination or reclassification
of the Common Stock and prior to the expiration of 20 Trading Days after the
ex-dividend date for such dividend or distribution, or the record date for such
subdivision, combination or reclassification, then, and in each such
14
<PAGE>
case, the Current Market Price Per Share shall be appropriately adjusted to
reflect ex-dividend trading or such subdivision, combination or
reclassification. The closing price for each day shall be (i) if the Common
Stock is then quoted on the Nasdaq National Market, the Nasdaq SmallCap Market
or another primary national securities exchange, the closing bid price of the
Common Stock as reported by the Nasdaq National Market, the Nasdaq SmallCap
Market or such primary national securities exchange (as the case may be), (ii)
if the Common Stock is not then traded on the Nasdaq National Market, the Nasdaq
SmallCap Market nor on a national securities exchange, the closing bid price in
the over-the-counter market as reported by the National Association of
Securities Dealers' Automated Quotation System or, if not so reported, the price
as reported by the National Quotation Bureau, Inc., or any organization
performing a similar function or (iii) if no such prices are then furnished, the
fair market value of a share of Common Stock as mutually determined by the Board
of Directors of the Corporation and holders of at least a majority of the Series
A Preferred.
8. RESIDUAL RIGHTS. All rights accruing to the outstanding shares of
the Corporation not expressly provided for in the terms of the Series A
Preferred shall be vested in the Common Stock.
The holders of the Series A Preferred shall vote as a separate class
with respect to any matter or proposed action as to which applicable law or this
Certificate of Incorporation require the vote, consent, or approval of the
holders of the Series A Preferred.
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Designation to be signed by its duly authorized officer this _____ day of
November, 1998.
SUNPHARM CORPORATION
By: ______________________________
Name:
Title:
PREFERRED STOCK PURCHASE AGREEMENT
- - --------------------------------------------------------------------------------
SECURITIES PURCHASE AGREEMENT
- - --------------------------------------------------------------------------------
SUNPHARM CORPORATION
300,000 shares of Series A Redeemable Convertible Preferred Stock
and
853,565 shares of Common Stock
issued in exchange for
an aggregate of
$1,200,000 and 346,596 Warrants to purchase Common Stock
- - --------------------------------------------------------------------------------
Dated as of November 13, 1998
- - --------------------------------------------------------------------------------
<PAGE>
SECURITIES PURCHASE AGREEMENT
THIS SECURITIES PURCHASE AGREEMENT (this "Agreement"), dated as of this
13th day of November, 1998, by and among SunPharm Corporation, a Delaware
corporation (the "Company"), and the Persons listed on SCHEDULE A attached
hereto (individually, a "Purchaser" and, collectively, the "Purchasers").
WHEREAS, the Purchasers entered into a Unit Purchase Agreement with the
Company dated March 28, 1997 (the "Unit Purchase Agreement"), pursuant to which
the Purchasers purchased units, each unit consisting of one share of the
Company's Common Stock (as defined below) and one Warrant (as defined below) to
purchase one share of the Company's Common Stock;
WHEREAS, the Company desires to issue and sell to the Purchasers, and
the Purchasers desire to acquire on the terms and subject to the conditions set
forth herein, an aggregate of 300,000 shares of Series A Redeemable Convertible
Preferred Stock, par value $.001 per share (the "Series A Preferred Stock"), and
an aggregate of 853,565 shares of Common Stock;
NOW, therefore, in consideration of the premises and the mutual
covenants contained in this Agreement, the parties agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.01 DEFINITIONS. As used in this Agreement, references to
either gender shall include the other gender, and the following terms shall have
the following meanings (such meanings to be equally applicable to both the
singular and plural forms of the terms defined):
"Affiliate" shall have the meaning given to such term in Rule
12b-2 of the Rules and Regulations under the Exchange Act.
"Agreement" means this Securities Purchase Agreement, as
amended, modified or supplemented from time to time.
"Business Day" means any day on which commercial banks are not
authorized or required by law to close in New York, New York.
<PAGE>
"Commission" means the United States Securities and Exchange
Commission, or any other agency successor thereto.
"Common Shares" means shares of Common Stock.
"Conversion Shares" means those shares of Common Stock
issuable upon the conversion of the Series A Preferred Stock.
"Common Stock" shall mean the Common Stock, par value $.0001
per share, of the Company, and shall include any stock into which such
Common Stock shall have been changed or any stock resulting from any
reclassification of such Common Stock and all other stock of any class
or classes (however designated) of the Company the holders of which
have the right, without limitation as to amount, either to all or to a
share of the balance of current dividends and liquidating dividends
after the payment of dividends and distributions on any shares entitled
to preference.
"Company" means and shall include SunPharm Corporation, a
Delaware corporation, and its successors and permitted assigns.
"Exchange Act" means the Securities Exchange Act of 1934 or
any successor Federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time.
"Guarantee" shall mean any obligation, contingent or
otherwise, of any Person guaranteeing or having the economic effect of
guaranteeing any Indebtedness of any other Person in any manner,
whether directly or indirectly, and including, without limitation, any
obligation of such Person, direct or indirect, (i) to purchase or pay
(or advance or supply funds for the purchase or payment of) such
Indebtedness or to purchase (or to advance or supply funds for the
purchase of) any security for the payment of such Indebtedness, (ii) to
purchase property, securities or services for the purpose of assuring
the owner of such Indebtedness of the payment of such Indebtedness, or
(iii) to maintain working capital, equity capital or other financial
statement condition of the primary obligor so as to enable the primary
obligor to pay such Indebtedness; provided, however, that the term
"Guarantee" shall not include endorsements for collection or deposit,
in either case, in the ordinary course of business.
"Indebtedness" shall mean, with respect to any Person, (i) all
obligations of such Person for borrowed money, or with respect to
deposits or advances of any kind (other than deposits, advances or
excess payments accepted in connection with the sale by such Person of
products or services in the ordinary course of business), (ii) all
obligations of such Person evidenced by bonds, debentures, notes or
similar instruments, (iii) all
2
<PAGE>
obligations of such Person upon which interest charges are customarily
paid (other than obligations accepted in connection with the purchase
by such Person of products or services in the ordinary course of
business), (iv) all obligations of such Person under conditional sale
or other title retention agreements relating to property purchased by
such Person, (v) all obligations of such Person issued or assumed as
the deferred purchase price of property or services (other than
accounts payable to suppliers incurred in the ordinary course of
business and paid when due), (vi) all Indebtedness of others secured by
(or for which the holder of such Indebtedness has an existing right,
contingent or otherwise, to be secured by) any Lien or security
interest on property owned or acquired by such Person whether or not
the obligations secured thereby have been assumed, (vii) all
obligations of such Person under leases required to be accounted for as
capital leases under generally accepted accounting principles, and
(viii) all Guarantees of such Person.
"Lien" shall mean: (i) any interest in property (whether real,
personal or mixed and whether tangible or intangible) which secures an
obligation owed to, or a claim by, a Person other than the owner of
such property, whether such interest is based on the common law,
statute or contract, including, without limitation, any such interest
arising from a lease, mortgage, charge, pledge, security agreement,
conditional sale, trust receipt or deposit in trust, or arising from a
consignment of bailment given for security purposes (other than a trust
receipt or deposit given in the ordinary course of business which does
not secure any obligation for borrowed money), (ii) any encumbrance
upon such property which does not secure such an obligation, and (iii)
any exception to or defect in the title to or ownership interest in
such property, including, without limitation, reservations, rights of
entry, possibilities of reverter, encroachments, easements, rights of
way, restrictive covenants, licenses and PROFITS A PRENDRE. For
purposes of this Agreement, any Person shall be deemed to be the owner
of the leasehold or other interest in any property which it has
acquired or holds subject to a lease and the owner of any property
which it has acquired or holds subject to a conditional sale agreement
or other similar arrangement pursuant to which title to the property
has been retained by or vested in some other Person for security
purposes.
"Person" means an individual, corporation, partnership,
association, joint venture, trust, or unincorporated organization, or a
government or any agency or political subdivision thereof.
"Preferred Shares" means shares of Series A Preferred Stock.
"Purchaser" has the meaning specified in the introduction to
this Agreement, and its successors and permitted assigns.
3
<PAGE>
"Recapitalization Event" means any stock dividend, stock
split, combination, reorganization, recapitalization, reclassification,
consolidation, merger or similar event involving a change in the
Company's corporate structure.
"Registrable Shares" means (i) the Shares, (ii) the Conversion
Shares, (iii) any shares of Common Stock issued to the Purchasers upon
a redemption of the Series A Preferred Stock and (iv) any other shares
of Common Stock issued to the Purchasers in respect of the foregoing
Shares because of any Recapitalization Event.
"Securities Act" means the Securities Act of 1933 or any
successor Federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time.
"Shares" or "Securities" means the Common Shares and the
Preferred Shares, collectively.
"Subsidiary" or "Subsidiaries" shall mean any corporation,
partnership, trust or other entity of which the Company and/or any of
its other Subsidiaries directly or indirectly owns at the time a
majority of the outstanding shares of any class of equity security of
such corporation, partnership, trust or other entity.
"Warrants" shall mean the stock purchase warrants issued
pursuant to the Warrant Agreement dated as of March 28, 1997 entitling
the record holders thereof to purchase from the Company shares of
Common Stock, subject to adjustment as provided in the Warrant
Agreement; individually, a "Warrant".
"Warrant Agreement" shall mean the Warrant Agreement dated as
of March 28, 1997 by and between the Company and the Purchasers
identified therein, pursuant to which the Warrants have been issued and
have been exercisable at the Exercise Price (as defined therein) at any
time after the Closing Date and before 5:00 P.M., New York time, on the
Expiration Date (as defined therein), as amended, modified or
supplemented from time to time.
ARTICLE II
PURCHASE AND SALE OF THE SECURITIES
SECTION 2.01 AUTHORIZATION OF THE SHARES. The Company has authorized
the issuance and sale of 300,000 shares of Series A Preferred Stock having the
rights, restrictions and privileges and preferences set forth in the Certificate
of Designation attached hereto as Exhibit A (the "Series A Certificate of
Designation") and an aggregate of 853,565 shares of Common Stock.
4
<PAGE>
SECTION 2.02 CLOSING. Subject to the terms and conditions set forth in
this Agreement, and in reliance on the representations and warranties set forth
in this Agreement, the Company agrees to issue and sell to the Purchasers at the
Closing and the Purchasers, severally but not jointly, agree to purchase from
the Company, (i) that number of Preferred Shares set forth opposite their
respective names on SCHEDULE A under the caption "Number of Preferred Shares
Purchased at Closing" and (ii) that number of Common Shares set forth opposite
their respective names on SCHEDULE A under the caption "Number of Common Shares
Purchased at Closing" at a purchase price equal to (A) Four Dollars and Zero
Cents ($4.00) per share of Series A Preferred Stock and (B) the surrender by the
Purchasers of that number of Warrants set forth opposite their respective names
on SCHEDULE A under the caption "Number of Warrants Surrendered at Closing." The
closing of the purchase and sale of the Securities (the "Closing") shall take
place at the offices of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. at
5:00 p.m. on November 13, 1998 (the "Closing Date") or at such time and date
thereafter as the Purchasers and the Company may agree. At the Closing, the
Company will, subject to Section 2.03, deliver to each Purchaser certificates
for the number of Preferred Shares and Common Shares being purchased by such
Purchaser registered in such Purchaser's name (or its nominee), against (i)
delivery of a check or checks payable to the order of the Company, or a transfer
of funds to the account of the Company by wire transfer, representing a portion
of the purchase price paid by such Purchaser and (ii) surrender by such
Purchaser of the number of Warrants set forth opposite such Purchaser's name on
SCHEDULE A under the caption "Number of Warrants Surrendered at Closing,"
representing the remaining portion of the purchase price. At the Closing or as
soon as practicable after the Closing, each Purchaser shall surrender such
Purchaser's certificates representing such Purchaser's Warrants to the Company
(acting, until such time as all certificates representing such Warrants shall
have been exchanged in accordance herewith, as Exchange Agent hereunder (the
"Exchange Agent")) in exchange for certificates representing such Purchaser's
Common Shares; PROVIDED that, notwithstanding the foregoing, on the Closing
Date, by virtue of the Closing and without any further action on the part of the
Purchasers, the Company or any other Person, (i) the Preferred Shares and the
Common Shares being purchased by the Purchasers shall be issued by the Company
and shall be deemed issued and outstanding capital stock of the Company for all
intents and purposes and (ii) the Warrants being surrendered by the Purchasers
shall be deemed to be surrendered and canceled by the Purchasers, whether or not
the certificates representing such Warrants have been physically surrendered or
delivered to the Company or its agent.
ARTICLE III
COMPANY REPRESENTATIONS AND WARRANTIES
In order to induce the Purchasers to enter into this Agreement and to
consummate the transactions contemplated hereby, the Company hereby represents
and warrants to the Purchasers as follows:
5
<PAGE>
SECTION 3.01. ORGANIZATION AND GOOD STANDING. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware. The Company has the requisite corporate power and
authority to own and operate its properties and assets and to carry on its
business as currently conducted. The Company is qualified to do business in the
State of Florida. The Company is not qualified to do business as a foreign
corporation in any other jurisdiction and such qualification is not now
required, except to the extent that the failure to so qualify would not have a
material adverse effect on the Company's business as currently conducted.
SECTION 3.02. CORPORATE POWER AND AUTHORIZATION. The Company has the
corporate power and authority to execute and deliver this Agreement, to issue
and sell the Shares hereunder and to issue and deliver the Conversion Shares
upon conversion of the Preferred Shares, and to perform its obligations under
the terms of this Agreement. All corporate action on the part of the Company,
its directors and stockholders necessary for the authorization, execution,
delivery and performance by the Company of this Agreement and the authorization,
sale, issuance and delivery of the Shares and the Conversion Shares has been
taken or will be taken prior to Closing. This Agreement constitutes the valid
and binding obligation of the Company, enforceable in accordance with its terms,
except as the enforceability thereof may be limited by bankruptcy, insolvency or
other laws relating to or affecting creditors' rights generally and by general
equitable principles. The Shares have been and the Conversion Shares will be
duly authorized and, when issued in compliance with the provisions of this
Agreement, will be validly issued, fully paid and nonassessable; and the Shares
and the Conversion Shares when issued and delivered in accordance with the terms
of this Agreement and (in the case of the Conversion Shares) the Series A
Certificate of Designation, will be free of any Liens or encumbrances created by
the Company; PROVIDED, HOWEVER, that the Shares and the Conversion Shares may be
subject to restrictions on transfer under state or federal securities laws as
set forth herein.
SECTION 3.03. CAPITALIZATION. The authorized capital stock of the
Company consists of 27,500,000 shares, divided into 25,000,000 shares of Common
Stock, par value $0.0001 per share, of which 5,767,830 shares are issued and
outstanding, and 2,500,000 shares of undesignated blank check preferred stock,
par value $0.001 per share ("Preferred Stock"), of which 300,000 shares shall be
designated as Series A Preferred Stock in accordance with the Series A
Certificate of Designation prior to the Closing. All of the outstanding shares
of Common Stock have been duly authorized and validly issued and are fully paid
and nonassessable. The Company has reserved (i) up to 300,000 shares of Common
Stock for issuance upon exercise or conversion of the Preferred Shares, (ii) up
to 3,527,272 shares of Common Stock for issuance upon exercise of warrants
issued by the Company (including any Warrants being surrendered pursuant hereto)
and (iii) up to 1,137,754 shares of Common Stock for issuance upon the exercise
of options to purchase Common Stock issued by the Company. SCHEDULE 3.03 sets
forth the outstanding capitalization of the Company as of the
6
<PAGE>
date hereof, including the material terms (expiration date, exercise price,
etc.) of such outstanding options and warrants and, except for such outstanding
options and warrants, there are no other options, warrants or other rights
outstanding to purchase or acquire, or any securities convertible into, nor has
the Company agreed to issue or reissue, other than pursuant to this Agreement,
any of the Company's authorized and unissued capital stock. There are no
agreements or understandings that affect or relate to the voting or giving of
written consent with respect to any of the Company's outstanding securities.
There are no preemptive rights with respect to the issuance or sale of the
Company's capital stock and there are no restrictions on the transfer of the
Company's capital stock other than those arising from federal and state
securities laws.
SECTION 3.04. SEC REPORTS; FINANCIAL STATEMENTS. The Company has filed
with the Commission all forms, reports and documents required to be filed by it
pursuant to the Exchange Act, all of which, when filed, complied in all material
respects with all applicable requirements of the Exchange Act. The Purchasers
have been provided true and correct copies (not including exhibits) of the
Company's (i) Annual Report on Form 10-KSB for the fiscal year ended December
31, 1997, as filed with the Commission, (ii) Quarterly Reports on Form 10-QSB
for the quarters ended March 31, 1998 and June 30, 1998, in each case as filed
with the Commission, and (iii) proxy statements relating to all meetings of its
stockholders (whether annual or special) since December 31, 1997 and prior to
the date hereof (collectively, the "Company's SEC Reports"). As of their
respective dates, the Company's SEC Reports (not including any exhibits and
schedules thereto and documents incorporated by reference therein) did not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading. The
audited financial statements and unaudited interim financial statements of the
Company included in the Company's SEC Reports or incorporated by reference
therein were prepared in accordance with generally accepted accounting
principles ("GAAP") (subject, in the case of such unaudited financial
statements, to the absence of complete footnotes) applied on a consistent basis
(except as indicated therein or in the notes thereto) and fairly present in all
material respects the financial position of the Company at the dates thereof and
the results of its operations and cash flows for the periods then ended (subject
in the case of the unaudited interim financial statements, to normal year-end
audit adjustments).
SECTION 3.05. ABSENCE OF CERTAIN DEVELOPMENTS. Since December 31, 1998,
there has been no change in the assets, liabilities, condition (financial or
otherwise), operating results, business or prospects of the Company from that
reflected in the Company's SEC Reports, except changes in the ordinary course of
business that have not been, individually or in the aggregate, materially
adverse to the assets, properties, condition (financial or otherwise), operating
results, business or prospects of the Company. Since December 31, 1998, the
Company has not (i) directly or indirectly declared or paid any dividend or
ordered or made any other distribution on account of any shares of any class of
the capital stock of the Company, (ii) directly or indirectly redeemed,
purchased or otherwise acquired any such
7
<PAGE>
shares or agreed to do so or set aside any sum or property for any such purpose,
(iii) made any capital expenditures exceeding $100,000, or (iv) incurred any
indebtedness exceeding $100,000.
SECTION 3.06. COMPLIANCE WITH OTHER INSTRUMENTS. The Company is not in
violation or default of any provision of its Certificate of Incorporation or
By-Laws or of any material mortgage, indenture, contract, agreement, instrument,
judgment or decree to which the Company is a party or by which it is bound. The
execution, delivery and performance by the Company of this Agreement and the
consummation of the transactions contemplated hereby will not result in any
violation of or conflict with the Company's Certificate of Incorporation or
By-Laws, and will not result in any violation of or conflict with, or constitute
a default under, any material mortgage, indenture, contract, agreement,
instrument, judgment or decree to which the Company is a party or by which it is
bound or in the creation of any material mortgage, pledge, Lien, encumbrance or
charge upon any of the properties or assets of the Company.
SECTION 3.07. REGISTRATION RIGHTS. Except as set forth in SCHEDULE 3.07
hereto, and the provisions of Article VII of this Agreement, the Company is not
under any contractual obligation to register under the Securities Act any of its
currently outstanding securities or any of its securities which may hereafter be
issued.
SECTION 3.08. GOVERNMENTAL CONSENT. No consent, approval or
authorization of or registration, qualification, designation, declaration or
filing with any governmental authority on the part of the Company is required in
connection with the valid execution, delivery and performance of this Agreement
or the offer, sale or issuance of the Shares and the Conversion Shares or the
consummation of any other transaction contemplated hereby, except for filings
that may be required to comply with applicable federal and state securities
laws.
SECTION 3.09. OFFERING. Subject to the accuracy of the representations
of the Purchasers in Article IV, the offer, sale and issuance of the Shares as
contemplated by this Agreement will constitute transactions exempt from the
registration requirements of Section 5 of the Securities Act.
SECTION 3.10. SUBSIDIARIES. The Company has no subsidiaries and does
not otherwise own or control, directly or indirectly, any equity interest in any
corporation, association, partnership or business entity, nor has the Company
made any commitment or subscribed for the purchase of any such equity interest.
SECTION 3.11. ABSENCE OF UNDISCLOSED LIABILITIES. The Company does not
have any liability or obligation, absolute or contingent, that is not reflected
in the financial statements included in the Company's SEC Reports, other than
obligations and liabilities which taken individually or in the aggregate would
not have a material adverse effect on the Company's assets, liabilities,
condition (financial or otherwise), operating results, business or prospects.
8
<PAGE>
SECTION 3.12. TAXES. The Company has filed all tax returns and reports
required by law to be filed, and has paid all taxes, assessments and other
governmental charges that are due and payable, except for those matters
reasonably being contested by the Company and those matters which, individually
and in the aggregate, would not have a material adverse effect on the Company's
assets, liabilities, condition (financial or otherwise), operating results,
business or prospects. The charges, accruals and reserves on the books of the
Company in respect of taxes are considered adequate by the Company, and the
Company knows of no assessment for additional taxes or any basis therefor.
SECTION 3.13. TITLE TO PROPERTIES: LIENS AND ENCUMBRANCES. The Company
has good title to all properties and assets which it owns or purports to own,
both real and personal, tangible and intangible, reflected on the balance sheet
included in the financial statements included in the Company's SEC Reports or
acquired after the date thereof (except inventory or other personal property
disposed of in the ordinary course of business subsequent to the date thereof),
and such properties and assets are not subject to any mortgage, pledge, Lien,
security interest, encumbrance or charge other than (i) Liens for current taxes
not yet due and payable, (ii) Liens and encumbrances that do not materially
detract from the value of the property subject thereto or materially impair the
operations of the Company, or (iii) Liens securing obligations reflected in such
financial statements. With respect to properties or assets it leases, the
Company is in compliance with such leases (except for such defaults or breaches
that would not have a material adverse affect on the Company) and holds valid
leasehold interests free of any Liens, claims or encumbrances except for those
described in subsections (i) through (iii) hereof.
SECTION 3.14. LITIGATION. ETC. There are no actions, suits, proceedings
or investigations (i) pending or, to the Company's knowledge, threatened against
the Company or which otherwise involve the Company's business or operations, or
(ii) to the Company's knowledge, pending or threatened against any of its
officers, directors or principal stockholders in their capacities as officers,
directors or stockholders.
SECTION 3.15. EMPLOYEES. To the Company's knowledge, no employee of
the Company is in violation of any term of any employment contract or any other
contract or agreement between such employee and the Company. None of the
employees of the Company is represented by any labor union, and there is no
strike or other labor dispute pending or, to the knowledge of the Company,
threatened, with respect to the Company.
9
<PAGE>
SECTION 3.16. COMPLIANCE WITH LAW. The Company is conducting its
business and operations in material compliance with all governmental rules and
regulations applicable thereto, including without limitation those relating to
occupational safety, environmental, health and employment practices, and is not
in violation or default in any material respect under any statute, law,
ordinance, rule, regulation, judgment, order, decree, concession, grant,
franchise, license or other governmental authorization or approval applicable to
it or any of its properties.
SECTION 3.17. PERMITS. The Company has all permits, licenses, orders
and approvals of any federal, state, local or foreign governmental or regulatory
body (collectively, the "Permits") that are material to or necessary in the
conduct of its business as now conducted; all such Permits are in full force and
effect; no violations have been recorded in respect of any such Permits; and no
proceeding is pending or, to the knowledge of the Company, threatened to revoke
or limit any such Permits.
SECTION 3.18. BROKERS OR FINDERS. The Company has not retained any
investment banker, broker or finder in connection with the transactions
contemplated by this Agreement, and there are no brokerage commissions, finder's
fees or similar items of compensation payable in connection therewith based on
any arrangement or agreement made by or on behalf of the Company.
SECTION 3.19. DISCLOSURE. This Agreement, including the schedules
hereto, was prepared in good faith by the Company and does not contain any
untrue statement of a material fact or omit a material fact necessary to make
the statements therein not misleading.
SECTION 3.20. INTELLECTUAL PROPERTY. The Company owns or possesses the
requisite licenses or rights to all trademarks, service marks, service names,
trade names, patents and patent applications, copyrights and other rights
(collectively the "Intangibles") described as owned or licensed by the Company
in the SEC Reports. There is no claim, action or proceeding by any person
pending or, to the Company's knowledge, threatened which pertains to or
challenges the validity, enforceability or exclusive right of the Company with
respect to any Intangibles used in the conduct of the Company's business except
as described in the SEC Reports. To the Company's knowledge, the Company's
current products, services and processes do not infringe on any Intangibles held
by any third party. Except as set forth in the agreements disclosed in the SEC
Reports, the Company is not under any obligation to pay royalties or fees of any
kind whatsoever to any third party with respect to technology it has developed,
uses, employs or intends to use or employ.
SECTION 3.21. MATERIAL CONTRACTS. All contracts, agreements (including
license agreements and any other agreements relative to the Company's
technology), leases or other commitments, written or oral, absolute or
contingent, to which the Company is a party are filed or incorporated by
reference as exhibits to the Company's SEC Reports, other than (i) contracts
entered into in the ordinary course of business, requiring the expenditure by
the
10
<PAGE>
Company or the payment to the Company of no more than $100,000 and (ii)
contracts terminable by the Company on no more than 30 days' notice without
material cost or liability to the Company. Each such material contract
(including, without limitation, contracts between the Company and each of (i)
the University of Florida Research Foundation, (ii) Warner-Lambert Co. and (iii)
Raymond Bergeron) is valid and in full force and effect, and no event of default
(or event or circumstance which, with the lapse of time or giving of notice, or
both, would constitute an event of default) exists under any such material
contract. The Company is not in breach of any of the material provisions of any
such material contract and, to the Company's knowledge, no other party to any
such material contract is in breach of any of the material provisions thereof.
SECTION 3.22. INTERESTED PARTY TRANSACTIONS. The Company is not a
guarantor or indemnitor of any indebtedness of any other person, firm or
corporation. Except as set forth in SCHEDULE 3.22 hereto, no stockholder,
executive officer or director of the Company, nor any immediate family member of
such person, is a party to any transaction with the Company which is or would be
required to disclose in the Company's SEC Reports pursuant to Item 404 of
Regulation S-K of the rules and regulations under the Securities Act and the
Exchange Act.
SECTION 3.23. BOOKS AND RECORDS. The minute books of the Company
reflect, in all material respects, all meetings and other corporate actions of
the stockholders and Board of Directors (and any committees thereof) of the
Company.
SECTION 3.24. ERISA. Each employee benefit plan (within the meaning of
Section 3(3) the Employment Retirement Income Security Act of 1974, as amended
("ERISA")) which is subject to ERISA and/or the Internal Revenue Code of 1986,
as amended (the "Code") conforms to, and its operation and administration are in
compliance with, all applicable requirements of ERISA and/or the Code, as
applicable. There are no actions, suits or claims pending (other than routine
claims for benefits) or threatened against any employee plan or against the
assets of any employee plan. Each "Employee Welfare Benefit Plan" (as defined in
Section 3(1) of ERISA) covering any present or former employee of the Company
subject to the requirements of COBRA has complied with all requirements for
continuation coverage under group health benefit plans under COBRA and there are
no claims against the Company for a failure or alleged failure to comply with
the COBRA continuation requirements. The Company does not and has not ever
contributed to a "multiemployer plan" (as defined in Section 3(37) of ERISA) and
no amount is due or owing on account of any withdrawal therefrom.
Notwithstanding anything else set forth herein, the Company has incurred no
liability with respect to any such plan under ERISA (including, without
limitation Title I or Title IV of ERISA, other than liability for premiums due
to the Pension Benefit Guaranty Corporation), the Code or other applicable law,
which has not been satisfied in full, and no event has occurred, and there
exists no condition or set of circumstances which could result in the imposition
of any liability under ERISA (including, without limitation Title I or Title IV
of ERISA), the Code or other applicable law with respect to any such plan.
11
<PAGE>
SECTION. 3.25 ENVIRONMENTAL LAWS.
(a) The Company is in compliance with all limitations,
restrictions, conditions, standards, prohibitions, requirements, obligations,
schedules and timetables contained in any Applicable Environmental Laws, or in
any plan, order, decree, judgment, notice or demand letter issued, entered,
promulgated or approved thereunder. For purposes of this Agreement, the term
"Applicable Environmental Laws" shall mean Comprehensive Environmental Response,
Compensation and Liability Act of 1980,42 U.S.C. 9601 ET. SEQ. ("CERCLA");
Resource Conservation and Recovery Act of 1976,42 U.S.C. 6901 ET. SEQ. ("RCRA");
Federal Water Pollution Control Act, 33 U.S.C. 1251 ET. SEQ.; and Clean Air Act,
42 U.S.C. 7401 ET. SEQ. and any similar provisions of state or local law in any
jurisdictions where the properties of the Company are located, and the
regulations thereunder, and any other local, state and or federal laws or
regulations, whether currently in existence or hereafter enacted that govern.
(b) The Company is not aware of, nor has the Company received
notice of, any past present or future events, conditions, circumstances,
activities, practices, incidents, actions or plans which may interfere with or
prevent continued compliance, or which may give rise to any common law or legal
liability, or otherwise form the basis of any claim, action, suit, proceeding,
hearing or investigation, based on or related to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or handling, or the
emission, discharge, release or threatened release into the environment, of any
pollutant, contaminant, or hazardous or toxic material or waste.
(c) No Hazardous Material has been incorporated in, used on,
stored on or under, released from, treated on, transported to or from, or
disposed of on or from any property owned or leased by the Company such that,
under Applicable Environmental Laws (i) any such Hazardous Material would be
required to be removed, cleaned-up or remediated before the property could be
altered, renovated, demolished or transferred, or (ii) the owner or lessee of
the property could be subjected to liability for the removal, clean-up or
remediation of such Hazardous Material; and the Company has not received any
notification from any Governmental Bodies or other third parties relating to
Hazardous Material on or affecting any property owned or leased by the Company
or relating to any potential or known liability under Applicable Environmental
Laws arising from the ownership or leasing of any property. For purposes of this
Agreement, "Hazardous Material" shall mean any substance which as of the date of
this Agreement shall be identified as "hazardous" or "toxic" or otherwise
regulated under CERCLA or RCRA or which has been or shall be determined at any
tine by any agency or court to be a hazardous or toxic substance under
Applicable Environmental Law. The term "Hazardous Material" shall also include,
without limitation, raw materials, building components, the products of any
manufacturing or other activities on the properties, wastes, petroleum, and
source, special nuclear or by-product material as defined by the Atomic
12
<PAGE>
Energy Act of 1954,42 U.S.C. ss.ss. 3011 ET. seq., as amended.
ARTICLE IV
PURCHASER REPRESENTATIONS AND WARRANTIES
SECTION 4.01 REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS. Each
Purchaser represents and warrants to the Company as follows:
(a) INVESTMENT INTENT. Such Purchaser is acquiring the Shares as
indicated on Schedule A for its own account for the purpose of investment and
not with a view to, or for sale in connection with, the distribution thereof,
and that it has no present intention of distributing or selling such Shares.
(b) TRANSFER RESTRICTIONS. Such Purchaser understands that the
Shares and the Conversion Shares have not been registered under the Securities
Act, or the securities laws of any state or other jurisdiction, and hereby
agrees not to make any sale, transfer or other disposition of the same in the
absence of (i) an effective registration statement covering such securities
under the Securities Act and any securities laws of any applicable state or
other jurisdiction or (ii) an applicable exemption from registration under the
Securities Act (including, without limitation, pursuant to Rule 144 under the
Securities Act) and other applicable securities laws.
(c) OPPORTUNITY TO INVESTIGATE. Such Purchaser (i) has had the
opportunity to ask questions concerning the Company (including, without
limitation, the Company's prior financings) and all such questions posed have
been answered to such Purchaser's satisfaction; (ii) has been given the
opportunity to obtain any additional information it deems necessary to verify
the accuracy of any information obtained concerning the Company; and (iii) has
such knowledge and experience in financial and business matters that it is able
to evaluate the merits and risks of purchasing the Shares and to make an
informed investment decision relating thereto.
(d) ACCREDITED INVESTOR. Such Purchaser is an "accredited
investor" as such term is defined in Regulation D under the Securities Act.
(e) ORGANIZATION AND GOOD STANDING. If such Purchaser is not an
individual, such Purchaser is duly organized, validly existing and in good
standing under the laws of the State or country of its formation.
(f) POWER AND AUTHORIZATION. If such Purchaser is not an
individual, such Purchaser has the power and authority to enter into this
Agreement, and the execution, delivery and performance by such Purchaser of this
Agreement have been duly authorized by
13
<PAGE>
all necessary corporate or partnership action. This Agreement constitutes the
valid and binding obligation of such Purchaser, enforceable in accordance with
its terms, except as the enforceability thereof may be limited by bankruptcy,
insolvency or other laws relating to or affecting creditors' rights generally
and by general equitable principles.
(g) BROKERS OR FINDERS. There are, and there will be, no brokerage
commissions, finder's fees or similar items of compensation payable by the
Company in connection with any broker's or finder's arrangement or agreement
made by or on behalf of such Purchaser, and such Purchaser hereby indemnifies
the Company against the same.
ARTICLE V
CONDITIONS TO CLOSINGS
SECTION 5.01. CONDITIONS TO THE PURCHASERS' OBLIGATIONS. Each
Purchaser's obligation to purchase and pay for the Securities to be purchased by
it at the Closing is subject to the complete satisfaction by the Company, on or
before such Closing, of the following conditions:
(a) OPINION OF COMPANY'S COUNSEL. The Purchasers shall have
received from counsel for the Company, an opinion, dated the date of the Closing
Date, in the form set forth in EXHIBIT B hereto with respect to the Closing.
(b) REPRESENTATIONS AND WARRANTIES; OFFICER'S CERTIFICATE. The
Company's representations and warranties contained in Article III shall be true
and correct on and as of the date of the Closing with the same effect as if made
on and as of the date of the Closing. All agreements and conditions to be
performed or satisfied by the Company hereunder on or before the date of the
Closing shall have been duly performed or satisfied. The Company shall have
delivered to the Purchasers a certificate, dated the date of the Closing and
signed by the President of the Company, to such effect.
(c) CONSENTS AND APPROVALS. The Company shall have delivered to
the Purchasers a certificate, dated the date of the Closing and signed by the
President of the Company, listing any consents, waivers, approvals,
authorizations, registrations, filings and notifications (including without
limitation those of the character referred to in Section 3.08) which are
necessary, to which shall be attached evidence, satisfactory to the Purchasers,
that the same have been obtained or made and are in full force and effect, or
stating that none is necessary.
(d) CHARTER OF THE COMPANY. The Purchasers shall have received a
copy of the Company's Certificate of Incorporation thereof, certified as of a
recent date by the Delaware Secretary of State.
14
<PAGE>
(e) CLOSING DOCUMENTS. The Purchasers shall have received (i)
certificates representing the Shares registered in the names of the Purchasers,
(ii) such certificates as to the good standing of the Company and certificates
of officers of the Company as counsel to the Purchasers may reasonably request.
(f) SUFFICIENCY OF PROCEEDS. The Purchasers shall be satisfied
that the net proceeds from the issuance and sale of the Shares will be
sufficient to fund the Company's operations for a period of not less than three
(3) months following the Closing.
(g) PROCEEDINGS AND DOCUMENTS. All corporate and other proceedings
and all documents incident to the transactions contemplated by this Agreement
and the other agreements contemplated hereby shall be satisfactory in form and
substance to the Purchasers and their counsel, and the Purchasers and the
counsel shall have received copies of all documents and records relating
thereto. In addition, all financial, legal and other due diligence shall have
been completed to the reasonable satisfaction of the Purchasers.
(h) OTHER PURCHASERS. Each other Purchaser purchasing more than
10,000 Preferred Shares shall have tendered the purchase price and accepted
delivery of the Shares to be issued to them at the Closing as set forth in
SCHEDULE A.
(i) PAYMENT OF FEES AND DISBURSEMENTS OF PURCHASERS. The costs,
fees and expenses of counsel to the Purchasers identified in Section 9.14 shall
have been paid in full.
(j) BOARD OF DIRECTORS. Upon the Closing, the Company shall have
caused to be appointed or elected to the Company's Board of Directors a
designated representative of the holders of the Series A Preferred Stock.
SECTION 5.02. CONDITIONS TO THE COMPANY'S OBLIGATIONS. The Company's
obligation to issue the Securities to the Purchasers at the Closing is subject
to the satisfaction of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES. The representations and
warranties of each Purchaser contained in Article IV shall be true, correct and
complete in all material respects on and as of the date of the Closing with the
same force and effect as if they had been made on and as of the date of the
Closing.
(b) PAYMENT OF PURCHASE PRICE. Each Purchaser shall have delivered
to the Company and the Company shall have received payment in full of the cash
portion of the purchase price relating to the number of Securities to be
purchased by such Purchaser at the Closing.
15
<PAGE>
(d) PROCEEDINGS AND DOCUMENTS. All corporate and other proceedings
and all documents incident to the transactions contemplated by this Agreement
and the other agreements contemplated hereby shall be satisfactory in form and
substance to the Company and its counsel, and the Company and its counsel shall
have received copies of all documents and records relating thereto.
16
<PAGE>
ARTICLE VI
COVENANTS OF THE COMPANY
SECTION 6.01 AFFIRMATIVE COVENANTS. The Company covenants and agrees
that, from the date of the Closing and thereafter so long as Fifteen Percent
(15%) of the number of Preferred Shares originally issued shall remain
outstanding, it shall, unless it has received the prior written consent or
written waiver of at least 66-2/3% of the holders of such outstanding Preferred
Shares, perform and observe the following covenants and provisions, and shall
cause each Subsidiary, if and when such Subsidiary exists, to perform and
observe the following covenants and provisions as applicable to such Subsidiary:
(a) FINANCIAL STATEMENTS; OTHER REPORTS. The Company and each
Subsidiary will maintain proper books of account and records in accordance with
GAAP applied on a consistent basis, and will deliver to each holder of Series A
Preferred Stock (or Affiliate transferee thereof) owning at least fifty thousand
Preferred Shares (each, a "Rights Holder"):
(i) as soon as available and in any event within forty-five
(45) days after the end of each of the first three quarters of each
fiscal year of the Company, a copy of the Company's quarterly Report on
Form 10-Q or Form 10-QSB, prepared in accordance with GAAP consistently
applied (subject to year-end audit adjustments), and duly certified by
the Chief Financial Officer of the Company;
(ii) as soon as available and in any event within ninety (90)
days after the end of each fiscal year of the Company, a copy of
Company's Annual report on Form 10-K or Form 10-KSB, prepared in
accordance with GAAP consistently applied, together with the annual
audit report for such year by one of the "big six" independent public
accountants of recognized standing;
(iii) promptly after sending, making available, or filing the
same, such other reports and financial statements as the Company shall
send or make available to the stockholders of the Company; and
(iv) in the event that the Company ceases to become subject to
the provisions of Section 13 or 15(d) of the Exchange Act, all reports
and other documents that would be required to be filed by the Company
under the Securities Act and the Exchange Act if the Company were then
subject to the provisions of Section 13 or 15(d) of the Exchange Act,
at the times and in the manner that such reports and documents would be
required to be so filed.
Neither the foregoing provisions of this Section 6.01(a) nor any other
provision of this Agreement shall be in limitation of any rights which a
Purchaser may have with respect to the books and records of the Company and its
Subsidiaries, or to inspect their properties or
17
<PAGE>
discuss their affairs, finances and accounts, under the laws of the
jurisdictions in which they are incorporated.
(b) BOARD OBSERVATION; INSPECTION. Each Rights Holder and such
agents, advisors and counsel as such Rights Holder may designate, may, at its
expense, (i) attend and observe each meeting (whether physical or telephonic) of
the Company's Board of Directors or any committee thereof (and with respect to
which the Company covenants and agrees to provide each Rights Holder with
reasonable advance notice) or (ii) visit and inspect any of the properties of
the Company and each Subsidiary, examine the books of account of the Company and
each Subsidiary, take extracts therefrom and discuss the affairs, finances and
accounts of the Company and each Subsidiary with its officers and employees and
public accountants (and by this provision the Company and each Subsidiary hereby
authorizes said accountants to discuss with such Rights Holder and such persons
its finances and accounts), at reasonable times and with reasonable prior notice
during normal business hours. All such visits and inspections shall be conducted
in a manner which will not unreasonably interfere with the normal business
operations of the Company and each Subsidiary.
(c) PRESERVATION OF CORPORATE EXISTENCE. The Company and each
Subsidiary will preserve and maintain its corporate existence, rights,
franchises and privileges in the jurisdiction of its incorporation, and qualify
and remain qualified, as a foreign corporation in each jurisdiction in which
such qualification is necessary or desirable in view of its business and
operations or the ownership of its properties. The Company and each Subsidiary
shall preserve and maintain all licenses and other rights to use patents,
processes, licenses, trademarks, trade names, inventions, copyrights and other
Intangibles owned or possessed by it and necessary to the conduct of its
business.
(d) COMPLIANCE WITH LAWS. The Company will comply, and cause each
of its Subsidiaries to comply, with all applicable laws, rules, regulations and
orders of any governmental authority, noncompliance with which could materially
adversely affect its business or condition, financial or otherwise.
(e) BOARD OF DIRECTORS. The Company shall at all times maintain
provisions in its By-laws or certificate of incorporation indemnifying all
directors against liability and providing for the advancement of expenses to the
maximum extent permitted under the laws of the jurisdiction of its
incorporation.
(f) AVAILABILITY OF COMMON STOCK. The Company shall, from time to
time, in accordance with the laws of the state of its incorporation increase the
authorized amount of Common Stock if at any time the number of shares of Common
Stock remaining unissued and available for issuance shall be insufficient to
permit the conversion of all the then outstanding Preferred Shares.
18
<PAGE>
(g) USE OF PROCEEDS. The Company shall use the net proceeds from
the issuance and sale of the Shares solely to fund ordinary operating expenses
of the Company.
(h) CERTAIN PATENT MATTERS. The Company represents that certain of
its intellectual property is licensed to it by the University of Florida
Research Foundation (the "UFRF"). The Company agrees to comply with its royalty
and other contractual obligations to UFRF in order to maintain its rights to the
intellectual property licensed by UFRF, in each case to the extent it is
commercially reasonable for the Company to do so.
(i) INDEMNIFICATION. The Company shall indemnify, defend and hold
each Purchaser and its officers, directors, partners, employees and agents and
each other Person which controls (within the meaning of the Securities Act) such
Purchaser or any of its partners harmless against all liability, loss or damage,
together with all reasonable costs and expenses related thereto (including legal
and accounting fees and expenses), arising from, relating to, or connected with
(i) the untruth, inaccuracy or breach of any representations, warranties or
covenants contained herein or (ii) the use, generation, storage, release,
threatened release, discharge, disposal or presence of Hazardous Materials (as
defined below) on, under or about any properties owned or leased by the Company
by any Person during the period that the Company was the legal or equitable
owner of any properties owned or leased by the Company or which occurred prior
to such time and was otherwise actually known by, or should have been known by,
the Company. The obligation of the Company to indemnify each Purchaser and its
officers, directors, partners, employees and agents and each other Person which
controls (within the meaning of the Securities Act) such Purchaser or any of its
partners shall specifically cover and include, without limitation, all fines and
penalties imposed by federal, state or local authorities, costs of removing or
neutralizing the Hazardous Materials, injury to the property adjoining any
properties owned or leased by the Company, injury to persons living or working
on or about any properties owned or leased by the Company or adjoining or
otherwise affecting property, and all other indirect or consequential damages
incurred by each Purchaser and its officers, directors, partners, employees and
agents and each other Person which controls (within the meaning of the
Securities Act) such Purchaser or any of its partners.
SECTION 6.02 CERTAIN NEGATIVE COVENANTS. Without limiting any other
covenants or provisions hereof, the Company covenants and agrees that it will
comply with and observe the following negative covenants and provisions, and
will cause each Subsidiary to comply with and observe such of the following
covenants and provisions as are applicable to such Subsidiary, if and when such
Subsidiary exists, and will not without the written consent or written waiver of
the holders of at least 66-2/3% of the holders of the Series A Preferred Stock,
do any of the actions set forth in the following covenants and provisions so
long as any Series A Preferred Stock remains outstanding:
19
<PAGE>
(a) NO AVOIDANCE. The Company will not, by amendment of its
Certificate of Incorporation or through any consolidation, merger,
reorganization, transfer of assets, 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 Agreement or the certificates evidencing the
issuance of the Conversion Shares. Without limiting the generality of the
foregoing, the Company (i) will not permit the par value or the determined or
stated value of any shares of the Company's Common Stock receivable upon the
conversion of the Preferred Shares to exceed the amount payable therefor upon
such exercise, (ii) will take all such action as may be necessary or appropriate
in order that the Company may validly and legally issue fully paid and
non-assessable shares of the Company's Common Stock, upon the conversion of the
Preferred Shares from time to time outstanding, including, without limitation,
amending its Certificate of Incorporation to reduce or eliminate the par value
of the Common Stock and (iii) will not take any action which results in an
adjustment in the number of Conversion Shares obtainable upon the conversion of
the Preferred Shares if the total number of shares of the Company's Common Stock
(or other securities) issuable after such action upon the exercise or conversion
of all of the then-outstanding Preferred Shares would exceed the total number of
shares of the Company's Common Stock (or other securities) then authorized by
the Company's Certificate of Incorporation and available for purpose of issuance
upon such exercise.
(b) PROTECTIVE PROVISIONS. The Company shall not engage in any of
the actions specified in Section 5 of the Series A Certificate of Designation.
(c) TRANSACTIONS WITH RELATED PARTIES. Other than in the ordinary
course of business of the Company, neither the Company nor any Subsidiary will
engage in any transaction with, or enter into any contract, agreement or other
arrangement providing for, the employment of, furnishing of services by, rental
of real or personal property from, or otherwise requiring payments to, any
officer, employee or director of the Company or any Related Party of such
persons or entities (other than pursuant to the terms of employment or
consulting arrangements by the Company disclosed in the Company's SEC Reports or
any such agreements that hereafter shall be approved by the Company's Board of
Directors). For purposes of this Agreement, "Related Party" shall mean any
individual who is a director or officer of the Company; any Person who is an
"affiliate" of the Company, as such term is defined in Rule 405 under the
Securities Act; any Person that owns five percent or more of the outstanding
equity stock of any class of the Company; any member of the family (as defined
in Section 267(c)(4) of the Internal Revenue Code) of, or any individual who has
the same home as, any individual (or the spouse of any such individual)
described above; and any trust, estate or partnership of which an individual
described above is a guarantor, fiduciary, beneficiary or partner.
(d) BUSINESS. The Company will only engage in the business of
research, development and production of pharmaceutical products and activities
ancillary thereto.
20
<PAGE>
(e) CONFLICTING AGREEMENTS. The Company will not enter into any
agreement which by its terms might restrict the performance of the Company's
obligations pursuant to the terms of this Agreement or the provisions relating
to the Series A Preferred Stock included in the Series A Certificate of
Designation, including, but not limited to, registration rights and the payment
of dividends on, the redemption, voting or conversion of the Series A Preferred
Stock.
(f) EMPLOYEE STOCK AND STOCK OPTIONS. The Company will not issue
Common Stock or stock options to its officers, directors, employees or others
who render services to the Company except for issuances of stock options and
issuances of shares of Common Stock upon exercise of such stock options which,
in each case, constitute Excluded Shares (as defined in the Series A Certificate
of Designation).
(g) NO CHANGES. Between the date of execution of this Agreement
and the Closing Date, and except for the filing of the Series A Certificate of
Designation, the Company shall not, without the prior written consent of the
Purchasers: (a) issue any capital stock or any option, warrant or right to
acquire capital stock; (b) organize any Subsidiary; (c) make any change in its
capital stock; (d) declare or pay any dividends or make any distributions in
respect of its capital stock; (e) enter into any merger or consolidation or
other business combination, (f) repurchase any stock, or (g) enter into any
material transaction, agreement, understanding or commitment; provided that, for
purposes of (g) above, the prior written consent of the Purchasers shall not be
required in the event that the directors selected by the Purchasers consent to
such action.
(h) ENVIRONMENTAL MATTERS.
(i) The Company shall promptly advise each holder of
the Series A Preferred Stock in writing of any pending or threatened claim,
demand or action by any governmental body or third party relating to any
Hazardous Materials affecting any properties owned or leased by the Company of
which it has knowledge. The Company shall not discharge, place, release, spill
or dispose of any Hazardous Materials or any other pollutants or effluents upon
any properties owned or leased by the Company or elsewhere (including, but not
limited to, underground injection of such substances) other than in compliance
with the Applicable Environmental Laws and the Company shall not discharge into
the air any emission which would require a permit under the Clean Air Act or its
state counterparts or any other Applicable Environmental Laws. The stockholders
of the Company shall have no control over, or authority with respect to, the
waste disposal operations of the Company.
(ii) The use of any property by the Company, and any
future development, construction and operation of property purchased, leased or
otherwise acquired by the Company, shall, in all respects, comply with, and are
or shall be, lawful, permitted and conforming uses in all material respects
under all applicable building, fire, safety, subdivision,
21
<PAGE>
zoning, sewer, environmental, securities, health, insurance and other laws,
ordinances, rules, regulations and plan approval conditions of any governmental
or public body or authority.
SECTION 6.03 CERTAIN ADDITIONAL NEGATIVE COVENANTS. Without limiting
any other covenants or provisions hereof, the Company covenants and agrees that
it will comply with and observe the following negative covenants and provisions,
and will cause each Subsidiary to comply with and observe such of the following
covenants and provisions as are applicable to such Subsidiary, if and when such
Subsidiary exists, and will not without the written consent or written waiver
(which consent or waiver shall not be unreasonably withheld) of the holders of
at least 66-2/3% of the holders of the Series A Preferred Stock, do any of the
actions set forth in the following covenants and provisions so long as any
Series A Preferred Stock remains outstanding:
(a) INDEBTEDNESS: COMMITMENTS. The Company will not incur (a)
Indebtedness in excess of $100,000, or (b) Commitments (defined below) in excess
of $100,000 in the aggregate. For purposes of this Agreement, "Commitments"
shall mean all obligations of the Company and its Subsidiaries, contingent or
otherwise, pursuant to long-term leases (other than leases for real property),
or other obligations pursuant to similar agreements which, in each case, are
required to be capitalized in accordance with GAAP.
(b) GUARANTEES. The Company will not incur any guarantee or
similar contingent obligation in respect of the Indebtedness of others in excess
of $100,000, whether or not classified on the Company's balance sheet as a
liability.
(c) NO ACQUISITIONS. The Company shall not, nor shall it permit
any of its Subsidiaries to, acquire or agree to acquire by merging or
consolidating with, or by purchasing a substantial equity interest in or a
substantial portion of the assets of, or by any other manner, any business or
any corporation, partnership, association or other business organization or
division thereof or otherwise acquire or agree to acquire, or permit any of its
Subsidiaries to acquire or agree to acquire, any assets for a purchase price
which is in excess of ten percent (10%) of the Company's net worth.
(d) NO DISPOSITIONS. Other than in the ordinary course of business
and other than dispositions of obsolete assets, the Company will not, nor shall
it permit any of its Subsidiaries to, sell, lease, encumber or otherwise dispose
of or agree to sell, lease, encumber or otherwise dispose of, in any transaction
or series of related transactions, assets having an aggregate book value in
excess of ten percent (10%) of the Company's net worth.
SECTION 6.04.
(a) TERMINATION OF SECTION 6.03 CERTAIN ADDITIONAL NEGATIVE
COVENANTS. The Company's obligations under the provisions set forth in Section
6.03 above shall terminate on the
22
<PAGE>
earlier to occur of (i) the second anniversary of the Closing Date or (ii) the
date on which the closing price of the Common Shares of the Company on NASDAQ
(or, if not then listed on NASDAQ, listed on any other national securities
market) shall have exceeded $10.00 per share (subject to adjustment) for a
period of 60 consecutive days.
ARTICLE VII
REGISTRATION RIGHTS
SECTION 7.01.
(a) INCIDENTAL REGISTRATION. If the Company at any time (other
than pursuant to subsection (b) below)) proposes to register any of its
securities under the Securities Act for sale to the public, whether for its own
account or for the account of other security holders or both (except with
respect to registration statements on Forms S-4, S-8 or any successor to such
forms or another form not available for registering the Registrable Securities
for sale to the public), each such time it will promptly give written notice to
all holders of the Registrable Securities of its intention so to do. Upon the
written request of any such holder, received by the Company within thirty (30)
days after the giving of any such notice by the Company, to register any or all
of its Registrable Securities, the Company will use its best efforts to cause
the Registrable Securities as to which registration shall have been so requested
to be included in the securities to be covered by the registration statement
proposed to be filed by the Company, all to the extent requisite to permit the
sale or other disposition by the holder (in accordance with its written request)
of such Registrable Securities so registered. If the registration of which the
Company gives notice is for a registered public offering involving an
underwriting, the Company shall so advise the holders of Registrable Securities
as a part of the written notice given pursuant to this Section 7.01(a). In such
event the right of any holder of Registrable Securities to registration pursuant
to this Section 7.01(a) shall be conditioned upon such holder's participation in
such underwriting to the extent provided herein. All holders of Registrable
Securities proposing to distribute their securities through such underwriting
shall (together with the Company and the Other Shareholders (as defined below)
distributing their securities through such underwriting) enter into an
underwriting agreement in customary form with the underwriter or underwriters
selected for underwriting by the Company. Notwithstanding any other provision of
this Section 7.01(a), if the underwriter determines that marketing factors
require a limitation on the number of shares to be underwritten, the Company
shall so advise all holders of securities requesting registration of any
limitations on the number of shares to be underwritten, and the number of shares
of securities that are entitled to be included in the registration and
underwriting shall be allocated (i) first to the Company with respect to shares
of Common Stock being sold for its own account; and (ii) then, to holders of
Registrable Securities and Other Shareholders requesting registration in
proportion, as nearly as practicable, to the respective amounts of securities
owned by them. Notwithstanding the foregoing provisions, the Company may
withdraw any registration statement referred to in this Section 7.01(a) without
thereby incurring any liability to
23
<PAGE>
the holders of Registrable Securities. If any holder of Registrable Securities
disapproves of the terms of any such underwriting, it may elect to withdraw
therefrom by written notice to the Company and the underwriter. Any Registrable
Securities or other securities excluded or withdrawn from such underwriting
shall be withdrawn from such registration.
(b) REGISTRATION ON FORM S-3.
(i) In addition to the rights provided in Section 7.01(a), subject to
a limit of one (1) registration hereunder in any six (6) month
period, if at any time (A) any holder or holders of the
Registrable Securities request that the Company file a
registration statement on Form S-3 or any comparable or successor
form thereto for a public offering of all or any portion of the
shares of Registrable Securities held by such requesting holder or
holders, the reasonably anticipated aggregate price to the public
of which would exceed US $500,000, and (B) the Company is a
registrant entitled to use Form S-3 or any comparable or successor
form thereto to register such shares, then the Company shall use
its best efforts to register under the Securities Act on Form S-3
or any comparable or successor form thereto, for public sale in
accordance with the method of disposition specified in such
notice, the number of shares of Registrable Securities specified
in such notice.
(ii) Following receipt of any notice under this Section 7.01(b), the
Company shall immediately notify all holders of Registrable
Securities from whom notice has not been received and such holders
shall then be entitled within thirty (30) days after receipt of
such notice from the Company to request the Company to include in
the requested registration all or any portion of their shares of
Registrable Securities. The Company shall use its best efforts to
register under the Securities Act, for public sale in accordance
with the method of disposition specified in the notice from
requesting holders described in paragraph (a) above, within 45
days of its receipt of such notice, the number of shares of
Registrable Securities specified in such notice (and in all
notices received by the Company from other holders within thirty
(30) days after the receipt of such notice by such holders).
Notwithstanding anything to the contrary contained herein, no
request may be made under this Section 7.01(b) after the effective
date of a registration statement filed by the Company covering a
firm commitment underwritten public offering and prior to the
later to occur of the completion of the period of distribution for
such offering or 90 days after the effective date of such
registration statement.
(iii)If the holders requesting such registration intend to distribute
the Registrable Securities covered by their request by means of an
underwriting, they shall so advise the Company as a part of their
request made pursuant to this Section 7.01(b) and the Company
shall include such information in the written notice referred to
in paragraph (ii) above. The right of any holder to registration
pursuant to this Section 7.01(b) shall be conditioned upon such
holder's agreeing to participate in
24
<PAGE>
such underwriting and to permit inclusion of such holder's
Registrable Securities in the underwriting. If such method of
disposition is an underwritten public offering, the holders of at
least a majority in interest of the shares of Registrable
Securities to be sold in such offering may designate the managing
underwriter of such offering, which managing underwriter shall be
reasonably acceptable to the Company. A holder may elect to
include in such underwriting all or a part of the Registrable
Securities it holds.
(iv) A registration statement filed pursuant to this Section 7.01(b)
may, subject to the following provisions, include (A) shares of
Common Stock for sale by the Company for its own account, (B)
shares of Common Stock held by officers or directors of the
Company and (C) shares of Common Stock held by persons who are
entitled to include such shares in such registration (the "Other
Shareholders"), in each case for sale in accordance with the
method of disposition specified by the requesting holders;
PROVIDED, HOWEVER, that if the number of shares so included
pursuant to clauses (A), (B) and (C) above exceeds the number of
Registrable Securities presented by the holders requesting
registration thereof, then such registration shall be deemed to be
a registration in accordance with Section 7.01(a). If such
registration shall be underwritten, the Company, such officers and
directors and Other Shareholders proposing to distribute their
shares through such underwriting shall enter into an underwriting
agreement in customary form with the representative of the
underwriter or underwriters selected for such underwriting on
terms no less favorable to such officers, directors or Other
Shareholders than the terms afforded the holders of Registrable
Securities. If and to the extent that the managing underwriter
determines that marketing factors require a limitation on the
number of shares to be included in such registration, then the
shares of Common Stock held by officers or directors (other than
Registrable Securities) of the Company or by Other Shareholders
(other than Registrable Securities) and shares of Common Stock to
be sold by the Company for its own account shall be excluded from
such registration to the extent so required by such managing
underwriter, and unless the holders of such shares and the Company
have otherwise agreed in writing, such exclusion shall be applied
first to the shares held by the directors and officers and the
Other Shareholders to the extent required by the managing
underwriter, then to the shares of Common Stock of the Company to
be included for its own account to the extent required by the
managing underwriter. If the managing underwriter determines that
marketing factors require a limitation of the number of
Registrable Securities to be registered under this Section
7.01(a), then Registrable Securities shall be excluded in such
manner that the securities to be sold shall be allocated among the
selling holders pro rata based on their ownership of Registrable
Securities. In any event all securities to be sold other than
Registrable Securities will be excluded prior to any exclusion of
Registrable Securities. No Registrable Securities or any other
security excluded from the underwriting by reason of the
underwriter's marketing limitation
25
<PAGE>
shall be included in such registration. If any holder of
Registrable Securities, officer, director or Other Shareholder who
has requested inclusion in such registration as provided above,
disapproves of the terms of the underwriting, such holder of
securities may elect to withdraw therefrom by written notice to
the Company and the managing underwriter. The securities so
withdrawn shall also be withdrawn from registration. Except for
registration statements on Form S-4, S-8 or any comparable form or
successor thereto, the Company will not file with the Commission
any other registration statement with respect to its Common Stock,
whether for its own account or that of other stockholders, from
the date of receipt of a notice from requesting holders pursuant
to this Section 4.3 until the completion of the period of
distribution of the registration contemplated thereby or 120 days
after the effective date of such registration, whichever is later.
SECTION 7.02. REGISTRATION PROCEDURES. In connection with the Company's
requirement to use its best efforts to effect the registration of any
Registrable Shares under the Securities Act, the Company will, as expeditiously
as possible:
(a) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement effective for
the period specified herein and comply with the provisions of the Securities Act
with respect to the disposition of all Registrable Shares covered by such
registration statement in accordance with the sellers' intended method of
disposition set forth in such registration statement for such period;
(b) furnish to each seller of Registrable Shares such number of
copies of the registration statement and each such amendment and supplement
thereto (in each case including all exhibits) and the prospectus included
therein (including each preliminary prospectus) as such persons reasonably may
request in order to facilitate the public sale or other disposition of the
Registrable Shares covered by such registration statement;
(c) use its best efforts to register or qualify the Registrable
Shares covered by such registration statement under the securities or "blue sky"
laws of such jurisdictions as the sellers of Registrable Shares reasonably shall
request, PROVIDED, HOWEVER, that the Company shall not for any such purpose be
required to qualify generally to transact business as a foreign corporation in
any jurisdiction where it is not so qualified or to consent to general service
of process in any such jurisdiction, unless the Company is already subject to
service in such jurisdiction;
(d) use its best efforts to list the Registrable Shares covered
by such registration statement with any securities exchange on which the Common
Stock of the Company is then listed;
(e) comply with all applicable rules and regulations under the
Securities Act
26
<PAGE>
and Exchange Act;
(f) immediately notify each seller of Registrable Shares under
such registration statement, at any time when a prospectus relating thereto is
required to be delivered under the Securities Act, of the happening of any event
of which the Company has knowledge as a result of which the prospectus contained
in such registration statement, as then in effect, includes an untrue statement
of a material fact or omits to state a material fact required to be stated
therein or necessary to make the statements therein not misleading in light of
the circumstances then existing, and promptly prepare and furnish to such seller
a reasonable number of copies of a prospectus supplemented or amended so that,
as thereafter delivered to the purchasers of such Registrable Shares, such
prospectus shall not include an untrue statement of a material fact or omit 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;
(g) make available for inspection by each seller of Registrable
Shares, and any attorney, accountant or other agent retained by such seller
reasonable access to all financial and other records, pertinent corporate
documents and properties of the Company, as such parties may reasonably request,
and cause the Company's officers, directors and employees to supply all
information reasonably requested by any such seller, attorney, accountant or
agent in connection with such registration statement;
(h) cooperate with the selling holders of Registrable Shares to
facilitate the timely preparation and delivery of certificates representing
Registrable Shares to be sold, such certificates to be in such denominations and
registered in such names as such holders or the managing underwriter may request
at least two business days prior to any sale of Registrable Shares; and
(i) permit any holder of Registrable Shares which holder, in the
sole and exclusive judgment, exercised in good faith, of such holder, might be
deemed to be a controlling person of the Company, to participate in good faith
in the preparation of such registration or comparable statement and to require
the insertion therein of material, furnished to the Company in writing, which in
the reasonable judgment of such holder and its counsel should be included.
In connection with each registration hereunder, the sellers of
Registrable Shares will furnish to the Company in writing such information
requested by the Company with respect to themselves and the proposed
distribution by them as shall be necessary in order to assure compliance with
Federal and applicable state securities laws; and such sellers shall provide the
Company with appropriate representations with respect to the accuracy of such
information.
SECTION 7.03. EXPENSES. All expenses incurred in complying with
Sections
27
<PAGE>
7.01 and 7.02, including, without limitation, all registration and filing fees,
printing expenses, fees and disbursements of counsel and independent public
accountants for the Company, fees and expenses (including counsel fees) incurred
in connection with complying with state securities or "blue sky" laws, fees of
the National Association of Securities Dealers, Inc., transfer taxes, fees of
transfer agents and registrars, and reasonable fees and disbursements of one
counsel selected by a majority in interest of the sellers of Registrable Shares,
shall be paid by the Company.
SECTION 7.04. INDEMNIFICATION AND CONTRIBUTION.
(a) In the event of a registration of any of the Registrable
Shares under the Securities Act pursuant to this Article VII, the Company will
indemnify and hold harmless each holder of Registrable Shares, its officers,
directors and partners, and each other person, if any, who controls such holder
within the meaning of the Securities Act, against any losses, claims, damages or
liabilities, joint or several, to which such holder, officer, director, partner
or controlling person may become subject under the Securities Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon (i) any untrue statement or alleged
untrue statement of any material fact contained in any prospectus, offering
circular or other document incident to such registration (including any related
notification, registration statement under which such Registrable Shares were
registered under the Securities Act pursuant to Section 7.01, any preliminary
prospectus or final prospectus contained therein, or any amendment or supplement
thereof), (ii) any blue sky application or other document executed by the
Company specifically for that purpose or based upon written information
furnished by the Company filed in any state or other jurisdiction in order to
qualify any or all of the Registrable Shares under the securities laws thereof
(any such application, document or information herein called a "Blue Sky
Application"), (iii) any omission or alleged omission to state in any such
registration statement, prospectus, amendment or supplement or in any Blue Sky
Applications executed or filed by the Company, a material fact required to be
stated therein or necessary to make the statements therein not misleading, (iv)
any violation by the Company or its agents of the Securities Act or any rule or
regulation promulgated under the Securities Act applicable to the Company or its
agents and relating to action or inaction required of the Company in connection
with such registration, or (v) any failure to register or qualify the
Registrable Shares in any state where the Company or its agents has
affirmatively undertaken or agreed in writing that the Company will undertake
such registration or qualification (provided that in such instance the Company
shall not be so liable if it has used its best efforts to so register or qualify
the Registrable Shares) and will reimburse each such seller, and such officer,
director and partner, and each such controlling person for any legal or other
expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability or action, promptly after
being so incurred, PROVIDED, HOWEVER, that the Company will not be liable in any
such case if and to the extent that any such loss, claim, damage or liability
arises out of or is based upon an untrue statement or alleged untrue statement
or omission or alleged omission so made in conformity with written information
furnished by any such holder or any such controlling
28
<PAGE>
person in writing specifically for use in such registration statement or
prospectus.
(b) In the event of a registration of any of the Registrable
Shares under the Securities Act pursuant to this Article VII, each seller of
such Registrable Shares thereunder, severally and not jointly, will indemnify
and hold harmless the Company, each person, if any, who controls the Company
within the meaning of the Securities Act, each officer of the Company who signs
the registration statement, each director of the Company, each other seller of
Registrable Shares against all losses, claims, damages or liabilities, joint or
several, to which the Company or such officer, director or other seller may
become subject under the Securities Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon any untrue statement or alleged untrue statement of any material
fact contained in any prospectus offering circular or other document incident to
such registration (including any related notification, registration statement
under which such Registrable Shares were registered under the Securities Act
pursuant to Section 7.01, any preliminary prospectus or final prospectus
contained therein, or any amendment or supplement thereof), or any Blue Sky
Application or arise out of or are based upon the omission or alleged omission
to state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, and will reimburse the Company and
each such officer, director and other seller for any legal or other expenses
reasonably incurred by them in connection with investigating or defending any
such loss, claim, damage, liability or action, promptly after being so incurred,
PROVIDED, HOWEVER, that such seller will be liable hereunder in any such case if
and only to the extent that any such loss, claim, damage or liability arises out
of or is based upon an untrue statement or alleged untrue statement or omission
or alleged omission made in reliance upon and in conformity with information
pertaining to such seller, as such, furnished in writing to the Company by such
seller specifically for use in such registration statement or prospectus; and
PROVIDED, FURTHER, HOWEVER, that the liability of each seller hereunder shall be
limited to the proportion of any such loss, claim, damage, liability or expense
which is equal to the proportion that the public offering price of the
securities sold by such seller under such registration statement bears to the
total public offering price of all securities sold thereunder, but not in any
event to exceed the proceeds received by such seller from the sale of
Registrable Shares covered by such registration statement.
(c) Promptly after receipt by an indemnified party hereunder of
notice of the commencement of any action, such indemnified party shall, if a
claim in respect thereof is to be made against the indemnifying party hereunder,
notify the indemnifying party in writing thereof, but the omission so to notify
the indemnifying party shall not relieve it from any liability which it may have
to such indemnified party other than under this Section and shall only relieve
it from any liability which it may have to such indemnified party under this
Section if and to the extent the indemnifying party is prejudiced by such
omission. In case any such action shall be brought against any indemnified party
and it shall notify the indemnifying party of the commencement thereof, the
indemnifying party shall be entitled to participate in and, to the extent it
shall wish, to assume and undertake the defense thereof with counsel
satisfactory to such indemnified party, and, after notice from the indemnifying
party to such
29
<PAGE>
indemnified party of its election so to assume and undertake the defense
thereof, the indemnifying party shall not be liable to such indemnified party
under this Section for any legal expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation and of liaison with counsel so selected, PROVIDED,
HOWEVER, that, if the defendants in any such action include both the indemnified
party and the indemnifying party and the indemnified party shall have reasonably
concluded that there may be reasonable defenses available to it which are
different from or additional to those available to the indemnifying party or
that the interests of the indemnified party reasonably may be deemed to conflict
with the interests of the indemnifying party, the indemnified party shall have
the right to select a separate counsel and to assume such legal defenses and
otherwise to participate in the defense of such action, with the expenses and
fees of such separate counsel and other expenses related to such participation
to be reimbursed by the indemnifying party as incurred. No indemnifying party,
in the defense of any such claim or action, 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 action. 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 defense of such claim and litigation resulting
therefrom.
(d) In order to provide for just and equitable contribution to
joint liability under the Securities Act in any case in which either (i) the
Company, any holder of Registrable Shares exercising rights under this
Agreement, or any controlling person of any such holder, makes a claim for
indemnification pursuant to this Section but it is judicially determined (by the
entry of a final judgment or decree by a court of competent jurisdiction and the
expiration of time to appeal or the denial of the last right of appeal) that
such indemnification may not be enforced in such case notwithstanding the fact
that this Section provides for indemnification in such case, or (ii)
contribution under the Securities Act may be required on the part of the
Company, any such selling holder or any such controlling person in circumstances
for which indemnification is provided under this Section; then, and in each such
case, the Company and such holder will contribute to the aggregate losses,
claims, damages or liabilities to which they may be subject (after contribution
from others) in such proportion so that such holder is responsible for the
portion represented by the percentage that the public offering price of its
Registrable Shares offered by the registration statement bears to the public
offering price of all securities offered by such registration statement, and the
Company is responsible for the remaining portion; PROVIDED, HOWEVER, that, in
any such case, (A) no such holder of Registrable Shares will be required to
contribute any amount in excess of the proceeds received from the sale of all
such Registrable Shares offered by it pursuant to such registration statement;
and (B) no person or entity guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) will be entitled to contribution
from any person or entity who was not guilty of such fraudulent
misrepresentation.
30
<PAGE>
(e) The indemnities and obligations provided in this Section
shall survive the transfer of any Registrable Shares by such holder.
ARTICLE VIII
LIMITATIONS AND RESTRICTIONS
SECTION 8.01. RESTRICTIONS ON SALES BY PURCHASERS. Each Purchaser
agrees that until the first anniversary of the Closing hereunder, it will not,
nor will it permit any of its Affiliates to sell or propose to sell any Shares
purchased at the Closing except as follows:
(a) A Purchaser may transfer Shares to any of its Affiliates;
(b) A Purchaser may sell its Shares pursuant to a tender offer or
exchange offer for all outstanding shares of the Company's Common Stock approved
by the Company's Board of Directors;
(c) A Purchaser may (i) if such Purchaser is a partnership,
distribute Shares to the partners of such partnership, (ii) transfer Shares to
such Purchaser's children and/or grandchildren and/or such Purchaser's spouse's
children and/or grandchildren, whether biological or adopted (collectively, such
Purchaser's "descendants"), (iii) transfer Shares to the trustee or trustees of
a trust revocable solely by such Purchaser, (iv) transfer Shares to the trustee
or trustees of an irrevocable trust the sole beneficiaries of which are such
Purchaser, his spouse and/or his descendants, (v) transfer Shares to a guardian
or conservator, or (vi) transfer any such shares in the event of death to such
Purchaser's heirs or the beneficiaries or the legal representative of his
estate; and
(d) A Purchaser may sell all or any part of the Shares owned by
Purchaser or its Affiliates pursuant to the registration rights provisions
contained in Article VII.
ARTICLE IX
MISCELLANEOUS
SECTION 9.01. NOTICES. All notices, requests, consents and other
communications hereunder shall be in writing, shall be addressed to the
receiving party's address set forth below or to such other address as a party
may designate by notice hereunder, and shall be either (i) delivered by hand,
(ii) made by telecopy or facsimile transmission (receipt confirmed) or (iii)
sent by international overnight or express courier.
31
<PAGE>
If to the Company: SunPharm Corporation
The Veranda, Suite 301
814 Highway AIA
Ponte Vedra Beach, FL 32082
Attn: President
FAX: (904) 394-2727
with a copy to : Cecilia Bryant, General Counsel
1400 Prudential Drive, Suite 7
Jacksonville, FL 32207
FAX: (904) 398-5477
If to a Purchaser: at its address on Schedule A hereto
with a copy to: Mintz Levin Cohn Ferris Glovsky and
Popeo, P.C.
One Financial Center
Boston, MA 02111
Attn: Lewis J. Geffen, Esq.
FAX: (617) 542-2241
All notices, requests, consents and other communications hereunder shall be
deemed to have been given either (i) if by hand, at the time of the delivery
thereof to the receiving party at the address of such party set forth above,
(ii) if made by telecopy or facsimile transmission, at the time that receipt
thereof has been acknowledged by electronic confirmation or otherwise, or (iii)
if sent by overnight or express courier, on the Business Day following the day
such notice is delivered to the courier service.
SECTION 9.02. LEGENDS. Each Purchaser acknowledges that, until
registered under the Securities Act and any applicable state securities laws or
transferred pursuant to the provisions of Rule 144 promulgated under the
Securities Act ("Rule 144"), each certificate representing a Share, whether upon
initial issuance or upon any transfer thereof, shall bear a legend (and the
Company and its transfer agent shall make a notation on its books of transfer to
such effect), prominently stamped or printed thereon, in substantially the
following form:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR
THE SECURITIES LAWS OF ANY APPLICABLE STATE OR OTHER JURISDICTION, HAVE
BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO DISTRIBUTION OR
RESALE AND MAY NOT BE SOLD, MORTGAGED, PLEDGED, HYPOTHECATED OR
OTHERWISE TRANSFERRED IN THE
32
<PAGE>
ABSENCE OF (1) AN EFFECTIVE REGISTRATION STATEMENT COVERING SUCH
SECURITIES UNDER THE ACT AND ANY SECURITIES LAWS OF ANY APPLICABLE
STATE OR OTHER JURISDICTION, (2) AN EXEMPTION FROM REGISTRATION ,
PURSUANT TO RULE 144 UNDER THE ACT OR (3) A WRITTEN OPINION IN FORM AND
SUBSTANCE SATISFACTORY TO THE COMPANY TO THE EFFECT THAT REGISTRATION
IS NOT REQUIRED PURSUANT TO SOME OTHER APPLICABLE EXEMPTION FROM
REGISTRATION UNDER THE ACT OR UNDER OTHER APPLICABLE SECURITIES LAWS."
SECTION 9.03. ENTIRE AGREEMENT. This Agreement embodies the entire
agreement and understanding between the parties hereto with respect to the
provisions hereof and supersedes all prior oral or written agreements and
understandings relating to the provisions hereof, and no other statement,
representation, warranty, covenant or agreement of any kind not expressly set
forth in this Agreement shall affect, or be used to interpret, change or
restrict, the express terms and provisions of this Agreement.
SECTION 9.04. MODIFICATIONS AND AMENDMENTS. The terms and provisions of
this Agreement may be modified or amended only by written agreement executed by
the Company and the holders of not less than a majority of the outstanding, with
the Series A Preferred Stock and the Common Stock voting together as a single
class.
SECTION 9.05. WAIVERS AND CONSENTS. Except as otherwise expressly
provided herein, the terms and provisions of this Agreement may be waived, or
consent for the departure therefrom granted, only by written document executed
by the Company and the holders of not less than a majority of the outstanding
Shares. No such waiver or consent shall be deemed to be or shall constitute a
waiver or consent with respect to any other terms or provisions of this
Agreement, whether or not similar. Each such waiver or consent shall be
effective only in the specific instance and for the purpose for which it was
given, and shall not constitute a continuing waiver or consent.
SECTION 9.06. ASSIGNMENT. The rights and obligations under this
Agreement may not be assigned by either party hereto without the prior written
consent of the other party (which consent shall not be unreasonably withheld),
except that a Purchaser without the consent of the Company may assign this
Agreement or any of its rights or obligations (i) to an Affiliate of the
Purchaser or to an entity with which the Purchaser shall merge or consolidate or
to which the Purchaser shall sell or assign all or substantially all of its
assets or (ii) in compliance with the provisions of Section 4.01(b) or Section
8.01.
SECTION 9.07. BENEFIT. All statements, representations, warranties,
covenants and agreements in this Agreement shall be binding on the parties
hereto and shall inure to the benefit of the respective successors and permitted
assigns of each party hereto. Nothing in this
33
<PAGE>
Agreement shall be construed to create any rights or obligations except among
the parties hereto, and no person or entity shall be regarded as a third-party
beneficiary of this Agreement, except for the persons entitled to
indemnification pursuant to the provisions of Article VII.
SECTION 9.08. GOVERNING LAW. This Agreement and the rights and
obligations of the parties hereunder shall be construed in accordance with and
governed by the law of the State of Delaware, without giving effect to the
conflict of law principles thereof.
SECTION 9.09. SEVERABILITY. In the event that any court of
competent jurisdiction shall determine that any provision, or any portion
thereof, contained in this Agreement shall be unenforceable in any respect, then
such provision shall be deemed limited to the extent that such court deems it
enforceable, and as so limited shall remain in full force and effect. In the
event that such court shall deem any such provision, or portion thereof, wholly
unenforceable, the remaining provisions of this Agreement shall nevertheless
remain in full force and effect.
SECTION 9.10. INTERPRETATION. The parties hereto acknowledge and
agree that: (i) each party and its counsel reviewed and negotiated the terms and
provisions of this Agreement and have contributed to its revision; (ii) the rule
of construction to the effect that any ambiguities are resolved against the
drafting party shall not be employed in the interpretation of this Agreement;
and (iii) the terms and provisions of this Agreement shall be construed fairly
as to all parties hereto and not in favor of or against any party, regardless of
which party was generally responsible for the preparation of this Agreement.
SECTION 9.11. HEADINGS AND CAPTIONS. The headings and captions of
the various subdivisions of this Agreement are for convenience of reference only
and shall in no way modify, or affect the meaning or construction of any of the
terms or provisions hereof.
SECTION 9.12. ENFORCEMENT. Each of the parties hereto acknowledges
and agrees that the rights acquired by each party hereunder are unique and that
irreparable damage would occur in the event that any of the provisions of this
Agreement to be performed by the other party were not performed in accordance
with their specific terms or were otherwise breached. Accordingly, in addition
to any other remedy to which the parties hereto are entitled at law or in
equity, each party hereto shall be entitled to an injunction or injunctions to
prevent breaches of this Agreement by the other party.
SECTION 9.13. NO WAIVER OF RIGHTS, POWERS AND REMEDIES. No failure
or delay by a party hereto in exercising any right, power or remedy under this
Agreement, and no course of dealing between the parties hereto, shall operate as
a waiver of any such right, power or remedy of the party. No single or partial
exercise of any right, power or remedy under this Agreement by a party hereto,
nor any abandonment or discontinuance of steps to enforce any such right, power
or remedy, shall preclude such party from any other or further exercise thereof
or the exercise of any other right, power or remedy hereunder. The election
34
<PAGE>
of any remedy by a party hereto shall not constitute a waiver of the right of
such party to pursue other available remedies. No notice to or demand on a party
not expressly required under this Agreement shall entitle the party receiving
such notice or demand to any other or further notice or demand in similar or
other circumstances or constitute a waiver of the rights of the party giving
such notice or demand to any other or further action in any circumstances
without such notice or demand.
SECTION 9.14. EXPENSES. Each of the parties hereto shall pay its
own fees and expenses in connection with this Agreement and the transactions
contemplated hereby whether or not the transactions contemplated hereby are
consummated, except that (i) the Company shall pay the reasonable fees and
expenses for one legal counsel for the Purchasers and (ii) in the event that the
Closing does not occur through no fault of the Purchasers after execution of
this Agreement, the Company shall be responsible for the reasonable and
documented out of pocket expenses of the Purchasers.
SECTION 9.15 CONFIDENTIALITY. Each of the Purchasers, on the one
hand, and the Company, on the other hand, acknowledge and agree that any
information or data it has acquired from the other, not otherwise properly in
the public domain, was received in confidence. Each such party agrees not to
divulge, communicate or disclose, or use to the detriment of the disclosing
party or for the benefit of any other person or persons, or misuse in any way,
any confidential information of the disclosing party concerning the subject
matter hereof; PROVIDED that (i) the foregoing obligation with respect to the
disclosure and use of such information shall not apply to any information which
such party can demonstrate (A) was at the time of disclosure to such party or
thereafter, but prior to its disclosure by such party to any third party,
through no fault of such party, publicly available (other than as a result of
disclosure by such party), (B) has been disclosed to such party on a
non-confidential basis from a source other than any other party which, to such
party's knowledge, was not prohibited from disclosing such information to such
party by a legal, contractual, fiduciary or other obligation, (C) has been
independently developed by the such party without the violation of any of my
obligations under this Agreement or (D) is required to be disclosed by
applicable law (including, without limitation, the federal securities laws),
rule, regulation or regulatory body (including, without limitation, the National
Association of Insurance Commissioners) and (ii) such party may, if required by
subpoena or valid legal process, disclose any such information, but only to the
extent so required and only after using its best efforts to give the other party
or parties (as the case may be) prior notice of such required disclosure in
order to afford such party or parties an opportunity to obtain an injunction, a
protective order or other relief.
SECTION 9.16. COUNTERPARTS. This Agreement may be executed in one
or more counterparts, and by different parties hereto on separate counterparts,
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
35
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement or caused this Agreement to be executed by their duly authorized
representatives, as of the date first written above.
SUNPHARM CORPORATION
By:______________________________________
Name:
Title:
Counterpart Signature Pages Begin on Next Page
36
<PAGE>
COUNTERPART SIGNATURE PAGE FOR PURCHASERS
The undersigned hereby agrees to become a party to that certain
Securities Purchase Agreement dated as of November __, 1998 (the "Agreement")
among SunPharm Corporation (the "Company") and others. From and after the
undersigned's execution and delivery and the Company's acceptance of this
Counterpart Signature Page, the undersigned shall be a party to the Agreement.
____________________________________________________
Printed Name of Purchaser
____________________________________________________
Signature of Purchaser
Investment Amount:__________________________________
Number of shares of Series A Redeemable
Convertible Preferred Stock:________________________
Number of 1997 Warrants surrendered:
Number of shares of Common Stock:___________________
By:_________________________________________________
Title:______________________________________________
Address:____________________________________________
____________________________________________________
____________________________________________________
Date:_______________________________________________
Agreed and accepted as to
_________ shares of Series A Redeemable
Convertible Preferred Stock
_________ shares of Common Stock
SUNPHARM CORPORATION
By:____________________
Title:_________________
Date:__________________
<PAGE>
<TABLE>
<CAPTION>
SCHEDULE A
Number of Number of Number of
Preferred Shares 1997 Warrants Common Shares Cash Portion of
Purchased Surrendered Purchased Purchase Price
Purchaser At Closing At Closing At Closing Paid At Closing
--------- ---------- ---------- ---------- ---------------
<S> <C> <C> <C> <C>
Pensionskassen for Vaerksteds- 123,375 142,857 351,029 $493,500
funktionaerer i Jernet
12 Sankt Annae Plads - DK 1250
Copenhagen K - Denmark
Apoteksassistenternes 123,375 142,857 351,029 $493,500
Pensionskasse
Hojbro Plads 6 - DK 1200
Copenhagen K - Denmark
Gottfried Hoffman 25,000 28,571 71,130 $100,000
Wiesenrain 5
CH6314 Unteraegeri
Switzerland
InterSouth Partners III, L.P. 25,000 28,571 71,130 $100,000
1000 Park Forth Plaza
Durham, NC 27713
Charles and Irma Dimmler 1,050 1,216 2,987 $4,200
Charles L. Dimmler, IV 350 405 996 $1,400
Erika I. Dimmler 350 405 996 $1,400
Cecilia Bryant 1,500 1,714 4,268 $6,000
TOTAL 300,000 346,596 853,565 $1,200,000
</TABLE>
<PAGE>
EXHIBIT A
<PAGE>
SCHEDULE 3.07
Registration Rights
Registration rights have been granted by the Company pursuant to the following
agreements:
Revised Form of Warrant Agreement relating to Redeemable
Common Stock Purchase Warrants (Exhibit 4.2 to Amendment No. 3
to the Company's Registration Statement on Form SB-2)
(Registration No. 33-85416-A).
Investment Agreement between the Registration and SunPharm
Investors, L.P., dated January 11, 1993, relating to the
Registrant's 9.5% Extendable Notes and Warrants (Exhibit 4.4
to the Company's Registration Statement on Form SB-2)
(Registration No. 33-85416-A).
Revised form of Unit Purchase Option issued to Royce
Investment Group, Inc. (Exhibit 4.5 to Amendment No. 3 to the
Company's Registration Statement on Form SB-2) (Registration
No. 33-85416-A).
Form of Bridge Warrant Certificate (Exhibit 10.10 to the
Company's Registration Statement on Form SB-2) (Registration
No. 33-85416-A).
Form of Subscription Agreement for Bridge Financing (Exhibit
10.13 to the Company's Registration Statement on Form SB-2)
(Registration No. 33-854160-A).
Second Amended and Restated Registration Rights Agreement
(Exhibit 10.14 to the Company's Registration Statement on Form
SB-2) (Registration No. 33-85416-A).
First Amendment to Second Amended and Restated Registration
Rights Agreement (Exhibit 10.16 to Amendment No. 1 to the
Company's Registration Statement on Form SB-2) (Registration
No. 33-385416-A).
Unit Purchase Agreement dated as of March 28, 1997 by and
between the Company and the Purchasers identified therein.
2
<PAGE>
SCHEDULE 3.22
Related Party Transactions
Stefan Borg, founder of the Company was issued 467,400 shares of Common
Stock in October 1991, in connection with the initial formation of the Company.
No cash consideration was paid for such shares. Mr. Borg has also been awarded
an option to acquire an additional 46,740 shares of Common Stock at $.32 per
share, all of which are now vested based upon achievement of certain performance
milestones, and an option to acquire an additional 25,000 shares of Common Stock
at $2.80 per share, which vests over a five year period from the award date of
August 12, 1997. The Company also loaned Mr. Borg an aggregate of $35,000 during
1992 and 1993, which amount was forgiven in that Mr. Borg was engaged as
President of the Company on the due date (April 1, 1996). On March 17, 1995, the
Company loaned Mr. Borg $10,000 at 6% per annum, due April 1, 1996 and extended
thereafter at interest of 10% per annum. On March 31, 1997, the Company loaned
Mr. Borg $87,491 at 8% per annum, due March 31, 1998 and extended thereafter at
interest of 1 1/2% per month. On April 1, 1997, the Company loaned Mr. Borg
$24,500 at 8% per annum, which was repaid on July 11, 1997.
The Company has also entered into an employee loan agreement with Paul
M. Herron, its Vice President and Chief Financial Officer in the amount of
$30,000, effective May 27, 1998, at 8% simple interest per annum. The loan is
forgiveable in installments of $10,000 on the first and second anniversary
dates, respectively, with the balance of principal and interest then due
forgiveable on the third anniversary date, provided that Mr. Herron is an
employee of the Company on the aforesaid dates.
The Company entered into License Agreements with the University of
Florida Research Foundation, Inc. in December 1991 and October 1995. The Company
has issued the Foundation a total of 342,760 shares of Common Stock in partial
consideration for the rights granted under the License Agreements and has
ongoing royalty obligations under the License Agreements. The Company also
entered into a Sponsored Research Agreement with the Foundation under which the
Company has agreed to fund research at the University of Florida through 1999 at
an annual cost of approximately $408,450 in 1992, $625,000 per year from 1993
through 1996, and $875,000 per year thereafter.
Dr. Janicki, a director of the Company, purchased 116,850 shares of
Common Stock of the Company in December 1991 at $.0064 per share, in connection
with his election to the board of directors and his agreement to provide
scientific consulting services to the Company during 1992. Dr. Janicki was also
issued a stock option for 10,388 shares of Common Stock in exchange for the
extension of his consulting agreement for 1993, exercisable at $.32 per share.
In August 1992, Dr. Janicki loaned the Company $150,000 for working capital. In
December 1992, Dr. Janicki purchased 2,500 shares of Series B Preferred Stock
(which were
3
<PAGE>
converted into 4,000 shares of Common Stock upon the completion of the Company's
January 1995 initial public offering) by forgiveness of $12,500 in outstanding
principal of the note for such loan and the remaining balance was repaid in
January 1993. Dr. Janicki also received an option to purchase 23,370 shares of
Common Stock of the Company at $.32 per share as consideration for loaning the
Company such funds. An additional option for the purchase of 77,900 shares of
Common Stock at $.32 per share was issued to Dr. Janicki pursuant to his
consulting agreement with the Company as a result of his efforts in assisting in
securing the Company's strategic alliance with Nippon Kayaku. The shares vest
and become exercisable proportionately based upon the total amount potentially
payable under the Nippon Kayaku agreement that has actually been received by the
Company from Nippon Kayaku or upon the expiration of ten years, if not
previously vested. At December 31, 1995, a total of 3,895 shares may be
exercised. Dr. Janicki has assigned his rights to exercise and acquire 15,580 of
the shares subject to this option to Mr. Schoellhorn (7,790 shares) and one
other person (7,790 shares) for their assistance in completing this transaction.
Mr. Schoellhorn, a director of the Company, purchased 10,000 shares of
Series B Preferred Stock (converted into 16,000 shares of Common Stock upon
completion of the Company's initial public offering) in October 1992 when he was
elected to the Board of Directors. In connection with such election and
purchase, the Company entered into a consulting agreement with Mr. Schoellhorn
to provide financial and business advice to the Company in exchange for an
option to acquire 31,160 shares of Common Stock at a purchase price of $.32 per
share. The Company also issued Mr. Schoellhorn a stock purchase warrant to
acquire 77,900 shares of Common Stock at a price of $1.93 per share in
connection with his election to the Board of Directors in October 1992.
In November and December 1994 and January 1995, the Company borrowed an
aggregate of $200,000 from Messrs. Rejeange, Schoellhorn, Dr. Janicki and one
other individual who is no longer a director. In consideration for such loans,
the Company issued a note in the principal amount of $100,000, together with a
warrant to purchase 10,000 shares of Common Stock at an exercise price of $7.00
per share, to Mr. Rejeange, a note in the principal amount of $15,000, together
with a warrant to purchase 1,500 shares of Common Stock at an exercise price of
$7.00 per share, to Mr. Schoellhorn, and a note in the principal amount of
$10,000 together with a warrant to purchase 1,000 shares of Common Stock at an
exercise price of $7.00 per share, to Dr. Janicki. The warrants are not
exercisable until January 20, 1997. The Company repaid such notes from the
proceeds of its initial public offering.
In addition, in September 1993, each of the non-employee directors of
the Company (Dr. Janicki and Messrs. Schoellhorn and Schwartz) was issued an
option for 7,790 shares at an exercise price of $.32 per share, vesting over
twelve months from issuance, and Mr. Rejeange was issued an option in June 1994
to purchase 15,580 shares at $1.61 per share, vesting over twenty-four months
from issuance, is exchange for services as a Board member. Upon his appointment
as Chairman of the Board of Directors, Mr. Rejeange was granted an
4
<PAGE>
option to purchase 10,000 shares of the Company's Common Stock at a purchase
price of $7.25 per share. The option will expire in ten years and was fully
vested upon its issuance.
See attached Summary Table of Outstanding Options and Warrants herein
incorporated.
SECOND AMENDMENT TO
CORPORATE RESEARCH AGREEMENT
This Second Amendment to Corporate Research Agreement is entered into
as of this 9th day of September, 1996 by and between SUNPHARM CORPORATION, a
corporation duly organized under the laws of Delaware and currently having its
principal office at 4651 Salisbury Road, Suite 205, Jacksonville, Florida 32256
(thereinafter referred to as "Sponsor") and the UNIVERSITY OF FLORIDA RESEARCH
FOUNDATION, INC., a not-for-profit corporation duly organized and existing under
the laws of the state of Florida and having its principal office at 223 Grinter
Hall, University of Florida, Gainesville, Florida 32611-2037, U.S.A.
(hereinafter referred to as "UFRFI").
WITNESSETH:
WHEREAS, Sponsor and UFRFI have entered into a Corporate Research
Agreement dated April 30, 1993 to be effective March 26, 1993, (the "Research
Agreement"), which Research Agreement superseded in its entirety an earlier
Corporate Research Agreement between the parties dated December 9, 1991;
WHEREAS, Sponsor and UFRFI entered into a First Amendment to the
Research Agreement as of May 16, 1994 in order to extend the term of the period
covered by such Research Agreement and to make certain other related changes
thereto;
WHEREAS, the parties desire to enter into this Second Amendment to the
Research Agreement in order to extend the term thereof, to provide for certain
additional payments by Sponsor to UFRFI and to revise the Project Description
and Project Work accordingly.
NOW THEREFORE, in consideration of the premises and mutual covenants
herein contained, the parties hereto agree as follows:
1. In exchange for the execution of the Fourth Amendment to Patent
License Agreement by UFRFI and Sponsor, dated the date hereof, Sponsor agrees
that it will increase the total direct costs payable to UFRFI pursuant to
Section 4.1 of the Research Agreement by the sum of $200,000 per year for direct
costs and $50,000 per year for indirect costs during the term of the Research
Agreement, commencing January 1, 1997. The total amount payable by sponsor to
UFRFI on an annual basis commencing January 1, 1997 shall be $875,000. In
addition, Sponsor will increase quarterly payments, starting October 1, 1996
from the current $156,000 per quarter to $177,000 for the fourth quarterly
payment, 1996, and to $198,000 for the first quarterly payment, 1997. For each
quarterly payment thereafter, Sponsor shall pay the sum of $218,750.
2. The definition of Contract Period contained in Section 1.3 of the
Research Agreement is hereby amended by deleting the date "December 31, 1996"
and inserting in lieu thereof the date "December 31, 1998."
<PAGE>
3. The definitions of "Project Description" in Section 1.1 and "Project
Work" in Section 1.2 of the Research Agreement are hereby amended to include the
descriptions of the project or projects as described in Exhibit A to this Second
Amendment.
4. The definition of "University Inventions" in Section 1.4.2.2 of the
Research Agreement is hereby amended by deleting the phrase "present and future"
from the first line thereof.
5. Except as amended hereby, the Research Agreement shall be and remain
in full force and effect.
6. This Second Amendment to Corporate Research Agreement may be
executed in one or more counterparts, each of which shall be deemed an original
and all of which shall be taken together as one instrument.
IN WITNESS WHEREOF, the parties have caused this Second Amendment to
Corporate Research Agreement to be executed as of the date and year first above
written.
SPONSOR:
SunPharm Corporation
By:/s/ STEFAN BORG
-------------------------------
Stefan Borg,President
UFRFI:
University of Florida
Research Foundation, Inc.
By: /s/ RONALD M. KUDLA
------------------------------
Name: Ronald M. Kudla
Title: Director, OTL
READ AND ACKNOWLEDGED Reviewed by UFRFI's Attorney:
/s/ RAYMOND J. BERGERON /s/ GREGORY A. NELSON
- - ------------------------------- -------------------------------
Raymond J. Bergeron Gregory A. Nelson
Sept. 9, 1996
(This attorney shall not be deemed a
signatory to this Agreement.)
-2-
THIRD AMENDMENT TO
CORPORATE RESEARCH AGREEMENT
This third Amendment to Corporate Research Agreement is entered into as
of this 2nd day of April, 1998 by and between SUNPHARM CORPORATION, a
corporation duly organized under the laws of Delaware and currently having its
principal office at 4651 Salisbury Road, Suite 205, Jacksonville, Florida 32256
(hereinafter referred to as "Sponsor") and the UNIVERSITY OF FLORIDA RESEARCH
FOUNDATION, INC., a not-for-profit corporation duly organized and existing under
the laws of Florida and having its principal office at 223 Grinter Hall,
University of Florida, Gainesville, Florida 32611-2037, U.S.A (hereinafter
referred to as "UFRFI").
WITNESSETH:
WHEREAS, Sponsor and UFRFI have entered into a Corporate Research
Agreement dated April 30, 1993 to be effective March 26, 1993, (the "Research
Agreement"), which Research Agreement superseded in its entirety an earlier
Corporate Research Agreement between the parties dated December 9, 1991;
WHEREAS, Sponsor and UFRFI entered into a First Amendment to the
Research Agreement as of May 16, 1994 and a Second Amendment to the Research
Agreement on September 9, 1996 in order to extend the term of the period covered
by such Research Agreement;
WHEREAS, the parties desire to enter into this Third Amendment to the
Research Agreement in order to extend the term thereof,
NOW THEREFORE, in consideration of the premises and mutual covenants
herein contained, the parties hereto agree as follows:
1. The definition of "Contract Period" contained in Section 2 of the
Second Amendment to the Research Agreement is hereby deleted in its entirety and
the following is inserted in place thereof:
"1.3 "Contract Period" will be December 9, 1991 through
December31, 1998, during which time the UFRFI shall perform the Project
Work; which period shall be extended on December 31 of each year on a
thirty-six month basis without further action of the parties unless
either party notified the other of its desire to terminate this
Agreement on written notice to the other given at least twelve months
in advance of the then-current period."
2. Except as amended hereby, the Research Agreement shall be and remain
in full force and effect.
<PAGE>
3. This Third Amendment to Corporate Research Agreement may be executed
in one or more counterparts, each of which shall be deemed an original and all
of which shall be taken together as one instrument.
IN WITNESS WHEREOF, the parties have caused this Third Amendment to
Corporate Research Agreement to be executed as of the date and year first above
written.
SPONSOR:
SunPharm Corporation
By:/s/ STEFAN BORG
-------------------------------
Stefan Borg,Preside
UFRFI:
University of Florida
Research Foundation, Inc.
By: /s/ T. WALSH
------------------------------
Name: Thomas E. Walsh
Title: Secretary
READ AND ACKNOWLEDGED
/s/ RAYMOND J. BERGERON
- - -------------------------------
Raymond J. Bergeron
EXHIBIT 11.1
SunPharm Corporation
CALCULATION OF WEIGHTED AVERAGE SHARES OUTSTANDING
AND NET LOSS PER SHARE
For twelve months ended December 31, 1998:
Days
Total Shares Outstanding
------------ -----------
5,737,828 x 7 = 40,164,796
5,745,618 x 56 = 321,754,608
5,748,618 x 15 = 86,229,270
5,758,901 x 13 = 74,865,713
5,760,330 x 22 = 126,727,260
5,767,830 x 203 = 1,170,869,490
6,621,395 x 49 = 324,448,355
------------ -------------
365 2,145,059,492
Weighted Average Shares = 2,145,059,492 / 365 = 5,876,875
Net Loss Per Share = $ (3,767,392)/ 5,876,875 = $ (0.64)
For twelve months ended December 31,1997:
Days
Total Shares Outstanding
------------ -----------
3,708,879 x 87 = 322,672,473
5,537,165 x 5 = 27,685,825
5,608,101 x 76 = 426,215,676
5,672,471 x 44 = 249,588,724
5,732,471 x 113 = 647,769,223
5,735,328 x 27 = 154,853,856
5,737,828 x 13 = 74,591,764
----------- -------------
365 1,903,377,541
Weighted Average Shares = 1,903,377,541 / 365 = 5,214,733
Net Loss Per Share = $ (3,906,425)/ 5,040,060 = $ (0.75)
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000884888
<NAME> SunPharm Corporation
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 0
<SECURITIES> 1,699,200
<RECEIVABLES> 124,865
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,861,934
<PP&E> 75,018
<DEPRECIATION> 17,085
<TOTAL-ASSETS> 2,054,007
<CURRENT-LIABILITIES> 451,913
<BONDS> 0
0
300
<COMMON> 662
<OTHER-SE> 20,871,578
<TOTAL-LIABILITY-AND-EQUITY> 2,054,007
<SALES> 0
<TOTAL-REVENUES> 393,855
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,161,247
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,767,392)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,767,392)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,767,392)
<EPS-PRIMARY> (0.64)
<EPS-DILUTED> 0
</TABLE>
